Report to Stockholders
David J. O'Reilly, Chairman and CEO
2002 Stockholders Meeting
San Ramon, California, May 15, 2002
Also see a press release regarding this speech.
Good morning. It is a pleasure to welcome you to the first meeting of the stockholders of ChevronTexaco Corporation.
I'd like to introduce and acknowledge the contributions of our leadership team, including vice chairmen Glenn Tilton and Peter Robertson; Pat Woertz, executive vice president responsible for our global downstream; Darry Callahan, executive vice president responsible for power, chemical and technology; John Watson, vice president and chief financial officer; and Harvey Hinman, vice president and general counsel.
In the next few minutes, I will share with you some of our financial and operational results, as well as highlights of our accomplishments since completing the merger last October. I'll also spend some time discussing our vision and our values and their importance to the success of the company.
However, before I get to those matters, I'd first like to spend a moment discussing safety.
One shared goal across all our businesses is the desire to improve safety and reliability. We are employing a rigorous system to improve and manage performance in safety, environment, health, reliability and efficiency. We call this operational excellence.
We are encouraged by our progress. For example, we continue to see improvement in safety performance, as you can see on this chart. Our ultimate goal is zero incidents, and at ChevronTexaco we are creating a culture that emphasizes safety as a top priority for everyone.
I'll now turn to financial performance. Our net income for 2001 was $3.3 billion. When special items and merger-related expenses are excluded, our operating earnings for the year were a solid $6.8 billion.
Last month, we announced our first-quarter 2002 results — our first full quarter as a new company. Net income was $725 million. After accounting for special items and merger-related costs, operating earnings were $931 million.
These results were lower than the same period in 2001 largely because of the sharp decline in crude oil and natural gas prices from the previous year. Also, we experienced some of the poorest industrywide margins in refining and marketing in many years.
While lower than in 2001, it is important to keep these results in perspective. The entire industry saw a similar drop-off. But significantly, the synergy benefits we are already seeing from the merger improved our performance, which has been acknowledged by Wall Street analysts. I will describe those synergy benefits in greater detail in a few moments.
In addition, we are beginning to see evidence of a general recovery in the global economy, which in turn should increase demand for our products. And we are in a strong position to take advantage of these improving conditions as they occur.
As a global energy company, our job is to responsibly develop and deliver energy products and services that contribute to an improvement in quality of life for people around the world. Our mission is to do this in a manner that creates maximum value for you our stockholders. And our primary goal is to be No. 1 among our peers in total stockholder return.
I am pleased to report that for the period Jan. 1, 2000, through May 13, 2002 (just two days ago), we are the leader in total stockholder return among our peers, and we are working hard to maintain that position.
In the upstream sector, which we see as a key driver of future growth, we replaced 127 percent of the oil and gas we produced during 2001. This marks the ninth consecutive year that reserve additions have exceeded production.
Net crude oil, natural gas and gas liquids production for 2001 was 2.8 million barrels of oil equivalent per day. We expect to see overall production grow by about 1 percent this year, and over the longer term, our objective is to grow at an annual rate of 2.5 percent to 3 percent through 2006.
In Kazakhstan, production at the Tengiz Field increased for the eighth consecutive year, and we started up the Caspian Pipeline to bring that production to world markets. That same pipeline will move our Karachaganak production starting in late 2003.
In Africa, we continued development in the Block 0 area offshore Angola with the installation of the North Nemba Platform and in Block 14 with the start-up of production on Kuito Phase 1C.
In Nigeria, we signed agreements for Phase 3 of the Escravos natural gas project and announced a plan to develop a gas-to-liquids plant. Work is also proceeding on the Agbami discovery in the deepwater offshore, which potentially holds as many as 1 billion recoverable barrels of oil equivalent.
With the awarding of operatorship to ChevronTexaco for Block 250, we hold the largest net acreage position in the very promising Nigeria deepwater, with over 2 million net acres over seven blocks.
In Venezuela, we started up the Hamaca Project, which contains an estimated 2.1 billion barrels of recoverable reserves.
In the deepwater Gulf of Mexico, our net production was a record 104,000 barrels of oil equivalent per day. We successfully started up Typhoon ahead of budget and schedule, and we had a number of discoveries including the recently announced Tahiti prospect that show considerable promise.
We also increased production at Hibernia offshore eastern Canada and at Captain in the U.K. North Sea.
And in the Pacific Rim, we saw first production in the Malampaya gas field offshore Philippines and in a new field in the Bohai Gulf in China.
In the downstream sector, we increased our worldwide operating earnings by 29 percent over 2000 results. With a truly global downstream business — complete with a world-class refining and retail network and an ability to achieve significant synergies and efficiencies — we are well-positioned to provide our customers with quality products. We continue to improve our safety and reliability, both critical success factors in this business.
We're also investing in our refineries to provide our customers with cleaner fuels. For instance, we have initiated a $150 million project at our Pascagoula, Mississippi, refinery — the company's largest — to produce lower-sulfur gasoline and diesel. And we launched a modification of our California facilities to produce cleaner-burning gasoline without MTBE, which will be phased out of use in the state.
We also continue to invest strategically in the retail end in order to strengthen our market position. We have the benefit of some of the strongest brands in the business — Chevron, Texaco and Caltex — brands that are second to none in terms of quality and consumer confidence. And we intend to fully exploit the power of those brands.
The merger has also bolstered our position in the growing power and advanced energy technology sectors, and the business teams are accelerating the momentum that existed prior to the merger.
