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Chevron 1
Chevron: Strategic Business Assessment
Cullen Cosco
Fernando Garcia Ulloa
Cara Hughes
Tim Nutter
Reagan Walters
Chevron 2
Table of Contents
EXECUTIVE SUMMARY ..............................ERROR! BOOKMARK NOT DEFINED.
OVERVIEW OF THE FIRM ..........................ERROR! BOOKMARK NOT DEFINED.
FINANCIAL HISTORY AND STATUS ........................................................................ 7
STRATEGIC MARKETING ANALYSIS ................................................................... 17
PERCEPTUAL MAP.................................................................................................... 23
MACROENVIRONMENTAL FORCES ..................................................................... 25
MARKETING MIX ...................................................................................................... 28
ISOLATED SALES FORECAST................................................................................. 30
MANAGERIAL ACCOUNTING ANALYSIS ............................................................ 32
ANALYSIS OF COST BEHAVIOR ............................................................................ 32
PROCESS ANALYSIS................................................................................................. 33
BALANCED SCORECARD ........................................................................................ 34
STRATEGIC ASSESSMENT OF OPERATIONS...................................................... 37
ORDER WINNERS AND QUALIFIERS, DISTINCTIVE COMPETENCIES........... 37
PROCESSES, FACILITIES, AND LOCATIONS........................................................ 44
SUPPLY CHAIN INTEGRATION AND OUTSOURCING ....................................... 46
TECHNOLOGY AND SYSTEMS............................................................................... 50
INFRASTRUCTURE ................................................................................................... 51
SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY.................... 54
SWOT ANALYSIS ......................................................................................................... 59
CONCLUSION ............................................................................................................... 66
WORKS CITED.............................................................................................................. 67
Chevron 3
EXECUTIVE SUMMARY
Chevron is one of the largest oil corporations in the world averaging over 2.5 million
barrels of oil and equivalents daily in 2014. It is a vertically integrated company involved
in both the upstream and downstream sectors, with a diversified portfolio of oil products,
and is cash heavy having over $13 billion in cash and equivalents in 2014 (Chevron,
2014).
Despite the companies’ strengths, Chevron has faced major macro-environmental factors
that have impacted its performance and profitability in the past couple of years. Oil
prices have plummeted, forcing the company to sell off its assets and incur more debt to
keep the company maintaining its goals of increased dividend payouts. If oil prices
continue to drop or stay relatively the same for longer periods of time, Chevron could
face harder times to come.
The SWOT analysis provided a deeper understanding of where Chevron has strengths,
weaknesses, opportunities, and threats. Chevron has many major global capital projects,
which allows them to have a strong global brand and a strong revenue stream. A
diversified portfolio, including crude oil, natural gas, liquefied natural gas, geothermal,
solar, biofuel, hydrogen, etc. has allowed Chevron to appeal to a wide array of
consumers, which is a competitive advantage. Focusing on alternative energies will
decrease Chevron’s dependency on crude oil, which may help it in the long run. Spending
over $700 million in research and development allows Chevron to keep up with the
increase needs of energy around the world (Chevron, 2014). Some of the opportunities
include increasing natural gas production and repositioning themselves as an energy
company, not just an oil company. This will allow them to be less affected by the
decrease in oil price. While Chevron has some major strengths and opportunities, it also
faces many weaknesses and threats. Legal issues, government and environmental
regulations, high competition, global recession, and cost of environmental hazards are
some of the main weaknesses and threats.
After examining Chevron’s financial figures, we find that the firm’s profitability, asset
management, and debt management ratios are the most crucial in our recommendation to
buy or sell the corporation’s stock. Chevron appears to have major asset management
issues, which will decrease shareholder wealth maximization. But, Chevron’s shareholder
equity reliance shows it is looking towards expansion, increased market share, and strong
earnings due to its increased debt capacity. Overall, we would recommend buying
Chevron’s stock due to its high profitability, diversified portfolio, low stock price, and
positive outlook for the future of Chevron and the price of oil.
Chevron 4
OVERVIEW OF THE FIRM
Chevron is the second largest integrated energy company in the United States, and the
fifth largest in the world. Its mission statement is to do business “The Chevron Way”,
which means to get results the right way. Chevron is focused on being transparent and
showing who they are and what they believe in and what they want to accomplish. To be
a competitive company, Chevron has a strong vision to safely provide energy products, to
deliver world-class performance, and to keep the best interest of the stakeholders.
Chevron is built on seven key values: integrity, trust, diversity, ingenuity, partnership,
protecting people and the environment, and high performance. The industries that
Chevron is involved in include traditional resources (oil, natural gas, oil sands),
renewable resources (geothermal, solar), and emerging fuels (biofuels, gas-to-liquids).
For products and services, Chevron serves both consumers and businesses. Chevron
provides consumers with fuels and stations, gift and credit cards, and motor oils and fuel
additives. For businesses, Chevron provides a wide array of products, from additives,
aviation fuel, base oils, chemicals, fuels, lubricants, marine fuel, MSDS, and other
specialty products.
On September 10th, 1879 the Pacific Coast Oil Company was founded by a group of
explorers and merchants. California Star Oil Works founded the first successful oil well
in California, which launched California as a huge oil-producing state. California Star did
not have enough capital to take the marketing opportunity in California, so Pacific Coast
Oil acquired them in 1879 by Colonel Charles Felton. By the next year, Colonel Charles
Felton made the largest and most modern refinery in California. In 1890, Pacific Coast
Oil Company was struggling trying to expand, so they agreed to be acquired by the
Standard Oil Company. The Standard Oil Company soon became a financial stronghold
by introducing an impressive product line, a growing refining system, and an extensive
pipeline system. By the time World War I had begun, the Standard Oil Company of
California began to look beyond the United States’ shores for oil and gas reserves. The
war had depleted the United States’ crude oil supply, which forced oil companies to look
elsewhere for this resource. In 1936, Standard Oil Company created at partnership with
Texaco to be a potential market for its Middle Eastern oil. They also created a joint
venture with Caltex to help create an extensive marketing network in Asia and Africa.
The Standard Oil Company decided to make a major change in 1977, which was to
rename the company to Chevron. The Chevron name came from the 1930s when the
Standard Oil Company of California could not use this name outside the geographic area
due to the terms of the breakup of Standard Oil. Due to this, the company came up with
the name “Chevron” to use on its retail products. The name change was meant to create a
stronger identity and to form a more bonded organization. In today’s era,
ChevronTexaco’s goal is to dive into complex fields and to search for renewable
resources and improve the efficiencies of their current operations (Chevron, 2014)
Chevron has a complex operation and supply chain system to create its wide array of
products. The whole supply chain is divided between upstream and downstream
productions. Upstream production includes exploration and production, which is the
Chevron 5
locating drilling of the crude oil. Downstream production deals with the refining,
transportation, and marketing of the various products Chevron offers. For upstream
production, Chevron has to incorporate technology and signal processing and
geotechnical analysis to find crude oil around the world. Once the crude oil has been
found and evaluated, then it will be extracted and sent as crude oil or to the downstream
sector that produces gasoline. The downstream production begins with the refining of
crude oil, which is the removal of unwanted particles. Then, the refined oil is transported
through pipes or by shipping to the distribution center where it will finally reach the
consumer or business (Chevron, 2014).
Chevron uses a differentiated marketing strategy because it markets to several segments
with a marketing mix strategy matched specifically to its desires and expectations.
Chevron different target market segments are small businesses, specific age groups and
local and foreign communities. Chevron advertises specifically at small businesses in
hopes that they will potentially utilize the resources that Chevron has to offer. This is
part of Chevron’s Supplier Diversity program; Chevron works directly with small
businesses in order to promote an inclusive business environment for the benefit of not
only Chevron but also its suppliers. Chevron also targets specific age groups in different
ways, for an example the company targets children only for educational purposes, but the
company targets college students as potential improvements within the organization.
Chevron uses its ads as a way to market the company’s product uniqueness in order to let
its customers know that the products Chevron produces are the safest and most advanced
products in the market (Chevron, 2014).
Financially, Chevron and all other major oil companies have taken a huge hit because of
the recent decline in oil prices. In 2011, the price of oil was around $105 a barrel and now
it is around $36 a barrel (MacroTrends, 2014). This event has caused a decrease in total
revenue for Chevron since 2011. Chevron has had a decrease in sales and other operating
expenses since 2011, from $244.4 billion to $200.5 billion in 2014 (Chevron Annual
Report, 2014). But, it has seen an increase in total assets, but a decrease in total current
assets. Chevron has also increased its total liabilities, but decreased its total current
liabilities in the past few years. This means that Chevron is becoming less liquid.
Chevron has seen an increase in total stockholder equity since 2011, which is most
influenced by an increase in retrained earnings. An increase in retained earnings could
mean that Chevron has been profitable over the past few years, which in turn makes the
dividends less than Chevron’s profits. Since the decline in the oil market, Chevron stock
would be considered a bargain for most investors, even when compared to its
competitors, such as Exxon Mobil and BP. Chevron’s stock price has seen a decrease
since the middle of 2014 and saw its lowest point in August of 2015 since 2011. But all
of Dividends are good indicators on whether or not a company is doing well and
benefitting its shareholders. Chevron is known to have a high dividend payout, which is
appealing to shareholders. Having a low debt-to-equity ratio allows Chevron to keep
paying its shareholders, even if its cash flow struggles. Over the past few years,
Chevron’s cash flow has had difficulties keeping up with the amount of new projects
Chevron is taking on. Chevron has spent billions on new projects, which has hindered its
cash flow drastically.
Chevron 6
Chevron and the other oil and energy industries are all dependent on technology. A major
part of Chevron’s view on technology is that the oil companies should be more like
technology companies. Chevron has three main technology companies: Energy
Technology, Technology Ventures, and Information Technology. By building technology
centers in Australia, the United Kingdom, and the United States, Chevron is able to focus
on improving its efficiency and productivity of its operations. One main reason Chevron
is focused on technology is to invest in renewable energies. An integrated upstream and
downstream technology sector allows Chevron to be a strong player from the moment the
crude oil is extracted until it reaches the consumers gas tank. Chevron is a leader in using
various technologies for deep-water fields and hydro processing technologies, which
gives them competitive advantage over other energy companies and positively impacts its
position in the fuel marketplace.
Oil companies tend to be scrutinized for not focusing on corporate responsibility.
Chevron focuses on minimizing worker injury by creating a program called the
Operational Excellence Management System. This system has helped to improve the
personal safety and health of Chevron workers. Chevron is also concerned with
protecting the environment by trying to decrease the petroleum spill volume every year.
In 2014, Chevron achieved a record low petroleum spill volume of 838 barrels (Chevron
Corporate Responsibility Report, 2014). To show commitment to specific communities,
Chevron has developed connections with local suppliers and has focused on employing
local workforces. Chevron shows interest in the community by also donating millions to
education support systems. In the annual report, Chevron is proud to say that in 2014,
they spent more than $240 million globally on social investments (Chevron, 2014).
Chevron 7
FINANCIAL HISTORYAND STATUS
Upon examining Chevron’s financials and deriving their ratios, we find their numbers to
be generally positive, mostly rivaling or exceeding those of the industry average and
competitors of similar resource availability and capacity. Even still, many of Chevron’s
ratios have diminished over the five years we examined, resulting from unfavorable
market factors that have taken a toll on the industry as a whole. We set out to determine
why Chevron’s numbers resulted how they did, what factors have led to steadily
decreasing numbers over the short term, and if it seemingly promising profitability
performance is ultimately being offset by other categories.
Profitability
Return on Equity
Return on Equity
Chevron Industry Average
2010 0.1798 0.1319
2011 0.2201 0.2145
2012 0.1899 0.1775
2013 0.1424 0.1479
2014 0.1232 0.1162
5-Year Average 0.1711 0.1576
Return on Equity (ROE) is used to measure the return earned on these investments.
Between 2010 and 2014, Chevron’s ROE has overall exceeded industry average, only
falling short of the measure by a minimal margin in 2013. As it pertains to Chevron’s net
income, the corporation has emphatically attempted to cut costs and minimize expenses
in its downstream operations, which perhaps explains why its ROE has remained above
industry average of late; however, the steady decrease in both ROE and net income can,
in part, be explained by two factors. The first of these is Chevron’s increased investments
in research and development, as well as exploration efforts. Since 2010, Chevron has
been pouring money into developments such as its Gorgon liquefied natural gas project in
Australia and the startup of the Congo River Crossing Pipeline, which has naturally taken
away from its net income. Secondly, the petroleum market as a whole has been hit by
decreased oil prices, which have not only diminished Chevron’s net income, but also
those of all companies involved in the industry. We find that once their projects are
complete and are successful, Chevron will see major growth and an increase in return on
equity. Likewise, once America gets out of its current gas price slump, its net income will
return to similar volumes as previously realized, and its ROE will be reflected by a steady
increase. Despite all of this, what we find perhaps most problematic as it applies to ROE
is Chevron’s numbers compared to Exxon—its primary U.S. competitor and a firm of
similar size and resource availability. While Exxon, too, has been hit by the same
Chevron 8
aforementioned factors that have plagued Chevron over the past five years, its ROE has
consistently been significantly higher than that of Chevron—averaging 0.2153 to
Chevron’s 0.1711. We find that this is not so much of a net income concern, but is
instead a result of Chevron’s financial reliance on common shareholder equity instead of
debt utilization. As we explain in the debt management section of our report, this reliance
bodes poorly for shareholders, making them harbor more risk than they might if they
invest in other petroleum corporations, but also allows for higher debt capacity for
Chevron—which it could use in the future to expand and flourish if it so chooses.
Return on Assets
Return on Assets (ROA) is used to measure how efficiently a company uses its assets to
generate revenue. Between 2010 and 2014, Chevron’s ROA has consistently been over
industry average, which indicates that the corporation has used its invested capital
relatively well in its operational activities. Much like its ROE numbers, ROA has steadily
decreased over the past few years, as net incomes have diminished, while asset
investment has increased. As previously mentioned, since 2010 Chevron has invested in
new startups, initiatives, and equipment, which, in this case, has taken away from net
income and given to total assets—almost surely accounting for this drop in ROA. Once
gas prices return to normal and Chevron’s projects develop and are implemented, the
firm’s ROA should increase and become steady again. Additionally, the fact that the
firm’s ROA has remained well above industry average despite additional expenses and
unfavorable market conditions indicates that utilizes its invested capital well in all
conditions, and points to a profitable and less turbulent future.
Net Profit Margin
Net Profit Margin is used to measure what percentage of dollars brought into a company
through sales is directly translated to profits. Over the five years we evaluated, Chevron’s
net profit margin has remained well over the industry average (almost by twofold), and
has been relatively steady, only experiencing a slight decrease in 2013 and 2014. Once
again, this ebb can be attributed to low gas prices and investment in new projects and
capital. The importance of this ratio can be found in that Chevron, as has been the case
with its other profitability ratios, has weathered unfavorable market conditions relative to
the rest of the industry. While net profits and sales have waned, alike, Chevron has
minimized its costs of goods sold and operational expenses, which we believe will bode
well for them as gas prices rise again and their projects begin to pay off.
AssetManagement
Inventory Turnover
Inventory turnover shows how well a company is managing its inventory. Chevron’s
inventory turnover has been twice as high as the industry average inventory turnover
since 2010. This means that Chevron has less excess inventory than the industry or it
Chevron 9
means that Chevron has strong sales. Looking closer at the industry, we realize that
inventory management was the driving force behind Chevron having a better inventory
turnover. Chevron’s inventory includes crude oil, petroleum products, and chemicals. It is
also important to not that most oil companies, including Chevron, use a last in, first out
costing method. Companies do this because there is an assumption that the cost of
inventory will increase over time due to inflation. This means that the ending inventory
will be valued at the earlier costs, which should be lower if inflation continues to occur.
In the annual report, Chevron discusses about lowering inventory due to the drastic fall in
price of a barrel of oil. The price of crude oil in the middle of 2014 was over $100 a
barrel. Today, the price of crude oil is roughly $35 a barrel (CITE). In just 18 months, the
total crude oil market changed. To compensate for this change, Chevron has lowered its
inventory levels because Chevron saw the sudden decrease in oil price and knew that it
was better to have a low inventory. Lower prices and high inventory is not a situation that
companies want, especially those that use the last in, first out costing method because it
means that their inventory costs will increase. Chevron is efficient in holding a low level
of crude oil and other products in relations to sales. In 2014, there was an increase in
transportation costs ($350 million) to help cut the time it takes to get their products to
their consumers (Chevron Annual Report). By doing this, Chevron can take the crude oil
straight from the ground and almost directly to the customer; this means that Chevron
does not have to store up their products.
Since 2011, Chevron’s inventory turnover has decreased, which means that Chevron is
not handling their inventories as efficiently and/or they do not have strong sales.
Chevron’s sales have decreased, while its inventory has increased in costs. This is in
direct correlation to the drastic drop in the price of oil. But, the whole industry took this
hit and Chevron’s inventory turnover is still well over the industry average.
Average Days to Sell
To emphasize that Chevron is handling inventory efficiently, it is important to look at
average days to sell inventory. The industry average is about 77% higher than Chevron’s
average days to sell inventory. This means that Chevron sells its inventory quicker than
the industry on average, so they are more efficient when handling inventory. With the
downturn of oil prices, oil companies need to see where they can cut corners so their
profitability does not decrease. Chevron seems to be well positioned for the decrease in
oil prices due to their efficient transportation system. As previously mentioned, Chevron
invests greatly in their transportation systems. By being involved in the transportation
sector, Chevron can personally decrease its inventory by speeding up the transportation
process. Chevron owns interest in seven liquefied natural gas carriers in Australia, they
are the largest shareholder in the West African Gas Pipeline Company, and they own
50% interest in the Karachaganak-Atyrau Transportation System. These are just some of
the few examples of Chevron’s power over the transportation of their products. Chevron
is increasing transportation efficiency by conducting expansion projects, such as the one
in Kazakhstan where they are working to expand by 670,000 barrels per day of the
pipeline capacity (Chevron Supplement to the Annual Report). Improving the pipeline
transportation will enable Chevron to shorten the delivery process, which in turn will
Chevron 10
lower the need for stored inventory. Having low inventory levels has allowed Chevron to
have a handle of keeping the average days to sell inventory low.
Fixed Asset Turnover
Fixed Assets Turnover
Chevron Industry Average
2010 1.8144 2.1964
2011 1.9272 2.4062
2012 1.5747 2.2324
2013 1.2841 1.9712
2014 1.0499 1.7532
5-Year Average 1.5301 2.1119
Even though Chevron has a high inventory turnover, the fixed asset turnover was the first
indication that Chevron may be having issues managing their assets. The industry
average is about 38% higher than Chevron’s fixed asset turnover. This means that
Chevron’s fixed asset investments are not generating the sales that were expected from
the investments. It is important to look at this ratio for manufacturing industries because
it helps to measure whether of not a major purchase adds value to the shareholders. Just
some of the major projects that Chevron worked on in 2014 include progressed
construction in Angola, Australia, China, Kazakhstan, Russia, and the United States.
Chevron also commenced the production of the Chirag Oil Project in Azerbaijan, Jack/St.
Malo deep-water project and the Tubular Bells project in the United States, and the
Bibiyana Expansion Project in Bangladesh (Chevron Annual Report, 2014). Looking at
all of these investments, it is important to see whether or not they are effective and
increasing shareholder value. Putting billions of dollars in investments during a decrease
in oil price can be detrimental to Chevron in the short term because it is spending more,
while receiving lower sales. However, looking in the long run, the price of oil is expected
to increase over the next few years. If this occurs, then Chevron is positioned well in the
industry having these new projects and investments. Most of the projects that Chevron is
working on in 2014-2015 seem to be projects that are have been in progress for many
years. The value of these projects will not be determined until the project is completed
and the efficiency of the investment can be measured.
