Why did reported net income fall in 1993, and what was the underlying trend?

Reported net income fell 19% to $1.265 billion from $1.569 billion, mainly because of $883 million in after-tax special items, including a $543 million U.S. refining restructuring charge and a $130 million Ortho sale gain offset by other charges. Excluding special items, earnings rose 38% to $2.148 billion, driven by lower operating costs, lower exploration expense, and stronger refined product margins. The 1992 comparison also includes a $641 million cumulative accounting-change charge, so the year-over-year comparison is distorted.

How exposed is Chevron to low crude oil prices, and what happened to realizations?

Chevron is exposed. Posted WTI prices fell to $13.25 at year-end 1993, the lowest in over five years, and the company's average U.S. crude realization dropped to $14.58 per barrel from $16.50. Management warned that if low prices persist, earnings and cash flow from ongoing operations may be negatively affected, and that the goal of generating $1 billion annually in cash from U.S. E&P may be difficult to reach in 1994. Partial offsets came from higher natural gas prices and strong refined product margins for much of the year.

What is the company doing about its U.S. refining business and environmental compliance costs?

Chevron is restructuring U.S. refining by selling the Philadelphia refinery (letter of intent with Sun Company signed in February 1994) and the Port Arthur refinery (exclusive negotiations with Clark Refining announced March 1994). This cuts about 350,000 barrels per day, or 25%, of U.S. refining capacity and avoids large Clean Air Act investments. The company still plans to spend nearly $1 billion on the Richmond and El Segundo, California refineries for reformulated gasoline, and an estimated $1.1 billion in refining environmental capital over five years. Environmental remediation reserves totaled $746 million at year-end 1993.

How much production and reserve growth is Chevron getting from its international projects?

Net crude oil and NGL production rose about 1% to 950,150 barrels per day including affiliates, with growth from Papua New Guinea, Kazakhstan, and Indonesia. Proved reserves were 2.4 billion barrels of crude and NGLs for consolidated companies, and the Tengizchevroil joint venture in Kazakhstan added 1.1 billion barrels of net reserves. However, TCO is producing only about 30,000 barrels per day against 65,000 of capacity because export pipeline capacity is constrained, and negotiations on the pipeline are described as very difficult. Other growth projects include the Alba field in the UK North Sea, which began production in January 1994, and the Hibernia project offshore Newfoundland, expected to start in 1997.

CVX 10-K FY1993 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1994. Cited figures are marked; the original filing is the authoritative source.

Chevron Corporation's 1993 Form 10-K, filed March 30, 1994, describes a year of weak oil prices, a large restructuring, and a continued pivot toward international upstream growth.

Net income fell 19% to $1.265 billion^a ($3.89 per share) from $1.569 billion in 1992, but the headline figure is distorted by special items. Special items reduced 1993 earnings by $883 million after tax, driven largely by a $543 million charge to restructure U.S. refining and marketing (the sale of the Philadelphia and Port Arthur refineries). Excluding special items and the 1992 accounting-change charge, earnings were $2.148 billion, up 38% from 1992.

Crude prices fell to five-year lows by year-end, with WTI posted at $13.25^b, and the company's realization from U.S. crude fell to $14.58 per barrel. Sales and other operating revenues declined to $36.2 billion from $38.2 billion. Management is pursuing a strategy of shifting capital to international exploration and production (68% of E&P spending in 1993, expected to reach 75% in 1994), growing the Caltex affiliate in Asia Pacific, reducing refining capacity by about 25%, and cutting costs.

Operating and administrative costs fell to $6.51^c per barrel from $7.45 in 1991, and the company set a further target of a $0.25 per barrel reduction by the end of 1994. Balance-sheet metrics are solid: the debt-to-capital ratio improved to 35.0%, senior debt is rated AA/Aa2, and the company plans a two-for-one stock split and a 5-cent quarterly dividend increase to $0.925 per share.

