Chevron Corporation (Nyse:cvx) Is One

Chevron Corporation (NYSE:CVX) is one of the world's leading producers of oil and gas products, and has created one of the most advanced exploration, production and distribution networks globally in existence today. Chevron has operations that encompass the entire oil and natural gas industry value chain, from exploration and production to refining, international or global marketing, and logistics. At present Chevron Global Marketing operates in 26 nations of the over 100 nations the company has field, exploration and processing facilities in. At present Chevron's global brand is comprised of the Chevron, Texaco and Caltex (DataMonitor, 2008). Chevron Global Marketing pays a critical role in the development of key initiatives in emerging markets, including the definition of marketing throughout 3rd world nations including Kenya and Uganda (Corrin, 2008). In addition Chevron Global Marketing also plays a critical role in the development of Chinese market expansion strategies as well (McGregor, 2007). During 2005-2006 when gasoline prices and concerns over green or environmental performance of oil companies began to increase significantly over previous years' Chevron began a national program to refresh the company's image as well (National Petroleum News, 2006).

Over time the role of Chevron Global Marketing has been to be one of the key internal participants in defining the roadmap to innovation for the company (Strategic Direction, 2007). Chevron has been one of the leaders in the oil & gas industry in terms of marketing differentiation, creating Techron as a brand of premium gasoline as well. Taken together, as all these factors illustrate how much of a leader Chevron is in global marketing of oil and gas products, in addition to an exceptional ability to manage global distribution channels and multiple customer segments. Due to all these factors, Chevron is a fascinating company to monitor and continually learn from.

Industry Background

The oil and gas exploration and production industry is primarily comprised of crude oil exploration and production (76%) with natural gas comprising the remaining 24%. This shift to oil exploration and production has specifically been due to the rising price of crude oil on the markets of the world. Table 1: Global Oil and Gas Exploration and Production, illustrates the rise in revenue from $1,528B in 2004 to $3,915B in 2008. Despite this growth there is a reduction in the number of establishments participating in the industry, from 9,323 in 2004 to 8,984 in 2008, a reduction of 339 establishments over the five-year period. Paradoxically however employment has grown from just over 1 million to 1.11 in the period. This indicates that the industry has become increasing efficient.

Table 1: Global Oil and Gas Exploration and Production

Key Factors 2004 2005 2006 2007 2008 Unit of Measure Industry Revenue $1,528.9 $2,143.9 $2,491.7 $2,762.7 $3,915.6 $Bill Industry Gross Product $1,299.6 $1,865.2 $2,167.9 $2,411.9 $3,406.6 $Bill Number of Establishments 9,323 9,266 9,153 9,040 8,984 Units Number of Enterprises 8,250 8,200 8,100 8,000 7,950 Units Employment 1,013,747 1,035,022 1,057,699 1,090,747 1,111,019 Units Exports $760.7 $1,089.4 $1,293.5 $1,482.2 $2,207.9 $Bill Imports $760.7 $1,089.4 $1,293.5 $1,482.2 $1,510.5 $Bill Total Wages $37.3 $38.8 $40.8 $43.4 $45.4 $Bill Domestic Demand $1,528.9 $2,143.9 $2,491.7 $2,762.7 $3,218.2 $Bill Crude Oil Output 72.5-73.8-73.5-73.3-74.5 Million barrels per day Source: (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008)

Crude oil comprises 76% of the total global production in this industry, followed by natural gas with 24% of total production as of 2007 according to DataMonitor (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008).

Figure 2: Global Oil and Gas Products and Services Segmentation

Product/Services

Share

Crude oil

Natural gas

Source: (DataMonitor: Oil & Gas Industry Profile, 2008)

In evaluating the industry and Chevron's role within it, it is critical to keep in mind that there are widely varying grades of oil, each requiring a specific type of refinery and distribution operation (Petroleum Economist, 2007). These grades of crude oil vary from the highest quality light sweet crude oil to poor quality heavy, sour crude oil. Different grades of oil necessitates that Chevron have significantly different refinery configurations. From these different refinery configurations, the company produces different proportions of refined petroleum products including gasoline and automotive distillate based on the demand from its customers and distribution channels. Of all grades of oil, sweet crude is the most difficult to find and extract from the ground, with the lower-grade oil being more prevalent, yet much more costly to process and transform into gasoline and other petroleum products.

