Chevron Corporation (CVX)

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Chevron (CVX)

Q3 2011 Earnings Call

October 28, 2011 11:00 am ET

Executives

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

Michael Wirth - Executive Vice President of Downstream and Chemicals

Jeanette Ourada -

Analysts

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

John P. Herrlin - Societe Generale Cross Asset Research

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

Blake Fernandez - Howard Weil Incorporated, Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

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

Paul Sankey - Deutsche Bank AG, Research Division

Allen Good - Morningstar Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Jason Gammel - Macquarie Research

Presentation

Operator

Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the call over to the Vice President of -- the Vice President and Chief Financial Officer for Chevron Corporation, Ms. Pat Yarrington. Please go ahead.

Patricia E. Yarrington

Thank you, Sean. Welcome to Chevron's Third Quarter Conference Call and Webcast. On the call with me today are Mike Wirth, Executive Vice President of Downstream and Chemicals; and Jeanette Ourada, General Manager, Investor Relations. Our focus today is on Chevron's financial and operating results for the third 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 third quarter earnings were $7.8 billion or $3.92 per diluted share. Earnings in the third quarter 2011 were more than twice that of third quarter 2010. Upstream benefited from higher crude oil prices, and Downstream benefited from gains on asset sales and improved margins.

Return on capital employed for the trailing 12 months exceeded 22%. Our debt ratio at the end of September was 7.5%. This is lower than previous quarters due to the early and economic redemption of a $1.5 billion Chevron Corporation bond. In the third quarter, we repurchased $1.25 billion of our shares. In the fourth quarter, we expect to repurchase the same amount.

Of particular note, we announced Wednesday that Chevron's Board of Directors approved a $0.03 per share or 3.8% increase in the quarterly common stock dividend. Our Board took the unusual step to authorize a second dividend increase this year because of the company's strong performance and financial position, as well as their confidence in the company's future cash-generating capabilities.

Chevron has a long history of annual dividend increases, 24 consecutive years. The 2 dividend actions in 2011 resulted in annual quarterly dividend increase of 12.5%, which is consistent with our priority of delivering long-term dividend growth to our shareholders.

Turning to Slide 4. Cash generation from operations was $11.5 billion during the third quarter. This is, yet again, a new quarterly record for the company and has resulted from continued strong operational performance. Asset sales during the quarter, which included the Pembroke Refinery, generated about $2 billion in proceeds. Year-to-date, cash generated from operations was $32 billion, reflecting the strong cash-generating power of our recent investments and of our base business. This strong cash flow allows us to both reinvest in the top-tier project queue, as well as reward our shareholders with meaningful dividend growth and a sustainable share repurchase program.

At quarter end, our cash balances totaled over $20 billion, up $3.3 billion year-to-date. This puts us in a net cash position of $10.6 billion.

Jeanette will now take us through the quarterly comparisons.

Jeanette Ourada

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

Third quarter earnings were $7.8 billion, slightly higher than second quarter earnings. Starting on the left side of the chart, Upstream earnings were down $670 million, driven by lower crude oil realizations and lower volumes, partly offset by favorable foreign exchange effects.

Downstream results increased $942 million between quarters, benefiting from gains on asset sales, favorable foreign exchange effects and improved international margins. The variance in the Other bar reflects the unfavorable swing in corporate tax items.

On Slide 6, our U.S. Upstream earnings for the third quarter were $442 million lower than the second quarter's results. Combined crude oil and natural gas realizations reduced earnings by $190 million. Chevron's average U.S. crude oil realizations decreased 7% between consecutive quarters, slightly higher than the 5% drop and posted Midway Sunset and LLS spot rices.

Natural gas realizations also dropped, decreasing 5% between quarters, in line with average Henry Hub spud prices. Between quarters, sales volumes decreased 32,000 barrels oil equivalent per day, decreasing earnings by $105 million. The Other bar is comprised of a number of unrelated items, including the absence of gains on several small asset sales during the second quarter.

Turning to Slide 7. International Upstream earnings were down $228 million compared with the second quarter. Lower realizations decreased earnings by $225 million. Unit realizations for liquids decreased about 4%, in line with the decrease in average Brent spot prices. Natural gas realizations were relatively flat between periods, but benefited earnings by about $45 million due to sales mix.

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