CHEVRON 2/04/94 Stock Price 52 week YTD Pr Div Gross Rating 2/03 --- Range --- Chg Rate Yield Chevron Corp. MO 94.38 99-73 8 3.70 3.9 Est. - Interim EPS - -EBITDA 94- FY/IP EPS93 EPS94 PE94 --Next- -YrAgo- per/sh p/e CHV 12/01Q 6.57R 6.85 14.3 n/a n/a 15.40 6.1 Chevron (CHV) 94 3/8 , 1994 $6.85, 1995 $7.45, Moderate Outperformer 1. Chevron earned $6.57. Chevron's earnings have been driven by a number of factors over the past few years, with major fixed cost reductions a key item. Chevron has articulated a goal for 1994 of reducing its operating costs further by $.25 per barrel; under Chevron's methodology, per barrel costs are expressed over the spectrum of all barrels handled in its system, whether they are related to production, refining or marketing. Its goal is to reduce costs expressed on this basis from $6.51 per barrel in 1993 to $6.26 per barrel in 1994. If accomplished (and Chevron management now brings major credibility to such statements due to its success in the past few years), it would actually be more impressive than it sounds. This is because the imminent sale of the Port Arthur and Philadelphia refineries will effectively mean Chevron has to cut costs by some $.35-$.40 per barrel rather than the official $.25 goal. This reflects that the operating costs of the two refineries are much lower than for Chevron as a whole. The sale, thus, has the ironic effect of raising costs. The sale is nevertheless a very positive one for Chevron in refocusing its domestic refining/marketing operations into areas of strength. Chevron's cost- cutting focus for 1994 does not involve major employee reduction. It is designed to maintain earnings if oil prices are as much as $2 per barrel below the l993 level. 2. International production operations will show substantial growth in 1994, and this is being viewed as a key area for strategic expansion beyond 1994 as well. Near term, new production from the Alba Field in the U.K. North Sea, new fields in Cabinda (Areas B and C), expanded Duri field production in Indonesia, new gas production from the Goodwyn platform offshore Australia and higher production from the Tengiz field in Kazakhstan will be the key contributors. International production is expected to increase by 9% in 1994. Domestic production is expected to be more or less flat. 3. Chevron has not yet finalized either of its two pending refinery sales. The sale of the Philadelphia refinery to the Lincolnshire group is expected to firm up shortly (i.e., by the end of the first quarter). Negotiations concerning the Port Arthur refinery are more complicated as they involve environmental matters and agreements on transfer pricing for petrochemical operations (these are not being sold but use refinery produced feedstock). Apparently there have been several bids for Port Arthur. After the sale of the two refineries, Chevron will have a top-tier system, focused on the West Coast and the southern part of the country. Chevron is making major investments in its two California refineries, with about 50% devoted to environmental-related expenditures (i.e., primarily CARB II reformulated gasoline) and 50% to upgrading projects. 4. Financially, analysts project that Chevron will be generating free cash flow in 1994, with discretionary cash flow of about $5 billion ($15.30 per share) and expected asset sales of some $400 million, more than covering capital and exploratory expenses of about $3.9 billion and dividends of around $1.2 billion. The recent dividend increase to $3.90 per share was made meeting the test that oil prices could end up $2-$3 per barrel lower in 1994 than 1993. Even under these conditions, the increase was viewed as prudent. 6. Chevron is continuing to add credibility to its now oft-stated goals to be better than the best and to provide shareholders with leading rates of return. It has cut costs significantly, it has growth prospects in its international production division and West Coast refining/marketing and cyclical recovery potential in chemicals. It has thoroughly changed its overall corporate culture from one of overconservatism to one that emphasizes better utilization of what was always a strong asset base.