In addition to creating petroleum products, the oil and gas industry also supplies products and services to a number of value chain related markets including petroleum refining and the production of petroleum products, gasoline and automotive engine additives being the most prevalent. Increasingly oil production is actively being used to generate electricity primarily for 3rd world nations, although this use as continued to stay at a constant rate relative to the exponential growth from gas production (DataMonitor: Oil & Gas Industry Profile, 2008).

Of the two major products of the oil and gas industry, natural gas is far more diverse and is also used in the manufacture of petrochemical products. Chevron resells the natural gas its extracts for purposes of power generation, which consumes 13.5% of total industry output. Only 10.5% is consumed within homes for heating and cooking (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008).

Company Background

Chevron Corporation (NYSE:CVX) has a global market share of 2.4% (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008) and was originally formed by the merger of Texaco Inc. And Chevron Corporation merged in October 2001. Headquartered in San Francisco, CA Chevron operates in over 100 nations with subsidiaries developed to specifically focus on increasing supply chain efficiency and performance, Chevron coordinates marketing efforts in 26 nations with the Chevron Global Marketing Division (Stone, Leary, 2007) which plays a critical role in the strategic direction of the company. This specific team also was instrumental in creating the brand of Chevron Corporation in May, 2005. Chevron's Global Marketing Division also is responsible for the positioning and branding of the acquisition of Unocal in 2006. This was after the China National Offshore Oil Corporation (CNOOC), a 100% state-owned agency of China, offered $18.5B for Unocal. The U.S. House of Representatives voted to block the Bush administration from approving CNOOC's bid to acquire Unocal while also calling for a review of the negotiations between Unocal and CNOOC. Chevron was approached by Unocal and completed a bid of $17B at a special meeting of stockholders in August 10, 2005. Unocal shareholders and board members felt the offer was too low, yet eventually accepted it given the ruling by the U.S. government against the purchase by CNOOC. The acquisition of Unocal broadened the total available market for Chevron, expanding their operations in the Asia Pacific, the Caspian region, and the Gulf of Mexico. Specifically in the Asia Pacific region, the Unocal acquisition is leading Chevron to compete in these markets more effectively than in the past. In addition, Chevron continues to be a leading industry producer in the Caspian region and Gulf of Mexico. Unocal's most significant amount of oil reserves had been in the Eastern European country of Azerbaijan, and had a controlling interest in the Azerbaijan International Operating Company (AIOC) and Baku-Tbilsi-Ceyhan (BTC) export pipeline. These two strategic assets have also been integrated into the global marketing and selling strategies of the company as well (Stone, Leary, 2007) leading to best practices in performance of supply chain, strategic sourcing, product development, logistics and fulfillment.

Chevron Stock Performance

Chevron Corporation (NYSE:CVX) has a current market capitalization rate of $143.8B at the current per share trading price of $70.82 with 13.4M shares traded as of January 23rd, 2008. Figure 3, Chevron Stock Performance over the last five years shows that through 2007 the stock price continually climbed as the price of oil continued to be the subject of speculation throughout this time period. Reflecting the global economic slowdown, Chevron's stock price started to fall as OPEC further increased prices. This led to very high gas prices, which in turn led to consumers purchasing less gas than they had in decades.

Figure 3: Chevron Stock Performance

Chevron however has been able to sustain its performance across profitability, liquidity, debt management and asset management ratios through the time periods of 2003 through 2007 according to the company's filings with the Securities and Exchange Commission (Chevron, 2008). What is remarkable about Chevron is the Revenue per Employee continual growth despite economic uncertainty in the 2007 timeframe.

Table 2: Chevron Corporation Ratio Analysis

Profitability Ratios

ROA % (Net)

ROE % (Net)

ROI % (Operating)

EBITDA Margin %

Calculated Tax Rate %

Revenue per Employee

Liquidity Indicators

Quick Ratio

Current Ratio

Net Current Assets % TA

Debt Management

LT Debt to Equity

Total Debt to Equity

Interest Coverage

Asset Management

Total Asset Turnover

Receivables Turnover

Inventory Turnover

Accounts Payable Turnover

Accrued Expenses Turnover

Property Plant & Equip Turnover

Cash & Equivalents Turnover

Sources: (Chevron, 2008)

