雪佛龍 (CVX) 2005 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning, and welcome this the Chevron third quarter investor relations, conference call.

  • At this time all participants are in placed and a listen-only mode. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to our host Dave O'Reilly Sir, you may begin.

  • Dave O'Reilly - Chairman & CEO

  • Welcome to the Chevron third quarter earnings conference call.

  • This is Dave O'Reilly, and today on the call I'm joined by Steve Crowe our Chief Financial Officer, and Irene Melitas our Investor Relations Manager.

  • Our focus today will be on Chevron's finance and and operating results for the third quarter.

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

  • Before we get started please be reminded that today's presentation contains estimates, projections and other forward-looking statements.

  • I ask that you review the Safe Harbor Statement on slide two.

  • Now turning to slide three.

  • There were two issues that played a significant part in our third quarter performance.

  • The first is the Unocal transaction and the second, of course, the multiple hurricanes.

  • Beginning with Unocal.

  • The deal closed on August 10th, and the results that we presented to you all reflect two months of data only.

  • That's two months out of the three.

  • We're very pleased with the pace of integration and on track to delivering the synergies by middle of next year.

  • On the hurricanes, we are the number one operator on the gulf of Mexico shelf and of course a big player in the deep water.

  • And the hurricanes Katrina and Rita in particular hit us in the core of our operations.

  • Katrina in the eastern gulf and Rita in the west.

  • On average we had 90,000 barrels equivalent oil production shut in during the quarter.

  • And we'll have more to say about the impacts of the hurricanes later in our presentation.

  • And of course, the hurricane Katrina in particular also effected Pascagoula Refinery.

  • We have only one big refinery in the Gulf of Mexico, Pascagoula with the capacity of 325,000 barrels a day.

  • First of all it was shut down in July for a period of time because of hurricane Dennis which you may recall came into the gulf coast near the Pas -- the Mississippi, Florida border.

  • And then of course when Katrina hit, it was damaged, not severely, though, and we were able to bring it back up or start to bring it back up in October.

  • However, we were basically -- we basically had no refining capacity operating in the Gulf for about half of the third quarter, and we're in a position where we were acquiring products on the open market and reselling at, what I would consider, restrained prices, particularly in the effected areas of southern Alabama, Mississippi, and Louisiana.

  • Not shown on the slide is the fact that almost 700 of our people have lost their homes or had their homes severely damaged.

  • I'm very proud of the work they have done to help restore what we have been able to restore so far.

  • And I -- I feel a the high level of commitment that has been involved in generating these results, and of course they are continuing to work hard to continue to restore production in the Gulf.

  • Turning to slide four which provides an overview of our financial performance.

  • Despite these adverse storm effects the Company had solid third quarter earnings of 3.6 billion, or $1.64 per diluted share.

  • Our results benefited from higher prices for crude oil and natural gas, and improved refining margins.

  • However, given our leading position in the Gulf of Mexico shelf and our large refinery in Pascagoula we were obviously highly impacted by the storms which I mentioned earlier.

  • There were no special items in the quarter this year in contrast to last year's about $500 million or so.

  • Return on capital employed over the trailing four quarters was 23%.

  • Our balance sheet continues to demonstrate tremendous financial strength and flexibility.

  • The debt to capital ratio ended of the quarter at under 19% with net debt under 5%.

  • But our cash balance of $11 billion is 200 million above the balance at the beginning of the year.

  • Notwithstanding the cash consideration paid in connection with the Unocal acquisition and the capital expenditures that we have made, the cash portion of our capital expenditures which are reported in our earnings.

  • Stock buy backs in the third quarter totaled $700 million.

  • Since your buy back program was put into effect in 2004, the Company has repurchased over 4.5 billion of it's common shares -- $4.5 billion worth of its common shares as part of that $5 billion repurchase program.

  • I'm now going to turn it over to Steve Crowe to take us through the quarterly comparisons.

  • Steve.

  • Steve Crowe - VP and CFO

  • Thanks.

  • Dave.

  • My remarks compare third quarter 2005 to the second quarter 2005.

  • Bear in mind that our earnings release compared third quarter 2005 to the same quarter a year ago.

  • Slide five shows that net income was down 2% relative to the previous quarter as adverse effects -- adverse storm effects more than offset earnings contributions attributable to two months of former Unocal operations, higher crude oil and natural gas prices in the upstream, have stronger refining margins in the downstream.

  • Starting with the left-hand side of the chart, foreign exchange effects resulted in a book loss of $52 million in the third quarter as compared to the second quarter gain.

  • Substantially higher crude oil and natural gas prices, added about $740 million to upstream results.

  • Stronger refining margins were largely offset by weaker marketing margins, resulting in a modest net downstream margin variance.

  • Third quarter earnings benefited from higher volumes due to two months of the former Unocal operations.

  • The benefits, however, were dampened by curtailed production due to hurricanes Katrina and Rita and other third quarter storms in the Gulf of Mexico.

  • Earnings from chemicals declined on softer ethylene margins and storm effects.

  • The negative tax-related variance includes the absence of certain tax benefits realized in the second quarter.

  • While the variance represented by the “Other” bar reflects the third quarter results of storm related costs, an increase in the environmental reserves, and the inclusion of the non-volume-related impact of former Unocal operations.

  • There were lots of moving parts, the net of which was a 2% earnings decline.

