Chevron Corporation: Staying Focused, Pursuing Opportunities, Shaping The Future
Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
Annual Meeting of Stockholders
San Ramon, California
Also see a press release regarding this speech.
Thank you very much and good morning, ladies and gentlemen.
Welcome to our 1999 Annual Meeting, which is being held, for the first time, at Chevron Park in San Ramon. By moving the meeting from San Francisco, we're achieving substantial cost savings. It also gives you — our stockholders — a chance to see one of our biggest employee centers.
Our all-important international exploration and production company, Chevron Overseas Petroleum, has its headquarters here — as does our information technology unit, CITC.
We also have some of our U.S. refining and marketing operations here. Our Chemical company has been in San Ramon for many years, but soon will be moving to Houston. In total, about 2,700 employees work here at Chevron Park.
Last April in New Orleans, we celebrated the completion of the most successful year in Chevron's history — 1997.
1997's record earnings of $3.2 billion were a remarkable achievement and a testament to the skills and the hard work of all Chevron employees.
What a difference a year makes.
By the time we convened in New Orleans last year, we already knew that 1998 would be a tough year — we just didn't know how tough.
Now we know.
When we last met, oil prices had already fallen to about $15 a barrel, down from more than $25 a barrel at the beginning of 1997. By mid-December, four months ago, prices had sunk below $11 a barrel.
Three events came together to drive down the price of crude oil:
- There were economic problems in Asia, which now appear to have reduced demand by over a million barrels a day.
- We had a warm winter.
- And finally, in late 1997, just as the Asian demand was starting to decline, OPEC decided to increase its production levels.
All three things together resulted in large surpluses of crude oil.
Fortunately, in the last few weeks, prices have begun to recover, due primarily to OPEC's recent agreement to reduce production. If OPEC and other producers can stick to the production cuts they agreed to last month, I think prices will be stronger.
Although 1998's price drop was the most significant since 1986, let's try to put it into a longer-term perspective.
The price of crude oil has jumped around a lot over the last 12 years, and it will probably continue to do so in the future. Our company's response to this anticipated price volatility is to be prepared and remain flexible.
We can't rely on oil prices remaining above $15, so we've developed plans to deal with low prices over the next two to three years.
In 1998, low crude prices obviously had a dramatic effect on earnings.
Here's a comparison of the results for 1998 for all the major oil companies:
- Our earnings for the year fell off 39 percent, compared with 1997's record year.
- Our upstream operations have shown the most dramatic declines, dropping 50 percent because of the lower crude prices.
- In the case of our North American exploration and production unit, there also have been lower prices for natural gas.
- Fortunately, our U.S. refining & marketing company ended up having another really good year. That's in spite of a terrible hurricane at the end of September that shut down our Pascagoula refinery in Mississippi for over two months.
I think it was tremendous the way our people from all over Chevron's worldwide operations pitched-in to help get that refinery back on stream as safely and as quickly as possible. It was a job very, very well done.
Obviously, when you have lower earnings, you're going to have a lower return on capital employed (ROCE). In 1997, we had a ROCE of 14.7 percent, which was the highest in a long, long time — driven by our record earnings. You can see here, that our return on employed capital for 1998 was 9.2 percent, the first decline after three straight years of increases.
One area where we continued to show excellent improvement in 1998 was safety.
In 1998, we achieved the lowest worldwide safety incident rate for employees in our documented history — with 1.23 incidents for every 200,000 hours worked.
Through the efforts of all of our employees, we've been able to cut our incident rate in half since 1993. To put it another way — 735 fewer people got hurt in 1998 than 5 years ago. Several of our organizations achieved "best-ever" safety records last year. I don't have time to go through all of them, but let me just mention a couple.
Our U.S. exploration and production company had its best year ever in 1998, with an incident rate of 1.04. Our operations at Tengiz in Kazakhstan recorded over 5 million man-hours last year without a lost-time accident. These are terrific accomplishments, and it's something that I think all Chevron employees should feel extremely proud of.
While we're on the subject of safety, I think it's a good time to mention another subject that is also very important. That's our efforts to deal with the Y2K problem.
Y2K is shorthand for "Year 2000" and refers to the potential problems that old computer programs, or old computer process systems with embedded technology, might run into when they try to read the last two digits of the year 2000. Nobody really knows what will happen when these old systems read double zero on January 1 of next year. That's why the single most important thing we have to complete in 1999 is to try to make all of our facilities Y2K compliant.
We're focusing now on what we call our mission-critical systems. These are systems that could create significant adverse effects — on us, on the communities where we operate, or on the environment — if they fail. Our effort involves every plant and facility we have, and it includes developing contingency plans for any problems that might result at the end of this year. We can't guarantee we won't have some problems — but I can assure you — we will be prepared for Jan. 1, 2000.
Now let's take a look at stockholder return, which has become our main financial objective in recent years.
Our objective for the five-year period, 1994 to 1998, was to be No. 1 among our major U.S. competitors. As you can see on this chart we unfortunately didn't make it. In fact, we came in fourth. However, our average stockholder return over the last five years was 17.8 percent, which, in absolute terms, is pretty good.
Notice that the Amoco and Mobil bars have orange tops on them. That's the merger premium that their acquirers paid to buy those two companies. If we exclude those premiums, then Chevron would have been second only to Exxon. If you consider the 10-year period 1989 to 1998, we remained in first place, if you exclude Mobil's merger premium.
For 1998, our operating expenses came in at just under $7 billion.
Since 1991, we've trimmed $2.4 billion off our operating expenses — a tremendous accomplishment — one to which every employee in our company has made a contribution.
