Financial Management at Chevron
Busuyi Afe
Financial Management
Chevron Corporation Project
August
27, 2012
TABLE
OF CONTENT
1 Abstract
1.1
Introduction: Chevron Corporation………………………………………………...2
1.2 Capital
Structure…………………………………………………………………….2
2 Capital Structure of Chevron
Corporation……………………………………………..3
2.1 Preview of Capital
Structure…………………………………………………………………………………...4
2.2 Capital Structure
Risks………………………………………………………………………………………..4
2.3 Modigliani and Miller (MM)
Theory……………………………………………………………………………………….6
2.4 The impact of Capital Structure and
Evidence…………………………………………..8
3 Chevron Corporation Estimation and Conclution………………………………………….8
4 Glossaries………………………………………………………………………………....9
5 References………………………………………………………………………………….10
ABSTRACT
Chevron Corporation has been a leader in Oil and Gas
industry in the world. Careful
consideration and study of financial report of Chevron Corporation has greatly
helped to understand and evaluate the company’s financial operation and
performance in terms of financial stability, capital structure, risks and
estimations.
This paper further investigates the concept of
capital structure and how it relates to the financial development and
implication on Chevron Corporation return on investment (ROI), return on equity
(ROE), return on invested capital (roic) and its risk profile.”Still, the
second-largest oil and gas company in the U.S managed to post a 25% increase in
revenues during the full year (CNN.Money, 2012).The paper also investigates the
importance of capital structure and how it measures the profitability of
Chevron Corporation.
The research on Chevron also focuses on the revenues
generated during a financial year and the impact on the shareholders using
financial ratio and the financial statement provided by Chevron Corporation annual
report 2011 and other websites such as cnnmoney.com, Wall Street journal.com
and nytimes.com.
It is a great fact that Chevron has been facing a
lot of challenges to meet financial obligation to shareholders for several
years despite the rise of price of oil and gas. Chevron has strived hard in
financing its assets using the combination of equity, debt and marketable
securities.
1.1
Introduction
Chevron Corporation has been a leader in fuel
industry and the company has strived very hard to generate more revenue despite
the economic situation in the world and shareholders has benefited from the
company by getting good dividends every year.”Chevron Corporation(Chevron)
manages its investments in subsidiaries and provides administrative, financial,
management and technology support to the United States and international
subsidiaries that engage in petroleum operations, chemical operations, power
operation and energy services”(NYtimes.com,2012).Chevron Corporation has been a
great leader in upstream and downstream operation of gas and oil industry.
As part of commitment of Chevron to meet demand for
world consumption of oil products, Chevron offers different products such as
refined products at affordable price.
The world economy has been facing turbulent time but
Chevron is still a prosperous organization because there was a great net profit
of $26.9billion on sales as at 2011 and that actually makes it necessary for
this paper to examine capital structure at Chevron.
1.2 Capital
Structure
Every organization determines to increase equity
value and that will give shareholders more confident to buy more company
stocks. A good financial manager must put into consideration of return on
equity and company debt.
Most big organizations have been implementing
capital structures to strengthen their return on equity and that actually
reduces weighted average costs of capital for short and long term investment
“Capital structures by themselves can lower the overall cost of capital and
maximize the return of assets versus the cost of liabilities.”(HFMA, 2005).The
main goals of capital structure utilization are for company to increase profit
and reduce cost of production.
2.0
Capital Structure of Chevron Corporation
The
objective of Chevron Corporation optimal capital structure is to evaluate the
cost of debt and company equity and to make sure that capital structure is
financially sustainable in order to maximize the stock price for a long period.
The knowledge of capital structure will help
financial manager at Chevron to able to calculate earning and any changes in
economic value added(EVA).Chevron has been able to manage debt acquired for a
period of time in an effective way because there was long-term debt in
2010 of $11billion which has been
reduced to $9,6Billion in 2011 and Chevron total equity has greatly grown to
$122 billion in 2011 compared to $105 Billion in 2010.The account payable has
increase to $22 billion in 2011 because
Chevron was able to make a lot of expenditure because of increase
company revenue.
Capital
Structure of Chevron Corporation 2011
|
Financial Products
|
Amount $Billion
|
Percentage%
|
|
Account
Payable
|
22
|
14
|
|
Total
Equity
|
122
|
79
|
|
Total
Debt
|
10
|
7
|
|
Total
|
154
|
100
|
2.1
Preview of Capital Structure Issues
Chevron
Corporation has greatly focused on how to boost revenue and optimize financial
management to meet the goals of shareholders.”Chevron delivered outstanding
financial and operating results in 2011. Even during turbulent economic times, are
achieved record earnings, advanced our industry-leading queue of major capital
projects to sustain long-term production growth and largely completed the
global restructuring of our downstream business.” (Chevron.2011). The capital
structure has greatly helped Chevron to manage equity and liabilities in a very
effective way that will sustain the company operation for a long time.
2.2
Capital Structure Risks
The mismanagement of capital structure can lead to
financial risk that Chevron can loose its
equity and increase company debt “The concept of risk may be defined as
the possibility that the actual return may not be same as
expected”(Omisore,et,al,2012.p21).Chevron has diversified its investment
globally and development of new products to generate more revenues and minimize
risk of losing revenues. The importance of building more assets is to pay off
company debt and to be able to handle future uncertainty.
2.3
Modigliani and Miller Theory
Modigliani and Miller theory views capital structure
in a different perspective that makes capital structure to be irrelevant to the
success of a firm. The theory believes the success of a company depends on its
earning power that free of paying no taxes, debt need to be risk free. The theory
also let us understands the value of a firm is independent of capital
structure.”Stocks and bonds are traded in perfect capital structure” (Brigham
& Eherdt, 2011.p997). Most organizations are financing their company
operation through sale of stocks, borrowing money and using company profit.
