As Chevron Lowers Its Y2K Bar, Analysts Worry

Investors, nervous about Y2K, are also concerned about the oil giant's maverick Y2K budgeting.
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Imagine Evel Knievel falling from the sky on his red, white and blue motorcycle, having cleared only half of the 20 buses lined up beneath him. He suddenly hollers about the roar: "Did I say 20? Actually, I was aiming for 15!" You likely wouldn't so much admire his quick study of the challenge at hand as be suspicious of his ability to get the job done.

So, I can understand why some Y2K analysts are concerned about the plans of

Chevron

(CHV)

, the global oil giant based in San Francisco. A study of filings with the

Securities and Exchange Commission

shows a disturbing oddity: Either Chevron is nowhere near completing the $250 million year 2000 problem it identified just a year ago, or Chevron, alone among the oil companies, finds its Y2K problem suddenly disappearing.

For an oil company, fixing the Y2K problem means a lot more than adding some "19s" into corporate legacy computer systems. Y2K problems are a global tangle of far-flung offices, ships and refineries. Chevron has found problems with PCs on offshore oil platforms in Angola, embedded chips at filling stations throughout California, satellites for credit-card processing and computerized valves buried deep in drilling rigs at the Gobe oil fields in Papua New Guinea. By any standard, it is a bewildering problem.

The company has admitted as much. In filings with the SEC, Chevron said that on Dec. 31, 1998, its global Y2K problem would cost $250 million to fix. It warned that it has only spent $75 million on the project but reassured regulators, saying "the rate of expenditure

is expected to increase significantly in 1999." But by end of the March quarter, only $25 million more had been spent. The rate barely accelerated in the second quarter, rising to $30 million. In the third quarter, with time running out and the $250 million goal looming, Chevron reported that its total expenditures were at just $145 million.

Y2K, Why Worry? Chevron Lowers Its Bar

Source: Securities and Exchange Commission

But each quarter, Chevron has nudged down the estimate of its total Y2K remediation project, lowering the bar by exactly $25 million a quarter. By the end of the third quarter, Chevron said its problem only looked like $175 million, not $250 million, a 30% reduction. "In the beginning of the project, there were no firm numbers in place," says Chevron spokeswoman Nancy Malinowski. "These were ballpark estimates and the ballpark was high. As the work began and they actually got in there, they began to see exactly what they were dealing with."

And yet, the other major oil companies haven't seen their Y2K problem disappear. The SEC requires that all publicly traded companies disclose their estimated Y2K remediation costs.

Mobil

saw that project goal fall by just 5% over the year ended Sept. 30, to $175 million from $185 million. Its merger partner

Exxon

saw its internal Y2K cost estimates increase over the same period, to $240 million from $225 million. (The companies, now trading as

ExxonMobil

(XOM) - Get Report

, have yet to combine information technology operations.)

Reuters

reports that

Weiss Rating

says most large U.S. oil-refining companies are either average or above average in adherence to their Y2K plans. Chevron is one of the few rated below average.

So, why would Chevron keep trimming its expected costs? Some analysts point toward increased liability the company might face in the event of Y2K-related failures. By lowering its overall Y2K target, legal experts say Chevron might lower its exposure to lawsuits should Y2K problems occur, because it can more easily the meet the lowered target.

"Jurors are looking for confirmation that a company has done everything that it needed to do," says Philip K. Anthony, CEO of

Decision Quest

, a prominent national jury consulting firm. Decision Quest has done research into possible jury reaction to Y2K-related failures. "If Chevron says they've identified a problem of a certain size and done most of that work, a jury might look more favorably at that."

Mobil Was Less Sanguine

Source: Securities and Exchange Commission

Exxon Saw Costs Increase

Source: Securities and Exchange Commission

To be sure, Chevron's filings might just be a case of extremely conservative Y2K budgeting. And the company says that when expenses are revealed for the year's last quarter, they will show a final surge toward the finish line. "Costs went up more towards the end," Malinowski says. "We had to hire extra people, consultants and take people away from their primary jobs. All of this has added to the cost of that project."

Still, investors who are nervous about Y2K are nervous about Chevron's maverick Y2K budgeting. "If they can't estimate their project -- whether they're over budget or they're excessively under budget -- it tells me that they didn't have an understanding of the scope of the project," says William Ulrich of the California-based

Tactical Strategy Group

. Ulrich has advised hundreds of companies on their Y2K plans and is particularly concerned about Chevron. "It seems to me that their 10-K and 10-Q filings have been loaded with all kinds of legal terminology that they 'might not be ready for this' and they 'may have problems with that,' but in the meantime they haven't spent a good percentage of their budget. There is a concern that they're not effectively managing their business, and the bottom line is that Wall Street doesn't like a company that can't figure out its budgeting."

Chevron is busy staffing up a high-tech Y2K monitoring facility in San Ramon, Calif., where some 50 employees will monitor the millennial rollover across the globe. "We have plans to follow the sun as it crosses different time zones, through 90 countries, from Papua New Guinea back around to Hawaii," Malinowski says.

The Street will be watching as well. "Think of a North Sea drilling rig, the size of the

Sears Tower

, where it's estimated that there are 8,000 to 10,000 microprocessors and systems," says Dennis G. Grabow, of the Chicago-based

Millennium Investment Corporation

. "Embedded systems are a more difficult problem than remediating code in a bank. I don't have a lot of confidence that they'll get all of that fixed. I don't short Chevron here -- oils can be tricky because an oil shortage could be good for the stock -- but I don't go into the millennium long either."

Chevron insists that the job will get done. "We're very confident that we'll be fine for the rollover," Malinowski says. "You can't equate readiness with dollars spent. Ongoing projects, when you actually start to do the labor, in the beginning you have to just guess. There are a lot of places you have to look to find Y2K issues."

Which is why plenty of investors will be looking at Chevron.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

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archive.

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