雪佛龍 (CVX) 2002 Q4 法說會逐字稿

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  • Operator

  • Good morning, ladies and gentlemen, and well welcome to your ChevronTexaco fourth quarter Earnings Conference Call.

  • At this time, all lines have been placed on a listen-only mode, and the floor will be open for your questions and comments following the presentation.

  • It is my pleasure to turn the floor over to Mr. Dave O’Reilly.

  • Sir, you may begin.

  • David OReilly - Chairman and Chief Executive Officer

  • Thank you.

  • This is Dave O’Reilly, and welcome to all of you to this Earnings Conference Call.

  • Today I'm going joined by John Watson, our CFO and Pierre Breber, Manager – Investor Relations.

  • We'll refer to slides which were e-mailed to you this morning and which are also available on the web.

  • So let's get started.

  • Side 2 shows today's agenda.

  • John will begin by providing a review of the fourth quarter earnings.

  • I'll follow John and talk about 2002, a difficult and disappointing year for the company, but one in which a lot of good was accomplished.

  • I'll then talk about our plans for 2003, a year in which we'll be highly focused on improving our performance and portfolio.

  • We'll expect to see more synergy benefits flow to the bottom line.

  • We have rationalized our capital program further and focused it on the highest value activities, particularly our portfolio of world class major upstream growth projects.

  • And we are committing to high grading our portfolio and realizing maximum economic benefits for our assets.

  • All of this activity is geared towards improving our returns and capital by 2 to 3% in the 2003 to 2004 time frame.

  • The commitment I made to you at the analyst meeting in November 2001, shortly after the merger closed.

  • But let me turn it to John to review the fourth quarter.

  • John Watson - Vice President and Chief Financial Officer

  • Thanks Dave.

  • Good morning, I'll start by reminding you that our presentation contains estimates projection and other forward-looking statements.

  • Please review the Safe Harbor Statement on Chart 3.

  • I'll cover the quarter variance an analysis with the next set of slides.

  • If you have detailed questions about the quarter I will take them during Q&A, or you can contact Pierre Breber, IR Manger, after this call.

  • I also remind you my remarks will be comparing the fourth quarter to the third quarter.

  • As you know the press release compares the fourth quarter of '02 to the fourth quarter of 2001.

  • Chart 4 shows the fourth quarter reported earnings were 85 cents a share.

  • Special items as detailed in the press release were modest this quarter.

  • Dynegy announced it was earnings today.

  • We generally record the 26% share of their results.

  • Our share of their restructuring and other charges were $52m.

  • Merger integration costs $108m after-tax and in line with previous guidance.

  • Our merger costs are now substantially complete.

  • Net of special items and merger effects, operational earnings $1 a share.

  • Foreign exchange losses were $79m and as a result of the deterioration of the U.S. dollar against a number of currencies around the world, including the U.K. pound and the Argentine peso.

  • Net of foreign exchange losses, operating earnings were $10.07 per share.

  • Chart 5 is the high level reconciliation of the change in operating earnings from the third quarter to fourth quarter.

  • Earnings declined $172m to $1.065b.

  • I mentioned foreign exchange losses in this quarter versus gains in this third quarter, this explains $144m of change.

  • Oil prices trended up in the quarter but were flat on average.

  • Higher gas prices in the U.S. were responsible for the improvement in upstream realization.

  • Our realizations were $3.55 per 1,000 cubic feet up 78 cents from the third quarter.

  • The other category was a net negative of $168m between periods.

  • Now, there are many items in this bar both plus and minus for the quarter.

  • Chemical cogeneration and power and gasification earnings off a combined total of $60 between periods.

  • This change reflected seasonal and industry specific conditions.

  • Discrete items such as higher casualty losses from the Gulf Coast storms, severance, property taxes and royalty matters and charges incurred during the temporary demobilization efforts in Kazakhstan cost another $75m in total.

  • These charges related to topics that received some press during the quarter.

  • Finally, we had bad debt expense, asset impairments and write-offs and litigation provisions.

  • These were generally offset positive tax items reported at the corporate level.

  • Again, the net of these factors were $168m negative quarters and unfavorable swing between quarters of about 16 cents a share.

  • The only comment I'll make on Chart 6 for the U.S. upstream segment is that the Gulf Coast storm activity hurt earnings $90m in the fourth quarter. $25m from casualty losses and $65m from lower production.

  • All consistent with earlier guidance.

  • This compares to $25m in total storm effects in the third quarter.

  • 60,000 barrels of day production was shut in on average from the quarter for the storms compared to 17,000 barrels a day in the third quarter.

  • Most of the production was back on stream by year end.

  • About 5,000 barrels a day is expected back in February.

  • Permanent losses are estimated at 10 to 15,000 barrels a day of the 60,000-barrel a day figure I quoted.

  • In the international upstream on Chart 7, production lifting improvements, helped earnings $80m between quarters.

  • Higher facility uptime in the U.K. and record production from Hibernia and Canada contributed.

  • Production Venezuela was down only slightly between quarters due to the national strike that started in December.

  • As of today production at [Hamaka] continues to be shut in but work on the upgrader continues.

  • Net production from [Hamaka] was 10,000 barrels in the two months prior to strike.

  • LL652 is operating at slightly different rates. [Boscan] production was about 40,000 barrels a day during January and is expected to increase to 60,000 barrels a day in February.

  • Average production in [Boscan] in 2002 was 95,000 barrels a day.

  • During the fourth quarter, OPEC quotas lowered production 10,000 barrels a day in Venezuela and 30,000 barrels a day in Nigeria.

