A Solid Foundation For Growth And Success

By Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
Chevron Corporation

Annual Meeting of Stockholders

San Francisco, California

It's always a pleasure to see so many of our stockholders at our annual meeting. Last year, we met in Houston and I know that many of you were unable to attend that meeting. So a special welcome to you this morning.

The first thing that I'd like to do is bring you up to date on the progress we've made toward our key financial goal. That goal is to provide you a total stockholder return that's higher than any of our key competitors for the five years -- 1994 through 1998. It's a tough goal. I'm sure that many of you recall that for the previous five years -- 1989 through 1993 -- Chevron was No. 1 among major oil companies, with a stockholder return of 18.9 percent -- five percentage points ahead of the average of our key competitors.

We know that repeating in that No. 1 spot for the current five-year period will be very difficult. But we're determined to do it.

Our annualized rate from the first of 1994 through the end of April was nearly 18 percent. That's a strong return, but it only puts us in a tie for fourth place among our leading competitors. That's not where we want to be, and I'm confident that we will improve on that position over the next two-and-a-half years.

Overall, our 1995 financial results were encouraging.

Our operating earnings were up 17 percent to nearly $2 billion. "Operating earnings" are an important measure of performance because they show income without the effect of any special items or accounting adjustments. There was a significant special item in 1995 -- a new accounting standard that reduced our earnings by $659 million.

Apart from this, the other large special item was a $168 million after-tax write-down of our real estate development business. The decision to sell the Chevron Land and Development Company fits with our strategic intent of concentrating efforts on our core businesses. Altogether, the special items brought reported earnings down to $930 million, or $1.43 a share.

Most of our businesses had an excellent year. Our international exploration and production company posted record earnings, and our chemicals business had the highest operating earnings in its history. Our U.S. exploration and production company also performed well in spite of low natural gas prices through most of the year.

On the other hand, output from our U.S. refining operations was curtailed by some planned and some unplanned maintenance shutdowns at our refineries. In addition, we had an extended period of downtime at the Richmond Refinery as we tied in new units to make the new cleaner-burning gasolines mandated by the state of California.

Cost control is an important factor in Chevron's financial performance. Over the past five years, we've cut more than $1.5 billion from our cost structure, including nearly $300 million last year.

In the global business climate of the 90s, cost control can no longer be viewed as something that gives you an edge over the competition. It's now a competitive necessity. One of the most impressive -- and most important --accomplishments of 1995 was the remarkable improvement in Chevron's safety performance.

Our goal is to have the best safety record among our key competitors. During the past two years, we've cut our rate of recordable incidents nearly in half. Not only does this save money, but -- more important -- it also reduces the pain and suffering of personal injuries This shows that when our employees focus on an important goal, they can make things happen.

1995 was an outstanding year for adding new oil and natural gas reserves. Overall, Chevron replaced 138 percent of our oil and gas production with new proved reserves. As a reflection of our emphasis on growth outside the U.S., the international replacement rate was an impressive 178 percent. The rate for the U.S. -- where it has become increasingly difficult for the petroleum industry to operate -- was a very respectable 92 percent.

Overall, our worldwide net crude oil production reached 1 million barrels a day.

At the end of the year, Chevron's worldwide proved reserves stood at 6 billion barrels of oil and equivalent gas. More than 700 million barrels were added to reserves, with more than 50 percent coming from new drilling.

Now, let's look at our first quarter 1996 results, which were excellent both operationally and financially.

Our net income was up $616 million or 94 cents a share -- a 34 percent increase over last year's first quarter. And our operating earnings were up an impressive 56 percent over the first quarter of 1995.

Worldwide exploration and production earnings benefited from strong crude oil and U.S. natural gas prices. At $519 million, they were up 61 percent over last year's first quarter. Our worldwide refining and marketing earnings also improved over last year. In particular, our U.S. operations showed a big improvement -- earning $18 million compared with a loss of $102 million last year.

Here, higher crude oil prices hurt us. Our product prices could not keep up with the higher costs -- not only of crude oil, but also of the added cost of making the new and cleaner-burning California gasolines.

As expected -- our chemical earnings dropped. This is the outcome of softer industry conditions and higher feedstock costs.

