Chevron Corporation (CVX)

CVX 
$109.03
*  
3.01
2.84%
Get CVX Alerts
*Delayed - data as of Dec. 18, 2014  -  Find a broker to begin trading CVX now
Exchange: NYSE
Industry: Energy
Community Rating:
View:    CVX Pre-Market
 
 
Symbol List Views
FlashQuotes InfoQuotes
Stock Details
Summary Quote Real-Time Quote After Hours Quote Pre-market Quote Historical Quote Option Chain
CHARTS
Basic Chart Interactive Chart
COMPANY NEWS
Company Headlines Press Releases Market Stream
STOCK ANALYSIS
Analyst Research Guru Analysis Stock Report Competitors Stock Consultant Stock Comparison
FUNDAMENTALS
Call Transcripts Annual Report Income Statement Revenue/EPS SEC Filings Short Interest Dividend History
HOLDINGS
Ownership Summary Institutional Holdings Insiders
(SEC Form 4)
 Save Stocks

Chevron Corporation (CVX)

Q4 2012 Earnings Conference Call

February 1, 2013, 11:00 AM ET

Executives

John S. Watson - Chairman and CEO

Patricia E. Yarrington - VP and CFO

Jeff Gustavson - General Manager, Investor Relations

Analysts

Evan Calio - Morgan Stanley, Research Division

Paul Sankey - Deutsche Bank Securities Inc.

Jason Gammel - Macquarie Research

Douglas Leggate - Bank of America Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Cheng - Barclays Capital, Research Division

Iain Reid - Jefferies & Company, Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Allen Good - Morningstar, Inc

John P. Herrlin - Societe Generale Cross Asset Research

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good morning. My name is Sean, and I’ll be your conference facilitator today. Welcome to Chevron's Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the call over to the Chairman and Chief Executive Officer of Chevron Corporation Mr. John Watson. Please go ahead, sir.

John S. Watson

Okay. Thanks, Sean. Welcome to Chevron’s fourth quarter earnings conference call and webcast. On the call with me today are Pat Yarrington, our Chief Financial Officer and Jeff Gustavson, who is the General Manager of Investor Relations. We will of course refer to slides that are available on Chevron’s website.

Before we get started, please be reminded that the presentation contains estimates, projections and other forward-looking statements. We ask that you review the usual cautionary statement that we have on Slide 2.

Turning to slide 3, I want to begin where we always do is safety. We continue to achieve world-class low industrial injury and illness rates. We had our lowest ever days away from work rate and once the date is finalized we expect to again lead the industry for the second consecutive year on this measure. We are also focused on process safety, with many successes. Last year we had our fewest number of spills ever, which translated to record low spill volume. We believe this two will be the best in the industry. Having said this, it was not a perfect year. We do believe that zero incidence is attainable. We are not there yet, but we’re striving to learn and improve to get incidence free operations.

Our financial performance in 2012 was quite strong. We expect when all the 2012 results were in to again post the highest Upstream earnings per barrel by a significant margin and to be very near the top and Downstream earnings per barrel as well. These excellent financial results validate our strategies and the many past investment decisions.

We’d like to summarize just a few additional accomplishments from last year. In our Upstream business we’re steadily progressing our major capital projects, the Gorgon project was over 55% complete at year-end. And Wheatstone has made good progress as well, both from a construction standpoint and in securing of tick commitments through several new long-term LNG supply agreements. We just posted a short video of recent Gorgon construction progress on our webpage, www.chevron.com. I encourage you to take a few minutes to view the video. The progress is quite impressive.

We also continued construction activities on our projects in the deepwater Gulf of Mexico where Big Foot and Jack/St. Malo are both on budget and on schedule for start-up in 2014. We achieved start-up at Usan, and Agbami Phase 2 developments in Nigeria as well as Caesar/Tonga, Tahiti 2 deepwater projects in the Gulf of Mexico.