International Competitors

Chevron faces its most formidable competition throughout the South American nations, starting with its largest and most well-capitalized competitor, Refinadora Costarricense de Petroleos S.A. (RECOPE, S.A), based on Costa Rica. There is also the Columbian nationalized oil conglomerate operating under the name Empresa Colombiana de Petroleos (ECOPETROL). Both of Chevron's largest global competitors are nationalized by the nations they operate in, which make pricing and market execution strategies in these specific countries difficult. In addition, there are significant cultural differences between the U.S. And these countries as well. As a result, there continues to be a strong push towards creating more co-ownership of oil refineries, production centers and operations between U.S..-based companies working in the area and national governments. In the case of the Brazilian government, who approached Chevron about such an arrangement in 2008 specifically for partnership with Petroleo Brasileiro S.A., Chevron declined to enter into a nationalized-based alliance with the company and nation and instead sold the assets of their refineries to Brasileiro S.A. instead (Wall Street Journal, 2008). In Mexico, Chevron competes with Petroleos Mexicanos (Pemex), another partially nationalized oil producer, which has sought to have an alliance with Chevron to gain access to American markets through the NAFTA Agreement. Latin American and Mexican oil producing companies however are more focused on how to gain access to American markets while attaining the economies of scale achievable through nationalization, which makes the level of competition in these alliances formidable. Chevron therefore has been reluctant to create partnerships with nationalized oil producers as a result (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008).

Additional competitors globally include the entirely nationalized Russian oil producer Surgutneftegaz OAO, which Chevron is relying on Unocal's assets and fields in that region to provide competitive parity.

There are nearly a dozen other competitors Chevron has globally including Royal Dutch Shell Plc, China Petroleum & Chemical Corp. Inc., Jinzhou Petrochemical Co Ltd., PetroChina Co Ltd., all in China. StatoilHydro ASA, Valero Energy Corp., Repsol YPF, S.A., Nippon Oil Corp, SK Corp. (Korea), Marathon Oil Corp., and PTT Public Co Ltd. In total, Chevron has eighteen competitors over $50B in sales in 2008, each with significantly different levels of performance and process efficiency as indicated by the employee headcounts shown in Table 3, Chevron Global Competitors Financial Results, 2008. Provided in the analysis are Revenues, Net Income, Total Assets, Total Liabilities, and Total Employee Count. With nearly 40% of competitive revenues coming out of the highly nationalized regions of South America and Mexico, it is clear that Chevron faces significant competitive challenge in this region of the world (DataMonitor: Oil & Gas Industry Profile, 2008) yet cannot specifically participate in nationalization efforts or risk impacting their own profitability. Instead, Chevron will need to selectively compete in key Latin American and Mexican markets by first focusing on their innate efficiencies in diesel products (National Petroleum News, 2006) and redefine the role of all competitors in this industry by embracing global eco-friendly, sustainability and "green" initiatives (Harding, 2007). Instead of concentrating then on global competition on price, Chevron is successfully changing the focus to its core strengths of diesel (National Petroleum News, 2006) and sustainability or green marketing (Harding, 2007).

Table 3: Chevron Global Competitors Financial Results

Revenues Net Income Total Assets Total Liabilities Empl. Refinadora Costarricense de Petroleos S.A. (RECOPE, S.A) (Costa Rica)

Empresa Colombiana de Petroleos - ECOPETROL (Colombia)

Petroleos Mexicanos (Pemex) (Mexico)

Surgutneftegaz OAO (Russia)

Exxon Mobil Corp.

Royal Dutch Shell Plc

Chevron Corporation $

220,904,000,000 $

148,786,000,000 $

65,000 ConocoPhillips

China Petroleum & Chemical Corp. Inc. Jinzhou Petrochemical Co Ltd.

PetroChina Co Ltd.

StatoilHydro ASA

Petroleo Brasileiro S.A.

Valero Energy Corp. (New)

Repsol YPF, S.A.

Nippon Oil Corp

SK Corp. (Korea)

Marathon Oil Corp.

PTT Public Co Ltd.

Domestic Competitors

Exxon is the largest competitor that Chevron has in the U.S. with $404B in revenues attained during 2008. Conoco-Phillips is just below Chevron with $194M in revenue during 2008 as well. The majority of competitors have annual revenues below $100B in the U.S., lead by Valero Energy and Marathon Oil. Table 4, Chevron U.S. Competitors, 2008 provides an analysis of 2008 Revenues, Net Income, Total Assets, Total Liabilities and Employees.

Table 4: Chevron U.S. Competitors, 2008

Revenues

Net Income

Total Assets

Total Liabilities

Employees

Exxon Mobil Corp.

Chevron Corporation

ConocoPhillips

Valero Energy Corp. (New)

Marathon Oil Corp.

Sunoco, Inc.

Hess Corp

Tesoro Corporation

PDV America, Inc.

