CHEVRON CORP quarterly report, Q1 FY2014

Chevron Corporation — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; filed May 2, 2014. The unaudited filing covers Chevron’s Upstream and Downstream segments and other activities.

Financial results and position

The filing does not provide a clear consolidated operating-margin figure. Cash from operations less cash capital expenditures was approximately negative $127 million. Chevron paid $1.9 billion in common dividends and repurchased $1.25 billion of shares.

Material changes and segment performance

• Upstream: Earnings fell to $4.3 billion from $5.9 billion, mainly due to lower production and crude realizations, higher taxes, depreciation and exploration costs, and adverse currency effects. Worldwide net oil-equivalent production declined 2% to 2.588 million barrels per day.
• Downstream: Earnings were $710 million versus $701 million. Better U.S. refining margins, lower operating costs and a $100 million pipeline-affiliate sale gain were largely offset by weaker international margins and adverse currency effects.
• Other activities: Net charges rose to $505 million from $439 million, mainly because of a mining-asset impairment, partly offset by lower corporate charges.
• Revenue declined 6% and net income attributable to Chevron declined 27%. Equity-affiliate income decreased to $1.9 billion from $2.3 billion. Depreciation, depletion and amortization rose to $4.1 billion from $3.5 billion.

Outlook, commentary and risks

• Management estimated 2014 net oil-equivalent production would average approximately 2.610 million barrels per day, based on Brent at $109 per barrel. The estimate is subject to operational, project, geopolitical, weather, quota, demand and fiscal-term uncertainties.
• In April 2014, Chevron announced a 7% increase in its quarterly dividend to $1.07 per share, payable in June. Management said capital spending could be adjusted during extended periods of low commodity prices or narrow refining and chemicals margins.
• Capital and exploratory expenditures, including affiliates’ shares, were $9.4 billion in Q1, up from $8.9 billion. Major projects included Gorgon and Wheatstone LNG and deepwater Gulf of Mexico developments. Gorgon turbine installation was completed, with LNG start-up anticipated in mid-2015; first production began at Azerbaijan’s Chirag Oil Project.
• Q1 Brent averaged $108 per barrel. U.S. Henry Hub natural gas averaged $5.11 per thousand cubic feet, compared with $3.45 a year earlier. Principal risks include commodity-price and refining-margin volatility, project execution and cost inflation, political and regulatory actions, currency movements, operational disruptions, environmental liabilities and litigation.
• Ecuador litigation: Ecuador’s National Court ratified a judgment in November 2013 but removed punitive damages, leaving a stated judgment of $9.5 billion. Chevron appealed to the Constitutional Court, which agreed to consider the appeal in March 2014. Foreign enforcement actions continued; Canada’s Supreme Court granted an appeal in April. A U.S. district court ruled for Chevron in a related fraud case in March 2014, and defendants appealed. Management said the outcome and any financial effect were uncertain and could not be reasonably estimated.
• Other contingencies: Management said potential exposure from the Brazil Frade incident was not determinable and could be significant to a single period, despite a roughly $43 million settlement for social and environmental programs. Tax-audit outcomes may significantly change unrecognized tax benefits, but the possible adjustment range was not estimable. Environmental and other claims may affect results when recognized; management did not expect known environmental matters to materially affect consolidated financial position or liquidity.
• Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.

Investor verification priorities

1. Track production against the 2014 target and monitor declines, downtime and project ramp-ups.
2. Assess whether upstream earnings pressures from production, realizations, taxes, depreciation, exploration and currency effects persist.
3. Monitor capital spending, project schedules and costs, and operating cash flow relative to investment, dividends and buybacks.
4. Review debt growth, commercial-paper usage and refinancing capacity. Balance-sheet short-term debt was $3.0 billion at March 31, compared with $374 million at year-end; management separately reported $11.0 billion of obligations due within one year, including amounts reclassified as long-term.
5. Follow Ecuador appeals and enforcement actions, Brazil-related proceedings, tax audits, and environmental and regulatory contingencies for changes in potential exposure.