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Chevron: Strategic Business Assessment

Cullen Cosco

Fernando Garcia Ulloa

Cara Hughes

Tim Nutter

Reagan Walters

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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

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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.

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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

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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.

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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).

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FINANCIAL HISTORY AND 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

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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.

Asset Management 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

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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

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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

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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

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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

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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

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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

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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 BUSINESS ANALYSIS

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

243,841230,208 219,795

200,239211,807

y = -4E-06x + 275396R² = 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

Re

ven

ue

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 Cost Behavior 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

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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.

Process Analysis 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.

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Balanced Scorecard

Strategy Map

Increase profit

Financial

Invest in Workplace

Operational Excellence

Internal

Execute with Excellence

Decrease Costs

Customer

Pricing

Customer Satisfaction

Learning & Growth

Chevron 35

Financial Perspective - 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.

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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 - Decrease Costs 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 - Operational Excellence 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

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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 ASSESSMENT OF 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

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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

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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 geotherma l 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).

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Distinctive Competency: Increase in Production

With the oil industry being an oligopoly, it is hard for companies to have distinctive competencies compared to its competitors. One main distinctive competency is that

Chevron has been ranked number one in earnings per barrel for 5 years in a row for its downstream and chemical segment. Another unique capability that Chevron has is their geothermal energy. Chevron is the leading producer of geothermal energy. Geothermal

energy is important in today’s economy because more people are becoming environmentally conscious. Geothermal emissions have fewer chemical pollutants and it

also provide clean, renewable power. Chevron also has around 40% interest in another geothermal company in the Philippines. In 2014, Chevron was awarded by the Center for Sustainable Shale Development as being the first company to complete the water and air

evaluation and verification process. Chevron was certified after earning all 15-performance standards that are centered on environmental stewardship and the

continuous improvement for water and air. Chevron is the largest producer of crude oil and natural gas in the Gulf of Mexico. Over

the past year, Chevron has invested over $700 million in research and development alone (Chevron Annual Report). Valero only spent approximately $260 million and BP spent

$400 million in research and development in 2014. Exxon and Shell also do not seem to have the desire for rapid growth compared to Chevron. Shell especially is more concerned with selling assets to pay for rising capital than spending more money to drive

growth (Market Watch). Chevron also realized soon that the only way they can grow is to have strong partnerships. In the 2014, Chevron “Achieved an exploration drilling success

rate of 66% with 35 discoveries worldwide and added 1.4 billion barrels of oil-equivalent resources” (Chevron Annual Report, 2014). Chevron also made 5 natural gas discoveries in Australia and added 11 deep-water leases in the Gulf of Mexico. For 2015, Chevron

spent approximately $3 billion in more exploration activities, such as drilling 50 more wells worldwide. The Shale and Tight resources area of energy companies is another way

that Chevron is differentiating itself from its competitors. Shale and tight formation is typically conventional oil that is found in reservoirs that have low permeability. Chevron has a significant shale and tight resource position in the Permian Basin in the United

States. Investing millions in high-volume and high-value growth projects allows Chevron to stand out from its competitors. Even though Chevron is increasing spending, it is

expected to see a huge return on these new projects in the near future.

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Processes, Facilities, and Location

Processes

The process of an oil company is one of the most important aspects of an oil company due to the high, continuous demand for oil around the world. Chevron uses a continuous flow processing strategy, which is a “made-to-stock strategy emphasizing uninterrupted

production” (Market Watch). Most oil companies use the same strategy of “make-to-stock” because it implores producing high volume, standardized products. A continuous

flow processing strategy decreases lead time, which is the “delay between requesting a product and receiving it”, by continuously producing the product. There will always be a demand for oil, so having it readily available all the time is important for oil companies.

A simplified version of Chevron’s process could be described as a product layout. A product layout is a single, unchanging pattern through a facility (Market Watch, 2014).

Chevron follows this process because it requires low reliance on skilled labor due to its machine heavy orientation. Product Layouts also allow companies to have high utilization of resources because it creates high volumes of standardized output.

Resources

The size of Chevron requires it to have a large amount of resources, or inputs. Some main inputs that most companies require include people, materials, equipment, knowledge, and

infrastructure. In 2014, Chevron had 61,456 employees, which is a slight increase from 2010 when Chevron had 58,267 employees (Chevron Annual Report, 2014). Chevron

separates it service station employees, which include Chevron, Texaco, and Caltex service stations. In 2014, Chevron had 2,359 employees, which is a decrease from 3,939 employees in 2010 (Chevron, 2014). This decrease was caused by the need to cut costs.

The main input of raw materials for Chevron is crude oil.

One way that Chevron receives oil is by deep-water drilling. Chevron is the largest leaseholder in the Gulf of Mexico, where Chevron has used advanced technology “to find oil beneath 7,000 feet of water and more than 20,000 feet of earth” (Chevron Annual

Report, 2014). These oilrigs sit on top of buoyant sidings, which keeps the rigs floating on the water. Beneath the water, there is a five-mile long drill pipe made of steel that

ends in a drill that is covered in casing to protect from the high pressure and cold water. The drill then connects with porous rock and draws out the hot oil to the surface. The whole process of deep-water drilling requires billions of dollars and thousands of

workers.

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Locations

Oil companies have to be globalized if they want to be successful. Chevron has a diverse portfolio of

countries to keep a competitive advantage. The United States portfolio has its main assets located in California, the Gulf of Mexico, Colorado,

Louisiana, Michigan, New Mexico, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia,

and Wyoming (Chevron Annual Report, 2014). In 2014, Chevron was named the “largest liquids producer” in the United States by producing

664,000 barrels of oil a day. San Joaquin Valley has more than 17,000 oil wells, which makes it

Chevron’s number one net daily oil producer. In the Gulf of Mexico, Chevron is the largest leaseholder and producers roughly 133,000

barrels of crude oil daily. The company is also engaged in upstream activities in Argentina, Brazil, Canada, Colombia, Greenland,

Suriname, Trinidad, and Venezuela. Africa represents about 17% of the companies net daily oil-equivalent production (439,000 barrels in 2014) by being involved in Angola, the Democratic Republic of the Congo, Liberia, Mauritania, Morocco, Nigeria, Republic

of the Congo, Sierra Leone, and South Africa. Other than drilling and refining, Chevron also has service stations to provide its products to consumers. Chevron, Texaco, and

Caltex has service stations in the United States, Canada, Hong Kong, Malaysia, New Zealand, the Philippines, Singapore, South Africa, and Thailand (Chevron Annual Report, 2014).