Shell Oil Co.

Murphy Oil Corp

United States Steel Corp. (New)

Anadarko Petroleum Corp

Premcor Refining Group, Inc.

Chevron Global Marketing

Chevron has specifically organized their global marketing function into a specific cross-functional resource that all other product divisions rely on. Appropriately called the Global Marketing Division, this organization serves 26 nations and has a structure that aligns marketing directors to each region of the world in addition to marketing staffs for executing strategies and tactics. One of the global marketing initiatives has been the defining of a more performance-oriented unique value proposition for the company (National Petroleum News, 2006) in addition to the sustainability and green initiatives the company has successfully launched for low-emissions fuels (Harding, 2007). One of the core strengths of Chevron is their ability to execute from a marketing standpoint globally. Figure 4, Global Market Share of the Oil, Gas and Exploration Markets, 2007, shows Chevron with a 2.4% globally as a result. Considering the fact that its top three global competitors benefit from heavy nationalization this is a significant accomplishment.

Figure 4: Global Market Share of the Oil, Gas and Exploration Markets, 2007

Company

Market Share Range

Saudi Arabian Oil Company

National Iranian Oil Company

Petroleos Mexicanos

Exxon Mobil Corporation

Chevron Corporation

PetroChina Company Limited

Royal Dutch Shell plc

Source: (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008)

Within the Oil and Gas Exploration industry Chevron is considered a global leader in marketing execution, specifically in the area of events (Lofstock, 2007). In addition, Chevron Global Marketing's research unit has been responsible for the development of several marketing initiatives globally to integrate refinery operations into communities as part of a Corporate Social Responsibility (CSR) initiative (Franco, 2008) the company has created. In addition, Chevron Global Marketing also has one of the industry's most well planned and executed retail networks comprised of approximation 25,800 retail outlets globally (DataMonitor: Oil & Gas Industry Profile, 2008). As Chevron Global Marketing is one of the company's core strengths it is discussed in the next section in greater detail. The greatest challenge the company has faced however from a marketing standpoint are the difficult issues of Corporate Social Responsibility (CSR) (Agrawal, Lemos, 2007).

SWOT Analysis

The following is an analysis of the strengths, weaknesses, opportunities and strengths of Chevron.

Strengths

First, the company has attained strong market position globally, against competitors who have in the majority of cases, been nationalized and therefore benefit from significant infusions of cash from their home nations. Second, Chevron has worked to define a very efficient energy value chain globally (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008) that has served as the foundation for the company achieving predictable and steady financial performance (Haldis, 2008). Fourth and most significant, the Chevron Global Marketing organization is considered one of the most in the industry (DataMonitor: Oil & Gas Industry Profile, 2008) due to its distribution network mentioned earlier, and its aviation fuel sales in nearly 1,000 different airports. Chevron commands an 11% market share in aviation fuel globally as well (DataMonitor: Oil & Gas Exploration & Production Industry Profile, 2008). The marketing and distribution of Havoline, Delo Ursa, Meropa and Taro are all leading brands in the markets served as well.

Weaknesses

Weaknesses that Chevron faces globally is the need for greater CSR-based programs in Nigeria, where there has been a strong push for nationalization in addition to worker unrest, which led to the sale of refineries to the nation (Corrin, 2008). Second, the company is facing a series of lawsuit from the Iraqi government, which has accused and now sued 70 different corporations accusing them of paying kickbacks to Saddam Hussein, specifically as part of the Oil-for-Food program initiated by the U.N. Third, the weaknesses of declining oil and gas reserves globally and the reduction in the quality of high grade oil (DataMonitor: Oil & Gas Industry Profile, 2008) and the reduction in sales of aftermarket refined products (ibid) are also significant weaknesses that the company is facing globally as it enters 2009.

Opportunities

Opportunities for Chevron are many, with the three most significant globally being the opportunity to capitalize on biofuels and the increasing emphasis on sustainability (Harding, 2007) in addition to low-emission fuels. The second is the continual growth for liquefied natural gas that Chevron is well positioned to capitalize on globally due to its production and distribution centers in regions of the world where this resource is mined. This includes Russia and the Eastern European nations that have since become accessible with the Unocal acquisition (Stone, Leary, 2007). Third, demand for refined products continues to increase significantly in China, and Chevron's proven retailing expertise can be applied to this specific opportunity with potentially profitable results. China's highly regulated and nationalized oil and gas exploration and production industry however is an impediment to this opportunity becoming fully realized.