Remarks for Annual Stockholders Meeting Suny Purchase
Peter I. Bijur, Chairman and Chief Executive Officer
Purchase, New York
Good afternoon. I'm Peter Bijur. As Chairman of your company, it is my privilege to welcome you to the 2000 Texaco Stockholder Meeting, and to share with you the many exciting developments that have taken place at Texaco since our meeting in 1999.
Today I want to address a number of issues – distinct in their own right but definitely related.
- First I'll review our financial performance for 1999 and the first quarter this year.
- Second is the matter of crude oil prices and product prices – a topic that has certainly garnered its share of headlines in recent months.
- Third, I'll discuss the "new economy" – what it means to our industry, to supply and demand, and to Texaco's stock price.
- In addition, I'd like to review some of our operational accomplishments and the status of the strategies we have in place to build shareholder value for the future.
- And finally, I'll close with a discussion of what it means, in my view, to be a responsible corporate citizen in this global economy, and the importance of people to Texaco's future.
Let me begin with our financial performance.
As we detail in our annual report, 1999 was an excellent year for Texaco.
On the strength of higher crude oil prices, we achieved normalized earnings of $1.2 billion – a 36% increase over 1998. On the exploration and production side of the business, we saw an 87% improvement in earnings over 1998, with a continuing reduction in Texaco's operating expenses.
In the downstream, the refining sector continues to be a concern for us. A sustained period of excess capacity across the industry was made worse last year by the rising cost of crude feedstocks. This in turn further weakened refined product margins. Indeed, margins were at a 10-year low. The result was a 20% decline in our downstream earnings in 1999. And while we are seeing some signs of an improvement in margins this year, refining continues to be a challenging sector at best.
Across the company we've achieved enormous benefit from the rigorous cost reduction efforts launched in 1998. Through the hard work of Texaco teams around the world, we've realized savings of $743 million – substantially exceeding our target of $650 million, and one full year ahead of schedule.
On the whole, 1999 was a year of very solid performance for the company, especially rebounding off of a very difficult times in 1998.
Moving into 2000, the high crude price environment continues to strengthen our earnings, as illustrated by the first quarter results which we announced yesterday. Our normalized earnings for the quarter were $602 million, or $1.10 per share, the highest quarter since 1981.
But our future earnings are not and should not be solely dependent upon commodity prices. To ensure continued success and future growth, we need to be a company that is responsive to the changing face of the marketplace and the energy sector. The strategies we set into motion in 1998 reflect that need and are on track to provide strong and sustained growth in shareholder value.
Before going into more detail about those initiatives, I want to stay on the matter of price – both crude price and our stock price.
When I stood before you a year ago, crude prices – when adjusted for inflation – had hit their lowest level since the great depression, and the average price of gasoline in the United States had fallen to less than a dollar per gallon.
Last month, crude prices surged to almost $35 per barrel before backing off, and the average U.S. Price of gasoline reached nearly $1.60 per gallon.
There are two primary reasons to explain these increases. First, as you know, OPEC – acting in its own interest – implemented a series of production cuts, the last and deepest being in March 1999.
Secondly, economic growth has been accelerating in most major markets. And with that, demand for petroleum products has been increasing worldwide.
Prices thus rose in precise alignment with the fundamental laws of supply and demand.
Predictably, given OPEC's agreement last month to relax its production quota, crude prices have declined to about $25 per barrel . Gasoline prices have also come down, following once again the broad movements in underlying oil markets.
It is interesting to note that the rise in crude and product prices over the past year did not trigger the kind of inflationary push we might have seen in earlier times.
In fact, the dependence of the U.S. Economy on petroleum today is far less than in the past. Oil consumed per dollar of U.S. GDP has fallen by almost 40% since 1980 and expenditures on petroleum have dropped from about 8% of total U.S. Spending to only about 3% over this period.
Indeed, there are far more powerful forces at play in both the U.S. and abroad, and their convergence has led to the creation of the so-called "new economy."
- First, pervasive technological advances and massive investments in the internet;
- Second, globalization – the opening of the world's markets through deregulation, trade liberalization and privatization; and
- Third, corporate restructuring that occurred in many sectors – positioning U.S. business to take advantage of these first two factors I just mentioned.
Yet even in this "new economy" petroleum demand continues to grow.