Total Asset Turnover
Total Assets Turnover
Chevron Industry Average
2010 1.0262 1.1397
2011 1.1280 1.2406
2012 0.9554 1.2195
2013 0.8341 1.1369
2014 0.7229 1.0707
5-Year Average 0.9333 1.1615
Chevron 11
The total asset turnover is also lower than the industry average, which should not be a
surprise. This ratio just provides another measurement to show that Chevron is not
investing in projects that are providing enough value to their shareholders. Another topic
of concern for major energy companies is the idea of renewable energies, especially
liquefied natural gas. Chevron is investing millions in crude oil projects that have a long
payback period. If the research of renewable energy continues in a positive linear
regression, then crude oil may not be a commodity anymore. Tying up money in these
massive fixed asset projects could be the downfall of Chevron. In the exploration sector,
Chevron did make 5 natural gas discoveries in Western Australia and Chevron continued
to work on the Chuandongbei natural gas project in China (Chevron Annual Report,
2014). Chevron realizes that to be successful in today’s society, it is important to consider
all types of energies. As of right now, it is too difficult to see whether or not Chevron’s
investments will pay off in the end. Chevron is truly depending on an increase in oil
price.
Average Collection Period
With all of these investments occurring, it is vital that Chevron is good about collecting
its credit and keeps its cash flowing. But, Chevron’s average collection period ratio is
actually about 14% higher than the industry average. This is a problem for Chevron
because it means that they have poor asset management, more specifically poor account
receivable management. There is not a huge difference between Chevron’s average
collection period and the industry average collection period, so it does not seem to be an
area of concern for Chevron.
Debt Management
Debt-to-Equity Ratio
Debt-to-Equity Ratio
Chevron Industry Average
2010 0.746 1.248
2011 0.714 1.222
2012 0.690 1.168
2013 0.687 1.091
2014 0.703 1.096
5-Year Average 0.708 1.165
Debt-to-Equity Ratio (D/E) is used to indicate how much debt a company is using to fund
its assets relative to the value of its shareholders’ equity. Between 2010 and 2014,
Chevron’s D/E has remained reasonably steady, but has also proven significantly lower
than industry average. This reflects Chevron’s reliance on shareholders’ equity as
opposed to incurring debt to fund its assets. While Chevron neglects to disclose why they
choose this method of financing, their relatively low debt utilization can likely be
explained by their believe that they do not need to expand at present and can primarily
Chevron 12
rely on shareholder’s equity, or that the corporation is simply looking to increase its debt
capacity and expand when market conditions are more favorable. From an investor’s
perspective, the former reason may not bode well, as risk from the shareholders’ side of
financing increases, while the latter could lead to a promising future.
Times-Interest Earned Ratio
Times-Interest Earned Ratio is used to measure how well a firm can meet its debt
obligations. Chevron only disclosed numbers for TIE for 2010-2012, which ultimately
proved inconclusive and unhelpful, as each ratio resulted in negative numbers and could
not aptly be compared to the industry as a whole. This can likely be explained by
Chevron’s aforementioned reliance on shareholder equity rather than debt in financing its
assets, which, again, could prove to either be detrimental or useful, depending on how
Chevron utilizes its high debt capacity in the future.
Debt Ratio
Debt ratio is used to measure the portion of a given firm’s assets are financed by debt,
and indicate the extent of its leverage (the higher the ratio, the more leverage the firm
has). The more leverage a company comprises, the more risk is involved in its financing;
however, leverage is often necessary for expansive growth and companies can often find
ways to sustainably utilize debt to its benefit. As it applies to Chevron, the corporation’s
debt ratios have averaged 0.4145 from 2010-2014. Given that the oil and gas industry
deals with products of immense inelasticity to most variables, Chevron could probably
handle more debt, and, in turn, risk, than it currently possesses. However, given that
Chevron is a publically traded company, it would appear that it primarily relies on
stakeholder financing in its operations. Likewise, given that Chevron is well established
and evidently sufficiently funded, it may choose to avoid utilizing debt simply because it
does not need to. Over the past five years, Chevron’s debt ratios have remained very
consistent. However, both its total liabilities and total assets have significantly increased
over this span, but both in accordance with its average debt ratio. Increases in both
categories can possibly be explained by the additional debt Chevron has incurred to fund
its revamped investment program and/or by the firm repurchasing $5B of its own
common stock—which it plans to restructure due to market conditions (Chevron 2014).
The former occurrence would reflect an increase in both total liabilities and total assets,
whereas the latter would simply cause an increase in total assets. Compared to its
competition, Chevron has among the lowest in the petroleum industry, with its average
debt ratio being 0.5286. It is difficult to assign these results to a particular cause, outside
of assuming that its competition is either attempting to expand at a faster rate than
Chevron and is willing to take on extra risk, or that they are not receiving the same
degree of stakeholder funding at present.
Debt Ratio 2
Debt Ratio 2 is used to measure to what degree the company funds its assets. Between
2010 and 2014, Chevron’s debt ratios 2 have fluctuated around its five-year average of
Chevron 13
0.0658, and have consistently fallen far short of the industry’s 0.1698 average. Chevron’s
average has a similar explanation to it as its debt ratio average—resulting from
considerably low debt, in general, relative to its assets. As to why it is so far below the
industry average can likely be explained by Chevron’s minimal long-term debt
obligations, which can likely be simply explained by the company’s apparent reliance on
short-term debt. Summarily, this ratio tells a similar story as its debt ratios, except
indicating that most of Chevron’s debt obligations are taken out in the short term, as
opposed to the long.
Liquidity
Current Ratio
After realizing that Chevron may be having asset management issues, especially fixed
asset and total asset turnover ratio, the current ratio will provide more information about
Chevron’s assets. The current ratio indicates the firm’s ability to repay its short-term
liabilities with short-term assets. The fact that Chevron’s current ratio average for the past
5 years is over 1.5 tells us that they have more current assets than current liabilities.
Compared to the industry, Chevron’s current ratio is well above the industry average.
Companies want their current ratio to be high because it demonstrates a company’s
ability to pay its current liabilities with its current assets. But, after seeing that Chevron
may be having asset management issues, this means that Chevron has to be handling their
liabilities well to keep their current ratio above the industry average. However, a
significant decrease in the ratio from previous years might mean that either more short-
term liabilities were incurred, or that short-term assets have been terminated (Chevron
Annual Report, 2014). A decrease in the current ratio can be explained by Chevron’s
underperforming cash provided by operating activities, which is down to $31.5 billion in
2014 compared to $35 billion in 2913. This is due to the toll that falling oil prices have
taken on the upstream segment of Chevron’s business. Also, Chevron spent $5 billion in
cash in 2014 repurchasing common stock ad $7.9 billion in dividends; $400 million more
than in 2012. Chevron saw a rise in short-term debt from $374 million in 2013 to $3.8
billion in 2014 at year-end (Chevron Annual Report, 2014). This is due mostly to an
increase in issuing of commercial paper in 2014 as well as an increase in the interest rates
of the commercial paper (Chevron Annual Report, 2014). The current ratio is adversely
affected in all periods by the fact that Chevron’s inventories are valued on a last-in, first-
out basis, as previously mentioned. At the end of 2014, the book value of inventory was
lower than replacement costs by $8.1 billion.
Acid-Test Ratio
To get a closer look at the liquidity of Chevron, the acid-test ratio will give us more
insight on how well Chevron is at meeting their financial obligations. The acid-test ratio
shows whether or not a company has a sufficient amount of short-term assets to cover its
current liabilities. The acid-test ratio does not take inventory into consideration. Before
even looking at the data, we expected Chevron’s acid-test ratio to be higher than the
Chevron 14
industry average because they have a higher current ratio. Generally speaking, an acid-
test ratio of one or greater is considered favorable. As is applies to Chevron, the
corporation has upheld a favorable acid-test ratio between 2010 and 2014, averaging a
ratio of 1.3621. However, over the past 5 years, Chevron’s ratios have had a slight
downturn, growing in inventory and current liabilities, while remaining relatively
consistent in its current assets volume. Chevron’s fluctuation in current assets could be
explained by several different instances, such as the corporation dispersing roughly $7.9
billion in dividends in 2014, during which quarterly common stock dividends were
increased by 7% and prices per common share increased to $1.07 (Chevron Annual
Report, 2014). Likewise, consistent inventory increases may be assigned to Chevron’s
last in, first out method of accounting, which can cause buildup from a numerical
standpoint (Chevron Annual Report, 2014). As for Chevron’s fluctuation in current
liabilities, aside from the ebbs and flows in volume that occurs from paying off debt in
different amounts at different times, Chevron began taking on more debt in 2012 in order
to finance its ongoing investment program (Chevron Annual Report, 2014). Compared to
competitors in the petroleum industry, Chevron’s acid-test ratios have proven superior
between 2010-2014, topping the industry average of 0.9149. Exxon and Shell, two
corporations that exceed Chevron in size, for instance, have both comprised favorable
current asset to inventory margins, but have accrued nearly double the current liabilities
in proportion.
Miscellaneous
Dividends per Share
Dividends per Share is used to measure how much dividends an investor will receive per
share they purchase. Between 2010 and 2014, Chevron’s dividends per share were the
highest of its competitors and nearly tripled that of the industry average. As mentioned in
Chevron’s 2014 Annual Report, the corporation’s emphasis is on maximizing shareholder
wealth, and paying out relatively hefty dividends is likely a measure of keeping
stockholders’ happy (as Chevron relies so heavily on their funding).
Earnings per Share
Earnings per Share (EPS) is used to measure how much each share purchased contributes
to the company’s earnings. Over the five years we evaluated, Chevron’s earnings per
share steadily exceeded the industry average. This was likely caused by Chevron buying
back so much of its own stock over this span, while maintaining a relatively steady net
income. In other words, these seemingly eye-pleasing numbers are less of a result of large
earnings, but instead less common shares proportionately than the rest of the industry.
Price-to-Earnings Ratio
Price-to-Earnings Ratio is used to measure how many dollars per share results in the
company’s earnings. Between 2010 and 2014, Chevron’s price per share proved to be
Chevron 15
higher than most, but was offset by higher EPS, which resulted in an average favorable to
the rest of the industry. As a result, it seems that Chevron’s stock justifiably costs more
than a majority of its competitors’, as it yields, on average, higher returns to the firm.
Consensus
After examining Chevron’s financial figures, we find that the firm’s profitability, asset
management, and debt management ratios are the most crucial in our recommendation to
buy or sell the corporation’s stock. We believe that Chevron’s profitability ratios are an
overall positive, as they have been exceptional compared to the rest of the industry, and
has essentially been dictated by market conditions. The firm’s return on equity, return on
assets, and net profit margin, alike, have remained well above industry average over the
past five years—indicating that Chevron has effectively utilized its equity and asset
investments to create revenue, as well as converting its revenues into net income. While
all three of these components have waned over the past two years (in direct relationship
with its net income), we believe that this can be explained by diminished market gas
prices, as well as considerable investment in startups, equipment, and research and
development efforts. We find that these temporary obstacles will be resolved soon, and
that an accordingly increased net income indicates an even more profitable future for
Chevron.
Chevron’s asset management ratios, on the other hand, prove to be a red flag for
investors. While the firm’s inventory turnover and average days to sell are superior to the
rest of the industry, which indicates strong sales, efficient manufacturing, and effective
inventory management, Chevron’s fixed asset turnover, total asset turnover, and average
collection period are inferior by comparison. By the numbers, it appears that Chevron’s
investments in both types of assets have not been as conducive of earnings as they had
anticipated, and despite strong sales performance, transactions paid for on credit are not
collected as promptly as the rest of the industry. Ultimately, Chevron’s asset management
does not bode well for investors and, if not corrected, will continue to take away from
shareholder wealth maximization.
We find that Chevron’s debt management points to a variety of interesting opportunities,
and serves as a tiebreaker in our recommendation to buy or sell the firm’s stock. All
ratios under this category point to Chevron’s reliance on shareholders’ equity, rather than
debt utilization—made most clear by the firm’s 39%-higher-than-industry average debt-
to-equity ratio. Chevron’s reliance on shareholder equity could be perceived as a
negative, as it implies more financial risk for the investor (rather than for the firm, as
taking on debt would entail), but it can also be viewed as increased debt capacity to be
capitalized on in the future. Based on our findings regarding Chevron’s future plans to
use its funding, Chevron appears to intend to expand to regions it does not have a strong
presence in to date (such as Asia), and shift its efforts towards the ever popular renewable
energy movement, and is simply waiting to utilize its debt capacity when market
conditions become favorable again and strong income can sustain such significant growth
(Chevron Annual Report 2014). In the end, we find that Chevron’s shareholder equity
Chevron 16
reliance is an exciting opportunity for expansion, increased market share, and strong
earnings as a result of increased debt capacity, and points to promising future for
Chevron and investors, alike.
While Chevron’s asset management is weaker than its competitors in the petroleum
industry, we believe, as a team, that this drawback is compensated by the firm’s strong
profitability and promising debt capacity utilization opportunities. Ultimately, purely
based on our financial analysis of Chevron, we find that the positives adequately
outweigh the negatives, and we recommend investors buy the corporation’s stock.
Chevron 17
STRATEGIC BUSINESSANALYSIS
Evaluation of Immediate Environment
Chevron competes across a wide variety of market segments. Chevron has an upstream
business, which includes the exploration and extraction of natural resources. Chevron
also has a downstream business, which includes refining and manufacturing, chemicals,
products, and transportation. The downstream industry accounts for around 81.61% of
Chevron’s revenue, however the upstream business accounts for 88 % of its net income
(Chevron 10k, 2014).
Since energy from natural resources is consumed everyday by people across many
different income and geographic levels, Chevron is fully integrated in refining and selling
a commodity good. Oil price is driven by supply and demand, and is set in a futures
market. An oil futures contract is a legally binding agreement that gives one the right to
purchase oil by the barrel at a predefined price on a predefined date in the future. Oil is
usually traded on the New York Mercantile Exchange (NYME) in 1000-barrel
increments (Investopedia, 2014).
Since oil is traded in a futures market, the price of oil at the pump is based largely on
retail locations relationships with their suppliers. There are three primary supply
arrangements that influence a retailers operation.
Major oil owned and operated -These retail locations receive the oil directly from the
corporation’s refinery assets and their profit or loss is integrated in that of the
corporation. Chevron owns and operates less than 10% of the retail locations in their
name (Chevron 10k, 2014).
Branded Independent Retailer - Approximately 52% of retail gasoline facilities are
operated by independent business owners who sign a supply contract and sell gasoline
under a brand owned or controlled by a refinery company (Chevron, 2014). Branded
retailers pay a surcharge per gallon for using refiner’s brand, benefiting from their
marketing and more secure supply. When the supplies are constrained, these retailers are
given a higher level of priority for accessing product, although access to supplies may be
restricted.
Unbranded Independent retailer - 43% of retail gasoline facilities are operated by
independent business owners who do not sell gasoline under a brand owned or are
controlled by a refining company. These retailers purchase gasoline off the unbranded
wholesale market, which is comprised of gallons not dedicated to fulfill a refiner's
contracts. These retailers do not pay a marketing surcharge like their branded competitors
do; consequently, unbranded gasoline is typically sold at all levels of trade for a lower
price than branded gasoline. However, when supplies are constrained, these retailers have
the lowest level of priority to access gasoline, often incur the largest wholesale price
increases and may be completely denied access to the product (NACS, 2008).
Chevron 18
The income of Chevron and other large oil companies depend largely on the price of the
barrel of crude oil. The price of crude oil has fallen significantly since mid-year 2014,
over $150 per barrel to around $40 per barrel. This reflects robust non-OPEC supply
growth led by expanding unconventional production in the United States, weakening
demand in the emerging markets, and the decision by OPEC in fourth quarter 2014 to
maintain its current production ceiling. The downturn in the price of crude oil has
impacted, and depending on the duration, will continue to significantly impact Chevrons
results of operations and cash flows. It is important to note however, that Chevron and
other major oil companies are predicting that oil will increase in price, due to
expectations in increasing demand, and slow in supply growth. Oil demand has seen an
increase globally in demand from 92.4 millions of barrels a day in 2014 to 93.6 in 2015
(Statista, 2015). From these statistics there does seem to be accuracy in oil companies
claims that there is growth in the demand for the oil market. However, Dutch disease,
which will be examined more in the macro-environmental section, may cause the supply
of oil globally to stay higher than Chevron’s expectations, keeping the price of a barrel
low despite future expectations of increased demand.
Chevron and its competitors are usually constrained to similar limitations that affect their
profitability. Most of the major oil companies are fully integrated which creates an array
of competition areas from upstream to downstream. Production levels of OPEC have a
huge impact on the level of supply in the market place influencing the price. Upstream
business is affected heavily on how well Chevron and their competitors can acquire
natural gas, oil leases and other properties for the equipment and labor required to
develop and operate those properties. While downstream business, affected by the
upstream, competes in transportation, entities, sale and acquisitions of various goods or
services in a national and international market (Chevron 10k, 2014).
Chevron attempts to differentiate itself from its competitors with marketing claims that its
gasoline is superior. “Make no mistake; all gasoline is not the same. By enjoying the
benefits of a cleaner engine with lower emissions and higher performance, cars love
Chevron with Techron, and so should you” (Chevron, 2014). The chemicals that Chevron
adds to its gasoline are meant to add value to its product. This signals to consumers that
Chevron’s gasoline is of a higher quality, and as a result, it strengthens the Chevron
brand. The 2014 Harris Poll EquiTrend, which takes into account familiarity, quality,
purchase consideration, a brand’s ability to generate conversation online, and social
media ranked Chevron as the 10th gasoline brand in the United States. (Figure 1.1) Brand
strength is valuable, as Georgetown University studies have shown that the stronger the
brand equity generally the better the stock performance and the lower the stock volatility
(Duffy, 2014).
Chevron 19
Rank Brand
1 Costco
2 Murphy
3 Shell
4 Speedway
5 BJ’s
6 ExxonMobil
7 Sam’s Club
8 Hess
9 Sunoco
10 Chevron
Figure 1.1
It is important to note that public opinion, and lawsuits affect oil companies significantly.
Chevron is defending itself in a lawsuit claiming that Chevron is responsible for
environmental and social harms in the Amazon region of Ecuador (This will be discussed
further in the macro environmental section). Though these charges look unlikely to ever
be enforced, public opinion of Chevron can be hurt by these allegations, causing certain
consumers to stop purchasing gasoline under their brand name, ultimately hurting the
company and those affiliated.
Chevron 20
FIGURE BASED ON FORTUNE 500 OIL PRODUCTION REVENUE 2014
The market share of oil companies is based on total sales revenue for the industry at $5.7
trillion (Fortune 500, 2014). It is important to note that government owned corporations
that compete in the market hold a majority of the market share. Although the companies
that are presented here have small percentage of global market share, they make up a
significant amount of market share among corporations.
Chevron’s top five competitors, are Exxon, Shell, BP, Valero, and Conoco. (Bloomberg)
Though, because Valero is not a fully integrated company who competes in the upstream
business, it will be excluded in the briefs.
Exxon
Exxon had sales revenue of over $394 billion, and a global market share of 6.9% in 2014.
(Figure 1.2) Exxon has a market cap of $333.2 billion, the fourth largest in the world.