  • Exploration expenses were up between quarters internationally but totaled $600m before-tax worldwide for the year, slightly lower than our guidance, fully consistent with the synergies savings we've discussed in the past.

  • Dave will have more to say about our exploration efforts a little bit later.

  • For the year production was down 2.8%, but flat after adjusting for OPEC curtailments beyond planned amounts and the adverse impact of higher prices on cost recovery in certain royalty barrels.

  • Net of these effects and the impact of the Gulf Coast storms production close to the target 1% increase.

  • Dave will also talk a little more about the 2003 outlook a little later.

  • On Chart 9, U.S. downstream earnings off $155m between quarters.

  • Margins were slightly better than third quarter while volumes were down seasonally.

  • Branded gasoline sales remained strong up 4% versus the fourth quarter of 2001.

  • I mentioned earlier in reviewing total earnings that other included both pluses and minuses in each segment.

  • Many minuses were recorded in this downstream segment.

  • Other items on this chart include various asset write-offs, and revaluations, litigations and other reserve adjustments and trade credit losses and not indicative of our expectations takes going forward.

  • In the international downstream on Chart 10, earnings off $88m despite slightly improved margins.

  • Foreign exchange losses from the decline of U.S. dollar was the largest negative factor.

  • Higher operating cost, in part due to refinery shut down activity and lower pipeline earnings contributed to lower results between periods.

  • Chemical earnings were down $9m on lower ethylene and polyethylene margins on Slide 11.

  • The corporate and other segment results were up $138m between quarters primarily reflecting favorable tax adjustments.

  • Similar to the U.S. downstream the $22m in net charges not indicative of our expectations going forward.

  • Net charges to $200-225m, excluding our share of Dynegy results would be a more typical quarter.

  • That completes my remarks, now let me turn it over to Dave O'Reilly.

  • David OReilly - Chairman and Chief Executive Officer

  • Okay.

  • Thank you, John.

  • Let me start with Slide 13.

  • The company's financial performance in 2002 is poor.

  • It was completely unsatisfactory to me, to all of us at the company, and, obviously, to our shareholders.

  • Beginning with our operating earnings, they were adversely impacted by a number of the things that John mentioned - Very weak global downstream and chemical margins, and also higher pension expenses, among other factors.

  • But the large special item charges primarily related to Dynegy significantly reduced our reported quarter earnings.

  • The Dynegy investment this past year has turned out poorly and we're accountable for the outcomes of our investment decisions and I certainly hold myself accountable for this one.

  • That being said, we are focused on realizing maximum value for our investment in Dynegy regardless of how much is carried on our books currently.

  • We also had other asset write-offs this year, which I'm not pleased with either.

  • They ultimately reflect poor outcomes on capital investments.

  • I expect you to judge us based on the choices we make and on our performance, and I know this company is applying more rigger and discipline to the decision making processes.

  • I can assure you we expect better outcomes in the future.

  • Turning to Slide 14, clearly, our poor financial performance overshadowed our successes in 2002.

  • I feel good about the merger, and it's because of these many accomplishments in our first year, some of which are highlighted on Slide 14.

  • Our merger integration, operationally, has rapid and smooth, and we're on track to deliver $2.2b of synergies by the end of this quarter.

  • Our revamped exploration program delivered a string of discovery and appraisal successes in the deep waters of the Gulf of Mexico, Angola, and Nigeria.

  • We continue to advance our major upstream projects, and in particular we achieved several key milestones in building our global gas business, notably winning a high prized China LNG contract and announcing plans to build a regasification plant in the Gulf of Mexico.

  • Our global gas resources and capabilities have increased significantly as a result of the merger, and this is an important benefit that we expect to deliver long-term value for the company.

  • Finally, we reduced our debt and extended our record of 15 consecutive years with higher annual dividends.

  • I'd like to turn and talk about our exploration program for a moment, which is shown on Slide 15.

  • Right after the merger closed in 2001, I met with you in New York and talked about my expectations for the merged company's exploration program.

  • I emphasized that we would get the synergy on the input side, that's lower costs, but we would also get synergy on the output side with better results.

  • The yellow line on this chart shows how we delivered the lower costs.

  • Our exploration expenses were down more than $400m in 2002.

  • We did this by spending less capital, having more success.

  • Now the dollars spent in the year usually don't correspond to the [proved] barrels added.

  • You can see noted on this chart that most of our 2002 deep water exploration success was not yet booked as reserves last year.

  • Despite that we did replace 114% of our production in 2002.

  • Our tenth consecutive year of reserve replacements greater than 100%, which I think demonstrates a track record of success.

  • We believe you have to look at these measures over long time periods, but this is an excellent post merger start.

  • Now, that's a quick review of the year.

  • And let me say it again, I feel good about the merger and the company's ability to compete effectively in this industry.

  • Building off our successes and, importantly, lessons learned in 2002, I'm confident that 2003 will be a much better year.

  • Looking forward now, let's turn to Slide 16.

  • Our story has not changed since the merger.

  • We told you went to strike a balance between returns and growth, with a particular emphasis in the early years of improving returns.

  • This means we are committed to improving the performance of the underlying base business by realizing the synergy benefits, operating with excellence, and making wise investments on our assets.

  • To the extent that certain businesses should not be in the portfolio and are worth more to others, we'll take appropriate action.

  • At the same time, we are intensely focused on executing our queue of world class upstream growth projects, including our growth portfolio of gas opportunities.

  • These major upstream projects are one of the keys to long-term value operation for the company.

  • Slide 17 shows you how we've expressed our commitment to improve returns.

  • We've shown this slide a number of times since the merger closed, and it, too, has not changed.

