Why did Chevron's 1998 earnings decline so sharply?

The main driver was the collapse in crude oil and natural gas prices, which fell to 20-year lows. Average U.S. crude realizations dropped to $11.42 per barrel from $17.68 in 1997, and refined product realizations also declined. Reported results were further reduced by a $637 million litigation reserve tied to the Cities Service lawsuit. Lower margins in chemicals and the Pascagoula, Mississippi refinery shutdown after Hurricane Georges added to the pressure.

Is Chevron's dividend at risk?

The filing says there are no restrictions on the company's ability to pay dividends, and the quarterly dividend was set at $0.61 per share for 1999, an annual rate of $2.44. Chevron has paid dividends for 87 consecutive years and increased them for 11 years in a row. Dividends paid in 1998 totaled $1.596 billion, which exceeded operating cash flow after investing needs, so the company increased borrowings to fund the gap. Investors should watch whether oil prices recover enough to keep the payout covered without additional debt.

What is the Cities Service lawsuit and how much could it cost?

The case involves a claim by OXY USA, successor to Cities Service, arising from the 1982 termination of a merger agreement with Gulf Oil, which Chevron acquired in 1984. A 1996 jury verdict led to a judgment of $742 million, including interest accruing at 9.55% per year. The Oklahoma Supreme Court affirmed the judgment in March 1999, and Chevron recorded a $637 million reserve in 1998. Chevron said it will seek further review, so the final outcome is not yet certain.

What is Chevron's growth strategy for the coming years?

Chevron is focusing its capital on international exploration and production, which management calls its growth engine. Key projects include the Tengiz field in Kazakhstan, the Block 0 and Block 14 developments in Angola, Nigeria's Escravos gas project, the Hibernia field offshore Newfoundland, and the Genesis and Gemini deepwater projects in the Gulf of Mexico. Chevron is curtailing spending in international chemicals and downstream operations, has agreed to exclusively pursue a combination of its Permian Basin assets with ARCO's, and is selling non-core assets including its offshore California operations.

How exposed is Chevron to the Caltex tax claim and other contingencies?

The IRS has claimed $292 million in excise taxes, $140 million in penalties, and $1.6 billion in interest against Caltex, a 50%-owned affiliate, relating to crude oil sales to Japanese customers beginning in 1980. Caltex is contesting the claim and has posted a $2.52 billion letter of credit, guaranteed by Chevron and Texaco. Chevron also faces MTBE-related lawsuits, royalty and severance tax challenges, and the Richmond refinery explosion of March 25, 1999. Management said it does not expect these matters to materially affect its financial position or liquidity, though costs could be material to earnings in a given period.

CVX 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.

Chevron's 1998 10-K shows a sharp earnings decline driven by the collapse in crude prices.

Net income fell 59% to $1.339 billion^a from a record $3.256 billion in 1997, and sales and other operating revenues dropped 26% to $29.9 billion. Excluding special items, earnings were $1.945 billion, down 39%. The results were weighed down by a $637 million litigation reserve tied to the Cities Service lawsuit, which the Oklahoma Supreme Court affirmed in March 1999.

Average U.S. crude realizations fell to $11.42^b per barrel, the lowest in 20 years, and the company said it did not expect significant price improvement near term. Management is responding with a further $500 million cost reduction target for 1999 and a 1999 capital and exploratory budget of $5.1 billion, about 4% below 1998. The balance sheet and cash flow picture weakened.

Operating cash flow fell to $3.73 billion^c from $4.88 billion, which was not enough to cover investing needs and dividends of $2.44 per share. Total debt rose 25% to $7.56 billion, and the debt-to-capital ratio climbed to 30.7% from 25.8%. The interest coverage ratio dropped to 5.1 from 14.3.

Chevron still carries AA/Aa2 senior debt ratings and has $4.05 billion^d in committed credit facilities, and it says its dividend has been paid for 87 consecutive years. Strategically, Chevron is concentrating capital on international upstream growth, including Kazakhstan's Tengiz field, West Africa, Hibernia offshore Canada, and the deepwater Gulf of Mexico.

