An Outstanding Year For Chevron

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

Annual Meeting of Stockholders

San Francisco, California

I enjoy this annual opportunity to tell you -- the owners of the company -- how we're doing and to share with you our plans for the future. And, it's especially enjoyable when we've had such a good year.

1996 was an outstanding year for Chevron. We had the highest earnings in our 117-year history. Here are a few of the significant financial highlights of the year . . .

Operating earnings of more than $2.6 billion -- an increase of 35 percent over 1995.

Return on capital employed was 12.8 percent, our highest rate in 15 years.

Annual dividends increased for the ninth straight year.

Debt was reduced by $1.6 billion to its lowest level in 13 years.

Finally, our total stockholder return was a strong 28.5 percent.

All these -- and more -- added up to a great year for Chevron.

Most of our businesses had excellent results last year, especially our exploration and production operations . . . what we call our "upstream" activities. Higher crude oil and natural gas prices during most of the year gave these operations a real boost.

In the U.S., upstream operating earnings more than doubled to $1.1 billion. Our international upstream operations also posted record earnings of more than $1.1 billion.

Chevron produced oil and natural gas at record rates in many parts of the world. All told, we produced more than 1 million barrels of liquids a day -- the highest level since 1986 -- and we set production records in Angola, Nigeria and Kazakhstan.

We also added to our reserves for the fourth straight year -- replacing 112 percent of our oil and gas production with new proved reserves. Our emphasis on growth outside the United States continues to pay dividends. International oil production was up 8 percent over 1995, and the reserve replacement rate was a remarkable 149 percent.

Just yesterday, we announced a major discovery offshore Angola -- our first in that country's emerging deep-water area. The well is in 1,300 feet of water, and is adjacent to the Chevron-operated network of offshore fields and facilities in shallower waters closer to the coast.

This exciting new discovery, with the potential to be a giant field, shows the value of Chevron's geologic expertise in an area where we have extensive experience.

Crude oil and natural gas prices affect the various segments of an integrated oil company in different ways. For example, higher oil and gas prices help our upstream companies, but they can hurt our refining, marketing and chemicals activities.

Although our U.S. downstream operations were greatly improved over 1995, they were still hampered by high raw material costs, and low marketing margins. Late in the year, this was particularly true here in California, one of the world's most competitive petroleum markets.

International downstream earnings also were driven down by the same factors.

In addition, the higher cost of raw materials, plus a cyclical downturn in the chemical business, reduced our 1996 chemicals earnings to less than half 1995's record results.

Of course, it's impossible to talk about either Chevron's outstanding financial or operational progress without pointing out the vital role that our continuing cost-reduction activities play.

Cost control is now the way we do our business, and it is imperative to our success. Since 1991, we've reduced our actual operating expenses by more than $1.4 billion, while also absorbing inflation.

We also took another important step to improve our competitiveness last year, by reorganizing our three technology companies under the coordination of a newly appointed Vice President for Technology. By integrating the expertise of our upstream, downstream and information technology companies, we'll be able to accelerate the development and application of technologies throughout our worldwide operations.

Technology has long been one of Chevron's competitive advantages; one of the strengths that has made the company the partner of choice around the world.

I'd like to mention one other accomplishment of which I'm very proud -- the continuous improvement in our safety performance. Our goal is to have the best safety record among our key competitors. From 1993 to 1996, we cut our rate of recordable incidents in half. Not only does this save money, but -- more important -- it also saves the pain of personal injuries. In people terms, that improvement meant 656 fewer injuries to Chevron employees in 1996.

Now, I'd like to bring you up-to-date on Chevron's progress on its most important financial goal -- to provide you a total stockholder return that's higher than any of our key competitors for the five-year period -- 1994 through 1998.

Total stockholder return is the combination of stock-price appreciation plus dividends. This is a highly competitive industry, and to claim that No.1 spot is a real challenge.

Chevron held the top place among major oil companies for the 5 years between 1989 and 1993. Three years ago, when we announced that our goal was to repeat as No. 1, we knew it would be difficult. And it is.

Our average annual return from January 1, 1994, through the first quarter of 1997 was a strong 20 percent. Although this is above the S&P, it is a little more than two-and-a-half points below the current oil industry leader. We are committed to improve that performance during the rest of this year and in 1998 so we'll end the five-year period in first place.

We're also pleased that our total stockholder return for the past eight years was 18.9 percent, still the highest of our oil industry peers.

Now, what do you do after the kind of record-setting year we had in 1996? Well, first, I know some things you don't do. You don't spend too much time patting yourself on the back. You don't relax. You don't assume that the good times will just roll along on their own.

What you do is renew your efforts. Re-examine and fine-tune your plans. And, importantly, maintain your focus.

This leads me to Chevron's first quarter results. Following right where we left off at the end of 1996, our first quarter of 1997 was excellent -- both financially and operationally.

Our net income was $831 million or $1.27 a share -- a 35 percent increase over the 1996 first quarter. And -- excluding special items -- our first quarter operating earnings were an all-time high of $804 million.

Our worldwide liquids production was up 63,000 barrels a day to about 1.1 million, an increase of 6 percent from last year's first quarter.

Our worldwide upstream earnings also were excellent, benefiting from crude oil and natural gas prices that -- on average -- were higher than a year ago. Operating earnings were $665 million, up more than 28 percent over the first quarter of 1996.

However, prices have fallen significantly from year-end 1996. This has helped our U.S. downstream and chemicals businesses, as lower feedstock and fuel costs have improved product sales margins.

Operating earnings for our U.S. downstream activities were $78 million, up sharply from the $18 million in last year's first quarter.

Although -- at $63 million -- chemicals net earnings were about flat with last year's first quarter, they were greatly improved over the last quarter of 1996.