  • Turning to slide six, as Dave highlighted the two big stories for Chevron in the third quarter are the completion of the Unocal transaction and the significant adverse effects of this season's hurricanes in the Gulf of Mexico.

  • On slide six is pictured the storm track of a half dozen or so tropical storms and hurricanes since June.

  • The ones that seriously affected our operations were Dennis in July, the green dotted line, it's landfall was east of Pensacola.

  • Katrina in August, the red dotted line, with it's landfall just east of New Orleans.

  • And Rita in September, the blue dotted line and landing in the lake Charles area near the Texas, Louisiana border.

  • The chart on the right summarizes the effects of hurricanes Katrina, Rita, and other storm activity on third quarter results.

  • The impact of the Gulf of Mexico storms on third quarter exceeded $600 million, including all expenses and lost profit opportunity that reduced Gulf of Mexico production and output at our Pascagoula Refinery.

  • The average volume impact was about 90,000 barrels a day of oil equipment in the upstream and almost 160,000 barrels per day of crude runs for refining as the refinery was down about 40 days during the quarter.

  • The carryover effects on the fourth quarter results are expected to be even more significant.

  • Our recovery from the storms is underway.

  • Earlier this month we announced our Pascagoula Refinery restarted operations and currently roughly about 45% of our production in the Gulf region is back on line.

  • Despite the losses we are both fortunate and thankful that we were able to safely shut down our downstream and chemical operations in the Gulf region as well as safely evacuate personnel multiple times from our offshore production facilities during the quarter.

  • Slide seven displays our U.S. upstream earnings, which increased about $230 million to 1.2 billion.

  • Higher liquid's realizations boosted earnings by more than 200 million.

  • Average quarterly prices for WTI increased over $10 per barrel while San Joaquin heavy rose nearly $12 (per barrel).

  • Our liquids realizations were up over $8.90 per barrel.

  • A less favorable mix of light to heavy volumes limited our realization increase as production of lighter oil in the Gulf of Mexico was impacted by storm-related downtime.

  • Natural gas realizations had an $85 million profit effect.

  • Our average realizations increased just over $1 per thousand cubic feet, slightly less than the average increase in bid week prices reflecting the shut-in volumes from the Gulf of Mexico.

  • Driven by the effects of the storms, which more than offset benefits of including two months of former Unocal operations, lower volumes dampened earnings by $25 million.

  • Among other things the variance in the other bar reflects casualty and other costs associated with the storms.

  • As shown on slide eight, International upstream earnings for the quarter exceeded the prior quarter's earnings by more than $300 million.

  • Foreign exchange effects were negative in the third quarter compared to having a positive impact in the second quarter.

  • Third quarter losses partly reflected the weakening of the U.S. dollar against the Canadian dollar.

  • Higher realizations benefited earnings by about $445 million.

  • Liquid realizations increased about $9 per barrel, slightly lower than the average of spot brand prices.

  • The volume bar indicates a positive variance between quarters, attributable to the integration of former Unocal operations for August and September.

  • This benefit was partially offset by lower liftings in the UK and Kazakhstan in line with production declines related to shut downs.

  • The timing of shipments from West Africa and the PNZ also adversely affected the quarter to quarter variance.

  • The OpEx, exploration and other variance bars largely pertain to the non-volume related addition of former Unocal operations.

  • The other bar also includes the unfavorable swing in certain tax items.

  • Slide nine summarizes the change in worldwide oil and gas production, including other produced volumes.

  • The volume increase between quarters was 127,000 oil equivalent barrels per day, inclusive of the positive 282,000 barrel per day contribution of former Unocal operations, and the adverse storm-related effects.

  • Excluding the Unocal barrels, Gulf of Mexico storm effects, and the price effects on production sharing contracts, legacy Chevron's underlying worldwide volumes declined 3%, or 73,000 oil equivalent barrels per day.

  • U.S. production was essentially flat between quarters as the impact of storms in the Gulf of Mexico and normal field declines more than offset the 76,000 barrels per day addition attributable to the Unocal acquisition.

  • Storm activity reduced this quarter's production levels by about 90,000 barrels a day, as Dave said, compared to 15,000 barrels a day in the second quarter.

  • Absent storm affects and the Unocal production barrels, a quarter-to-quarter change was less than 1%.

  • Outside the U.S., oil and gas production increased 132,000 barrels per day between quarters.

  • Excluding Unocal volumes of 206,000 barrels per day, and the effects of cost recovery barrels and variable royalty provisions, legacy Chevron's underlying production was 4% lower primarily due to planned maintenance in the United Kingdom and inventory movements not reflecting underlying gross production in Indonesia.

  • Relative to the third quarter of last year, oil equivalent production in the U.S. declined by 66,000 oil equivalent barrels per day.

  • This year's more severe storm activity in the Gulf of Mexico contributed 65,000 oil equivalent barrels per day to the year-to-year variance.

  • While asset sales accounted for another 27,000 barrels per day of the variance.

  • Unocal related production partially offset the combined effects for the quarter.

  • So exclusive of the storm effects, asset sales, and the addition of Unocal production, third quarter production fell about 6% between years due to normal field declines.

  • That were offset somewhat but new or increased production in certain fields.