(Yahoo Finance) Exxon has a massive and efficient upstream business that accounts for
80 cents out of every dollar that the company earns. The competitive advantage that
Exxon holds, is the capital and technology to be able to extract crude oil in places other
companies do not have the capability. Exxon holds 32 refineries that have relatively
Chevron 21
helped its net income, with the decline of oil prices. Exxon is different from others in the
industry, as it does not operate in the midstream business. Exxon finds it more
economical to let third parties handle the business of operating the pipelines,
transportation, etc, (McFarlane, 2014).
Shell
Shell had $421 billion in sales revenue in 2014 and a market share of 7.31%, highest of
the discussed competitors. Shell is different from its competition because it holds the
most retail locations at over 44,000 (Shell 2014 Annual Report). The high number of
retail stores Shell holds worldwide help its brand, as Shell rank fourth on the 2014 Harris
Poll EquiTrend (Figure 1.1) However, the high number of retail locations has also caused
Shell to have $353 billion in total assets for 2014, more than Chevron by 25%
(Bloomberg, 2014). The large number of retail locations comes with a larger amount of
risk and liability. Shell, like Chevron tries to market their gasoline as one of higher
quality. On the company website, Shell has pages where the consumer can read how
Shell nitrogen enriched gasoline, “Actively cleans performance-robbing gunk from intake
valves and fuel injectors.” They also claim “No other gasoline is better”, marketing that
their gasoline adds value for their customers.
ConocoPhillips
ConocoPhillips is a fully integrated global company; it is the third largest oil company in
the United States. ConocoPhillips strongly believes in its brand. They claim that their
accountability and performance are what separates them (Conoco Annual Report, 2014).
However, it is important to note that Conoco sales revenue has decreased by 77% since
2008, causing them to have lost significant market share. This can most likely be
attributed to the fact that ConocoPhillips deals almost exclusively in upstream, where
profits have been affected the most by lower oil prices (Nasr, 2015). If the price of crude
Chevron 22
barrels continues to stay low, ConocoPhillips will continue to report loses in future
quarters.
British Petroleum (BP)
BP had sales revenue of $353 billion in 2014, and a market share of 6.28%. BP is like the
discussed competition, in the sense that it has been seeing lower profit margins due to
low oil prices. However, BP is still trying to recover from its responsibility in one of the
world’s worst oil spills in 2010, where BP agreed to pay up to $18.7 billion in
compensation damages. This spill has severely hurt the financial health of the company
(Gilbert and Kent, 2014). This can be seen in the 2014 income statement, where BP
reported earnings of $4 billion. This is lower than Chevron’s income by 80% for 2014
(Bloomberg, 2014). BP, like discussed competitors, claims that its gasoline is superior.
“Gasoline with invigorate” (BP, 2014).
Chevron:
Chevron has low sales revenue in comparison to discussed competitors, $200
billion (Bloomberg, 2014). However, in 2014 Chevron reported net income of $19
billion. Only Exxon had a higher net income, $32 billion (Bloomberg, 2014). Chevron
also has a relatively high market share, 3.37%. (Figure 1.2) Chevron holds two more
brands, Texaco and Caltex. These increase the company’s relevance and customer’s
options when at the pump. Thanks to personal prepaid cards and business credit cards
that Chevron offers, customers can enjoy more convenience and options to buy snacks,
Chevron 23
fuel and services at the at any Chevron, Texaco, and Caltex gas station. These cards and
brands add value to Chevron by offering customer convenience (Chevron, 2014).
Perceptual Map
The variables for the perceptual map are market share (Y-axis), and net income (x-axis)
based on 2014 data (Figure 1.3). This map shows us that though Chevron holds median
market share, it is has high net income. Despite their net income falling by 28% from
2013, Chevron reported higher net income than all discussed competitors, besides Exxon.
This drop in net income is due to oil prices per barrel falling from over $136 in 2008 to
$40 in 2014 (Forbes, 2014). This map suggests that Chevron has been able to run more
efficiently than its competitors. Chevron has room to increase its market share through
the production of more barrels of oil and equivalents. Chevron currently produces 2.6
million barrels of oil and equivalents per day, while Exxon currently produces 5.3 million
of barrels of oil and equivalents per day (Forbes, 2014). Chevron is attempting to increase
their market share by investing $3 billion in exploration activities to drill more than 50
exploration and appraisal wells worldwide (Chevron Annual Report, 2014).
Figure 1.3
Chevron 24
BCG Matrix
The BCG Matrix is used to evaluate the firm’s products in terms of market share and
growth potential. U.S. shale natural gas extraction and refining is a star for Chevron.
According to leading market research firm MarketsandMarkets, production volume of
shale gas is expected to grow at a compounded annual growth rate of 5.4% until
2021(MarketsandMarkets, 2014) The Gorgon project is in the final stages of
commissioning to allow start up of train 1. The project has the capacity to supply 300
terajoules of gas per day to Western Australia. It is globally one of the largest natural gas
projects ever undertaken, where Chevron is a subsidiary of 47% (Chevron, 2014).
Geothermal is another star for Chevron, as the market has continued to grow at a steady
compounded rate of 4% to 5% (Matek, 2014). Chevron’s geothermal interest in Indonesia
and the Philippines produce facilities that have an operating capacity of 1,339 mega-
watts, capable of providing energy for millions of people in these countries
(Chevron.com).
Chevron’s cash cows include its oil lubricants/cleaners, where the top four companies
Exxon, Shell, BP, and Chevron hold over 42% market share (GrandViewResearch).
However, it is important to note that lubricant growth depends heavily on the economy,
following the market with a relatively close beta. Lubricants have a high barrier to entry
as brand locality plays a large part (Ibisworld.com). Crude oil is also a cash cow for
Chevron. Chevron holds a high market share at 3.37% (Figure 1.2) and growth in the
market is projected to be low due to macro environmental factors that will be discussed
later in the analysis.
Another cash cow for Chevron includes their joint venture, Chevron Phillips Chemical.
The company is half owned by Chevron and half owned by Phillips 66, and is a top
supplier of products used to make many convenient items, including HDPE for pressure
pipe, Styrentics for packaging and electric parts, Aromatics for solvents, Olefins for
plastics and fibers and lubricants. The chemical industry is expected to have high, but
slowing growth with a compounded annual growth rate of over 4% for 2015-2020.
Chevron Phillips Chemical contributed over $2 billion in income for Chevron in 2014
(Chevron Annual Report, 2014).
Chevron 25
Chevron Power and Energy Management (Gas-Fired Cogeneration Facilities) are
question marks for Chevron. The Gas-Fired Cogeneration Facilities produce energy
through six plants, which this sub company of Chevron owns and operates in California
(Chevron, 2014)
Chevron Technology Ventures is a dog for Chevron. It is one of the three technology
companies that Chevron owns to support its worldwide operations. It identifies, develops,
and sponsors emerging energy technologies and helps integrate them into Chevron’s core
business. In 2014, Chevron spent $300 million in this sub company (Chevron, 2014)
However, this amount will probably be reduced significantly in the upcoming year due to
Chevron’s expectation to reduce spending.
Macro-environmental Forces Impacting the Firm
Some of the major macro-environmental forces impacting Chevron include oil price
volatility, environmental regulations, accidents, and taxes.
Oil price volatility impacts all firms involved in the oil business. Oil price is dictated by
supply and demand. The U.S. production of oil has nearly doubled in the last six years.
Foreign oil producers who used to solely import their oil into the U.S. are now trying to
compete in the Asian markets. Part of their competing strategy is to drop their prices. On
the demand side, the underperforming economies of Europe and some developing
Chevron 26
countries have reduced their consumption for oil. Car efficiency has also played a role in
reducing the demand for oil (Krauss, 2015). Oil companies suffer from the drop in oil
prices because they are forced to sell oil and oil refined products at a price that is below
the cost of production/extraction. Royal Dutch Shell has announced cuts to their payrolls
to save cash and many smaller oil and gas producers are cutting dividends and selling
assets to be able to continue operations (Krauss, 2015). “Most of Chevron’s earnings
depend on the profitability of its upstream business segment. The biggest factor affecting
the results of operations for the upstream segment is the price of crude oil. The downturn
in the price of crude oil has impacted, and, depending upon its duration, will continue to
significantly impact the company’s results of operations, cash flows, capital and
exploratory investment program and production outlook. If lower prices persist for an
extended period of time, the company’s response could include further reductions in
operating expenses, capital, exploratory expenditures, and additional asset sales”
(Chevron Annual Report, 2014). Chevron purchased $5.0 billion of its common stock in
2014. Due to the current market conditions, the company is suspending the share
repurchase program for 2015 (Chevron Annual Report, 2014).
Chevron 2014 Annual Report, p. 11
The West Texas Intermediate (WTI) price of crude oil averaged $98 per barrel in 2013
and $93 in 2014. At November 18th, 2015, the price was at $41 (CNBC, 2014)
Oil prices are not likely to recover any time soon because oil production does not seem to
decline fast enough in the United States. The recovering economies in some countries
may bring demand and oil prices up within the next year or two (Krauss, 2014)
A peculiar type of macro-environmental factor that affects Chevron indirectly is Dutch
Disease. Dutch Disease occurs when countries with strong currencies purchase oil that is
exported from countries whose economies rely heavily on oil production, but have a
weaker currency. When countries with stronger currencies, such as the United States, buy
the crude oil exported from countries with weaker currencies, it floods the weaker
currency country with dollars. This inflow of dollars (stronger currency) causes the local
currency to be worth more, along with the price of the goods that these countries produce.
Then, these goods reach prices that are not competitive in foreign markets, which causes
the weaker currency countries to either rely more heavily on the production of oil, or to
come up with innovative policies to diversify their economy and make up for lost
Chevron 27
income. If they choose to rely more heavily on oil production, then the world supply of
oil goes up, and consequently the price of oil goes down. This is known as the Dutch
Disease (Belinski, 2015).
Environmental regulation and litigation regarding environmental issues is a macro-
environmental factor that affects all oil companies. Chevrons as well as many of its top
competitors are consolidated in the U.S. However, Chevron differs because it also has a
big downstream segment. This segment consists of 13 refineries and five major chemical
manufacturing facilities throughout the world (Chevron Supplement to Annual Report,
2014). These refineries are held to increasing environmental standards, which add costs
to the manufacturing process of fuels and are hard to predict when they will increase.
“Virtually all aspects of the business in which the company engages are subject to various
international, federal, state, and local environmental, health and safety laws, regulations
and market-based programs. These regulatory requirements continue to increase in both
number and complexity over time and govern not only the manner in which the company
conducts its operations, but also the products it sells” (Chevron 2014 Annual Report,
2014). A recent example is MTBE. MTBE, or methyl tertiary butyl, is a gasoline additive
that was widely used by Chevron and many of its competitors to raise octanage. MTBE is
harmless but it can render large reservoirs of water undrinkable due to its unpleasant
taste, if it leaks from gasoline deposit tanks or refineries (Chevron, 2014). MTBE was
banned in California and New York, especially hurting Chevron since it owns most of its
U.S. refineries in California. Chevron along with other companies that used MTBE in
California have pending litigation, making it hard to assess how it is going to turn out
(Chevron Annual Report, 2014). A good portion of Chevron’s resources is directed
towards litigation over alleged accidents. $150 million went towards settling an oil spill
off the coast of Brazil, for which the Brazilian government asked $22 billion initially.
Nigeria wants $3 billion for a gas well operated by Chevron that blew up and killed two
workers in 2012. In Ecuador, Chevron has decades of long pending litigation for oil spill
damages to the Amazonian Rain Forest. A judge levied an $18 billion judgment against
Chevron in Ecuador in 2011. This litigation is still pending due to the many proofs of
evidence brought forth in court against the judges by Chevron due to blatant acts of
corruption and bribery from the plaintiff’s part (Helman, 2015). It seems like accidents
like the ones mentioned should not count as macro environmental factors affecting the
firm. However, the repercussions of those accidents are more often than not determined
by the magnitude of the accident, but by the local political situation of where they
happened as well as the instability of legal institutions. These political situations that
determine the outcome of litigation are macro environmental factors that very tangibly
affect Chevron as a firm. “When you run one of the world’s biggest oil companies, stuff
happens. Billions of dollars worth of stuff” –Christopher Helman (Helman, 2015).
Interestingly enough, Chevron treats these accidents as a macro environmental force.
This is an excerpt from the Environmental Matters section of the 2014 annual report:
“It is not possible to predict with certainty the amount of additional investments in new or
existing facilities or amounts of incremental operating costs to be incurred in the future
to: prevent, control, reduce, or eliminate releases of hazardous materials into the
environment; comply with existing and new environmental laws or regulations; or
Chevron 28
remediate and restore areas damaged by prior releases of hazardous materials” (Chevron
Annual Report, 2014)
Total worldwide environmental capital expenditures for 2015 are expected to be at $0.9
billion, which are in addition to already ongoing costs of complying with current
environmental regulations (Chevron Annual Report, 2014).
Pending Litigation for Chevron
Taxes are macro environmental forces that affect either adversely or positively all
oil firms, though it is usually adverse. However, Chevron was affected positively on taxes
that do not have to do with income due to a decrease in duty expense in South Africa
along with lower consumer excise taxes in Thailand (Chevron Annual Report, 2014).
Marketing Mix
Due to Chevron’s diverse line of products and services, we decided to focus on gasoline
in this marketing mix because it is the most sold product in its downstream segment.
Also, it is the product that most people are familiar with. The most sold product overall is
actually crude oil condensate and it is produced in its upstream segment. This relates to
our perceptual map since the map depicts net income, which is directly affected by
revenue.
Product: Chevron makes most of its net income from the upstream business. However,
the ultimate consumer does not want crude oil, he/she wants refined a refined product.
Chevron’s most sold downstream product is gasoline. It 2014 alone, Chevron sold $41.3
billion worth of gasoline. This accounts for 44% of all refined product sales and 22% of
Chevron’s operating revenue. (Chevron 10k) Consumers use gasoline for a wide variety
of products that range from cars, boats, and some airplanes in the transportation sector, to
power generators, lawn mowers, leaf blowers, etc. in different sectors throughout the
world. Today’s world and economies heavily depend on fossil fuels such as gasoline to
meet its energy needs.
Ecuador Nigeria California
Chevron 29
Price: The price of gasoline is determined by the price of crude oil, as well as refining,
marketing, distribution, and tax expenses. About 47% of gasoline prices are determined
by the price of crude oil. About 20% of the price of gasoline is determined by taxes, 19%
is due to marketing and distribution costs, and the remaining portion is due to refining
costs. (U.S. Energy Information Administration)
Due to the large dependence upon the price of crude oil, the price of gasoline is largely
affected by factors outside of its manufacturer’s hands.
Place: Chevron makes most of its gasoline available through 19,550 retail stations under
the brands of Texaco, Caltex, and Chevron. Chevron franchises the majority of these
locations and makes money of a commission from the volume of gasoline sold through
each location. These retail stations are spread throughout the world in the following
countries: Canada, Hong Kong, Malaysia, New Zealand, Phillipines, Singapore, South
Africa, Thailand, and the U.S. Chevron also distributes gasoline through jet fuel service
companies in 35 airports across the world. (Chevron.com) Chevron does all of its
distribution through its transportation segment. This reveals how fully integrated the
company is.
Promotion: Chevron does not engage in promotional campaigns that advertise its
products individually. This is due to the price inelastic nature of fuels. Lubricants are the
exception to this. The type of promotion that Chevron engages in is company wide
advertisements, which promote a good image of the company, typically portraying
something good that they do for the environment, or the number of jobs that they create.
These types of promotions are intended to impress a good image of the company upon its
potential consumers and create further sales. Image can play a huge role in the outcome
Chevron 30
of the business. BP, for example, lost a lot of customers as a result of the oil spill they
had in 2010. The same happened to Exxon after the oil spill that they had in Alaska.
Isolated Sales Forecasting
We chose to use the revenue from upstream and downstream activities because they are
the main revenue sources for Chevron. Revenue from upstream represents the revenue
made from the exploration and extraction of crude petroleum and natural gas. Revenue
from downstream represents the revenue made from the refining and chemical operations
that transform the petroleum and natural gas into various products. Other sources of
revenue include areas of technology power management operations, but these amounted
to only 0.11% of the total revenue for Chevron in 2014. Since the contribution of these
other sources of revenue is relatively small, they are not discussed in the analysis.
U.S. GDP is the macro environmental variable. GDP stands for Gross Domestic Product.
We chose GDP because Chevron is a U.S. based company that holds most of its
downstream operations in the U.S. We also chose GDP because of the increased
production of U.S. oil over the last years has played a critical role in the drop of oil prices
(Chevron Annual Report, 2014).
197,565
243,841
230,208 219,795
200,239
211,807
y = -4E-06x + 275396
R² = 0.0521
0
50,000
100,000
150,000
200,000
250,000
300,000
14,000,000,000 15,000,000,000 16,000,000,000 17,000,000,000 18,000,000,000 19,000,000,000
Revenue
GDP
Linear Regression
Chevron 31
The values displayed for the year 2015 are forecasted values obtained through the
forecasting function of excel. The forecasted GDP was obtained based on the U.S. yearly
trend from the past five years. Since GDP is the independent variable, the forecast for the
revenue was made based on the forecasted value of GDP for 2015. The next step was to
do a scatterplot using the known data for GDP and revenue plus the newly forecasted
one. Again we used GDP as the independent variable, and revenue as the dependent
variable. After that we added a trend line and displayed the R^2 value, as well as the
formula of the line
We found that the relationship between GDP and revenue is not clear-cut. GDP has been
steadily increasing over the past 5 years, whereas revenue from Chevron’s main
operating activities has fluctuated without a clear sense of direction. Our analysis goes as
follows: Increased GDP reflects the increased production of U.S. oil, which has nearly
doubled over the past 12 years. This increased supply coming from the U.S. has been
attributed as part of the reason for the recent drop in world prices. (Krauss, 2015)
Chevron makes most of its income from the upstream segment. Low oil prices forces
Chevron to sell the crude it extracts at a price that is below operational costs which
causes it to lose money. However, on the downstream side of things, cheap oil is not so
bad. It allows Chevron’s downstream segment to acquire crude at a lower price and refine
it into gasoline and other products at a lower cost. This seemingly inversely proportional
effect that GDP seems to have on upstream and downstream is what makes the sales
forecast hard to read. What we know is that until oil prices come up again, Chevron will
more than likely continue to struggle to make ends meet, given the heavier role that the
upstream segment plays in its operations. This struggle to make ends meet has also
caused Chevron to cut back on payrolls and close off some assets. The closing of these
assets also accounts for a decrease in revenue given the decrease in production that it
causes.
US GDP* Revenue From Upstream & Downstream. *
2010 14,964,372,000 197,565
2011 15,517,926,000 243,841
2012 16,163,158,000 230,208
2013 16,768,053,000 219,795
2014 17,419,000,000 200,239
2015 18,014,316,700 211,807
*In millions (World Bank, GDP)
Chevron 32
MANAGERIAL ACCOUNTING ANALYSIS
Analysis of CostBehavior
Chevron is one of the worlds largest integrated energy companies, and is known around
the world though its three different brands, Chevron, Texaco, Caltex. Chevron’s
American products fall under the Chevron and Texaco brands, while the international
products are mostly available through Caltex, except for Texaco in Europe.