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Supply Chain Integration and Outsourcing

Chevron has one of the most complex supply chains because they control every aspect of the supply chain in order to improve efficiency and productivity. It would be considered

an “integrated energy company”. Some of the complexity of the supply chains derives from the multiple processes of oil, which includes exploration, production, crude pipelines, shipping, trading, refining, and storage terminal. Chevron is the supplier, the

manufacturer, the distributer, and in some cases the retailer of the various energy products. Chevron is involved in each of these processes, allowing them to have a wide

portfolio of segments in the marketplace. For the supply chain, Chevron has 9 customers and 103 suppliers. This is not an accurate representation of Chevron because Chevron is also a supplier for itself as well. All of Chevron’s suppliers are either drilling or refining

companies, such as Pacific Drilling, New Zealand Refining, or Key Energy Services (Chevron Annual Report, 2014). Chevron breaks its supply chain by upstream and

downstream productions. The upstream sector deals with the exploration and production of crude oil. The downstream sector includes refining, market, lubricants, supply and trading, chemicals, and transportation. Chevron separates out technology and other

energy segments from its two main sectors. The first part of the supply chain includes exploration and production, which makes up

about 16.26% of the company’s revenue (Chevron Annual Report, 2014). Majority of Chevron’s revenue comes either from gasoline, which provided them with $41,257,000 in

2014, or crude oil, which provided them with $70,811,000 (Chevron Annual Report, 2014). Exploration and production would be considered the upstream part of the industry. This segment of the company involves Chevron producing and exploring crude oil and

Chevron 47

natural gas all over the world. For most oil companies, there are four ways to receive crude oil: it either comes from wells on the land, jack pumps, offshore drilling platforms,

or offloaded from overseas tankers. In 2014, Chevron focused on the deep-water regions of West Africa, the United States Gulf of Mexico, and Australia to drill for new crude oil.

Chevron is the largest oil produce in Thailand and in Indonesia. Being the largest leasehold in the

Gulf of Mexico also helps Chevron stay on top of its competition.

Once the oil is drilled, it is usually stored in tanks where it can be

treated. From there is goes through a pump station and transmission

lines to reach the refinery or chemical plant. This is where the downstream sector takes over. The

downstream industry at Chevron makes up about 83.61% of the

company’s revenue (Chevron Annual Report, 2014). Chevron has six refineries in Singapore, Thailand, South Korea, and three in the United States. These six refiners make up more than 75% of the company’s total crude oil refining capacity (Chevron Annual

Report, 2014). But, Chevron does not fully own any of these refineries. By only owning 50% of the Yeosu Refinery in South Korea, Chevron is cutting costs because GS Caltex

Corporation is in charge of maintaining the refinery. This allows Chevron to focus more on building their brand and less on being a pro at refining. Allowing a company that solely focuses on refining will create a higher quality product, which is a main concern

for Chevron. Chevron also owns 64% of the refinery in Map Ta Phut, Thailand and 50% of the Singapore Refining Company. The three main processes of refining include

separation processes, upgrading processes, and conversion processes. Separation is a process where the crude oil is boiled to separate the various components. The most common separation process is distillation, which is heating the liquid to vaporize the

lighter components, which will later be condensed to crude oil. The upgrading process uses chemical reactions to upgrade the quality of the oil. Lastly, the conversion process

deals with changes in the molecular structure of the oil to get it to its final phase. After the refining processes, some of the crude oil may be stored for future use, or go to a

distribution terminal where it will then go to the business or the customer. To keep up with all of the links between the upstream and downstream sectors, Chevron created the

Supply and Trading business, which is headquartered in Houston, Texas. There are also trading hubs located in London, Singapore, and California (Chevron Annual Report Supplement, 2014). The purpose of Chevron Supply and Trading is to coordinate the

production, refining, transportation, and selling of all major grades of crude oil. Once the oil is refined, the Supply and Trading sector distributes the oil by shipping or by

pipelines. Chevron has a subsidiary company called the Shipping Company that can transport crude oil, refined, products, liquefied petroleum gas, and liquefied natural gas to

Chevron 48

customers around the globe. Chevron uses a various collection of deep-sea charters and vessels to deliver the oil to the businesses or customers. The seller delivers crude oil to

the buyer in bulk FOB at the loading terminal onto the consumer’s vessel. The Chevron Pipe Line Company is a subset company of Chevron that is an extensive network of

pipes. These pipes can transport crude oil, natural gas, and other refined products around North America (Chevron Annual Report, 2014). The Pipe Line Company has headquarters in Bellaire, Texas and owns over 4,634 net miles of Untied States pipeline

(Chevron Annual Report, 2014). Other than in the United States, Chevron has major interest in pipelines around the world, such as the Caspian Pipeline Consortium in

Kazakhstan, the West African Gas Pipeline in Nigeria, the Baku-Tbilisi-Ceyhan Pipeline, and the Western Route Export Pipeline. Pipelines are the most effective ways to transport large volumes of fuel long distances. The oil then moves from the pipeline to a terminal

where it will either continue through the pipeline, or it will be transferred to a barge, truck, or train. All of these then end up at another terminal to be put in a pipeline or truck

to be distributed. Once the oil finally gets to the businesses, Chevron still has control over the selling of the product to the consumer.

The final piece of the supply chain is the retail side of the business, or better known as the customer side. Chevron owns over 8,000 Chevron, Texaco, and Caltex branded retail

outlets where their products are sold. But, Chevron products are sold through a network of 16,377 retail stations with affiliated companies. By being involved in majority of the supply chain, Chevron has more control over the operating costs and the time efficiency

from the time the oil comes out of the ground to the pump at the gas station. Over the past few years, the Global Marketing Logistics team at Chevron began working on improving

their fuel distribution system around the world. The Global Marketing Logistics team is in charge of distributing over 12 billion gallons of fuel products every year. Out of the total volume, about a third is handled by Chevron directly, while the others are contract

carriers (Chevron Annual Report, 2014).