This leads me to a discussion of our interest in Dynegy, among the largest players in the energy convergence sector. ChevronTexaco holds a 26.5 percent interest in Dynegy. In addition, Dynegy purchases our domestic natural gas, while we purchase natural gas liquids from Dynegy. This sector has experienced a great deal of turmoil since last autumn, and obviously we are monitoring these issues very closely. We are supportive of Dynegy's efforts to address the challenges it is facing, and we remain optimistic about the long-term value potential for this sector.
I'd like to return now to a discussion of synergy, which I alluded to earlier.
One important first-quarter milestone was the achievement of our interim synergy target rate of $1.2 billion ahead of our original timetable, and we are making tremendous progress toward our total objective of $1.8 billion by early next year. Behind these numbers are some real success stories:
- In exploration, we have implemented a restructuring program that is expected to deliver annual pre-tax savings of $300 million, yet still deliver world-class results, as we saw with the Tahiti discovery I noted earlier.
- Our production teams have been seeking operating efficiencies in common areas operated separately prior to the merger. For example, in the San Joaquin Valley, operations are being optimized to reduce expenses while maintaining crude oil production.
- Collaboration is occurring across our worldwide refining network, leading to the adoption of best practices. For instance, a technology used at the company's refinery in the United Kingdom was deployed in South Africa to reduce the cost of processing high-acid crude. And a new cogeneration technology implemented at the El Segundo Refinery has been made available to other refineries as well.
- Our ability to leverage the company's size and purchasing power is being used to reduce costs of convenience store operations, product distribution and advertising. In the United Kingdom, product exchange agreements were implemented to significantly reduce the cost of tariffs and transportation to move product through pipelines and terminals.
- In shipping, the larger transportation volumes worldwide for both upstream and downstream are providing more opportunities to optimize ship utilization.
- And of course, we are seeing the customary merger synergies by converting our information technology systems to a single network, consolidating our human resources and accounting systems and selling redundant assets.
Beyond these achievements, we are seeing another kind of synergy: Upstream and downstream businesses in countries that were part of legacy Chevron, Texaco or Caltex prior to the merger are now coming together to create greater opportunities for ChevronTexaco in each of those countries.
Slide: 2002 capital & exploratory spending program
Looking ahead, we have high-graded the capital-spending program for 2002 by picking the best of the heritage companies' opportunities. Our $9.4 billion budget is lower than the combined budgets of Chevron and Texaco in 2001, due in part to our ability to achieve considerable merger-related capital efficiencies. And we will focus our capital spending on those projects and initiatives offering the greatest opportunity for long-term value and growth, largely in the upstream sector.
None of this would be possible without the commitment and engagement of thousands of ChevronTexaco employees around the world. This commitment is due, in large part, to a shared set of values and business principles that, when taken together, we call The ChevronTexaco Way. It is a statement of who we are and what we believe. It addresses our performance goals, our ambitions and how we conduct business.
The ChevronTexaco Way goes well beyond financial targets and operational procedures. A company must be judged by more than its results. It must also be judged by how it achieves those results. And at ChevronTexaco that means conducting our business with integrity and accountability, along with open and honest two-way communication.
Each of you found on your seat a copy of The ChevronTexaco Way. We're very proud of it, and we are pleased to share it with you today.
Our vision is to be the global energy company most admired for its people, partnership and performance.
In our vision we emphasize three pillars.
- The first is people. ChevronTexaco is more than a collection of assets. We are a team of people from 180 countries and many cultures and backgrounds — all brought together by a shared passion for doing the right things in the right way. Our principles endorse a spirit of inclusion and foster an environment where everyone can reach their full potential. This is the foundation of our commitment to diversity.
- The second pillar is partnership. It is our ambition to be the partner of choice wherever we work. The people of ChevronTexaco have an unrivaled reputation for building and sustaining lasting partnerships around the world — partnerships that offer mutual benefit and reach deep into the communities where we work.
- Performance — the third pillar of our vision — is, of course, the most visible measure of success to you our stockholders.
Slide: 4 plus 1
We don't achieve world-class performance by accident or coincidence. We focus on four critical drivers of business success: operational excellence, cost reduction, capital stewardship and profitable growth. Building world-class organizational capability in each is critical to achieving our financial goals. We call these priorities "4+1." And while they may not sound trendy, they are the nuts and bolts of successful performance.
Recently, regulators, lawmakers and the media have been paying a great deal of attention to the issue of financial accounting and reporting, and whether there is a need for any reform. I know that you as stockholders have a considerable interest as well, so I wanted to share with you my thoughts on this important topic.
In The ChevronTexaco Way we say, "We are honest with others and ourselves. We meet the highest ethical standards in all business dealings. We do what we say we'll do."
That means we are committed to the highest ethical standards of accounting and financial reporting. Our annual report, along with all of our financial reports, reflects two fundamental principles: transparency and full disclosure. We provide complete information for the recipients of our financial statements, and we are direct in how we explain these statements.
The bottom line is this: We know our integrity is central to our reputation, and our reputation is a critical determining factor for you our investors. That's why ChevronTexaco is so committed to these principles.
I'd like to close my remarks by once again acknowledging the role of the men and women of ChevronTexaco. People who have come together from three separate companies and many different cultures, and have so quickly created not simply a bigger energy company but a better one. A great energy company — one that strives to be the most admired.
I am excited about our future, confident in our ability to achieve our goals and proud to be a part of this great new company, ChevronTexaco.
Thank you very much.
Updated: May 2002