Chevron, Texaco, and Caltex all use various direct materials in the production of the
petroleum products it produces. The main products these brands carry are gasoline, jet
fuels, gas oils, lubricants, and residual fuel oils. One of the main materials that each of
these products contain is crude oil, which chevron produces through its upstream
segment. Most of all of Chevron’s retail fuels contain Techron, which is a gasoline
additive and has been developed by Chevron to help engine parts stay cleaner in order to
produce lower engine emissions. Another direct material that is used in the production of
the lubricant products is the packaging. Nearly all of the lubricant products are packaged
in a thick plastic bottle.
Chevron carries significant overhead expenses from both its downstream and upstream
business segments. Chevron’s overhead from its downstream business is largely due to
the manufacturing of the fuels and other products sold. The manufacturing of the
products is done through various refineries around the world. Chevron incurs substantial
overhead expenses in order to keep these refiners operating. The upstream segment of
exploration and production of the crude oil and natural gas also plays a huge role in
Chevron’s overall overhead costs. Chevron is producing millions of barrels of oil
reserves each day due to its production operations across the world. The company is
invested in many different projects both on and off shore in order to keep up with its oil
and gas production. These projects require Chevron to operate thousands of plants and
wells across the world, all which contribute to the company’s overhead expenses.
Due to Chevrons reliance on massive plants and refiners in the production of its products
and services, most of the company’s costs are fixed. Chevron acquires an assortment of
fixed expenses in order to keep all of its production operations performing efficiently, as
well as maintaining the complex machinery. Chevron’s fixed costs are made up of,
regulatory compliance costs, which will not vary much with the level of production.
Other fixed costs are the equipment and land that Chevron has bough, because these costs
will stay constant no matter how much oil is produced. And lastly, Chevron acquires
fixed costs because of its workers who have long-term contracts, such as company
officers and consulting geologists (Chevron, 2014). Chevron also supplies itself with the
crude oil needed in the production of most of their downstream products, which allows
the company to cut out some variable costs from outside supplies.
Since most of Chevron costs are fixed, it creates a more difficult and complex decision-
making process when dealing with production problems. If Chevron had more variable
Chevron 33
costs it would allow the company to cut operating costs more easily. It is easier for a
company to remove a variable cost from a process without completely altering it, but this
is much more difficult to do with fixed costs. If Chevron wanted to lower the companies
operating costs in its upstream segment of exploration the company would most likely
have to shut down a plant. Chevron would have to do this because the plants operation is
based mostly on fixed costs, so the only way to remove these costs would be by shutting
down the plant completely.
ProcessAnalysis
The costing system that Chevron most likely uses is the process costing system. The
process costing system is best used in production systems that mass-produce identical
products over a long period of time. In the process costing system the product costs are
divided evenly between all of the products produced during that time period (Davis,
2015). This type of costing system fits best with Chevron because almost all of the
products that Chevron produces are mass-produced in a uniform manner. When Chevron
is producing Delo Engine Oils, each bottle on that production line is going to have the
same amount of the same product in it. This is the same for any of the other products that
Chevron produces; each bottle of that product is going to use the same amount of direct
labor and direct materials in the production of it. Using the process costing system it
would be much easier for Chevron to analyze how much it costs to produce one unit of
engine oil, than it would be using a job costing system.
Chevrons supply chain is much different than most companies; this is because Chevron is
its own supply chain. Chevron controls and operates both the upstream and the
downstream business aspects of the company; this means Chevron is the supplier, the
manufacturer and also the distributor of the company’s supply chain.
Since Chevron controls every part of its supply chain, it allows them to have more control
over product costs. When a company is dealing with an outsourced supply chain they are
not in control of the prices that they supply demands. If there is a high demand for a
certain material that is necessary in the production of a product the supplier has the
ability to mark up the price that material. The company that is producing the product then
has the make the decision to pay the marked up price of the material or the company may
try and find another supplier at a cheaper price. No matter what option the company
choices, they still had to go through this problem because of their outsourced supply
chain. Chevron does not have to worry about this type of problem because they are their
own supplier of the direct materials used in the production of the company’s products.
Since they do not have to worry about any outside suppliers Chevron is able to price its
products based solely on things that are in the company’s control.
Chevron 34
BalancedScorecard
Strategy Map
Increase profit
Financial
Invest in Workplace Operational Excellence
Internal
Execute with Excellence Decrease Costs
Customer
Pricing Customer Satisfaction
Learning &
Growth
Chevron 35
FinancialPerspective - Increase Earnings
In 2014, Chevron’s net income was $19.241 billion; this was a decrease compared to
2013 when the company’s net income was $21.423 billion and even more of a decrease
from 2012 net income of $26.179 billion (Chevron Annual Report, 2014). One of the
reasons for the drop in net income has to do with the price of crude oil, which has fallen
significantly. This decrease in price of crude oil has directly impacted Chevron’s
operations. The company is investing a large amount of money in its upstream segments,
including exploration and production over the past years but Chevron has had to cut back
on these costs in response to the fall crude oil prices. Since Chevron’s upstream business
accounts a large amount of its earnings from the sale of crude oil, the company is going
to continue to be hit with losses until the price of crude oil increases or Chevron
decreases operational expenses.
Measure:
1. Decrease operating and administrative expenses by 10%
Decreasing Chevrons operation and administrative expenses by 10 percent is a
lagging financial metric. It is lagging because Chevron will not be able to see if
the 10 percent decrease in these expenses actually increased the company’s
earnings until after a certain point in time.
2. Decrease capital and exploratory expenditures by 20%
Decreasing Chevrons capital and exploratory expenditures by 20 percent is a
lagging financial metric. It is lagging because Chevron will not know if the 20
percent decrease in these expenses actually increased the company’s earnings
until after a certain point in time.
Customer - Pricing
Since Chevron is in control of its own supply chain, it becomes easier for the company to
have control over the price of its products. Chevron is able to maintain a competitive
advantage over its direct competitors because they do not have an outsourced supply
chain. The problem that can occur with having control over its supply chain is that
Chevron takes direct hits when things like, a decrease in crude oil price occurs. Since
most of the products that Chevron produces contain mostly crude oil, you would think
that would mean they are able to price their products even cheaper now that crude oil is
cheaper. This is not so, if Chevron were to do this, then they would be loosing even more
money. They have to keep their prices at a point where they are still able to cover some
of the operational expenses. This becomes a problem when dealing with customers
because most people want to buy the cheapest gas they can find, and if Chevron is not
able to compete with other companies’ prices, then they will start to loose customers.
Chevron 36
Internal - Execute with Excellence
One of Chevrons strategies is to “Execute with Excellence through rigorous application
of our operational excellence and capital steward systems and disciplined cost
management”(Chevron, 2014). As a whole, Chevron finds it extremely important to
operate every aspect of the company in responsible and efficient manners, in order to
achieve operational excellence. One of Chevron’s values is High Performance, the
company is finds it extremely important that it does not settle when meeting goals, but
yet Chevron strives to exceed the expectations that have been set.
Internal - DecreaseCosts
Due to the decrease in price of crude oil over the past year, Chevron has to cut costs in
order to cut the companies losses as much as possible. These costs are being cut from
operational costs and administrative expenses and a decrease in exploratory expenditures.
Once Chevron starts to decrease these costs the company will be able to make up for
some of the financial losses that they have incurred over the past two years.
Measure:
1. Manufacturing cycle efficiency of 95%
This is a lagging non-financial metric. It is lagging because Chevron will not
know if the if having 95% efficiency in the company’s manufacturing cycle will
have an effect to Chevrons internal strategies.
Learning and Growth - Invest in Workforce
One of Chevron’s company wide strategies is to invest as much as possible in the people
of Chevron in order to develop a talented global workforce that gets results the right way.
Chevron works to deliver energy to the world in every way that is possible. Chevron
trains its employees to work to find new ways to develop reliable energy that is
affordable.
Learning and Growth - OperationalExcellence
Chevron has set up a program called Operational Excellence, this program provides
employees and contractors with 10 Tenets of Operation they must follow. This code of
conduct is based upon two key principles, Do it safely or not at all, and There is always
time to do it right. Operational Excellence was set in order to provide a company wide
program that insures that Chevrons employees are being as safe as possible while
Chevron 37
working and also that they are completing all tasks as efficient as possible. Chevron uses
Operational Excellence as a way to focus on five different areas; safety, health,
environment, reliability, and lastly efficiency. Chevron
Measure:
1. Number of Employee on job injuries, Less than 1%
This is a lagging non-financial metric to measure if Chevron’s employees are
following the Operational Excellence program and being as safe as possible
while working for Chevron.
STRATEGIC ASSESSMENTOF OPERATIONS
In this section, we set out to make a strategic assessment of Chevron’s operations,
all as it applies to supply chain, technology, infrastructure, and company culture. We
found that Chevron comprises a vertically integrated supply chain, which enables it to
have closer control over its operational activities, as well as easily coordinate day-to-day
activities and minimize costs. The firm entails a number of order qualifiers that make it
competitive in the petroleum market, as well as order winners and distinct competencies
in its extraction, refining, and sales that ultimately give it distinct competencies and an
edge over the competition in a variety of aspects. Likewise, we found that Chevron
utilizes advanced and unique technologies that enable superior performance in fault
imaging, monitoring oil levels in extraction sites, and optimal performance of refinery
machinery. As it pertains to corporate culture, Chevron operates under an array of
cooperative and ethical modi operandi such as “The Chevron Way” and its Operational
Excellence Management System (OEMS), as well as conducting several Corporate Social
Responsibility initiatives that promote environmental, social, and financial sustainability
(Chevron, 2014).
Key Order Winners and Qualifiers, Distinctive Competencies
Order Winner: Worker Safety and the Environment
Chevron’s main focus, like most companies, is to create value for their stockholders and
to keep their process consistent and efficient for quality products. To add value to a
company, it is important to discover the key characteristics that set the company apart
from its competitors. These characteristics are known as order winners. Chevron has
competitive advantage in several different avenues. One main focus for Chevron is
Chevron 38
dealing with the safety of its people and the environment. Oil companies are always
scrutinized and criticized by environmental groups and human rights organizations. By
going against the mainstream, Chevron created an order winner out of an unlikely sector
for energy and oil companies. Chevron is an order winner in environmental safety
compared to its competitors, but it still is not completely clear of environmental issues.
The reason for order winners though is to stand out from its competitors in the same
industry, not other industries. In the annual corporate responsibility report, it states that
“The Chevron Way” is striving “to develop a culture in which everyone believes that all
incidents are preventable and that ‘zero incidents’ is achievable” (Chevron Annual
Report, 2014). The “Zero is Attainable Personal Safety” initiative has allowed “66 [of
Chevron’s] organizations [to receive] 176 Personal Safety awards” and “36 organizations
earned 59 Process safety awards” (Chevron Annual Report, 2014). Chevron developed a
system called Operational Excellence Management (OEMS) to “systematically manage
process safety, personal safety and health, the environment, reliability, and efficiency”
(Chevron Operational Excellence Management Overview, 2014). This system was
created to keep regulations in place and to minimize the risk of incidents. The goal is to
manage processes as to prevent “explosions, fires, and accidental releases”. The OEMS
focused on leadership accountability because leaders set the objectives of the company
and guide the company in a specific direction. A major portion of the OEMS is the
Management System Process, which “is a systematic approach used to drive progress
toward world-class performance” (Chevron Annual Report, 2014). This process is used to
identify potential risks and to assess the effectiveness of the company.
Oil and energy companies constantly feel the pressure of protecting the environment,
especially after the BP oil spill in 2010. Even though all of Chevron’s competitors have a
safety system in place, Chevron’s environmental safety system seems to be more in depth
and more involved. This is proven when in 2014, Chevron’s Total Recordable Incident
Rate was the lowest it has ever been since the beginnings of the company. HART Energy
Publishing, the world’s largest energy industry publishers, honored Chevron in 2009 with
the Refining and Energy Companies of the Year Award. This award entails that Chevron
is focused on three personal and corporate achievements: “a cleaner environment,
investment and corporate growth, and vision”. The cleaner environment category is
Chevron 39
mainly focused on the aspect of producing not only cleaner gasoline, but higher quality
gasoline as well (Chevron Annual Report Supplement, 2014).
A main focus for oil companies in protecting the environment is to concentrate on
petroleum spill volume. Chevron has decreased its total spill volume in barrels from
10,169 in 2011 to 838 in 2014 (Chevron Annual Report, 2014). Another accomplishment
of Chevron is its overall score of 95 points on the CDP S&P 500 Climate Change Report.
This report takes into consideration how visible a company is when it comes to
environmental risks. They are concerned with the carbon footprints of major companies.
Chevron was ranked number six out of the top performers. The CDP looks at two
different emissions, one is “all greenhouse gas emissions that are directly from sources
that are owned or controlled by
the reporting entity” and the
other is “All indirect greenhouse
gas emissions from the
consumption of purchased
electricity, heat, or steam” (CDP
Report, 2014). Compared to its
competitors, Chevron had the
strongest score. ConocoPhillips
received a score of 89 and Exxon
Mobil Corporation received a 76.
Being environmentally conscious
is an order winner for Chevron
because it shows that the
company is not just considered
with making a profit and
producing the most barrels of oil,
but they are thinking outwardly
about the health of the environment. It provides them a competitive advantage over its
competitors by showing that they are transparent about the harmful effects of drilling and
refining oil and the steps they are taking to minimize their carbon footprint.
One way Chevron is limiting their effects on the environment is by researching new types
of energy. Chevron is the world’s leading producer of geothermal energy, which is
created by the heat from the earth and it emits virtually no greenhouse gases. They began
the research and development of geothermal energy in the 1960s and have expanded from
California to Indonesia and the Philippines. Other than the company itself, “Chevron also
has a 40 percent interest in the Philippine Geothermal Production Company” (Chevron
Annual Report, 2014). Chevron strives to increase the production of geothermal energy
because it is a clean, renewable energy. Exxon is also looking to geothermal energy, but
they only have stake in New Zealand. But, geothermal energy is not evolved enough to
support the current world’s energy needs. Because of this, Chevron has invested three
billion dollars in environmental projects in Kazakhstan alone. “Chevron is Kazakhstan’s
largest private oil and gas producer” and they have “increased gas utilization rates to
Chevron 40
more than 99 percent” (Chevron Annual Report, 2014). Chevron also has researched
solar, wind, biofuel, and hydrogen as options for renewable energies.
Order Winner: Cost Leadership
Another order winner for Chevron is cost leadership. For the past five years, Chevron has
been ranked number one in earnings per barrel in upstream, downstream, and chemical
compared to its competitors (Chevron Annual Report Supplement, 2014). Chevron
announced in the annual report that they will have “an exploratory budget of $35 billion”,
which is “13 percent lower than total investments for 2014”. They did this by being
selective of their various investments. With the ever-changing costs and operating
expenses of crude oil and natural gas, Chevron is exposed to macro environmental
factors. To counter these negative factors, Chevron has to focus on cost management.
Chevron’s overall cost of goods sold in 2014 was roughly $160 billion. Exxon’s cost of
goods sold was around $285 billion and BP’s was $199 billion. Lowering costs will help
Chevron have a distinct competitive advantage, especially with the recent decrease in the
price of oil. Oil has cost roughly $110 per barrel over the four years, but has now dipped
below $50 per barrel in 2015. The drop in oil price is partly caused by the efficiency of
oil production. Over the past few years, the United States domestic oil production has
nearly doubled, which has caused them to import the oil elsewhere (Chevron Annual
Report, 2014). This oil is now competing in the Asian markets, which is forcing
producers to lower the price of oil. The decline of economies in Europe and the recent
stock market crash in China, the demand for oil has decreased, so oil companies are
lowering prices to create a competitive advantage. Cutting costs is one of the few ways
for oil companies to counteract the lowering price of oil and to keep the same gross
margin.
Chevron focuses on improving refining processes to keep costs down as well. An
example of improving process is a project in Salt Lake City, Utah where they updated an
atmospheric distillation column to increase “plant reliability and feedstock flexibility”
(Chevron Annual Report, 2014). Capital and operating costs have been reduced by
roughly half due to Chevron’s elimination of “tanks and valves associated with traditional
well testing facilities” (Chevron Annual Report, 2014). Chevron also chose to focus on
Chevron 41
the part of its business that had the largest component, which is crude oil in the
downstream business. Roughly 85% of Chevron’s revenue comes from the downstream
business. Chevron also has invested around $707 million in research and development to
come up with ways to be more cost effective and to be environmentally friendly
(Chevron Annual Report, 2014).
Order Winner: Techron
The energy and oil market could be considered an oligopoly because there are only a few
leading companies that dominant most of the industry. The hardest part of being in an
oligopoly is creating differentiation in products. Oil is a commodity that cannot be altered
much to create a different product. But, oil is always in high demand, so it is important
for a company to create differentiation between itself and its competitors. Chevron has
trumped this statement and by adding Techron in its oil. Techron is a fuel additive that
was developed by Chevron that was created to meet fuel cleanliness standards (Techron,
2014). Chevron’s gasoline was one of the first to be named “Top Tier Detergent
Gasoline” (Techron, 2014). Top Tier Gasoline is described as the “premier standard for
gasoline performance” that require certain EPA levels “to ensure optimal engine
performance”. It helps to protect car engines from deposit buildups, which can be
harmful to car. Keeping car engines clean will maximize mileage, prevents loss of power,
and lower harmful emissions (Techron, 2014). By removing sulfur and other deposits,
Chevron has created a way to please customers by having a cleaner, higher quality of
fuel. This would be considered an order winner because none of Chevron’s competitors
have a similar product that is as high quality and efficient as Techron.
Order Qualifiers
A main concern for oil companies is how consumers perceive its brands. Chevron has
coined the phrase “The Chevron Way”, which means “getting results the right way”.
(Chevron Way, 2014). The goal of this slogan is for Chevron to show to its consumers
that it wants to be transparent as possible. The company is built on certain values, such as
integrity, trust, diversity, ingenuity, partnerships, protective, and high performance. Some
of the key enterprise strategies that Chevron embodies include investing in people to
develop “a talented global workforce”, executing with excellence, and growing
profitability to keep a competitive advantage (Chevron Annual Report, 2014). Another
focus is trying to differentiate in the technology department and investing in renewable
and efficient energy solutions. “The Chevron Way” would be considered just an order
qualifier because the other competitors have a similar outlook on their goals. Valero does
have similar visions, missions, and values, but they have not coined a phrase to embody
these ideas. Shell, BP, and Exxon also do not have a phrase to explain what their
company is striving to do. ConocoPhillips is closest to Chevron in that they have the title
“SPIRIT” to describe their values: safety, people, integrity, responsibility, innovation,
and teamwork (ConocoPhillips Who We Are, 2014). If these companies did not have a
clear vision, they would not be as successful and effective in the oil industry.
Chevron 42
Service stations are the way that oil companies reach the typical consumer and not
business-to-business interactions. With three premium brands (Chevron, Texaco, and
Caltex), Chevron has gas stations located all over the world. This would be an order
qualifier because having service stations are considered a competitive characteristic if oil
companies want to be in the minds of consumers. Even though Chevron has roughly
8,000 service stations, its competitors have many more. Shell has over 44,000 stations
and Exxon has around 19,000 stations, but Valero has only 7,400 stations. It is important
for Chevron to keep its consumer base of gasoline sales because it makes up roughly 20%
of its revenue from upstream and downstream productions for 2014 (Chevron Annual
Report, 2014). Chevron, Texaco, and Caltex stations do not do anything that
differentiates themselves from the other gas stations. But, Chevron does not focus on
gasoline stations as much due to the fact that approximately 35% of the total upstream
and downstream productions come from crude oil. This is why Chevron is concerned
with the exploration and production of crude oil.