In the criticism of Modigliani and Miller theory,
the cost of asset is always expensive than the cost of debt. In case of firm
facing financial problem the firm can afford to pay off debt and equity holders
have little or nothing for his/her investment.
2.4
Capital Structure Evidence and Implications
The economic
power of Chevron Corporation depends on how they manage effectively the debt
and equity. Chevron takes it as priority to reduce debt every year through
revenues generated from sales of company products.”However, there is also
evidence that is inconsistent with the static optimal target capital structure
implied by trade-off theory.” For example stock prices are volatile, which
frequently causes a firm’s actual market-based debt ratio to deviate from its
target.( Brigham & Eherdt,2011.p618).Chevron has implemented capital
structure in all phases of financial management and that has great impact on
the company to build higher equity and pay better dividends to shareholders.
3.
Chevron Optimal Capital Estimation and Conclusion
The financial statement of chevron greatly indicated
that the revenues generated has been increased from 2009 to 2011 and that
actually shows that Chevron is making profit and they can afford to pay good
dividends to shareholders.
Chevron must find a way to improve staff training
and spend more on business process so tat they can maintain their leadership
role in oil industry. Chevron makes it mandatory to pay off debt every year and
increase its equity that has been their secret to success. The new acquisition
of oil well around the world has boosted Chevron foreign investment and
increased global revenues.
4.0
Glossaries
|
Accounts payable
|
Carrying value as of the balance sheet date of liabilities incurred
(and for which invoices have typically been received) and payable to vendors
for goods and services received that are used in an entity's business. Used
to reflect the current portion of the liabilities (due within one year or
within the normal operating cycle if longer).
|
|
Current liabilities
|
Total obligations incurred as part of normal operations that are
expected to be paid during the following twelve months or within one business
cycle, if longer.
|
|
Total liabilities
|
Sum of the carrying amounts as of the balance sheet date of all
liabilities that are recognized. Liabilities are probable future sacrifices
of economic benefits arising from present obligations of an entity to
transfer assets or provide services to other entities in the future.
|
|
Chevron Corporation stockholders’ equity
|
Total of all Stockholders' Equity (deficit) items, net of receivables
from officers, directors, owners, and affiliates of the entity which are
attributable to the parent. The amount of the economic entity's stockholders'
equity attributable to the parent excludes the amount of stockholders' equity
which is allocable to that ownership interest in subsidiary equity which is
not attributable to the parent (noncontrolling interest, minority interest).
|
|
Total equity
|
Total of Stockholders' Equity (deficit) items, net of receivables from
officers, directors owners, and affiliates of the entity including portions
attributable to both the parent and noncontrolling interests (previously
referred to as minority interest), if any. The entity including portions attributable
to the parent and noncontrolling interests is sometimes referred to as the
economic entity.
|
Cash flow from operating activities
Cash generated from the company's
businesses; an indicator of a company's ability to pay dividends and fund capital
and common stock repurchase programs. Excludes cash flows related to the
company's financing and investing activities.
Earnings
Net income attributable to Chevron
Corporation as presented on the Consolidated Statement of Income.
Goodwill
An asset representing the future
economic benefits arising from the other assets acquired in a business
combination that are not individually identified and separately recognized.
Margin
The difference between the cost of
purchasing, producing and/or marketing a product and its sales price.
Return on capital employed (ROCE)
Ratio calculated by dividing earnings
(adjusted for after-tax interest expense and non controlling interests) by the
average of total debt, noncontrolling interests and Chevron Corporation
stockholders' equity for the year.
Return on stockholders' equity
Ratio calculated by dividing earnings
by average Chevron Corporation stockholders' equity. Average Chevron
Corporation stockholders' equity is computed by averaging the sum of the
beginning-of-year and end-of-year balances.
Total stockholder return (TSR)
The return to stockholders as measured by stock price appreciation and
reinvested dividends for a period of time
References
Brigham, E. & Ehrhardt, M. (2011).
Financial management theory and
practice. (13th ed.). Mason: South-Western Cengage Learning.
CNNMoney.(2012).Chevron.Fortune
500.Retrieved on August 10,2012 from www.money.cnn.com/fortune500/2012/snapshots/385.html
Chevron Corporation(2012).Annual
Report 2011.Retrieved on August 10,2012 from www.chevron.com/AnnualReport2011
HFMA.(2005).Financing the Future
2.Report 2.Strategies for Effective Capital Structure Management,Healthcare
Financial Management.Retrieved on August 10,2012 from http://web.ebscohost.com.lib.kaplan.edu/ehost
Milken,M(2009).Why Capital
Structure Matters.Wall Street Journal.Retrieved on August 10,2012 http://online.wsj.com/online.html
NYTimes(2012).Chevron
Corporation,Business day.Retrieved on August10,2012 from http://topics.nytimes.com/top/news/business/companies/Chevron_Corporation/index.html
Omisore,I,Yusuf,M and
Nwufo,C.I.(2012).The modern portfolio theory as an investment decision
tool.Journal of Accounting and Taxation Vol4,(2).Retrieved on August 10,2012
from http://web.ebscohost.com.lib.kaplan.edu/ehost
Porter,G.A
& Norton, C.L (2008).Using Financial Accounting Information 5ed
Edition.Thomson,South-Western.Ohio
Stock
Analysis,(2012). Valuation Ratios .Retrieved on August 27,2012 from
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