On the Call: Chevron CEO John Watson

The Associated Press

Chevron Corp., the second largest U.S. oil and gas company, posted a sharp increase in earnings for the fourth quarter on higher production, better refinery performance, and a gain from an asset swap that increased the company's position in a gas field in Australia.

Fourth quarter net income jumped 41 percent to $7.2 billion on revenue of $60.6 billion.

The company's full year production fell slightly, however, along with revenue and profit. On a call with investors, CEO John Watson was asked why the company hasn't been able to grow its U.S. oil production amid a surge in domestic production. Watson also answered questions about the company's ability to find oil around the world, its considerable cash position and when the company's fire-damaged refinery in Richmond, Calif. will come back online.

Questions and answers have been edited for length and clarity.

Q: There is a U.S. oil revolution underway, and you do seem relatively underweight in that area which is after all your own backyard. What's your appetite to step up your exposure to U.S. oil?

WATSON: We are investing in a big way in the United States offshore, and we've had a long standing position in California that produces oil. We've had a mature business and a lot of acreage in west Texas, and then we've recently added to that with the acquisition that we - where we picked up some acreage in New Mexico from Chesapeake (Energy Corp.).

I'll tell you we tend to be returns-focused when we make investments. And I'll tell you right now, a lot of what we see, a lot of transactions come across our desks ... are selling (at prices) that we think are very pricey.

Now we feel very good about the acquisition of acreage from Chesapeake. That was a complex transaction. We think we negotiated a good deal there. We don't have a position in (North Dakota's) Bakken formation. I think I've said before if I could wind back the clock and see that well, it'd be nice to have a position, but it's very pricey right now. And to just pour a bunch of capital in there and enter that fray, I don't know that we could make full cycle economics look very good.

Q: Chevron is one of the largest landholders in two U.S. oil fields. Why are you drilling less than your peers there?

WATSON: We are ramping up rig activity. We are ramping up rapidly in (New Mexico's) Delaware basin as you would expect. We've got over - really over 20 in the (West Texas) Permian region that are running right now. We are seeing volume growth in both of these areas that are a part of the plan going forward. The industry is very focused on building organizational capability and we've added a significant number of new people and added to our drilling training programs that we have in place both in the United States and overseas. We're not going to operate if we don't have people that we think are trained and capable. And I think there are pressures on the industry but when we plan to ramp up we only plan to ramp up if we have the right people.

Q: Has there been a change in the way you decide where to explore oil and gas as new potential resources have arisen in new countries around the world in recent years?

WATSON: The reality is we have a long queue of opportunities. It's as good as it's ever been since I've been in the company, and we have more opportunities coming at us every day at all phases of development from exploration all the way up through discovered resources and other opportunities. And so we can be a little bit choosey.

We favor early, low-cost entries where we can add value over time through the application of our technology or know-how. When it gets down to a pure bidding war with a lot of different players in the U.S., there's a lot of money that's looking for opportunities and if it's not a particularly difficult entry for a party it means there'll be a lot of bidders and prices get bid up. So while the resources are very good and well understood in the U.S. and in many cases are quite prolific, we're focused on the kind of returns that we can get. And so we have made selective entries in the U.S. We feel good about their entries. And we have picked up some acreage overseas, notably in half a dozen countries in central Europe.

Q: On the cash pile, can you just remind us again why we're holding so much cash on the balance sheet in this interest rate environment?

WATSON: Our uses of cash are geared toward paying and sustaining and growing the dividend, funding the capital programs that are required to make our earnings and cash flow grow, keeping some capacity on the balance sheet for the ups and downs in the commodity markets and changes that can take place in the business, and finally returning cash to shareholders through repurchases. And that's been our strategy for a long, long time. You're correct: we have more cash than debt on our balance sheet. We have had a conservative balance sheet. But we know that there are uncertainties out there, and we think that's the best way to run our balances at this point.

Q: Could you give us an update on the Richmond refinery and when it will return to full operation?

WATSON: We're targeting first quarter, and I have no reason to think it will be other than that at this time. The repair work is going well. And it's been arduous getting permits and going through the process here in Richmond, but we're working through that and expect that we'll be ready to go here in the first quarter.