Chevron Corporation (Chevron) is one of the largest integrated energy companies in the world. It is involved in almost every aspect of the energy industry: from exploring, producing, transporting and refining crude oil and natural gas; to marketing petroleum products; to manufacturing and selling petrochemical products and generating power. The company recorded total revenues of $220,904 million in the financial year ended December 2007(FY2007), an increase of 5.1% over the financial year ended December 2006 (FY2006).The company generated 43.9% of its sales and other operating revenues from the US in FY2007, and the remaining 56.1% from its international operations. In 2008, Chevron is ranked 3 in the Fortune 500 list of top 1000 companies, up from 4 in 2007. Chevron’s strong market position reduces its business risk. However, failure to comply with the stringent environment regulations would adversely impact the company’s operations.

Strengths

Strong Market Position

Chevron is one of the leading global energy companies.The company is the second-largest integrated energy company in the US and among the largest corporations in the world, based on market capitalization as of December 31, 2007. Besides the US, the company operates in 180 other countries. The company recorded total revenues of $220,904 million in the financial year ended December 2007 (FY2007), an increase of 5.1% over the financial year ended December 2006 (FY2006).

The company generated 43.9% of its sales and other operating revenues (before eliminations) from the US in FY2007, and the remaining 56.1% from its international operations. In 2008, Chevron is ranked third in the Fortune 500 list of top 1000 companies, up from fourth in 2007. The company’s upstream and downstream activities are conducted in North America, South America, Europe, Africa, the Middle East, Central and Far East Asia, and Australia. Strong market position in a market with high barriers to entry gives it a competitive advantage.

Presence across the energy value chain

Chevron operates in a wide range of businesses worldwide and commands presence across the energy value chain. The company engages in fully integrated petroleum operations, chemicals operations, mining operations of coal and other minerals, power generation, and energy services. Chevron operates across the energy value chain through its four divisions: downstream, upstream, chemicals, and others.

Exploration and production (upstream) operations explore for, develop, and produce crude oil and natural gas and also market natural gas. Chevron’s downstream operations undertake refining, fuels and lubricants marketing, supply and trading, and transportation activities. Refining, marketing and transportation (downstream) operations transport crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. Chemical operations include the manufacture and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant oil additives.

Chevron also operates in other businesses which include mining operations, power generation businesses, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, alternative fuels, and technology companies.

The company provides administrative, financial, management and technology support to the US and foreign subsidiaries engaged in energy services. Chevron’s presence across the energy value chain provides the company with opportunities to optimize its business while minimizing business risks.

Strong marketing operations

Chevron markets petroleum products throughout much of the world through its strong global retail network.The company markets its products under three principal brands: Chevron, Texaco, and Caltex. As of 2007, Chevron had an extensive marketing network supporting approximately 25,800 retail outlets. In the US, the company markets under the Chevron and Texaco brands.The company supplies directly through retailers and marketers almost 9,700 branded motor vehicle retail outlets, concentrated in the mid-Atlantic, southern, and western states. Approximately 550 of the outlets are company-owned or leased stations.
Additionally, Chevron supplies directly or through retailers and marketers to approximately 15,400 branded service stations, including affiliates outside the US. Chevron also manages other marketing businesses globally. The company markets aviation fuel at over 1,000 airports, with a global market share of about 11%. The company is also a leading marketer of jet fuels in the US. It markets an extensive line of lubricant and coolant products under brand names that include Havoline, Delo, Ursa, Meropa, and Taro. The company’s strong retail network gives widespread visibility in the market. Strong marketing operations enable Chevron to penetrate into new markets and gain a strong hold.

Steady financial performance

Over the years, Chevron has delivered consistent financial results.The company had a strong asset base of $148.8 billion in FY2007, an increase of 12.2% over FY2006. The total revenues of the company have increased at a CAGR of 16% during 2003-2007 from $121,277 million in FY2003 to $220,904 million in FY2007. Further, the revenues increased at a rate of 5.1% in FY2007 over FY2006.

