Financial Position of Chevron Corporation in Prospects Relating to their Liquidity Finance Essay

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In this report, I revised the financial position of Chevron Corporation in prospects relating to their liquidity, profitability, efficiency and financial stability. In order to arrive at a decision, I collected Chevron’s key financial ratios and used it as a tool to conduct a thorough research. The calculations are showed in this report but sources are referenced to appendices.

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“Financial Position of Chevron Corporation in Prospects Relating to their Liquidity Finance Essay”

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The results the analysis carried out show that the overall comparative performance of Chevron Corporation to ExxonMobil goes a little above average over 3 financial years but also requires reconstruction in areas like their liquidation and increasing inventory levels. Noting the inelasticity in the energy sector, Chevron was also affected by various economic factors which contributed to their performances.

HISTORICAL BACKGROUND

The ideas of many small business entrepreneurs vary upon their respective objectives but regardless of their goals, they share a single desire – success. In the 19th century, an idea was incorporated by the undeterred pioneers Demetrius Scofield and Frederick Taylor in the name of Pacific Coast Oil Company following an oil discovery in Los Angeles, U.S.A. and has been the oldest predecessor of what is identified today as Chevron Corporation. A significant gap from 1879 – 2010 can only translate success within the organization and to quantify their progress is to say Chevron Corporation has a brilliant corporate strategy and is deeply invested in corporate virtues which over the years has benefited their customers and communities around the globe.

Recalling the adventures in the early 1990s across America with increased competition in the petrochemical market and the acquisition of Pacific coast Oil Company by Standard Oil Corporation after lacking potential marketing savvy. They decided to shift their interest to regions that had no history of discoveries "Saudi Arabia". Before they were given exploration rights in the region in 1932, Standard Oil Corporation (Socal) had embarked on a quest for oil in other geographical regions like the Philippines and Alaska but proved elusive until 1938 when they made their first international oil discovery in a remote area in Saudi Arabia. During the happy years of the 1950’s the world’s largest oil field in Ghawar, Saudi Arabia was discovered by Socal.

With series of events that have occurred in over a century, Chevron Corporation has dramatically penetrated many markets with operations in over 100 countries, diversified to be the world leading geothermal energy producing company and engages in upstream (exploration and refining) and downstream (distribution & marketing) operations and also in aspects relating to energy and its environment. Chevron Corporation has proved to be self sustainable, financially capable to compete in any given situation although rivalled by other petroleum giants like Royal Dutch Shell, ExxonMobil, and British Petroleum (BP).

Chevron Richmond refinery was the first and is situated in the city of Richmond, San Francisco bay, California and was operational years before the incorporation of the city in 1905. As the years progressed, other refineries were opened in El Segundo in California, Pascagoula in Mississippi and Yeosu in South Korea. These refineries have created many job opportunities for different cultural backgrounds over the years. Chevron Headquarters was previously located in San Francisco but later moved to San Ramon, California after being sold in 1999.

ANALYSIS & PERFORMANCE APPRAISAL

With the information from Chevron’s 3 years financial report, I was able to produce key financial ratios that are significant to the organization. The tables and charts below will assist in translating the meaning of these ratios and a description of the ratios effect within the organization is also expressed.

Basically, the first ratio which is identified is the liquidity ratio which demonstrates the ability of the organization to meet its short term debt obligation by converting asset to cash. By reading this section of this report, you will comprehensive understanding of Chevron’s financial position.

Liquidity Ratios millions

2009 $

2008 $

2007 $

Current Ratio =

Current Asset/ Current Liabilities

37216/26211

= 1.4

36470/32023

= 1.1

39377/33798

= 1.2

Quick Ratio =

Current Asset – Inventories / Current Liabilities

37216 – 5529/ 26211

= 1.2

36470 – 6854/ 32023

= 0.9

39377 – 5310/ 33798

= 1.0

From an analytical point of view and noting the volatility in the liquidity ratios, some of the figures on the table above can be regarded acceptable given that Chevron demonstrates the ability in settling its short-term obligations. However, with critical analysis, it will show that the current ratio of 2008 particularly had an adverse affect because their inventories which are usually valued at a LIFO basis (Last In, First Out) took a capital loss.

Inflation was an essential factor that contributed to what would have been a tax advantage to tax liability. Therefore, the applied LIFO liquidation method suffered during this period – (old inventories was sold at the current price), ensuing the replacement cost to be greater than the inventory. Similar deficits occurred in 2009 but not as critical as the years before.

In a more conservative approach, Chevron’s 2008 quick ratio is quite revealing in interpreting their dependency on their inventory. There was declination of current asset in 2008 compared with 2007 (See Appendix 2). To stringently determine the liquidity of Chevron we need to review both liquidity ratios and observe the time interval of the conversion of capital assets to cash.

Figure 1.0 Comparative Liquidity Ratio

There are significant differences between the current ratio of Chevron and its competitors e.g. ExxonMobil and BP. ExxonMobil steals a 1.47 current ratio in 2007 and maintains the same figure in the following year but drops at 2009 to ~1.1 while BP had a 1.04 in 2007, declined to 0.95 in 2008 as a result of their current liabilities exceeding their current asset but recovered in 2009 with a 1.14. By average performance, ExxonMobil would appear to have better liquidity management over the 3 financial years.

In terms of feasibility, Chevron compared with the other competitors, has a higher tendency to reach a target current ratio above 2.0 in the next 3 financial years because of the recent surge in demand of inventories across the market (WikiWealth, (2009) Chevron Stock Research & Investment News CVX, https://www.wikiwealth.com/research:cvx, October 27, 2010). This will create room for flexibility and responsiveness in debt settlement and other obligations.

