雪佛龍 (CVX) 2007 Q2 法說會逐字稿

Good morning. My name is Matt and I will be your conference facilitator today. Welcome to Chevron's second-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I will now turn the conference over to the Chairman and CEO of Chevron Corporation, Mr. Dave O'Reilly. Please go ahead, sir.

Thank you, Matt, and welcome to Chevron's second-quarter earnings conference call. Today, I'm joined by Steve Crowe, Chief Financial Officer and Irene Melitas, Manager of Investor Relations.

Our focus today is on Chevron's financial and operating results for the second quarter of 2007 and I will refer to the slides that are available on the Web.

I will 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.

Turning to slide 3, the Company reported earnings of $5.4 billion in the second quarter, up 24% from the second quarter of 2006.

Earnings of $2.52 per diluted share were up 28% from a year ago. The main drivers for the increase were first, a $680 million after-tax gain on the sale of our interest in Dynegy, partially offset by costs of $160 million from retiring uneconomic debt. Second, the absence of hurricane-related charges for uninsured costs incurred in the second quarter of 2006. And thirdly, higher margins for refined products.

Second-quarter results were 14% higher than the first quarter, which Steve will discuss shortly. Return on capital employed for the trailing four quarters was 24% and the debt ratio was about 10% at quarter end. Share repurchases totaled $1.75 billion, reflecting a higher buyback pace, which Steve foreshadowed at last quarter's conference call. We now expect to complete the current buyback program in the third quarter. Steve will now take us through the quarterly comparisons. Steve?

Thanks, Dave. My remarks compare second-quarter results to those of the first quarter 2007. As a reminder, our earnings release compares second quarter 2007 to the same quarter a year ago.

Turning to slide 4, second-quarter net income was $665 million higher than the first quarter's result, driven by stronger commodity prices in the upstream and higher realized margins in the downstream, particularly in refining. An increase in environmental remediation charges and a charge for the early redemption of Texaco capital bonds contributed negatively to the quarter's results. Both items were highlighted in our interim update. The other bar reflects a negative variance in tax-related items and the net of everything else.

Both periods had like sized asset sales gains, the Nerefco sale in the first quarter, and Dynegy in the second largely offsetting one another.

Slide 5 summarizes the results of our U.S. upstream earnings, which improved by about $425 million between quarters. Higher realizations, particularly for liquids, benefited earnings by 220 million between quarters. The $7.29 per barrel increase in crude realizations was generally in line with the increase on a composite of industry benchmark prices and contributed to a favorable $200 million variance between quarters.

Improved natural gas realizations resulted in a $20 million profit effect. Though Henry hub midweek prices increased by $0.76 per thousand cubic feet, our average realizations rose $0.16 per thousand cubic feet, reflecting our regional production mix and spot sales.

Volumes, including one additional producing day, increased earnings by $30 million. Other primarily reflects a favorable variance in FAS 133 effects, lower exploration expenses, and a gain on the sale of a couple of small operations.

Turning to slide 6. International upstream earnings were $305 million higher than the first quarter's. Stronger oil prices benefited earnings by about $560 million and were partly offset by lower gas realizations. Unit liquids realizations improved $10.17 per barrel, in line with the rise in spot rent prices. Higher liftings in Canada, Bangladesh, and Azerbaijan and other international locations resulted in a positive earnings variance of $120 million. The negative $70 million for litigation represents the absence of a favorable litigation settlement in the first quarter. The variance in other includes an unfavorable swing in tax-related items as well as higher operating and depreciation expense.

Slide 7 summarizes the change in worldwide oil equivalent production, including volumes produced from oilsands in Canada. Daily volumes were down by 13,000 barrels per day between quarters with the larger changes by country noted on the slide. For the first six months of the year, our worldwide oil equivalent production averaged 2,640,000 barrels per day. We expect production for the second half of the year to be in line with the first.

Turning to slide 8. U.S. downstream results in the second quarter exceeded the prior quarter's by about $430 million. Higher realized margins benefited earnings by $390 million relative to the first quarter, reflecting stronger industry margins, particularly refining. Refining margins were partially dampened by inventory-related effects and an unfavorable variance in final pricing adjustments for long-haul crude. Marketing margins also improved the quarter's results.

