雪佛龍 (CVX) 2007 Q1 法說會逐字稿

Good morning. My name is Matt and I will be your conference facilitator today. Welcome to Chevron's first-quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded.

I will now turn the conference over to Vice President and Chief Financial Officer of Chevron Corporation, Mr. Steve Crowe. Please go ahead, sir.

Thank you, Matt. Welcome to Chevron's first-quarter earnings conference call. Today on the call I'm joined by Irene Melitas, Manager of Investor Relations. Our focus today is on Chevron's financial and operating results for the first quarter of 2007. We will refer to the slides that are available on the Web. I remind you that today's presentation contains estimates, projections and other forward-looking statements, and ask that you review the Safe Harbor statement on slide 2.

I will begin with slide 3, which provides an overview of our financial performance. The Company reported earnings of $4.7 billion for the quarter or $2.18 per diluted share. Earnings were up 18% from the first quarter a year ago, reflecting a $700 million after-tax gain on the sale of our interest in the Nerefco refinery in the Netherlands and higher margins on refined products worldwide. These benefits were partially offset by the effect of lower prices for crude oil and natural gas on upstream profits. First-quarter results were 25% higher than the fourth quarter of 2006, which Irene will discuss shortly.

Return on capital employed for the trailing four quarters was 23%. And the debt ratio was about 12% at quarter end. Earlier this week, we announced an 11.5% dividend increase, raising our quarterly dividend to $0.58 per share. 2007 marks the 20th consecutive year that the Company has increased its annual dividend payout. Share repurchases totaled $1.25 billion, the same quarterly pace as in 2006.

Slide 4 highlights some of the milestones we achieved in recent months. Starting with upstream, last month we announced the startup of our Bibiyana natural gas field in Bangladesh. The field is initially expected to produce 200 million cubic feet of natural gas per day, rising to 500 million cubic feet per day by 2010. Exploration success continues with the announcement of two deepwater oil accumulations in the northern part of the Republic of Congo, Moho-Bilondo permit. Chevron's nonoperated interest is 31.5%. Evaluation and development option studies are underway.

In the downstream, we announce the sale of our 31% interest in the Nerefco refinery in the Netherlands. The transaction closed at the end of March and was part of our portfolio rationalization efforts highlighted during the March analyst meeting.

Irene will now take us through the quarterly comparisons. Irene?

Thanks, Steve. My remarks compare first-quarter results to those of the fourth quarter 2006. As a reminder, our earnings release compared first quarter 2007 to the same quarter a year ago.

Turning to slide 5, first-quarter net income was about $940 million higher than the fourth quarter's results. First-quarter earnings benefited by $700 million from the sale of our interest in the Nerefco refinery in Europe, as indicated in our interim update for the quarter. Volume effects reduced earnings by $175 million and were primarily attributable to lower listings in Canada and production in the U.S.

A decrease in exploration expense contributed favorably to the quarter's results. The other bar reflects a positive swing in tax-related items, lower operating expenses, and the net of everything else.

Slide 6 summarizes the results of our U.S. upstream earnings, which declined by $90 million between quarters. The benefit of higher natural gas realizations were partially offset by lower liquids realizations and netted to a $20 million improvement in earnings. The $1.38 per barrel decrease in crude realizations was generally smaller than the decrease in industry benchmark prices. While the average price per WTI declined by $1.89 per barrel between quarters, the Gulf of Mexico benchmarked trade month price, which is on a lagged basis, declined by about $0.95 per barrel.

Higher natural gas realizations resulted in a $50 million profit improvement. Though Henry Hub bid-week prices improved by $0.24 per thousand cubic feet, our average realizations improved $0.50 per thousand cubic feet, reflecting our regional production mix and spot sales.

Volume effects associated with third-party pipeline disruptions in the Gulf of Mexico and San Joaquin Valley and two fewer producing days reduced earnings by $65 million. Other primarily reflects an unfavorable variance in FAS 133 effects, which was partially offset by lower exploration expenses and other items.

