How much of the 2004 earnings increase came from underlying operations rather than one-time items?

Special items added about $1.2 billion after tax in 2004, versus a net charge of about $53 million in 2003. Management attributed roughly $400 million of the upstream improvement to special items and the rest to higher prices, partly offset by lower production. The core businesses therefore improved substantially, but the reported 84% net income increase overstates the growth in recurring earnings.

What is the outlook for production and why does it matter?

Worldwide oil-equivalent production fell about 5% in 2004 because of normal field declines, property sales and Hurricane Ivan shut-ins, and management expects 2005 output to be lower again. Growth is expected to come from projects such as Tengizchevroil's expansion (targeting 430,000-500,000 bpd of crude by late 2006), Angola Block 14, Nigeria's Agbami, and deepwater Gulf of Mexico fields. Investors should watch whether these projects reverse the six-year production decline.

How concentrated is the company's reserve base from a political-risk perspective?

About 27% of proved reserves were in Kazakhstan at year-end 2004, and about 25% of net proved oil-equivalent reserves were in OPEC member countries (Indonesia, Nigeria, Venezuela and the Partitioned Neutral Zone). Host-government actions, civil unrest and OPEC quotas are all identified as risk factors that could affect volumes and returns.

Is the company's balance sheet and dividend secure if oil prices fall?

The company reports $10.7 billion in cash and marketable securities, investment-grade ratings (AA from S&P and Aa2 from Moody's), $4.7 billion of committed credit facilities, and a debt ratio of 19.9%. Management states it can raise borrowings or cut capital spending to sustain the dividend during low-price periods, and it does not hedge crude price exposure beyond ordinary business needs. A significant, persistent decline in crude prices would still pressure earnings and capital plans.

What contingent liabilities could affect future results?

Key exposures include more than 70 MTBE lawsuits, environmental reserves of $1.05 billion, indemnities tied to the 2002 Equilon and Motiva sales (up to $300 million for specified liabilities, with no cap on certain environmental claims), about $963 million of guarantees for affiliates, and a potential $200 million net liability from the Elk Hills equity redetermination. Management does not expect these to have a material adverse effect on financial position, though amounts could be material to earnings in a given period.

CVX 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 3, 2005. Cited figures are marked; the original filing is the authoritative source.

ChevronTexaco's 2004 Form 10-K shows a record earnings year driven by high commodity prices and large asset-sale gains.

Net income rose to $13.3 billion^a ($6.28 diluted EPS) from $7.2 billion in 2003, on sales and other operating revenues of $150.9 billion. Upstream (exploration and production) earned $9.5 billion, and downstream (refining, marketing and transportation) earned $3.3 billion, its best result in recent years. Results also include $1.2 billion of net special gains, mainly from the sale of more than 300 North American producing properties for about $2.5 billion, so underlying earnings growth was smaller than the headline figure suggests.

The balance sheet strengthened considerably. Cash and marketable securities reached $10.7 billion, total debt fell to $11.3 billion^b, and the debt-to-capital ratio dropped to 19.9% from 25.8%. The company paid $3.2 billion in dividends, repurchased $2.1 billion of stock under a $5 billion three-year program, and raised its quarterly dividend 10% to $0.40 per share after a two-for-one split in September 2004.

The main risks are commodity-price exposure, a steady production decline (worldwide oil-equivalent output fell about 5% in 2004 and is expected to fall again in 2005, partly from Hurricane Ivan), and concentrated geopolitical exposure, with about 27% of proved reserves in Kazakhstan. Management guides to 2005 capital and exploratory spending of about $10 billion^c, 20% higher than 2004, with the Tengizchevroil expansion and deepwater projects as key growth drivers.

02—Key points

Key Highlights

Net income of $13.3 billion in 2004, up 84% from $7.2 billion in 2003; diluted EPS of $6.28 after the two-for-one split.
Net special gains of $1.2 billion, mainly from asset dispositions (about $2.5 billion of North American property sales), which flatter reported earnings relative to core operations.
Upstream earnings of $9.5 billion versus $6.4 billion in 2003, supported by average liquids realizations of $34.12/bbl versus $26.66/bbl and natural gas of $5.51/Mcf versus $5.01/Mcf.
Worldwide oil-equivalent production declined about 5% to 2.5 million barrels per day including affiliates, with 2005 production expected to be lower again.
Balance sheet strengthened: total debt down to $11.3 billion, debt-to-capital ratio of 19.9% (from 25.8%), and $10.7 billion of cash and marketable securities.
Shareholder returns: $3.2 billion in dividends, a 10% dividend increase to $0.40 per quarter, and $2.1 billion of share buybacks under a $5 billion program.
Capital and exploratory spending of $8.3 billion in 2004, with 2005 guidance of about $10 billion, 74% of it for exploration and production.

03—Questions

Frequently Asked Questions

How much of the 2004 earnings increase came from underlying operations rather than one-time items?
Special items added about $1.2 billion after tax in 2004, versus a net charge of about $53 million in 2003. Management attributed roughly $400 million of the upstream improvement to special items and the rest to higher prices, partly offset by lower production. The core businesses therefore improved substantially, but the reported 84% net income increase overstates the growth in recurring earnings.
What is the outlook for production and why does it matter?
Worldwide oil-equivalent production fell about 5% in 2004 because of normal field declines, property sales and Hurricane Ivan shut-ins, and management expects 2005 output to be lower again. Growth is expected to come from projects such as Tengizchevroil's expansion (targeting 430,000-500,000 bpd of crude by late 2006), Angola Block 14, Nigeria's Agbami, and deepwater Gulf of Mexico fields. Investors should watch whether these projects reverse the six-year production decline.
How concentrated is the company's reserve base from a political-risk perspective?
About 27% of proved reserves were in Kazakhstan at year-end 2004, and about 25% of net proved oil-equivalent reserves were in OPEC member countries (Indonesia, Nigeria, Venezuela and the Partitioned Neutral Zone). Host-government actions, civil unrest and OPEC quotas are all identified as risk factors that could affect volumes and returns.
Is the company's balance sheet and dividend secure if oil prices fall?
The company reports $10.7 billion in cash and marketable securities, investment-grade ratings (AA from S&P and Aa2 from Moody's), $4.7 billion of committed credit facilities, and a debt ratio of 19.9%. Management states it can raise borrowings or cut capital spending to sustain the dividend during low-price periods, and it does not hedge crude price exposure beyond ordinary business needs. A significant, persistent decline in crude prices would still pressure earnings and capital plans.
What contingent liabilities could affect future results?
Key exposures include more than 70 MTBE lawsuits, environmental reserves of $1.05 billion, indemnities tied to the 2002 Equilon and Motiva sales (up to $300 million for specified liabilities, with no cap on certain environmental claims), about $963 million of guarantees for affiliates, and a potential $200 million net liability from the Elk Hills equity redetermination. Management does not expect these to have a material adverse effect on financial position, though amounts could be material to earnings in a given period.

04—Continue

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