More people and goods are moving across the planet at an unprecedented pace. More air travel means more demand for our aviation fuel. All those trucks delivering products that you are ordering on the Internet are raising demand for diesel fuel. The "new economy" is, in fact, driving greater demand for Texaco's products.
In the industrialized world, GDP is expected to increase 3.4% this year, and to continue at this pace in 2001. In the developing countries we see
GDP growth at 4.8% this year; accelerating to 6% by next year.
Petroleum demand will likewise remain in step. We see demand rising by about 1.4 million barrels per day this year and almost 2 million barrels per day next year.
Looking out over the balance of the decade, sustained economic growth will mean increased demand for all energy forms, with oil maintaining its 40% share of the entire energy picture.
So in a sense, the "new economy" itself is a growth engine for Texaco, and we are well positioned to take advantage of it.
But the "new economy" is also having an impact on investors and the traditional value stocks, including ours.
Yesterday, Texaco stock closed at $51 3/16 per share. Since the beginning of the year, our stock is down about five percent. This performance is typical of most of the oil stocks during the first quarter and, indeed, with many of the traditional value stocks.
While the behavior of the markets in recent months is more about the tug of war between the "new economy" and the "old economy", ultimately over time, it is performance – along with
Expectations of future performance – that are the most important measures of a company's value.
And, ladies and gentlemen, Texaco offers a very impressive value proposition, based not only on our record over the past year, but also on the foundation we have built for our future.
Let's consider some of the achievements of 1999 that contributed to this solid base:
- A billion barrel discovery in Nigeria – our largest in more than 30 years...
- The acquisition of a 45% stake in a huge gas project in the Philippines...
- Last year we replaced reserves at the rate of 111%, leading to the highest reserve base that we've had in 15 years, and the longest reserve life we have seen in 20...
- World-class exploration opportunities which we are pursuing in the deepwater gulf of Mexico, Nigeria and Brazil...
- We captured $743 million in savings and a plan to capture an additional $400 million in savings in the coming year...
- The largest downstream venture in the U.S. – one that has achieved $800 million in cost savings and synergies, and which ranked second in earnings growth amongst U.S. Competitors last year...
- And a retail network in the Caribbean and Latin America that is the envy of our industry.
Looking forward, we have an equally impressive set of initiatives that will enable us to achieve real and sustained growth in the years to come.
First, we are upgrading our portfolio of assets in all sectors of the business. For the upstream that means disposing of non-strategic producing assets.
In the downstream, it means reducing our exposure to refining – a sector that has lagged for many years. Capital freed up by these asset sales will be reinvested in markets and businesses that promise higher earnings and margins over a sustained period – such as marketing, transportation and lubricants.
Second, we are focusing our capital and people on high-impact, high-return projects in the upstream part of the business – projects that can produce a substantial, profitable step-change in our production and earnings over a long period of time.
Taken together, we expect the upstream initiatives will:
- Add more than 2.5 billion barrels equivalent of high-margin oil and gas to Texaco reserve base;
- We will grow production at a rate of 2 to 3% over the coming years from our expected production base of 1.1 million barrels of oil equivalent; and
- These projects will generate first-quartile returns and cash flows well into the new century.
Our portfolio of large-scale international upstream projects will command more than 70% of Texaco's investment budget this year – a rate that we expect will continue into the near future.
But with our strong cash flow and balance sheet, I am confident we can comfortably fund all of our projects.
Recognizing that the model of a successful global energy company goes beyond the upstream and downstream sectors, we're always seeking new sources of revenue – in both the "old" and "new" economies – by tapping advanced technologies to launch or expand businesses with significant future potential.
For example, we are moving aggressively to expand our international power business, and for one simple reason: the growing world needs more electricity.
Indeed, demand for power is outpacing total energy demand. So we are investing in financially sound, environmentally smart power projects in key markets. Altogether Texaco today has equity interest in 44 projects operating or under development with a generating capacity of close to 6,000 megawatts.
We're also leveraging our leadership in gasification technology – an environmentally superior process that converts low-value materials into clean energy and chemical products.
And we have created a new business team – Texaco Energy Systems Inc. – to expand our role in environmentally advanced technologies, such as fuel cells and hydrocarbons-to-liquids processes.
As we look forward, it may be the Internet that holds the most potential for creating substantial efficiencies within Texaco. Over the past year, we have begun to aggressively use online technologies to tap new markets and seek ever-smarter ways to run our businesses.
