01—Abstract
Summary
Summary of the 10-K filed March 1, 2006. Cited figures are marked; the original filing is the authoritative source.
Chevron's 2005 10-K (filed March 1, 2006) reports a record year shaped by the August 2005 acquisition of Unocal, which added roughly 1.5 billion barrels of net oil-equivalent proved reserves and was valued at $17.3 billiona.
Net income rose to $14.1 billionb in 2005 from $13.3 billion in 2004, while sales and other operating revenues climbed about 28% to $193.6 billion. Upstream (exploration and production) earned $11.7 billion, up from $9.5 billion, and international upstream was the main driver. Downstream earnings fell to $2.8 billion from $3.3 billion as hurricane-related downtime and higher costs offset stronger refining margins.
Management guides to significantly higher investment and production in 2006. Capital and exploratory spending is projected to rise 33% to $14.8 billionc, with about $11.3 billion directed to exploration and production, and oil-equivalent production is expected to reach 2.7 to 2.8 million barrels per day, up from about 2.5 million in 2005. Growth drivers include Unocal properties, new project start-ups, and major developments such as Tahiti, Blind Faith, Agbami, TCO's expansion, and Gorgon LNG.
Hurricanes Katrina and Rita reduced Gulf of Mexico output, and management expects Gulf production of about 200,000 barrels per day in 2006 versus roughly 300,000 before the storms. Balance sheet and shareholder returns remained strong. Total debt rose to $12.9 billiond, the debt-to-capital ratio fell to 17.0% from 19.9%, and stockholders' equity reached $62.7 billion.
Dividends rose 12.5% to $0.45 per quarter, and the company repurchased about $3 billion of stock in 2005, with a new authorization of up to $5 billion over three years. Key risks flagged include commodity price volatility, hurricane and political disruption, OPEC quotas, and environmental liabilities, including about $1.3 billion of environmental reserves and ongoing MTBE litigation.
02—Key points
Key Highlights
- Net income of $14.1 billion in 2005, up about 6% from $13.3 billion in 2004; diluted EPS of $6.54 versus $6.28
- Sales and other operating revenues of $193.6 billion, up 28% year over year, driven by higher crude, gas and refined product prices and five months of Unocal revenue
- Unocal acquisition closed August 10, 2005 for an aggregate $17.3 billion (about $7.5 billion cash plus 169 million Chevron shares), adding roughly 1.5 billion barrels of net proved reserves
- 2006 capital and exploratory budget of $14.8 billion, up 33%, with about $11.3 billion for upstream
- 2006 oil-equivalent production guidance of 2.7 to 2.8 million barrels per day, versus about 2.5 million in 2005
- Upstream income rose to $11.7 billion from $9.5 billion, while downstream income fell to $2.8 billion from $3.3 billion due to hurricane downtime
- Quarterly dividend raised 12.5% to $0.45 per share; $3 billion of stock repurchased in 2005 and up to $5 billion more authorized over three years
03—Questions
Frequently Asked Questions
How did the Unocal acquisition affect Chevron's 2005 results and 2006 outlook?
Unocal contributed only about five months of earnings and production in 2005, yet it added roughly 1.5 billion barrels of net proved reserves and about $2 billion to U.S. upstream and $2.9 billion to international upstream earnings through higher prices and Unocal volumes. For 2006, the acquisition is a key reason production is expected to rise to 2.7 to 2.8 million barrels per day, alongside new project start-ups. The purchase also brought about $4.7 billion of goodwill and roughly $4.3 billion of asset retirement obligations, and it increased debt by about $2.2 billion.
Why did downstream earnings decline in 2005 despite stronger refining margins?
U.S. downstream income fell about $300 million from 2004 as refinery downtime and higher fuel costs offset better average refined-product margins. The Pascagoula refinery was shut for more than a month after Hurricane Katrina, and Gulf Coast marketing and pipeline operations were disrupted. International downstream income dropped about 10% to $1.8 billion, mainly due to lower sales volumes, higher fuel and transportation costs, an explosion and fire at a U.K. terminal, and tax adjustments.
How much is Chevron spending on capital projects, and where is it focused?
Total 2005 capital and exploratory expenditures were $11.1 billion excluding the Unocal purchase, about three-fourths of it upstream, with roughly 70% of upstream investment outside the United States. For 2006, spending is budgeted at $14.8 billion, including affiliates. Major upstream focus areas include deepwater Gulf of Mexico exploration, western Africa, and development projects in Angola, Nigeria, Kazakhstan and the deepwater Gulf of Mexico. Downstream spending is estimated at $2.8 billion, and chemicals at $250 million.
What are the main risks investors should consider from this filing?
Chevron states that crude oil prices are the single largest variable affecting results, and it generally does not hedge that exposure. Other key risks include hurricanes and other severe weather in the Gulf of Mexico, political instability in host countries (about 23% of proved reserves are in Kazakhstan and about 22% are in OPEC countries), possible OPEC quota limits on production, and environmental and litigation liabilities, including more than 70 MTBE lawsuits. Environmental reserves rose to $1.47 billion at year-end 2005, mainly from Unocal-related sites. The filing also cites uncertainty in integrating Unocal and the potential for future production shortfalls.
04—Continue