Chevron exerts the most power on the supply chain to control the quality and cost of its products. Being one of the largest oil companies in the world has allowed Chevron to keep control over its supply chain. A major focus for Chevron is to create successful

partnerships with their suppliers. Chevron’s Procurement and Supply Chain Management organization was created to “ensure goods and services are delivered safely, reliably, at a

competitive cost, and always on a platform of integrity” (Chevron Annual Report, 2014). Chevron has high expectations of its suppliers because oil is a commodity and needs to be ready when the customer or business needs it. Suppliers are evaluated based on several

different criteria: compliance, financial, health, environment, safety, capability, and information protection risks (Chevron Annual Report, 2014). Chevron is also concerned

with Supplier Diversity to benefit themselves and the suppliers. Small businesses owned by minorities or veterans are the major focus for Chevron to create diversity. Some of Chevron’s main partners include YPF, Solazyme, BrightSource Energy, Nigerian

National, BP, and Safeway (Chevron Annual Report, 2014). Compared to its main competitors, Chevron has developed a strong supply chain, but is not in the top. While

Chevron only has roughly 4,000 miles of pipelines, Exxon has over 8,000 miles in the United States (Exxon Annual Report, 2014). ConocoPhillips has over 27,000 miles of oil

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and natural gas pipelines (ConocoPhillips Annual Report, 2014). But, both BP and Shell have 4,000 or less miles of pipelines, which puts Chevron in the middle of its

competition.

Globalization is a major factor for every single oil company because crude oil is a resource that can be found around the world. This could also be a weakness for Chevron because it is dependent on the success of many different countries. Chevron’s upstream

segment is involved in North and South America, Africa, Asia, Australia, and Europe. Globalization has allowed oil companies to have more access to resources, technology,

and knowledge. The main weaknesses of the supply chain come from macro environmental factors. With the decrease in oil prices previously mentioned, the supply chain will be affected because Chevron will have to focus on cutting cost if it wants to

keep the same contribution margin. The extreme size and growth of the company could also negatively impact the supply chain because Chevron is stretching its limits. Chevron

is in charge of drilling, transporting, refining, distributing, and selling oil. While Chevron is outsourcing some of these tasks, it still owns and operates a vast majority of them. This means higher costs and could cause a lower quality of oil.

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Technology and Systems Chevron develops and utilizes a number of technologies that are crucial to their many

processes. As it relates to its upstream industry involvement, one mechanism that is essential to Chevron’s operational activities is its real-time reservoir management system. This technology comprises a next-generation multiphase slow meter that allows real-time

measures of oil production in fields that was developed under the Chevron GE Technology Alliance and Chevron Los Alamos National Laboratory R&D Alliance

(Chevron, 2014). The system allows for quicker and more consistent data, effective interventions and decision-making in processes that Chevron was not able to manage as precisely using previously and, ultimately, helps the corporation mine for oil more

efficiently. Another imperative form of technology Chevron utilizes is its advanced computing infrastructure within its Information Technology department. This system

utilizes seismic data processing and interpretation that promotes new levels of optimal decision-making and processing capabilities (Chevron, 2014).

Chevron also utilizes a number industry leading systems that provide technological advantages and, ultimately, distinct competencies for them on the production side that

competitors are not privy to. Among these is its proprietary ocean bottom node and cable-sensing technology, which the corporation implements in its upstream activities (Chevron 2014). This mechanism improves imaging of subsalt objectives, enables tracking of fluid

migration during field production, and aids in imaging of faults, which allows Chevron access to sub-surface raw materials that competitors may not be able to detect at present.

Another technology that gives Chevron distinct competencies over its competitors is its unique viscosity-grade oil product, which it produces in its downstream operations. This lubricant allows customers to move to a high-performance, heavy-duty motor oil product

when encountering stop-and-go operation, and improves diesel fuel reliability through fuel economy performance, oxidation stability, and deposit control (Chevron 2014).

Lastly, another technology used in Chevron’s downstream activities is its ICR 1000 hydrotreating catalyst, which improves refinery profitability by extending catalyst life, allowing processing of difficult feedstocks, and increasing yields of high-quality product

(Chevron, 2014).

Chevron also comprises technologies that are continually being developed by the corporation’s scientists and engineers to one day provide systems to its customers and employees, alike, that competitors will not be able to provide at comparable proficiency.

One of these is Chevron’s European upstream business’s commissioned integrated operations center that enables greater integration of offshore and onshore operations in

the North Sea (Chevron, 2014). Another involves Chevron’s efforts in renewable energy advances, particularly relating to its photovoltaic demonstration project. This development continues to test and evaluate solar technologies and has produced 5.4

million kilowatt-hours of renewable energy from inception in April 2011 through year-end 2014 (Chevron, 2014).

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Infrastructure Chevron’s corporate culture was reshaped and can today be defined by then-executive

Darry Callahan’s 2001 talk and essay “Changing the Corporate Culture at Chevron.” The corporation was facing difficulty distinguishing itself from its competition in the oil and gas industry, and sought to undergo changes that would do just that for Chevron from an

operational standpoint, focusing primarily on three particular pillars: Strategy, Behavior, and Process. Chevron based these changes on what they called “Reinforcement-Based

Leadership”—changes implemented from the top to the bottom of the corporate structure, and composed of key components including Vision, Strategies, Synergies, Valuation, Structure, and Culture to use as guidelines as Chevron made its transition towards

excellence (Callahan, 2001). Under Callahan’s instructions, Chevron made a number of logistical changes, such as: moving headquarters from San Francisco Bay Area to

Houston, implementing reorganization that created Petrochemicals and Plastics Divisions, as well as Streamlined Oronite Additives Division, exiting the specialty polymers business, divesting unprofitable product lines, establishing corporate-wide cost-

reduction initiative, and starting up new plant in Saudi Arabia. Even still, Callahan made it a point that Chevron focus more on that “how’s” rather than the “what’s,” setting a few

concrete and comprehensive goals for the corporation as follows: improve financial performance, grow the businesses that achieve acceptable returns, meet or exceed project business plans, and operating under “The Chevron Way” (Callahan, 2001). Today,

Chevron’s emphasis is still on operating optimally, not only producing premium goods for its consumers, but also valuing its employees, bolstering its manufacturers and their

countries of origin, and involving its shareholders and financiers.

As it relates to workforce resource management, Chevron makes protecting its employees

a high priority. One of these includes product stewardship, with which the firm works to minimize risk in all aspects of products’ lifecycles, including manufacturing, transportation, use, and disposal. In accordance with OEMS, Chevron works to comply

with health and environmental information, as well as international law, to ensure both safety and accordance with international law (Chevron, 2014). This is best represented by

the chemical safety measures the firm takes for the benefit of its employees. In 2014, Chevron updated its labels and how it identifies chemicals following Globally Harmonized System of Classification and Labeling of Chemicals (GHS), implemented in

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over 65 countries worldwide. Updates have been implemented in over 14,500 Safety Data Sheets (SDS’s) in 37 different languages to meet 2015 deadlines (Chevron, 2014).

