Chevron Corporation — Q1 2012 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet amounts are compared with December 31, 2011. Chevron operates primarily through Upstream and Downstream segments. Interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Sales and other operating revenues | $58.896 billion | $58.412 billion |
| Income before income taxes | $12.069 billion | $11.122 billion |
| Net income attributable to Chevron | $6.471 billion | $6.211 billion |
| Diluted earnings per share | $3.27 | $3.09 |
| Dividends per share | $0.81 | $0.72 |
| Cash from operating activities | $8.387 billion | $9.814 billion |
| Capital expenditures (cash flow statement) | $5.895 billion | $4.645 billion |
| Capital and exploratory expenditures, including affiliate share | $6.417 billion | $5.046 billion |
| Cash, time deposits and marketable securities | $19.768 billion | $20.071 billion at year-end |
| Total debt and capital lease obligations | $9.3 billion | $10.2 billion at year-end |
| Current ratio | 1.6 | 1.6 at year-end |
| Debt ratio | 6.9% | 7.7% at year-end |
Net income attributable to Chevron increased about 4.2% year over year; revenue increased about 0.8%. Calculated net margin was approximately 11.0%, versus 10.6% in Q1 2011. Operating cash flow fell about 14.5%, with a $2.795 billion working-capital outflow, compared with a $110 million inflow a year earlier. Cash flow from operations exceeded reported capital expenditures by approximately $2.5 billion before dividends and other investing or financing uses.
Material changes and segment results
- Upstream: Earnings rose to $6.171 billion from $5.977 billion. Higher oil and gas realizations were partly offset by lower production, higher taxes, and increased exploration and operating costs. Worldwide net oil-equivalent production declined to 2.631 million barrels per day from 2.760 million.
- Downstream: Earnings increased to $804 million from $622 million. International Downstream benefited from approximately $200 million of asset-sale gains, mainly from the Spanish fuels and finished-lubricants business sale; lower refined-product margins partly offset the increase.
- All Other: Net charges increased to $504 million from $388 million, mainly due to higher U.S. environmental reserve additions and other corporate charges.
- Income tax expense rose to $5.570 billion from $4.883 billion; the effective tax rate increased to 46% from 44%, primarily reflecting lower utilization of non-U.S. tax credits in international upstream operations.
- Cash and cash equivalents increased to $18.871 billion from $15.864 billion, while time deposits declined to $658 million from $3.958 billion. Total assets were $214.890 billion, versus $209.474 billion at year-end.
Outlook, management commentary and risks
- Management said the 2012 production outlook remained subject to substantial uncertainties, especially resolution of the Brazil Frade shut-in. Excluding Brazil impacts, the remainder of the portfolio was described as on pace to meet production guidance in the 2011 Form 10-K; this filing does not provide a clear numerical full-year production target.
- In April 2012, Chevron announced an 11.1% increase in its quarterly dividend to $0.90 per share, payable in June. The company repurchased 11.6 million shares for $1.25 billion during Q1 and stated that its ongoing program generally anticipated $500 million to $2 billion of repurchases per quarter, subject to market and other conditions.
- Capital and exploratory spending, including equity affiliates, increased to $6.417 billion; 92% was allocated to upstream. Management cited the flexibility to adjust capital spending if commodity prices or margins weaken.
- Brazil: Following a November 2011 Frade Field seep of approximately 2,400 barrels, a second small seep was identified in March 2012 and production was suspended as a precaution. Two civil suits seek $10.7 billion each; criminal charges were filed against 11 employees. The company said potential regulatory fines and penalties could be significant to net income in a period, but the ultimate exposure was not determinable.
- Ecuador: The filing describes an adverse judgment, appellate rulings, ongoing appeals and related arbitration and U.S. litigation. Chevron disputes the judgment and says it cannot estimate a reasonably possible loss or range. The underlying judgment amounts and enforcement efforts are material matters to monitor.
- Other exposures include MTBE litigation, environmental obligations, tax examinations, guarantees and indemnities. A Motiva letter purported to preserve certain indemnity claims; the filing says no loss range could be estimated. Environmental costs beyond recorded probable and estimable obligations could materially affect results in the period recognized, although management did not expect a material effect on consolidated financial position or liquidity.
- Key business sensitivities include oil and gas prices, refining and chemical margins, production declines, project delays and costs, political or regulatory changes, weather, and operational disruptions. Management warned forward-looking statements are subject to these and other risks.
- Management reported disclosure controls were effective as of March 31, 2012, and no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Track Frade Field developments, Brazil litigation and regulatory proceedings, and any changes to production guidance or associated financial exposure.
- Monitor the Ecuador case, appeal and arbitration progress, and attempts to enforce the judgment; the company did not estimate a possible loss range.
- Assess whether higher commodity realizations can offset production declines, rising exploration and operating costs, and the higher tax rate.
- Review working-capital movements and cash generation against the elevated capital program, dividends and share repurchases.
- Follow the size and resolution of environmental, tax and indemnity contingencies, including the Motiva claims and MTBE matters.