Business Analysis:Chevron Corporation

Business Analysis:Chevron Corporation

1. Company overview

Chevron Corporation is one of the most successful international energy corporations in the United States whose headquarter is in California. The corporation’s business scope includes oil, natural gas, hydrocarbon exploration, and power generation. The upstream operations of the company primarily consist of the exploration, development, and production of crude oil and natural gas. It also includes processing, liquefaction, transportation, and regasification of liquefied natural gas. There is also transportation of crude oil by major international oil export pipelines; storage, and marketing of natural gas; and a gas-to-liquids plant (1). Downstream operations consist primarily of refining of crude oil into petroleum products; marketing of crude oil and refined products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives (1).

2. Industry overview

The petroleum industry includes the global processes of exploration, extraction, refining, transporting, and marketing of petroleum products (2). The petroleum industry is usually divided into upstream operation, midstream operation, and downstream operation. As mentioned before, Chevron Corporation has an upstream operation and downstream operation. The upstream operation includes the process of developing and reserving oil resources, while midstream and downstream operations include the process of refining and transporting oil resources. The relationship between supply and demand is a decisive key in the petroleum industry. The demand for petroleum can be influenced by local, national, and global economies such as taxes, law, and government policies. The supply of petroleum can be influenced by geographic location, and the key energy, fuel, and chemical factors. The technological updates and costs are also significant factors that affect the supply of petroleum. With the limited existing petroleum resources and large numbers of national and international corporations, the petroleum industry is considered a highly competitive industry.

3. Company’s strategy

Chevron’s Company strategy is divided into two categories: the upstream and downstream strategies. In the upstream, the company’s strategy is to deliver industry-leading outcomes while developing high-value resource opportunities. In the downstream, the strategy is to grow earnings across the value chain and achieve targeted investment to lead the industry lead in returns (1). The main operating profit of Chevron Company is from the sales of crude oil, refined product, and natural gas.

4. Potential risks
   1. The Chevron’s operation could be disrupted by natural or human factors that are beyond its control.

Chevron Corporation, as an energy company that can be influenced by both natural disasters and human causes. Natural disasters such as hurricanes, storms, floods, fires, and other extreme weather can cause physical damage to the industry. These radical natural phenomena have happened more frequently in recent years since the environment changed. Thus, it is difficult to predict the occurrence of such events in the future and to make policies that can help to prevent and manage them. The human causes include system breakdown, terrorist acts, and misoperation. The risk of failure to control the oil resources can harm both the human and natural environment and result in irreversible damage.

1. The scope of Chevron’s business will decline if the company does not successfully develop its resources

The Chevron Company is in an extractive business. Therefore, if it is not successful in replacing crude oil and natural gas in its process with possible prospects for future organic opportunities and acquisition opportunities, then the company’s productivity will decline (1). This risk relates to the company’s internal management, such as obtaining and renewing the rights to explore, develop, and produce hydrocarbons, and the ability to bring long-lead-time. If the company’s management is going in the wrong direction, then the supply of the resource will decline. It means it will not meet to demand of the consumers, resulting in a decline in operating revenue.

5. Basic ratios

The business strategy in 2018 and 2019 is reflected in the ratio. 2016 is not included because it has a negative profit margin, return on assets, and return on equity. The company performing pool in 2016 and more ratio explanation is on Part 3.

Part 2: Accounting Analysis

1. Chevron Corporation has three inventories: crude oil and petroleum products, chemicals and materials, supplies, and other records. The petroleum products and chemical inventories are in the cost or net realizable. The company uses the Last-in First-out method. If the prices of inventories are increasing, it means the costs of inventories are more than the actual result. The total inventory for 2018 is $5,704 million, and $5,585 million. The amount of inventory has increased for the last three years.
2. The accounts and notes receivable less allowance for 2018 is $15,050 million and $15,353 million. The receivables are valued under the fair value method. The company also has long-term receivables, which has been decreasing over the years.
3. There is no detail explanation about the bad debt expense in the company’s annual report. However, it can indicate that bad debt expense has increased over the last three years. As the company write-off bad debt every year, the amount keeps on decreasing. The strategy consistent with the company belief is that the credit risks are limited; thus, the company routinely assesses the financial strength of its customers.

