01—Abstract
Summary
Summary of the 10-K filed March 9, 2004. Cited figures are marked; the original filing is the authoritative source.
ChevronTexaco's 2003 Form 10-K shows a sharp earnings recovery: net income rose to $7.23 billiona ($6.96 diluted per share) from $1.13 billion in 2002, driven mainly by higher crude oil and natural gas prices (WTI averaged about $31, Henry Hub gas above $5/mcf) and a rebound in downstream refining margins.
Operating revenues reached $120 billionb. Results were helped by a $365 million gain on the exchange of Dynegy preferred stock, while 2002 was depressed by $2.3 billion of Dynegy-related write-downs. Excluding special items, the upstream segment carried earnings, with U.S. and international E&P segment income of $2.8 billion and $3.4 billion respectively.
Balance sheet and cash flow strengthened meaningfully. Operating cash flow rose 24% to $12.3 billionc, total debt fell by $3.7 billion to $12.6 billion, and the debt-to-capitalization ratio dropped to about 26% from 34%. Equity grew to $36.3 billion.
Capital and exploratory spending was $7.4 billiond including affiliates, down from $9.3 billion, and management guided to $8.5 billion for 2004, with about 75% directed to exploration and production. The company's underlying concerns remain production and portfolio issues. Worldwide oil-equivalent output fell about 4% in 2003, with U.S. output down 7% due to mature field declines and storm damage, and management expects further U.S. declines in 2004.
Management is pursuing a significant asset disposition program (about $1.1 billion of assets held for sale, mainly U.S. non-core properties), a global restructuring of the downstream business, and a potentially material MTBE and Unocal patent litigation exposure. Reserve replacement was 108% of production, the 11th consecutive year above 100%.
02—Key points
Key Highlights
- Net income of $7.23 billion (diluted EPS $6.96) versus $1.13 billion in 2002, aided by higher oil and gas prices and a $365 million gain on Dynegy preferred stock exchange
- Operating cash flow of $12.3 billion, up 24%, funding capital spending of $5.6 billion (consolidated) and reducing total debt by $3.7 billion to $12.6 billion
- Debt-to-capitalization ratio improved to roughly 26% from 34% a year earlier; committed credit facilities of $4.3 billion and AA/Aa2 senior debt ratings
- Worldwide oil-equivalent production declined about 4% in 2003, with U.S. output down 7%; management expects lower U.S. output in 2004
- Reserve replacement of 108% of production (114% excluding sales and acquisitions), the 11th straight year above 100%
- Downstream earnings rebounded to $1.17 billion on improved refining margins, while chemicals earnings stayed weak at $69 million
- Ongoing portfolio pruning: about $1.1 billion of U.S. upstream assets held for sale, a global downstream restructuring, and a planned 2004 capital budget of $8.5 billion
03—Questions
Frequently Asked Questions
What drove the large increase in ChevronTexaco's 2003 earnings?
Net income rose to $7.23 billion from $1.13 billion, mainly because crude oil and natural gas prices were much higher (WTI averaged about $31, up roughly $5, and Henry Hub gas averaged over $5 per mcf versus about $3). Downstream margins also recovered, and 2002 had been depressed by $2.3 billion of Dynegy-related write-downs. Special items were roughly neutral in 2003 (net -$53 million).
Is production growing or shrinking, and what does management expect for 2004?
Production is shrinking. Worldwide oil-equivalent output fell about 4% in 2003, and output has declined at roughly 2% a year over five years. U.S. production fell 7% from normal field declines and storm-related shut-ins. Management expects lower U.S. oil-equivalent production in 2004, with the overall 2004 level uncertain due to OPEC quotas and civil unrest, notably in Nigeria.
How much debt does the company carry and is the balance sheet healthy?
Total debt and capital lease obligations fell to $12.6 billion from $16.3 billion, and the debt-to-capitalization ratio dropped to about 26%. Operating cash flow of $12.3 billion covered capital spending, dividends of about $3 billion, and a $1.4 billion pension contribution. Senior debt is rated AA (S&P) and Aa2 (Moody's), and the company had $5.3 billion of cash and marketable securities.
What are the main litigation and environmental risks disclosed?
The main items are the Unocal patent litigation, which could bring royalties on gasoline production in California and potentially a larger share of U.S. output, and MTBE lawsuits (more than 60 claims) that could be material to net income in any period. Environmental remediation reserves were $1.15 billion at year-end, and the company also faces an Elk Hills equity redetermination with a possible net liability of up to about $200 million. The company says these exposures are not expected to be materially adverse to its financial position, but some could be material to earnings in a given period.
What is the company doing to improve returns and what are the capital plans for 2004?
ChevronTexaco is selling non-strategic U.S. upstream properties (about 400 core fields will be retained), has restructured its downstream business along global functional lines, and sold the El Paso refinery and about 400 service stations. Capital and exploratory spending is budgeted at $8.5 billion for 2004 (about 15% above 2003), with about $6.4 billion for exploration and production, most of it outside the U.S. in areas such as Nigeria, Angola, deepwater Gulf of Mexico, Kazakhstan, and natural gas/LNG projects.
04—Continue