Another order qualifier for Chevron is its brand and logo value. Chevron’s brand was
built on the ideas of quality, reliability, and cleanliness. It wanted to be an “engaging and
likeable persona” (Brand Index, 2014). Strong brand value has allowed the Chevron
Corporation to be the second-largest United States based energy company. Chevron’s
logo was inspired by a shield or personal armor. This logo was made to show that
Chevron is a positive and fortified company. Shell and Exxon are considered the oil
companies with the most recognizable brands and logos (Cassaro, 2014). All of
Chevron’s competitors have strong logo recognition as well because consumers pass
several gas stations everyday. With oil being a commodity, these companies have to
focus on keeping their brand and logo in the minds of consumers. One way that Chevron
tried to increase its brand value was by creating the “Chevron Car”, which was an
advertising campaign that consisted of television advertisements, billboards, and toy cars.
The reason behind the cute and fun drawings of the cars, which was completed by
Aardman (creator of Wallace and Gromit), is to show the lighter side of Chevron. These
“charmingly chatty” cars were created to create a stronger customer connection (Chevron
Cars, 2014).
Chevron Strategic Business Analysis
Chevron Strategic Business Analysis
Chevron Strategic Business Analysis
Chevron Strategic Business Analysis
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Chevron Strategic Business Analysis
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Chevron Strategic Business Analysis
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Chevron Strategic Business Analysis
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Chevron Strategic Business Analysis
Chevron Strategic Business Analysis
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Chevron Strategic Business Analysis
Chevron Strategic Business Analysis
Chevron Strategic Business Analysis

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Chevron Strategic Business Analysis

  • 1. Chevron 1 Chevron: Strategic Business Assessment Cullen Cosco Fernando Garcia Ulloa Cara Hughes Tim Nutter Reagan Walters
  • 2. Chevron 2 Table of Contents EXECUTIVE SUMMARY ..............................ERROR! BOOKMARK NOT DEFINED. OVERVIEW OF THE FIRM ..........................ERROR! BOOKMARK NOT DEFINED. FINANCIAL HISTORY AND STATUS ........................................................................ 7 STRATEGIC MARKETING ANALYSIS ................................................................... 17 PERCEPTUAL MAP.................................................................................................... 23 MACROENVIRONMENTAL FORCES ..................................................................... 25 MARKETING MIX ...................................................................................................... 28 ISOLATED SALES FORECAST................................................................................. 30 MANAGERIAL ACCOUNTING ANALYSIS ............................................................ 32 ANALYSIS OF COST BEHAVIOR ............................................................................ 32 PROCESS ANALYSIS................................................................................................. 33 BALANCED SCORECARD ........................................................................................ 34 STRATEGIC ASSESSMENT OF OPERATIONS...................................................... 37 ORDER WINNERS AND QUALIFIERS, DISTINCTIVE COMPETENCIES........... 37 PROCESSES, FACILITIES, AND LOCATIONS........................................................ 44 SUPPLY CHAIN INTEGRATION AND OUTSOURCING ....................................... 46 TECHNOLOGY AND SYSTEMS............................................................................... 50 INFRASTRUCTURE ................................................................................................... 51 SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY.................... 54 SWOT ANALYSIS ......................................................................................................... 59 CONCLUSION ............................................................................................................... 66 WORKS CITED.............................................................................................................. 67
  • 3. Chevron 3 EXECUTIVE SUMMARY Chevron is one of the largest oil corporations in the world averaging over 2.5 million barrels of oil and equivalents daily in 2014. It is a vertically integrated company involved in both the upstream and downstream sectors, with a diversified portfolio of oil products, and is cash heavy having over $13 billion in cash and equivalents in 2014 (Chevron, 2014). Despite the companies’ strengths, Chevron has faced major macro-environmental factors that have impacted its performance and profitability in the past couple of years. Oil prices have plummeted, forcing the company to sell off its assets and incur more debt to keep the company maintaining its goals of increased dividend payouts. If oil prices continue to drop or stay relatively the same for longer periods of time, Chevron could face harder times to come. The SWOT analysis provided a deeper understanding of where Chevron has strengths, weaknesses, opportunities, and threats. Chevron has many major global capital projects, which allows them to have a strong global brand and a strong revenue stream. A diversified portfolio, including crude oil, natural gas, liquefied natural gas, geothermal, solar, biofuel, hydrogen, etc. has allowed Chevron to appeal to a wide array of consumers, which is a competitive advantage. Focusing on alternative energies will decrease Chevron’s dependency on crude oil, which may help it in the long run. Spending over $700 million in research and development allows Chevron to keep up with the increase needs of energy around the world (Chevron, 2014). Some of the opportunities include increasing natural gas production and repositioning themselves as an energy company, not just an oil company. This will allow them to be less affected by the decrease in oil price. While Chevron has some major strengths and opportunities, it also faces many weaknesses and threats. Legal issues, government and environmental regulations, high competition, global recession, and cost of environmental hazards are some of the main weaknesses and threats. After examining Chevron’s financial figures, we find that the firm’s profitability, asset management, and debt management ratios are the most crucial in our recommendation to buy or sell the corporation’s stock. Chevron appears to have major asset management issues, which will decrease shareholder wealth maximization. But, Chevron’s shareholder equity reliance shows it is looking towards expansion, increased market share, and strong earnings due to its increased debt capacity. Overall, we would recommend buying Chevron’s stock due to its high profitability, diversified portfolio, low stock price, and positive outlook for the future of Chevron and the price of oil.
  • 4. Chevron 4 OVERVIEW OF THE FIRM Chevron is the second largest integrated energy company in the United States, and the fifth largest in the world. Its mission statement is to do business “The Chevron Way”, which means to get results the right way. Chevron is focused on being transparent and showing who they are and what they believe in and what they want to accomplish. To be a competitive company, Chevron has a strong vision to safely provide energy products, to deliver world-class performance, and to keep the best interest of the stakeholders. Chevron is built on seven key values: integrity, trust, diversity, ingenuity, partnership, protecting people and the environment, and high performance. The industries that Chevron is involved in include traditional resources (oil, natural gas, oil sands), renewable resources (geothermal, solar), and emerging fuels (biofuels, gas-to-liquids). For products and services, Chevron serves both consumers and businesses. Chevron provides consumers with fuels and stations, gift and credit cards, and motor oils and fuel additives. For businesses, Chevron provides a wide array of products, from additives, aviation fuel, base oils, chemicals, fuels, lubricants, marine fuel, MSDS, and other specialty products. On September 10th, 1879 the Pacific Coast Oil Company was founded by a group of explorers and merchants. California Star Oil Works founded the first successful oil well in California, which launched California as a huge oil-producing state. California Star did not have enough capital to take the marketing opportunity in California, so Pacific Coast Oil acquired them in 1879 by Colonel Charles Felton. By the next year, Colonel Charles Felton made the largest and most modern refinery in California. In 1890, Pacific Coast Oil Company was struggling trying to expand, so they agreed to be acquired by the Standard Oil Company. The Standard Oil Company soon became a financial stronghold by introducing an impressive product line, a growing refining system, and an extensive pipeline system. By the time World War I had begun, the Standard Oil Company of California began to look beyond the United States’ shores for oil and gas reserves. The war had depleted the United States’ crude oil supply, which forced oil companies to look elsewhere for this resource. In 1936, Standard Oil Company created at partnership with Texaco to be a potential market for its Middle Eastern oil. They also created a joint venture with Caltex to help create an extensive marketing network in Asia and Africa. The Standard Oil Company decided to make a major change in 1977, which was to rename the company to Chevron. The Chevron name came from the 1930s when the Standard Oil Company of California could not use this name outside the geographic area due to the terms of the breakup of Standard Oil. Due to this, the company came up with the name “Chevron” to use on its retail products. The name change was meant to create a stronger identity and to form a more bonded organization. In today’s era, ChevronTexaco’s goal is to dive into complex fields and to search for renewable resources and improve the efficiencies of their current operations (Chevron, 2014) Chevron has a complex operation and supply chain system to create its wide array of products. The whole supply chain is divided between upstream and downstream productions. Upstream production includes exploration and production, which is the
  • 5. Chevron 5 locating drilling of the crude oil. Downstream production deals with the refining, transportation, and marketing of the various products Chevron offers. For upstream production, Chevron has to incorporate technology and signal processing and geotechnical analysis to find crude oil around the world. Once the crude oil has been found and evaluated, then it will be extracted and sent as crude oil or to the downstream sector that produces gasoline. The downstream production begins with the refining of crude oil, which is the removal of unwanted particles. Then, the refined oil is transported through pipes or by shipping to the distribution center where it will finally reach the consumer or business (Chevron, 2014). Chevron uses a differentiated marketing strategy because it markets to several segments with a marketing mix strategy matched specifically to its desires and expectations. Chevron different target market segments are small businesses, specific age groups and local and foreign communities. Chevron advertises specifically at small businesses in hopes that they will potentially utilize the resources that Chevron has to offer. This is part of Chevron’s Supplier Diversity program; Chevron works directly with small businesses in order to promote an inclusive business environment for the benefit of not only Chevron but also its suppliers. Chevron also targets specific age groups in different ways, for an example the company targets children only for educational purposes, but the company targets college students as potential improvements within the organization. Chevron uses its ads as a way to market the company’s product uniqueness in order to let its customers know that the products Chevron produces are the safest and most advanced products in the market (Chevron, 2014). Financially, Chevron and all other major oil companies have taken a huge hit because of the recent decline in oil prices. In 2011, the price of oil was around $105 a barrel and now it is around $36 a barrel (MacroTrends, 2014). This event has caused a decrease in total revenue for Chevron since 2011. Chevron has had a decrease in sales and other operating expenses since 2011, from $244.4 billion to $200.5 billion in 2014 (Chevron Annual Report, 2014). But, it has seen an increase in total assets, but a decrease in total current assets. Chevron has also increased its total liabilities, but decreased its total current liabilities in the past few years. This means that Chevron is becoming less liquid. Chevron has seen an increase in total stockholder equity since 2011, which is most influenced by an increase in retrained earnings. An increase in retained earnings could mean that Chevron has been profitable over the past few years, which in turn makes the dividends less than Chevron’s profits. Since the decline in the oil market, Chevron stock would be considered a bargain for most investors, even when compared to its competitors, such as Exxon Mobil and BP. Chevron’s stock price has seen a decrease since the middle of 2014 and saw its lowest point in August of 2015 since 2011. But all of Dividends are good indicators on whether or not a company is doing well and benefitting its shareholders. Chevron is known to have a high dividend payout, which is appealing to shareholders. Having a low debt-to-equity ratio allows Chevron to keep paying its shareholders, even if its cash flow struggles. Over the past few years, Chevron’s cash flow has had difficulties keeping up with the amount of new projects Chevron is taking on. Chevron has spent billions on new projects, which has hindered its cash flow drastically.
  • 6. Chevron 6 Chevron and the other oil and energy industries are all dependent on technology. A major part of Chevron’s view on technology is that the oil companies should be more like technology companies. Chevron has three main technology companies: Energy Technology, Technology Ventures, and Information Technology. By building technology centers in Australia, the United Kingdom, and the United States, Chevron is able to focus on improving its efficiency and productivity of its operations. One main reason Chevron is focused on technology is to invest in renewable energies. An integrated upstream and downstream technology sector allows Chevron to be a strong player from the moment the crude oil is extracted until it reaches the consumers gas tank. Chevron is a leader in using various technologies for deep-water fields and hydro processing technologies, which gives them competitive advantage over other energy companies and positively impacts its position in the fuel marketplace. Oil companies tend to be scrutinized for not focusing on corporate responsibility. Chevron focuses on minimizing worker injury by creating a program called the Operational Excellence Management System. This system has helped to improve the personal safety and health of Chevron workers. Chevron is also concerned with protecting the environment by trying to decrease the petroleum spill volume every year. In 2014, Chevron achieved a record low petroleum spill volume of 838 barrels (Chevron Corporate Responsibility Report, 2014). To show commitment to specific communities, Chevron has developed connections with local suppliers and has focused on employing local workforces. Chevron shows interest in the community by also donating millions to education support systems. In the annual report, Chevron is proud to say that in 2014, they spent more than $240 million globally on social investments (Chevron, 2014).
  • 7. Chevron 7 FINANCIAL HISTORYAND STATUS Upon examining Chevron’s financials and deriving their ratios, we find their numbers to be generally positive, mostly rivaling or exceeding those of the industry average and competitors of similar resource availability and capacity. Even still, many of Chevron’s ratios have diminished over the five years we examined, resulting from unfavorable market factors that have taken a toll on the industry as a whole. We set out to determine why Chevron’s numbers resulted how they did, what factors have led to steadily decreasing numbers over the short term, and if it seemingly promising profitability performance is ultimately being offset by other categories. Profitability Return on Equity Return on Equity Chevron Industry Average 2010 0.1798 0.1319 2011 0.2201 0.2145 2012 0.1899 0.1775 2013 0.1424 0.1479 2014 0.1232 0.1162 5-Year Average 0.1711 0.1576 Return on Equity (ROE) is used to measure the return earned on these investments. Between 2010 and 2014, Chevron’s ROE has overall exceeded industry average, only falling short of the measure by a minimal margin in 2013. As it pertains to Chevron’s net income, the corporation has emphatically attempted to cut costs and minimize expenses in its downstream operations, which perhaps explains why its ROE has remained above industry average of late; however, the steady decrease in both ROE and net income can, in part, be explained by two factors. The first of these is Chevron’s increased investments in research and development, as well as exploration efforts. Since 2010, Chevron has been pouring money into developments such as its Gorgon liquefied natural gas project in Australia and the startup of the Congo River Crossing Pipeline, which has naturally taken away from its net income. Secondly, the petroleum market as a whole has been hit by decreased oil prices, which have not only diminished Chevron’s net income, but also those of all companies involved in the industry. We find that once their projects are complete and are successful, Chevron will see major growth and an increase in return on equity. Likewise, once America gets out of its current gas price slump, its net income will return to similar volumes as previously realized, and its ROE will be reflected by a steady increase. Despite all of this, what we find perhaps most problematic as it applies to ROE is Chevron’s numbers compared to Exxon—its primary U.S. competitor and a firm of similar size and resource availability. While Exxon, too, has been hit by the same
  • 8. Chevron 8 aforementioned factors that have plagued Chevron over the past five years, its ROE has consistently been significantly higher than that of Chevron—averaging 0.2153 to Chevron’s 0.1711. We find that this is not so much of a net income concern, but is instead a result of Chevron’s financial reliance on common shareholder equity instead of debt utilization. As we explain in the debt management section of our report, this reliance bodes poorly for shareholders, making them harbor more risk than they might if they invest in other petroleum corporations, but also allows for higher debt capacity for Chevron—which it could use in the future to expand and flourish if it so chooses. Return on Assets Return on Assets (ROA) is used to measure how efficiently a company uses its assets to generate revenue. Between 2010 and 2014, Chevron’s ROA has consistently been over industry average, which indicates that the corporation has used its invested capital relatively well in its operational activities. Much like its ROE numbers, ROA has steadily decreased over the past few years, as net incomes have diminished, while asset investment has increased. As previously mentioned, since 2010 Chevron has invested in new startups, initiatives, and equipment, which, in this case, has taken away from net income and given to total assets—almost surely accounting for this drop in ROA. Once gas prices return to normal and Chevron’s projects develop and are implemented, the firm’s ROA should increase and become steady again. Additionally, the fact that the firm’s ROA has remained well above industry average despite additional expenses and unfavorable market conditions indicates that utilizes its invested capital well in all conditions, and points to a profitable and less turbulent future. Net Profit Margin Net Profit Margin is used to measure what percentage of dollars brought into a company through sales is directly translated to profits. Over the five years we evaluated, Chevron’s net profit margin has remained well over the industry average (almost by twofold), and has been relatively steady, only experiencing a slight decrease in 2013 and 2014. Once again, this ebb can be attributed to low gas prices and investment in new projects and capital. The importance of this ratio can be found in that Chevron, as has been the case with its other profitability ratios, has weathered unfavorable market conditions relative to the rest of the industry. While net profits and sales have waned, alike, Chevron has minimized its costs of goods sold and operational expenses, which we believe will bode well for them as gas prices rise again and their projects begin to pay off. AssetManagement Inventory Turnover Inventory turnover shows how well a company is managing its inventory. Chevron’s inventory turnover has been twice as high as the industry average inventory turnover since 2010. This means that Chevron has less excess inventory than the industry or it
  • 9. Chevron 9 means that Chevron has strong sales. Looking closer at the industry, we realize that inventory management was the driving force behind Chevron having a better inventory turnover. Chevron’s inventory includes crude oil, petroleum products, and chemicals. It is also important to not that most oil companies, including Chevron, use a last in, first out costing method. Companies do this because there is an assumption that the cost of inventory will increase over time due to inflation. This means that the ending inventory will be valued at the earlier costs, which should be lower if inflation continues to occur. In the annual report, Chevron discusses about lowering inventory due to the drastic fall in price of a barrel of oil. The price of crude oil in the middle of 2014 was over $100 a barrel. Today, the price of crude oil is roughly $35 a barrel (CITE). In just 18 months, the total crude oil market changed. To compensate for this change, Chevron has lowered its inventory levels because Chevron saw the sudden decrease in oil price and knew that it was better to have a low inventory. Lower prices and high inventory is not a situation that companies want, especially those that use the last in, first out costing method because it means that their inventory costs will increase. Chevron is efficient in holding a low level of crude oil and other products in relations to sales. In 2014, there was an increase in transportation costs ($350 million) to help cut the time it takes to get their products to their consumers (Chevron Annual Report). By doing this, Chevron can take the crude oil straight from the ground and almost directly to the customer; this means that Chevron does not have to store up their products. Since 2011, Chevron’s inventory turnover has decreased, which means that Chevron is not handling their inventories as efficiently and/or they do not have strong sales. Chevron’s sales have decreased, while its inventory has increased in costs. This is in direct correlation to the drastic drop in the price of oil. But, the whole industry took this hit and Chevron’s inventory turnover is still well over the industry average. Average Days to Sell To emphasize that Chevron is handling inventory efficiently, it is important to look at average days to sell inventory. The industry average is about 77% higher than Chevron’s average days to sell inventory. This means that Chevron sells its inventory quicker than the industry on average, so they are more efficient when handling inventory. With the downturn of oil prices, oil companies need to see where they can cut corners so their profitability does not decrease. Chevron seems to be well positioned for the decrease in oil prices due to their efficient transportation system. As previously mentioned, Chevron invests greatly in their transportation systems. By being involved in the transportation sector, Chevron can personally decrease its inventory by speeding up the transportation process. Chevron owns interest in seven liquefied natural gas carriers in Australia, they are the largest shareholder in the West African Gas Pipeline Company, and they own 50% interest in the Karachaganak-Atyrau Transportation System. These are just some of the few examples of Chevron’s power over the transportation of their products. Chevron is increasing transportation efficiency by conducting expansion projects, such as the one in Kazakhstan where they are working to expand by 670,000 barrels per day of the pipeline capacity (Chevron Supplement to the Annual Report). Improving the pipeline transportation will enable Chevron to shorten the delivery process, which in turn will