In terms of workforce health and safety, Chevron claims that it aims to protect all of its

61,000 full-time employees, as well as its nearly 226,000-contract workforce. The corporation seeks to achieve the Zero Is Attainable Award, which is bestowed upon companies that complete a minimum of 1 million work hours without any injuries to

employees on the job (Chevron, 2014). Likewise, Chevron seeks to be proficient in process safety. Under OEMS standards, Chevron conducts routine inspections of

facilities, field validation screenings of workers, and hazard analysis of work sites to reduce breakdowns, injuries, and product contamination. Ultimately, these measures are meant to ensure safety of employees as well as fire, explosion, and leak prevention.

The results of these efforts have proven successful over the past decade for Chevron.

According to the American Petroleum Institute’s Benchmarking Survey of Occupational Injuries, Illnesses and Fatalities in the Petroleum Industry data, Chevron’s Total Recordable Incident Rate per 200,000 work-hours falls well below the benchmark for

“safe” work environments in this industry (Chevron, 2014). In recent years, Chevron’s incidents have decreased from 38 to 19 between 2013 and 2014 (Chevron, 2014).

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Chevron also puts a significant emphasis on education and health, both domestically and abroad in the countries in which it conducts business. One key component to this effort is

human rights. Embodied by Chevron’s “The Chevron Way” and OEMS program, the corporation actively works to establish and bolster human rights in the countries with

which it engages in business. For the past 15 years, Chevron has held a leadership position as a lead corporate pillar representative on the steering committee for the Voluntary Principles on Security and Human Rights initiative (Chevron, 2014). Another

invaluable aspect of Chevron’s involvement with education and health is stakeholder engagement. The firm believes in building long lasting, mutually beneficial relationships

with host government, communities, and stakeholders allows Chevron the opportunity to share valuable information and be open to feedback on operational performance from all involved. In 2014, Chevron revamped its Stakeholder Engagement program by disclosing

more financial information, demonstrating the direction the corporation is looking to move in regarding operational capabilities, and actively engaging with its funders in a

transparent manner (Chevron, 2014). Likewise, Chevron finds that a key element of doing business is revenue transparency.

Chevron believes that accurate accounting of revenues by both large corporations and governments fosters positive relationships that lead to tranquil investment climates,

economic growth, and social wellbeing. As a result, Chevron participates in the multinational, stakeholder-run Extractive Industries Transparency Initiative (Chevron, 2014). Chevron is the longest continually-serving member of EITI, operating in EITI-

implemented countries. Chevron is also largely involved in social investment. Chevron’s social performance is enhanced by its large-scale social investment partnerships that

support improving access to health, education and economic development opportunities in the areas where it operate (Chevron, 2014). Social investments aim to promote economic wellbeing and social stability in the nations Chevron deals with, not only for its

employees’ sakes, but for all civilians—acting as a symbol of good faith and gratitude.

The results of Chevron’s health and educational efforts have proven fruitful in recent years. As it applies to education, Chevron invested more than $100 million in education over the past three years in the United States and has pledged an additional $30 million

through 2015 to support science, technology, engineering and math, or STEM, education (Chevron, 2014). In terms of health, Chevron has partnered with a variety of African

nations to promote prevention of mother-to-child transmission of HIV (PMTCT). Chevron’s partnership has helped train more than 440 individuals on the latest PMTCT approaches and techniques, has contributed to more than 30,000 pregnant women being

tested for HIV, and has reached more than 117,800 individuals with PMTCT messaging (Chevron, 2014).

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Sustainability and Corporate Social Responsibility According to its 2014 Annual Report, Chevron aims to be seen as “the” global energy

company, valued for both its performance and integrity. The corporation has implemented several programs, including OEMS and “The Chevron Way,” a “comprehensive, proven means to systematically manage process safety, personal safety

and health, the environment, reliability, and efficiency (Chevron, 2014),” to both strengthen its workforce and to enhance its image to potential stakeholders and the

public, alike. Chevron has made it clear that it seeks to meet the triple bottom line—financial, environmental, and social responsibility—and has taken a plethora of measures over recent years to take care of not only their own, but the world as a whole.

Given that petroleum extraction and use has taken a considerable toll on the environment

over the past century, Chevron consistently makes protecting the environment and taking minimal environmental risk a priority in its sustainability efforts. One faction of this endeavor relates to the firm’s involvement in biodiversity. Works to avoid or reduce

significant damage on sensitive species, habitats and ecosystems, which is best exemplified by Chevron’s Salak operation. The group has been situated in one of

Indonesia’s largest national parks since 2006, and works with park rangers, wildlife experts and advocates protecting biodiversity through habitat and environmental education and monitoring (Chevron, 2014). In 2014, the Salak operation collaborated

with Conservation International in 2014 in use of motion-sensor cameras to monitor Javan leopards and other endangered species, and has made significant strides in

protecting the indigenous species in the areas Chevron extracts and manufactures petroleum products (Chevron, 2014).

Another component of Chevron’s environmental safety emphasis is climate change awareness and energy efficiency development. The corporation recognizes the rise in

greenhouse gases in the atmosphere that have arisen from fossil fuel use, and, as a result, attempts to use as little petroleum as possible in its operational activities. For instance, Chevron’s Kazakhstan operation, Tengizchevroil, has invested nearly $3B in

environmental projects since 2000, and has increased gas utilization by 99% since its inception, either via reinjection of the product into its Tengiz Field reservoir as fuel, or

immediately selling into domestic or export market (Chevron, 2014). Chevron also remains constantly mindful of its water use—particularly fresh water—attempting to utilize all water in its operations as efficiently and effectively as possible. Chevron

recognizes that fresh water is an increasingly scarce and vital resource for businesses, environments, and communities. An example of the corporation’s water conservation

efforts can by found at Chevron’s California refineries, which use recycled and reclaimed water for a majority of its operations—over 70% since 1999. For every barrel extracted from Kern County, 10 barrels of water are generated (water that is brought to the surface

during operations that extract hydrocarbons from oil and gas reservoirs), some of which is captured, treated, and distributed to local farmers (Chevron, 2014).

