Chevron Corporation (CVX)

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Chevron (CVX)

Q3 2012 Earnings Call

November 02, 2012 11:00 am ET

Executives

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

Jeff Gustavson

Michael K. Wirth - Executive Vice President of Global Refining Marketing Lubricants Supply and Trading

Analysts

Evan Calio - Morgan Stanley, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Douglas Terreson - ISI Group Inc., Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Faisel Khan - Citigroup Inc, Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Jason Gammel - Macquarie Research

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

Presentation

Operator

Good morning. My name is Sean, and I will be your conference facilitator today. Welcome to Chevron's Third Quarter 2012 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 E. Yarrington

All right. Thank you, Sean. Welcome to Chevron's Third Quarter Earnings Conference Call and Webcast. On the call with me today is Mike Wirth, Executive Vice President, Downstream & Chemicals; and Jeff Gustavson, General Manager, Investor Relations. 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. Financially, it was another solid quarter. The company's third quarter earnings were $5.3 billion or $2.69 per diluted share. Current quarter earnings are down about 30%, compared to both second quarter 2012 and to third quarter 2011. It is important to note that both comparative periods, second quarter this year and third quarter last year, are among the strongest quarters we've ever had. It is also important to note, as you will see in the remainder of the presentation, that a number of items negatively affect our third quarter comparisons, including swings in foreign exchange and timing effects in the downstream, as well as timing of asset sale gains and other transactions.

Year-to-date, earnings are down about 13% versus 2011, which was a record earnings year. Return on capital employed for the trailing 12 months was 17.4%, and our debt ratio at the end of September was 8.5%. In the third quarter, we repurchased $1.25 billion of our shares. In the fourth quarter, we expect to repurchase the same amount.

Turning to Slide 4. Cash generated from operations was almost $8 billion during the quarter, bringing our year-to-date operating cash flow to just over $26 billion, which is net of about $2 billion build in inventory. At quarter end, our cash balances were approximately $21 billion, and our net cash position was approximately $9 billion. We've had the right strategies and executed well against them. This has led to excellent financial performance, strong cash generation and total shareholder returns that lead the peer group.

Jeff will now take us through the quarterly comparisons.

Jeff Gustavson

Thanks, Pat. Turning to Slide 5. I'll compare results of the third quarter 2012 with the second quarter 2012. As a reminder, our earnings release compares third quarter 2012 with the same quarter a year ago. Third quarter earnings were $5.3 billion, a decrease of approximately $2 billion from second quarter results. Overall, foreign exchange movements accounted for about 25% of this decline. We moved from a net positive foreign exchange position in second quarter of almost $200 million to a net negative position of nearly $300 million in the third quarter.

Upstream earnings were down $481 million on unfavorable foreign exchange effects and lower production, partly offset by a gain on an asset sale.

Downstream results decreased by approximately $1.2 billion between quarters, driven primarily by unfavorable inventory valuation effects, lower volumes and lower realized margins. The variance in the Other bar reflects higher corporate charges and an unfavorable swing in corporate tax items.

On Slide 6. Our U.S. upstream earnings for the third quarter were $196 million lower than second quarter's results. Lower realizations reduced earnings by $140 million. Although key benchmark crude spot prices were roughly flat between quarters, Chevron's average U.S. crude oil realizations decreased 6% due to the monthly lag on pricing for most of our Gulf of Mexico volumes. This was partly offset by a 21% increase in natural gas realizations between periods.

Lower production volumes, primarily due to disruptions from Hurricane Isaac in the Gulf of Mexico, decreased earnings by $85 million between periods. The Other bar reflects a number of items, including an increase in operating expenses related to higher maintenance and other production-related activities, as well as lower exploration expenses during the quarter.

Turning to Slide 7. International upstream earnings were $285 million lower than the second quarter. An unfavorable swing in foreign currency effects decreased earnings by $470 million. The third quarter had foreign exchange losses of approximately $250 million, compared to gains of $220 million during the second quarter. As a reminder, these are primarily balance sheet translation effects.

Lower liftings, primarily due to planned turnarounds in Kazakhstan and the U.K., decreased earnings by $235 million. The gain from the previously announced sale of an equity interest in the Wheatstone LNG Project increased earnings by about $600 million. The sale supports our strategies and growth plans for LNG in the region, expanding our existing partnership with Tokyo Electric, who have committed to total LNG offerings of 4.2 million tons per year from the Wheatstone Project. The Other bar reflects a number of unrelated items, including higher DD&A, as well as higher operating expenses, largely associated with turnaround activities.

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