Refining volumes increased results by $135 million between quarters, primarily due to the completion of the first-quarter Richmond refinery crude unit turnaround. The unfavorable variance in other largely reflects an increase in costs for environmental remediation as highlighted in our interim update.

Turning to slide 9, international downstream results of $517 million were lower than the first quarter's. Absent the first quarter's $700 million gain on the sale of our interest in the Nerefco refinery, results were $56 million lower between quarters. Realized downstream margins improved earnings by about $150 million, primarily led by higher refining margins in most regions, in line with the rise in indicator margins. Lower volumes resulted in a decline of about $45 million between quarters, reflecting the first-quarter Nerefco sale. Included in other is an unfavorable swing in foreign exchange effects along with higher operating expenses, reflecting increased maintenance and labor costs.

Slide 10 shows earnings from chemicals were $104 million in the second quarter compared with $120 million in the first quarter. Results for olefins improved during the quarter due to higher ethylene and polyethylene margins and increased ethylene volumes. This was more than offset by an asset write-down in aromatics.

Slide 11 covers all other. Second-quarter results show a positive variance from the prior quarter, arising from a gain on the sale of our interest in Dynegy, which was partially offset by a charge related to the early redemption of Texaco capital bonds, both of which were highlighted in our interim update. The variance in the other bar reflects an increase in environmental remediation expense for legacy Texaco and Unocal sites that have been closed or sold, tax-related and other miscellaneous items. Absent the Dynegy gain, and charge related to debt redemption, net charges for this segment fell within the guidance range of $160 million to $200 million provided in our interim update.

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

Thanks, Steve. Turning to slide 12, we highlight some of the recent developments of the last few months. Starting with upstream, last month we announced a delay in our Gulf of Mexico Tahiti project due to (technical difficulty) problems discovered in the facility's mooring shackles. New shackles have been ordered and the timing of their installation is currently under review. At this time, we have no further updates to provide regarding the completion date for these activities but we'll keep you apprised once we have a firm, defined recovery plan in place.

We've also signed a memorandum of understanding with the Venezuelan government for the retention of our 30% interest in Hamaca. The MOU established the basic terms of the conversion and governance of the new joint venture company. Final conversion steps including the National Assembly's approval and the issuance of a presidential transfer decree are expected later this year.

In Europe, we successfully completed a production test of the Rosebank appraisal well west of Shetland. Chevron holds a 40% interest in the Rosebank discovery and is the operator. A third appraisal well is expected to be completed later this year and the resulting data will determine the future work program for the discovery.

On the downstream side, earlier in the quarter, we disclosed that an extensive planned turnaround of our major crude distillation unit in the El Segundo refinery was underway. That turnaround is now mechanically complete and the unit startup is underway. During the downtime, certain work was performed to progress the heavy crude project, which remains on track for year-end completion.

We also completed the sale of our Fuels Marketing assets in Uruguay and announced an agreement for the sale of the Benelux marketing assets in Europe. That transaction is expected to close during this third quarter. And, both transactions are part of our portfolio rationalization efforts highlighted during our March analyst meeting.

Then, finally, in May, as we mentioned earlier, we sold our interest in Dynegy. Our decision was driven by Dynegy's exit from oil and gas activities and the Company's increasing focus on power generation, thereby minimizing the strategic fit with Chevron.

That concludes our prepared remarks. We will now take your questions and one caller and one question per caller at a time please. We will try to wrap up at or before the top of the hour. So, Matt, please open the lines for questions.

(Operator Instructions). Dan Barcelo, Banc of America.

Regarding U.S. natural gas production, you mentioned in the press release that it's down about 7% year on year due to base declines. However, if I look over the last three quarters or so, sequentially it seems the decline is a lot less. I don't know if you could give any further guidance on base declines for natural gas and even for oil, which actually has been pretty flat, especially given the pullback in natural gas prices.

Dan, this is Irene. We don't really assign a decline value to natural gas versus liquids. The guidance we've previously issued is that overall, our decline rate worldwide is about 4 to 5%. And in the U.S., it is higher -- somewhere in the neighborhood of about 7%. But we don't otherwise provide a split between liquids and gas.

Doug Leggate, Citigroup.

Mine is kind of a related question I guess. Production guidance for the balance of this year and perhaps looking ahead, could you just give us -- bring us up to date with where you see things? Just to be clear, Venezuela is now I guess fully out of the equation in terms of the Empresa Mixta there. But do you see any other changes taking place in Venezuela that might impact your production outlook over the balance of this year in particular?

