Chevron (CVX)

Q2 2012 Earnings Call

July 27, 2012 11:00 am ET

Executives

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

Jeanette Ourada

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

Analysts

Douglas Terreson - ISI Group Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

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

Jason Gammel - Macquarie Research

Robert A. Kessler - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Paul Y. Cheng - Barclays Capital, Research Division

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

John P. Herrlin - Societe Generale Cross Asset Research

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

Allen Good - Morningstar Inc., Research Division

Presentation

Operator

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Good morning. My name is Kevin, and I'll be your conference operator today. Welcome to the Chevron Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the Vice President and Chief Financial Officer of Chevron, Ms. Pat Yarrington. Please go ahead.

Patricia E. Yarrington

Great. Good morning, and thank you, Kevin. 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. 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 on Slide 2.

Slide 3 provides an overview of our financial performance. Financially, it was a strong quarter. The company's second quarter earnings were $7.2 billion or $3.66 per diluted share. Comparing the second quarter 2012 to the same quarter a year earlier, our earnings declined 7%. Upstream was down on lower crude prices and volumes, while Downstream benefited from improved margins and gains on asset sales. Return on capital employed for the trailing 12 months was about 20%. Our debt ratio at the end of June was 7.3%. In the second quarter, we repurchased $1.25 billion of our shares. In the third quarter, we expect to repurchase the same amount.

Relative to our peers as of June 30, we hold the #1 ranking in total shareholder return for the 3-year, 5-year and 10-year periods and actually, for every period in between. We believe this clearly demonstrates the long-term value we are creating for our shareholders.

Turning to Slide 4, cash generated from operations was almost $10 billion during the second quarter. At quarter end, our cash balances totaled over $21 billion. This puts us in a net cash position of $11 billion.

Jeanette will now take us through the quarterly comparison. Jeanette?

Jeanette Ourada

Thanks, Pat. Turning to Slide 5. I'll compare results of the second quarter 2012 with the first quarter 2012. As a reminder, our earnings release compares second quarter 2012 with the same quarter a year ago.

Second quarter earnings were $7.2 billion, over $700 million higher than the first quarter results. Upstream earnings were down $551 million on lower crude oil realizations, partly offset by favorable foreign exchange effects. Downstream results improved $1.1 billion between quarters, driven by better margins and favorable inventory effects. The variance in the Other bar reflects lower corporate charges and a favorable swing in corporate tax items.

On Slide 6, our U.S. upstream earnings for the second quarter were $211 million lower than the first quarter's results. Combined liquids and natural gas realizations reduced earnings by $145 million. Chevron's average U.S. crude oil realizations decreased 4% between consecutive quarters, substantially less than the roughly 9% drop in average WTI spot and posted Midway Sunset prices. Gulf of Mexico realizations actually increased between quarters due to the monthly lag on pricing of HLS, Mars and LLS. Natural gas realizations also dropped, decreasing 13% between quarters. Higher production volumes, primarily in the Gulf of Mexico and California, increased earnings by $40 million between periods. The Other bar reflects a number of unrelated items including incremental abandonment costs due to 2005 and 2008 hurricanes and higher exploration expense.

Turning to Slide 7. International upstream earnings were $340 million lower than the first quarter. Lower realizations reduced earnings by $525 million. Liquids realizations decreased 10%, in line with the decrease in average Brent spot prices. Partially offsetting were higher natural gas realizations, which increased earnings by $25 million. Lower liftings, mainly in Brazil and Australia, decreased earnings by $130 million. Higher operating expenses reduced earnings by $40 million, reflecting higher costs across multiple categories.

Moving to the next bar. A favorable swing in foreign currency effects increased earnings by about $425 million. The second quarter had a gain of $219 million, compared to a loss of $208 million in the first quarter. The total year-to-date impact is a favorable $11 million. The Other bar reflects a number of unrelated items including higher exploration expense.

Slide 8 summarizes the quarterly change in Chevron's worldwide net oil equivalent production. Production decreased 7,000 barrels per day between quarters. Lower prices increased volumes as the production sharing and variable-royalty contracts during the second quarter, increasing production about 7,000 barrels per day. Average Brent spot prices decreased about $10 per barrel between quarters, which resulted in about a 700 barrel per day volume increase for each dollar decrease in Brent.

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