The company’s profits have followed a similar trend.The operating profit of the company has increased at a CAGR of 15% during 2003-2007 from $31,131 million in FY2003 to $57,406 million in FY2007. In FY2007, the operating profit recorded an increase of 2.5% over FY2006. The net profit of the company has increased at a CAGR of 27% during 2003-2007 from $7,230 million in FY2003 to $18,688 million in FY2007. In FY2007, the net profit recorded an increase of 9% over 2006. Steady financial performance enables the company to manage its operations well and also increases the financial flexibility of the company.

Weaknesses

Employee unrest in Nigeria

In June 2008, workers of Chevron facilities in Nigeria went on a strike over working conditions and number of expatriate staff. Chevron, the world’s eighth-biggest oil producer, produces about 350,000 barrels a day in Nigeria from around 30 fields.The company’s equity share is around 129,000 barrels per day.

The Petroleum and Natural Gas Senior Staff Association of Nigeria, or Pengassan, called on a strike over safety standards and staffing issues in Chevron facilities in the country. The workers’ union had accused Chevron of employing large foreign staff and demanded the removal of Fred Nelson, the company’s head in Nigeria.The five day strike, however did not affect the production at Chevron facilities.

In addition, Chevron is facing stiff opposition by its workers over the sale of its 60% majority share in Chevron Oil Nigeria. The workers accuse the company management of engaging in secret talks with the new buyers to avoid paying the employees their entitlements. Such employee actions adversely affect the operations of the company and could result in supply disruptions thereby affecting the company’s margins.

Legal action by the Iraqi Government

The Iraqi Government has sued 70 corporations accusing them of paying kickbacks to former Iraqi leader Saddam Hussein’s government under the United Nations (UN) Oil-for-Food program.

Towards the end of June 2008, the government of Iraq sued 70 companies for $10billion through a law firm, Maney and Purrington. These companies face an allegation of defrauding the country’s citizens out of food and medical provisions during Saddam Hussein’s rule. The Iraq government believes these companies paid bribes to Saddam Hussein to secure business contracts under the UN Oil-for-Food program. The program was intended to allow Iraq to sell oil on the world market in exchange for food and medicine for ordinary Iraqis.

Chevron is one of these companies facing legal action. GlaxoSmithKline, BNP Paribas, and Chrsyler are some other large corporations facing a lawsuit. The lawsuit claims the companies had violated US racketeering laws including mail and wire fraud and money laundering. Chevron and Vitol are also accused of breaching their fiduciary duties.

Such legal actions could result in huge penalties and can have adverse effects on the company’s profitability. In addition, they adversely affect the credibility of the company.

Declining sales of refined products

There has been a consistent decline in the sales volume of refined products. The sales of refined products by Chevron averaged 3,484,000 barrels per day (b/d) in 2007 declining by 137,000 b/d when compared with 2006. The company recorded a refined products sales volume of 3,621,000 b/d in 2006, a decline of 104,000 b/d when compared with 2005.

The down stream segment (which includes the sale of refined products) contributed 72.2% to the sales and other operating revenues (before eliminations) in FY2007. A decline in sales implies a competitive disadvantage and increase in the business risk of the company. A continuation of this trend is likely to have an adverse impact on the company’s revenue growth rates.
Declining oil and gas reserves

Chevron’s crude oil and gas reserves have been steadily declining over the years. The net proved reserves of crude oil, condensate, and natural gas liquids have declined at a CAGR of 8% during 2004-2007. The company recorded 3,086 million barrels of net proved reserves of crude oil, condensate, and natural gas liquids in 2007, a decrease of 13.1% as compared with 2006. The crude oil reserves had declined by 6.4% to 3,553 million barrels in 2006 compared with 2005. Chevron reported crude oil reserves of 3,794 million barrels in 2005 and 3,902 million barrels in 2004.

A similar trend can be noticed in the net proved reserves of natural gas of Chevron. The net proved reserves of natural gas of Chevron have declined at a CAGR of 5% during 2005-2007.The company recorded 11,699 million barrels of net proved reserves of natural gas in 2007, a decrease of 1.7% as compared with 2006.The natural gas reserves declined by 9.1% to 11,903 million barrels in 2006 compared with 2005. Chevron reported natural gas reserves of 13,089 million barrels in 2005.