  • Our goal is to improve our ROCE 2 to 3% in the 2003-2004 period.

  • Noting that time frame, it takes time for the merger synergy benefits to fully kick in and for greater capital efficiency to hit the bottom line.

  • And, of course, significant portfolio actions must wait for the expiration of the pooling period later this year.

  • You will remember that the merger lowered Legacy Chevron ROCE by almost 2%, as a result this company has a returns gap versus our best competitors.

  • And our most important objective is to close this gap by achieving this target, and this year will be the first down payment on doing it.

  • On the next set of slides, I'll begin to tell you how.

  • Let me start with the merger synergies on Slide 18.

  • On last quarter's call, John Watson talked with you in great detail about how we think about synergy capture.

  • He showed you that we've taken actions that lead to synergies such as workforce reductions and facility consolidations.

  • He also showed you that the synergies were hitting the bottom line, although partial masked by other factors including industry wide increases in payroll and benefit and pension expenses.

  • This slide shows you our three synergy targets.

  • We achieved the first two early and are on track to achieving the third by the end of this quarter.

  • Because synergy is a go-forward concept much of the benefit is still to be realized.

  • We expect the synergies will increase 2003 earnings by at least $400m more than last year.

  • Now, let's talk about our capital management and how it will improve returns on a go-forward basis.

  • I'll refer you to Slide 19.

  • For a merger announcement we've talked about increasing the capital efficiency of the company.

  • I've already covered how our more efficient explosion program is delivering improved as a results.

  • The benefits of greater capital efficiency can be seen there early as our exploration program because the cycle times are shorter.

  • As pre-merger capital commitments are complete, more of the capital budget dollars are actively managed within the new company's capital management process.

  • You can see on this slide that we've taken spending down in 2002 and further rationalized it in 2003.

  • We've high-graded our investments and we are applying greater rigor and discipline to project capital management.

  • Our 2003 capital program is 20% lower than the three-year averages for the combined companies prior to the merger, with decreases across all business lines including the upstream.

  • Upstream spending is down 10% from pre-merger levels in part due to lower spending and in mature production areas of the U.S. in particular.

  • We are spending less capital but focusing it on our highest value projects, and we believe this is the right trade-off for our shareholders.

  • Our lower upstream capital program will result in lower production rates in the U.S, in particular.

  • And this is reflected in our 2003 outlook on Slide 20.

  • These are very uncertain times.

  • We're starting the year with production shut-ins in Venezuela and the unknown impacts of a likely Iraq conflict making even a year out commitment on production difficult.

  • While we don't know what we'll produce, we do know in 2003 we will be capable of producing at slightly higher rates than 2002 actual production.

  • Assuming 2003 prices of $24 WTI and no OPEC constraints.

  • Now, if predicting production one year out is hard, the long-term is even more difficult.

  • At merger closing, we stated that we expect production growth to be modest in the near term and to grow long term at the rate of 2.5-3% annually by 2006.

  • A lot has changed since.

  • We've rationalized the capital program and cut back on spending in mature areas.

  • We've embarked on studies and concluded that we will high grade the upstream portfolio.

  • And the macro environment remains weaker than expected.

  • Those these reasons, production in 2006 is not likely to reflect a 2.5-3% annual growth rate from a 2001 base.

  • In fact, at this time, we aren't prepared to provide an updated target because much work is underway.

  • In particular, Iran future portfolio [high grade].

  • We may not provide a revised target because it may not be in the best interest of our shareholders.

  • Production is the result of our investment and portfolio choices and decisions and is not the starting point.

  • We will continue to manage our portfolio to maximize value and that, at times, maybe at odds with the state of production target.

  • What's not changed however is our commitment to delivering on time and on budget our portfolio of major upstream projects, and I'm going to discuss those on the next slide.

  • We've shown on Slide 21 this data several times in the past year or so.

  • It shows our major upstream development projects.

  • They're phased within our capital management process and the expected year of startup.

  • Despite news reports and other events our expected production from these projects is in line with our earlier expectations.

  • Some have moved up such as Karachaganak and [Chadpanaroon].

  • Some have moved back such as the Tengiz expansion.

  • Most are unchanged.

  • We've added a year to our outlook to show that our portfolio and exploration program continue to generate opportunities that will impact long-term production rates.

  • A lot can happen to accelerate or decelerate the projects or even remove them up to Phase 3, but once in Phase 4, AFE approved as shown on the chart, and once they're sanctioned, we're focused and committed to getting these projects on line, on time, and on budget with the value operation proposition as promised.

  • The third major lever on improving returns is our management of the portfolio.

  • In the past, we have actively high-graded our assets.

  • Slide 22 shows proceeds from asset sales during the 1990s from three Legacy companies including former Caltex.

  • Excluding FTC mandated sales, since the merger was announced in October 2000, our actions have been limited to rationalizing the exploration program and shutting down some inefficient Latin America refineries and smaller chemical units.

  • The pooling period ends later this year.

  • We have taken the last year to get to know our businesses better before making decisions about our portfolio.

  • I think that this is wise and we'll make better choices as a result.

  • We're in the late stages of a rigorous evaluation of the entire portfolio, upstream and downstream in our other businesses.

  • And we expect to finalize our work by mid year.

  • Our commitment to high grading the portfolio is strong, and as the decision criteria on this slide show, we are focus pd on maximizing economic value when making these decisions.

  • Before I close, I'd like to talk about the strength of our portfolio.

  • In most places where we compete, we are number one, two, or three.

  • We want to build highly competitive businesses.

  • Businesses that are low cost, can generate strong returns and have growth potential.