It is curtailing chemicals and downstream spending. Other items to note are the March 1999 explosion at the Richmond, California refinery, the planned Permian Basin combination with ARCO's unit, and the pending Caltex IRS excise tax claim, which Chevron and Texaco have guaranteed through a $2.52 billion letter of credit.

02—Key points

Key Highlights

Net income fell 59% to $1.339 billion ($2.04 diluted EPS) from a record $3.256 billion in 1997; excluding special items, earnings were $1.945 billion, down 39%.
A $637 million litigation reserve for the Cities Service lawsuit, after the Oklahoma Supreme Court affirmed a $742 million judgment, was the largest special charge (about $682 million after tax for litigation and regulatory issues).
Average U.S. crude realization fell to $11.42 per barrel from $17.68 in 1997, the lowest in 20 years; average spot WTI averaged $14.38 for 1998, and was $16.18 on March 26, 1999.
Operating cash flow of $3.73 billion did not cover investing spending and dividends, so borrowings rose; total debt climbed 25% to $7.56 billion and the debt-to-capital ratio rose to 30.7%.
Cost reduction target of another $500 million in 1999 and a 1999 capital and exploratory budget of $5.1 billion, about 4% lower than 1998, with roughly 70% of the E&P program directed to international projects.
Worldwide net oil and gas production reached a record 1,107,300 barrels per day, with reserve additions replacing 119% of production; international operations replaced 165% of output, while U.S. operations replaced 52%.
Quarterly dividend held at $0.61 per share ($2.44 annual), extending an increase streak of 11 consecutive years; the company retains AA senior debt ratings from S&P.

03—Questions

Frequently Asked Questions

Why did Chevron's 1998 earnings decline so sharply?
The main driver was the collapse in crude oil and natural gas prices, which fell to 20-year lows. Average U.S. crude realizations dropped to $11.42 per barrel from $17.68 in 1997, and refined product realizations also declined. Reported results were further reduced by a $637 million litigation reserve tied to the Cities Service lawsuit. Lower margins in chemicals and the Pascagoula, Mississippi refinery shutdown after Hurricane Georges added to the pressure.
Is Chevron's dividend at risk?
The filing says there are no restrictions on the company's ability to pay dividends, and the quarterly dividend was set at $0.61 per share for 1999, an annual rate of $2.44. Chevron has paid dividends for 87 consecutive years and increased them for 11 years in a row. Dividends paid in 1998 totaled $1.596 billion, which exceeded operating cash flow after investing needs, so the company increased borrowings to fund the gap. Investors should watch whether oil prices recover enough to keep the payout covered without additional debt.
What is the Cities Service lawsuit and how much could it cost?
The case involves a claim by OXY USA, successor to Cities Service, arising from the 1982 termination of a merger agreement with Gulf Oil, which Chevron acquired in 1984. A 1996 jury verdict led to a judgment of $742 million, including interest accruing at 9.55% per year. The Oklahoma Supreme Court affirmed the judgment in March 1999, and Chevron recorded a $637 million reserve in 1998. Chevron said it will seek further review, so the final outcome is not yet certain.
What is Chevron's growth strategy for the coming years?
Chevron is focusing its capital on international exploration and production, which management calls its growth engine. Key projects include the Tengiz field in Kazakhstan, the Block 0 and Block 14 developments in Angola, Nigeria's Escravos gas project, the Hibernia field offshore Newfoundland, and the Genesis and Gemini deepwater projects in the Gulf of Mexico. Chevron is curtailing spending in international chemicals and downstream operations, has agreed to exclusively pursue a combination of its Permian Basin assets with ARCO's, and is selling non-core assets including its offshore California operations.
How exposed is Chevron to the Caltex tax claim and other contingencies?
The IRS has claimed $292 million in excise taxes, $140 million in penalties, and $1.6 billion in interest against Caltex, a 50%-owned affiliate, relating to crude oil sales to Japanese customers beginning in 1980. Caltex is contesting the claim and has posted a $2.52 billion letter of credit, guaranteed by Chevron and Texaco. Chevron also faces MTBE-related lawsuits, royalty and severance tax challenges, and the Richmond refinery explosion of March 25, 1999. Management said it does not expect these matters to materially affect its financial position or liquidity, though costs could be material to earnings in a given period.

04—Continue

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