Turning to slide 7, international upstream earnings were about $90 million higher than the fourth quarter's. Lower oil prices reduced earnings by about $35 million and were partially offset by higher gas realizations. Unit liquids realizations declined by $0.62 per barrel, less than the drop in spot Brent prices due to country mix effects.

Lower listings in Canada resulted in a negative earnings variance of $100 million. A decrease in exploration expenses benefited earnings by $155 million. The variance in other includes lower operating expenses between quarters.

Slide 8 summarizes the change in worldwide oil equipment production, including volumes produces from oil sands in Canada. Daily volumes were down by 12,000 barrels between quarters. During the first quarter, U.S. production declined 14,000 barrels per day due to third-party pipeline disruptions affecting the Gulf of Mexico and San Joaquin Valley and natural field declines.

Outside the U.S., oil and gas production was relatively flat between quarters. Production increases in the United Kingdom reflect the absence of downtime at Britannia during the fourth quarter. This increase was offset by lower production in Canada due to unplanned downtime at Hibernia.

Turning to slide 9, U.S. downstream results in the first quarter were slightly higher than the prior quarters. Lower realized margin effects of about $85 million adversely impacted earnings relative to the fourth quarter. This was primarily due to the effects of the Richmond refinery crude unit turnaround, which was extended by repairs associated with the fire. The unit was down for most of the quarter, which prevented the Company from capturing the improved West Coast refining margins. Refining margins were also dampened by supply effects during the quarter.

Marketing margins were lower on the West Coast. Weaker asphalt and lubricant margins also affected the quarter's results. Somewhat offsetting these lower margin effects were improved refining and marketing margins in the East. The other variance includes lower expenses at the Pascagoula refinery following the fourth quarter's FCC shutdown and expansion project and other miscellaneous items.

Turning to slide 10, international downstream earnings of about $1.3 billion were substantially higher than the fourth quarter's. The sale of our interest in the Nerefco refinery and associated assets in the Netherlands resulted in an after-tax gain of $700 million. After the sale, results were about $40 million lower between quarters. Realized downstream margins improved earnings by about $50 million, led by higher refining margins in most regions, in line with the rise in indicator margins. An unfavorable swing in foreign exchange effects reduced earnings by $90 million and drove the variance in other.

Slide 11 shows earnings from chemicals were $120 million in the first quarter compared with $124 million in the fourth quarter. Results for olefins declined during the quarter, primarily due to lower ethylene margins and higher manufacturing costs related to planned turnarounds. The improvement in additives earnings reflects the combination of higher margins and lower nonmanufacturing expenses.

Slide 12 covers all other. First-quarter results show a positive variance from the prior quarter, due to higher earnings associated with the Company's investment in Dynegy, included in the P&L businesses bar, and, as mentioned in our interim update guidance, favorable corporate tax items included in other. Largely as a result of the variance in tax items, net charges for segment other were lower than our standard quarterly guidance for this segment that calls for a range of $160 to $200 million, excluding Dynegy.

That completes our brief analysis for the quarter. Back over to you, Steve.

Thanks, Irene. That concludes our prepared remarks. We will now take your questions. One question per caller, please. We will wrap up at or before the top of the hour. Matt, please open the lines for questions.

(OPERATOR INSTRUCTIONS). Dan Barcelo, Banc of America.

The downstream, you had an impact, obviously, in the first quarter from Richmond. I didn't know if you could just further quantify for us a bit some of the nonrecurring operational impacts for first quarter for the downstream relative to the just the refining margin impacts or other environment impacts?

Just for a little bit of background, as Irene mentioned, we had a fire that occurred at the Richmond refinery in mid-January at the crude unit just as it was being brought down for scheduled maintenance. We had a failure of a swingout wash oil pipe spool. But as I mentioned, there was a planned turnaround being readied, so our supply position already anticipated the unit being out of service. The fire itself extended the shutdown by about a month, and the refinery was back by the end of the first quarter.

From an analytical perspective, if you tried to get an estimate of the cost of the incident, including the lost profit opportunity as well as the additional repair costs, it's probably on the order of $150 million or so.