Crude oil prices have continued to soften into the second quarter, which should help maintain our improved downstream and chemical margins. At the same time, our continued production growth and our cost-reduction efforts should lessen the impact of the declining prices on our upstream results.

The theme of this year's Annual Report is "Dimensions of Growth." We chose the word "dimensions" because Chevron not only has many places to grow, but it also has many ways to grow.

One thing that clearly demonstrates our company's growth is our planned spending for 1997, which -- at $5.9 billion -- will be the largest in Chevron's history, up more than $1 billion over our spending last year.

The largest portion -- more than 60 percent or $3.6 billion -- is earmarked for worldwide exploration and production. Consistent with our strategy to increase our international upstream business, about $2.3 billion of that will be spent outside the United States.

We still feel that there are excellent U.S. prospects and plan to increase upstream spending by more than $100 million to about $1.3 billion.

This year, we're also increasing our worldwide refining, marketing and transportation investment -- by about 15 percent, to $1.4 billion.

One dramatic area of growth is our supergiant Tengiz oil field -- a joint venture we formed with the Republic of Kazakhstan in 1993.

The numbers -- even in this capital-intensive, big-project industry -- are truly remarkable:

a 40-year project carrying a potential $20 billion price tag.

estimated recoverable reserves of more than 6 billion barrels of oil, making it one of the world's largest fields.

estimated production that could be in excess of 700,000 barrels a day within 10 to 15 years.

The obstacles -- or should I say challenges -- have also been formidable, but 1996 marked tremendous progress in this critically important project for Chevron:

Tengiz production averaged 112,000 barrels a day --double the 1995 level.

Production at year-end was about 160,000 barrels a day.

The increased production gave us earnings for Tengiz of more than $100 million.

Ownership of the project has shifted from the original 50-50 joint venture. Last May, Mobil bought half of the Kazakh government's 50 percent share for a price of about $1.1 billion. Then last week, we completed the sale of 5 percent of the project to LUKARCO, a joint venture of LUKoil, the giant Russian oil company, and Arco. This sale of a small part of the field has, we feel, greatly helped our relations with the Russian government.

But the key to unlocking the full potential of Tengiz is a pipeline to carry the oil to a Black Sea port from which it can be shipped to world markets.

In December -- after years of intensive negotiations -- we finally signed an agreement to build the long-desired 900-mile pipeline. First oil is scheduled to flow through the pipeline in late 1999, and eventually the line should carry as much as 1.5 million barrels a day.

All of these successful results came from some tremendous efforts by a Chevron team of employees. They did a truly outstanding job, and I think we'll look back on 1996 as the major turning point for this project.

There are numerous other examples of what we mean by "Dimensions of Growth," but our time is limited. Many of these are described in a special essay in our 1996 Annual Report, and I urge you to read it -- if you haven't already done so. All stockholders were sent a copy of the report; however, if you'd like another, there are extras in the registration area.

Now I'd like to turn the meeting over to our Vice Chairman, Jim Sullivan, who'll give you a closer look at Chevron's operations around the world.

(JNS speaks; then KTD returns to the podium.)

Thank you, Jim.

Earlier I asked the question -- "Where do you go after a great year?" In other words, what must we do in 1997 -- and beyond -- to build on our success?

Jim showed you that Chevron has the assets and the projects in place on which to build for future growth. I think he also demonstrated that we have a strategic plan that will carry the company forward to a successful future.

But -- let's face it -- the other major petroleum companies also have an impressive lineup of assets, projects and plans. I just happen to think ours are better.

Also, there are several things that set Chevron apart from its competition. The most crucial is Chevron's work force of committed employees.

"The Chevron Way" is the document that explains who we are, what we stand for and what we believe in. If you haven't read it, I encourage you to.

One of the most important parts of "The Chevron Way" is the statement of our Committed Team Values. The opening paragraph states, and I quote: "Chevron people working together as a team are the key to success." It goes on to list eight core values that guide our work lives: honesty and integrity, trust, diversity, communication, recognition, achievement, partnership and alignment.

Of these core values, one of the most important is diversity. This is not something new to Chevron. As a company with operations in most states and about 90 countries, we are a diverse organization.

Diversity is an important business issue. By valuing the uniqueness of individuals and by thriving on the different perspectives and ideas they bring to our business, we will be more innovative and make better decisions. A diverse work force will help us understand, communicate with and better serve our diverse customers and the communities in which we operate.

Increasing the diversity of our employee group is one of my highest priorities.

I greatly value the dedicated work of all Chevron employees. I like to take every opportunity to tell them that I am proud of their tremendous accomplishments and to thank them. All the milestones, records and highlights that we've described this morning -- from our year of record earnings, to new oil discoveries to improved safety records -- all were made possible by the creative and hard work of Chevron employees throughout the world.

This is a good time to introduce you to a few of Chevron's outstanding employees -- those whose impressive individual or team efforts have earned them the Chairman's Award. I'd like them to stand because they deserve our thanks and a generous round of applause.

Before I turn to the question-and-answer portion of our meeting, there is one very important public issue I'd like to make you aware of. It's the Environmental Protection Agency's proposal to revise the National Ambient Air Quality Standards. These proposed new standards for ozone and particulate matter would impose levels that are much more stringent than current requirements and would cost businesses and U.S. consumers tens of billions of dollars -- far exceeding any potential health benefits.

Although the time for public comment is past, there are still several procedural steps needed before the proposed air-quality standards become final.

If you feel, as I do, that these new standards are not needed to protect health, and, in fact, would be harmful to the U.S. economy, I urge you to write to both your state and federal elected officials, or even the President of the United States.

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

Updated: April 1997