News Column

CHEVRON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 2, 2014

First Quarter 2014 Compared with First Quarter 2013

Key Financial Results Earnings by Business Segment Three months ended March 31 2014 2013 (Millions of dollars) Upstream United States $ 912$ 1,132 International 3,395 4,784 Total Upstream 4,307 5,916 Downstream United States 422 135 International 288 566 Total Downstream 710 701 Total Segment Earnings 5,017 6,617 All Other (505 ) (439 )



Net Income Attributable to Chevron Corporation (1) (2) $ 4,512$ 6,178 ____________________ (1) Includes foreign currency effects

$ (79 )$ 246



(2) Income net of tax, also referred to as "earnings" in the discussions that follow.

Net income attributable to Chevron Corporation for the first three months of 2014 was $4.5 billion ($2.36 per share - diluted), versus $6.2 billion ($3.18 per share - diluted) in the first three months of 2013. Upstream earnings in first quarter 2014 were $4.3 billion compared with $5.9 billion a year earlier. The decrease between comparative periods was mainly due to lower crude oil production and realizations, and higher tax, depreciation and exploration expenses, along with adverse foreign currency effects. Downstream earnings in first quarter 2014 were $710 million compared with $701 million in the corresponding 2013 period. Higher margins on refined product sales in the U.S. and gains on asset sales were offset by lower international margins and adverse foreign currency effects. Refer to pages 29 through 31 for additional discussion of results by business segment and "All Other" activities for first quarter of 2014 versus the same period in 2013.

Business Environment and Outlook Chevron is a global energy company with substantial business activities in the following countries: Angola, Argentina, Australia, Azerbaijan, Bangladesh, Brazil, Cambodia, Canada, Chad, China, Colombia, Democratic Republic of the Congo, Denmark, Indonesia, Kazakhstan, Myanmar, the Netherlands, Nigeria, Norway, the Partitioned Zone between Saudi Arabia and Kuwait, the Philippines, Republic of the Congo, Singapore, South Africa, South Korea, Thailand, Trinidad and Tobago, the United Kingdom, the United States, Venezuela, and Vietnam. Earnings of the company depend mostly on the profitability of its upstream and downstream business segments. The biggest factor affecting the results of operations for the company is the price of crude oil. In the downstream business, crude oil is the largest cost component of refined products. Seasonality is not a primary driver of changes in the company's quarterly earnings during the year. To sustain its long-term competitive position in the upstream business, the company must develop and replenish an inventory of projects that offer attractive financial returns for the investment required. Identifying promising 25



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areas for exploration, acquiring the necessary rights to explore for and to produce crude oil and natural gas, drilling successfully, and handling the many technical and operational details in a safe and cost-effective manner are all important factors in this effort. Projects often require long lead times and large capital commitments. The company's operations, especially upstream, can also be affected by changing economic, regulatory and political environments in the various countries in which it operates, including the United States. From time to time, certain governments have sought to renegotiate contracts or impose additional costs on the company. Governments may attempt to do so in the future. Civil unrest, acts of violence or strained relations between a government and the company or other governments may impact the company's operations or investments. Those developments have at times significantly affected the company's operations and results and are carefully considered by management when evaluating the level of current and future activity in such countries. The company continually evaluates opportunities to dispose of assets that are not expected to provide sufficient long-term value or to acquire assets or operations complementary to its asset base to help augment the company's financial performance and growth. Refer to the "Results of Operations" section, beginning on page 29 for discussions of net gains on asset sales during 2014. Asset dispositions and restructurings may also occur in future periods and could result in significant gains or losses. The company closely monitors developments in the financial and credit markets, the level of worldwide economic activity, and the implications for the company of movements in prices for crude oil and natural gas. Management takes these developments into account in the conduct of daily operations and for business planning. Comments related to earnings trends for the company's major business areas are as follows: Upstream Earnings for the upstream segment are closely aligned with industry prices for crude oil and natural gas. Crude oil and natural gas prices are subject to external factors over which the company has no control, including product demand connected with global economic conditions, industry production and inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related damage and disruptions, competing fuel prices, and regional supply interruptions or fears thereof that may be caused by military conflicts, civil unrest or political uncertainty. Any of these factors could also inhibit the company's production capacity in an affected region. The company closely monitors developments in the countries in which it operates and holds investments, and seeks to manage risks in operating its facilities and businesses. The longer-term trend in earnings for the upstream segment is also a function of other factors, including the company's ability to find or acquire and efficiently produce crude oil and natural gas, changes in fiscal terms of contracts, and changes in tax laws and regulations. The company continues to actively manage its schedule of work, contracting, procurement and supply-chain activities to effectively manage costs. However, price levels for capital and exploratory costs and operating expenses associated with the production of crude oil and natural gas can be subject to external factors beyond the company's control. External factors include not only the general level of inflation, but also commodity prices and prices charged by the industry's material and service providers, which can be affected by the volatility of the industry's own supply-and-demand conditions for such materials and services. In recent years, Chevron and the oil and gas industry generally experienced an increase in certain costs that exceeded the general trend of inflation in many areas of the world. Capital and exploratory expenditures and operating expenses can also be affected by damage to production facilities caused by severe weather or civil unrest, delays in construction, or other factors. 26



