CHEVRON: A FINANCIAL AND STRATEGIC ANALYSIS

Miranda GahaganBADM 495

Dr.April 24, 2013

Executive Summary

Chevron is one of the largest publicly traded companies in the world. With a current market cap over $229 billion, it is a significant player in the global energy and oil market. The company specializes in crude oil, practically all facets of fossil fuels, but also participates in other energy sources. Since its inception, Chevron has had a fairly positive return and high profit margin. Although 2009 marked a tragic year for most all publicly traded companies, Chevron has shown to be growing out of the recessional slump. The following report analyzes three financial and three strategic areas of the company based on the analysis of the 2012 Chevron Annual Report and other financial data. The analysis addresses potential concerns and positive aspects of the company’s current stance. In regards to the financial areas—inventory turnover, free cash flow, ands retained earnings—Chevron has some legitimate concerns…After assessing the strategic aspects of the company—strategic architecture, risks, and product mix—Chevron…Which resulted in these recommendations…in conclusion…

Table of Contents (2 pages)

COMPANY PROFILE

Headquartered in San Ramon, California, Chevron is one of the largest oil and

energy corporations in the world (1). Operating out of over 100 different countries,

Chevron is involved in all avenues and arenas of crude oil and energy production

including: manufacturing, exploration, chemical production, geothermal and solar energy,

and much more. The company began in 1879 as the Pacific Coast Oil Company, which

was later acquired my Standard Oil Company that then merged with Gulf Oil Corp(1).

Later Chevron acquired Texaco and Unocal Corp to solidify their position as an oil and

energy leader. Given the position held by Chevron, the company faces a variety of

challenges along with seeing a potentially bright future. With the demand for fossil fuels

increasing, and the availability of these fuels decreasing, Chevron is trying to meet the

global demand for energy on a variety of fronts (1). The international corporation has

seen its share of success as well as challenges in terms of market recession and

environmental litigation. With a market cap of $229.78 billion, Chevron is the one of the

largest publicly traded companies in the world (2). Chevron has a standard corporate

structure and has recently changed its organizational and marketing strategy to compete

with its largest opposition, Exxon Mobil(2).

o Company Balance Sheet and Income Statement(1 page) Profileo Company Cash Flow and Key Ratios Profile:(Current, Quick, Inventory Turn Rate, Accounts Receivable Collection Days, Return on Equity, Stock Performance, Altman Z Score (http://www.ehow.com/how_5101572_calculate-altman-score.html) (http://www.encalc.com/formulas.php)

FINANCIAL ANALYSIS

COGS to Inventory

One important ratio in evaluating a company’s financial standing is the cost of goods sold

(COGS) as compared to the average inventory. This ratio, also known as inventory

turnover, allows one to measure how efficiently a company is managed in terms of its

product. In 2012, Chevron turned a 24.4% inventory turnover ration a compared 31.3%

and 24.8% in 2011 an 2010 respectively (3). As it is known, a higher inventory turnover

ratio tends to indicate a better efficiency and performance; however in the case of oil and

energy companies it can also point to potential concerns over depleting resources.

Chevron, along with its competitors, has expanded its search for new sources of crude oil

and other sources of energy with varying degrees of success. This being said, Chevron

has showed that despite the economic downturn, inventory turnover has remained a

positive aspect in favor of the company (4). This was achieved by lowering COGS across

the company and resulting in a 25.6% overall decrease and the gross profit margin

increases by 10% (3). However, ultimately Chevron has not reached its historical high’s

and still falls short of its major competitor Exxon Mobil.

Free Cash Flow

In regards to the company’s free cash flow, Chevron has remained generally positive in

the last few years (4). This positive cash flow is indicative of Chevrons ability to retain

income as well as reinvest it. Chevron’s cash flow is competitive among its opposition as

well as have a better cash flow margin than Exxon. This margin shows that the company

efficiently translates sales to cash thus increasing profitability. In all, the free cash flow

shows little to no concern on behalf of Chevron.

Net Income to Retained Earnings.

The next relation to examine is of that between net income and retained earnings.

Retained in earnings is extremely important for it allows us too reevaluate areas in which

we can potentially expand growth and increase profitability. Chevron marked an

impressive retained earnings of $159.73 billion compared to the net income of $26.33

billon (4). According to this, Chevron has utilized its profits quite efficiently in order to

boost different areas of its upstream strategy segment (to be further discussed later. The

earnings retained by Chevron in the past year provides a potentially interesting

conundrum due to the history and maturity of the company. Though the company has a

fairly decent payout per share, usually more established companies have less retained

earnings for the have effectively utilized their profits throughout the years to minimize

the amount of money needed to be reinvested. However, the retained earnings also

present Chevron with the opportunity for continued growth and advancement in different

areas of its market strategy. As such, the company has the potential of overstretching

itself or reducing the overall value of the company by not reimbursing its shareholders to

the extent they expect.