Doug Leggate, Citigroup.

The tax in the quarter, Steve, I think Irene alluded to it a little bit there in the comments, but it was obviously quite a bit lower than your guidance. Can you just walk us through some of the major items there and just reiterate, perhaps, what you expect the run rate to be for the balance of the year?

The first-quarter effective tax rate was 37.6%. And if you look at the average effective tax rate for full year 2006, it was more on the order of 46%. So as you pointed out, it was considerably lower than last year. In looking at the components as to why our average effective tax rate is lower in the first quarter for a 90-day period, I'd point to three things.

Number one, we had a lower tax rate associated with the Nerefco sale, certainly a nonrecurring item from a run rate perspective. Number two, we had some favorable adjustments for prior periods resulting from the completion of tax audits. And number three, in the first quarter, proportionately more income was earned in lower-tax-rate jurisdictions. Clearly, we operate in many tax jurisdictions, so as they shift from location to location, you can get some noise on that score.

With respect to the favorable adjustments for prior periods, as Irene mentioned, we tried to at least reference this in the April 10 interim update. In that interim update, we spoke about the all other segment -- we said for the first quarter, favorable tax-related effects at the corporate level are expected to substantially offset corporate charges for the period. So given the earlier guidance, that should have given some indication that we were going to be getting a favorable tax benefit. But those three components explain roughly the 10% decline, or 9% decline, from sort of an average run rate.

As to your question what might be an average rate, I think the rate that we saw in 2006 is pretty representative. Again, there will be noise that occurs when we have adjustments as a result of completion of tax audits, and there will be noise to the extent that you have transactions that result in tax rates different than that average.

Thanks very much for your question. I hope that helps.

Ron Oster, A.G. Edwards.

I had a quick question on Gorgon, and I was wondering if you could give us an update in terms of any progress that may have been made there regarding the development type or any contract sales, and if you could just kind of go over some of the major hurdles that need to be overcome before it could be sanctioned and any timeframe on sanction, it would be helpful.

We covered this at last month's New York analyst meeting, but for the benefit of those who may not have heard that, let me give a little bit of background. Gorgon is a project of great scale and complexity, and certainly we are dealing with increasing market-related costs.

Gorgon is presently in the engineering and design phase. You may recall last December, we received concurrence on the environmental framework for a two-train LNG facility on Barrow Island, which was given by the Western Australian government. We are now awaiting the final environmental permit from the Western Australian government and the Commonwealth, which we expect will occur around midyear.

During the last several months, we have undertaken additional studies to reduce costs, consider appropriate production capacities and try to mitigate any uncertainty with respect to the execution before we make a final investment decision. But the project is moving forward, and the first hurdle that we need to get past is the environmental permit, which I mentioned we hope to see in the not-too-distant future.

As was indicated in the slides that we showed at the analyst meeting last month, startup is expected after 2010. It is difficult for me to give anything more precise at this stage of the game until some of these milestones are completed. But I thank you for your question.

Mark Flannery, Credit Suisse.

My question is on Kazakhstan and Tengiz in particular. Can you just update us what we expect to see from that project as we go through the year? Any maintenance or ramp-ups, ramp-downs, that kind of thing?

Again, this was a project that George Kirkland discussed at last month's analyst meeting. But let me give just a little bit of a backdrop here on this phased expansion at TCO. The sweet gas injection came on in the latter part of 2006. This year, we've tested it and established the sustained injection rates and pressures and the mechanical operation of the facilities.

Later in 2007, we expect the sour gas injection to commence, and staged oil will increase. Once fully online in 2008, as the project ramps up, we see Tengiz's gross production capacity increasing from levels in the neighborhood of 285,000 barrels a day to a range of 460,000 to 550,000 barrels a day once it is fully online. So it is moving ahead. And we will continue to update you with respect to the project as more information becomes available.

Paul Cheng, Lehman Brothers.

Just a quick one. Since you updated Gorgon, can you give us an update on Nigeria and Angola on the LNG project to see where we are in terms of sanctioning those projects?

