01—Abstract
Summary
Summary of the 10-K filed February 23, 2017. Cited figures are marked; the original filing is the authoritative source.
Chevron's 2016 10-K shows a severe downturn year: the company posted a net loss attributable to Chevron of $497 milliona (EPS of -$0.27), versus earnings of $4.59 billion in 2015 and $19.24 billion in 2014.
Sales and other operating revenues fell to $110.2 billionb from $129.9 billion, and the loss was driven by upstream, where U.S. upstream lost $2.05 billion and international upstream lost $483 million, reflecting Brent averaging $44/bbl in 2016 versus $52 in 2015. Downstream earnings declined to $3.4 billion from $7.6 billion, while the company's all-other segment charged $1.4 billion. Management responded with capital spending cuts of 39% to $18.1 billion, operating and administrative cost reductions of $2.5 billion, and $2.8 billion in net asset sale proceeds, while the dividend was raised by one cent to $4.29 per share for the 29th consecutive annual increase.
The balance sheet absorbed the shortfall through borrowing. Total debt and capital lease obligations rose to $46.1 billionc from $38.5 billion, the current ratio dropped to 0.9, the debt ratio rose to 24.1% from 20.2%, and the interest coverage ratio turned negative at -2.6x.
Management stated that the company retains high-quality credit ratings (AA-/Aa2) and substantial borrowing capacity, and it plans 2017 capital and exploratory spending of $19.8 billiond, with upstream production expected to grow 4 to 9 percent at a $50 Brent assumption. For investors, the key issues are the sensitivity of earnings to crude prices, the ability to sustain the dividend while free cash flow is negative after capex, the pace of major project start-ups (Gorgon, Wheatstone, Tengiz FGP/WPMP, Big Foot, Stampede), and litigation exposure tied to the Ecuador/Lago Agrio judgment, for which management does not estimate a reasonably possible loss.
02—Key points
Key Highlights
- Net loss attributable to Chevron of $497 million in 2016 (EPS -$0.27), down from $4.59 billion in 2015 and $19.24 billion in 2014.
- Upstream segment loss of $2.54 billion, with U.S. upstream at -$2.05 billion and international at -$483 million, reflecting lower crude realizations and impairments of about $3.0 billion in DD&A.
- Capital and exploratory expenditures cut 34% to $22.4 billion including affiliates ($18.1 billion in capex), with 2017 plans of $19.8 billion.
- Total debt and capital lease obligations increased to $46.1 billion from $38.5 billion; the debt ratio rose to 24.1%, and the current ratio fell to 0.9.
- Net proved reserves of 11.1 billion barrels of oil-equivalent at year-end 2016, with a reserve replacement ratio of 95%; 23% of reserves are in Kazakhstan, 20% in Australia and 18% in the U.S.
- Dividend raised by $0.01 per quarter to $4.29 per share annually, the 29th consecutive year of increases, while dividends paid totaled $8.0 billion.
- Downstream earnings fell to $3.4 billion from $7.6 billion, driven by lower refining margins, the absence of the 2015 Caltex Australia gain, and asset impairments.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 23, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $110.22B$138.48B | −20.4% |
| Cost of Revenue | $59.32B— | — |
| Gross Profit | $50.89B— | — |
| R&D Expenses | $476.00M$601.00M | −20.8% |
| SG&A Expenses | $4.30B$4.44B | −3.1% |
| Operating Expenses | $116.63B$133.63B | −12.7% |
| Interest Expense | $201.00M$0 | — |
| Net Income | -$497.00M$4.59B | −110.8% |
| EPS (Basic) | $-0.27$2.46 | −111.0% |
| EPS (Diluted) | $-0.27$2.45 | −111.0% |
| Shares Outstanding (Basic) | 1.87B1.87B | +0.3% |
| Shares Outstanding (Diluted) | 1.87B1.88B | −0.1% |
05—Questions
Frequently Asked Questions
Why did Chevron post a net loss in 2016?
The loss was driven primarily by the collapse in crude oil prices. Brent averaged $44 per barrel in 2016 versus $52 in 2015, and U.S. and international crude realizations fell sharply. Upstream results were also weighed down by impairments and depreciation of about $3.0 billion, lower asset-sale gains, and higher tax items, partly offset by lower exploration and operating expenses.
Can Chevron sustain its dividend given the lower earnings and rising debt?
The company paid $8.0 billion in dividends in 2016 and raised the quarterly payout by one cent, but operating cash flow fell to $12.8 billion versus $19.5 billion in 2015, below the level needed to cover capital spending plus dividends. The gap was funded by asset sales of $2.8 billion and additional borrowing. Management cites high-quality credit ratings and substantial borrowing capacity, and says it can modify capital spending to protect the dividend during extended low-price periods. Continued dividend growth therefore depends on a recovery in crude prices or further asset sales.
What are the main growth projects that could drive future production?
Management expects 2017 worldwide oil-equivalent production to grow 4 to 9 percent versus 2016 at a $50 Brent assumption, before asset sales of 50,000 to 100,000 barrels per day. Key projects include Gorgon Train 3 (start-up expected Q2 2017), Wheatstone LNG Train 1 (mid-2017), the Tengiz Future Growth and Wellhead Pressure Management Project (first oil planned for 2022, adding about 260,000 barrels per day), Mad Dog 2 (first oil 2021), Big Foot (late 2018), Stampede (2018), and Clair Ridge (2018). Shale growth in the Permian Basin is a key near-term driver.
What legal risks does Chevron face, and how material are they?
The largest exposure is the Ecuador (Lago Agrio) litigation, in which an Ecuadorian provincial court judgment was reduced by the National Court to about $9.5 billion. Chevron contends the judgment is fraudulent and unenforceable, and it has pursued enforcement challenges in Canada, Brazil and Argentina as well as a BIT arbitration against Ecuador. Management does not believe a reasonably possible loss or range of loss can be estimated. Other matters include EPA and California air-quality enforcement related to the Richmond refinery fire and several NOVs, each of which may result in civil penalties of $100,000 or more.
How exposed is Chevron to oil price changes?
Chevron's earnings are highly sensitive to crude prices, which the company identifies as the single largest variable affecting results. The upstream segment depends mainly on Brent and WTI benchmarks, and most equity crude is priced off Brent. Management's risk factors highlight that extended periods of low prices could reduce upstream earnings, cash flow, reserves, and capital programs, and could trigger impairments and downgrades. Derivative hedging is limited and was not material to 2016 results. The company also flags a 5 percent reduction in proved reserves as increasing UOP DD&A by about $700 million.
06—Continue