The results of Chevron’s environment protection efforts have proven beneficial to the corporation, the environment, communities, and governments, alike. As a result of

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operational safeguards put in place, Chevron’s Petroleum Spill statistics have increased steadily since 2010—from 9,602 barrels spilled and 8,225 recovered to 838 barrels

spilled and 396 recovered (Chevron, 2014). In 2014, Chevron became the first energy company to meet the Center for Sustainable Shale Development’s voluntary shale gas

drilling standards. The 15 performance standards include surface water and groundwater standards that require maximizing water recycling and developing ground-water protection plans (Chevron, 2014). Additionally, In 2014, Chevron scored a 95 CDP S&P

500 Climate Change Report—the highest of any corporation in the petroleum industry (Chevron, 2014).

Chevron contributes to its sustainability through Corporate Social Responsibility by

providing jobs and development opportunities for suppliers in countries with which they engage in business. According to the firm’s 2014 Responsibility Report, Chevron claims “we demonstrate our commitment to the countries and communities where we live and

work by creating jobs, developing and sourcing from local suppliers, and employing local workforces,” finding that its own operational success is often directly related to the

welfare and development of its employees, both domestic and abroad. One way Chevron supports its foreign suppliers is through capacity building. The corporation designs and implements programs to aid local communities in meeting industry standards and provide

goods to Chevron, as well as other petroleum producers. For instance, Chevron Nigeria Limited (CNL) has partnered with Nigeria oil and gas companies (Beneprojecti Nigeria

Limited) to produce and deliver a Dynamic Positions II platform vessel, which is used to supply and support offshore oil and has operations (Chevron, 2014).

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Similarly, Chevron works toward increasing supplier sourcing to strengthen the

efficiency and performance of its associates. Chevron collaborates with government agencies, national oil companies, nongovernmental organizations (NGO’s) to identify

high-impact and sustainable workforce and supplier development opportunities. The corporation yearly invests in operational supervision, local training and education, as well as machinery optimization projects (Chevron, 2014). Chevron also puts significant

emphasis on local hiring, committed to employing a workforce that represents its communities and native countries. The firm works to identify a capable workforce,

provides education, collaborates onsite, and works hands-on to help carry out projects. In 2014, 92 percent of Chevron’s employees worked in their nation of origin (Chevron, 2014).

The results indicate that Chevron invested more in providing job and development

opportunities for its foreign constituents than any other corporation in the oil and gas business. According to Chevron’s 2014 Responsibility Report, Chevron spent over $63B on goods and services globally in 2014. Domestically, Chevron spent nearly $1 billion on

goods and services from women- and minority-owned businesses in the United States and more than $2.5 billion on goods and services from U.S.-based small businesses in 2014.

In 2012,every direct Chevron job supported 29 additional jobs in Thailand, and Chevron helped drive more than 2.4 percent of the country’s gross domestic product. In 2013, the Chevron Gulf of Mexico Business Unit supported 61,500 jobs in the United States,

including 26,200 in Louisiana, 14,000 in Mississippi and 750 in Alabama. In 2011, Chevron’s contribution to Louisiana’s gross state product was $6.5 billion. This

contribution was more than seven times the economic contribution of the seafood industry $877 million) and almost two-thirds of the economic contribution of the tourism industry ($10.3 billion).

Chevron’s Corporate Social Responsibility also takes form as economic and social

investments in the countries it operates its upstream activities. Chevron financially contributes to the social and economic welfare of in the countries where they do business, as it finds that that its commercial success is directly related to the societal progress of

these areas (Chevron, 2014). Domestically, in 2014, Chevron invested $20B in 27 U.S. counties as part of its Appalachia Partnership Initiative (Chevron, 2014). These efforts

are designed to improve workforce education in Pennsylvania, Ohio, and West Virginia, ultimately to foster productivity and safety in Chevron’s east coast operations. Abroad, Chevron invested over $10B in its five-year program, the Bangladesh Partnership

Initiative (BPI). One of the largest corporate social investment initiatives in Bangladesh, the BPI will work with local non-governmental and international development

organizations to assess local needs and establish enterprise and work-force development programs (Chevron, 2014).

Lastly, a key component of Chevron’s sustainability efforts pertain to cultivating a diverse, talented, and engaged workforce. One way the corporation seeks to strengthen

this group is through workforce training and development. Chevron employs more than 61,000 individuals, and it greatly values each person’s development and assisting them in

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realizing their career goals. In 2014, 3,200 employees were actively involved in Horizons, an accelerated development program that strengthens that technical proficiency

of workers with fewer than six years of experience in the field (Chevron, 2014).

Chevron strives to be a global leader in diversity, employing a variety of values and viewpoints to drive the corporation in a successful and all-inclusive direction. In 2014, Chevron achieved a rating of 100 percent on the Human Rights Campaign Corporate

Equality Index (the only in the petroleum industry to achieve a perfect score), which ranks U.S. companies committed to lesbian, gay, bisexual and transgender (LGBT)

equality in the workplace for its tenth consecutive year (Chevron, 2014). Likewise, Chevron received the 2014 Work-place Excellence Award from Out & Equal Workplace Advocates for its dedication to workplace equality for LGBT individuals (Chevron,

2014). Additionally, Chevron invests considerable time and funds in workforce engagement programs. Chevron openly communicates with its 61,000 employees, taking

their considerations and feedback into account, in order to promote employee involvement. In 2014, Chairman and CEO John Watson held informal meetings with a select group of employees to share thoughts and insights on Chevron’s diversity efforts

(Chevron, 2014). Additionally, in 2014, 21,000 (roughly a third) of Chevron’s employees participated in the firm’s employee networking opportunities, which serve to host open

discourse with employees and management, as well as celebrate cultural diversity in the workplace (Chevron, 2014).

Chevron is actively engaged in sustainability efforts and Corporate Social Responsibility for a variety of reasons. A few are obvious, as they are conducive of efficient operations

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and a health workplace environment. Firstly, Chevron clearly aims to reverse some of the negative connotations associated with the petroleum industry, the most glaring being

BP’s 2008 Gulf of Mexico Oil Spill. Secondly, Chevron realizes that it is generally savvy to invest both financially and personally in the nations it conducts business in, as it

promotes positive and long-standing relations with foreign constituents, as well as optimizing Chevron’s own operations abroad. However, Chevron has also been involved in several scandals, itself, that it would like to make up for, such as the Ecuadorian

pollution scandal. In the 1970’s Texaco, then partnered with Ecuadorian state oil, left contaminants in a variety of regions during its extraction operations, rendering a

multitude of Ecuadorians sick. Ultimately, Chevron was ordered to pay over $9B in restitution, the second largest fine for environmental encroachment only to BP’s $20B penalty for its aforementioned American oil spill (Romero, 2011). Another example is the

“National City Lines Conspiracy” of 1950. Then-Standard Oil was convicted of conspiring with General Motors and Firestone Tires in destroying electrified rail and

electric bus transit systems in 44 major U.S. cities. Systems were then replaced with GM buses that ran on Standard Oil gasoline and Bridgestone tires (The Brooklyn Historic Railway Association 2012). Yet another instance of controversy for Chevron was its

2012 Richmond, California Refinery Explosion. On August 6, 2012, an explosion and fire erupted at Chevron’s Richmond, California Refinery caused by a diesel leak in one of

the facility’s crude distillation units. Ultimately, 15,000 people were hospitalized (primary for sickness induced by fume inhalation, and Chevron paid $2M in restitution (Berton, 2013).

