Chevron Corporation (CVX)

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Chevron Corporation (CVX)

Q1 2010 Earnings Call

April 30, 2010 11:00 am ET

Executives

Patricia Yarrington – Vice President, Chief Financial Officer

Jeanette Ourada – General Manager, Investor Relations

Analysts

Doug Terreson - ISI Group

Evan Calio - Morgan Stanley

Doug Leggate - BofA Merrill Lynch

Jason Gammel - Macquarie Research Equities

Paul Sankey - Deutsche Bank

Edward Westlake - Credit Suisse

Paul Cheng - Barclays Capital

Mark Gilman - The Benchmark Company

Pavel Molchanov - Raymond James

Faisel Khan - Citi

Jacques Rousseau - RBC

Presentation

Operator

Good morning. My name is Sean and I will be your conference facilitator today. Welcome to Chevron’s first quarter 2010 earnings conference call. (Operator Instructions) I will now turn the conference call over to the Vice President and Chief Financial Officer of Chevron Corporation, Ms. Pat Yarrington. Please go ahead.

Patricia Yarrington

Good morning. Thanks Sean very much. Welcome to Chevron’s first quarter earnings conference call and webcast. Jeanette Ourada, General Manager, Investor Relations is on the call with me.

Our focus today is on Chevron’s financial and operating results for the first quarter of 2010. We’ll refer to the slides that are available on Chevron’s website.

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

Slide 3 provides an overview of our financial performance. The company’s first quarter earnings were $4.6 billion or $2.27 per diluted share. Our first quarter 2010 earnings increased about 150% compared with the first quarter of 2009. Our upstream business benefited from higher crude oil prices and higher production. Net oil equivalent production was up about 5% from a year ago, due mainly to the ramp up of major capital projects. Downstream earnings were lower, reflecting the absence of 2009 gains on asset sales, as well as 2010 charges related to previously announced employee reductions. First quarter 2010 earnings rose 48% compared to the fourth quarter of 2009, which Jeanette will discuss shortly in more detail.

Return on capital employed for the trailing 12 months was about 13%. The debt ratio dropped below 10% at the end of the quarter. And finally, we announced on Wednesday that Chevron’s board of directors approved a $0.04 per share, or 5.9% increase in the common stock quarterly dividend. This follows only nine months after the previous quarterly increase, which was in the third quarter of 2009.

Turning to Slide 4, I’ll now compare results of first quarter 2010 with the fourth quarter of 2009. As a reminder, our earnings release compares first quarter 2010 with the same quarter a year ago. First quarter earnings were about $1.5 billion higher than the fourth quarter. Higher crude oil and natural gas realization, as well as lower operating expenses, benefited the company’s worldwide upstream results. Cash from earnings were also higher, most of the result of improved refining margins across all regions and the absence of unfavorable fourth quarter inventory effects.

The variance in the other bar reflects slower corporate charges. Earnings in first quarter included charges of $175 million associated with employee reductions and the downstream businesses and corporate staff.

As I alerted you in our fourth quarter earnings call, we have done some re-segmentation of reported earnings and I’d like to go through those changes with you now. Starting this year, both our chemicals businesses meaning Oronite Additives and our Chevron Phillips Chemicals joint venture, report to Mike Wirth. Their performance results are now included in the downstream business segment.

In addition, certain upstream enabling operations, primarily the Escravos gas to liquids project and major international export pipelines, have been reclassified from the downstream segment to the upstream segment. These upstream enabling assets are fundamental to the success and economics of their related upstream operations. In our judgment, the revised segmentation more appropriately aligns current and future capital allocation decisions with segment performance results and management oversight responsibilities within the company.

Prior period information has been conformed accordingly, and for transparency we have footnoted the slides for each impacted segment to provide earnings for the comparable periods using the previous reporting methodology.

Jeanette will now take us through the quarterly comparisons for each of the business segments. Jeanette?

Jeanette Ourada

Thanks Pat. On Slide 5, our U.S. upstream earnings for the first quarter were $90 million higher than the fourth quarter’s results. Higher crude oil and natural gas realizations benefited earnings by $175 million. Chevron’s average U.S. crude oil realization was up about $3 per barrel between consecutive quarters, slightly more than the increase in the average spot price of West Texas Intermedia.

Natural gas realizations increased 25% between quarters, in line with Henry Hub’s spot prices, and represented about half of the positive variance. Lower production volumes decreased earnings by $80 million between periods. This was primarily due to the absence of a favorable royalty settlement recognized in the prior quarter. The other bar is comprised of a number of offsetting items.

Turning to Slide 6, international upstream earnings were up about $470 million compared with the fourth quarter. Higher oil and natural gas realizations increased earnings by $145 million. Average realizations for liquids rose 2%, in line with the increase in Brent spot prices. Natural gas realizations were also higher in the first quarter, contributing about $100 million to earnings. This was in part due to retroactive price settlements on long-term natural gas contracts.

Operating expenses were down $215 million from the fourth quarter. The reduction in OpEx reflects small reductions across multiple categories and operations. The other bar represents an increase of $113 million, and includes various unrelated components, the largest being a favorable variance in tax items.

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