The company’s oil and natural reserves position has been further affected by declining reserves replacement ratio (RRR). A declining stock of oil and gas reserves can impact Chevron’s operational performance.

Opportunities

Increasing demand for refined products in China

The demand for refined petroleum products in China is expected to rise sharply in the coming decades. China, despite substantial additions to refining capacity over the next three decades, is expected to remain a net importer of refined products in 2030. The refining capacity in China is forecast to increase from 6.2 million barrels per day in 2006 to 14.6 million barrels per day in 2030.

Over the next 10 years, about 60% percent of the world’s petrochemical demand growth is expected to occur in Asia, with more than one-third in China alone. The company has exploration interests in China. In December 2007, Chevron’s main Chinese subsidiary signed a 30-year production-sharing contract with China National Petroleum Corporation (CNPC) for the joint development of the Chuandongbei natural gas area in central China. Under this agreement, Chevron would assume the role of an operator and hold a 49% participating interest with CNPC will hold a 51% interest in the project. The Chuandongbei gas development area covers nearly 2,000 square kilometers in the Sichuan province.

Chuandongbei, which includes the Tieshanpo, Dukouhe-Qilibei and Luojiazhai gas fields, has an estimated resource base of 5 trillion cubic feet of natural gas. Design capacity at the proposed gas plants is expected to be 740 million cubic feet of natural gas per day.

China has always been a key market in the company’s long term growth strategy. Furthermore, Chevron plans to undertake a multiphase work program with CNPC’s subsidiary PetroChina Southwest Oil and Gas Field Company to evaluate additional reserves in the contract area and commence front end engineering and design work.These investments in China would enable the company to export refined products or establish fresh refining capacity and take advantage of the increasing demand for refined products in the country.
Increasing demand for liquefied natural gas (LNG)

The demand for liquid fuels is expected to increase from the 86 million oil-equivalent barrels per day, as of December 2007, to 116 million oil-equivalent barrels per day in 2030. The global liquefied natural gas (LNG) demand is forecasted to grow at more than 4% per year through 2030, driven by the demand in North America, Europe, and Asia Pacific markets.The demand for LNG would reach about 16% of the world’s gas demand by 2030.

Currently, Chevron is participating in LNG projects in Angola, Mississippi, and Australia. In February 2007, the company received approval from the Federal Energy Regulatory Commission for a terminal designed to process imported liquefied natural gas (LNG) for distribution to industrial, commercial, and residential customers in Mississippi, Florida, and the Northeast.The terminal would have an initial natural gas processing capacity of 1.3 billion cubic feet per day. In Australia, a fifth LNG train, which is intended to increase export capacity by more than 4 million metric tons per year, is expected to be commissioned in late 2008. In March 2008, the company announced plans to develop a new Australian LNG project, based on its 100%-owned Wheatstone natural gas discovery. The facility to be located on the northwest coast of mainland Australia would have an initial capacity of at least one 5 million-ton-per-annum LNG production train with expansion capacity for additional production trains.

In Angola, Chevron has interest in the LNG project designed with a capacity to process 1 billion cubic feet of natural gas per day and would provide a commercial option for Angola’s natural gas resources. Chevron has a 36% interest in the Angola LNG affiliate.The plant is expected to start-up in 2012. Such investments place the company in an ideal position to exploit growing demand for LNG.

Capital investments

Chevron plans to invest $22.9 billion in capital spending during the FY2008 to deliver major projects to meet growing world energy demand. This $22.9 billion capital and exploratory spending program for FY2008 marks a 15% increase from estimated outlays of $20 billion in FY2007.

About 75% of the investment budget in FY2008 would be invested in upstream oil and gas exploration and production projects worldwide. Another 20% is allocated to the company’s downstream businesses that manufacture, transport, and sell gasoline, diesel fuel, and other refined products. The total budget for expenditures in the US is approximately $8 billion.

