Chevron Corporation — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Chevron reports Upstream and Downstream segments; results are exposed to oil and gas prices, refining margins, and global operating conditions.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales and other operating revenues | $32.315 billion | $50.978 billion |
| Net income attributable to Chevron | $2.567 billion | $4.512 billion |
| Diluted earnings per share | $1.37 | $2.36 |
| Operating cash flow | $2.319 billion | $8.417 billion |
| Cash capital expenditures | $7.602 billion | $8.544 billion |
| Dividends paid | $1.997 billion | $1.895 billion |
- Net income attributable to Chevron fell about 43%; revenue declined about 37%. The company’s approximate net margin was 7.9%, versus 8.9% in the prior-year quarter.
- Upstream earnings were $1.560 billion, down from $4.307 billion. U.S. Upstream recorded a $460 million loss; international Upstream earned $2.020 billion.
- Downstream earnings increased to $1.423 billion from $710 million, supported by higher U.S. and international refined-product margins.
- Cash flow from operations less cash capital expenditures was approximately negative $5.283 billion, compared with negative $127 million in Q1 2014.
- Cash, cash equivalents, time deposits and marketable securities totaled $13.1 billion at quarter-end. Current assets were $41.270 billion and current liabilities $29.445 billion; the reported current ratio was 1.4.
- Total debt and capital lease obligations were $33.9 billion, up from $27.8 billion at year-end 2014. The debt ratio was 17.9%, versus 15.2%. Chevron issued approximately $6.0 billion of long-term notes during the quarter.
- Quarterly dividend was $1.07 per share. The company said it did not plan share repurchases under its program in 2015.
Material changes and management commentary
- Lower crude oil realizations were the principal driver of lower Upstream earnings. Average crude oil and natural gas liquids realizations fell to $43 per barrel in U.S. Upstream from $91 and to $46 internationally from $99.
- Worldwide net oil-equivalent production rose 4% to 2.681 million barrels per day. Q1 Brent averaged $54 per barrel and WTI averaged $49, both substantially below 2014 full-year averages; U.S. Henry Hub natural gas averaged $2.87 per thousand cubic feet.
- Lower revenue and purchased-product costs primarily reflected lower crude and refined-product prices. Other income increased, partly due to asset-sale gains and favorable foreign currency effects. Foreign currency effects increased earnings by $580 million, compared with a $79 million decrease in Q1 2014.
- The effective tax rate fell to 10% from 43%. Management attributed the change to one-time tax benefits, including a U.K. statutory rate reduction, changes in jurisdictional income mix, and foreign currency remeasurement effects.
- Management forecast 2015 net oil-equivalent production flat to 3% above 2014. It said prolonged low prices could lead to further expense and capital-spending reductions and additional asset sales; the timing of any oil-price recovery was uncertain.
- Chevron completed the sale of its Caltex Australia interest on April 2, 2015, receiving $3.6 billion. A $1.6 billion gain was expected in Q2, so it was not included in Q1 results.
Risks, contingencies, and unusual items
- Management highlighted sensitivity to oil and gas prices, refining margins, project execution, production interruptions, geopolitical events, regulation, currency movements, and environmental and litigation exposures.
- The Ecuador litigation includes a $9.5 billion Ecuadorian judgment affirmed by that country’s National Court, with Chevron’s appeal pending before the Constitutional Court. Chevron disputes the judgment and is contesting enforcement actions internationally. Management said it could not estimate a reasonably possible loss or range.
- Other matters include MTBE claims, environmental obligations, and the Brazil Frade Field incident; ultimate exposure for certain claims is not determinable. The filing says known probable and estimable environmental obligations have been provided for, but additional costs could affect results when recognized.
- Tax audits remain open in several jurisdictions; management said developments could significantly increase or decrease unrecognized tax benefits within 12 months, but it could not estimate the possible adjustment range.
- A Richmond refinery proposal to resolve alleged violations could result in a civil penalty of $100,000 or more.
- The filing reports no material change in risk factors from Chevron’s 2014 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower oil prices persist and how they affect Upstream earnings, cash generation, leverage, and capital spending.
- Whether the 2015 production outlook of flat to 3% growth is achieved, including risks in the Saudi-Kuwait Partitioned Zone, where production was 76,000 barrels per day and a complete loss was possible but not included in guidance.
- Cash-flow and funding requirements relative to the dividend, capital program, and rising debt; confirm the timing and terms of debt maturities and refinancing.
- The Q2 accounting and cash proceeds from the Caltex Australia sale, and whether further asset dispositions occur.
- Developments in the Ecuador litigation and other legal, environmental, and tax contingencies; potential losses are uncertain and not fully quantifiable.