  • Outside the U.S., third quarter 2005 production levels were essentially flat compared to the third quarter 2004, once the effects of the Unocal volumes and lower volumes associated with cost oil recovery and variable royalty provisions of certain production sharing contracts are excluded.

  • Turning to slide 10, U.S. downstream net income fell about $260 million between quarters on lower realized margins and reduced volumes largely due to the storm effects.

  • Margin effects decreased earnings by $105 million relative to the second quarter, reflecting weaker marketing margins in the east and west, and a $35 million unfavorable swing in final pricing adjustments for long-haul crudes only partially offset by the positive impact of higher refining margins.

  • In the west, the Los Angeles Motor Gasoline Dealer Tank Wagon to Spot Indicator Margin dropped almost $5.50 per barrel.

  • While in the East the Houston Rack to Spot Indicator Margin also decreased by about $5.50 per barrel.

  • A combination of rising crude prices, supply disruptions, and the run-up in spot product prices accounted for the marketing margin decline.

  • Indicative refining margins for the industry were up both on the West Coast and in the gulf coast.

  • On the gulf coast the light heavy differential indicator increased by over $12 per barrel for the quarter.

  • However, storm-related downtime in Pascagoula prevented our ability to capture the full benefit.

  • Largely driven by storm-related downtime refinery input volumes and production of high-value products suffered during the quarter and reduced earnings by about $130 million.

  • Overall refined product sales were also down mainly due to storm-related supply constraints.

  • Granted motor gasoline sales, however, were up slightly due to seasonal summer driving.

  • Turning to slide 11, third quarter international downstream earnings of about $430 million were 25% below the second quarter's.

  • An unfavorable swing in foreign exchange results primarily in South Africa and the UK, impacted earnings negatively by $34 million.

  • The effects of higher refining margins were partially offset by a decline in marketing margins, the combination of which resulted in a positive variance, of $125 million between quarters.

  • Refining margins generally improved in all regions, Asia, Europe, and Canada.

  • Building on last quarter's momentum the Brent margin improved by almost $1.50 per barrel, while the Dubai cracking margin climbed by almost $2 per barrel.

  • Weaker marketing margins particularly in Asia resulted from escalating spot product prices largely attributable to the impact of the U.S. hurricanes.

  • Volume effects resulted in a positive variance of $30 million between quarters.

  • Net refinery input was up just over 80,000 barrels per day for the quarter.

  • Primarily driven by the absence of downtime in the second quarter.

  • Several tax-related items, particularly related to Asia Pacific region of our operations reduced earnings by about a $160 million between quarters, while the other bar items which included softer earnings from shipping on lower freight rates and fewer voyages lowered earnings by about $100 million.

  • Slide 12 shows chemical results were $6 million in the third quarter, compared to 84 million in the second quarter.

  • The combined effects of hurricanes Katrina and Rita resulted in a shut down of petrochemical units which impacted third quarter earnings for Chevron Phillips Chemical Company our 50% owned equity affiliate.

  • Increases in feedstock costs and the impact of September inventory builds related to storm and turnaround activities negatively impacted ethylene margins.

  • The ”Other” bar includes our Oronite additives business which experienced lower earnings due to decreased volumes and higher manufacturing costs from plant shut downs related to the storms.

  • Slide 13 covers all other.

  • Third quarter results reflect an increase in environmental reserves for certain properties no longer operated by Chevron consistent with your interim update guidance.

  • The other bar primarily reflects the aggregation of minor variances of tax and other corporate charges.

  • Our third quarter interim update guidance for this segment also called for net quarterly charges in the range of $250 to $300 million excluding Dynegy.

  • Actual net charges for the quarter were slightly higher.

  • That completes our brief analysis of the quarter.

  • And now I'll turn it back to Dave.

  • Dave O'Reilly - Chairman & CEO

  • Thanks, Steve.

  • Turning to slide 14, and before I turn to your questions, I'd like to summarize some of the other areas of progress that have been made during the quarter.

  • We have already talked about the Unocal acquisition being completed.

  • We're delighted that that has occurred and the integration is well underway and progressing quickly, and we have welcomed over 5,000 former Unocal employees into the Company.

  • However, there's some other items that we're making progress as well in.

  • You recall we have sanctioned Tahiti project in the deepwater Gulf of Mexico.

  • And in this quarter we rec -- we announced our decision to proceed with the development of Blind Faith in the deepwater Gulf of Mexico.

  • In this project we hold a 62.5% interest and are the operator.

  • First production is anticipated in 2008 with initial daily output of 30,000 barrels a day of crude and 30 million cubic feet a day of natural gas.

  • In Canada the sale of North Rock Resource Limited was completed generating proceeds of $1.7 billion.

  • North Rock was a wholly owned Canadian subsidy of Unocal, and that divestiture was consistent with the divestiture we made last year of our conventional oil and gas business in Western Canada.

  • In the UK Chevron was awarded exploration rights to eight blocks under the 23rd United Kingdom offshore licensing round.

  • Four of these blocks in which Chevron holds a 40% interest are located near the significant Rosebank/Lochnagar offshore discovery.

  • Three of the blocks in which the Company holds a 65% interest, are located near the Capercaille prospect West of Shetland.

  • The 8th block owned 70% by Chevron is located within the inner Moray Firth south of Chevron's Captain Field.

  • Finally on this chart in Venezuela, Chevron was awarded an expiration license for the Cardon III block located offshore western Venezuela.