We continue to expand our discovered resource base with asset acquisitions in the Delaware basin in the U.S. and in Western Canada through an agreement to join the Kitimat LNG project. We also grew our exploration portfolio by acquiring positions in several new areas and including the Kurdistan region of Iraq, Suriname, Sierra Leone, Lithuania and the Ukraine.

Our reserve replacement ratio was 112% with ads distributed broadly across Upstream portfolio. In our Downstream business we completed our three year restructuring plan and have delivered on the commitments we made when we first began simplifying our business, streamlining our portfolio. We do see cost and improving returns all while retaining skill where we have competitive positions. We also continue to make progress on key growth projects in our lubricants and chemical businesses. We’re very proud of our performance this past year.

With that, I’ll turn it over to Pat, who’ll take you through our financials. Pat.

Patricia E. Yarrington

Hey, thank you, John. Slide 4 provides an overview of our financial performance. The Company’s fourth quarter earnings were $7.2 billion or $3.70 per diluted share. For the year, earnings were an impressive $26.2 billion. This equates to $13.32 per diluted share nearly tied with 2011’s record performance. Return on capital employed for the year approached 19% and our debt ratio at year-end was 8.2%. 2012 marked our 25th consecutive annual dividend increase with an 11.1% rise in the quarterly rate. This demonstrates our confidence in our future performance and is consistent with our priority of rewarding our shareholders with sustained and competitive dividend growth.

In the fourth quarter, we repurchased $1.25 billion of our shares bringing the full year share repurchase total to $5 billion. In the first quarter of 2013, we expect to repurchase the same amount $1.25 billion of shares.

Finally, Chevron's 2012 TSR was 5%. We continue to lead our peer group on total shareholder returns for the three-year, the five-year and the ten-year period as well as all periods in between. And you probably noticed we are also off to a strong TSR start so far this year.

Turning to slide 5, cash generated from operations was $12.9 billion during the fourth quarter. For the full year, cash from operations was nearly $39 billion reflecting our impressive operating performance and the cash generating strength of our portfolio.

At year end, our cash balances totaled $22 billion. This kept us in a net cash position of about $10 billion at year end. Our strong cash flow and solid balance sheet continued to be a competitive advantage.

Now on slide 6, I'll compare the results of fourth quarter 2012 with the third quarter of 2012. As a reminder, our earnings release compares fourth quarter 2012 with the same quarter a year ago.

Fourth quarter earnings were $7.2 billion, nearly $2 billion higher than third quarter results. Upstream earnings increased $1.7 billion reflecting increased gains on asset transactions and higher liftings.

Downstream results were up $236 million between quarters, driven by favorable inventory effects and gains on asset transactions. The variance in the other bar reflects a favorable swing in corporate tax items, partially offset by higher corporate charges.

On slide 7, our U.S. Upstream earnings for the fourth quarter were $241 million higher than third quarter's results. Higher realizations improved earnings by $40 million, driven largely by a 22% increase in natural gas realizations.

Higher production volumes increased earnings by $85 million between periods, reflecting recovery in production, post Hurricane Isaac in the Gulf of Mexico and increased production associated with recently acquired acreage in the Permian Basin. The other bar reflects a number of unrelated items, including favorable tax impacts and the net effect of small asset transactions.

Now on slide 8, international Upstream earnings were about $1.5 billion higher than the third quarter. Higher liftings increased earnings by $295 million. Planned turnarounds in Kazakhstan and in the UK in the third quarter were completed and production from these fields returned to normal levels in the fourth quarter.

Realizations increased earnings by $95 million, reflecting a 2% improvement in average liquid realizations currently in line with the increase in Brent prices. A favorable swing in foreign currency effects improved earnings by about $220 million. The fourth quarter had a loss of about $30 million compared to a loss of $250 million in the third quarter.

Asset sales gains increased earnings by a net $830 million. Fourth quarter results included a gain of $1.4 billion from the previously announced asset exchange in Australia while the third quarter contained a gain of $600 million associated with the sale of an equity interest in the Wheatstone Project. The other bar reflects a number of unrelated items, including lower exploration expenses.