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Table of Contents [[Image Removed]] The chart above shows the trend in benchmark prices for Brent crude oil, West Texas Intermediate (WTI) crude oil, and U.S. Henry Hub natural gas. The Brent price averaged $109 per barrel for the full-year 2013. During first quarter 2014, Brent averaged $108 per barrel and ended April 2014 at about $108. The majority of the company's equity crude production is priced based on the Brent benchmark. While geopolitical tensions and supply disruptions have supported crude prices in 2014, the price for Brent-related crudes in the Atlantic Basin also reflects negative economic developments, high refinery maintenance in Europe and North America, and higher production from Iraq, Iran and the North Sea. The WTI price averaged $98 per barrel for the full-year 2013. During first quarter 2014, WTI averaged $99 per barrel and ended April 2014 at about $100. WTI traded at a discount to Brent throughout 2013 and first quarter 2014 due to high inventories and excess crude supply in the U.S. midcontinent market. A differential in crude oil prices exists between high quality (high-gravity, low-sulfur) crudes and those of lower quality (low-gravity, high-sulfur). The amount of the differential in any period is associated with the supply of heavy crude versus the demand, which is a function of the capacity of refineries that are able to process this lower quality feedstock into light products (motor gasoline, jet fuel, aviation gasoline and diesel fuel). In the first quarter 2014, the differential eased in North America as light sweet crude oil production in the U.S. midcontinent region remained robust, while refinery maintenance dampened demand. Outside of North America, supply disruptions in Libya and elsewhere supported light sweet crude markets relative to heavier, more sour crudes. Chevron produces or shares in the production of heavy crude oil in California, Chad, Indonesia, the Partitioned Zone between Saudi Arabia and Kuwait, Venezuela and in certain fields in Angola, China and the United Kingdom sector of the North Sea. (See page 33 for the company's average U.S. and international crude oil realizations.) In contrast to price movements in the global market for crude oil, price changes for natural gas in many regional markets are more closely aligned with supply-and-demand conditions in those markets. In the U.S., prices at Henry Hub averaged $5.11 per thousand cubic feet (MCF) in the first three months of 2014, compared with $3.45 during the first three months of 2013. At the end of April 2014, the Henry Hub spot price was $4.82 per MCF. Fluctuations in the price for natural gas in the United States are closely associated with customer demand relative to the volumes produced in North America. Outside the United States, price changes for natural gas depend on a wide range of supply, demand and regulatory circumstances. In some locations, Chevron is investing in long-term projects to install infrastructure to produce and liquefy natural gas for transport by tanker to other markets. International natural gas realizations averaged $6.02 per MCF during the first three months of 2014, compared with $6.07 in the same period last year. (See page 33 for the company's average natural gas realizations for the U.S. and international regions.) The company's worldwide net oil-equivalent production in the first three months of 2014 averaged 2.588 million barrels per day. About one-fifth of the company's net oil-equivalent production in the first three months of 2014 occurred in the OPEC-member countries of Angola, Nigeria, Venezuela and the Partitioned Zone between Saudi Arabia and Kuwait. OPEC quotas had no effect on the company's net crude oil production for first quarter 2014 or 2013. At their December 2013 meeting, members of OPEC supported maintaining the current production quota of 30 million barrels per day, which has been in effect since December 2008. 27