In looking at Chevron’s sustainability and Corporate Social Responsibility critically, we

evaluated whether the corporation’s efforts make sense and if they ultimately work in its favor. As it relates to the triple bottom line, most of Chevron’s sustainability focus pertains to environmental and social investment. Because of the environmental and social

incidents resulting from the oil and gas industry (Chevron especially), it would follow that the firm would place more emphasis on these two components of the triple bottom

line. Not only does it look good to customers and media, but strengthens its operational capabilities, contributing to its own financial wellbeing by attracting and maintaining customers. As to whether Chevron’s approach to sustainability works, we find that the

firm’s efforts rival those of its primary competition, aligning closely with Exxon and perhaps being slightly outdone by the over-compensating BP. While it might not ever

change the public’s perception of petroleum firms without involvement of the media, it is clear that Chevron not only makes an earnest effort to be socially and environmentally responsible, but it is among its highest priorities. Realistically, Chevron’s sustainability

programs probably makes not difference to its customers, as gas products are so inelastic (to essentially all factors), neither businesses nor consumers will stop buying gas,

regardless. As a result, we believe that Chevron’s sustainability and Corporate Social Responsibility efforts ultimately make sense and work from an operational standpoint. However, we believe that Chevron could be more transparent in its annual reports and

could be more indicative of the direction the corporation seeks to move from operational and industry standpoints, primarily for the benefit of prospective stakeholders and casual

consumers.

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SWOT ANALYSIS

Strengths

Major Global Capital Projects

Chevron production is projected to grow as a result of continued investment in major

capitol projects. The 2014 signing of agreements to begin exploration in the Nambuena Block of the Vaca Muerta Shale in Argentina, is a major strength as these agreements have projected Chevron to ramp up oil production to 3.1 million barrels of oil a day in

2017 (Chevron Annual Report, 2014). Offshore acreage was acquired in the Western Gulf of Mexico, Mauritius, Myanmar and New Zealand, which have also helped increase

their projections for future barrel production. Another major project that Chevron took on in 2014 was the Athabasca Oil Sands Expansion project in Canada, where the average total daily production of crude oil increased by 43,000 barrels to a total per day of

243,000 barrels per day. With having a wide array of projects worldwide, Chevron has created a strong global presence in more than 180 countries. Chevron has a global

marketing network in 84 countries as well. Starting in 2014, Chevron has stated that over the next three years they expect to start up

15 major capital project (Chevron, 2014). One of the major projects Chevron has begun is occurring in Africa, where Chevron is exploring for oil in Sierra Leone, Mauritania, Morocco, and Liberia. Chevron is also producing and exploring crude oil in Nigeria,

Republic of the Congo, and Angola (Chevron, 2014). In Nigeria, the Agbami Field is producing roughly 134,000 barrels of crude oil per day. Chevron plans to development

this field more by opening up two more wells, to make a total of ten, which will increase the production of crude barrels per day. Chevron is also exploring and producing oil in Asia. The Tengizchevroil Future Growth Project in Kazakhstan plans to increase the total

daily crude oil production from 250,000 barrels to 300,000 barrels over the next few years (Chevron, 2014). These projects are considered a strength for Chevron because they

will help increase Chevron’s market share. This is a good strategic plan because it allows them to differentiate themselves from their competition by increasing their efficiency and oil production.

Diversified Portfolio/Research and Development

Chevron is considered to be one of the largest multinational and integrated energy

company. This is because Chevron is involved in many different sectors of the market, such as traditional resources, renewable energy sources, and emerging fuel sources. The

traditional resource sector includes oil, natural gas, and oil sands. The renewable energy sources sector includes geothermal and solar energy. And lastly, the emerging fuels sector deals with biofuels and gas-to-liquids sources, which include clean diesel fuels.

This means that Chevron is highly diversified in the many different energy sectors,

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including the refining, exploration, and production of all of these different types of energy.

With the increasing demand for renewable energy, Chevron focused its research and

development budget towards renewable energies. Chevron is the world’s leading manufacturer of geothermal energy, which is created by the heat of the earth and it emits almost no greenhouses gases (Chevron, 2014). In 1960, Chevron began geothermal

operations in the Geysers located in San Francisco, California. From this small start, Chevron has grown to be able to produce enough geothermal energy to support millions

of people in Indonesia and the Philippines (Chevron, 2014). To increase its market share in the geothermal market, Chevron also holds a 40% interest in the Philippine Geothermal Production Company.

Even though it seems as if renewable resources are the future for energy companies, it is

still important to focus on the traditional resources because that is the major revenue stream for most energy companies. “The world has produced about 1 trillion barrels of crude oil to date” and this number is expected to increase drastically (Chevron, 2014). As

of 2014, Chevron is the largest private producer of oil in Kazakhtan and is the largest oil producer in Indonesia (Chevron, 2014). Focusing on traditional and renewable resources

allows Chevron to appeal to a wide variety of customers and businesses. The reason that portfolio diversification is a strength for Chevron is that it reduces long-

term risks, it usually results in a higher return, and it allows for adjustments in the investment mix. Chevron is positioned well in the market by being a strong crude oil

provider and by researching into new types of energies. It lowers the risk of Chevron just focusing on traditional resources, which as of right now is not the top future energy source. Having a diversified portfolio has forced Chevron to spend around $700 million

in research and development in 2014 alone. Compared to its main competitor ExxonMobil, Chevron spent roughly 3.5% of its sales revenue on research and

development, while ExxonMobil only spent 2.4% in 2014 (Chevron, 2014). This shows that Chevron is not only concerned with finding alternative resources, but also is concerned with improving its operations in the upstream and downstream segments.

Research and development is a strength for Chevron because it has allowed them to have a competitive advantage during this slump in oil prices by staging them to be ready for

when oil prices start to rise again.