  • And this natural gas potential is on trend to the north of the prolific Maracaibo producing area.

  • Turning to slide 15, the Company recently filed an application with the Federal Energy Regulatory Commission to own, construct and operate a natural gas import terminal at Casotte Landing adjacent to our refinery at Pascagoula Mississippi.

  • The proposed onshore terminal is expected to have initial daily import capacity of about 1.3 billion cubic feet a day of gas.

  • Earlier in the quarter we acquired the remaining 40% interest in BridgeLine Holdings.

  • Bridgeline manages and operates more than 1,000 miles of pipeline and 12 billion cubic feet of natural gas storage capacity in southern Louisiana.

  • The acquisition is consistent with our plans to grow our Company's natural gas business Just yesterday we announced the signing of Heads of Agreement for the first sale of liquified natural gas from the Chevron led Gorgon project in Australia.

  • This will go to Japan, the world's largest LNG market.

  • The agreement was signed by Chevron Australia with with Tokyo Gas, a major Japanese utility company for the purchase of 1.2 million metric tons per year of LNG beginning in 2010 for 25 years.

  • And finally we commenced the installation of 350 mile offshore segment of the West Africa gas pipeline.

  • Once constructed the entire 420 mile pipeline will have the capacity of approximately 475 million cubic feet a day.

  • This pipeline will provide natural gas to markets in Ghana, Togo and Benin and will serve to reduce the flaring of natural gas from our operations in Nigeria.

  • And finally on slide 16, while we expect that the effects of these Gulf of Mexico storms will be felt for sometime, our operations are beginning to recover from the disruptions.

  • Earlier this month we announced that the Pascagoula Refinery had restarted and by end of the month we expect it to be operating normally.

  • We are very proud of our accomplishments and the commitment of our employees who have made this restart possible as well as restoring about 45% of the offshore production of oil and gas.

  • That concludes my prepared remarks.

  • I'll now take your questions.

  • We'll try to answer as many as we can in the remaining half hour.

  • I'd ask you if you'd -- you'd limit your questions to one, because I know we have a number of people on the line who have requested the opportunity to ask questions.

  • So Crystal, please open up the lines for questions.

  • Operator

  • [OPERATOR INSTRUCTIONS] Arjun Murti Goldman Sachs

  • Arjun Murti - Analyst

  • Thank you, Dave.

  • Regarding the refining business, there seems to be a lot of political interest as well as a flurry of corporate announcements about, major expansions, new builds and so forth.

  • Just curious how Chevron is thinking about growing it's refining business.

  • I know you have a long history there, and conditions haven't always been as robust as they are right now.

  • Is that something you would seriously consider major new build projects?

  • And if so, should we expect anything more likely to be outside of the U.S. perhaps in Saudi of China or India versus in the U.S.?

  • Thank you.

  • Dave O'Reilly - Chairman & CEO

  • Thanks, Arjun.

  • First of all we have, of course announced some more -- we have modest increases in capacity that are underway.

  • Recently completed a small incremental work at -- at -- at El Segundo, and we are next year expanding our capacity to make gasoline at Pascagoula, that project's already underway.

  • In the U.S. we -- we plan to continue to expand our existing refineries and have the opportunity to do so.

  • You will continue to see us pushing in that direction.

  • We don't feel that we need to build a grass roots refinery, but we have the capability, and the space, assuming we can get the permits to expand capacity at a number of our existing refineries, particularly the -- the larger ones.

  • We are also, of course expanding in Asia, which is another area that we're very interested in.

  • We -- as you recall last year, increased our interest in the Singapore refinery from one-third to 50% and we're evaluating and I expect we'll shortly announce an expansion at our refinery in Korea.

  • So we are clearly involved in expanding our refining capacity.

  • I don't expect them to be grass roots, at least certainly not in the United States, but I am optimistic that we can continue to increase capacity in our existing refineries here at home.

  • Arjun Murti - Analyst

  • Thank you.

  • Dave O'Reilly - Chairman & CEO

  • You're welcome.

  • Operator

  • Mark Flannery, CSFB.

  • Mark Flannery - Analyst

  • Dave, if you could be a bit more precise about the impact that's going to happen on -- on fourth quarter production volumes from the storm.

  • Clearly it's going to depend on when you get this stuff back up.

  • But maybe -- maybe a best guess or a range number might help us with modeling.

  • Dave O'Reilly - Chairman & CEO

  • Yes.

  • Yes, Mark, and it's a reasonable question.

  • And it's a difficult one to answer, and let me do the best I can.

  • And the reason I'm qualifying it a little bit is that, it's not just -- it's not just that -- we don't control everything here.

  • As you -- as you probably -- I know you'll appreciate that.

  • We have pipe lines that are -- that are others -- that we have to rely on.

  • And there are gas plants, for example, on shore through which our gas is processed, and we have to rely on third parties to -- to repair and refurbish and start up the facilities in those cases as well.

  • So -- so some of this is within our control, and some of it is outside our control.

  • But our best estimate for the average for the quarter would be about 50% or so of what we would normally produce in the Gulf of Mexico.

  • We would normally expect to produce 320,000 barrels of oil equivalent, in the Gulf of Mexico, and we expect that about half of that would -- would be a reasonable number to -- to -- to achieve so around 160,000 barrels OED.

