Chevron Corporation Earnings Call Nuggets: Tax Rates and Cash Distribution
Chevron Corporation (NYSE:CVX) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.
Edward Westlake – Credit Suisse: Just a quick question on the tax rate if I may. Obviously, it dropped down to 39.3 and you flag favorable tax rates in some of the commentary. Are there any sort of structural changes here in terms of shifts or is this tax optimization in the quarter?
Patricia E. Yarrington – VP and CFO: There is nothing structural here Ed. As you probably know that as certain projects mature and particularly as they get to the FID stage, it’s not unusual to have certain tax impact triggered by reaching that project milestone and that’s really what we saw occurring here in the first quarter. That’s what gave a lower effective tax rate in first quarter ’13. We expect this to balance out over the end of the year and so I think from a longer term perspective, thinking back to the 2012 effective tax rate, which is about 43% that’s a pretty reasonable place for you to peg the overall expectation for the year.
Edward Westlake – Credit Suisse: And then just switching topics, on natural gas in the U.S., obviously, a bit of benefit from Marcellus and Atlas over the last couple of quarters, but the gas price, I guess, it’s rebounded a little a little bit. Should we expect that gas production probably turns down a little bit as it started to in the first quarter as you go through the balance of the year?
Patricia E. Yarrington – VP and CFO: Well, I think what we have said in the past that we have really restricted all of our dry gas production to minimal amounts, principally in the Marcellus area, and of course, we’re being helped there economically by the carry that is still in place. All the rest of our gas production efforts really are geared towards heavy liquid concentration efforts, and so we should continue to see those ramp up.
Evan Calio – Morgan Stanley: Let me ask you maybe a longer-term question of how you think about the longer-term CapEx and cash return strategy? And I ask in the context that in my view Chevron’s relative free cash flow inflection in 2014, ‘15 time period as you begin to see the cash benefit of these relatively heavier and current period of capital investment. And the question hence becomes do you believe that when you likely have incremental cash during this period, the cash returns to shareholders via buybacks or dividends increase or that you see additional reinvestment opportunities in the portfolio to maybe replicate this ‘14 to ‘17 growth period, how you think about that?
Patricia E. Yarrington – VP and CFO: Okay. Well, I would say broadly I mean, first of all, we believe the best way over time that we create value for our shareholders is by making the right investment choices. And if we have a strong queue, if we have projects that are very nicely attractive, nicely economic, then obviously that’s an important element for us. We have been in a stage where we have had very nicely attractive projects. And so that is really what has given rise to the heavy investment period of time. We do take our dividend commitment to our shareholders very, very seriously. That is the first priority of return of distributions to the shareholders. So you should expect that to continue to grow as long as earnings and cash flow continue to grow, and we of course are able to grow earnings and cash flows if we invest appropriately. So we work very hard at trying to get that balance right between attractive projects for reinvestment in the business and then also dividend distributions to the shareholders. If we get into periods of times where we have surplus cash, free cash flow beyond the C&E requirement, beyond the dividend requirement that’s really what we peg our share repurchase program to distribute, and we look at that every quarter, we evaluate what we think the kind of the medium-term requirements for the firm are in terms of reinvestment. We obviously have a hypothesis about what our Board might do on dividends. We look at what we think is happening from a commodity price standpoint in there for what net generation into the firm might be, and that’s how we peg our share repurchases. It is the most flexible element of our cash distribution formula…
Evan Calio – Morgan Stanley: Understood. Let me try maybe one different way, if I could. The percentage of cap that’s invested in the project queue that’s (not anything real bad) today. It is relatively higher than where it’s been historically. I think you gave the 35% number at the Analyst Day. And I know there’s a lot of variabilities, but under current conditions, would you expect that to normalize back into this 25% to 30% range, once you are exiting this kind of peak spending period through call them 2015 timeframe.
Patricia E. Yarrington – VP and CFO: I think the best guidance I can give you on now would be to, have you take a look at if the duration of the investment cycles for some of the projects that we have underway. When you are talking about LNG project, and of course we have got Gorgon and Wheatstone underway, we have Kitimat which is just in the very, very embryonic stage here, but those have very long investment cycle, 60 month plus. That’s much different than what you would get in sort of the factory investment types of cycles that you might achieve and say a Permian ramp up for example. So, I think you need to look at the kinds of projects that we have in our queue and the overall investments cycle times for those projects in the queue. And that is going to give you an indication of how much pre-productive capital we might have built up on our balance sheet at any point in time. I did say, back in March that our pre-productive capital was in the high 30s. And that is an abnormally high level for U.S. and so all things being equal once you get through the heavy spend period we would expect that to come down as long as, we don’t have another set of projects moving forward. We do try to balance this all out. And in this end I think we have certainly demonstrated a history of doing that being able to do that successfully, because our project queue has been – is very economic and it’s producing the returns that we are benefitting from, from a cash flow standpoint and our investors are benefiting from a distribution standpoint.