  • Crafting a company composed of these kinds of assets and only these kinds of assets is the primary objective of our investment and portfolio decisions.

  • The next set of slides highlight three of our leading asset positions that we've built over the years and have these characteristics.

  • Our goal is to continue to create value from these positions while building new Legacy asset positions as well.

  • Slide 23, let's start with the Caspian.

  • We were first into this area.

  • We are the largest producer there with growing production every year.

  • We have excellent future investment opportunities, including the Tengiz expansion project which we announced recently is back on track.

  • As well as the Karachaganak expansion which will completed this year.

  • Slide 24 shows our position in offshore Africa.

  • We are the largest operator in Angola with a great infrastructure position.

  • First to bring on production in its deep water and have made nine discoveries on Block 14 with more explorations still to come.

  • We are also one of the largest operators in near offshore Nigeria.

  • We are advancing a large gas-to-liquids projects there.

  • Our major development is progressing and we have a number of explosion discoveries in the deep water and high-quality acreage position with more exploration potential to come.

  • The third area, Slide 25 I'll highlight is the Gulf of Mexico.

  • We’re by far the largest operator on the shelf with great infrastructure.

  • And we have a number of deep-water projects online and we've drilled the largest discovery in the deep water last year.

  • We have active drilling program in 2003 to test more areas around both the Tahiti and Great White discoveries.

  • I could talk about some of our more leading positions where we’re one, two, three, such as the San Joaquin Valley and Indonesia, and offshore Australia where we're the largest resource holder of natural gas.

  • But in the interest of time I'm going to wrap up so we can take your questions.

  • Summarizing on Slide 26 - 2002 has been a difficult year for the company.

  • I'm not pleased with our performance.

  • At the same time, we have taken steps to provide a platform for a much better 2003.

  • The merger integration and synergy capture is on track and results in bottom line benefits in the coming year.

  • We will continue the focus on cost competitiveness.

  • Our capital program is more efficient and down 20% from the years just prior to the merger.

  • Our capital is focused on the upstream projects that will yield the most long-term value.

  • We are committed to high-grading the portfolio, and will do so with the objective of maximizing economic value.

  • All of this, merger synergies, greater capital efficiency, and portfolio high-grading is geared to improving our returns and closing the performance gap with our top competitors.

  • Slide 27 - Three years ago, when I became CEO, I told you all that our goal was to deliver number one TSR to our shareholders.

  • We were in first place until we took a serious hit in 2002 and slipped to second, but it's our intent to get back on top.

  • I expect you to judge us on the choices we make and on our performance.

  • And I hope that my comments today have given you confidence that we will make the right investment and portfolio decisions leading to long-term value for the company and its shareholders.

  • That concludes my prepared remarks.

  • John and I will take your questions.

  • And in order to give you a chance to ask questions, please limit yourself to one question at a time, and we'll try to wrap up at the end of the hour.

  • Will you please open the phone lines?

  • Thank you for your help.

  • Operator

  • Thank you, sir.

  • The floor is open for questions.

  • If you do have a question or comment, please press the numbers 1 followed by 4 on your touch-tone telephone.

  • If you wish to withdraw your question at any point, you may do so by pressing the pound key.

  • We also ask that if on the speaker speakerphone top please utilize your handset to provide optimum sound quality.

  • And once again please limit your questions to one at a time.

  • Our first question is coming from Tyler Dann of Banc of America Securities.

  • Tyler Dann - Analyst

  • Good morning.

  • How are you?

  • David OReilly - Chairman and Chief Executive Officer

  • Good morning, Tyler.

  • Tyler Dann - Analyst

  • My question is related to the 2002 full year results versus 2001.

  • I did not see in the slide presentation.

  • You did, obviously, reconcile the operating to reported operating, but what I am curious about is if you could go into some detail, please, about the tangible economic impact that you believe you realized from the synergy capture in 2002.

  • And how that translated into the earnings for the year.

  • And then, to complete the picture, what the drivers would have been, you know, macro and otherwise, to translate into, obviously, a lower bottom line number for the year?

  • Clearly, there are some macro factors, but I'd like you to try and, if you could, outline some of the major factors.

  • John Watson - Vice President and Chief Financial Officer

  • Sure, Tyler.

  • This is John.

  • I will be happy to make some comments.

  • When we talked about synergy in the past, we've always referenced it versus the base year of 2000 which was prior to the merger.

  • So if we make a comparison on that basis, we have achieved a substantial portion of the $2.2b in synergies during the time period indicated.

  • What we've said, though, is that those synergies are received gradually over the time period in question.

  • So the full-year effects that you get in, for example, the calendar year 2002, are limited depending upon when those, synergies are in fact realized.

  • Having said that, what we've said previously is if you want to look at 2000 operating earnings going to 2002 operating earnings, which is kind of the comparison that we've been working under, you've had some pretty sharp deterioration in a number of fundamentals during that feared.

  • Upstream realizations, downstream chemicals, margins, et cetera.

  • What we have said is that this next year we expect to receive $400m in after-tax improvement based on the synergies that we captured in 2002 and realize it hit the bottom line versus 2003.

  • During the calendar year 2002, some of the synergies that we realized were, in fact, offset.

  • Last quarter, I went through, frankly, in some detail the synergies that may have been masked by things that impacted us and, to some degree, others in the industry.

  • The most noteworthy item that I talked about was pension expense, and I talked about that primarily because of the decline in the equity markets that's taken place in that time.

  • And just as an indication, between 2000 and 2002, pension expense went from credit to expenses and the change is about $500m before tax.

  • Between 2001 and 2002 that number is about $300m before tax.

