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CVX > SEC Filings for CVX > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for CHEVRON CORP

Form 10-Q for CHEVRON CORP


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

             Second Quarter 2014 Compared with Second Quarter 2013
               And Six Months 2014 Compared with Six Months 2013

Key Financial Results
                          Earnings by Business Segment
                                               Three Months Ended             Six Months Ended
                                                     June 30                       June 30
                                               2014            2013          2014          2013
                                                            (Millions of dollars)
Upstream
United States                             $      1,054      $   1,083     $   1,966     $   2,215
International                                    4,210          3,866         7,605         8,650
Total Upstream                                   5,264          4,949         9,571        10,865
Downstream
United States                                      517            138           939           273
International                                      204            628           492         1,194
Total Downstream                                   721            766         1,431         1,467
Total Segment Earnings                           5,985          5,715        11,002        12,332
All Other                                         (320 )         (350 )        (825 )        (789 )
Net Income Attributable to Chevron
Corporation (1) (2)                       $      5,665      $   5,365     $  10,177     $  11,543
____________________
(1) Includes foreign currency effects     $       (232 )    $     302     $    (311 )   $     548


(2) Income net of tax; also referred to as "earnings" in the discussions that follow.

Net income attributable to Chevron Corporation for second quarter 2014 was $5.7 billion ($2.98 per share - diluted), versus $5.4 billion ($2.77 per share - diluted) in the corresponding 2013 period. Net income attributable to Chevron Corporation for the first six months of 2014 was $10.2 billion ($5.34 per share
- diluted), versus $11.5 billion ($5.95 per share - diluted) in the first six months of 2013. Upstream earnings in second quarter 2014 were $5.3 billion compared with $4.9 billion a year earlier. The increase between comparative periods was mainly due to higher gains on asset sales and increased crude oil realizations and sales volumes, partly offset by higher depreciation and exploration expenses, along with adverse foreign currency effects. Earnings for the first six months of 2014 were $9.6 billion compared with $10.9 billion a year earlier. Gains from asset sales and higher crude oil realizations were more than offset by higher depreciation, exploration and operating expenses and unfavorable foreign currency effects. Downstream earnings in second quarter 2014 were $721 million compared with $766 million in the corresponding 2013 period. Higher earnings from the 50 percent-owned Chevron Phillips Chemical Company LLC and stronger margins on refined product sales in the U.S. were more than offset by lower international margins and adverse foreign currency effects. Earnings for the first six months of 2014 were $1.4 billion compared with $1.5 billion in the corresponding 2013 period. Higher margins on refined product sales in the U.S., stronger earnings from the 50 percent-owned Chevron Phillips Chemical Company LLC and gains from asset sales in the U.S. were more than offset by lower international margins and unfavorable changes in effects of foreign currency and derivative instruments. Refer to pages 29 through 32 for additional discussion of results by business segment and "All Other" activities for second quarter of 2014 versus the same period in 2013.

Business Environment and Outlook
Chevron is a global energy company with substantial business activities in the following countries: Angola, Argentina, Australia, Azerbaijan, Bangladesh, Brazil, Cambodia, Canada, China, Colombia, Democratic