Slide 9 summarizes the quarterly change in Chevron's worldwide net oil equivalent production. Production increased 152,000 barrels per day between quarters. Recovery from the impacts of Hurricane Isaac in the Gulf of Mexico increased production by 23,000 barrels per day. Absence of planned turnaround activity primarily in Kazakhstan and the UK increased production by 94,000 barrels a day.

The base business bar includes higher cost recovery volumes and production from newly acquired acreage in the Permian Basin, partially offset by normal field declines. Production for major capital projects increased in the fourth quarter by 7,000 barrels a day, primarily driven by the ramp-up of Perdido in the Gulf of Mexico.

Slide 10 compares full year 2012 net oil equivalent production to that of 2011. Production decreased by 63,000 barrels per day in 2012. Frade remained shut-in for the year reducing daily production by 29,000 barrels. The base business and other bar reflects normal sale decline as well as the impact of smaller asset sales. Our base decline rate for the year was approximately 4% in line with prior guidance. Incremental production for major capital projects contributed 85,000 barrels a day, driven by the ramp up of Platong 2 gas project, in Thailand and Perdido in the Gulf of Mexico as well as the start-up of Usan, in Nigeria. Our original production guidance for 2012 was 2.68 million barrels of oil equivalent per day. We got short of that guidance by 70,000 barrels per day, predominantly due to the Suriname project and the delayed experience with the start-up of Angola LNG.

Turning to slide 11. U.S. Downstream Earnings decreased $125 million in the fourth quarter. Realized margins decreased earnings by $90 million, driven mainly by weaker refining margins on both the Gulf and West coast due to lower demand and higher seasonal gasoline inventory levels. Improved marketing margins only partly offset the decline in refining margins.

Volumes reduced earnings by $30 million, primarily due to the continued shutdown of the Richmond, California, refinery crude unit. A return to normal operations at the Pascagoula, Mississippi refinery, post hurricane Isaac partly offset the decrease. Inventory effects represented a $95 million improvement in earnings between quarters, largely reflecting favorable year-end LIFO effect. Operating expenses increased $100 million, largely due to higher maintenance, transportation and environmental related expenses.

On slide 12, International Downstream Earnings improved $361 million this quarter. Higher realized margins benefited earnings by $60 million. Lower crack spreads in Asia were more than offset by improved marketing margins and pricing lag effects for sales in naphtha and jet fuel in key markets. Inventory effects represented a $145 million improvement in earnings between quarters, mostly reflecting the absence of negative inventory impacts during the third quarter.

Gains on asset sales combined with the absence of charges associated with the portfolio restructuring in Australia in the third quarter improved earnings by $210 million. The other bar reflects a number of unrelated items including unfavorable swing and foreign exchange impact.

Slide 13 covers All Other. Fourth quarter net charges were $538 million, compared to a net $575 million net charge in the third quarter, so a decrease of $37 million between periods. A favorable swing in corporate tax items resulted in $99 million benefit to earnings while corporate costs was $62 million higher this quarter.

For the full-year this segment had net charges of $1.9 billion which is higher than our quarterly guidance range of $300 million to $400 million. Given the number of discrete items that impacted this segment in 2012, we are upping our guidance range for 2013 to $400 million to $500 million per quarter to reflect several miscellaneous items including increased environment remediation costs and higher corporate expenses.

With that, I’d like to now turn it back over to John, for a few thoughts on 2013.

John S. Watson

Hey, thanks, Pat. Let’s turn to slide 14. In early December we announced $36.7 billion capital program for 2013. Our capital program is well aligned with our long stated strategy of investing in attractive projects that will deliver volume growth and value growth for our shareholders. The program supports continued progress at several large Upstream projects under construction, notably our legacy LNG projects in Australia and our deepwater Gulf of Mexico developments.

Continued investments in our current project queue is expected to drive profitable growth through the end of the decade. We are also increasing our exploration activities, including the initial appraisal of recently acquired acreage in the Kurdistan region of Iraq, Suriname, Sierra Leone and several international unconventional players among other areas.