  • So that plus other inflation near pressures does offset some of the synergy effects that are realized.

  • If you compare versus 2001, there are a number of other changes that have taken place, including absence of earnings from Dynegy, [inaudible].

  • But I guess what I would tell you, our view is that, roughly, $800m or so in synergies have been realized after-tax in 2002 going to about 1.2 that will be realized in 2003 for an increment of $400m.

  • Now I've covered a lot of ground in that explanation and hopefully that gives you some feel for what's been achieved and some of the reasons why not all of it is readily apparent because of the masking effects in 2002.

  • David OReilly - Chairman and Chief Executive Officer

  • And if I could build on that Tyler, I think the benefit of the synergies flowing that you is an important factor in helping raise our competitive return and capital employ as that hits the bottom line.

  • Tyler Dann - Analyst

  • Thank you.

  • Operator

  • Thank you your next question is coming from Fadel Gheit from Fahnestock.

  • Fadel Gheit - Analyst

  • Good morning, David.

  • I have a question for you.

  • What would you have done differently last year to achieve the outcome of the poor earnings.

  • David OReilly - Chairman and Chief Executive Officer

  • Well, there are a lot of things.

  • We could have made better decisions on a couple of calls I mentioned earlier such as Dynegy and, some prior-year decisions that relate to our upstream and downstream.

  • For example, we took write-downs, for example, in [Catina] in the Congo, which is a project 10 years old, and write-down in Caltex Australia.

  • I can't so clearly these were decisions in the pipeline that hit us negatively.

  • Frankly, we stayed focused on the merger, integrating the merger and implementing it, and we had some, I think, bad downstream conditions and other conditions that John -- adversely affected us.

  • If we could have anticipated that I ahead of time, obviously, we would have done better.

  • But I do think we've had basic operational success.

  • We have captured a lot of synergy.

  • We have rationalized our exploration portfolio and seeing some of the benefits of that flowing through, and that will continue to flow through.

  • We had good reserve replacement rates, and I think we positioned ourselves for a stronger performance going forward, even in an uncertain economic environment.

  • Fadel Gheit - Analyst

  • Thank you.

  • David OReilly - Chairman and Chief Executive Officer

  • Thank you.

  • Operator

  • Thank you, our next question is coming from Douglas Terreson of Morgan Stanley.

  • Douglas Terreson - Analyst

  • Hi Dave and John.

  • How are you?

  • David OReilly - Chairman and Chief Executive Officer

  • Hello, Doug.

  • Douglas Terreson - Analyst

  • With what sounds like will end up being a revision in your production forecast can you review the primary components expected to allow the company to obtain the 2 to 3% rise in returns by '03 and '04?

  • And more specifically, could you relate the base starting point for the return capital number and whether it's been adjusted in any way?

  • And the contributions you expect from the productivity portfolio management and capital allocation programs that you talked about?

  • David OReilly - Chairman and Chief Executive Officer

  • Yeah, Tyler, I think the best way to position the returns is in a relatively basis because, obviously, it's hard to pick a absolute number because of the uncertainty of commodity prices.

  • So I'd like for our performance to improve relative to competition by 2 to 3% over this two-year period.

  • Clearly the full capture of synergy is going to play an important role in that, and even though some of those gains have been masked because of the issues that John referred to, we should see more visible progress of that.

  • We also have learned an awful lot more about our portfolio ourselves as we assembled it the last year.

  • And I think the benefits of operating with excellence and understanding how that portfolio can be optimized, even from an operational perspective, it's the second important issue.

  • Clearly, the third is the capital investment.

  • We have focused our capital on what we've considered to be the value of trading opportunity, and some of the capital that's been in the pipeline that is being spent will start to generate earnings later this year.

  • I mentioned a couple of those projects that will come on line.

  • And then finally there's the question of portfolio management.

  • It's hard for me to predict accurately and I'm not going to until later in the year what our plans are going to be, other than to say that obviously we will get back on track when we have more liberty to do so and dispose of some assets that we think are not stray strategically well suited to the company.

  • So I view it as a combination of those things, and I do plan following our work by mid year to have an analyst call to communicate more clearly particularly the portfolio management dimension of that.

  • Douglas Terreson - Analyst

  • Since allocation gains are typically of the longer term variety, it sounds like, and I’m just trying to summarize what you said, that the majority of the gains that allow the company to get to the target will be productivity and portfolio management related over the next two years.

  • David OReilly - Chairman and Chief Executive Officer

  • And synergy capture, locking in that synergy capture I mentioned earlier.

  • John Watson - Vice President and Chief Financial Officer

  • I'll also mention we've gone through one of the tightest budgeting periods that I can remember in the company's history.

  • So we're scrutinizing costs pretty closely.

  • Douglas Terreson - Analyst

  • That's usually good news, John, thanks a lot.

  • Operator

  • Our next question is coming from Paul Ting from Salomon Smith Barney.

  • Paul Ting - Analyst

  • Good morning.

  • David OReilly - Chairman and Chief Executive Officer

  • Morning.

  • Paul Ting - Analyst

  • I have an operating-related question.

  • Focusing on the downstream area, some of the other companies who have reported so far have indicated that there are some initial signs, although not very strong signs of recovery in the far east area downstream.

  • Your own data show sequential improvements in the far east of refining and marketing.

  • Could you give us a brief description of what you are seeing in the Asia-Pacific markets?

  • Are things getting better?

  • Or this is no more than just a foreign exchange created.

  • David OReilly - Chairman and Chief Executive Officer

  • I think the uncertain economic outlook, I think, very much weighs still on Asia.

  • First of all, we still have overcapacity.