Thanks, Doug. As I had mentioned in the aggregate for the enterprise, we see second-half production largely the same as we had in the first. That is, 2,640,000 barrels a day or thereabouts.

In the second half of the year, we do anticipate some declines here in the United States as a result of normal field declines, particularly in the Gulf of Mexico. But internationally we expect to see some pickup in Eurasia as a result of our TCO expansion that will be coming on later in the year, as well as a full six months of Bibiyana, where it came online at the end of the first quarter this year.

As far as the specifics on Venezuela are concerned, for Hamaca, right at this juncture, the terms have not been made public, so we won't comment on that particularly. But our projects are largely on track. And as I said, we expect to be about the same for the full year. Thanks very much. May we have the next question?

Arjun Murti, Goldman Sachs.

My question is on some of the tax claims that have been filed by Russia related to the CPC that at least have been in the press. I realize the nature of these things are difficult to forecast outcomes and so forth, but just given the importance of your Tengiz project in Kazakhstan production, to the extent you're not able to come to some sort of settlement with Russia, do they have any reasonable recourse or actions they can take? Or should we feel that since it is a separate country from Kazakhstan we shouldn't feel that the Tengiz or Kazakh production is at risk for any reason related to these tax claims?

Arjun, there have been some tax claims. By the way, these are not unusual. We get them all over the world, United States included. But let me just put them in perspective.

The very first tax claim that we appealed and went to the higher court, the higher court kicked it back down to the lower court. So, and these are kind of I would say legitimate questions for tax authorities to ask that we need to resolve. So, that was an encouraging sign. So, I expect that we're going to resolve these tax claims just like we do in other jurisdictions. And it's a matter of interpretation of the tax code and sitting down and understanding one another and getting a resolution. Now, having said that, with Tengiz of course we are also looking at other options. We're not solely dependent on CPC. We have a significant rail program -- export program that we have exercised in the past. As you remember, we operated Tengiz for five or six years without any CPC pipeline. But we have many other options and we are also developing a southern route to take advantage of our participation in the Baku-Ceyhan line. So there are multiple options for exports here, but I wouldn't get hung up on this tax case because I think it's just an example of something we have to work our way through.

Paul Cheng, Lehman Brothers.

Dave, can you give an update on the status of Gorgon, Agbami and also the Neutral Zone contract expansion?

Gorgon, Agbami and Neutral Zone. Let me start with Gorgon. You'll recall that one of the big issues last year was getting government approval from the environmental perspective from the Western Australia government, and the Western Australian government EPA had filed an objection. We worked our way through that and at the end of last year, we were able to resolve those issues and objections from the EPA and gain the approval of the Western Australian government to go ahead with the project.

Then there were two other issues remain, which we talked about in the spring at our March analyst meeting. The first was getting federal government approval -- or the Commonwealth government, technically, approval for the environmental permits there. That process is still underway and is not complete but I'm confident that we're going to get completion there and we're working hard to get it there.

The other issue was the question of cost and the cost escalation that we're seeing in the whole LNG supply chain -- fabrication, contractors, construction, etc. That led us to go back and work with our partners late last year and we're continuing that work. Although we should be wrapping it up this year. It caused us to go back with our partners and look at trying to come up with alternatives and optimization for the construction plan and facilities, different configurations. That work is underway. We're working with our partners.

This is an enormously big project. It's very important from a capital stewardship perspective to get it right. So we're looking at a facility that's going to be on the ground for decades and producing very, very copious quantities of gas. So we wanted to get it right. We're working our way through it. And when we get it right we will move forward with it. But that work is still underway. That's Gorgon.

Let me -- you asked two other questions. Although you were supposed to ask one. So, (multiple speakers)

It's all in one question.

I know, yes. Agbami, next month I will be in Korea, visiting the FPSO, which is nearing completion. It's one of the largest ever built, the size of an aircraft carrier, I've been told; so I'm looking forward to seeing it. And it's going to sail later this quarter, or early in the fourth quarter. So, everything is online with Agbami.