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Republic of the Congo, Denmark, Indonesia, Kazakhstan, Myanmar, the Netherlands, Nigeria, Norway, the Partitioned Zone between Saudi Arabia and Kuwait, the Philippines, Republic of the Congo, Singapore, South Africa, South Korea, Thailand, Trinidad and Tobago, the United Kingdom, the United States, Venezuela, and Vietnam.
Earnings of the company depend mostly on the profitability of its upstream and downstream business segments. The biggest factor affecting the results of operations for the company is the price of crude oil. In the downstream business, crude oil is the largest cost component of refined products. Seasonality is not a primary driver of changes in the company's quarterly earnings during the year.
To sustain its long-term competitive position in the upstream business, the company must develop and replenish an inventory of projects that offer attractive financial returns for the investment required. Identifying promising areas for exploration, acquiring the necessary rights to explore for and to produce crude oil and natural gas, drilling successfully, and handling the many technical and operational details in a safe and cost-effective manner are all important factors in this effort. Projects often require long lead times and large capital commitments.
The company's operations, especially upstream, can also be affected by changing economic, regulatory and political environments in the various countries in which it operates, including the United States. From time to time, certain governments have sought to renegotiate contracts or impose additional costs on the company. Governments may attempt to do so in the future. Civil unrest, acts of violence or strained relations between a government and the company or other governments may impact the company's operations or investments. Those developments have at times significantly affected the company's operations and results and are carefully considered by management when evaluating the level of current and future activity in such countries.
The company continually evaluates opportunities to dispose of assets that are not expected to provide sufficient long-term value or to acquire assets or operations complementary to its asset base to help augment the company's financial performance and growth. Refer to the "Results of Operations" section, beginning on page 29 for discussions of net gains on asset sales during 2014. Asset dispositions and restructurings may also occur in future periods and could result in significant gains or losses.
The company closely monitors developments in the financial and credit markets, the level of worldwide economic activity, and the implications for the company of movements in prices for crude oil and natural gas. Management takes these developments into account in the conduct of daily operations and for business planning.
Comments related to earnings trends for the company's major business areas are as follows:
Upstream Earnings for the upstream segment are closely aligned with industry prices for crude oil and natural gas. Crude oil and natural gas prices are subject to external factors over which the company has no control, including product demand connected with global economic conditions, industry production and inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related damage and disruptions, competing fuel prices, and regional supply interruptions or fears thereof that may be caused by military conflicts, civil unrest or political uncertainty. Any of these factors could also inhibit the company's production capacity in an affected region. The company closely monitors developments in the countries in which it operates and holds investments, and seeks to manage risks in operating its facilities and businesses. The longer-term trend in earnings for the upstream segment is also a function of other factors, including the company's ability to find or acquire and efficiently produce crude oil and natural gas, changes in fiscal terms of contracts, and changes in tax laws and regulations. The company continues to actively manage its schedule of work, contracting, procurement and supply-chain activities to effectively manage costs. However, price levels for capital and exploratory costs and operating expenses associated with the production of crude oil and natural gas can be subject to external factors beyond the company's control. External factors include not only the general level of inflation, but also commodity prices and prices charged by the industry's material and service providers, which can be affected by the volatility of the industry's own supply-and-demand conditions for such materials and services. In recent years, Chevron and the oil and gas industry generally experienced an increase in certain costs that exceeded the general trend of inflation in many areas of the world. Capital and exploratory expenditures and operating expenses can also be affected by damage to production facilities caused by severe weather or civil unrest, delays in construction, or other factors.


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The chart above shows the trend in benchmark prices for Brent crude oil, West Texas Intermediate (WTI) crude oil, and U.S. Henry Hub natural gas. The Brent price averaged $109 per barrel for the full-year 2013. During 2014, Brent averaged $110 per barrel in the second quarter, $109 per barrel for the six-month period, and ended July at about $104. The majority of the company's equity crude production is priced based on the Brent benchmark. While geopolitical tensions and supply disruptions have supported crude prices in 2014, the price for Brent-related crudes in the Atlantic Basin also reflects continued softness in the global economic recovery, high refinery maintenance in Europe and higher production from Iraq and Iran.
The WTI price averaged $98 per barrel for the full-year 2013. During 2014, WTI averaged $103 per barrel in the second quarter, $101 per barrel for the six-month period and ended July at about $98. WTI traded at a discount to Brent throughout 2013 and the first six months of 2014 due to high inventories and excess crude supply in the U.S. midcontinent market.
A differential in crude oil prices exists between high quality (high-gravity, low-sulfur) crudes and those of lower quality (low-gravity, high-sulfur). The amount of the differential in any period is associated with the relative supply/demand balances for each crude type, which are functions of the capacity of refineries that are able to process each as feedstock into high-value light products (motor gasoline, jet fuel, aviation gasoline and diesel fuel). In the first six months of 2014, the differential eased in North America as light sweet crude oil production in the U.S. midcontinent region remained robust, while refinery maintenance dampened demand. Outside of North America, supply disruptions in Libya and elsewhere supported light sweet crude markets relative to heavier, more sour crudes.
Chevron produces or shares in the production of heavy crude oil in California, Indonesia, the Partitioned Zone between Saudi Arabia and Kuwait, Venezuela and in certain fields in Angola, China and the United Kingdom sector of the North Sea. (See page 35 for the company's average U.S. and international crude oil realizations.)
In contrast to price movements in the global market for crude oil, price changes for natural gas in many regional markets are more closely aligned with supply-and-demand conditions in those markets. In the U.S., prices at Henry Hub averaged $4.86 per thousand cubic feet (MCF) for the first six months of 2014, compared with $3.76 during the first six months of 2013. At the end of July 2014, the Henry Hub spot price was $3.75 per MCF. Fluctuations in the price for natural gas in the United States are closely associated with customer demand relative to the volumes produced in North America.
Outside the United States, price changes for natural gas depend on a wide range of supply, demand and regulatory circumstances. In some locations, Chevron is investing in long-term projects to install infrastructure to produce and liquefy natural gas for transport by tanker to other markets. International natural gas realizations averaged $6.00 per MCF during the first six months of 2014, unchanged from the same period last year. (See page 35 for the company's average natural gas realizations for the U.S. and international regions.) The company's worldwide net oil-equivalent production in the first six months of 2014 averaged 2.567 million barrels per day. About one-fifth of the company's net oil-equivalent production in the first six months of 2014 occurred in the OPEC-member countries of Angola, Nigeria, Venezuela and the Partitioned Zone between Saudi Arabia and Kuwait. OPEC quotas had no effect on the company's net crude oil production for the second quarter or six-month periods of 2014 or 2013. At their June 2014 meeting, members of OPEC supported maintaining the current production quota of 30 million barrels per day, which has been in effect since December 2008.