Well, those projects are earlier in their development. The Angola LNG project, in which we own about a 36% equity, is still in FEED. That is the front-end engineering and design phase. It is progressing with the collaboration of our partners, and we expect FID later this year.

As to the Nigeria LNG project, the Olokola one, it too is in FEED, with engineering and design work underway. It is a little bit further back than the Angola one, but we will keep you apprised as it progresses. That is the current status. Thank you much.

Mark Gilman, Benchmark.

Wanted to see if I could get a little bit more clarification on the international downstream earnings, knowing that that segment contains a number of what I would consider to be nonrefining and marketing activities, including shipping, including CPC, including the petrochemical interest in Korea with LG. I also noticed in that variance analysis, there was no mention one way or the other of the potential absence of the fourth-quarter LIFO benefit that favorably impacted those results. So if you could clarify that first-quarter result in that segment, drill down a little bit, I would appreciate it.

Thanks, Mark. You asked about some of the other contributing factors to our international downstream earnings, for example, shipping and so forth. Shipping was actually down between quarters on account of fewer liftings and lower freight rates. The earnings contributed from the Sasol JV were positive between quarters. Trading margins were higher between quarters. And clearly, the biggest driver as far as other items relates to foreign exchange, which was a negative variance between the two quarters. Inventory-related effects, I do not have that specifically isolated at this time. We could certainly get that to you after the call.

You're quite right, it is a very large business with lots of components in it. And making it simplified for these bar charts, we do take a lot of things that get netted together.

Bernie Picchi, Wall Street Assets.

It was interesting and pleasing to see that you had a 5% increase in branded gasoline sales in the U.S. in the quarter. I was a little surprised by that, given kind of what's happened to gasoline prices. Can you give us on any color on what may actually be happening region by region, and also kind of within the quarter, and if you could even go out into the beginning of the second quarter, are you seeing a continuation of that trend? Has there been a falling off or an acceleration, or what's going on?

The main driver that we have seen in our increase in volumes associated with branded gasoline here in the United States has been the expansion associated with the Texaco brand. As we got full use of that, we have expanded the brand both in the Southeast and now more recently on the West Coast. So that has been a key contributor for the increasing sales of branded gasoline that we have seen here in the United States. And as you can imagine, that's a very favorable development from our perspective. As far as I know, we don't see anything to suggest that that will not continue.

Oswald Clint, Sanford Bernstein.

Just one question on exploration, please. Given the very successful exploration discoveries quarter to date and actually over the last couple of years, is there any potential throughout the rest of the year for a step-up in drilling activity or some extra exploration wells to be drilled over the course of 2007?

Well, as we had talked about at our January call, we see the exploration activity essentially on par with that of last year. We've just had tremendous success with exploration, as you know. And over the last five years, our success rate has been industry leading at 45%. I don't have any specific new information with regards to the exploration program, but it is something that we are very proud of and have had a tremendous track record on. Perhaps we can get you some more detail if you will follow up with Irene a little later.

I would actually also recommend that you refer to the presentation by Bobby Ryan back in March, and on one of the slides, it actually provides in great detail what our program is for 2007.

John Herrlin, Merrill Lynch.

Looking upstream at your CapEx, you are up 26% versus first quarter last year, but down 21% versus fourth quarter. I'm just trying to get a sense of how and what you are spending on. Are these lumpy changes because of all the development stuff you're doing with things like Agbami and Tahiti, or is it because of exploration activity?

Certainly, our C&E pattern is influenced by the timing of these large projects that you have heard so much about. We monitor the capital program very, very closely. Sort of on a naive basis, if you look back for several years for Chevron, our spending tends to be back-end-loaded to the second half of the year. The $4.1 billion spent through the first quarter, in the aggregate -- that includes R&M and other as well -- is right in line with our historical pattern of spending about 20% to 21% of the full C&E amount in the first quarter. So I think your perception is correct -- It is driven largely by the timing of these projects.

Jason Gammel, Prudential.