  • Mark Flannery - Analyst

  • Great.

  • Thank you very much.

  • Dave O'Reilly - Chairman & CEO

  • Okay.

  • Mark Flannery - Analyst

  • Thanks.

  • Steve Crowe - VP and CFO

  • Mark, I would just add that around the first of October, following Rita, in the Gulf of Mexico, as Dave mentioned, we have about 320 OEG barrels, we were running about 20% was on line at the beginning of the quarter, and we're -- we're ramping up during the course of the quarter and for the reasons Dave said we won't know the exact number.

  • But as best as we can model it here, 50% is probably a fair estimate for your purposes.

  • Mark Flannery - Analyst

  • Okay.

  • Thank you very much.

  • Steve Crowe - VP and CFO

  • You bet.

  • Operator

  • Robert Kessler, Simmons & Company

  • Robert Kessler - Analyst

  • Good morning, gentlemen.

  • With regard to the $600 million aggregate hurricane effect on income is there a way you can split that out between opportunity costs and actual physical costs associated with repair work or dislocations and the like?

  • Steve Crowe - VP and CFO

  • Sure, Robert.

  • The number that we have, as we said, is something in excess of $600 million after tax for the -- for the quarter.

  • Approximately two-thirds of that is connected with lost opportunity profits.

  • So that's production volume that didn't occur in the Gulf of Mexico, and refinery production at Pascagoula that likewise didn't happen.

  • As for Pascagoula, recall that when -- when Dennis came in, we -- we had to shut down the pass Pascagoula Refinery for about -- about a week, just prior to it's arrival and once it came through.

  • And then we had the shut downs for the balance of the quarter once Katrina arrived.

  • The calculation of the lost profit opportunity, since it's an analytically derived one is something -- it's a very good question for you having posed it.

  • For the upstream side of the house, we've used essentially contemporaneous prices for crude and gas, and that's a fair approach, given the timing of the storms.

  • You appreciate the Gulf of Mexico crude is priced with a one-month lag, and given the workings of bid week pricing, using contemporaneous prices is -- is a good approximation.

  • Now on the downstream side for Katrina and Rita, recognizing that the market was very volatile following Katrina's arrival and spot prices were gyrating around as were -- as were margins, we decided to use sort of an average refining and marketing profitability during the first 7 months of -- of 2005.

  • We did this as a way to try to move out of the equation, the -- the impact of the hurricane itself.

  • The balance of the -- the costs are reflected in repair and maintenance costs up to the point where we will eventually hit the insurance deductibles.

  • There are also some ancillary costs that are connected with the hurricane by higher insurance and evacuation costs from the facilities, and there were also some write-offs of facilities as well.

  • So that's -- that's the general break down, and as you look at the chart on page six, you can see our -- our rough break down between the upstream side of the house, refining and marketing, and other.

  • And included in other then, would be, not only our chemical operations for Oronite and CPChem but also our pipeline operations as well.

  • Robert Kessler - Analyst

  • Very helpful thank you.

  • Given your comment about the insurance deductible limit, it sounds like you have done the calculation.

  • Any sense for -- for what your deductible is in aggregate for this and how much you might recover from insurance?

  • Steve Crowe - VP and CFO

  • Well, that is another very good -- very good question.

  • The way the insurance works, first of all, you have to separate it by storm.

  • So the insurance is by event.

  • So there's one for Katrina and one for Rita.

  • In the case of Chevron's policies they are further split between on shore and offshore.

  • And although there's some complications with various insurance coverages the simple answer is an approximate $125 million deductible on the on-shore and a $125 million deductible on the offshore per event.

  • Now Unocal has a little bit different , their -- their policies are different deductibles they're smaller, and it's a combined amount.

  • So it will take us some -- while to collect all of the data, but we may find when it's all said and done that the final costs will be in excess of our deductibles.

  • Robert Kessler - Analyst

  • Okay, great.

  • Thank you very much.

  • Operator

  • Nicki Decker, Bear Stearns

  • Nicki Decker - Analyst

  • Good morning, Dave and Steve.

  • The Unocal production contribution of 425,000 barrels a day for two months, how much reduction from former Unocal assets was shut in in the Gulf of Mexico due to the storms?

  • Steve Crowe - VP and CFO

  • It was a fairly small amount, Nicki.

  • My recollection was in the single digit range in terms of thousands of barrels a day.

  • Unocal's operations are more in the Western part of the Gulf, which means it would have been impacted more by Rita near the end of September rather than Chevron's operations which are more -- more widely spread.

  • Nicki Decker - Analyst

  • Thank you.

  • Steve Crowe - VP and CFO

  • You're welcome.

  • Operator

  • Doug Leggate, Citigroup

  • Doug Leggate - Analyst

  • Good morning Dave and Steve.

  • The refining and marketing variances, Steve, you have done a pretty good job trying to break out all these -- these moving parts this morning, but I wonder if I could challenge you one more time just to help us with the variance sequentially, please?

  • Refining and marketing margin changes, I think you gave us some numbers in the introduction remarks but I'm interested particularly in the U.S. moves.

  • Steve Crowe - VP and CFO

  • Okay.

  • Fair question, Doug.

  • You were right there were lots of moving parts here.