Our Downstream investments for 2013 are directed toward our premium base oil facility at our Pascagoula refinery, expanded additives production in Singapore and our projects which will enhance the reliability and flexibility of our Global Refining system. Additional projects will be funded by affiliates in our refining and chemicals joint venture.

Turning to slide 15, our net production outlook for the year is $2.65 million barrels of oil equivalent per day, an increase of about 1.5% from 2012 levels. This is based on average Brent price of $112 per barrel, the same average prices as 2012 and does not assume OPEC curtailments, material security or market impacts.

Our full-year estimate for 2013 is about on par with our fourth quarter 2012 production. The start up of Angola LNG as well as increased production from the deepwater Gulf of Mexico, Thailand and Nigeria are expected to roughly offset base business decline and normal turnaround activities later in the year.

Although we expect restart production – to restart production at the Frade field in Brazil, it will not contribute materially to this year's net production. Base business decline is still expected to about 4%.

Our 2017 production target remains intact, at 3.3 million barrels per day. In fact, over 90% of the volume contributing to the target is either currently producing or under construction with the remaining volume well understood.

We'll keep you posted through the year on developments and progress in both our Upstream and Downstream businesses. We also plan to provide a greater amount of additional detail at our upcoming Security Analyst Meeting in early March.

That concludes our prepared marks. We know welcome your questions. We do have a full queue, so please limit yourself to one question and a single follow-up if necessary. We'll do our best to see that we get your questions answered.

Sean, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Evan Calio with Morgan Stanley. Please go ahead with your question.

Evan Calio - Morgan Stanley, Research Division

Good morning, everybody.

John S. Watson

Hey, Evan.

Evan Calio - Morgan Stanley, Research Division

John, I believe you guys hold over 950,000 acres in the Delaware Basin inclusive of last year's asset acquisition and in a larger position in the Permian total making Chevron one of the larger acreage holders, yet running fewer rigs than some of the peers. So I mean how many unconventional rigs are you running and maybe you can discuss planned activity ramp in '13 and whether or not there is any internal constraints for you whether you're limited at all in the people side to accelerating this NAV realization? And I have a second question please.

John S. Watson

Well, we are ramping up rig activity. In fact, we're just looking at some of the material we're going to show you for the SAM meeting that's coming up, and we'll give you actually some pretty good rig count data. And what you'll see is we are ramping up rapidly in the Delaware Basin as you would expect. We got over – really over 20 in the Permian region that are running right now and we'll give you more specifics about the ramp-up that is headed there.

Activity in a fewer number of rigs are running up in the Marcellus region, but that too has been gradually ramping up as we -- as you know. We're still drilling gas prospects there as we have the carry that we're working through. I will be happy to give you a lot more detail on those with precision on the number of rigs. We are seeing volume growth in both of these areas that are part of the plan going forward.

You had a follow-up?

Evan Calio - Morgan Stanley, Research Division

Yes. I just was curious within that if you saw any internal constraints, meaning you're able to organically, to ramp those volumes.

John S. Watson

Well, we are. Having said that, I think the industry is very focused on building organizational capability and we've added a significant number of new people and added to our drilling training programs that we have in place both in the United States and overseas. And so organizational capability, we're not going to operate if we don't have people that we think are trained and capable and I think there are pressures on the industry, but when we plan to ramp up we only plan to ramp up if we have the right people.

Evan Calio - Morgan Stanley, Research Division

Understood. And my second question was, John, I know it's not your favorite topics as well as Pat is the Ecuador litigation. I know still there has been some positive movement there in the most recent quarter. We've read the judge directly implicating himself improper conduct as well as plaintiff, but also your legal involvement is spreading across the globe now in Argentina and Brazilian courts as well as U.S. and Canada and The Hague. So I was wondering if you could just provide any roadmap for activity in 2013 in these various theaters of operation and when the RICO case is set to commence, and I'll leave it there. Thanks.

Read the rest of this transcript for free on seekingalpha.com