Chevron Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Filed November 3, 2011. Interim financial statements are unaudited; management says they include normal recurring adjustments and are not necessarily indicative of future results. Dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $61.3B | $48.6B | $186.3B | $146.3B |
| Net income attributable to Chevron | $7.83B | $3.77B | $21.77B | $13.73B |
| Diluted EPS | $3.92 | $1.87 | $10.86 | $6.84 |
| Net margin, calculated from reported revenue and earnings | 12.8% | 7.8% | 11.7% | 9.4% |
| Cash provided by operating activities | — | — | $32.0B | $23.1B |
- Q3 and nine-month revenue rose 26% and 27%, respectively, mainly reflecting higher prices for crude oil, natural gas and refined products.
- Upstream earnings were $6.20B in Q3 and $19.05B year to date, up from $3.56B and $12.83B. Downstream earnings were $1.99B and $3.65B, compared with $0.57B and $1.74B.
- Q3 diluted EPS increased 110% year over year; nine-month diluted EPS increased 59%.
- The filing does not provide a consolidated operating-margin figure. Q3 and nine-month effective income tax rates were 41% and 42%, respectively.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow of $32.0B exceeded cash capital expenditures of $19.2B; capital and exploratory expenditures including equity affiliates were $20.8B. Investing cash flow was negative $22.5B and financing cash flow negative $9.4B.
- Operating cash flow funded capital spending, $4.5B of common dividends, $3.0B of share repurchases and the Atlas acquisition. Cash and cash equivalents were $14.2B; time deposits and marketable securities brought total cash, deposits and securities to approximately $20.3B at September 30.
- Total debt and capital lease obligations were $9.7B, down from $11.5B at year-end 2010. The debt ratio was 7.5%, versus 9.8%. The current ratio was 1.6, versus 1.7.
- Chevron had $6.0B in committed credit facilities, with no borrowings outstanding. Management said it had substantial borrowing capacity and flexibility to adjust capital spending.
- Quarterly dividend was raised 3.8% to $0.81 per share, payable in December 2011, following an 8.3% increase announced in Q2. The company repurchased $1.25B of shares in Q3.
Material changes and operating developments
- Higher crude realizations were the principal earnings driver: upstream earnings benefited from higher crude prices, while worldwide production declined. Total net oil-equivalent production averaged 2.599 million barrels per day in Q3, down 5% year over year; nine-month production averaged 2.684 million barrels per day, down 3%.
- Management expected production to rise by 100,000–150,000 barrels per day from Q3 to Q4, citing completed repairs and turnarounds and new production. The estimate was subject to operational, market, political and other uncertainties.
- Downstream improvement reflected better refined-product margins and asset-sale gains. The Pembroke refinery and related U.K. and Ireland downstream assets were sold August 1, 2011; the sale contributed approximately $500M to Q3 earnings. International downstream nine-month earnings also benefited from $720M in asset-sale gains.
- Chevron acquired Atlas Energy in February for approximately $4.5B including assumed debt, adding Marcellus Shale acreage. It also agreed to a carry arrangement under which Reliance funds 75% of Chevron’s drilling costs, up to $1.3B. Acquisition accounting remained provisional.
- Capital and exploratory expenditures including equity affiliates increased to $20.8B from $15.5B in the prior-year nine-month period; 90% was for upstream projects.
- Management cited final investment decisions for Wheatstone LNG in Australia, Clair Ridge in the U.K. North Sea and Tubular Bells in the Gulf of Mexico, as well as first gas at Thailand’s Platong Gas II.
Outlook, risks and contingencies
- No full-year earnings or revenue guidance is provided. Management emphasized sensitivity to crude and natural-gas prices, refining and chemical margins, production levels, costs and asset transactions.
- Risks include production interruptions, project delays and cost increases; political and regulatory changes, civil unrest and contract renegotiations; OPEC quotas; foreign-exchange movements; and environmental, tax and litigation matters.
- In the Ecuador Lago Agrio case, a February 2011 judgment assessed approximately $8.6B in damages plus about $0.9B for plaintiffs’ representatives, with an additional $8.6B in punitive damages unless Chevron issued an apology. Chevron appealed and disputes the judgment. A U.S. appeals court vacated a preliminary injunction against enforcement and stayed a related trial. Management said the ultimate outcome and financial effect are uncertain and that a reasonably possible loss estimate cannot be made.
- Chevron reported 18 pending MTBE lawsuits and claims; exposure is not determinable and could materially affect earnings in a period. Environmental contingencies and certain indemnities also could produce material charges, although management did not expect environmental costs to materially affect consolidated financial position or liquidity.
- A California court judgment halted further work on a Richmond refinery upgrade pending revised environmental review and permits. Management said outcomes and any financial effect were uncertain, with possible significance to earnings in a future period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether the anticipated Q4 production increase materialized and how production trends, including field declines and downtime, affected subsequent results.
- How much of earnings growth came from higher commodity prices, improved refining margins and one-time asset-sale gains, and whether those drivers persisted.
- Subsequent developments and potential enforcement exposure in the Ecuador litigation, as well as the status of MTBE, environmental and Richmond refinery matters.
- Final Atlas purchase-price allocation, integration and drilling results, and the remaining costs and schedule for major capital projects.
- Whether capital spending, dividends, repurchases and pension contributions remained supported by operating cash flow and the stated liquidity position.