  • True, there was an improvement in fourth quarter margins.

  • There was some winter, seasonal effects that improved, I think, the general energy consumption picture in that area, such as the nuclear plants in Japan that shut down, and then the winter effects of supplying fuel oil and the like.

  • But I think the key question is global economic recovery and how much that area is dependent on exports to, primarily, countries such as ours here in the United States.

  • And if the U.S. economy is sluggish, I would take a very cautious view about Asia.

  • We also had –significant foreign exchange effect in the fourth quarter of $56m negative.

  • And, of course, that's due to the weakening of the dollar relative to some of the fee currencies in the areas of Asia where we operate.

  • So I'd take a cautious view for this year.

  • Paul Ting - Analyst

  • Thank you.

  • Operator

  • Our next question is from Arjun Murti of Goldman Sachs.

  • Arjun Murti - Analyst

  • Regarding the return on capital goal.

  • I know the goal is to narrow the gap, but in buying a company with lower return on capital and having the synergies offset by some of the things you mentioned.

  • The gap has in fact widened.

  • And things like pension cost increases and medical cost increases, many companies have faced that.

  • Do you think you have the luxury to wait the ten months for pooling restrictions to expire to really restructure the portfolio, or do you think you should give serious consideration to breaking pooling?

  • As best as I understand there's no criminal penalty for that, I think you just have to restate the earnings.

  • Can you comment on that please.

  • David OReilly - Chairman and Chief Executive Officer

  • Well, there's a couple of questions here.

  • Let me just take it for a moment.

  • I think you've got to measure returns over periods of time, and I don't think it's reasonable -- we said at the very beginning that most of those returns would start to improve in 2003 and 2004 when we announced the merger to begin with.

  • We’re will almost at the time when we are liberated from pooling in any event, and we will be taking some portfolio actions in the intervening months, within the head room that we have.

  • And I can't be very specific about what those are other than that's product of the work already done.

  • So I think we've taken the time to do our homework.

  • We'll benefit from the understanding we have about the portfolio and I am confident this has been the right decision and we'll get better-quality results and sustainable results.

  • John Watson - Vice President and Chief Financial Officer

  • This is John, I'll add a couple of comments to that.

  • We talked about ROCE going down with the merged companies, but I'll point out that the values and the price that we paid for the acquisition reflected that.

  • So we were aware and the market was aware of the lower ROCE that Texaco had going into the transaction.

  • So I think to the extent market prices were fair at that time, we paid fair price.

  • We've gotten more of the synergy than we expected when we did the transaction, so I do feel good about the transaction.

  • With respect to pooling and breaking pooling, Exxon/Mobil did a pooling transaction, BP/Amoco did a pooling transaction.

  • They waited through the time period and had a chance to to look through the portfolio.

  • We're doing the same things.

  • It's not that we can't do any asset sales, we have opportunity to do some rationalization of the portfolio before that period in time, but it's that major divestures have to wait.

  • We like the transparency that pooling accounting gives to the financial numbers, so we’re going to stick with pooling again.

  • Arjun Murti - Analyst

  • Thanks for your answer.

  • I appreciate it.

  • Operator

  • Your next question is coming from Mark Gilman of First Albany.

  • Mark Gilman - Analyst

  • Good morning.

  • John Watson - Vice President and Chief Financial Officer

  • Morning, Mark.

  • Mark Gilman - Analyst

  • Dave, you specifically mentioned, and I think I can paraphrase it reasonably accurately, a more rigorous and disciplined decision-making process.

  • I wonder if you could come up with some tangible steps that you've taken from a process standpoint to assure that that's the case.

  • David OReilly - Chairman and Chief Executive Officer

  • Yes.

  • Well, let me start with particularly with big decisions on capital projects.

  • We have a very rigorous, multiple-step process that actually ensures that we evaluate alternatives and not just the obvious one that's on the table, over a range of alternatives before we focus on the selected opportunity to move forward.

  • One of the things we're doing is applying lessons learned in other areas to the decisions we make going forward.

  • Let me just give you an example.

  • We have teams of people that are expert in deepwater exploration and have had some success in West Africa.

  • Well, as a proposal comes to our organization to look at decision around exploration or even development in the deepwater Gulf of Mexico, we bring people together who have had experience in other parts of the globe to kind of do a peer review of the process and the decision we're about to make.

  • So we're making better decisions.

  • We also benchmark -- we insist on benchmarking the best in the upstream.

  • We use the independent project analysis benchmark data and it shows that there are certain prerequisite steps that a project decision needs to go through to have a successful outcome.

  • And by the leading metrics, we are making significant gains, better understanding what we're doing, better evaluation of the risks, better front-end loading of our engineering and design and better delivery on the time of construction and the cost of the construction.

  • So you will actually see it will slow projects down, in fact, that we feel have gotten -- that don't meet those criteria.

  • One example was [Agbomi]. [Agbomi] came to us from the pre-merger life.

  • We’ve revisited, restructured the team.

  • We moved it back into Phase 2 to sort out all of the best optimized development solution and sort out the commercial issues, and I think it's turning out to be a good decision.

  • So we're applying a very rigorous process, and it's one that I will be happy to go through in more depth when we meet together in the mid year.

  • Mark Gilman - Analyst

  • But, Dave, you've been doing these things all along, haven't you?

  • David OReilly - Chairman and Chief Executive Officer

  • We've been doing better and better at it and more wide spread across the company at it.

  • But we are now applying it to a much larger company and a much greater set of assets and a whole new set of people.

  • Mark Gilman - Analyst

  • So there's nothing like a more strong stringent hurdle or something more tangible.