Key risks include continued low crude and product prices, dependence on the Tengizchevroil (Kazakhstan) pipeline to unlock production growth, Point Arguello production disruption after tankering was suspended, and substantial environmental compliance spending (about $1.1 billion^d in refining capital over five years). Pending legal matters, including the Cities Service and Gulf Pension litigation, were not expected to be material.

02—Key points

Key Highlights

Net income fell 19% to $1.265 billion ($3.89/share) from $1.569 billion in 1992; excluding special items, earnings rose 38% to $2.148 billion
Special items reduced 1993 earnings by $883 million after tax, led by a $543 million U.S. refining and marketing restructuring charge tied to selling the Philadelphia and Port Arthur refineries (about 25% of U.S. refining capacity)
Sales and other operating revenues declined 5% to $36.2 billion, reflecting lower crude oil and refined product prices partly offset by higher U.S. natural gas prices ($1.99/MCF vs. $1.70)
Strategic shift to international E&P: 68% of 1993 E&P capital spending went overseas, expected to rise to 75% in 1994, with a $2.4 billion E&P budget and total 1994 capital spending of about $4.9 billion including affiliates
Cost discipline continued: operating and administrative costs fell to $6.51 per barrel from $7.45 in 1991, with a further $0.25 per barrel reduction targeted by end-1994
Balance sheet remains strong: total debt-to-capital ratio improved to 35.0% from 36.4%, debt fell $303 million to $7.5 billion, and senior debt is rated AA (S&P) and Aa2 (Moody's)
Shareholder actions: quarterly dividend raised to $0.925 per share (annualized $3.70) and a two-for-one stock split proposed for approval at the May 1994 annual meeting

03—Questions

Frequently Asked Questions

Why did reported net income fall in 1993, and what was the underlying trend?
Reported net income fell 19% to $1.265 billion from $1.569 billion, mainly because of $883 million in after-tax special items, including a $543 million U.S. refining restructuring charge and a $130 million Ortho sale gain offset by other charges. Excluding special items, earnings rose 38% to $2.148 billion, driven by lower operating costs, lower exploration expense, and stronger refined product margins. The 1992 comparison also includes a $641 million cumulative accounting-change charge, so the year-over-year comparison is distorted.
How exposed is Chevron to low crude oil prices, and what happened to realizations?
Chevron is exposed. Posted WTI prices fell to $13.25 at year-end 1993, the lowest in over five years, and the company's average U.S. crude realization dropped to $14.58 per barrel from $16.50. Management warned that if low prices persist, earnings and cash flow from ongoing operations may be negatively affected, and that the goal of generating $1 billion annually in cash from U.S. E&P may be difficult to reach in 1994. Partial offsets came from higher natural gas prices and strong refined product margins for much of the year.
What is the company doing about its U.S. refining business and environmental compliance costs?
Chevron is restructuring U.S. refining by selling the Philadelphia refinery (letter of intent with Sun Company signed in February 1994) and the Port Arthur refinery (exclusive negotiations with Clark Refining announced March 1994). This cuts about 350,000 barrels per day, or 25%, of U.S. refining capacity and avoids large Clean Air Act investments. The company still plans to spend nearly $1 billion on the Richmond and El Segundo, California refineries for reformulated gasoline, and an estimated $1.1 billion in refining environmental capital over five years. Environmental remediation reserves totaled $746 million at year-end 1993.
How much production and reserve growth is Chevron getting from its international projects?
Net crude oil and NGL production rose about 1% to 950,150 barrels per day including affiliates, with growth from Papua New Guinea, Kazakhstan, and Indonesia. Proved reserves were 2.4 billion barrels of crude and NGLs for consolidated companies, and the Tengizchevroil joint venture in Kazakhstan added 1.1 billion barrels of net reserves. However, TCO is producing only about 30,000 barrels per day against 65,000 of capacity because export pipeline capacity is constrained, and negotiations on the pipeline are described as very difficult. Other growth projects include the Alba field in the UK North Sea, which began production in January 1994, and the Hibernia project offshore Newfoundland, expected to start in 1997.

04—Continue

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