With the Richmond incident now largely behind you, can you provide us with any guidance about progress on capturing the reliability refinery within the system maybe in terms of utilization rates that we could expect to see for the remainder of the year based on what you know about scheduled maintenance?

Well, as we would have mentioned at last month's analyst meeting, we are spending a lot of time on process and equipment and people in trying to create that reliability refinery. Running the refineries with excellence is a very cost-effective way of increasing earnings for our shareholders.

As Mike would have mentioned last month, 2007 has a particularly heavy turnaround. As I mentioned, there was a turnaround -- the first planned turnaround in the first quarter at Richmond, and we have other planned turnarounds that occur here in the United States and overseas. For competitive reasons and commercial reasons, we don't describe the timing of those things until they are completed, but they will influence the metrics when you look at crude utilization.

However, they're well planned for, and the downstream units are up and running. And so we will continue to progress our efforts towards improving reliability. It is a key focus for our downstream business, and we expect to see continued progress just as we had done in 2006.

And Jason, if I may add one more thing, just a data point here, the number of outages for the last six months was about 40% lower than the prior six months. So I think that speaks to our ongoing progress in the reliability arena.

Paul Cheng, Lehman Brothers.

Just as a follow-up, when I am looking at your share buyback, it's about $1.25 billion a quarter. And if you are looking at your cash flow-generating capabilities and your cash on hand, is there any reason that the Company does not want to increase the run rate to a more substantial?

The cash on hand at the end of the first quarter included the proceeds from the Nerefco sale, which were received as the clock struck midnight on March 31. Absent that, the cash balances at the end of March relative to the end of the year were nearly the same.

As I pointed out, we spent $1.25 billion for share repurchases in the first quarter. Given the cash balances that we have now and our cash generation capacity, along with the strengthening of commodity prices, it is highly likely that we will increase the pace of our repurchase program here in the second quarter.

But we look at the repurchase program as an appropriate use of our cash that is in excess of operating needs and our capital program. But first and foremost, we have such a wonderful queue of projects, we want to make sure we fund the growth for our shareholders by making sure that those projects are well funded.

Over the last three years or so, we have used the share repurchase program as a way of -- a balanced capital realignment as we have reduced debt and reacquired equity. It is, however, even from an investment point of view, quite apart from capital structure, an attractive investment for excess cash for our shareholders, as we are purchasing reserves at rates that are under $10 a barrel. So I think you can expect a step-up in the repurchase rate in the second quarter.

Steve, can I just sneak in with an additional question? You talk about the branded sales, gasoline sales, up because of Texaco. Can you share with us some market intelligence in your network -- what is the same-store sales year over year for those stores that have been open more than 12 months?

I don't have the information for the change in volumes for same-store sales year to year. If you give us some time, we may be able to get that information for you.

Mark Gilman, Benchmark.

Steve and Irene, I wonder if we could talk in a little bit greater detail about the West African production numbers, which, in this particular quarter, and frankly in some quarters previously, seem to be running below that which I would expect, given the development inventory and progress on projects. Could you alert us to any specific entitlement and production-sharing contract effects regarding Angola and Block 14 in particular? Or alternately, if the first quarter is associated either -- decline from 4Q is associated either with Chad, Nigeria or elsewhere, if you could highlight that as well, please.

The variance in West Africa is largely driven by Nigeria. Last quarter, we had most of the variance in our Africa production, primarily in liquids, reflected an incremental production that was allocable to us under terms of one of our agreements that were completed in the quarter. These types of allocations occur periodically and are somewhat similar to cost recovery barrels. So what you are seeing, 4Q, 1Q, is the absence of that allocation, if you will.

In Angola, actually, the story is quite positive for the quarter. We did show a positive variance, and it reflects primarily strong performance of our fields out there and the addition of one more producing well at BBLT during the first quarter.

I think at this juncture, we will wrap it up. In closing, let me say that we appreciate everybody's participation on today's call. And I especially want to thank each of the analysts, on behalf of all the participants, for their questions during this morning's session. So Matt, back to you.

Ladies and gentlemen, this concludes today's first-quarter 2007 earnings conference call. You may now disconnect. Good day.