CHEVRON: A FINANCIAL AND STRATEGIC ANALYSIS

Miranda Gahagan BADM 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 companys current stance. In regards to the financial areasinventory turnover, free cash flow, ands retained earningsChevron has some legitimate concernsAfter assessing the strategic aspects of the companystrategic architecture, risks, and product mix ChevronWhich resulted in these recommendationsin 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) Profile o 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 companys 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 highs and still falls short of its major competitor Exxon Mobil.

Free Cash Flow In regards to the companys 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. Chevrons 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, lets 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 companys 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 Chevrons 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 Chevrons 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 to five academic principles from Strategy Dynamics Essentials to reach your conclusions about the companys existing strategy and your recommendations 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#.UXh3x46hMXc 3) http://www.advfn.com/p.php? pid=financials&btn=annual_reports&mode=&symbol=NYSE%3ACVX 4) http://www.chevron.com/annualreport/2012/documents/pdf/Chevron2012AnnualReport.p df 5) http://www.chevron.com/about/chevronway/strategy/ 6) http://www.nasdaq.com/article/chevron-corporation-good-value-or-high-riskcm115285#.UXhMg46hMXc 7) http://www.chevron.com/ecuador/ 8) http://www.forbes.com/sites/afontevecchia/2012/10/09/chevrons-q3-looks-nastysubstantially-lower-earnings-on-all-around-weakness/