  • In the U.S., the refining and margin bar that we show on slide 10 that has a volumetric -- has rather a margin change between quarters of $105 million, reflects a -- an uptick of approximately $60 million or so connected with refining and a negative $165 (million) or so connected with marketing.

  • On the volume side, the very large $130 million or so reduction in -- in volumes is largely connected with refinery downtime and -- at Pascagoula and our inability then to make high value products for [explicit] near half of the quarter.

  • Does that help, Doug?

  • Doug Leggate - Analyst

  • It does.

  • I guess the last opportunity cost would be on top of all of this then?

  • Correct?

  • Steve Crowe - VP and CFO

  • That's absolutely correct.

  • The lost opportunity cost is essentially embedded in all of these -- these bars, yes.

  • Doug Leggate - Analyst

  • All right.

  • Steve Crowe - VP and CFO

  • Another way of thinking about the LPO -- and in fact another way of thinking and the entire impact of the hurricanes which -- which we said was in excess of $600 million, had the hurricane not occurred our earnings would have been that much higher in the third quarter.

  • Doug Leggate - Analyst

  • Okay.

  • Great.

  • Thanks, Steve.

  • Steve Crowe - VP and CFO

  • Fair enough.

  • Operator

  • Mark Gilman, Benchmark Capital

  • Mark Gilman - Analyst

  • Guys good morning.

  • I wonder if I could specifically ask on -- on the Unocal merger what the incremental DD&A that you recorded in the third quarter was and what the balance sheet goodwill on that merger was?

  • Steve Crowe - VP and CFO

  • Sure, Mark.

  • Let me begin by saying for the entire analysts community, when we file the -- the 10 Q next Thursday, you'll see some disclosures in there, some of which I think you'll find particularly interesting.

  • One of which, breaks out for -- the $17.3 billion acquisition, and that's the measurement for accounting purposes, to the fair value of the assets acquired and the fair value of the liabilities assumed.

  • The -- the increase in the property's plant and equipment, of course, results in a higher DD&A charge as the production is produced.

  • And in round house numbers if memory serves me right, Mark, our higher DD&A for the third quarter is approximately $120 million BT, roughly $80 million AT.

  • That's on a worldwide basis.

  • On a second item for goodwill, you'll find that our goodwill is on the order of $3.5 billion.

  • And I would point out when you take a look at that, good -- goodwill represents the -- sort of the going concern element of the Unocal business, the collection of operations that we have that would take a while to accumulate otherwise.

  • It also reflects the option value that's provided to Chevron now that we have Unocal, particularly in areas in the -- in the Caspian and most notably for global gas in the Asian Pacific arena.

  • It also reflects the net present value of the synergies that we -- we talked about at the time of announcing the -- the acquisition.

  • So that's -- conceptually that's what the goodwill represents.

  • Mechanically, it's the difference, then, between what you determine to be the fair value of the assets and the fair value of the liabilities.

  • One element that -- that -- could escape people a bit is that, in the historical cost accounting model, the presumption is that the fair value of the assets can be taken for tax purposes as they are depreciated.

  • But in a pu -- in an acquisition like this, there's a step-up in the bases for book accounting purposes, but not for tax purposes, resulting in a -- in a deferred tax that will unwind over time.

  • But interestingly enough the deferred tax is greater than the -- then the goodwill.

  • So we feel pretty comfortable about our approach.

  • Mark Gilman - Analyst

  • Steve, could I just ask you to clarify that $120 million is that a two-month number.

  • Steve Crowe - VP and CFO

  • That's a two month number, Mark.

  • Yes.

  • Mark Gilman - Analyst

  • And that's over and above what Unocal's basic depreciation and depletion was.

  • Steve Crowe - VP and CFO

  • That's correct.

  • Mark.

  • Mark Gilman - Analyst

  • Thanks very much.

  • Steve Crowe - VP and CFO

  • Yes, and in fact one of the things we tried to address throughout this earnings release is that data and the volumetric data as well is the months of August and September over an entire three-month period.

  • Steve Crowe - VP and CFO

  • Thanks, Mark.

  • Good question.

  • Operator

  • Jennifer Rowland, JPMorgan

  • Jennifer Rowland - Analyst

  • Thanks I have a question about the international downstream variance.

  • You mentioned the tax related item of $160 million was Asia Pacific related.

  • I was wondering if you could elaborate on that and whether or not that an item that would impact result goings forward?

  • Steve Crowe - VP and CFO

  • Well, we -- we have a very, very large International Downstream business with operations in -- many of those 180 countries around the world.

  • And -- the variance -- the tax-related variance which we described on page 11 as to the change between the second and the third quarters of a negative 160 in part reflects the absence of some positive items that occurred in the second quarter and the inclusion of some tax items that were recognized in the -- in the third.

  • So it's -- it's a double swing there, if you will, Jennifer.

  • As to whether or not you can -- they tend to be a little bit lumpy in some of these things, so I wouldn't necessarily say that that type of delta coming to the third quarter would be representative.

  • Jennifer Rowland - Analyst

  • Okay.

  • And was -- was the swing -- I'm just try to understand because the variance slide that you showed last quarter International Downstream did -- did not show a positive variance for any tax-related items.

  • Steve Crowe - VP and CFO

  • It -- it would depend, then, of course between the changes between the first and second quarter and whether tax was significant.