I hate to think where we'd be today, in this low price environment, if we were still operating with the kind of cost structure that we had in 1991.
We are projecting a further $500 million cut for 1999, $80 million of which was attained in the first quarter.
One of the key elements driving down our per-barrel costs is the increase in our production volumes.
Let's look at one of our most impressive ones — our international liquids production.
From 1992 to 1998, we increased our international liquids production from 512,000 to 877,000 barrels a day. That's a 71 percent increase — more than 9 percent a year — a magnificent accomplishment.
I think it's important that the growth in production came from all parts of the world: from West Africa, which includes Nigeria, Angola and the Congo; our new ventures in Venezuela and Kazakhstan; and our more mature ventures in Indonesia, Australia and Canada.
From 1992 through 1998, Chevron clearly had the highest growth rate among our major competitors for international liquids production.
Growth is important in all of our businesses, and that goes for our U.S. refining and marketing business as well. Since 1994, our branded motor gasoline sales and our convenience store sales have steadily risen. That growth in sales has been an important part of the improved performance of Chevron Products Co. in the last couple of years.
Although prices have improved measurably in the last month or so, our first quarter results reflect the sharply lower prices that prevailed for much of the quarter.
Our net income was $329 million — or 50 cents a share — a decline of about 35 percent from last year's first quarter.
Operating earnings — excluding special items — were $281 million, down 36 percent from the first quarter of 1998. The drop in earnings was caused by sharply lower crude oil, natural gas and commodity chemical prices. We have been operating in this difficult price environment for more than a year now. Although the recent improvement in crude oil and natural gas prices is very encouraging, it came too late to have any significant positive effect on our first quarter earnings.
During the first three months of this year, average crude oil and natural gas prices were about 20 percent lower than last year's first quarter.
On a positive note, our international production continues to be a bright spot for us.
Liquids production increased 9 percent from the first quarter of last year, and our international natural gas production increased nearly 30 percent.
Our refining and marketing business also continues to do well.
Our worldwide downstream operating earnings increased to $184 million — 22 percent from last year's first quarter.
Because of the uncertainty caused by the lowest oil prices in more than a decade, we've spent a lot of time in the last six months fine-tuning our strategies for the future.
To start with, we're planning to operate on the basis that oil prices may well stay low — that is, $10 to $14 a barrel — over the next two to three years. Even at those prices, we plan to preserve our upstream growth projects. They're the key to our future success, and we're going to fund them.
In order to do that, however, we'll have to minimize our capital spending in other parts of our business, such as chemicals, refining and marketing, and exploration and production in the United States.
We also want to keep our debt ratio below 40 percent or so, which is what we believe is necessary to maintain our AA debt rating.
In order to make these things happen, we're aggressively reducing costs. For instance, as I mentioned earlier, we already have $500 million in cost reductions built into our plans for this year. On top of that, we've formed a new companywide team to find additional, sustainable cost cuts over a longer period of time. That team is now focusing on how we can improve our overall performance by restructuring the way we do many things.
Let's look now at our capital budget for 1999.
Our budget for this year is programmed for $5.1 billion. That's less than a 4 percent reduction from what we spent in 1998. Undertaking a budget of this magnitude — in these market conditions — says that we think we have a very strong future.
Capital efficiency — in this era of price volatility — is very, very important. We have a world-class process that not only helps us make informed decisions about spending our money but also helps us complete our projects in the most efficient, cost-effective way. This process will help us achieve a goal we've set for ourselves — to save 10 percent on all our capital projects this year.
Now, I'd like to turn the meeting over to Vice Chairman Jim Sullivan, who will give you a brief rundown of our downstream and chemical operations.
After he's finished, Vice Chairman Dave O'Reilly will update you on our worldwide exploration and production activities.
(Messrs. O'Reilly and Sullivan speak. Mr. Derr returns to the podium)
Thank you, Dave and Jim.
Let me say a word at this point about mergers and acquisitions. I'll just repeat what I've said a number of times recently — that we would consider any merger we think makes good economic sense for you our stockholders. I can assure you we have actively reviewed many possibilities, but I don't think Chevron has to get bigger to be successful and competitive.
For 10 years, we've had a higher total stockholder return than Exxon or Royal Dutch Shell, two companies more than twice our size.
Stockholder return is driven by earnings growth — and just being big doesn't guarantee that growth. We have the best growth prospects of any company in our industry, and I'm extremely confident about our future.
We've talked about a lot of things this morning and let me just try to summarize them for you.
First of all — we're obviously happy that oil prices have rebounded recently to the $17-to-$18 range. But even if they drop once again into the $10-to-$14 range, we'll continue to fund our major upstream growth projects. This is where our future growth lies. In order to fund these projects, all our other capital budgets will be minimized over the next couple of years.
All costs will have to be reduced in order to remain competitive. We will also keep a strong balance sheet, which allows you to do a lot of things — like helping you get through a period like the one we've been in.
I feel very strongly that our focus on stockholder return has served us very, very well over the last 10 years, and, therefore, we've set a new goal for the next five-year period — from 1999 to 2003 — of again striving to be No.1 in stockholder return.
I would also like to emphasize — as we move forward through this difficult period that we're going to do these things in The Chevron Way.
Our values, our principles, and our respect for safety and for the environment will not be sacrificed as we move through this program. We've spent the last decade creating what I think is now a very decentralized, nimble, fast-moving company, and we have a group of people — that I think will prove to the industry once again that Chevron employees can accomplish incredible results.
I thank them for all their past efforts.
I would be happy to entertain a motion for adjournment of the meeting.
All in favor say "aye."
The meeting is adjourned.
Thank you all for coming and sharing your time with us today.
Updated: April 1999