The third question you asked was the neutral zone. We're in the process of renegotiating or negotiating an extension or amendment to the Neutral Zone agreement which has been in place from 1949 and through different successor companies. And it's too early to predict the outcome other than to say that we are currently engaged and over the next year or so we hope to get that issue resolved. But, it's too early to say yet. It's early days in the negotiation. Thank you, I will take the next question please.

Nicole Decker, Bear Stearns.

My question is on the share buyback program, given that you came to complete your authorization next quarter. Interested in hearing your thoughts on the likelihood of an extension or a renewal.

This is Steve. As Dave mentioned, we anticipate completing the currently $5 billion authorized program in the third quarter. That would amount to $1.9 billion. And we fully expect that our Board will authorize a follow-up program right behind it. As indicated, we've been ramping up the repurchase program given the current market conditions and our debt profile. With $1.75 billion here in the second quarter and as I mentioned, $1.9 billion in the third quarter. So, thanks very much. But that can be your expectation. May we have the next question?

Bruce Lanni, A.G. Edwards.

Just a follow-up question, somewhat dealing with Paul Cheng. Gulf of Mexico, could you give us -- I tuned in a little bit late. You may have covered it but can you give us an update on Tubular Bells? The sanctioning there, as well as any status or comments on Jack and Bob North?

Okay, Bruce. Let me take that. Let me just kind of give you an overview of the Gulf of Mexico in general. I covered the Tahiti issue earlier in my opening remarks and we have no firm plan yet for recovery other than we have ordered replacement shackles and we're still working on a recovery plan there.

Blind Faith, the hull has been delivered to the Gulf. By the way, the Tahiti hull is in the Gulf. So it's not a question of the hull. It's a question of getting the shackles manufactured and coming up with a new program for installation. It's much too early to predict what time frame that can occur. But, on Blind Faith, the hull has been delivered into the Gulf of Mexico and that is looking on track.

Jack and Saint Malo, you'll recall last year we completed an extensive record-setting test on Jack and we have an appraisal program planned for both Saint Malo and a continuation of the appraisal of Jack during 2008, not during 2007. So you will not hear more from us this year other than to say there's more appraisal underway and that will lead to a much better understanding in '08 and beyond that, who knows. We will be developing some sort of a development plan to move forward. But it's -- that's the time frame for those two.

On Tubular Bells, we're still working with the operator on that to develop further appraisal and it's too early to predict yet what the ultimate development is there. But I would refer you to the operator on that one.

Was there another dimension? Bob North. I believe we have a well in our program currently with Bob North and it's -- we will have perhaps more to say about Bob North later this year.

Neil McMahon, Sanford Bernstein.

On Jack again, actually, it looked like there was a delay on the next appraisal well on Jack and I believe that your -- at the investor presentation earlier in the year, you were not planning to test the appraisal well. But, given the fact that it's been delayed into 2008, are you now going to test that next appraisal well? And maybe you could provide sort of an ongoing description of how you are finding the reservoir characteristics based on the work you've done so far.

Neil, I think let me go back and be very precise because we were very careful of what we said. We said we do our next appraisal well at Jack either late this year or early next year. And what I'm saying now is, it's going to be early next year, not late this year. It is unlikely that we will need to test that well. But it will help us characterize the scope of the reservoir. So, beyond that I'm not prepared to make any other predictions.

Saint Malo, it is -- I don't think we've made a decision yet as to whether we're going to test the Saint Malo well. A lot will depend on what we find in the next appraisal well. So, it's too early to tell what we'll do there.

One of the great advantages here is now we've merged our predevelopment teams because they have been both working -- this is the benefit of a merger between Chevron and Unocal because Unocal was the operator at Saint Malo. We are the operator at Jack. Now, we have been able to merge the technical teams that are working on this and I think we're trying to optimize our plans here so that we transfer learnings from one to the other and take the most efficient approach to developing this new trend in an economic way. So, early days yet. More work to come. But we're very satisfied with the progress we've made to date. Thank you.

May we have the next question please?

Mark Gilman, Benchmark.

I was wondering if you could provide just a little bit more clarity and granularity on the heavy crude projects at El Segundo and Yeosu in Korea in terms of what units in particular you're putting in, the size, the cost, and what the yield implications will be.

