Chevron Corporation (CVX)

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Chevron (CVX)

Q2 2011 Earnings Call

July 29, 2011 11:00 am ET


George Kirkland - Vice Chairman and Executive Vice President of Upstream & Gas

Patricia Yarrington - Chief Financial Officer, Principal Accounting Officer and Vice President

Jeanette Ourada -


Katherine Lucas Minyard

Edward Westlake - Crédit Suisse AG

Evan Calio - Morgan Stanley

Paul Cheng

Douglas Leggate - BofA Merrill Lynch

Paul Sankey - Deutsche Bank AG

Iain Reid - Jefferies & Company, Inc.

Jason Gammel - Macquarie Research



Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. 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

Okay. Thank you, Sean. Welcome to Chevron's second quarter earnings conference call and webcast. On the call with me today are George Kirkland, Vice Chairman and Executive Vice President of Upstream and Gas; and Jeanette Ourada, General Manager, Investor Relations. Our focus today is on Chevron's financial and operating results for the second quarter of 2011. 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 shown on Slide 2.

Slide 3 provides an overview of our financial performance. The company's second quarter earnings were $7.7 billion or $3.85 per diluted share. Comparing the second quarter 2011 to the same quarter a year earlier, our earnings were up 43%. Upstream benefited from higher crude oil prices, and Downstream benefited from improved margins. Return on capital employed for the trailing 12 months was over 19%. Our debt ratio at the end of June was 9.1%. In the second quarter, we had share repurchases of $1 billion.

Effective for the third quarter and reflecting the strength in crude prices and of our current near-term outlook, we are increasing the upper end of our target range on share repurchases to $2 billion. In the third quarter, we expect share repurchases of $1.25 billion.

Turning to Slide 4. Cash generated from operations was nearly $11 billion during the second quarter. This is a new record for the company, topping last quarter's performance. Year-to-date, we have used this strong cash flow in a manner completely consistent with our established financial priorities. We raised the dividend in the second quarter by 8%. We've funded a strong capital program and made some modest acquisitions. Both the organic and the inorganic components of these outlays are poised to earn attractive returns and drive future growth for the company.

We've also continued to strengthen our balance sheet, and we've returned surplus cash to our shareholders in the form of share buybacks. At quarter end, our cash balances totaled nearly $18 billion. This puts us in a net cash position of $6.5 billion.

Jeanette will now take us through the quarterly comparisons.

Jeanette Ourada

Thanks, Pat. Turning to Slide 5. I'll compare results of the second quarter 2011 with the first quarter 2011. As a reminder, our earnings release compares second quarter 2011 with the same quarter a year ago.

Second quarter earnings were $7.7 billion, $1.5 billion higher than the first quarter. Starting on the left side of the chart, Upstream earnings were up $894 million driven by higher crude oil realizations. Downstream results increased $422 million between quarters, benefiting from improved margins. The variance in the other bar reflects a favorable swing in corporate tax items and lower corporate charges.

On Slide 6, our U.S. Upstream earnings for the second quarter were $501 million higher than the first quarter's results. Combined crude oil and natural gas realizations benefited earnings by $420 million. U.S. crude realizations increased 17% between consecutive quarters, well above the 8% increase in the average spot price of West Texas Intermediate. As a reminder, our U.S. crude realizations are tied primarily to Mars, Louisiana Light Sweet and San Joaquin Valley heavy crudes, all of which traded at premiums to WTI during the second quarter.

Natural gas realizations also improved, increasing 8% between quarters, slightly higher than the 5% increase in the average Henry Hub bid week. Higher operating expenses decreased earnings by $55 million between periods, reflecting higher costs related to maintenance activities across multiple assets, including more workovers.

The higher expenses also reflect a full quarter of operations for our new Marcellus assets. The other bar is comprised of a number of unrelated items, including gains on several small asset sales and higher volumes due to an additional day between quarters.

Turning to Slide 7. International Upstream earnings were up $393 million compared with the first quarter. Higher oil and natural gas realizations benefited earnings by $875 million. Average liquids realizations increased 12%, in line with the increase in average Brent Spot Prices.

Natural gas realizations contributed $70 million of the variance, improving 9% between quarters. This improvement was driven by price increases in our primary Asian gas markets, which have crude-linked pricing components. Higher operating expense decreased earnings $205 million. The increase was spread across multiple geographic areas and included higher environmental remediation expense and higher maintenance and fuel costs.

You'll recall that last year on our third quarter call, we highlighted our expectation of a 2011 full year increase in reported operating expense of approximately $1 billion due to a new Indonesian agreement where we sell oil and purchase natural gas. Previously, we handled this through a volume exchange. There is no bottom line earnings impact and no impact on production.

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