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Chevron's 2010 Plans: Shrink Downstream Footprint and Limit North American Nat Gas Activity

Chevron, the second-largest U.S. integrated oil company, will scale back its downstream division, and shift its focus to the exploration and production of crude oil and natural gas this year. We won't know the details of Chevron's plans for its downstream division until March. What we do know is this: a global oversupply coupled with weak demand in a poor economy has squeezed margins on gasoline and other refined products.

Chevron's top execs gave a bit more color on its money-losing division during a quarterly earnings conference call with investors on Friday.

"We continue to see challenged economic condition and we're certainly not satisfied with our downstream results in 2009," said CEO John Watson in a conference call Friday with investors. "We are shifting to a simpler and less costly organization to improve returns and remain competitive in this difficult environment."
"In the course of the cycle we think downstream can earn good returns, certainly in excess of 10 percent," Watson later said. "I think we'll be in the downstream business going forward, but I think we'll be very measured where that footprint is."
Chevron also will limit its North American natural gas development activity due to current market activity, according to information presented during the call. And while Chevron does have position in several shale gas plays in the U.S. and Canada, don't expect any major acquisitions like ExxonMobil's purchase of XTO Energy, Watson said.

Chevron announced earlier this month plans to restructure its refinery and marketing operations, exit some markets and cut jobs. Chevron has already announced it will scale back capital spending in its downstream segment by about $900 million in 2010.

Both Chevron's U.S. and international downstream sectors lost money in the fourth quarter. In the United States, its downstream operations lost $345 million in the fourth quarter, compared with profits of $1.03 billion in the same quarter in 2008. Its international downstream operations lost $268 million compared with earnings of $1.05 billion in the same year-earlier period. Chevron exited 13 markets in 2009 -- asset sales that were all part of the company's plan to lower costs and capital employed in the downstream division, Watson said during the call.

All this means a greater focus on exploration and production, and for Chevron the continued investment in its Gorgon and Wheatstone liquefied natural gas projects in Australia. The company plans to spend $3.5 billion on those two projects alone in 2010.

Earlier this week, Chevron decided to move forward with the development of Papa Terra , a deepwater project offshore Brazil. First production is expected in 2013 and Chevron, which holds a 37.5 percent interest in the project, estimates it will cost $5.2 billion to develop. The project is estimated to recover 380 million barrels of oil.

Chevron is also focused on the Gulf of Mexico and recently blocked Maersk Oil's attempted acquisition of Devon Energy's stake in the St. Malo field. Chevron is the operator of that field and holds a 41.3 percent stake.

Here's the nuts and bolts of Chevron's 4Q results:

  • Chevron reported earnings of $3.07 billion or $1.53 per diluted share in the fourth quarter, a 37 percent decrease from the same quarter last year. Chevron's fourth-quarter earnings were down 19 percent from the $3.8 billion it earned in the third quarter of 2009.
  • Revenues in the fourth quarter were $48 billion, compared with $43 billion in same year-ago quarter. Chevron's full-year revenues were $167 billion in 2009 compared with $265 billion in 2008, a 37 percent decline.
  • The company's full-year 2009 earnings were $10.48 billion, down 56 percent from the $23. 93 billion it earned in 2008.
  • Chevron cut expenses 15 percent or $3.9 billion in 2009
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