Thanks, Mark. Let me just give you a general review on El Segundo first. And we tried to cover some of this in the March meeting. The El Segundo work really requires a lot of work in two areas. It requires facilities to be installed in our major crude unit, which is currently underway and actually just about wrapped up, as I mentioned in my remarks -- my formal remarks. The second phase of the construction work revolves around the coker because we need more coking capacity and more efficient coking capacity and that work will be conducted -- the construction work is already underway but it will be conducted and completed during a coker turnaround that we have scheduled in the fourth quarter this year. So, the plan is to have it all wrapped up. In the case of Yeosu, it is actually -- so the El Segundo is in the hundreds of millions sort of range.

The Yeosu project is $1.5 billion and it involves some new facilities -- dehydrogenation facilities as well as at the back end of it, a new lube base oil plant. The ability of the plant and the capacity of the plant to treat -- convert heavier crudes, that will be complete by the end of the year, and that's on track.

The lube oil plant is expected to start up in the second quarter of next year. It lags behind the basic plant itself. So, that's generally the scope of the two projects. The one in Yeosu is quite much more significant and we will be covering that in more detail in one of our upcoming calls or perhaps in our big analyst meeting early next year. Thank you.

Robert Kessler, Simmons.

Dave, I don't expect you to really speak on behalf of other oil companies but any thoughts as to why you are sticking around in Venezuela and despite Exxon and Conoco having taken Chavez to court effectively?

Well, first of all, we've been there a long time, since the 1940s originally. But let me just mention a couple of things. We were able to successfully convert our Boscan operation to a joint venture company last year. And in the process of doing that, preserve value and come out of it with what we think was a satisfactory conclusion. We believe that we have the same opportunity here at Hamaca. And I can't speak for other companies other than to say that we wouldn't be making this choice if we didn't think it was the right choice for Chevron and we are confident that under the circumstances, that we can complete the -- well the negotiations are complete but get them appropriately approved by the authorities so that we can continue to operate there. So, but I think in your question, you almost imply part of the answer. You should put that question to some of the others as well.

Any thoughts on a future heavy oil project in addition to Hamaca at this point?

No. I think our focus right now is on restructuring our current operations there. And we will just have to see how we're treated there, what the opportunities are in the future and our decisions to go further there are entirely dependent on our experience with the operations that we have already converted and are in the process of converting.

Mark Gilman, Benchmark.

I'm having an awful lot of difficulty with the transparency in the release regarding what are indicated to be no special items but as we go through the discussion there seem to be quite a number. I was hoping you could quantify the asset sales in U.S. E&P, the environmental provisions in refining and marketing, and to what extent those provisions are included in the $150 million number that is indicated in the waterfall chart regarding overall earnings. Also, the asset write-down in foreign E&P.

Thank you, Mark. Well, we don't disclose special items because we no longer view it as special items given the size of our firm. But, the things that we have disclosed in the press release and foreshadowed in the interim update are I think some of the key things that if you were making some adjustments you could take into account. Certainly, the largest among those would be the gain connected with our sale of the Dynegy shares. Similarly, in the same segment, we indicated that there was a charge in connection with the redemption of some uneconomic Texaco capital bonds, which we reacquired here in the second quarter. Those two might be things that you could pull from our reported results.

Mark, I'd like to build a little bit on it because I think Steve is right on the mark. We're not going to dig into the ups and downs because every quarter there are ups and downs. Just let me give you one example. We see environmental charges come pretty much every year. They come in lumps. Some quarters there are fewer and some quarters there are more. This quarter they are somewhat more than we have experienced for example in the first quarter. But it varies. And I think we've got to expect that these things are ongoing, so we treat them as a part of our ongoing business.

So I think from an analyst perspective, I think the best way to view our earnings is to look at them and then if we see things that we truly believe are unique and that do not belong kind of in routine business, such as the two items that Steve cited, I think those we will continue to highlight. But, others, I think you've got to take into the ongoing business environment and they are lumpy, slightly up sometimes, slightly down other times. But if there's something that we believe is a significant factor, that we think you ought to take into account, we're going to tell you about it, and that's why we've highlighted these two items that we did in the second quarter.

(OPERATOR INSTRUCTIONS).

I think we are about ready to wrap up. So, I would like to thank you all for participating in the call. Please let Irene or our team know if you have any follow-up questions. I will look forward to talking to you in future quarters or future meetings. Thank you for your interest in the Company and Matt, thank you for your help today. Good bye.

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