Why did Chevron's reported earnings fall so much in the fourth quarter?

Reported 4Q 2023 earnings of $2.3 billion were held down by roughly $3.7 billion of after-tax special items, including $1.8 billion of U.S. upstream write-offs and impairments (mainly in California) and $1.95 billion of after-tax decommissioning obligations for previously sold Gulf of Mexico assets. Foreign currency effects reduced earnings by a further $479 million. Excluding these items, adjusted earnings were $6.5 billion, which is lower than the prior-year quarter but far less dramatic a decline.

Is the dividend safe after the increase, and how does it compare with free cash flow?

The dividend was increased 8 percent to $1.63 per quarter. Full-year 2023 dividends totaled $11.3 billion, against free cash flow of $19.8 billion (or $23.0 billion excluding working capital). Coverage was therefore comfortable in 2023, although free cash flow was down about 47 percent from 2022 and the dividend is paid from a cash flow base that is sensitive to commodity prices.

What does the rise in the net debt ratio mean for the balance sheet?

The net debt ratio rose to 7.3 percent from 3.3 percent a year earlier, because net debt (total debt less cash and marketable securities) increased to about $12.6 billion from $5.4 billion, as cash balances fell. Total debt actually declined to $20.8 billion from $23.3 billion, so the increase reflects lower cash after record capital returns and acquisitions. The company still reports a gross debt ratio of 11.5 percent, which indicates a leverage level that remains moderate.

How important were the 2023 acquisitions to production and capital spending?

The PDC Energy acquisition added about 266,000 barrels of oil-equivalent per day to U.S. production in 4Q 2023 and was the main driver of the 34 percent year-over-year rise in U.S. quarterly output. Capex excluding the PDC purchase price was up 32 percent for the year, including about $450 million invested in PDC assets post-close and roughly $650 million of inorganic spend tied to the ACES Delta majority stake. The pending Hess acquisition is a larger transaction that is not yet reflected in these results.

What are the main risks flagged for investors in this release?

The release highlights exposure to crude oil and natural gas price volatility, refining margins, and OPEC+ production decisions. It also flags integration risk for PDC and the proposed Hess acquisition, including the need for Hess stockholder approval and regulatory clearance. Other risks include impairment and decommissioning charges on existing assets, geopolitical events such as the Russia-Ukraine and Israel-Hamas conflicts, and the evolving environmental and climate regulation that could affect operations and asset values.

CVX 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed February 2, 2024. Cited figures are marked; the original filing is the authoritative source.

Chevron reported fourth quarter 2023 earnings of $2.3 billion^a ($1.22 per diluted share), down sharply from $6.4 billion ($3.33 per share) a year earlier.

Adjusted earnings, which exclude special items and foreign currency effects, were $6.5 billion^b ($3.45 per share) versus $7.9 billion ($4.09 per share) in 4Q 2022. The headline GAAP decline was driven largely by $1.8 billion of U.S. upstream impairments (mainly California) and $1.9 billion of decommissioning obligations tied to previously sold U.S. Gulf of Mexico assets, along with a $479 million foreign currency drag. U.S. upstream posted a $1.3 billion loss for the quarter, while international upstream and downstream results were stronger than a year ago.

Full-year 2023 results were weaker than 2022 on lower commodity realizations and refining margins: net income of $21.4 billion^c versus $35.5 billion, and adjusted earnings of $24.7 billion versus $36.5 billion. Operationally, however, the year was a milestone one. Worldwide net oil-equivalent production reached a record above 3.1 million barrels per day, up 4 percent, with U.S. output up 14 percent on the PDC Energy acquisition and Permian growth.

Cash returns were a record $26.3 billion^d, including $14.9 billion of buybacks, and the company cut its net debt ratio to 7.3 percent from 3.3 percent after a debt-financed capital program and the PDC deal. Management also raised the quarterly dividend 8 percent to $1.63 per share. For investors, the key tensions are the quality of the earnings decline versus the strength of the capital return framework and the leverage cost of the year's acquisitions.

