CHEVRON CORP quarterly report, Q1 FY2018

Chevron Corporation — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Chevron is an integrated global energy company with Upstream and Downstream reportable segments. Interim financial statements are unaudited; results for the quarter are not necessarily indicative of full-year results.

Financial performance

Metric	Q1 2018	Q1 2017	Change / context
Sales and other operating revenues	$36.0 billion	$31.5 billion	Higher oil, refined-product and natural-gas prices and higher gas volumes; comparison is affected by a change in presentation of third-party taxes.
Income from equity affiliates	$1.64 billion	$1.15 billion	Higher upstream affiliate earnings, including Tengizchevroil, and higher CPChem earnings.
Net income attributable to Chevron	$3.64 billion	$2.68 billion	Upstream improvement more than offset lower Downstream earnings and weaker All Other results.
Diluted EPS	$1.90	$1.41	Dividends per share were $1.12 versus $1.08.
Operating cash flow	$5.04 billion	$3.78 billion	Higher prices and production, partly offset by a $2.10 billion working-capital outflow.
Cash capital expenditures	$3.00 billion	$3.32 billion	Total capital and exploratory expenditures, including equity affiliates, were $4.41 billion versus $4.39 billion.

Chevron’s reported sales presentation changed in 2018: $1.9 billion of excise, value-added and similar taxes collected for third parties were excluded from revenue and included in “Taxes other than on income.” The 2017 comparison includes $1.7 billion of these taxes in revenue. The accounting change had no earnings impact, but makes reported revenue growth less directly comparable.

Segment earnings: Upstream earned $3.35 billion, up from $1.52 billion, mainly on higher realizations and production. Downstream earned $728 million, down from $926 million, chiefly due to lower refined-product margins. All Other recorded net charges of $442 million versus earnings of $239 million, reflecting the absence of prior-year favorable corporate tax items and higher interest expense.

Taxes: Income tax expense increased to $1.41 billion from $430 million; the effective tax rate rose to 28% from 14%. Management attributed the rate change primarily to the mix of earnings across higher- and lower-tax jurisdictions and noted that the rate can vary substantially with earnings volatility.

Balance sheet, debt and liquidity

Cash and cash equivalents were $6.47 billion at March 31, 2018, compared with $4.81 billion at year-end; marketable securities were $38 million. Cash, cash equivalents and restricted cash totaled $7.52 billion.
Current assets were $31.73 billion and current liabilities $30.63 billion; the reported current ratio was 1.0, unchanged from year-end.
Total debt and capital lease obligations were $39.7 billion, up from $38.8 billion at year-end. Short-term debt was $8.60 billion and long-term debt $31.05 billion. The debt ratio was 20.9%, versus 20.7% at year-end.
Chevron reported $10.0 billion of committed credit facilities, with no amounts drawn at quarter-end. Management said certain obligations due within one year were expected to be refinanced long-term and not require working capital within that period.
Common dividends paid were $2.12 billion. Operating cash flow less cash capital expenditures and dividends was approximately negative $78 million for the quarter, before other investing and financing flows.

Material changes and operating developments

Worldwide net oil-equivalent production averaged 2.852 million barrels per day, up 7% from 2.676 million barrels per day. U.S. production rose 9% and international production rose 6%, with project growth partly offset by field declines and asset sales.
Average realized liquids prices increased in both U.S. Upstream ($56.12 per barrel versus $44.83) and International Upstream ($61.13 versus $48.56). International natural-gas realization rose to $5.85 per MCF from $4.36; U.S. natural-gas realization declined to $2.02 from $2.39.
Upstream affiliate results benefited from stronger earnings at Tengizchevroil. Its reported net income was $1.68 billion for the quarter; Chevron owns 50%.
Downstream margins weakened: U.S. earnings also reflected planned turnaround expense at the El Segundo refinery; international earnings were affected by lower refined-product margins. CPChem, 50%-owned by Chevron, began operating a new ethane cracker at its Cedar Bayou facility.
Other income fell to $159 million from $747 million, mainly because of lower asset-sale gains. The prior-year period included a $600 million gain from sale of the Indonesia geothermal business in International Upstream.
Assets held for sale were $1.20 billion at quarter-end, primarily upstream and downstream assets expected to be sold within 12 months. The filing reports a $163 million pre-tax loss associated with held-for-sale property, plant and equipment fair-value measurement.

Outlook, risks and contingencies

Chevron forecast 2018 net oil-equivalent production growth of 4%–7% versus 2017, assuming Brent crude at $60 per barrel and excluding anticipated 2018 asset sales. The company cautioned that this outlook is subject to operational, market, regulatory and geopolitical uncertainties.
The company targeted $5–$10 billion of before-tax proceeds from asset sales during 2018–2020. It reported selling its interest in California’s Elk Hills Field in April 2018; proceeds were expected in Q2.
Management described crude oil prices as the largest Upstream earnings driver and said the timing and sustainability of expected market improvement were uncertain. Risks include commodity prices and margins, cost inflation, project delays, production declines, OPEC actions, political disruption, severe weather, regulation, currency movements and access to capital.
The Ecuador litigation remains a significant unresolved contingency. The Ecuadorian judgment was reduced to approximately $9.5 billion after punitive damages were nullified; Chevron disputes the judgment and is contesting enforcement efforts. Management said it could not estimate a reasonably possible loss or range of loss.
Environmental and other contingencies include MTBE claims, remediation obligations, guarantees and long-term purchase commitments. Climate-related proceedings seek damages or injunctive relief; Chevron says it considers the cases legally and factually meritless and will defend them. Management considers the risk of material adverse impact from these proceedings remote, while acknowledging potential material consequences if liability or injunctions were imposed.
Tax audits remain open in several jurisdictions. Management said outcomes and timing are uncertain and it cannot estimate the range of possible adjustments to unrecognized tax benefits; significant increases or decreases may be possible within 12 months.
The filing reports effective disclosure controls as of March 31, 2018, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether production growth and project ramp-ups support the 4%–7% full-year outlook, particularly after planned asset sales and natural field declines.
Whether higher crude prices translate into sustained cash generation, and how working-capital needs, capital spending and dividends affect borrowing and liquidity.
Whether Downstream margins recover and whether the increase in affiliate earnings is sustained.
Progress and realized proceeds from the $5–$10 billion asset-sale program, including the Elk Hills transaction.
Developments in the Ecuador case, tax audits and environmental or climate-related proceedings; the filing provides no estimable loss range for Ecuador.
The effect of the revenue-tax presentation change when comparing reported revenue across periods; it did not affect earnings.