No – we're not about to rename ourselves texaco.com. But we are committed to marrying the best of our traditional business with the vast potential of the "new economy."
This year, we formed a new e-business unit to spur development throughout the company. We have invested in three online trading platforms – in houstonstreet.com and tradecapture.com, for an array of petroleum products, and in oceanconnect.com, for marine fuels and services.
Additionally, we are a founding member ofpetrocosm.com – the first global Internet marketplace created and owned by the energy industry. And we are devoting more staff and resources to exploit these new opportunities.
Taken together, we are confident that our strategies will drive continued growth in the coming years – and corresponding growth in shareholder value.
There is no shortage of premium investment opportunities before us. One of those opportunities is our own stock itself. Fueled by the strong cash flows generated by the high crude prices, we have resumed purchase our own stock under the previously authorized one-billion-dollar stock repurchase program.
Another element of our growth platform is to be a force for positive change wherever we do business – to be a responsible global citizen.
The people most vital to our business success – from employees and stockholders to customers, business partners and governments – all want to know that we treat the communities and environments in which we operate with deep respect and care.
That's why our commitment to worker safety and environmental stewardship is absolute.
Regarding safety in the workplace, we continue to see improvement in our culture and our performance. Admittedly, we work in an industry that poses significant safety risks. Texaco employees and contractors alike operate on the line each day under challenging conditions. But by making the necessary investments in training, equipment and communication, we can – and do – maintain a safe work environment.
Our goal is zero – zero tolerance for fatalities, lost-time incidents and injuries. Any other goal would be inconsistent with our guiding principle of respect for the individual.
Likewise, we are constantly seeking ways to raise the standard of our environmental performance. That means finding ways of reducing emissions and investing in cleaner and more efficient technologies. And part of that is understanding the need to be a positive contributor to the global dialogue on environmental issues.
That is especially the case when it comes to climate change. We believe our industry possesses the technology, the creativity and the resources to develop and implement market-based solutions – including emissions credit trading, technology development and transfer, and the aggressive pursuit of emissions reductions.
We also believe that the global warming challenge cannot be solved by industry alone. It requires the cooperation of industry, governments, the scientific community, NGO's and consumers. I do not believe that the Kyoto protocol as written is a workable solution to these challenges, but I firmly believe that the solutions are within our grasp. And Texaco intends to contribute to those solutions.
We operate in more than 150 countries around the world – countries of vastly different cultures and forms of government. It is impossible to succeed in these countries without an understanding of the needs of the workers and the people of these communities in which we operate. And by that I am referring to the matter of human rights.
In addition to the laws of the countries in which we operate, we are guided by our corporate conduct guidelines – a set of values and standards that direct our behavior and business decisions. Every employee is required to sign these guidelines, and every manager is judged by his or her conformance to them.
Central to our core values is "respect for the individual," and in our minds this is the foundation of human rights. This is why we are so determined to ensure a safe workplace. This is why we are so committed to raising the standard of environmental performance. This is why we respect employees' rights, as well as the economic desires and democratic aspirations of our neighbors around the world. This commitment will never change.
Before closing, I want to acknowledge and honor the people of Texaco.
The abilities and the passion that Texaco employees bring to their jobs, the variety and depth of experiences and ideas that come from being a diverse group of people, makes us a better company – and gives us our edge in the marketplace. Our commitment to diversity is opening new doors to talented, motivated people – and clearly we are better for it. This is not a passing fad. This is who we are.
Senior management may set the strategies and allocate the resources. But it is the people of Texaco – through their creativity, their enthusiasm and their absolute focus on building value – who are charting our company's future success. From all corners of the globe, the forward-looking people of this great company are turning ideas into results that matter. And they do it every day. I salute my colleagues, and thank them for their relentless drive to make Texaco a better company.
A year from now we will be on the threshold of the company's 100th year as a great enterprise. Few companies can boast of such a milestone.
Having been a personal eyewitness to more than a third of that history, I can say with certainty that we are poised for an era of unmatched success. Indeed, our portfolio of strategies, assets and opportunities is stronger today than at any time during my 34 years with this company.
Finally, I want say thank you to you – the stockholders of this great company – for your confidence in Texaco. The 18,000 Texaco employees around the world understand that is it our mission to create value for you. And that is a challenge we enthusiastically embrace – the challenge of creating the Texaco that will thrive in the "new economy."
Updated: April 2000