Profitability Ratios millions

2009 %

2008 %

2007 %

Net Profit Margin =

Net Income/ Net Sales

10483/171636

= 6.1

23931/273005

= 8.8

18688/220904

= 8.5

Return of Equity =

Net Income / Shareholder’s Equity

10483/91914

= 11.4

23931/86648

= 27.6

18688/77088

= 24.2

Return of Asset =

Net Income / total Asset

10483/164621

= 6.4

23931/161165

= 14.8

18688/148786

= 12.6

Chevron’s profitability structure is reliant on the earnings of its upstream and downstream business segments which are hung on the changes of oil prices. The profitability ratios of 2007 and 2008 reflect high earning which in return has produced good equity for investors. However, the upstream business segment which is particularly instrumental in generating higher profits than the downstream experienced some cost reduction at the end of 2008, during the wake of the recession; which had an impact on their net profit downsizing the Return of Equity for 2009.

Regardless of the fluctuating financial situation, Chevron reported a substantial profit margin which is above industry average following the increase in net income except for 2009 being as a result of cost reduction. The return on asset from 2007 – 2008 shows how effective they are using their asset, though there was a sharp drop in 2009, it is not very harmful in a long run. For the income statement, see appendix 1.

Figure 1.1 Comparative Return of Equity Chart

According the chart above, ExxonMobil appears to take the lead from equity returns with a 17.4, 38.5 and 33.4 in 2009, 2008 and 2007 respectively whereas Chevron reported a 11.4, 27.6 and 24.2 in 2009, 2008 and 2007 respectively but for long term investment in the oil sector, Chevron would be a better option because ExxonMobil will have huge deficits from their incurring debts which will probably feed on their assets.

Operational Efficiency Ratios millions

2009 %

2008 %

2007 %

Asset turnover =

Net Sales / Average total asset

171636 / 82310

= 2.1

273005/80582

= 3.4

220904/ 74393

= 2.9

Inventory turnover =

Sales / Inventory

171636/5529

= 31.04

273005/6854

= 39.83

220904/5310

= 41.60

Evaluating Chevron’s inventory turnover for these 3 consecutive years has proved tricky. In 2007 and 2008, the sales and orders that had to be met was relatively high which in return produced sharp profit but in 2009, Chevron incautiously increased their inventory without corresponding with the demand and that had an effect on the profitability. The cost of storing these inventories was a contributing factor. With relationship to their asset turnover, revenues were not generated as expected since they were dependent on their inventories. We should not be pessimistic because it is very typical in the industry as oil prices were hiked. I assume Chevron did nott take into account the recession effect on consumers although oil is a dominant commodity it is not immune to recession.

Figure 2.0 Comparative Inventory Turnover Ratios

ExxonMobil scored a 26, 39 and 35 for 2009, 2008 and 2007 respectively proving that Chevron has a better inventory turnover and would not necessarily need to deplete its existing inventory to match its competitor but rather ExxonMobil will subjectively have to improve.

Leverage Ratios millions

2009 $

2008 $

2007 $

Debt to Equity Ratio=

Total liabilities / Shareholders Equity

72707/91914

= 0.79

74517/86648

= 0.85

71698/77088

= 0.93

Interest coverage ratio =

EBIT / Interest Expense

18556000/28000

= 662.7

N/A

32440000/166000

= 195.4

In order to arrest debts, a decrease in Chevron D/E ratio subsequently from 2007 conveys that financial activity by investors is relatively proportional with the liabilities of the company. Funding with debts is not particularly harmful because it increases shareholders returns. In this case the stockholders have control of the organization.

Hypothetically, if the D/E margins went above 1 and maintained that for another 3 consecutive years, the severity of the situation could be identified as a pathway to financial distress.

Figure 2.1 Comparative Debts/ Equity Ratio

The idea for comparing ratios with industry competitors like ExxonMobil is to measure the growth of Chevron even though ExxonMobil has bigger asset. Here is the interesting part, ExxonMobil showed D/E ratio of 0.98, 1.01 and 1.1 for 2007, 2008 and 2009 respectively. This is as a result of using total shareholders equity to fund operations and this reduced equity returns and shoots liabilities.

COMPARATIVE SUMMARY

ENTERPRISE VALUE

Company

Revenue

EBIT Depreciation & Amortization

EBIT

Chevron

1.0x

5.5x

9.1x

Exxon Mobil

1.0x

6.8x

9.1x

Industry Average Value is 1.0x, 5.4x, 8.6 respectively

Margin of Safety/ EV Potential Increase:

Chevron Corporation – 28%

ExxonMobil – 15%

Though it’s notoriously difficult to determine a company’s earnings, their margin of safety for investment does not really guarantee returns for investors but creates room for errors by analyst compared to ExxonMobil.

CONCLUSION

Chevron is known for having a reputable dividend distribution record and its ability to produce excellent returns to its shareholders. Chevron is also known for having an efficient operating model which makes it an attractive asset for long term investment. Judging by Chevron’s performance of being able to increase its dividend for 23 consecutive years, ideally investors will continue to display a plausible investment.

Chevron’s annual turnover for the 3 financial years has been impressive with a market cap of about $168.32B and they have shown effective management of cost. Chevron has good reserves of 3.0 Billion Barrels and a sound financial metrics but from my evaluation, Chevron seems to be lacking in few areas like their liquidity, it was reported that as at 2009, Chevron laid off some workers due to their inability to meet certain obligations.

Chevron has a decent financial background and has kept operations at minimal, maybe they need to diversify to areas that are not solely dependent on oil. This will ensure a competitive advantage for them or rather replenish an inventory that will produce attractive financial return for their investment.

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Financial Position Of Chevron Corporation In Prospects Relating To Their Liquidity Finance Essay. (2017, Jun 26). Retrieved November 29, 2022 , from
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