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The company estimates that net oil-equivalent production in 2014 will average approximately 2.610 million barrels per day, based on an average Brent price of $109 per barrel. This estimate is subject to many factors and uncertainties, including quotas that may be imposed by OPEC; price effects on entitlement volumes; changes in fiscal terms or restrictions on the scope of company operations; delays in construction, start-up or ramp-up of projects; fluctuations in demand for natural gas in various markets; weather conditions that may shut in production; civil unrest; changing geopolitics; delays in completion of maintenance turnarounds; greater-than-expected declines in production from mature fields; or other disruptions to operations. The outlook for future production levels is also affected by the size and number of economic investment opportunities and, for new, large-scale projects, the time lag between initial exploration and the beginning of production. Investments in upstream projects generally begin well in advance of the start of the associated crude oil and natural gas production. A significant majority of Chevron's upstream investment is made outside the United States. On November 7, 2011, while drilling a development well in the deepwater Frade Field about 75 miles offshore Brazil, an unanticipated pressure spike caused oil to migrate from the well bore through a series of fissures to the sea floor, emitting approximately 2,400 barrels of oil. The source of the seep was substantially contained within four days and the well was plugged and abandoned. On March 14, 2012, the company identified a small, second seep in a different part of the field. No evidence of any coastal or wildlife impacts related to these seeps have emerged. A Brazilian federal district prosecutor filed two civil lawsuits seeking $10.7 billion in damages for each of the two seeps. On October 1, 2013, the Court dismissed the two civil lawsuits and approved a settlement under which Chevron and its consortium partners agreed to spend approximately $43 million on social and environmental programs. On November 11, 2013, the Court announced that the settlement is final. The federal district prosecutor also filed criminal charges against Chevron and eleven Chevron employees. On February 19, 2013, the court dismissed the criminal matter, and on appeal, on October 9, 2013, the appellate court reinstated two of the ten allegations, specifically those charges alleging environmental damage and failure to provide timely notification to authorities. On February 27, 2014, Chevron filed a motion for reconsideration. The company's ultimate exposure related to the incident is not currently determinable, but could be significant to net income in any one period. Refer to the "Results of Operations" section on pages 29 through 30 for additional discussion of the company's upstream business. Downstream Earnings for the downstream segment are closely tied to margins on the refining, manufacturing and marketing of products that include gasoline, diesel, jet fuel, lubricants, fuel oil, fuel and lubricant additives, and petrochemicals. Industry margins are sometimes volatile and can be affected by the global and regional supply-and-demand balance for refined products and petrochemicals, and by changes in the price of crude oil, other refinery and petrochemical feedstocks, and natural gas. Industry margins can also be influenced by inventory levels, geopolitical events, costs of materials and services, refinery or chemical plant capacity utilization, maintenance programs, and disruptions at refineries or chemical plants resulting from unplanned outages due to severe weather, fires or other operational events. Other factors affecting profitability for downstream operations include the reliability and efficiency of the company's refining, marketing and petrochemical assets, the effectiveness of its crude oil and product supply functions, and the volatility of tanker-charter rates for the company's shipping operations, which are driven by the industry's demand for crude oil and product tankers. Other factors beyond the company's control include the general level of inflation and energy costs to operate the company's refining, marketing and petrochemical assets. The company's most significant marketing areas are the West Coast of North America, the U.S. Gulf Coast, Asia and southern Africa. Chevron operates or has significant ownership interests in refineries in each of these areas. Refer to the "Results of Operations" section on pages 30 through 31 for additional discussion of the company's downstream operations. All Other consists of mining operations, power and energy services, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, alternative fuels, and technology companies. 28



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Operating Developments Noteworthy operating developments for the upstream business in recent months included the following: Argentina - Signed additional agreements to continue the development of the



Loma Campana Project in the Vaca Muerta Shale, and to begin exploration in

the Narambuena area of the NeuquÉn Basin.

Australia - Received and installed the final two Gorgon gas turbine

generators. All five of the generators have now been installed in preparation

for LNG plant start-up in mid-2015.

Australia - Commenced the development well drilling campaign for the

Wheatstone Project.

Azerbaijan - Achieved first production from the Chirag Oil Project in the

Caspian Sea.

Myanmar - Announced the acquisition of offshore shallow water acreage.

In the downstream, mechanical completion of the premium lubricants base-oil facility in Pascagoula, Mississippi, was achieved in April and ramp-up to full production is planned for mid-year. In addition, Chevron Phillips Chemical Company LLC, the company's 50 percent-owned affiliate, announced the start of construction of its U.S. Gulf Coast Petrochemicals Project. The company purchased $1.25 billion of its common stock in first quarter 2014 under its share repurchase program.

Results of Operations Business Segments The following section presents the results of operations and variances on an after-tax basis for the company's business segments - Upstream and Downstream - as well as for "All Other." (Refer to Note 5, on page 10, for a discussion of the company's "reportable segments," as defined under the accounting standards for segment reporting.) Upstream Three months ended March 31 2014 2013 (Millions of dollars) U.S. Upstream Earnings $ 912$ 1,132 U.S. upstream earnings of $912 million were down $220 million from the corresponding period in 2013. Earnings decreased due to lower crude oil production of $100 million and realizations of $70 million, as well as higher operating and depreciation expenses of $80 million each, partially offset by higher natural gas realizations of $110 million. The company's average realization per barrel for U.S. crude oil and natural gas liquids in first quarter 2014 was $91, compared to $94 a year earlier. The average natural gas realization in first quarter 2014 was $4.77 per thousand cubic feet and $3.11 in 2013. Net oil-equivalent production of 640,000 barrels per day in first quarter 2014 was down 24,000 barrels per day, or 4 percent, from the first quarter a year earlier. Production increases in the Marcellus Shale in western Pennsylvania and the Delaware Basin in New Mexico were more than offset by normal field declines. The net liquids component of oil-equivalent production of 438,000 barrels per day in the first quarter decreased 4 percent from the corresponding 2013 period. Net natural gas production was 1.21 billion cubic feet per day in first quarter 2014, a decrease of 3 percent from the comparative 2013 period. 29