  • 10. Chevron 10 lower the need for stored inventory. Having low inventory levels has allowed Chevron to have a handle of keeping the average days to sell inventory low. Fixed Asset Turnover Fixed Assets Turnover Chevron Industry Average 2010 1.8144 2.1964 2011 1.9272 2.4062 2012 1.5747 2.2324 2013 1.2841 1.9712 2014 1.0499 1.7532 5-Year Average 1.5301 2.1119 Even though Chevron has a high inventory turnover, the fixed asset turnover was the first indication that Chevron may be having issues managing their assets. The industry average is about 38% higher than Chevron’s fixed asset turnover. This means that Chevron’s fixed asset investments are not generating the sales that were expected from the investments. It is important to look at this ratio for manufacturing industries because it helps to measure whether of not a major purchase adds value to the shareholders. Just some of the major projects that Chevron worked on in 2014 include progressed construction in Angola, Australia, China, Kazakhstan, Russia, and the United States. Chevron also commenced the production of the Chirag Oil Project in Azerbaijan, Jack/St. Malo deep-water project and the Tubular Bells project in the United States, and the Bibiyana Expansion Project in Bangladesh (Chevron Annual Report, 2014). Looking at all of these investments, it is important to see whether or not they are effective and increasing shareholder value. Putting billions of dollars in investments during a decrease in oil price can be detrimental to Chevron in the short term because it is spending more, while receiving lower sales. However, looking in the long run, the price of oil is expected to increase over the next few years. If this occurs, then Chevron is positioned well in the industry having these new projects and investments. Most of the projects that Chevron is working on in 2014-2015 seem to be projects that are have been in progress for many years. The value of these projects will not be determined until the project is completed and the efficiency of the investment can be measured. Total Asset Turnover Total Assets Turnover Chevron Industry Average 2010 1.0262 1.1397 2011 1.1280 1.2406 2012 0.9554 1.2195 2013 0.8341 1.1369 2014 0.7229 1.0707 5-Year Average 0.9333 1.1615
  • 11. Chevron 11 The total asset turnover is also lower than the industry average, which should not be a surprise. This ratio just provides another measurement to show that Chevron is not investing in projects that are providing enough value to their shareholders. Another topic of concern for major energy companies is the idea of renewable energies, especially liquefied natural gas. Chevron is investing millions in crude oil projects that have a long payback period. If the research of renewable energy continues in a positive linear regression, then crude oil may not be a commodity anymore. Tying up money in these massive fixed asset projects could be the downfall of Chevron. In the exploration sector, Chevron did make 5 natural gas discoveries in Western Australia and Chevron continued to work on the Chuandongbei natural gas project in China (Chevron Annual Report, 2014). Chevron realizes that to be successful in today’s society, it is important to consider all types of energies. As of right now, it is too difficult to see whether or not Chevron’s investments will pay off in the end. Chevron is truly depending on an increase in oil price. Average Collection Period With all of these investments occurring, it is vital that Chevron is good about collecting its credit and keeps its cash flowing. But, Chevron’s average collection period ratio is actually about 14% higher than the industry average. This is a problem for Chevron because it means that they have poor asset management, more specifically poor account receivable management. There is not a huge difference between Chevron’s average collection period and the industry average collection period, so it does not seem to be an area of concern for Chevron. Debt Management Debt-to-Equity Ratio Debt-to-Equity Ratio Chevron Industry Average 2010 0.746 1.248 2011 0.714 1.222 2012 0.690 1.168 2013 0.687 1.091 2014 0.703 1.096 5-Year Average 0.708 1.165 Debt-to-Equity Ratio (D/E) is used to indicate how much debt a company is using to fund its assets relative to the value of its shareholders’ equity. Between 2010 and 2014, Chevron’s D/E has remained reasonably steady, but has also proven significantly lower than industry average. This reflects Chevron’s reliance on shareholders’ equity as opposed to incurring debt to fund its assets. While Chevron neglects to disclose why they choose this method of financing, their relatively low debt utilization can likely be explained by their believe that they do not need to expand at present and can primarily
  • 12. Chevron 12 rely on shareholder’s equity, or that the corporation is simply looking to increase its debt capacity and expand when market conditions are more favorable. From an investor’s perspective, the former reason may not bode well, as risk from the shareholders’ side of financing increases, while the latter could lead to a promising future. Times-Interest Earned Ratio Times-Interest Earned Ratio is used to measure how well a firm can meet its debt obligations. Chevron only disclosed numbers for TIE for 2010-2012, which ultimately proved inconclusive and unhelpful, as each ratio resulted in negative numbers and could not aptly be compared to the industry as a whole. This can likely be explained by Chevron’s aforementioned reliance on shareholder equity rather than debt in financing its assets, which, again, could prove to either be detrimental or useful, depending on how Chevron utilizes its high debt capacity in the future. Debt Ratio Debt ratio is used to measure the portion of a given firm’s assets are financed by debt, and indicate the extent of its leverage (the higher the ratio, the more leverage the firm has). The more leverage a company comprises, the more risk is involved in its financing; however, leverage is often necessary for expansive growth and companies can often find ways to sustainably utilize debt to its benefit. As it applies to Chevron, the corporation’s debt ratios have averaged 0.4145 from 2010-2014. Given that the oil and gas industry deals with products of immense inelasticity to most variables, Chevron could probably handle more debt, and, in turn, risk, than it currently possesses. However, given that Chevron is a publically traded company, it would appear that it primarily relies on stakeholder financing in its operations. Likewise, given that Chevron is well established and evidently sufficiently funded, it may choose to avoid utilizing debt simply because it does not need to. Over the past five years, Chevron’s debt ratios have remained very consistent. However, both its total liabilities and total assets have significantly increased over this span, but both in accordance with its average debt ratio. Increases in both categories can possibly be explained by the additional debt Chevron has incurred to fund its revamped investment program and/or by the firm repurchasing $5B of its own common stock—which it plans to restructure due to market conditions (Chevron 2014). The former occurrence would reflect an increase in both total liabilities and total assets, whereas the latter would simply cause an increase in total assets. Compared to its competition, Chevron has among the lowest in the petroleum industry, with its average debt ratio being 0.5286. It is difficult to assign these results to a particular cause, outside of assuming that its competition is either attempting to expand at a faster rate than Chevron and is willing to take on extra risk, or that they are not receiving the same degree of stakeholder funding at present. Debt Ratio 2 Debt Ratio 2 is used to measure to what degree the company funds its assets. Between 2010 and 2014, Chevron’s debt ratios 2 have fluctuated around its five-year average of
  • 13. Chevron 13 0.0658, and have consistently fallen far short of the industry’s 0.1698 average. Chevron’s average has a similar explanation to it as its debt ratio average—resulting from considerably low debt, in general, relative to its assets. As to why it is so far below the industry average can likely be explained by Chevron’s minimal long-term debt obligations, which can likely be simply explained by the company’s apparent reliance on short-term debt. Summarily, this ratio tells a similar story as its debt ratios, except indicating that most of Chevron’s debt obligations are taken out in the short term, as opposed to the long. Liquidity Current Ratio After realizing that Chevron may be having asset management issues, especially fixed asset and total asset turnover ratio, the current ratio will provide more information about Chevron’s assets. The current ratio indicates the firm’s ability to repay its short-term liabilities with short-term assets. The fact that Chevron’s current ratio average for the past 5 years is over 1.5 tells us that they have more current assets than current liabilities. Compared to the industry, Chevron’s current ratio is well above the industry average. Companies want their current ratio to be high because it demonstrates a company’s ability to pay its current liabilities with its current assets. But, after seeing that Chevron may be having asset management issues, this means that Chevron has to be handling their liabilities well to keep their current ratio above the industry average. However, a significant decrease in the ratio from previous years might mean that either more short- term liabilities were incurred, or that short-term assets have been terminated (Chevron Annual Report, 2014). A decrease in the current ratio can be explained by Chevron’s underperforming cash provided by operating activities, which is down to $31.5 billion in 2014 compared to $35 billion in 2913. This is due to the toll that falling oil prices have taken on the upstream segment of Chevron’s business. Also, Chevron spent $5 billion in cash in 2014 repurchasing common stock ad $7.9 billion in dividends; $400 million more than in 2012. Chevron saw a rise in short-term debt from $374 million in 2013 to $3.8 billion in 2014 at year-end (Chevron Annual Report, 2014). This is due mostly to an increase in issuing of commercial paper in 2014 as well as an increase in the interest rates of the commercial paper (Chevron Annual Report, 2014). The current ratio is adversely affected in all periods by the fact that Chevron’s inventories are valued on a last-in, first- out basis, as previously mentioned. At the end of 2014, the book value of inventory was lower than replacement costs by $8.1 billion. Acid-Test Ratio To get a closer look at the liquidity of Chevron, the acid-test ratio will give us more insight on how well Chevron is at meeting their financial obligations. The acid-test ratio shows whether or not a company has a sufficient amount of short-term assets to cover its current liabilities. The acid-test ratio does not take inventory into consideration. Before even looking at the data, we expected Chevron’s acid-test ratio to be higher than the
  • 14. Chevron 14 industry average because they have a higher current ratio. Generally speaking, an acid- test ratio of one or greater is considered favorable. As is applies to Chevron, the corporation has upheld a favorable acid-test ratio between 2010 and 2014, averaging a ratio of 1.3621. However, over the past 5 years, Chevron’s ratios have had a slight downturn, growing in inventory and current liabilities, while remaining relatively consistent in its current assets volume. Chevron’s fluctuation in current assets could be explained by several different instances, such as the corporation dispersing roughly $7.9 billion in dividends in 2014, during which quarterly common stock dividends were increased by 7% and prices per common share increased to $1.07 (Chevron Annual Report, 2014). Likewise, consistent inventory increases may be assigned to Chevron’s last in, first out method of accounting, which can cause buildup from a numerical standpoint (Chevron Annual Report, 2014). As for Chevron’s fluctuation in current liabilities, aside from the ebbs and flows in volume that occurs from paying off debt in different amounts at different times, Chevron began taking on more debt in 2012 in order to finance its ongoing investment program (Chevron Annual Report, 2014). Compared to competitors in the petroleum industry, Chevron’s acid-test ratios have proven superior between 2010-2014, topping the industry average of 0.9149. Exxon and Shell, two corporations that exceed Chevron in size, for instance, have both comprised favorable current asset to inventory margins, but have accrued nearly double the current liabilities in proportion. Miscellaneous Dividends per Share Dividends per Share is used to measure how much dividends an investor will receive per share they purchase. Between 2010 and 2014, Chevron’s dividends per share were the highest of its competitors and nearly tripled that of the industry average. As mentioned in Chevron’s 2014 Annual Report, the corporation’s emphasis is on maximizing shareholder wealth, and paying out relatively hefty dividends is likely a measure of keeping stockholders’ happy (as Chevron relies so heavily on their funding). Earnings per Share Earnings per Share (EPS) is used to measure how much each share purchased contributes to the company’s earnings. Over the five years we evaluated, Chevron’s earnings per share steadily exceeded the industry average. This was likely caused by Chevron buying back so much of its own stock over this span, while maintaining a relatively steady net income. In other words, these seemingly eye-pleasing numbers are less of a result of large earnings, but instead less common shares proportionately than the rest of the industry. Price-to-Earnings Ratio Price-to-Earnings Ratio is used to measure how many dollars per share results in the company’s earnings. Between 2010 and 2014, Chevron’s price per share proved to be
  • 15. Chevron 15 higher than most, but was offset by higher EPS, which resulted in an average favorable to the rest of the industry. As a result, it seems that Chevron’s stock justifiably costs more than a majority of its competitors’, as it yields, on average, higher returns to the firm. Consensus After examining Chevron’s financial figures, we find that the firm’s profitability, asset management, and debt management ratios are the most crucial in our recommendation to buy or sell the corporation’s stock. We believe that Chevron’s profitability ratios are an overall positive, as they have been exceptional compared to the rest of the industry, and has essentially been dictated by market conditions. The firm’s return on equity, return on assets, and net profit margin, alike, have remained well above industry average over the past five years—indicating that Chevron has effectively utilized its equity and asset investments to create revenue, as well as converting its revenues into net income. While all three of these components have waned over the past two years (in direct relationship with its net income), we believe that this can be explained by diminished market gas prices, as well as considerable investment in startups, equipment, and research and development efforts. We find that these temporary obstacles will be resolved soon, and that an accordingly increased net income indicates an even more profitable future for Chevron. Chevron’s asset management ratios, on the other hand, prove to be a red flag for investors. While the firm’s inventory turnover and average days to sell are superior to the rest of the industry, which indicates strong sales, efficient manufacturing, and effective inventory management, Chevron’s fixed asset turnover, total asset turnover, and average collection period are inferior by comparison. By the numbers, it appears that Chevron’s investments in both types of assets have not been as conducive of earnings as they had anticipated, and despite strong sales performance, transactions paid for on credit are not collected as promptly as the rest of the industry. Ultimately, Chevron’s asset management does not bode well for investors and, if not corrected, will continue to take away from shareholder wealth maximization. We find that Chevron’s debt management points to a variety of interesting opportunities, and serves as a tiebreaker in our recommendation to buy or sell the firm’s stock. All ratios under this category point to Chevron’s reliance on shareholders’ equity, rather than debt utilization—made most clear by the firm’s 39%-higher-than-industry average debt- to-equity ratio. Chevron’s reliance on shareholder equity could be perceived as a negative, as it implies more financial risk for the investor (rather than for the firm, as taking on debt would entail), but it can also be viewed as increased debt capacity to be capitalized on in the future. Based on our findings regarding Chevron’s future plans to use its funding, Chevron appears to intend to expand to regions it does not have a strong presence in to date (such as Asia), and shift its efforts towards the ever popular renewable energy movement, and is simply waiting to utilize its debt capacity when market conditions become favorable again and strong income can sustain such significant growth (Chevron Annual Report 2014). In the end, we find that Chevron’s shareholder equity
  • 16. Chevron 16 reliance is an exciting opportunity for expansion, increased market share, and strong earnings as a result of increased debt capacity, and points to promising future for Chevron and investors, alike. While Chevron’s asset management is weaker than its competitors in the petroleum industry, we believe, as a team, that this drawback is compensated by the firm’s strong profitability and promising debt capacity utilization opportunities. Ultimately, purely based on our financial analysis of Chevron, we find that the positives adequately outweigh the negatives, and we recommend investors buy the corporation’s stock.
  • 17. Chevron 17 STRATEGIC BUSINESSANALYSIS Evaluation of Immediate Environment Chevron competes across a wide variety of market segments. Chevron has an upstream business, which includes the exploration and extraction of natural resources. Chevron also has a downstream business, which includes refining and manufacturing, chemicals, products, and transportation. The downstream industry accounts for around 81.61% of Chevron’s revenue, however the upstream business accounts for 88 % of its net income (Chevron 10k, 2014). Since energy from natural resources is consumed everyday by people across many different income and geographic levels, Chevron is fully integrated in refining and selling a commodity good. Oil price is driven by supply and demand, and is set in a futures market. An oil futures contract is a legally binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Oil is usually traded on the New York Mercantile Exchange (NYME) in 1000-barrel increments (Investopedia, 2014). Since oil is traded in a futures market, the price of oil at the pump is based largely on retail locations relationships with their suppliers. There are three primary supply arrangements that influence a retailers operation. Major oil owned and operated -These retail locations receive the oil directly from the corporation’s refinery assets and their profit or loss is integrated in that of the corporation. Chevron owns and operates less than 10% of the retail locations in their name (Chevron 10k, 2014). Branded Independent Retailer - Approximately 52% of retail gasoline facilities are operated by independent business owners who sign a supply contract and sell gasoline under a brand owned or controlled by a refinery company (Chevron, 2014). Branded retailers pay a surcharge per gallon for using refiner’s brand, benefiting from their marketing and more secure supply. When the supplies are constrained, these retailers are given a higher level of priority for accessing product, although access to supplies may be restricted. Unbranded Independent retailer - 43% of retail gasoline facilities are operated by independent business owners who do not sell gasoline under a brand owned or are controlled by a refining company. These retailers purchase gasoline off the unbranded wholesale market, which is comprised of gallons not dedicated to fulfill a refiner's contracts. These retailers do not pay a marketing surcharge like their branded competitors do; consequently, unbranded gasoline is typically sold at all levels of trade for a lower price than branded gasoline. However, when supplies are constrained, these retailers have the lowest level of priority to access gasoline, often incur the largest wholesale price increases and may be completely denied access to the product (NACS, 2008).
  • 18. Chevron 18 The income of Chevron and other large oil companies depend largely on the price of the barrel of crude oil. The price of crude oil has fallen significantly since mid-year 2014, over $150 per barrel to around $40 per barrel. This reflects robust non-OPEC supply growth led by expanding unconventional production in the United States, weakening demand in the emerging markets, and the decision by OPEC in fourth quarter 2014 to maintain its current production ceiling. The downturn in the price of crude oil has impacted, and depending on the duration, will continue to significantly impact Chevrons results of operations and cash flows. It is important to note however, that Chevron and other major oil companies are predicting that oil will increase in price, due to expectations in increasing demand, and slow in supply growth. Oil demand has seen an increase globally in demand from 92.4 millions of barrels a day in 2014 to 93.6 in 2015 (Statista, 2015). From these statistics there does seem to be accuracy in oil companies claims that there is growth in the demand for the oil market. However, Dutch disease, which will be examined more in the macro-environmental section, may cause the supply of oil globally to stay higher than Chevron’s expectations, keeping the price of a barrel low despite future expectations of increased demand. Chevron and its competitors are usually constrained to similar limitations that affect their profitability. Most of the major oil companies are fully integrated which creates an array of competition areas from upstream to downstream. Production levels of OPEC have a huge impact on the level of supply in the market place influencing the price. Upstream business is affected heavily on how well Chevron and their competitors can acquire natural gas, oil leases and other properties for the equipment and labor required to develop and operate those properties. While downstream business, affected by the upstream, competes in transportation, entities, sale and acquisitions of various goods or services in a national and international market (Chevron 10k, 2014). Chevron attempts to differentiate itself from its competitors with marketing claims that its gasoline is superior. “Make no mistake; all gasoline is not the same. By enjoying the benefits of a cleaner engine with lower emissions and higher performance, cars love Chevron with Techron, and so should you” (Chevron, 2014). The chemicals that Chevron adds to its gasoline are meant to add value to its product. This signals to consumers that Chevron’s gasoline is of a higher quality, and as a result, it strengthens the Chevron brand. The 2014 Harris Poll EquiTrend, which takes into account familiarity, quality, purchase consideration, a brand’s ability to generate conversation online, and social media ranked Chevron as the 10th gasoline brand in the United States. (Figure 1.1) Brand strength is valuable, as Georgetown University studies have shown that the stronger the brand equity generally the better the stock performance and the lower the stock volatility (Duffy, 2014).
  • 19. Chevron 19 Rank Brand 1 Costco 2 Murphy 3 Shell 4 Speedway 5 BJ’s 6 ExxonMobil 7 Sam’s Club 8 Hess 9 Sunoco 10 Chevron Figure 1.1 It is important to note that public opinion, and lawsuits affect oil companies significantly. Chevron is defending itself in a lawsuit claiming that Chevron is responsible for environmental and social harms in the Amazon region of Ecuador (This will be discussed further in the macro environmental section). Though these charges look unlikely to ever be enforced, public opinion of Chevron can be hurt by these allegations, causing certain consumers to stop purchasing gasoline under their brand name, ultimately hurting the company and those affiliated.