  • I can't recall off the top of my head, Jennifer, but it may very well been included in what we show as the other bar this time.

  • Jennifer Rowland - Analyst

  • Thank you.

  • Operator

  • Paul Cheng, Lehman Brothers

  • Paul Cheng - Analyst

  • Good morning.

  • Hi, Dave, Steve, and Maria (should be Irene).

  • The thing I want to ask about the cash -- the priority of using cash.

  • Dave you look like by the end of the year you probably will be about net cash -- net cash zero by the end of the year and given the reasonably assumption that you are going to generate a lot of cash next year even if you assume going to increase your capital spending reasonably high.

  • With that in mind, is there any reason that we would not attempt to maybe opt for a much more aggressive share buy back program?

  • Or how do you prioritize that kind of free cash that -- in your mind?

  • Dave O'Reilly - Chairman & CEO

  • Okay.

  • Well, Paul, there -- the -- let me just kind of -- first of all say that we will be a little clearer about our intents here at the time that we announce our capital program, which normally we do in December.

  • In fact we're in the process right now of fine tuning and developing our -- our business plans.

  • So in December we will make an announcement as to our capital program and -- and we will address the other issues around cash at that time.

  • But let me just kind of give you philosophically what our priorities are.

  • Our priorities, of course are to maintain a strong balance sheet, to reinvest in the business, to maintain a consistent dividend policy, and to -- and to the extent -- the extent that we are doing all of those, then if we feel we have a -- an abnormally high cash benefit because of high prices or whatever it is, we have in the past bought back shares.

  • Our philosophy hasn't changed here.

  • But I can't give you anything specific until we finish doing our homework here, and are ready to make announcements about our plan for -- our specific plan and our for the year 2006.

  • Paul Cheng - Analyst

  • Thanks.

  • Can I have a quick follow-up?

  • Dave O'Reilly - Chairman & CEO

  • Yes.

  • Paul Cheng - Analyst

  • In the -- you are talking about the capital spending I know it's a little bit premature.

  • But you have Unocal asset now for three months.

  • Is there any [surprise] both on the upside or down side related to the offset that you can share with us?

  • Dave O'Reilly - Chairman & CEO

  • No, in fact I'm very pleased with -- with what we see so far.

  • In fact even without the benefits of synergies we're already seeing an accretion to earnings and cash flow per share.

  • So it -- it's been doing well.

  • It's off to a good start, and the assets that we have seen so far are as we expected.

  • Paul Cheng - Analyst

  • Okay.

  • Very good thank you.

  • Operator

  • Bill Costello, Boston and Company.

  • Bill Costello - Analyst

  • Hi, I just had one quick question I wanted to clarify.

  • When you were talking about the Pascagoula Refinery and you said that it would be up to normal, you know operations by the end of the month, I believe that's what you said.

  • I was just curious if you meant the month of October that we're currently in?

  • Or by the end of November?

  • Thank you.

  • Dave O'Reilly - Chairman & CEO

  • Yes, Bill, I meant -- I think I made that comment, I meant the month of October.

  • You'll recall that we -- we -- we began starting it up earlier this month, and so you know, for -- for modeling purposes or estimating, you can assume two months of normal operation with a kind of a ramp-up in front of that.

  • Bill Costello - Analyst

  • Great.

  • Thank you very much.

  • Dave O'Reilly - Chairman & CEO

  • You're welcome.

  • Operator

  • Daniel Barcelo, Banc of America Securities

  • Daniel Barcelo - Analyst

  • Yes, good morning, just a question on reserve position.

  • If in thinking of reserves even pre Unocal there's a large concentration beyond the U.S. to Kazakhstan and Nigeria I don't know if you could give us a country update there specifically?

  • And then a little bit broader picture, longer term what do you feel is a good reserve position with these areas of the U.S. and Asia, is there anything else you are lacking or want to build on?

  • Dave O'Reilly - Chairman & CEO

  • Okay.

  • Well we have -- you -- we have of course reserves all over the world.

  • But in particular we have reserves in -- outside of the United States and of course that's been where most of the growth in reserves has occurred.

  • So Dan, your point is -- is a good one.

  • As far as Kazakhstan is concerned, I just returned from a trip there.

  • And we are in the process of expanding Tengiz, which is coming along well, and we obviously have big reserves present in Kazakhstan but we're very pleased with our progress there.

  • And of course with Unocal being added to the Chevron portfolio, we have now presence also in Azerbaijan and access to two pipelines, Caspian pipeline and Baku--Ceyhan Pipeline.

  • So everything is moving well in that area.

  • We do have fairly large reserves in Nigeria, and -- and of course had -- had -- we have had some good exploration success in Nigeria, which -- and that success hasn't been booked yet, we're -- we're still in the process of evaluating some new discoveries there.

  • We are -- you have asked for areas outside that.

  • Our -- our -- our -- one of our areas of focus outside the United States is in -- is in -- in kind of in Australasia.

  • We have a tremendous presence in Australia with natural gas reserves that are not yet booked as proven, but are technically there and awaiting -- awaiting the final commitment to move ahead with Gorgon.

  • We took some very big steps there with the signing of the Heads of Agreement with -- for the sale of gas with Tokyo Gas.

  • We are continuing to pursue other commercial opportunities, and of course, still finishing up all of the detailed permitting work that has to be done before construction can start on the facilities themselves.