Part 3: Ratio Analysis

1. Profit margin

Profit margin is a profitability ratio that represents how many cents of profit the business has generated for each dollar of sales (3). The chart shows that the profit margin of Chevron Corporation decreased between 2014 and 2016. In 2016, the profit margin was negative, which indicates that the company incurred a loss. The year 2016 was a transition year for Chevron and the petroleum industry. The average profit margin in 2016 was 0.1% for the industry. The reasons for such reduction was the decrease in the supply of crude oil and petroleum products and the reduced petroleum costs. Between 2017 and 2018, the profit margin increased significantly. It is consistent with the company’s strategy of reducing the cost of exploring and refining petroleum and the significant increase in the price of gasoline. The profit margin of the Petroleum industry was 3.3% in 2018; Chevron had a net profit margin of 9.33%. The company had almost three times above the industry average. It indicates that the company performance in 2018 was excellent. Furthermore, the company had predictions that the price of gasoline will continue to increase in 2019.

2. Total asset turnover

Asset turnover computes as total sales divided by average assets. The ratio measures how effectively companies are using their assets to generate sales. The higher the asset turnover ratio, the better the performance of the company. In analyzing Chevron’s asset turnover ratios for the last five years, the results show that the lowest ratio was in 2016. As stated before, 2016 was a good year for the petroleum industry. The industry asset turnover ratios for 2016 were 0.78. For Chevron, the asset turnover ratio was only 0.42. It seems that Chevron incurred more problems than the overall industry average. However, between 2017 and 2018, the asset turnover ratio increased slightly. In 2018, the industry asset turnover ratio was 0.71. Chevron’s asset turnover ratio was only 0.63, which was below the industry average. The conclusion made is that the company was slowly gaining asset turnover through sales. Therefore, the company should pay more attention to ways to turn assets to sales much faster.

3. Return on asset

Return on assets is computed as net income divided by average total assets. It measures how much a firm earns for each dollar of investment in assets. Companies usually prefer to have higher ROA because it indicates that the company performed well in selecting and managing finances. The increasing ROA for 2017 and 2018 was due to the increase in sales revenues. The difference in total assets in these two years was 60 million. The difference in revenue was 20,000 million dollars.  The average ROA of the Petroleum industry was 5.7% in 2018 and 3.9% in 2017. The ROA for Chevron was 5.84% in 2018 and 3.62% in 2017. Therefore the company reached the market average.

4. Return on equity

Return on equity is a measure of how effectively management is using a company’s assets to create profits. The ROE was negative in 2016 because the company suffered from a net loss. As mentioned before, the petroleum industry sustained heavy losses in 2016, and Chevron was among the companies that were profoundly affected by that. The net income, as well as the stockholders’ equity, increased between 2017 and 2018. The increased net income mainly came from the tax deduction. In 2018, the U.S. statutory tax rate reduced from 35% to 21%. Additionally, in these two years, the company focused more on reducing the operating cost and maintain liquidity. The industry’s ROE ratio in 2018 was 6.4%. Chevron’s ROE was above the industry average, suggesting that Chevron’s strategy of reducing cost was effective.