  • 20. Chevron 20 FIGURE BASED ON FORTUNE 500 OIL PRODUCTION REVENUE 2014 The market share of oil companies is based on total sales revenue for the industry at $5.7 trillion (Fortune 500, 2014). It is important to note that government owned corporations that compete in the market hold a majority of the market share. Although the companies that are presented here have small percentage of global market share, they make up a significant amount of market share among corporations. Chevron’s top five competitors, are Exxon, Shell, BP, Valero, and Conoco. (Bloomberg) Though, because Valero is not a fully integrated company who competes in the upstream business, it will be excluded in the briefs. Exxon Exxon had sales revenue of over $394 billion, and a global market share of 6.9% in 2014. (Figure 1.2) Exxon has a market cap of $333.2 billion, the fourth largest in the world. (Yahoo Finance) Exxon has a massive and efficient upstream business that accounts for 80 cents out of every dollar that the company earns. The competitive advantage that Exxon holds, is the capital and technology to be able to extract crude oil in places other companies do not have the capability. Exxon holds 32 refineries that have relatively
  • 21. Chevron 21 helped its net income, with the decline of oil prices. Exxon is different from others in the industry, as it does not operate in the midstream business. Exxon finds it more economical to let third parties handle the business of operating the pipelines, transportation, etc, (McFarlane, 2014). Shell Shell had $421 billion in sales revenue in 2014 and a market share of 7.31%, highest of the discussed competitors. Shell is different from its competition because it holds the most retail locations at over 44,000 (Shell 2014 Annual Report). The high number of retail stores Shell holds worldwide help its brand, as Shell rank fourth on the 2014 Harris Poll EquiTrend (Figure 1.1) However, the high number of retail locations has also caused Shell to have $353 billion in total assets for 2014, more than Chevron by 25% (Bloomberg, 2014). The large number of retail locations comes with a larger amount of risk and liability. Shell, like Chevron tries to market their gasoline as one of higher quality. On the company website, Shell has pages where the consumer can read how Shell nitrogen enriched gasoline, “Actively cleans performance-robbing gunk from intake valves and fuel injectors.” They also claim “No other gasoline is better”, marketing that their gasoline adds value for their customers. ConocoPhillips ConocoPhillips is a fully integrated global company; it is the third largest oil company in the United States. ConocoPhillips strongly believes in its brand. They claim that their accountability and performance are what separates them (Conoco Annual Report, 2014). However, it is important to note that Conoco sales revenue has decreased by 77% since 2008, causing them to have lost significant market share. This can most likely be attributed to the fact that ConocoPhillips deals almost exclusively in upstream, where profits have been affected the most by lower oil prices (Nasr, 2015). If the price of crude
  • 22. Chevron 22 barrels continues to stay low, ConocoPhillips will continue to report loses in future quarters. British Petroleum (BP) BP had sales revenue of $353 billion in 2014, and a market share of 6.28%. BP is like the discussed competition, in the sense that it has been seeing lower profit margins due to low oil prices. However, BP is still trying to recover from its responsibility in one of the world’s worst oil spills in 2010, where BP agreed to pay up to $18.7 billion in compensation damages. This spill has severely hurt the financial health of the company (Gilbert and Kent, 2014). This can be seen in the 2014 income statement, where BP reported earnings of $4 billion. This is lower than Chevron’s income by 80% for 2014 (Bloomberg, 2014). BP, like discussed competitors, claims that its gasoline is superior. “Gasoline with invigorate” (BP, 2014). Chevron: Chevron has low sales revenue in comparison to discussed competitors, $200 billion (Bloomberg, 2014). However, in 2014 Chevron reported net income of $19 billion. Only Exxon had a higher net income, $32 billion (Bloomberg, 2014). Chevron also has a relatively high market share, 3.37%. (Figure 1.2) Chevron holds two more brands, Texaco and Caltex. These increase the company’s relevance and customer’s options when at the pump. Thanks to personal prepaid cards and business credit cards that Chevron offers, customers can enjoy more convenience and options to buy snacks,
  • 23. Chevron 23 fuel and services at the at any Chevron, Texaco, and Caltex gas station. These cards and brands add value to Chevron by offering customer convenience (Chevron, 2014). Perceptual Map The variables for the perceptual map are market share (Y-axis), and net income (x-axis) based on 2014 data (Figure 1.3). This map shows us that though Chevron holds median market share, it is has high net income. Despite their net income falling by 28% from 2013, Chevron reported higher net income than all discussed competitors, besides Exxon. This drop in net income is due to oil prices per barrel falling from over $136 in 2008 to $40 in 2014 (Forbes, 2014). This map suggests that Chevron has been able to run more efficiently than its competitors. Chevron has room to increase its market share through the production of more barrels of oil and equivalents. Chevron currently produces 2.6 million barrels of oil and equivalents per day, while Exxon currently produces 5.3 million of barrels of oil and equivalents per day (Forbes, 2014). Chevron is attempting to increase their market share by investing $3 billion in exploration activities to drill more than 50 exploration and appraisal wells worldwide (Chevron Annual Report, 2014). Figure 1.3
  • 24. Chevron 24 BCG Matrix The BCG Matrix is used to evaluate the firm’s products in terms of market share and growth potential. U.S. shale natural gas extraction and refining is a star for Chevron. According to leading market research firm MarketsandMarkets, production volume of shale gas is expected to grow at a compounded annual growth rate of 5.4% until 2021(MarketsandMarkets, 2014) The Gorgon project is in the final stages of commissioning to allow start up of train 1. The project has the capacity to supply 300 terajoules of gas per day to Western Australia. It is globally one of the largest natural gas projects ever undertaken, where Chevron is a subsidiary of 47% (Chevron, 2014). Geothermal is another star for Chevron, as the market has continued to grow at a steady compounded rate of 4% to 5% (Matek, 2014). Chevron’s geothermal interest in Indonesia and the Philippines produce facilities that have an operating capacity of 1,339 mega- watts, capable of providing energy for millions of people in these countries (Chevron.com). Chevron’s cash cows include its oil lubricants/cleaners, where the top four companies Exxon, Shell, BP, and Chevron hold over 42% market share (GrandViewResearch). However, it is important to note that lubricant growth depends heavily on the economy, following the market with a relatively close beta. Lubricants have a high barrier to entry as brand locality plays a large part (Ibisworld.com). Crude oil is also a cash cow for Chevron. Chevron holds a high market share at 3.37% (Figure 1.2) and growth in the market is projected to be low due to macro environmental factors that will be discussed later in the analysis. Another cash cow for Chevron includes their joint venture, Chevron Phillips Chemical. The company is half owned by Chevron and half owned by Phillips 66, and is a top supplier of products used to make many convenient items, including HDPE for pressure pipe, Styrentics for packaging and electric parts, Aromatics for solvents, Olefins for plastics and fibers and lubricants. The chemical industry is expected to have high, but slowing growth with a compounded annual growth rate of over 4% for 2015-2020. Chevron Phillips Chemical contributed over $2 billion in income for Chevron in 2014 (Chevron Annual Report, 2014).
  • 25. Chevron 25 Chevron Power and Energy Management (Gas-Fired Cogeneration Facilities) are question marks for Chevron. The Gas-Fired Cogeneration Facilities produce energy through six plants, which this sub company of Chevron owns and operates in California (Chevron, 2014) Chevron Technology Ventures is a dog for Chevron. It is one of the three technology companies that Chevron owns to support its worldwide operations. It identifies, develops, and sponsors emerging energy technologies and helps integrate them into Chevron’s core business. In 2014, Chevron spent $300 million in this sub company (Chevron, 2014) However, this amount will probably be reduced significantly in the upcoming year due to Chevron’s expectation to reduce spending. Macro-environmental Forces Impacting the Firm Some of the major macro-environmental forces impacting Chevron include oil price volatility, environmental regulations, accidents, and taxes. Oil price volatility impacts all firms involved in the oil business. Oil price is dictated by supply and demand. The U.S. production of oil has nearly doubled in the last six years. Foreign oil producers who used to solely import their oil into the U.S. are now trying to compete in the Asian markets. Part of their competing strategy is to drop their prices. On the demand side, the underperforming economies of Europe and some developing
  • 26. Chevron 26 countries have reduced their consumption for oil. Car efficiency has also played a role in reducing the demand for oil (Krauss, 2015). Oil companies suffer from the drop in oil prices because they are forced to sell oil and oil refined products at a price that is below the cost of production/extraction. Royal Dutch Shell has announced cuts to their payrolls to save cash and many smaller oil and gas producers are cutting dividends and selling assets to be able to continue operations (Krauss, 2015). “Most of Chevron’s earnings depend on the profitability of its upstream business segment. The biggest factor affecting the results of operations for the upstream segment is the price of crude oil. The downturn in the price of crude oil has impacted, and, depending upon its duration, will continue to significantly impact the company’s results of operations, cash flows, capital and exploratory investment program and production outlook. If lower prices persist for an extended period of time, the company’s response could include further reductions in operating expenses, capital, exploratory expenditures, and additional asset sales” (Chevron Annual Report, 2014). Chevron purchased $5.0 billion of its common stock in 2014. Due to the current market conditions, the company is suspending the share repurchase program for 2015 (Chevron Annual Report, 2014). Chevron 2014 Annual Report, p. 11 The West Texas Intermediate (WTI) price of crude oil averaged $98 per barrel in 2013 and $93 in 2014. At November 18th, 2015, the price was at $41 (CNBC, 2014) Oil prices are not likely to recover any time soon because oil production does not seem to decline fast enough in the United States. The recovering economies in some countries may bring demand and oil prices up within the next year or two (Krauss, 2014) A peculiar type of macro-environmental factor that affects Chevron indirectly is Dutch Disease. Dutch Disease occurs when countries with strong currencies purchase oil that is exported from countries whose economies rely heavily on oil production, but have a weaker currency. When countries with stronger currencies, such as the United States, buy the crude oil exported from countries with weaker currencies, it floods the weaker currency country with dollars. This inflow of dollars (stronger currency) causes the local currency to be worth more, along with the price of the goods that these countries produce. Then, these goods reach prices that are not competitive in foreign markets, which causes the weaker currency countries to either rely more heavily on the production of oil, or to come up with innovative policies to diversify their economy and make up for lost
  • 27. Chevron 27 income. If they choose to rely more heavily on oil production, then the world supply of oil goes up, and consequently the price of oil goes down. This is known as the Dutch Disease (Belinski, 2015). Environmental regulation and litigation regarding environmental issues is a macro- environmental factor that affects all oil companies. Chevrons as well as many of its top competitors are consolidated in the U.S. However, Chevron differs because it also has a big downstream segment. This segment consists of 13 refineries and five major chemical manufacturing facilities throughout the world (Chevron Supplement to Annual Report, 2014). These refineries are held to increasing environmental standards, which add costs to the manufacturing process of fuels and are hard to predict when they will increase. “Virtually all aspects of the business in which the company engages are subject to various international, federal, state, and local environmental, health and safety laws, regulations and market-based programs. These regulatory requirements continue to increase in both number and complexity over time and govern not only the manner in which the company conducts its operations, but also the products it sells” (Chevron 2014 Annual Report, 2014). A recent example is MTBE. MTBE, or methyl tertiary butyl, is a gasoline additive that was widely used by Chevron and many of its competitors to raise octanage. MTBE is harmless but it can render large reservoirs of water undrinkable due to its unpleasant taste, if it leaks from gasoline deposit tanks or refineries (Chevron, 2014). MTBE was banned in California and New York, especially hurting Chevron since it owns most of its U.S. refineries in California. Chevron along with other companies that used MTBE in California have pending litigation, making it hard to assess how it is going to turn out (Chevron Annual Report, 2014). A good portion of Chevron’s resources is directed towards litigation over alleged accidents. $150 million went towards settling an oil spill off the coast of Brazil, for which the Brazilian government asked $22 billion initially. Nigeria wants $3 billion for a gas well operated by Chevron that blew up and killed two workers in 2012. In Ecuador, Chevron has decades of long pending litigation for oil spill damages to the Amazonian Rain Forest. A judge levied an $18 billion judgment against Chevron in Ecuador in 2011. This litigation is still pending due to the many proofs of evidence brought forth in court against the judges by Chevron due to blatant acts of corruption and bribery from the plaintiff’s part (Helman, 2015). It seems like accidents like the ones mentioned should not count as macro environmental factors affecting the firm. However, the repercussions of those accidents are more often than not determined by the magnitude of the accident, but by the local political situation of where they happened as well as the instability of legal institutions. These political situations that determine the outcome of litigation are macro environmental factors that very tangibly affect Chevron as a firm. “When you run one of the world’s biggest oil companies, stuff happens. Billions of dollars worth of stuff” –Christopher Helman (Helman, 2015). Interestingly enough, Chevron treats these accidents as a macro environmental force. This is an excerpt from the Environmental Matters section of the 2014 annual report: “It is not possible to predict with certainty the amount of additional investments in new or existing facilities or amounts of incremental operating costs to be incurred in the future to: prevent, control, reduce, or eliminate releases of hazardous materials into the environment; comply with existing and new environmental laws or regulations; or
  • 28. Chevron 28 remediate and restore areas damaged by prior releases of hazardous materials” (Chevron Annual Report, 2014) Total worldwide environmental capital expenditures for 2015 are expected to be at $0.9 billion, which are in addition to already ongoing costs of complying with current environmental regulations (Chevron Annual Report, 2014). Pending Litigation for Chevron Taxes are macro environmental forces that affect either adversely or positively all oil firms, though it is usually adverse. However, Chevron was affected positively on taxes that do not have to do with income due to a decrease in duty expense in South Africa along with lower consumer excise taxes in Thailand (Chevron Annual Report, 2014). Marketing Mix Due to Chevron’s diverse line of products and services, we decided to focus on gasoline in this marketing mix because it is the most sold product in its downstream segment. Also, it is the product that most people are familiar with. The most sold product overall is actually crude oil condensate and it is produced in its upstream segment. This relates to our perceptual map since the map depicts net income, which is directly affected by revenue. Product: Chevron makes most of its net income from the upstream business. However, the ultimate consumer does not want crude oil, he/she wants refined a refined product. Chevron’s most sold downstream product is gasoline. It 2014 alone, Chevron sold $41.3 billion worth of gasoline. This accounts for 44% of all refined product sales and 22% of Chevron’s operating revenue. (Chevron 10k) Consumers use gasoline for a wide variety of products that range from cars, boats, and some airplanes in the transportation sector, to power generators, lawn mowers, leaf blowers, etc. in different sectors throughout the world. Today’s world and economies heavily depend on fossil fuels such as gasoline to meet its energy needs. Ecuador Nigeria California
  • 29. Chevron 29 Price: The price of gasoline is determined by the price of crude oil, as well as refining, marketing, distribution, and tax expenses. About 47% of gasoline prices are determined by the price of crude oil. About 20% of the price of gasoline is determined by taxes, 19% is due to marketing and distribution costs, and the remaining portion is due to refining costs. (U.S. Energy Information Administration) Due to the large dependence upon the price of crude oil, the price of gasoline is largely affected by factors outside of its manufacturer’s hands. Place: Chevron makes most of its gasoline available through 19,550 retail stations under the brands of Texaco, Caltex, and Chevron. Chevron franchises the majority of these locations and makes money of a commission from the volume of gasoline sold through each location. These retail stations are spread throughout the world in the following countries: Canada, Hong Kong, Malaysia, New Zealand, Phillipines, Singapore, South Africa, Thailand, and the U.S. Chevron also distributes gasoline through jet fuel service companies in 35 airports across the world. (Chevron.com) Chevron does all of its distribution through its transportation segment. This reveals how fully integrated the company is. Promotion: Chevron does not engage in promotional campaigns that advertise its products individually. This is due to the price inelastic nature of fuels. Lubricants are the exception to this. The type of promotion that Chevron engages in is company wide advertisements, which promote a good image of the company, typically portraying something good that they do for the environment, or the number of jobs that they create. These types of promotions are intended to impress a good image of the company upon its potential consumers and create further sales. Image can play a huge role in the outcome
  • 30. Chevron 30 of the business. BP, for example, lost a lot of customers as a result of the oil spill they had in 2010. The same happened to Exxon after the oil spill that they had in Alaska. Isolated Sales Forecasting We chose to use the revenue from upstream and downstream activities because they are the main revenue sources for Chevron. Revenue from upstream represents the revenue made from the exploration and extraction of crude petroleum and natural gas. Revenue from downstream represents the revenue made from the refining and chemical operations that transform the petroleum and natural gas into various products. Other sources of revenue include areas of technology power management operations, but these amounted to only 0.11% of the total revenue for Chevron in 2014. Since the contribution of these other sources of revenue is relatively small, they are not discussed in the analysis. U.S. GDP is the macro environmental variable. GDP stands for Gross Domestic Product. We chose GDP because Chevron is a U.S. based company that holds most of its downstream operations in the U.S. We also chose GDP because of the increased production of U.S. oil over the last years has played a critical role in the drop of oil prices (Chevron Annual Report, 2014). 197,565 243,841 230,208 219,795 200,239 211,807 y = -4E-06x + 275396 R² = 0.0521 0 50,000 100,000 150,000 200,000 250,000 300,000 14,000,000,000 15,000,000,000 16,000,000,000 17,000,000,000 18,000,000,000 19,000,000,000 Revenue GDP Linear Regression
  • 31. Chevron 31 The values displayed for the year 2015 are forecasted values obtained through the forecasting function of excel. The forecasted GDP was obtained based on the U.S. yearly trend from the past five years. Since GDP is the independent variable, the forecast for the revenue was made based on the forecasted value of GDP for 2015. The next step was to do a scatterplot using the known data for GDP and revenue plus the newly forecasted one. Again we used GDP as the independent variable, and revenue as the dependent variable. After that we added a trend line and displayed the R^2 value, as well as the formula of the line We found that the relationship between GDP and revenue is not clear-cut. GDP has been steadily increasing over the past 5 years, whereas revenue from Chevron’s main operating activities has fluctuated without a clear sense of direction. Our analysis goes as follows: Increased GDP reflects the increased production of U.S. oil, which has nearly doubled over the past 12 years. This increased supply coming from the U.S. has been attributed as part of the reason for the recent drop in world prices. (Krauss, 2015) Chevron makes most of its income from the upstream segment. Low oil prices forces Chevron to sell the crude it extracts at a price that is below operational costs which causes it to lose money. However, on the downstream side of things, cheap oil is not so bad. It allows Chevron’s downstream segment to acquire crude at a lower price and refine it into gasoline and other products at a lower cost. This seemingly inversely proportional effect that GDP seems to have on upstream and downstream is what makes the sales forecast hard to read. What we know is that until oil prices come up again, Chevron will more than likely continue to struggle to make ends meet, given the heavier role that the upstream segment plays in its operations. This struggle to make ends meet has also caused Chevron to cut back on payrolls and close off some assets. The closing of these assets also accounts for a decrease in revenue given the decrease in production that it causes. US GDP* Revenue From Upstream & Downstream. * 2010 14,964,372,000 197,565 2011 15,517,926,000 243,841 2012 16,163,158,000 230,208 2013 16,768,053,000 219,795 2014 17,419,000,000 200,239 2015 18,014,316,700 211,807 *In millions (World Bank, GDP)
  • 32. Chevron 32 MANAGERIAL ACCOUNTING ANALYSIS Analysis of CostBehavior Chevron is one of the worlds largest integrated energy companies, and is known around the world though its three different brands, Chevron, Texaco, Caltex. Chevron’s American products fall under the Chevron and Texaco brands, while the international products are mostly available through Caltex, except for Texaco in Europe. Chevron, Texaco, and Caltex all use various direct materials in the production of the petroleum products it produces. The main products these brands carry are gasoline, jet fuels, gas oils, lubricants, and residual fuel oils. One of the main materials that each of these products contain is crude oil, which chevron produces through its upstream segment. Most of all of Chevron’s retail fuels contain Techron, which is a gasoline additive and has been developed by Chevron to help engine parts stay cleaner in order to produce lower engine emissions. Another direct material that is used in the production of the lubricant products is the packaging. Nearly all of the lubricant products are packaged in a thick plastic bottle. Chevron carries significant overhead expenses from both its downstream and upstream business segments. Chevron’s overhead from its downstream business is largely due to the manufacturing of the fuels and other products sold. The manufacturing of the products is done through various refineries around the world. Chevron incurs substantial overhead expenses in order to keep these refiners operating. The upstream segment of exploration and production of the crude oil and natural gas also plays a huge role in Chevron’s overall overhead costs. Chevron is producing millions of barrels of oil reserves each day due to its production operations across the world. The company is invested in many different projects both on and off shore in order to keep up with its oil and gas production. These projects require Chevron to operate thousands of plants and wells across the world, all which contribute to the company’s overhead expenses. Due to Chevrons reliance on massive plants and refiners in the production of its products and services, most of the company’s costs are fixed. Chevron acquires an assortment of fixed expenses in order to keep all of its production operations performing efficiently, as well as maintaining the complex machinery. Chevron’s fixed costs are made up of, regulatory compliance costs, which will not vary much with the level of production. Other fixed costs are the equipment and land that Chevron has bough, because these costs will stay constant no matter how much oil is produced. And lastly, Chevron acquires fixed costs because of its workers who have long-term contracts, such as company officers and consulting geologists (Chevron, 2014). Chevron also supplies itself with the crude oil needed in the production of most of their downstream products, which allows the company to cut out some variable costs from outside supplies. Since most of Chevron costs are fixed, it creates a more difficult and complex decision- making process when dealing with production problems. If Chevron had more variable
  • 33. Chevron 33 costs it would allow the company to cut operating costs more easily. It is easier for a company to remove a variable cost from a process without completely altering it, but this is much more difficult to do with fixed costs. If Chevron wanted to lower the companies operating costs in its upstream segment of exploration the company would most likely have to shut down a plant. Chevron would have to do this because the plants operation is based mostly on fixed costs, so the only way to remove these costs would be by shutting down the plant completely. ProcessAnalysis The costing system that Chevron most likely uses is the process costing system. The process costing system is best used in production systems that mass-produce identical products over a long period of time. In the process costing system the product costs are divided evenly between all of the products produced during that time period (Davis, 2015). This type of costing system fits best with Chevron because almost all of the products that Chevron produces are mass-produced in a uniform manner. When Chevron is producing Delo Engine Oils, each bottle on that production line is going to have the same amount of the same product in it. This is the same for any of the other products that Chevron produces; each bottle of that product is going to use the same amount of direct labor and direct materials in the production of it. Using the process costing system it would be much easier for Chevron to analyze how much it costs to produce one unit of engine oil, than it would be using a job costing system. Chevrons supply chain is much different than most companies; this is because Chevron is its own supply chain. Chevron controls and operates both the upstream and the downstream business aspects of the company; this means Chevron is the supplier, the manufacturer and also the distributor of the company’s supply chain. Since Chevron controls every part of its supply chain, it allows them to have more control over product costs. When a company is dealing with an outsourced supply chain they are not in control of the prices that they supply demands. If there is a high demand for a certain material that is necessary in the production of a product the supplier has the ability to mark up the price that material. The company that is producing the product then has the make the decision to pay the marked up price of the material or the company may try and find another supplier at a cheaper price. No matter what option the company choices, they still had to go through this problem because of their outsourced supply chain. Chevron does not have to worry about this type of problem because they are their own supplier of the direct materials used in the production of the company’s products. Since they do not have to worry about any outside suppliers Chevron is able to price its products based solely on things that are in the company’s control.