  • David OReilly - Chairman and Chief Executive Officer

  • We're going to have move on.

  • Operator

  • Our next question is from David Wheeler of JP Morgan.

  • David Wheeler - Analyst

  • Hi.

  • Good morning.

  • The question is regarding the discussion of the growth rate going forward.

  • You mentioned you're not going to make the 2.5-3% because of portfolio high-grading and capital high-grading.

  • If we didn't count the portfolio high-grading against you, would you still not make that 2.5-3%?

  • And maybe this is for John.

  • The capital expenditures that were behind the 2.5-3% target, what are -- obviously, you're saying capital high grading -- What's the new CAPEX number behind it?

  • John Watson - Vice President and Chief Financial Officer

  • A couple of things.

  • Part of the reason for the change in philosophy around longer-term production targets has a lot to do with the variability of prices and cost recovery barrels, et cetera, OPEC constraints, so it's partly capital.

  • Partly others, it’s just too much variability.

  • With respect to capital spending.

  • When I talked about capital back I think the middle of last year, I think I talked about $9.5b, or so, in total capital.

  • And you see numbers now for this year that are a billion less than that.

  • So the capital numbers have come down.

  • You'll also notice that the numbers have come down in the U.S.

  • And, certainly, that's reflecting a high-grading of the opportunities that are there, and, frankly, we'll see somewhat steeper declines in the U.S. than we've seen previously because of a slowdown in the reinvestment rate in the U.S.

  • David Wheeler - Analyst

  • But just to clarify, aside from asset sales, you still would not make the 2.5-3% or don't expect to?

  • John Watson - Vice President and Chief Financial Officer

  • I think it depends on the assumptions.

  • When we put that chart together we talked about $20 oil, and we talked about no OPEC constraints at that time.

  • The reason why we're hesitant to give a specific number is people forget about the caveats.

  • And if you go back and look at the charts, so if you can tell me what your OPEC constraints are going forward as well as the prices, that's part of the reason.

  • David OReilly - Chairman and Chief Executive Officer

  • If I could just build on that, also.

  • I think I've made it clear also in my remarks that we're going to be focused on value creation, not just barrels.

  • And there are different profitability's to different barrels, and we're going to have to have to make the opportunity to where we create the most values.

  • That’s what is going to drive our decisions The production will be a result of the decisions.

  • David Wheeler - Analyst

  • Thank you.

  • Operator

  • Next question from Frederick Leuffer of Bear Stearns.

  • Frederick Leuffer - Analyst

  • Good morning.

  • David OReilly - Chairman and Chief Executive Officer

  • Hello, Fred.

  • Frederick Leuffer - Analyst

  • Dave, I think you've done an excellent job in terms to have the synergies and especially from the original targets, but as you said, there have been offsets beyond the company's control and, of course, this isn't unique to Chevron.

  • It's happening to all companies inside and outside of the oil industry.

  • But, unfortunately, I think unless we see cost savings to the bottom line, they're almost not worth doing.

  • So my question is this.

  • Are you prepared to take new and additional initiatives to bring savings to the bottom line beyond just $400m after tax?

  • David OReilly - Chairman and Chief Executive Officer

  • Well, let me just, first of all, point out that without the synergy captures, I think, we would have seen a bigger erosion.

  • I mean, those synergy captures are real, but they have been offset by some of the things you referred to.

  • And also a significant hit, particularly in the West Coast marketing margins, because the West Coast has sequentially declined.

  • Of course in that area, we're heavily weighted to the West Coast in our downstream, particularly in the U.S.

  • So that's exacerbated the near-term history here.

  • But I think the important question is will we be doing more than the $400m?

  • I think the answer is - of course.

  • I'm not going to give you a specific number because it is going to be tightly linked to the portfolio process and the outcome of the portfolio management process we've embarked on and we will be talking to you later in the day.

  • Clearly, costs are a very key factor in our business, and it's one that the organization is focused on.

  • We challenged the organization in our budgeting this year.

  • We've had a long, long history of cost management over a long period of time, and I can assure you that is going to continue to get our top priority attention.

  • Frederick Leuffer - Analyst

  • Terrific.

  • Thank you.

  • David OReilly - Chairman and Chief Executive Officer

  • Thank you.

  • Operator

  • Thank you.

  • Our next question is coming from Stephen Pfeifer of Merrill Lynch and Company.

  • Stephen Pfeifer - Analyst

  • Hi guys.

  • David OReilly - Chairman and Chief Executive Officer

  • Hi, Steve.

  • Stephen Pfeifer - Analyst

  • As you high-grade the capital program, other companies are obviously doing the same thing.

  • Can you talk specifically about what you're seeing in terms of recycle efficiencies in mature areas, North Sea, Gulf of Mexico on shore, maybe areas you're seeing higher F&D costs and more challenges in reserve replacement?

  • And compare that to some of your growth initiatives.

  • One of the major competitors is shifting the portfolio to try to deal with that issue.

  • Could you maybe discuss what you're seeing inside your businesses as these projects come to review and what you're doing in different regions?

  • Obviously, you’re somewhat tied with pooling, but could we see something beyond that where you could take more strategic actions and what is your appetite to do something aggressive?

  • Would it be on the margin small things or something that would move the numbers on the ROCE?

  • Thanks.

  • David OReilly - Chairman and Chief Executive Officer

  • We are seeing in some of the mature areas of the portfolio decline rates that made us question the value of investing capital dollars and trading value for our shareholders.

  • Those are typically in the mature areas - the US near Gulf of Mexico areas, near shore types of areas like that, in fact, you saw the whole industry ramp up the rig rate count about two years ago when gas prices were high, and the response was pretty anemic.