Vertically Integrated

Other than being an integrated oil company, Chevron is also vertically integrated. This means that Chevron has holdings in all of the different industry segments, which include upstream and downstream. The upstream portion of Chevron includes the exploration and

production of crude oil and natural gas. In 2014, Chevron produced roughly 2.6 million barrels of crude oil per day worldwide (Chevron, 2014). One reason that Chevron can

produce this many barrels per day is due to vertical integration. Allowing Chevron to operate more than one level of the distribution channel allows them to have a stronger

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quality and price control. Chevron’s main crude oil exploration and production operations occur in the United States, Australia, Angola, Gulf of Mexico, Nigeria, and Kazakhstan.

In the United States alone, Chevron has 11,000 crude oil and natural gas wells that cover 4,000,000 acres (Chevron, 2014).

For the downstream segment, Chevron owns and operates five refineries concentrated in North America, South Africa, and the Asia-Pacific region (Chevron, 2014). Chevron also

has a joint venture with Conoco Philips to create the Chevron Phillips Chemical Company, which diversified the portfolio of both companies. Chevron also has created a

pipe line company that transports crude oil, natural gas, natural gas liquids, carbon dioxide, petrochemicals, and refined products in the United States (Chevron, 2014). Chevron takes these finished products are markets them around the world under the name

of Chevron, Texaco, and Caltex brands. Chevron has retail stations located in the United States, Canada, Latin America, southern Africa, and the Asia-Pacific region (Chevron,

2014). Being involved in the full process of getting the oil from the ground to being sold to a

business has allowed Chevron to invest in greatly specialized assets, such as biofuel, it lowers costs of transactions by eliminating subsidiary companies, and it ensures quality

control based on Chevron’s standards. This is a strength for Chevron because it provides competitive advantage and differentiation because it allows for more production inputs, distribution resources, and retail channels (Chevron, 2014).

Weaknesses Legal Issues

Chevron has faced and is currently facing a good amount of different legal issues over the

past years. Currently the biggest legal issue that Chevron is facing is the Ecuador lawsuit. Chevron is defending itself against false allegations that the company is responsible for alleged environmental and social harms in the Amazon region of Ecuador (Chevron,

2014). In February of 2011, a court located in Lago Agrio, Ecuador rendered an $18 billion lawsuit, which was later reduced to $9.5 billion. This lawsuit was issued to

Chevron for alleged contamination resulting from the crude oil production in the region. After 3 years, the U.S. District Court in New York ruled that the Ecuadorian lawsuit against Chevron was a product of fraud and racketeering activity and found the lawsuit to

be unenforceable. There are many different reasons as to why this lawsuit was considered to be fraud. First of all, Chevron has never operated in Ecuador, the only

connection that Chevron has to Ecuador is that, Texaco Petroleum, was a minority partner in a oil consortium named Petroecuador, located in Ecuador from 1964-1992, but Texaco did not become a subsidiary of Chevron until 2001. In an agreement with

Ecuador, Texaco Petroleum was required to conduct a remediation of production sites after its split from Petroecuador. The government of Ecuador certified that Texaco

successfully completed this cleanup, but still Ecuador is trying sue Chevron stating that Texaco’s clean up was not successful and that Chevron must be held responsible. This

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lawsuit is a huge weakness to Chevron because it has been publicized throughout the world, making Chevron look bad.

Another issue that Chevron was sued for was in 2013, by the city of Richmond

California. Richmond sued Chevron one year after a massive refinery fire that covered the California city in smoke, causing thousands of people to seek treatment for respiratory problems. In the lawsuit, Richmond accused Chevron of “willful and

conscious disregard for public safety” (Wilkey, 2013). Richmond has asked for financial compensation for the costs of cleanup, public harm and other expenses, stating that

Chevron officials places profits and executive pay over public safety because the company failed to check and repair a corroded pipe in the refinery, which was the cause of the fire. The Richmond lawsuit sued Chevron for $11 million, to compensate the local

hospitals, government agencies and residents.

Environmental Hazards

Since Chevron is one of the worlds largest integrated oil companies it has to deal with

and try to prevent many different environmental hazards. Chevron is currently dealing with a massive lawsuit issued by Ecuador that claims Texaco, which is was acquired by

Chevron in 2001, contaminated the Amazon region of Ecuador. The damage from the contamination includes, 18 billion gallons of wastewater that was dumped into the streams in the amazon region, along with the construction of 916 open-air, unlined toxic

waste pits that run directly into the forest floor (ChevronToxico, 2012). Although this lawsuit was deemed to be fraud and Chevron is not going to be held responsible for

theses damages, it is still a good example of the environmental hazards that Chevron has to worry about.

Other environmental hazards that Chevron and other oil companies have to deal with are thermal pollution due to discharge of effluents with temperatures higher than recipient

water bodies. Chevron also has to be aware of the particular emissions into the atmosphere generated during operations at production and refining plants during the production of crude oil. Accidents that could occur during Chevrons upstream processes

can negatively impact the environment because these accidents could cause, large oil spills, leaks, fires and explosions on plants (ChevronToxico, 2012). Chevron has to be

extremely careful to follow all of the safety checks to make sure all of its refineries are following regulations in order to try and avoid any of these environmental hazards.

Opportunities

Increasing Demand for Natural Gas

Natural gas is an environmentally and efficiency energy source that has seen an increase in demand over the past few years. In 2014, natural gas accounts for roughly 20% of the

world’s energy consumption (Chevron, 2014). The United States Department of Energy stated that the demand for natural gas will grow by 56% through 2040 (Chevron, 2014).

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The reason for the increase in demand for natural gas contributes to the more informed consumer base. Most consumers know that it is important to take care of the environment

and to try and eliminate unnecessary harmful chemicals. Consumers are turning towards natural gas because it is the cleanest-burning conventional fuel, “producing lower levels

of greenhouse gas emissions than the heavier hydrocarbon fuels” (Chevron, 2014). Even though Chevron has natural gas resources in Africa, Australia, Southeast Asia, the

Caspian region, Latin America, and North America, there are major growth opportunities in this sector of the market. One area of natural gas that can be expanded on is from

shale. Shale rock formations can be found roughly three miles below the earth’s surface (Chevron, 2014). Horizontal drilling is used to access the natural gas and hydraulic fracturing is used to release the trapped gas. A major advantage of natural gas wells is

that they are expected to produce for 40 to 50 years (Chevron, 2014). Natural gas from shale production has risen 30-fold since 2000, which has allowed for an increase in

energy supplies and has reduced energy costs (Chevron, 2014). Natural Gas is a major opportunity for Chevron because it will differentiate itself from its competitors, such as ExxonMobil who has put most of its research and development in improving its crude oil

production. Increasing shale production will also create more jobs in the United States economy and will allow Chevron to become a fully integrated energy company.