  • 34. Chevron 34 BalancedScorecard Strategy Map Increase profit Financial Invest in Workplace Operational Excellence Internal Execute with Excellence Decrease Costs Customer Pricing Customer Satisfaction Learning & Growth
  • 35. Chevron 35 FinancialPerspective - Increase Earnings In 2014, Chevron’s net income was $19.241 billion; this was a decrease compared to 2013 when the company’s net income was $21.423 billion and even more of a decrease from 2012 net income of $26.179 billion (Chevron Annual Report, 2014). One of the reasons for the drop in net income has to do with the price of crude oil, which has fallen significantly. This decrease in price of crude oil has directly impacted Chevron’s operations. The company is investing a large amount of money in its upstream segments, including exploration and production over the past years but Chevron has had to cut back on these costs in response to the fall crude oil prices. Since Chevron’s upstream business accounts a large amount of its earnings from the sale of crude oil, the company is going to continue to be hit with losses until the price of crude oil increases or Chevron decreases operational expenses. Measure: 1. Decrease operating and administrative expenses by 10% Decreasing Chevrons operation and administrative expenses by 10 percent is a lagging financial metric. It is lagging because Chevron will not be able to see if the 10 percent decrease in these expenses actually increased the company’s earnings until after a certain point in time. 2. Decrease capital and exploratory expenditures by 20% Decreasing Chevrons capital and exploratory expenditures by 20 percent is a lagging financial metric. It is lagging because Chevron will not know if the 20 percent decrease in these expenses actually increased the company’s earnings until after a certain point in time. Customer - Pricing Since Chevron is in control of its own supply chain, it becomes easier for the company to have control over the price of its products. Chevron is able to maintain a competitive advantage over its direct competitors because they do not have an outsourced supply chain. The problem that can occur with having control over its supply chain is that Chevron takes direct hits when things like, a decrease in crude oil price occurs. Since most of the products that Chevron produces contain mostly crude oil, you would think that would mean they are able to price their products even cheaper now that crude oil is cheaper. This is not so, if Chevron were to do this, then they would be loosing even more money. They have to keep their prices at a point where they are still able to cover some of the operational expenses. This becomes a problem when dealing with customers because most people want to buy the cheapest gas they can find, and if Chevron is not able to compete with other companies’ prices, then they will start to loose customers.
  • 36. Chevron 36 Internal - Execute with Excellence One of Chevrons strategies is to “Execute with Excellence through rigorous application of our operational excellence and capital steward systems and disciplined cost management”(Chevron, 2014). As a whole, Chevron finds it extremely important to operate every aspect of the company in responsible and efficient manners, in order to achieve operational excellence. One of Chevron’s values is High Performance, the company is finds it extremely important that it does not settle when meeting goals, but yet Chevron strives to exceed the expectations that have been set. Internal - DecreaseCosts Due to the decrease in price of crude oil over the past year, Chevron has to cut costs in order to cut the companies losses as much as possible. These costs are being cut from operational costs and administrative expenses and a decrease in exploratory expenditures. Once Chevron starts to decrease these costs the company will be able to make up for some of the financial losses that they have incurred over the past two years. Measure: 1. Manufacturing cycle efficiency of 95% This is a lagging non-financial metric. It is lagging because Chevron will not know if the if having 95% efficiency in the company’s manufacturing cycle will have an effect to Chevrons internal strategies. Learning and Growth - Invest in Workforce One of Chevron’s company wide strategies is to invest as much as possible in the people of Chevron in order to develop a talented global workforce that gets results the right way. Chevron works to deliver energy to the world in every way that is possible. Chevron trains its employees to work to find new ways to develop reliable energy that is affordable. Learning and Growth - OperationalExcellence Chevron has set up a program called Operational Excellence, this program provides employees and contractors with 10 Tenets of Operation they must follow. This code of conduct is based upon two key principles, Do it safely or not at all, and There is always time to do it right. Operational Excellence was set in order to provide a company wide program that insures that Chevrons employees are being as safe as possible while
  • 37. Chevron 37 working and also that they are completing all tasks as efficient as possible. Chevron uses Operational Excellence as a way to focus on five different areas; safety, health, environment, reliability, and lastly efficiency. Chevron Measure: 1. Number of Employee on job injuries, Less than 1% This is a lagging non-financial metric to measure if Chevron’s employees are following the Operational Excellence program and being as safe as possible while working for Chevron. STRATEGIC ASSESSMENTOF OPERATIONS In this section, we set out to make a strategic assessment of Chevron’s operations, all as it applies to supply chain, technology, infrastructure, and company culture. We found that Chevron comprises a vertically integrated supply chain, which enables it to have closer control over its operational activities, as well as easily coordinate day-to-day activities and minimize costs. The firm entails a number of order qualifiers that make it competitive in the petroleum market, as well as order winners and distinct competencies in its extraction, refining, and sales that ultimately give it distinct competencies and an edge over the competition in a variety of aspects. Likewise, we found that Chevron utilizes advanced and unique technologies that enable superior performance in fault imaging, monitoring oil levels in extraction sites, and optimal performance of refinery machinery. As it pertains to corporate culture, Chevron operates under an array of cooperative and ethical modi operandi such as “The Chevron Way” and its Operational Excellence Management System (OEMS), as well as conducting several Corporate Social Responsibility initiatives that promote environmental, social, and financial sustainability (Chevron, 2014). Key Order Winners and Qualifiers, Distinctive Competencies Order Winner: Worker Safety and the Environment Chevron’s main focus, like most companies, is to create value for their stockholders and to keep their process consistent and efficient for quality products. To add value to a company, it is important to discover the key characteristics that set the company apart from its competitors. These characteristics are known as order winners. Chevron has competitive advantage in several different avenues. One main focus for Chevron is
  • 38. Chevron 38 dealing with the safety of its people and the environment. Oil companies are always scrutinized and criticized by environmental groups and human rights organizations. By going against the mainstream, Chevron created an order winner out of an unlikely sector for energy and oil companies. Chevron is an order winner in environmental safety compared to its competitors, but it still is not completely clear of environmental issues. The reason for order winners though is to stand out from its competitors in the same industry, not other industries. In the annual corporate responsibility report, it states that “The Chevron Way” is striving “to develop a culture in which everyone believes that all incidents are preventable and that ‘zero incidents’ is achievable” (Chevron Annual Report, 2014). The “Zero is Attainable Personal Safety” initiative has allowed “66 [of Chevron’s] organizations [to receive] 176 Personal Safety awards” and “36 organizations earned 59 Process safety awards” (Chevron Annual Report, 2014). Chevron developed a system called Operational Excellence Management (OEMS) to “systematically manage process safety, personal safety and health, the environment, reliability, and efficiency” (Chevron Operational Excellence Management Overview, 2014). This system was created to keep regulations in place and to minimize the risk of incidents. The goal is to manage processes as to prevent “explosions, fires, and accidental releases”. The OEMS focused on leadership accountability because leaders set the objectives of the company and guide the company in a specific direction. A major portion of the OEMS is the Management System Process, which “is a systematic approach used to drive progress toward world-class performance” (Chevron Annual Report, 2014). This process is used to identify potential risks and to assess the effectiveness of the company. Oil and energy companies constantly feel the pressure of protecting the environment, especially after the BP oil spill in 2010. Even though all of Chevron’s competitors have a safety system in place, Chevron’s environmental safety system seems to be more in depth and more involved. This is proven when in 2014, Chevron’s Total Recordable Incident Rate was the lowest it has ever been since the beginnings of the company. HART Energy Publishing, the world’s largest energy industry publishers, honored Chevron in 2009 with the Refining and Energy Companies of the Year Award. This award entails that Chevron is focused on three personal and corporate achievements: “a cleaner environment, investment and corporate growth, and vision”. The cleaner environment category is
  • 39. Chevron 39 mainly focused on the aspect of producing not only cleaner gasoline, but higher quality gasoline as well (Chevron Annual Report Supplement, 2014). A main focus for oil companies in protecting the environment is to concentrate on petroleum spill volume. Chevron has decreased its total spill volume in barrels from 10,169 in 2011 to 838 in 2014 (Chevron Annual Report, 2014). Another accomplishment of Chevron is its overall score of 95 points on the CDP S&P 500 Climate Change Report. This report takes into consideration how visible a company is when it comes to environmental risks. They are concerned with the carbon footprints of major companies. Chevron was ranked number six out of the top performers. The CDP looks at two different emissions, one is “all greenhouse gas emissions that are directly from sources that are owned or controlled by the reporting entity” and the other is “All indirect greenhouse gas emissions from the consumption of purchased electricity, heat, or steam” (CDP Report, 2014). Compared to its competitors, Chevron had the strongest score. ConocoPhillips received a score of 89 and Exxon Mobil Corporation received a 76. Being environmentally conscious is an order winner for Chevron because it shows that the company is not just considered with making a profit and producing the most barrels of oil, but they are thinking outwardly about the health of the environment. It provides them a competitive advantage over its competitors by showing that they are transparent about the harmful effects of drilling and refining oil and the steps they are taking to minimize their carbon footprint. One way Chevron is limiting their effects on the environment is by researching new types of energy. Chevron is the world’s leading producer of geothermal energy, which is created by the heat from the earth and it emits virtually no greenhouse gases. They began the research and development of geothermal energy in the 1960s and have expanded from California to Indonesia and the Philippines. Other than the company itself, “Chevron also has a 40 percent interest in the Philippine Geothermal Production Company” (Chevron Annual Report, 2014). Chevron strives to increase the production of geothermal energy because it is a clean, renewable energy. Exxon is also looking to geothermal energy, but they only have stake in New Zealand. But, geothermal energy is not evolved enough to support the current world’s energy needs. Because of this, Chevron has invested three billion dollars in environmental projects in Kazakhstan alone. “Chevron is Kazakhstan’s largest private oil and gas producer” and they have “increased gas utilization rates to
  • 40. Chevron 40 more than 99 percent” (Chevron Annual Report, 2014). Chevron also has researched solar, wind, biofuel, and hydrogen as options for renewable energies. Order Winner: Cost Leadership Another order winner for Chevron is cost leadership. For the past five years, Chevron has been ranked number one in earnings per barrel in upstream, downstream, and chemical compared to its competitors (Chevron Annual Report Supplement, 2014). Chevron announced in the annual report that they will have “an exploratory budget of $35 billion”, which is “13 percent lower than total investments for 2014”. They did this by being selective of their various investments. With the ever-changing costs and operating expenses of crude oil and natural gas, Chevron is exposed to macro environmental factors. To counter these negative factors, Chevron has to focus on cost management. Chevron’s overall cost of goods sold in 2014 was roughly $160 billion. Exxon’s cost of goods sold was around $285 billion and BP’s was $199 billion. Lowering costs will help Chevron have a distinct competitive advantage, especially with the recent decrease in the price of oil. Oil has cost roughly $110 per barrel over the four years, but has now dipped below $50 per barrel in 2015. The drop in oil price is partly caused by the efficiency of oil production. Over the past few years, the United States domestic oil production has nearly doubled, which has caused them to import the oil elsewhere (Chevron Annual Report, 2014). This oil is now competing in the Asian markets, which is forcing producers to lower the price of oil. The decline of economies in Europe and the recent stock market crash in China, the demand for oil has decreased, so oil companies are lowering prices to create a competitive advantage. Cutting costs is one of the few ways for oil companies to counteract the lowering price of oil and to keep the same gross margin. Chevron focuses on improving refining processes to keep costs down as well. An example of improving process is a project in Salt Lake City, Utah where they updated an atmospheric distillation column to increase “plant reliability and feedstock flexibility” (Chevron Annual Report, 2014). Capital and operating costs have been reduced by roughly half due to Chevron’s elimination of “tanks and valves associated with traditional well testing facilities” (Chevron Annual Report, 2014). Chevron also chose to focus on
  • 41. Chevron 41 the part of its business that had the largest component, which is crude oil in the downstream business. Roughly 85% of Chevron’s revenue comes from the downstream business. Chevron also has invested around $707 million in research and development to come up with ways to be more cost effective and to be environmentally friendly (Chevron Annual Report, 2014). Order Winner: Techron The energy and oil market could be considered an oligopoly because there are only a few leading companies that dominant most of the industry. The hardest part of being in an oligopoly is creating differentiation in products. Oil is a commodity that cannot be altered much to create a different product. But, oil is always in high demand, so it is important for a company to create differentiation between itself and its competitors. Chevron has trumped this statement and by adding Techron in its oil. Techron is a fuel additive that was developed by Chevron that was created to meet fuel cleanliness standards (Techron, 2014). Chevron’s gasoline was one of the first to be named “Top Tier Detergent Gasoline” (Techron, 2014). Top Tier Gasoline is described as the “premier standard for gasoline performance” that require certain EPA levels “to ensure optimal engine performance”. It helps to protect car engines from deposit buildups, which can be harmful to car. Keeping car engines clean will maximize mileage, prevents loss of power, and lower harmful emissions (Techron, 2014). By removing sulfur and other deposits, Chevron has created a way to please customers by having a cleaner, higher quality of fuel. This would be considered an order winner because none of Chevron’s competitors have a similar product that is as high quality and efficient as Techron. Order Qualifiers A main concern for oil companies is how consumers perceive its brands. Chevron has coined the phrase “The Chevron Way”, which means “getting results the right way”. (Chevron Way, 2014). The goal of this slogan is for Chevron to show to its consumers that it wants to be transparent as possible. The company is built on certain values, such as integrity, trust, diversity, ingenuity, partnerships, protective, and high performance. Some of the key enterprise strategies that Chevron embodies include investing in people to develop “a talented global workforce”, executing with excellence, and growing profitability to keep a competitive advantage (Chevron Annual Report, 2014). Another focus is trying to differentiate in the technology department and investing in renewable and efficient energy solutions. “The Chevron Way” would be considered just an order qualifier because the other competitors have a similar outlook on their goals. Valero does have similar visions, missions, and values, but they have not coined a phrase to embody these ideas. Shell, BP, and Exxon also do not have a phrase to explain what their company is striving to do. ConocoPhillips is closest to Chevron in that they have the title “SPIRIT” to describe their values: safety, people, integrity, responsibility, innovation, and teamwork (ConocoPhillips Who We Are, 2014). If these companies did not have a clear vision, they would not be as successful and effective in the oil industry.
  • 42. Chevron 42 Service stations are the way that oil companies reach the typical consumer and not business-to-business interactions. With three premium brands (Chevron, Texaco, and Caltex), Chevron has gas stations located all over the world. This would be an order qualifier because having service stations are considered a competitive characteristic if oil companies want to be in the minds of consumers. Even though Chevron has roughly 8,000 service stations, its competitors have many more. Shell has over 44,000 stations and Exxon has around 19,000 stations, but Valero has only 7,400 stations. It is important for Chevron to keep its consumer base of gasoline sales because it makes up roughly 20% of its revenue from upstream and downstream productions for 2014 (Chevron Annual Report, 2014). Chevron, Texaco, and Caltex stations do not do anything that differentiates themselves from the other gas stations. But, Chevron does not focus on gasoline stations as much due to the fact that approximately 35% of the total upstream and downstream productions come from crude oil. This is why Chevron is concerned with the exploration and production of crude oil. Another order qualifier for Chevron is its brand and logo value. Chevron’s brand was built on the ideas of quality, reliability, and cleanliness. It wanted to be an “engaging and likeable persona” (Brand Index, 2014). Strong brand value has allowed the Chevron Corporation to be the second-largest United States based energy company. Chevron’s logo was inspired by a shield or personal armor. This logo was made to show that Chevron is a positive and fortified company. Shell and Exxon are considered the oil companies with the most recognizable brands and logos (Cassaro, 2014). All of Chevron’s competitors have strong logo recognition as well because consumers pass several gas stations everyday. With oil being a commodity, these companies have to focus on keeping their brand and logo in the minds of consumers. One way that Chevron tried to increase its brand value was by creating the “Chevron Car”, which was an advertising campaign that consisted of television advertisements, billboards, and toy cars. The reason behind the cute and fun drawings of the cars, which was completed by Aardman (creator of Wallace and Gromit), is to show the lighter side of Chevron. These “charmingly chatty” cars were created to create a stronger customer connection (Chevron Cars, 2014).