Chevron Corporation (CVX)

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Chevron (CVX)

Q3 2010 Earnings Call

October 29, 2010 11:00 am ET

Executives

Michael Wirth - Executive Vice President of Downstream and Chemicals

Patricia Yarrington - Chief Financial Officer and Vice President

Jeanette Ourada -

Analysts

Evan Calio - Morgan Stanley

Pavel Molchanov - Raymond James & Associates

Mark Gilman - The Benchmark Company, LLC

Paul Cheng

Faisel Khan - Citigroup Inc

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Presentation

Operator

Good morning. My name is Sean, and I will be your conference. Facilitator today. Welcome to Chevron's Third Quarter 2010 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to the Vice President and Chief Financial Officer of Chevron Corporation, Ms. Pat Yarrington.

Patricia Yarrington

Thank you, Sean. Welcome to Chevron's third quarter earnings call and webcast. On the call with me today are Mike Wirth, Executive Vice President of Downstream and Chemicals; and Jeanette Ourada, General Manager of Investor Relations. Our focus today is on Chevron's financial and operating results for the third 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. And I ask that you review the cautionary statement on Slide 2.

Slide 3 provides an overview of our financial performance. The company's third quarter earnings were $3.8 billion or $1.87 per diluted share. Our third quarter 2010 earnings were flat compared to third quarter 2009. Compared to the second quarter 2010, earnings fell 30%. Janet will discuss the sequential earnings variance shortly. Return on capital employed for the trailing 12 months was about 16%. Total debt at the end of the quarter was $10.6 billion and our debt ratio was 9.4%.

Total cash at the end of the quarter was $14.5 billion, and this was after a $550 million pension contribution. Third quarter was our strongest cash generation quarter since third quarter 2008. As you will see in the remainder of our presentation, our third quarter earnings were negatively impacted by several large items, which had no corresponding impact on cash. A prime example here is foreign exchange, the quarter's earnings almost $370 million in foreign exchange losses, which were simply balance sheet translation effects.

In July, our Board of Directors approved a new share repurchase program as previously announced, we will begin repurchases in the fourth quarter here. We are targeting a repurchase rate between $500 million and $1 billion per quarter. And in the fourth quarter, we expect to repurchase $750 million of our shares.

Jeanette will now take us through the quarterly comparisons.

Jeanette Ourada

Thanks, Pat. Turning to Slide 4. I will compare results of third quarter 2010 with second quarter 2010. As a reminder, our earnings release compares third quarter 2010 with the same quarter a year ago. Third quarter earnings decreased $1.6 billion from the second quarter. Results for all segments dropped between periods. Upstream earnings were $978 million lower, largely due to unfavorable foreign currency variants and higher exploration expenses. Third quarter downstream results were $410 million lower, driven by adverse foreign currency and timing of variances. The other bar largely reflects the unfavorable pool in corporate tax items.

On Slide 5, our U.S. upstream earnings for the third quarter were $144 million lower than the second quarter's results. Crude oil realizations reduced earnings by $55 million. Chevron's U.S. crude realizations fell about $2 per barrel between consecutive quarters, slightly more than the 2% change in WTI spot prices. Natural gas realizations were flat between periods. Higher operating expenses decreased earnings by $35 million between periods, primarily due to impacts from the Gulf of Mexico drilling moratorium. The other bar represents a decrease of $54 million, which is comprised of a number of unrelated items, including higher asset impairment charges.

Turning to Slide 6, international upstream earnings were down $834 million compared with the second quarter. Realizations reduced earnings by $40 million, with lower liquids realizations, partially offset by higher natural gas realizations. Our average liquids realizations decreased 2% between quarters, in line with the decrease in average brand spot prices. Natural gas realizations improved 8% between quarters.

Lower listings decreased earnings by $115 million. For the third quarter, we were underlisted by over 3%, bringing the year-to-date position to slightly over 1% underlisted.

Higher exploration expense reduced earnings by $210 million due to well write offs in Turkey and Canada. An unfavorable swing in foreign currency effects lowered earnings between quarters by $350 million. The second quarter had a gain of about $100 million compared to a $250 million loss in the third quarter. The other bar reflects a number of unrelated items, including higher depreciation and lower pipeline and sulfur for earnings. In the interim update, we forecast $200 million of discreet items in the International Upstream segment. These items include an out-of-period depreciation adjustment and an equity redetermination of a field covering multiple leases. The depreciation adjustment covered multiple years, and was not material in any year. These items were either non-cash or cash neutral.

Slide 7 summarizes the quarterly change in Chevron's worldwide net oil equivalent production. Production decreased 8,000 barrels per day between quarters. Price changes had a modest effect on volumes under production sharing and variable royalty contracts in the third quarter, increasing production about 2,000 barrels per day. The average WTI price declined about $1.75 per barrel between quarters. Base business production decreased 30,000 barrels per day between quarters, mainly due to plant turnarounds in Europe and normal field declines, partly offset by higher demand in Thailand.

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