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The company estimates that net oil-equivalent production for the full-year 2014 will average about 98 to 99 percent of the previously-announced target of 2.610 million barrels per day, based on an average Brent price of $109 per barrel. This estimate is subject to many factors and uncertainties, including quotas that may be imposed by OPEC; price and other production entitlement effects; changes in fiscal terms or restrictions on the scope of company operations; delays in construction, start-up or ramp-up of projects; fluctuations in demand for natural gas in various markets; weather conditions that may shut in production; civil unrest; changing geopolitics; delays in completion of maintenance turnarounds; greater-than-expected declines in production from mature fields; or other disruptions to operations. The outlook for future production levels is also affected by the size and number of economic investment opportunities and, for new, large-scale projects, the time lag between initial exploration and the beginning of production. Investments in upstream projects generally begin well in advance of the start of the associated crude oil and natural gas production. A significant majority of Chevron's upstream investment is made outside the United States.
On November 7, 2011, while drilling a development well in the deepwater Frade Field about 75 miles offshore Brazil, an unanticipated pressure spike caused oil to migrate from the well bore through a series of fissures to the sea floor, emitting approximately 2,400 barrels of oil. The source of the seep was substantially contained within four days and the well was plugged and abandoned. On March 14, 2012, the company identified a small, second seep in a different part of the field. No evidence of any coastal or wildlife impacts related to these seeps have emerged. A Brazilian federal district prosecutor filed two civil lawsuits seeking $10.7 billion in damages for each of the two seeps. On October 1, 2013, the Court dismissed the two civil lawsuits and approved a settlement under which Chevron and its consortium partners agreed to spend approximately $43 million on social and environmental programs. On November 11, 2013, the Court announced that the settlement is final. The federal district prosecutor also filed criminal charges against Chevron and eleven Chevron employees. On February 19, 2013, the court dismissed the criminal matter, and on appeal, on October 9, 2013, the appellate court reinstated two of the ten allegations, specifically those charges alleging environmental damage and failure to provide timely notification to authorities. On February 27, 2014, Chevron filed a motion for reconsideration. The company's ultimate exposure related to the incident is not currently determinable, but could be significant to net income in any one period.
Refer to the "Results of Operations" section on pages 29 through 30 for additional discussion of the company's upstream business.
Downstream Earnings for the downstream segment are closely tied to margins on the refining, manufacturing and marketing of products that include gasoline, diesel, jet fuel, lubricants, fuel oil, fuel and lubricant additives, and petrochemicals. Industry margins are sometimes volatile and can be affected by the global and regional supply-and-demand balance for refined products and petrochemicals, and by changes in the price of crude oil, other refinery and petrochemical feedstocks, and natural gas. Industry margins can also be influenced by inventory levels, geopolitical events, costs of materials and services, refinery or chemical plant capacity utilization, maintenance programs, and disruptions at refineries or chemical plants resulting from unplanned outages due to severe weather, fires or other operational events. Other factors affecting profitability for downstream operations include the reliability and efficiency of the company's refining, marketing and petrochemical assets, the effectiveness of its crude oil and product supply functions, and the volatility of tanker-charter rates for the company's shipping operations, which are driven by the industry's demand for crude oil and product tankers. Other factors beyond the company's control include the general level of inflation and energy costs to operate the company's refining, marketing and petrochemical assets.
The company's most significant marketing areas are the West Coast of North America, the U.S. Gulf Coast, Asia and southern Africa. Chevron operates or has significant ownership interests in refineries in each of these areas. Refer to the "Results of Operations" section on pages 31 through 32 for additional discussion of the company's downstream operations.
All Other consists of mining activities, power and energy services, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, and technology companies.