The $17.5 billion upstream spending planned in FY2008 includes projects in the geographies of US Gulf of Mexico, US Mid-Continent, Nigeria, Angola, Kazakhstan, Western Australia, Thailand, Brazil, Indonesia, and Canada. The capital spending of $4.1 billion in FY2008 budgeted for global downstream operations include projects to upgrade the company’s refineries in Mississippi and California. An expenditure of approximately $1.3 billion is estimated for chemicals, technology, power generation, and other corporate activities in FY2008. Investments include projects related to unconventional hydrocarbon technologies, reservoir management, and gas-fired and renewable power generation.

These investments aim to develop new technology, bring on new upstream projects, increase the company’s base refining capacity, and grow its chemical business. These investments aim to grow the company’s business and reinforce Chevron’s position as a leading global energy company.

Biofuels initiative

Chevron believes that nonfood biofuels will play an important role in diversifying the energy supply in the US. The company has been working towards developing nonfood biofuels. Chevron has separate research partnerships under way with universities, national laboratories, and technology-based companies to advance the development of nonfood biofuels.

In 2007, the company entered into research alliances with Texas A&M University, with focus on the production and conversion of crops for biofuels from cellulose. Chevron also entered into a research alliance with the Colorado Center for Biorefining and Biofuel with focus on conversion technologies. The company also has research alliances with the University of California, Davis and the Georgia Institute of Technology that are focused on converting cellulosic biomass into transportation fuels.

In February 2008, Chevron formed a 50-50 joint venture company with Weyerhaeuser Company. This joint venture, Catchlight Energy, would develop the next generation of renewable transportation fuels from nonfood sources. The joint venture would engage in research activities to develop technology for converting cellulose-based biomass into economical, low-carbon biofuels. The two companies would contribute resources, including funding, background technology and employees, to Catchlight Energy. Catchlight’s initial focus will be on developing and demonstrating novel technologies for converting cellulose and lignin from a variety of sources into biofuels.

This is a significant step taken by Chevron to create a sustainable, economic, nonfood biofuels business at commercial scale. This move provides an opportunity for Chevron to realize its focus on developing and commercializing the energy resources of the future including biofuels and other renewables.

Threats

Economic slowdown in the US and the European Union

The company has a significant presence across the US and the European market. According to International Monetary Fund’s (IMF) World Economic Outlook, April 2008, the US and the European Union economy could face slowdown in 2008. The US GDP growth rate is likely to decline from 2.2% in 2007 to around 0.5% in 2008; and the GDP growth in the European Union market is forecasted to decline from 3.1% in 2007 to 1.8% in 2008. A weak economic outlook for these regions could depress industrial development and impact the demand for the company’s products.

Risks associated with conducting business outside the US

The company operates in more than 180 countries under the names Chevron, Texaco, Caltex, and Techron. International (non-US) operations accounted for 56.1% of the sales and other operating revenues (before eliminations) in the FY2007. In these foreign locations, the company might experience fluctuations in exchange rates, complex regulatory requirements, and restrictions on its ability to repatriate investments and earnings from its foreign operations. The company might also face changes in the political or economic conditions in the foreign countries it operates in. Such instabilities could negatively impact the revenue growth of the company.

Environmental regulations

Chevron’s businesses are subject to numerous laws and regulations relating to the protection of the environment.With rising awareness of the damage to the environment caused by industry, especially regarding global warming, regulatory standards have been continuously tightened in recent years. One of the most important developments in this area has been the introduction of the Kyoto Protocol for the reduction of greenhouse gases.

The protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5.2% on an average annual basis during the 2008-2012 period, compared with 1990 emissions levels.

Further, in 2005, the US environmental protection agency (EPA) issued a ’clean air interstate rule’ (CAIR), to reduce the emission levels. According to the rule, the states have to reduce the allowable sulfur dioxide (SO2) emissions by 70% and reduce Nitrous Oxide (NOX) emissions by 60% by 2015 compared with the 2003 levels.The company is governed by these regulations which could impose new liabilities. This could result in a material decline in Chevron’s profitability in the short term.

Further, in July 2008, Chevron was fined $30,000 for releasing too much air pollution in the Hatter’s Pond natural gas field near Creola.The Alabama Department of Environmental Management made an allegation that three compressor units in the gas field released higher amounts of volatile organic compounds than allowed under pollution permits. The fine is the 10th largest issued by the agency in 2008. Any such incident could negatively affect the image of the company.