STRATEGIC ANALYSIS

Strategic Architecture

Before addressing the strategic concerns of Chevron, let’s elaborate on the strategy itself

as laid out by the corporation. The company has segmented itself into: upstream, gas and

midstream, downstream and chemicals, technology, and renewable energy (5). The

upstream segment is designed increase the profitability of existing core markets of

Chevron as well as explore new ways to create other lasting, successful market areas. The

gas and midstream segment is structured to improve the commercialization of gas

resources while simultaneously growing a strong global gas business. In regards to

downstream and chemicals, the strategy is designed to increase revenue across the entire

area. The technology segment is as it seems, being designed to improve and utilize better

technologies for overall growth, while the renewable energy segment is committed to

ways to grow and invest in renewable energy sources.

One concern is the company’s decrease of the downstream segment of its

strategy, being that it is the basis of much of the overall efficiency. The company has

downsized employees in the shipping marketing and refining areas of development, while

focusing on expansion (8). However, it may be more prudent to strengthen the core areas

of production. Upstream projects tend to cost more than double what they did in 2005, as

well as increasing the risk involved in failed ventures (8). Despite this, one positive

aspect to Chevron’s strategy is its commitment to renewable energy. By reinvesting in

this, there is a decreased risk of loss on return due to the long term benefits of decreasing

non-renewable resources.

Product Mix

Chevron provides a variety of products to its consumers aside from energy concerns.

The primary source of Chevron’s income comes from its upstream operation which

comprises over 83% of the total income (6). Downstream operations offer the company

over 11.5% and all other operation make up the remaining 4.5% (6). The particular focus

Chevron has on its upstream segment allows it to continue to advance, however it is still

primarily rooted in finite resources. Ultimately, the company is involved in oil

exploration and refining, natural gas energies, supply and trading, drilling, pipelines,

global shipping, oil exploration, coal and other mining, chemicals ranging from

packaging to play things, wind and geothermal energy, as well as solar energy and much

more; all operated under three different brands of Chevron, Texaco and Caltex (6).

Risk

Although Chevron has a relatively long and illustrious history coming from Standard Oil,

all companies have risks, especially ones directly involved with the environment. Some

of theses risks come in the form of geopolitics, litigation, currencies, and more. One of

the biggest risks to Chevron, due to its particular susceptibility, is the ever-changing gas

prices (6). Chevron, nor its competitors, regulates gas prices, which affect the overall

profitability in a variety of ways. Other risks come in the form of equipment failures,

accidents, and environmental catastrophe. Furthermore, due to the limited amount of

fossil fuels remaining in reserves, the risks of Chevron tapping any particular source of

fossil fuel increases every day, which would dramatically effect the company and profits.

Lastly, litigation has presented trouble already for Chevron. When Chevron acquired

Texaco, it also inherited a $19 billion lawsuit from Ecuador (7) as well as recently being

sued for $10 billion dollars due to oil damage off the shores of Brazil (6).

SECTION 3: COMPANY STRATEGY

Align and integrate your Financial Concerns and your(2-3 pages)Strategic Concerns with the Porter Five Forces model and three tofive academic principles from “Strategy Dynamics Essentials” to reachyour conclusions about the company’s existing strategy and yourrecommendations for steering the strategy forward into the future.Evidence-based strategy analysis is required.

References and Works Cited (APA format)(1 page)(5-10 references, including 3-5 from e-text)

1) http://www.chevron.com/about/leadership/2)http://www.nasdaq.com/symbol/cvx#.UXh3x46hMXc3) http://www.advfn.com/p.php?pid=financials&btn=annual_reports&mode=&symbol=NYSE%3ACVX4) http://www.chevron.com/annualreport/2012/documents/pdf/Chevron2012AnnualReport.pdf5) http://www.chevron.com/about/chevronway/strategy/6) http://www.nasdaq.com/article/chevron-corporation-good-value-or-high-risk-cm115285#.UXhMg46hMXc7) http://www.chevron.com/ecuador/8) http://www.forbes.com/sites/afontevecchia/2012/10/09/chevrons-q3-looks-nasty-substantially-lower-earnings-on-all-around-weakness/