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Operating Developments
Noteworthy operating developments for the upstream business in recent months included the following:
Australia - All Gorgon Train 1 and common modules required for first LNG have been delivered and installed on Barrow Island.

Australia - The first deliveries arrived at the Wheatstone Project's Materials Offloading Facility. Preparations continue for arrival of the first Train 1 process modules later this year.

Chad/Cameroon - Completed the sale of the company's nonoperated interest in a producing concession in Chad and the related export pipeline interests in Chad and Cameroon for approximately $1.3 billion.

Nigeria - Achieved initial production of product at the Escravos Gas-to-Liquids facility.

United States - Offshore hookup and commissioning is underway at the Jack/St. Malo Project, which remains on track for expected start-up in fourth quarter 2014.

United States - The production platform has been installed offshore at the nonoperated Tubular Bells development, and start-up is expected in third quarter 2014.

In the downstream, commercial production began at the new premium lubricants base oil facility in Pascagoula, Mississippi, and expansion of the Singapore additives plant was completed. Chevron Phillips Chemical Company LLC, the company's 50 percent-owned affiliate, achieved start-up of the world's largest on-purpose 1-hexene plant, with a capacity of 250,000 metric tons per year, at its Cedar Bayou complex in Baytown, Texas.
The company purchased $1.25 billion of its common stock in second quarter 2014 under its share repurchase program.

Results of Operations
Business Segments The following section presents the results of operations and
variances on an after-tax basis for the company's business segments - Upstream
and Downstream - as well as for "All Other." (Refer to Note 5, on page 10, for a
discussion of the company's "reportable segments," as defined under the
accounting standards for segment reporting.)
Upstream
                              Three Months Ended           Six Months Ended
                                    June 30                    June 30

2014 2013 2014 2013
(Millions of dollars)

U.S. Upstream Earnings $ 1,054 $ 1,083 $ 1,966 $ 2,215

U.S. upstream earnings of $1.1 billion in second quarter 2014 were down $29 million from the corresponding period in 2013. Earnings decreased due to higher depreciation, exploration and operating expenses of $140 million, $100 million and $60 million, respectively. Partially offsetting these effects were gains on asset sales of $180 million and stronger crude oil and natural gas realizations of $50 million.
U.S. upstream earnings for the first six months of 2014 were $2.0 billion, down $249 million from the corresponding 2013 period. Earnings decreased due to higher depreciation, operating and exploration expenses of $220 million, $140 million and $110 million, respectively, along with lower crude oil volumes of $90 million, partially offset by gains on asset sales of $200 million and higher natural gas realizations of $130 million.
The company's average realization per barrel for U.S. crude oil and natural gas liquids in second quarter 2014 was $92.44, up from $92.25 a year ago. The average six-month realization per barrel for U.S. crude oil and natural gas liquids was $91.98 in 2014, compared to $93.36 a year earlier. The average natural gas realization in second quarter 2014 was $4.09 per thousand cubic feet, compared with $3.78 in 2013. The average six-month natural gas realizations were $4.42 per thousand cubic feet in 2014 and $3.44 in 2013.