Repositioning – Energy Company

Chevron has defined themselves as an integrated energy company, as stated above in this analysis. Chevron’s alternative energy includes geothermal, wind, solar, fuel cells,

hydrogen, and biofuels (Chevron, 2014). While Chevron is integrated by being involved in tradition, renewable, and emerging fuels, Chevron is still seen as being mostly an oil company. In 2014, Chevron made roughly $70 million in sales on crude oil alone, while

it only made $16 million in sales on natural gas sales (Chevron Annual Report, 2014). With the major decrease in oil price, oil companies are scrambling to find other ways to

keep their revenue levels high during this time of crisis. Having a diversified portfolio of energy sources will allow companies to continue to bring in revenue without completely suffering from the decline in crude oil price. Compared to its competitors, Chevron also

seems to be more focused on researching for alternative energies, which will give them a competitive advantage by differentiating them from its competition. As stated in the

research and development section, Chevron has spent more money in research and development of alternative energies than its main competitor, ExxonMobil. Even though Chevron has a diversified portfolio, Chevron could add value to its brand by having each

sector equally represented in the market. As of 2014, Chevron is seen as a crude oil company, when it could be seen as an oil, geothermal, natural gas, biofuel, and solar

energy company. Other than geothermal and solar, Chevron has also looked into other emerging fuels, such

as biofuels. Biofuels are renewable resources that are produced through biological processes. Chevron is focused on the biomass-based liquids with a chemical composition

close to crude oil (Chevron, 2014). This new area of energy could be a major opportunity for Chevron. Starting in 2006, Chevron has contributed around $12 million in research

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and development to create a process to convert biomasses into fuels. A major issue that Chevron has encountered while research biofuels is that it needs advance technology and

there are high costs of cultivating, harvesting, and transporting biomass (Chevron, 2014). But, if Chevron can use existing manufacturing facilities to produce advanced biofuels, it

may be able to cut costs of producing biofuels. Focusing on the research of new energies may be more costly in the short term, but it will position Chevron as a truly integrated oil company in the long run, which will better prepare them for the increase of alternative

energy.

Threats

Government/Environmental Regulations

Chevron and all other companies within the oil industry have to follow government regulations that affect the exploration, development, and production processes. One of the major environmental agencies that Chevron has to abide by is the United States

Environmental Protection Agency, or the EPA. The EPA is the federal regulatory agency for environmental protection. Oil and natural gas operations, like Chevron also have to

comply with the regulations set by the Bureau of Land Management. The American Petroleum Institute states “Waste and ground water protection requirements typically originate at the state level for exploration and production operations. Water discharge

requirements are mostly federal requirements, and air quality regulations are a mixture of state and federal requirements” (American Petroleum Institute, 2011). It is extremely

important that Chevron follows all of the government regulations because if it does not there are huge penalties that the company would have to pay.

The government and environmental regulations of the oil and natural gas industries can be seen as huge threats to these companies. Chevron uses very expensive and intense

machinery in its upstream business processes. If the government were to one day decide that the way Chevron operates its refineries and machinery is considered to be a threat to the environment Chevron would have a lot of problems to deal with. It is not easy for

Chevron to change its operations without having to spend a great deal of time and money. New government regulations could also cause Chevron to fall behind its competitors if it

were to have to change its processes. High Competition

Chevron has to deal with the constant threat of its direct competitors. The Oil and natural

gas industry is highly competitive and the companies within this industry are always trying to come up with new competitive advantages to put them ahead of their competition. A huge threat to Chevron and all other oil and natural gas companies is the

threat of new entrants. There are thousands of oil and oil services companies around the world, although Chevron has a high market share compared to most of theses companies,

there are still competitors such as, Exxon or Shell, that Chevron has to be competing against. These companies are all trying to figure out ways to out do each other, Chevron

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Strengths

Opportunities

Weaknesses

Threats

Increasing Natural Gas Repositioning themselves as

an energy company

Major Global capital Projects Diversified Portfolio Research and Development

Vertically Integrated

Legal Issues Cost of environmental

hazards

Government regulations Environmental regulations High competition

Global recession

is spending a great deal of its revenue and investing it into research and development to find new places around the world to drill. Chevron is spending the most out of its

competitors in research and development because it is one of the companies’ strengths that have the potential to put it ahead in the industry.

Global Recession

The raw material sector, which includes the oil and natural gas industry, has taken a direct hit from the global recession. When the global economy starts to contract,

commodity prices will tumble because of three different factors. The first factor is that the dollar will most likely appreciate against other currencies; this means that commodity prices will drop when the value of the dollar rises. Another factor is that consumption of

commodities will fall. This is because there is less demand for the raw materials that are used to make products. So overall when demand drops, and the supple remains the same

then the prices will drop. The last factor is that credit will be less readily available. "In a normal recession, credit grows at a less rapid rate than in an expansion," (Barrons, 2012). This is a bad thing to gas because the speculation in commodity markets tends to be

driven by credit, so when credit is reduced there is going to be a reduction in commodities and reduced prices (Barrons, 2012).

SWOT CHART

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CONCLUSION After completing an entire company analysis of Chevron we have come to the conclusion

that we would recommend to buy Chevron stock. There are many different reasons that have brought us to this recommendation.

We believe that Chevrons strengths and opportunities to grow ultimately outweigh the company’s weaknesses and threats. After completing at SWOT analysis we have

identified Chevrons strengths to be to be major global capital projects and a diversified portfolio, which includes crude oil, natural gas, liquefied natural gas, and alternative energy sources. With these strengths Chevron has been able to maintain a strong

competitive advantage over its customers. Chevron is also investing $700 billion into research and development of alternative energy sources, giving it another competitive

edge over its direct competitors. After taking a close look into Chevron’s financial information we have found that

Chevron’s profitability ratios are an overall positive, as they have been exceptional compared to the rest of the industry. Along with a positive profitability, Chevron’s return

on equity, return on assets and net profit margin are all well above the industry averages. With the assumption that the price of oil will begin to increase over the next couple of

years, this would be a huge help to Chevron’s financial figures and overall revenue. The industry as a whole is being hit hard by the decrease in the price of oil but Chevron has

gone a good job in decreasing its operating costs in order to keep its dividends per share, which is very important to its shareholders. Since we see Chevron moving in a positive direction in the future we would once again recommend to buy stock in Chevron.

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