01—Abstract
Summary
Summary of the 10-K filed March 17, 2003. Cited figures are marked; the original filing is the authoritative source.
ChevronTexaco's 2002 10-K shows a sharp earnings decline driven by a large non-cash write-down tied to its Dynegy investment.
Net income fell to $1.132 billiona ($1.07 per diluted share) from $3.288 billion in 2001 and $7.727 billion in 2000, and return on average stockholders' equity dropped to 3.5%. Special items totaled a $3.334 billion after-tax charge, of which $2.306 billion related to Dynegy (a $1.626 billion write-down of its common and preferred stock plus $680 million of its share of Dynegy's own special items). Excluding special items, the business remained profitable, but upstream results were pressured by lower U.S. natural gas realizations (about $2.89 per Mcf versus $4.38 in 2001) and a 3% decline in worldwide oil-equivalent production.
Downstream earnings collapsed to a loss in the U.S. segment, with management stating it does not expect a rebound to 2001 or 2000 levels in 2003. Balance sheet and cash flow remained solid. Operating cash flow was $9.9 billionb, cash and marketable securities totaled $3.8 billion, total debt and capital lease obligations declined to $16.3 billion, and the debt-to-capital ratio was 34%.
Credit ratings were AA (S&P) and Aa2 (Moody's). The company's 2003 capital and exploratory budget is $8.5 billionc, about 8% below 2002, with roughly 75% allocated to exploration and production and most of that outside the U.S. Management is also reviewing its asset portfolio and may pursue dispositions, and it is rebuilding a U.S. natural gas marketing function after Dynegy exited gas trading. The company's Dynegy preferred stock ($1.5 billion face, carried at $300 million) is not expected to be redeemed in full when due, and Dynegy's re-audit could trigger further restatements or write-downs.
Key 2003 watch items include the outcome of the Dynegy recapitalization, the Unocal patent litigation affecting gasoline sales, the Venezuela general strike impact on production, and growth projects such as Tengiz (expected to lift capacity to 430,000 to 500,000 barrels per day by mid-2006) and the Athabasca oil sands. Production in 2003 is expected to be slightly above 2002 levels in capacity terms, but actual output remains uncertain due to OPEC quotas and geopolitical risk.
02—Key points
Key Highlights
- Net income fell 66% to $1.132 billion ($1.07 per diluted share) from $3.288 billion in 2001, largely due to $3.334 billion of after-tax special items.
- Dynegy-related charges totaled $2.306 billion pre-tax, including a $1.626 billion write-down of common and preferred stock investments; the remaining book value of the Dynegy investment is $347 million.
- Return on average stockholders' equity declined to 3.5% from 9.8% in 2001; return on average capital employed fell to 3.2% from 7.8%.
- Worldwide oil-equivalent production declined about 3% to roughly 2.6 million barrels per day, while proved reserve replacement reached 114% of production (1.1 billion barrels added).
- U.S. refining, marketing and transportation posted a $398 million segment loss versus $1.254 billion of income in 2001, reflecting weak refined product margins; management does not expect a 2003 rebound to 2001 levels.
- Operating cash flow was $9.9 billion and total debt declined to $16.3 billion; senior debt remains rated AA by S&P and Aa2 by Moody's, with a debt-to-capital ratio of 34%.
- The 2003 capital and exploratory budget is $8.5 billion, about 8% below 2002, with roughly 75% directed to exploration and production and significant international growth projects including Tengiz, Angola, Nigeria and Australia LNG.
03—Questions
Frequently Asked Questions
Why did ChevronTexaco's net income fall so sharply in 2002?
Net income dropped to $1.132 billion from $3.288 billion in 2001, mainly because of $3.334 billion in after-tax special items. The largest component was $2.306 billion of Dynegy-related charges, reflecting a write-down of the investment after the collapse of the merchant energy sector. Weaker U.S. natural gas prices, lower production and very weak downstream refining margins also reduced earnings from operations.
How exposed is ChevronTexaco to Dynegy going forward?
The company holds a roughly 26% common stock interest carried at $47 million and $1.5 billion of Dynegy preferred stock carried at $300 million. Management does not expect Dynegy to have sufficient liquidity to redeem the preferred stock when it is due in November 2003. Further write-downs could occur if Dynegy's value declines again or if its ongoing re-audit of 1999-2001 results produces additional restatements. ChevronTexaco has also terminated its gas purchase and sale agreements with Dynegy and is building its own natural gas marketing unit.
Is the dividend and balance sheet at risk?
Dividends paid were about $3.0 billion in 2002 and the company stated it can continue paying its common dividend while maintaining its high credit ratings, using commercial paper flexibility and capital spending adjustments if needed. Operating cash flow of $9.9 billion and $3.8 billion of cash and marketable securities provide substantial coverage. However, the interest coverage ratio fell to 7.6 from 9.6, and the current ratio remains below 1.0, so financial flexibility is narrower than in prior years.
What are the main growth drivers and risks for 2003?
Growth is expected from international projects, including Tengiz capacity expansion to 430,000 to 500,000 barrels per day by mid-2006, Angola and Nigeria deepwater developments, the Malampaya gas project, the Australian LNG expansion, and the Athabasca oil sands. Key risks include OPEC production quotas, potential disruption from Venezuela's general strike and Iraq-related geopolitical events, Gulf of Mexico storm exposure, the Unocal patent litigation that could affect U.S. gasoline sales, and possible asset dispositions as management reviews its portfolio.
04—Continue