  • So we anticipate growth -- significant growth in reserves in Australia once we have got those items complete.

  • If you look at our total resource position, and I think we have shown this chart at the time of the Unocal acquisition, you'll see that our -- our resource position -- and these are not booked reserves, these are the total resources that are in place, but not yet commercialized.

  • Of the majors we have the largest resource position in Asia post Unocal acquisitions.

  • So this is something -- this is an area that we'll be continuing to focus on, places like Australia, Indonesia, Thailand, and -- and other countries in the region to build on that position -- commercialize those resources and of course supply them to the -- to the markets in Asia.

  • I hope that addresses your question.

  • I think it does.

  • Daniel Barcelo - Analyst

  • Thank you.

  • Steve Crowe - VP and CFO

  • Hey, Dan, one thing I would mention to you is in early March we're going to be having an Analyst's meeting and in early March we'll issuing the 2005 10Q.

  • And not unlike what we have for the 2004 10Q, fairly expansive disclosures in the forepart particularly on our upstream operations, and quite a bit more detail broken out about reserves and production by geographical area in the supplemental oil and gas tables at the back end of the finance statements.

  • So we'll be incorporating all of the Unocal operations, obviously and updating it, so I think you're going to have a pretty good investment base -- or database from which to work.

  • Daniel Barcelo - Analyst

  • Thanks.

  • Steve Crowe - VP and CFO

  • Thanks, Dan.

  • Operator

  • John Herrlin, Merrill Lynch

  • John Herrlin - Analyst

  • Just a quick one on deep water Gulf of Mexico.

  • Obviously the operations were stressed this year, facilities like Typhoon given the hurricane season.

  • Are we going to hear about any more design changes that you might be making for these facilities given your large exposure to the deep water play, and if you do have engineering design changes, would that effect timing of some of the projects like a Tahiti or Blind Faith?

  • Dave O'Reilly - Chairman & CEO

  • John, we obviously are analyzing the -- the Typhoon situation.

  • That -- that was actually -- we don't know the cause of it yet, but it's been explored.

  • One of the good things about these hurricanes is that our major -- our major facility -- the facilities of the type that we're currently building and moving forward with, did very, very well.

  • We have a number of other big facilities out there such as Genesis, and we have a number -- Genesis and others that -- that really did very well.

  • And I think -- I think we have a high degree of confidence that our designs are actually in pretty good shape, particularly relating to the work we're doing in Tahiti and Blind Faith.

  • However, that doesn't mean we shouldn't be evaluating it.

  • Frankly I do not think this will delay any of our projects going forward.

  • I think the big issue for projects in the Gulf of Mexico going forward is just the general -- the general availability of rigs for the industry and -- and other inputs here.

  • And the -- and the impact that the -- the storms have had on dedicating resources to repair, as well as dedicating resources to -- to -- to new projects.

  • So from a design standpoint, we're very comfortable.

  • None of the designs we're moving forward with are the same as we at -- at Typhoon.

  • We need to analyze what happened at Typhoon and understand it better.

  • John Herrlin - Analyst

  • Okay.

  • Thank you.

  • On the downstream --

  • Dave O'Reilly - Chairman & CEO

  • Hello?

  • Hello?

  • Operator

  • Okay.

  • His line has been knocked out of queue.

  • I'm not sure what happened.

  • Dave O'Reilly - Chairman & CEO

  • Crystal, we'll take one more call.

  • Operator

  • Neil McMahon, Bernstein

  • Neil McMahon - Analyst

  • McMahon is close enough.

  • Dave O'Reilly - Chairman & CEO

  • Neal believe me an O'Reilly can figure that out.

  • Neil McMahon - Analyst

  • Definitely, Dave I would expect you would from Donegal.

  • Anyway, quick -- quick question, just basically, if you could comment on what you are seeing in terms of Asian demand for products and for chemical products as well?

  • That would be great.

  • Thank you.

  • Dave O'Reilly - Chairman & CEO

  • You're welcome.

  • We are -- we're seeing some slow down in demand around the world.

  • Actually a little bit more in September in the United States, which we -- we're not sure whether that's an aberration or not, frankly.

  • Obviously the hurricane has disrupted some of the typical supply lines, and the numbers for September show, I think, for example, gasoline in the range of 4% decline year-over-year.

  • But there is evidence that's beginning to recover as supply is increased and prices have moderated.

  • In Asia, there has been some slow down in demand, but -- but -- but it's still positive, and I think -- you know, we have gone through a -- a year or two of very, very high growths in the region, and there's no reason to believe that the fundamentals aren't good there going forward and with -- with again, with moderating prices, I think you are seeing demand still relatively good in the region.

  • But -- but not as bullish or as aggressive and high as it was last year.

  • Neil McMahon - Analyst

  • Great.

  • Thanks a lot.

  • Dave O'Reilly - Chairman & CEO

  • Okay.

  • Thank you, Neal.

  • And it's time to wrap up.

  • I want to thank you very much for being on the call.

  • I appreciate your participation, and I look forward to our -- I guess our meeting in early March, when we'll be talking about our business in some more depth and hope that many of you will be able to be there, and if that I'll turn it over to you Crystal.

  • Operator

  • I would like to thank everyone.

  • And this does conclude today's teleconference.

  • You may disconnect at this time, and have a wonderful day.