5. Other ratios

2018. Current ratio is a liquidity ratio that measures the company’s ability to pay its short-term obligations. In 2017, the current ratios of Chevron showed a positive trend. The current assets increased in the year 2018. Similarly, the current liabilities increased slightly. In comparing the years 2018 and 2017, the cash and cash equivalents increased approximately doubled. It indicates that the company had the financial ability to pay its short-term obligations.
2019. Inventory turnover ratio measures the number of times a company sells its inventory. The main inventory for Chevron is Crude oil and petroleum products. In 2014, Chevron’s inventory ratio had the most favorable outcome. In 2018 the company sold its inventory 17.43 times on average. The company’s inventory turnover ratio was above the industry inventory turnover ratio. It shows that the company was successfully managing its inventory.
2020. Debt/equity ratio is an important ratio used to evaluate a company’s leverage. It is calculated by dividing total liabilities by total shareholder equity. A higher debt-equity ratio indicates that the company has higher risks to its shareholders. From 2016 to 2018, Chevron’s debt-equity ratio decreased steadily for those three years. The most significant liabilities of the company are called “Deferred credits and other noncurrent obligations.” It decreased by about 5,000 million dollars in 2018. Also, the company’s treasury stock decreased in 2018. The average industry’s debt-to-equity ratio for 2018 was 1.00, while for Chevron, the debt-to-equity ratio was only 0.22. Therefore, the conclusion is that the company has a high capability and lower risk to pay its obligations
2021. The accounts receivable turnover ratio measures the effectiveness of a company’s ability to collect its receivables. The company routinely assesses the financial strength of its customers (1). A high ratio suggests that a company is conservative when it comes to extending credit to its customers (4). The Chevron’s account receivable turnover increased between 2016 and 2018. In 2018, the account receivable increased to $279 million. The industry receivables turnover was 15.86, while Chevron’s receivable turnover ratio was 11.05 in 2018. Generally speaking,  the result shows that the company is efficient enough to collect its receivables. sthThis indicates that the company has reliable customers who pay their debts on time.

Part 4: Cash analysis

The company generates cash mainly through its operating activities from net sales over time. The net cash is primarily provided by operating activities. Chevron Corporation’s net cash provided by operating activities increased to $7648 between 2016 and 2017 and increased, even more, by rising to $10280 from 2017 to 2018. Operating activity cash flows include transactions and adjustments. Change in value is not defined as investing or financing activities.

Investing activity cash flows include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, equipment, and other productive assets. The amount of cash inflow (outflow) of investing activities excludes discontinued operations. Chevron Corporation’s net cash used for investing activities increased between 2016 and 2017 but then slightly declined between 2017 and 2018. From the given information, it can be seen that the investment operation of Chevron was stable. It gives it strong confidence in the investment, and with no much bad debts to be collected.

Financing activity cash flows include obtaining resources from owners and providing them with a return on and a return of in their investments, borrowing money and repaying amounts borrowed or settling the obligation, and obtaining and paying for other resources obtained from creditors. As seen from the information, Chevron Corporation’s net cash provided by (used for) financing activities declined between 2016 and 2017 but then slightly increased between 2017 and 2018.

Part 5: Financial Analysis

For the conference call, it shows a U.S. Downstream Operations, which earned $2.10 billion in the year 2018, compared with $2.94 billion in the year 2017. The increase was mainly due to the benefits of the tax absence, which was in 2017. It was primarily due to the planned refinery turnaround activity. Partially offsetting these were higher margins on refined product sales of $380 million and higher equity earnings from the 50% of $320 million, reflecting the absence of negative impacts from Hurricane Harvey.

The company’s future debt level is dependent primarily on results of operations, cash that may be generated from asset dispositions, the capital program, and shareholder distributions. Based on its high-quality debt ratings, it shows the company has a substantial borrowing capacity to meet unanticipated cash requirements. During the extended periods of low prices for crude oil and natural gas and narrow margins for refined products and commodity chemicals, the company can also modify capital spending plans. They can also discontinue or curtail the stock repurchase program to provide flexibility and to continue paying the common stock dividend and to remain committed to retaining the company’s high-quality debt ratings.

Part 6:

From the above information, the conclusion is that investments in associates are assessed for possible impairment when events indicate that the fair value of the investment may be below the company’s carrying value. Once the situation of understate becomes a long-term phenomenon. The carrying value must be a written down transfer to its fair value. This amount will then be recorded in the net income. Thus, it means one can make the investment since all its business activities, including the financing, operating, and investments are stable with an increasing trend. It raises the carrying value and increases the fair value, giving a higher rebate of investors.