Report to Stockholders

By David J. O'Reilly, Chairman and CEO
ChevronTexaco Corporation

2003 Annual Meeting of Stockholders

Midland, Texas, May 22, 2003

Also see a press release regarding this speech.

Good morning. Welcome to this meeting of ChevronTexaco stockholders.

I see a number of friends here today, both employees and retirees. I thank you for being here.

And my thanks also goes to the Midland office and the Permian business unit for hosting this meeting. The Permian Basin has played an important role in the history of our industry and certainly in the history of ChevronTexaco. Today, it remains one of the most prolific basins in the United States and a strong contributor to our nation's energy supply.

We're proud of our employees here and their commitment to being a good neighbor and running a safe, reliable operation.

Later today, I'll be presenting the "Zero Is Attainable" Award to one of the operating groups here. This is ChevronTexaco's highest recognition for safety. It's given to business units and staffs that have completed a full year with zero recordable injuries of any kind.

While we've not yet attained zero companywide, we had our safest year ever in 2002. And we're moving aggressively to be even safer this year and in the future.

At this time, I'd like to comment on the past year and then tell you about the plans we have in place and the steps we're taking to improve our performance and deliver higher value to you, our stockholders.

Financial Results for 2002

Let me begin by saying we were very disappointed in last year's financial results.

A number of factors took a toll on our performance:

  • Margins for refining and marketing as well as chemicals were very weak.
  • Pension expenses increased primarily due to the decline in the equity markets.
  • The company's net income was reduced by some $3.3 billion of charges for special items.

We had many successes during the year, but we were clearly challenged to perform better. And we are determined to continue to do so.

Earlier this month, we announced our first-quarter 2003 earnings. They showed we are definitely "up to the challenge" of delivering the performance you expect of us and we expect of ourselves.

As you can see, earnings in the first quarter of 2003 made a dramatic rebound. Net income was $1.9 billion, the highest we've seen since the merger.

Like most of the industry, we benefited from higher oil and natural gas prices as well as improved downstream margins. But we also benefited from strong, underlying operating performance. For the first quarter, our annualized return on capital employed was 19 percent.

We also had strong cash flow, which enabled us to further reduce our debt. Our debt-to-equity ratio is now 32 percent, compared to 34 percent at the end of last year.

Our low level of debt not only demonstrates our financial strength but also solidifies our double-A credit rating. There are only 20 U.S. industrial companies with a double-A — or better — credit rating.

Successes and Milestones — Merger and Synergies

Over the past year, we had a number of successes that will continue to contribute to earnings and create long-term value for our stockholders.

One of the most significant of these was successfully completing the integration of our merged companies. Today, we're operating as one company with common systems, policies and practices.

We now have a much broader platform for future growth. The merger gave us a portfolio of outstanding assets and projects as well as complementary technologies and combined expertise of two outstanding work forces.

We've now exceeded the synergies we promised when the merger was announced. Overall, we've captured an annual synergy rate of $2.2 billion — far higher than the $1.2 billion we had estimated at the outset.

Successes and Milestones — Upstream

On the operating side, some of our greatest achievements over the past year have come in our upstream business. Peter Robertson, who is vice chairman of the board and is responsible for our worldwide upstream activities, will be telling you more about them in his presentation (read Peter Robertson's remarks). But let me give you a few highlights.

  • Once again, we more than replaced our production through reserve additions.
  • We had an excellent year for exploration.
  • We had our first production from the Athabasca Oil Sands project in western Canada.
  • We increased production from the Caspian region for the ninth straight year and celebrated 10 years of partnership in Kazakhstan.
  • Through the merger and our own exploration efforts, we significantly increased our natural gas resources. As a result, we're now moving forward with an important initiative to create a global gas business.

Successes and Milestones — Downstream and Chemicals

Despite a difficult business environment, our downstream operations also have made some great strides over the past year. Pat Woertz, executive vice president of our global downstream operations, will cover the details in her speech (read Patricia Woertz's remarks).

The merger has given us a broader geographical presence. This has enabled us to establish global businesses for our lubricants and aviation fuels as well as better serve our customers throughout the world.

In chemicals, our joint venture has continued to lower its cost structure and improve its competitive position. Although this business continues to be affected by weak demand and excess capacity, it is well-positioned to serve the marketplace once the world economy rebounds.

Capital and Exploratory Expenditures

We're building on our recent successes with a capital program that's focused on developing our highest value projects.

Our capital spending budget for 2003 is $8.5 billion. This is about 10 percent less than for last year and about 30 percent less than for the combined companies in 2001.

Although our budget is lower, it fully enables us to fund the high-value projects we're pursuing.

Our budget demonstrates again the many cost-savings and efficiencies we're realizing from the merger. ChevronTexaco is committed to being a good steward of its capital. And we continue to raise the bar on our expectations of what defines a good project and a good return.

Total Stockholder Return

We have set an ambitious goal to be No. 1 among our competitors in total stockholder return for the period 2000 through 2004.

Toward this end, we benchmark ourselves against the largest players in the industry as well as the Standard & Poor's 500.

After holding the top ranking for the first two of the past three years, we're now in second place. However, we're confident that our future financial and operating performance can move us into the top slot again.

Our commitment to delivering stockholder value is clearly demonstrated in our 70-cent quarterly dividend. Our annual dividend payment has increased for 15 consecutive years, and it is one of the most competitive yields in the industry.

Improving our Performance in 2003

Our drive to improve performance and deliver higher stockholder value is focused on four fronts:

  • The first is what we call "operational excellence." This means running our operations safely, reliably, efficiently and with sound environmental stewardship.
  • We are continuing to lower our cost structure. We know we must keep our costs down. That is what is required to remain competitive in a commodity business like ours.
  • We have a very focused capital program with funds directed at projects that can deliver long-term value.
  • And finally, we're actively managing our portfolio. Our objective is to build highly competitive businesses that have a low cost structure, can generate strong returns and have growth potential.

By focusing on these four fronts, we expect to achieve our objective to improve our return on capital employed.

Closing Remarks

Our upstream portfolio is rich and broadly diversified with premier positions in many of the world's most promising oil and natural gas regions.

Our downstream operations have the scale and global reach to deliver full value across the entire energy chain. And we're just beginning to realize the full potential of that business.

Clearly, we've begun the year with a strong financial and operating base. But there are challenges ahead.

The outlook for the global economy is uncertain. And, of course, we continue to see political and social turmoil in many of the world's most promising regions for developing and marketing new oil and natural gas resources.

We cannot control world events, but we can — and are — controlling our own performance. We are doing so by:

  • operating safely and reliably and holding the line on costs,
  • maintaining a capital spending program that is focused and disciplined,
  • carefully managing our portfolio of assets.

ChevronTexaco is known as a company that can operate in the most politically and economically challenging places in the world.

In recent months, our employees have dealt with civil strife in Nigeria; a paralyzing oil strike in Venezuela; and the Iraqi war, which was fought very near our operations in the Partitioned Neutral Zone, between Kuwait and Saudi Arabia.

Beyond that, ChevronTexaco people have built enduring partnerships in more than 180 countries across the globe. I have great confidence in them, and I'm very optimistic about the future of our company.

I assure you: We are up to the challenge of delivering high value to you, our stockholders.

Read full text of Vice Chairman Peter Robertson's remarks to 2003 Annual Meeting of Stockholders

Read full text of Executive Vice President Patricia Woertz's remarks to 2003 Annual Meeting of Stockholders

Updated: May 2003