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Net oil-equivalent production of 667,000 barrels per day in second quarter 2014 was up 8,000 barrels per day, or 1 percent, from the second quarter a year earlier. Production increases in the Permian Basin in Texas and New Mexico and the Marcellus Shale in western Pennsylvania were partially offset by normal field declines. Net oil-equivalent production of 654,000 barrels per day in the first six months of 2014 was down 7,000 barrels per day, or 1 percent, from a year earlier. Production increases in the Permian Basin in Texas and New Mexico and the Marcellus Shale in western Pennsylvania were more than offset by normal field declines.
The net liquids component of oil-equivalent production of 460,000 barrels per day in second quarter 2014 was up 1 percent from the corresponding 2013 period. The net liquids component of oil-equivalent production of 449,000 barrels per day in the six-month period decreased 1 percent from the 2013 period. Net natural gas production was 1.24 billion cubic feet per day in second quarter 2014, an increase of 1 percent from the 2013 comparative period. Net natural gas production was 1.23 billion cubic feet per day in the six-month period, a decrease of 1 percent from the 2013 period.

                                          Three Months Ended         Six Months Ended
                                               June 30                   June 30
                                           2014          2013        2014         2013
                                                     (Millions of dollars)
   International Upstream Earnings*    $    4,210      $ 3,866    $   7,605     $ 8,650
   ____________________
   * Includes foreign currency effects $     (147 )    $   275    $    (200 )   $   447

International upstream earnings of $4.2 billion in second quarter 2014 increased $344 million from the corresponding period in 2013. The increase between quarters was primarily due to a gain on the sale of interests in Chad and Cameroon of $430 million, and higher realizations and sales volumes for crude oil of $280 million and $230 million, respectively. Partially offsetting these effects were higher exploration and depreciation expenses of $150 million and $110 million, respectively. Foreign currency effects decreased earnings by $147 million in the 2014 quarter, compared with an increase of $275 million a year earlier.
Earnings for the first six months of 2014 were $7.6 billion, down $1.0 billion from the corresponding period in 2013. The decrease between periods was primarily due to higher depreciation, exploration and tax expenses of $270 million, $250 million and $170 million, respectively. Partially offsetting these items was the gain on the sale of interests in Chad and Cameroon of $430 million. Foreign currency effects decreased earnings by $200 million in the first six months of 2014, compared with an increase of $447 million a year earlier.
The average realization per barrel of crude oil and natural gas liquids in second quarter 2014 was $101.15, compared with $93.71 a year earlier. The average realization per barrel of crude oil and natural gas liquids in the first six months of 2014 was $99.93, compared with $98.09 a year earlier.The average natural gas realization per thousand cubic feet in second quarter 2014 was $5.98 compared with $5.93 in the 2013 period. The average natural gas realization per thousand cubic feet in the first six months of 2014 was $6.00, unchanged from the 2013 period.
International net oil-equivalent production of 1.88 million barrels per day in second quarter 2014 was down 45,000 barrels per day, or 2 percent, from second quarter a year ago. Production increases from project ramp-ups in Nigeria, Brazil and Argentina were more than offset by price and other production entitlement effects in several locations and greater maintenance and turnaround downtime at Tengizchevroil in Kazakhstan. The negative effect of price and other production entitlement effects and planned maintenance was approximately 55,000 barrels per day. International net oil-equivalent production of 1.91 million barrels per day in in the first six months of 2014 was down 39,000 barrels per day, or 2 percent, from the corresponding 2013 period. Production increases due to project ramp-ups in Nigeria, Argentina, Brazil and Angola were more than offset by price and other production entitlement effects in several locations, increased downtime at Tengizchevroil in Kazakhstan, normal field declines and weather-related, unplanned downtime.
The net liquids component of oil-equivalent production of 1.23 million barrels per day in second quarter 2014 and 1.26 million barrels per day in the first six months of 2014 decreased 2 percent for both respective periods. Net natural gas production of 3.86 billion cubic feet per day in second quarter 2014 and 3.95 billion cubic feet per day in the first six months of 2014, decreased 3 percent and 2 percent from the corresponding 2013 periods.


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Downstream
                                 Three Months Ended             Six Months Ended
                                      June 30                       June 30
                                   2014            2013          2014           2013
                                              (Millions of dollars)


U.S. Downstream Earnings $ 517 $ 138 $ 939 $ 273

U.S. downstream operations earned $517 million in second quarter 2014, compared with earnings of $138 million a year earlier. The increase was mainly due to higher earnings of $160 million from the 50 percent-owned Chevron Phillips Chemical Company LLC and higher margins on refined product sales of $150 . . .

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