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Table of Contents Three months ended March 31 2014 2013 (Millions of dollars) International Upstream Earnings* $ 3,395$ 4,784 ____________________ * Includes foreign currency effects $ (53 ) $ 172 International upstream earnings of $3.4 billion in first quarter 2014 decreased $1.4 billion from the corresponding period in 2013. The decrease between quarters was primarily due to lower crude oil production of $180 million and realizations of $120 million, along with higher tax, depreciation and exploration expenses of $260 million, $150 million and $140 million, respectively. Foreign currency effects decreased earnings by $53 million in the 2014 quarter, compared with an increase of $172 million a year earlier. The average realization per barrel of crude oil and natural gas liquids in first quarter 2014 was $99 compared with $102 a year earlier. The average natural gas realization per thousand cubic feet in first quarter 2014 was $6.02 compared with $6.07 in the corresponding 2013 period. International net oil-equivalent production of 1.95 million barrels per day in first quarter 2014 was down 33,000 barrels per day, or 2 percent, from first quarter a year ago. Production increases due to project ramp-ups in Nigeria and Angola were more than offset by normal field declines and weather-related, unplanned downtime, particularly in Kazakhstan. The net liquids component of oil-equivalent production of 1.28 million barrels per day in the first quarter 2014 decreased 2 percent from first quarter 2013. Net natural gas production totaled 4.04 billion cubic feet per day in first quarter 2014, essentially unchanged from the 2013 period. Downstream Three months ended March 31 2014 2013 (Millions of dollars) U.S. Downstream Earnings $ 422$ 135



U.S. downstream operations earned $422 million in the first quarter 2014, compared with earnings of $135 million a year earlier. The increase was mainly due to higher margins on refined product sales of $160 million and a gain of $100 million on the sale of an interest in a pipeline affiliate. Lower operating expenses of $60 million, in part due to lower planned turnaround activity in first quarter 2014, also contributed to the increase in earnings. Refinery crude-input of 872,000 barrels per day in first quarter 2014 increased 296,000 barrels per day from the year-ago period. The increase was primarily due to the absence of effects of an August 2012 incident at the refinery in Richmond, California, that shut down the crude unit. The absence of first quarter 2013 planned turnaround activities at the refinery in Pascagoula, Mississippi, also contributed to the increase. Refined product sales of 1.20 million barrels per day were up 100,000 barrels per day from the first quarter 2013, mainly reflecting higher gas oil and kerosene sales. Branded gasoline sales increased 1 percent to 505,000 barrels per day.

Three months ended March 31 2014 2013 (Millions of dollars) International Downstream Earnings* $ 288$ 566 ___________________ * Includes foreign currency effects $ (28 )$ 76



International downstream operations earned $288 million in the first quarter 2014, compared with $566 million a year earlier. The decrease was mainly due to lower margins on refined product sales of $200 million. Foreign

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currency effects decreased earnings by $28 million in the 2014 period, compared to an increase of $76 million in the 2013 period. Refinery crude oil input of 774,000 barrels per day in the first quarter 2014 decreased 44,000 barrels per day from the year-ago period, mainly as a result of planned downtime at the Star Petroleum Refining Company in Thailand. Total refined product sales of 1.40 million barrel per day in the 2014 first quarter were down 46,000 barrels per day from the year-ago period, mainly due to lower fuel oil sales. All Other Three months ended March 31 2014 2013 (Millions of dollars) Net Charges* $ (505 )$ (439 ) ___________________ * Includes foreign currency effects $ 2 $ (2 )



All Other consists of mining operations, power and energy services, worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, alternative fuels, and technology companies. Net charges in first quarter 2014 were $505 million, compared with $439 million a year earlier. The change between periods was mainly due to the impairment of a mining asset, partially offset by lower corporate charges. Foreign currency effects increased net charges by $2 million for the first three months of 2013, compared to a $2 million decrease in net charges in the 2014 period.

Consolidated Statement of Income Explanations of variations between periods for selected income statement categories are provided below:

Three months ended March 31 2014 2013 (Millions of dollars)



Sales and other operating revenues $ 50,978$ 54,296

Sales and other operating revenues decreased $3.3 billion due to lower refined product and crude oil prices, partially offset by higher natural gas prices in the United States.


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