  • I think that's indicative of a trend.

  • We are, indeed, reallocating capital from some of those mature areas to growth areas.

  • You recall that in the early 90's and mid 90's, we did quite a bit of that.

  • We rationalized a whole bunch of U.S. fields.

  • We rationalized out of the mature assets we had in the North Sea and reinvested that money in growth opportunity in places like Angola, the early days of Kazakhstan, and the like.

  • And that's kind of where we have to go in this business if we're creating value on the long term.

  • That’s why I wanted to emphasize two points, one is portfolio management history we've had and that's been suspended for a period of time for a couple of years it's getting back on track, and also the investment opportunities we have in that chain of projects that are identified that are in the list that I showed on one of the charts.

  • I also want to build a point about gas.

  • We have some tremendous resources that are in the natural gas area and places like Australia and West Africa.

  • We also have made some great discoveries in the last year and had very good success.

  • And those projects have not even matured yet.

  • They're just gained of gleams in our eye where we listed them out there five or six years down the path.

  • But those are projects that will clearly mature as we complete the evaluation and come up with development plans for those opportunities.

  • Operator

  • Thank you, our next question is coming from Matthew Warburton from US Warburg.

  • Matthew Warburton - Analyst

  • Quick question, on the Slide No. 20, it appears your decline rate in the U.S. has more than doubled from the 3% you said in the previous presentations.

  • What is the risk as we go into 2003?

  • Will you see a faster decline if you’re starving the business of capital of those differentially higher value barrels that it goes like pension cost lost last year to offset the offset the $400m of synergy capture you expect.

  • David OReilly - Chairman and Chief Executive Officer

  • Well, the part of the chart, of course, the past year we did have a hurricane impact, particularly in the fourth quarter of the Gulf mix.

  • Setting aside that, yes, we are looking at a higher decline rate, approximately double what we had in our past presentations because we are putting less capital into the U.S. into those more mature areas.

  • So you're observation is correct.

  • And, so, we're focused, as I said before, on putting capital into where we think we can create the maximum value, and as you can see from our Gulf of Mexico progress, we have made the largest discovery in Tahiti, that’s a long-term development for the future.

  • And we’ll clearly [inaudible] for the shareholders, based on our initial assessment.

  • So I think your point is a good one.

  • We are seeing a higher decline right rate in the U.S. and something a product of the decision we made to consciously not try to chase barrels that are recycling dollars but to focus those dollars based on trading value.

  • Matthew Warburton - Analyst

  • But in terms of that fact that those barrels are declining faster are higher than other barrels in your portfolio, surely that accelerated loss of income will go some way to offset the incremental synergy you forecast.

  • David OReilly - Chairman and Chief Executive Officer

  • I think you need to count on us to make the right decision.

  • That is a general comment it couldn't be right or we don't manage it well.

  • But some of these dollars are going into new developments in the Gulf of Mexico for example where the margins are also pretty high.

  • They're not all necessarily going to lower margin environments.

  • Thank you.

  • Pierre Breber - Manager Investor Relations

  • We'll make this the last question if we can.

  • Operator

  • Our last question comes from Mark Flannery of Credit Suisse First Boston.

  • Mark Flannery - Analyst

  • I sneaked in there.

  • David OReilly - Chairman and Chief Executive Officer

  • Thanks Mark.

  • Mark Flannery - Analyst

  • I'd like to talk about ROCE and I know you mentioned you wanted this 2% relative improvement against the competition to be the outcome -- for 2 to 3%, let's say -- by 2003, 2004.

  • I'd like a little bit more detail on how you think about that.

  • Do you track those things on a mid-cycle basis, and do you mean closing the gap between, where you are now and where they are now, or where you expect to be and where you expect them to be as well?

  • Because, clearly, the competition isn't standing still either.

  • David OReilly - Chairman and Chief Executive Officer

  • Yes, your point's a good one.

  • Those numbers, when we generally look at them, we talk about mid-cycle sort of numbers, Mark.

  • But you can measure progress in any price environment relative to your competition.

  • In general terms, recognizing that there are some differences in portfolios, so I think we have a relative measure is clearly the way -- it keeps at the company focused, it keeps us all engaged in how to improve our business because, after all, we're competing for investor's dollars.

  • If you look back in our history, Legacy Chevron, we were number one in returning capital flow in the year 2000.

  • We'd like to drive back into that direction, but I think we have to recognize that this 2-year period is a down payment on getting back into that -- near the top-of-the-pile performance that we've had in the past.

  • And I'm confident that these steps we've taken, that we've talked about consistently as a part of the merger justification and as we emphasized again following the merger close in that very first meeting in November of 2001, we pointed out that 2003, 2004, we would see positive trend in that direction.

  • And it does take into account the fact that we don't expect our competitors to stand still either.

  • But I think relative is important for a number of things.

  • Absolutes -- portfolios get created in all sorts of different ways, through acquisitions that are sometimes pooled, sometimes purchase accounting, sometimes they're write-offs, et cetera, the different companies have at different times.

  • So I think tracking our selves relatively is the best way to measure our performance and that's what we're focused on.

  • Mark Flannery - Analyst

  • Thank you very much.

  • David OReilly - Chairman and Chief Executive Officer

  • I want to thank you all for participating.

  • Pierre Breber will be available for follow-up questions.

  • And I want to thank you, operator, for hosting the call.

  • Thank you very much.

  • Operator

  • Thank you all for your participation.

  • And that does conclude your teleconference, you may disconnect your lines at this time.

  • Have a great weekend.