Chevron's story isn't reflected just in numbers. These figures don't tell the whole story. On their own, they don't say what I strongly believe . . . that 1995 was a breakthrough year for our company.

Although -- as I mentioned earlier -- cost control continues to be a vital part of Chevron's strategy, we're excited about the opportunities for growth. And we're backing our optimism with an increased capital and exploratory budget. This year it's set at $5.3 billion -- a 10 percent increase over 1995.

About $3 billion of that is earmarked for worldwide exploration and production projects. Again, a 10 percent increase over last year. About 65 percent of that -- or more than $2 billion -- will be spent on international projects. We also feel that there are excellent prospects in the U.S., and we plan to increase U.S. exploration and production spending by about 20 percent to more than $1 billion.

We're increasing the budget for our worldwide chemicals business -- more than doubling it to about $500 million.

On the other hand, we're reducing the budget for worldwide refining, marketing and transportation by more than $250 million.

The optimism that is driving this budget is rooted firmly in Chevron's past performance because it has created a strong foundation that will provide for growth and future success. We are a stronger company now than ever before.

For instance, many of the major projects we've invested in over the years are beginning to provide significant cash flow and earnings.

We have honed our holdings -- divesting many non-strategic assets -- to create a stronger-than-ever portfolio.

Chevron also is well-known -- and well-respected -- for our strength in science and technology . . . our leadership on environmental issues . . . and our efforts to ensure that, wherever we operate, our neighbors benefit from our activities. These not only have contributed to our worldwide success, but also are the reasons Chevron often is the partner of choice in international joint ventures.

You've all received Chevron's 1995 Annual Report. If not or if you'd like an additional copy, they're available in the registration area. Our theme this year is "New Prospects. New Perspectives."

This year, we have a lot of new -- and exciting -- prospects and in a few minutes, Vice Chairman Jim Sullivan will describe many of them.

"New Perspectives" is a little harder to explain, but may be even more important. We're looking at our business in new ways . . . from a fresh perspective. In today's highly competitive global economy, you have to find new and better ways to run your business . . . or you don't survive. It's as simple as that.

Chevron definitely has new perspectives. We're more entrepreneurial -- as a company and as individual employees. One of the more important strengths of this company is its employees. When I say Chevron has changed and has a new perspective, I don't mean that an abstract, monolithic corporation is now different. What I really mean is that individual employees and small work teams are viewing their jobs differently and are working in new and better ways.

  • It was a new perspective that produced our innovative alliance with McDonald's.
  • It was looking at our usual businesses in an unusual way that led to the proposed merger of our U.S. natural gas and gas liquids businesses with the NGC Corporation. This is an extremely complex merger that will give Chevron 28 percent of a new company that will be North America's largest processor and marketer of natural gas and natural gas liquids.
  • It was taking a different perspective that allowed us to negotiate a new -- and unusual -- joint venture with Venezuela. This is the first time that Chevron's production, and refining and marketing businesses have joined together in an alliance with another country.

Now, I'd like to turn the meeting over to our Vice Chairman, Jim Sullivan for a closer look at many of Chevron's operations.

Mr. Sullivan speaks. Mr. Derr returns to podium.

Thank you, Jim.

Both Jim and I mentioned our innovative new venture in Venezuela. I've just returned from Caracas and Maracaibo, where we dedicated our new Chevron office and signed an agreement to consider expanding our alliance. I came back feeling very good about our prospects there.

But that feeling didn't last too long. I returned to find the petroleum industry under attack -- accused of everything from manipulating supplies to price gouging. The public and political reactions to rising gas prices were immediate and based on a several inaccurate conclusions.

One of the most fundamental misconceptions is that improved first quarter earnings and higher gas prices are proof of "price gouging."

In fact, in the first quarter, our U.S. refining and marketing earnings were just $18 million on capital of $6 billion. Although that was a big improvement over the $100 million loss of the previous year's first quarter, it was a rather disappointing return on capital of about 1 percent. Not what I'd call "price gouging."

Now let's look at some of the real reasons that gasoline prices have gone up. Basically, there are four main factors driving higher gasoline prices. And, unfortunately for the consumer, they converged in April.