Cash flow from operations fell to $35.6 billion from $49.6 billion, and free cash flow fell to $19.8 billion from $37.6 billion, which is still well above the dividend of $11.3 billion but leaves less room for buybacks at the 2023 pace. The pending Hess Corporation acquisition, which was announced but not closed as of this release, is a further source of uncertainty for the balance sheet and share count. Note that the 8-K itself is an earnings release furnished under Item 2.02 and is not deemed filed for purposes of Section 18.

02—Key points

Key Highlights

4Q 2023 GAAP earnings were $2.3 billion ($1.22 per diluted share), down from $6.4 billion ($3.33) in 4Q 2022, reflecting $1.8 billion of U.S. upstream impairments and $1.9 billion of Gulf of Mexico decommissioning charges.
Adjusted 4Q 2023 earnings were $6.5 billion ($3.45 per share) versus $7.9 billion ($4.09) a year earlier; full-year adjusted earnings were $24.7 billion ($13.13 per share) versus $36.5 billion ($18.83).
Record 2023 cash returned to shareholders of $26.3 billion, including $11.3 billion in dividends and $14.9 billion in share repurchases.
Quarterly dividend raised 8 percent to $1.63 per share, payable March 11, 2024, to holders of record on February 16, 2024.
Record worldwide and U.S. production in 2023, with worldwide output above 3.1 million BOE/d (up 4 percent) and U.S. output up 14 percent, driven by the PDC Energy acquisition and Permian growth.
Net debt ratio fell to 7.3 percent at year-end after over $4 billion of debt reduction, including all debt assumed in the PDC acquisition, though up from 3.3 percent a year earlier.
Cash flow from operations fell to $35.6 billion from $49.6 billion and free cash flow to $19.8 billion from $37.6 billion, mainly on lower commodity prices and refining margins; 2023 capex rose 32 percent to $15.8 billion.

03—Questions

Frequently Asked Questions

Why did Chevron's reported earnings fall so much in the fourth quarter?
Reported 4Q 2023 earnings of $2.3 billion were held down by roughly $3.7 billion of after-tax special items, including $1.8 billion of U.S. upstream write-offs and impairments (mainly in California) and $1.95 billion of after-tax decommissioning obligations for previously sold Gulf of Mexico assets. Foreign currency effects reduced earnings by a further $479 million. Excluding these items, adjusted earnings were $6.5 billion, which is lower than the prior-year quarter but far less dramatic a decline.
Is the dividend safe after the increase, and how does it compare with free cash flow?
The dividend was increased 8 percent to $1.63 per quarter. Full-year 2023 dividends totaled $11.3 billion, against free cash flow of $19.8 billion (or $23.0 billion excluding working capital). Coverage was therefore comfortable in 2023, although free cash flow was down about 47 percent from 2022 and the dividend is paid from a cash flow base that is sensitive to commodity prices.
What does the rise in the net debt ratio mean for the balance sheet?
The net debt ratio rose to 7.3 percent from 3.3 percent a year earlier, because net debt (total debt less cash and marketable securities) increased to about $12.6 billion from $5.4 billion, as cash balances fell. Total debt actually declined to $20.8 billion from $23.3 billion, so the increase reflects lower cash after record capital returns and acquisitions. The company still reports a gross debt ratio of 11.5 percent, which indicates a leverage level that remains moderate.
How important were the 2023 acquisitions to production and capital spending?
The PDC Energy acquisition added about 266,000 barrels of oil-equivalent per day to U.S. production in 4Q 2023 and was the main driver of the 34 percent year-over-year rise in U.S. quarterly output. Capex excluding the PDC purchase price was up 32 percent for the year, including about $450 million invested in PDC assets post-close and roughly $650 million of inorganic spend tied to the ACES Delta majority stake. The pending Hess acquisition is a larger transaction that is not yet reflected in these results.
What are the main risks flagged for investors in this release?
The release highlights exposure to crude oil and natural gas price volatility, refining margins, and OPEC+ production decisions. It also flags integration risk for PDC and the proposed Hess acquisition, including the need for Hess stockholder approval and regulatory clearance. Other risks include impairment and decommissioning charges on existing assets, geopolitical events such as the Russia-Ukraine and Israel-Hamas conflicts, and the evolving environmental and climate regulation that could affect operations and asset values.

04—Continue

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