  • Let's start with the one that is the basis of our free-market economy . . . supply and demand. Right now, supply is tight . . . and for a variety of reasons. An especially cold and long winter kept refineries busy making heating oil and diesel longer than usual. Then, in California, we had several refinery breakdowns. None were ours, I'm happy to say. Demand, on the other hand, is growing around the world. In the U.S. -- as reported in Sunday's New York Times -- people are driving more miles each year, the average use of gasoline is rising . . . and average gasoline mileage is declining.
  • Second -- until recently, crude oil prices have been rising. Since early February, they're gone up as much as $7.50 a barrel -- or 19 cents a gallon. The increase was caused by higher demand triggered by the cold weather and by the uncertainty over when the United Nations might lift the Iraqi oil embargo.
  • In California, another contributing factor is the state's new reformulated gasoline, which adds 5 to 15 cents a gallon to manufacturing costs. This gasoline is clearly one of the best ways to reduce air pollution. It's the cleanest burning gasoline in the world, delivering a 15 percent reduction in smog-forming emissions.
  • The fourth factor -- taxes. They account for roughly one-third of the pump price. In California, taxes add about 49 cents a gallon. And because sales taxes are applied to the pump prices, they've added another 2 to 3 cents a gallon since February first.

So -- we're not looking at a major mystery . . . or a conspiracy . . . or price gouging. We're looking at four separate, but understandable, events that came together and sent prices up -- the combination of short supply and increased demand, higher crude oil prices, higher manufacturing costs and higher taxes.

The U.S. Department of Energy and the Department of Justice say they plan to investigate. This happens every time there's a price spike -- especially one that comes in an election year. A recent New York Times columnist pointed out that a fuss over gasoline prices is -- as he put it -- "part of the American political tradition."

The results of these prior investigations always have been the same. They show that there was no price gouging. Just the marketplace in action.

When the emotional element is removed, gasoline is a fairly cheap commodity. Over the past few years, prices -- when adjusted for inflation -- have been as low as any time since World War II. In 1981, the average price was $1.38 a gallon. If prices had kept pace with inflation just since 1981, gasoline now would cost more than $2.25 a gallon.

These currently higher prices are not likely to last. The marketplace ultimately will correct the imbalance. Crude oil prices are starting to decline, and the price of gasoline should follow when inventories rebuild to normal levels.

Jim -- in his tour of the world -- described many of the reasons why I'm so optimistic about Chevron's future.

A key part of that future . . . or maybe I should say -- the key to the future is Chevron's committed team of employees.

One of the many positive outcomes of our restructurings has been a fresh view of the employee and what he or she can do when empowered and given the authority to make decisions.

We must not overlook the fact that today's jobs are more challenging and -- we hope -- more interesting. Chevron is a flatter organization. There are fewer layers of management and fewer people who spend their time checking and double-checking the work of others. We've delegated more authority -- and with it -- more responsibility to the people doing the work.

In short -- we're asking more of our people. . . . And they're asking more of themselves. Employee commitment is so important to Chevron that one of the eight strategic intents guiding the company states that we should -- "Build a committed team to accomplish the corporate Mission." And the first item in our corporate Vision says that we want employees to be proud of their success as a team.

I'd like to tell all of Chevron's employees that I'm proud of them. I'd also like to thank them for jobs well done. Everything we've talked about this morning -- from record earnings to added reserves to improved safety records -- was accomplished through the hard work of Chevron's employees. My thanks to each of them.

Now -- this is a good time to introduce you to a few of Chevron's most committed and most outstanding employees -- people who can be proud of their successes. These are the employees whose outstanding individual or team efforts recently have earned them the Chairman's Award. I'd like them all to stand. They deserve our praise and a generous round of applause. Once again, thank you all for jobs well done.

Over the past few years we've created several documents to define and guide the company. Last year, we put these all together into one document that we call "The Chevron Way."

In truth, it's really more than a document. In a few pages, this booklet states our Mission and Vision and outlines our values and beliefs. "The Chevron Way" sums up -- not only what Chevron is and what it does -- but also what we stand for and what we believe in.

I hope you'll pick up a copy of it as you leave this morning.

All of us in Chevron, appreciate your attendance here today, and we look forward to seeing you at future Annual Meetings.

Updated: May 1996