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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998 Commission file number 1-27
TEXACO INC.
(Exact name of the registrant as specified in its charter)
Delaware 74-1383447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Westchester Avenue
White Plains, New York 10650
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 253-4000
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Texaco Inc. (1) HAS FILED all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) HAS BEEN subject to such filing requirements for the past 90 days.
As of July 31, 1998, there were outstanding 535,859,243 shares of Texaco
Inc. Common Stock - par value $3.125.
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PART I - FINANCIAL INFORMATION
TEXACO INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
---------------------------------------------------------
(Millions of dollars, except as noted)
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------ --------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Sales and services $15,651 $22,796 $ 7,729 $10,983
Equity in income of affiliates, interest,
asset sales and other 540 729 315 513
------- ------- -------- -------
16,191 23,525 8,044 11,496
------- ------- -------- -------
DEDUCTIONS
Purchases and other costs 12,086 17,969 5,972 8,671
Operating expenses 1,225 1,571 645 790
Selling, general and administrative expenses 572 836 296 417
Exploratory expenses 231 192 90 93
Depreciation, depletion and amortization 763 757 375 372
Interest expense 234 203 116 102
Taxes other than income taxes 225 268 109 129
Minority interest 30 37 15 16
------- ------- -------- -------
15,366 21,833 7,618 10,590
------- ------- -------- -------
Income before income taxes 825 1,692 426 906
Provision for income taxes 224 141 84 335
------- ------- -------- -------
NET INCOME $ 601 $ 1,551 $ 342 $ 571
------- ------- -------- -------
Preferred stock dividend requirements $ 27 28 $ 13 $ 14
------- ------- -------- -------
Net income available for common stock $ 574 $ 1,523 $ 329 $ 557
======= ======= ======== =======
Per common share (dollars)
Basic net income $ 1.08 $ 2.93 $ 0.62 $ 1.07
Diluted net income $ 1.07 $ 2.85 $ 0.61 $ 1.05
Cash dividends paid $ 0.90 $ 0.85 $ 0.45 $ 0.425
Average shares outstanding for computation
of earnings per share (thousands)
Basic 531,232 519,328 530,550 519,375
Diluted 550,598 539,963 549,775 539,863
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- 1 -
TEXACO INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
-----------------------------------------
(Millions of dollars)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
-----------
ASSETS
Current Assets
Cash and cash equivalents $ 345 $ 311
Short-term investments - at fair value 48 84
Accounts and notes receivable, less allowance for doubtful
accounts of $20 million in 1998 and $22 million in 1997 3,931 4,230
Inventories 1,214 1,483
Deferred income taxes and other current assets 344 324
------- -------
Total current assets 5,882 6,432
Investments and Advances 7,234 5,097
Properties, Plant and Equipment - at cost 35,056 38,956
Less - accumulated depreciation, depletion and amortization 20,281 21,840
------- -------
Net properties, plant and equipment 14,775 17,116
Deferred Charges 904 955
------- -------
Total $28,795 $29,600
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 689 $ 885
Accounts payable and accrued liabilities
Trade liabilities 1,866 2,669
Accrued liabilities 1,266 1,480
Estimated income and other taxes 945 960
------- -------
Total current liabilities 4,766 5,994
Long-Term Debt and Capital Lease Obligations 6,281 5,507
Deferred Income Taxes 1,803 1,825
Employee Retirement Benefits 1,241 1,224
Deferred Credits and Other Noncurrent Liabilities 1,548 1,639
Minority Interest in Subsidiary Companies 641 645
------- -------
Total 16,280 16,834
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Stockholders' Equity
Market Auction Preferred Shares 300 300
ESOP Convertible Preferred Stock 440 457
Unearned employee compensation and benefit plan trust (354) (389)
Common stock (authorized: 700,000,000 shares, $3.125 par
value; 567,606,290 shares issued) 1,774 1,774
Paid-in capital in excess of par value 1,669 1,688
Retained earnings 10,083 9,987
Other accumulated nonowner changes in equity
Currency translation adjustment (107) (105)
Minimum pension liability adjustment (14) (16)
Unrealized net gain on investments 33 26
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Total other accumulated nonowner changes in equity (88) (95)
------- -------
13,824 13,722
Less - Common stock held in treasury, at cost 1,309 956
------- -------
Total stockholders' equity 12,515 12,766
------- -------
Total $28,795 $29,600
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-2-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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(Millions of dollars)
(Unaudited)
-----------------------
For the six months
ended June 30,
-----------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income $ 601 $ 1,551
Reconciliation to net cash provided by (used in)
operating activities
Receivable for refund of IRS deposits - (700)
Depreciation, depletion and amortization 763 757
Deferred income taxes (21) 185
Exploratory expenses 231 192
Minority interest in net income 30 37
Dividends from affiliates less than
equity in income (116) (144)
Gains on asset sales (58) (287)
Changes in operating working capital (316) (89)
Other - net 9 (52)
------- -------
Net cash provided by operating activities 1,123 1,450
INVESTING ACTIVITIES
Capital and exploratory expenditures (1,503) (1,451)
Proceeds from asset sales 113 742
Purchases of investment instruments (405) (608)
Sales/maturities of investment instruments 458 657
Payments from Equilon Enterprises LLC for prior years' capital expenditures 463 -
Other - net 25 (142)
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Net cash used in investing activities (849) (802)
FINANCING ACTIVITIES
Borrowings having original terms in excess
of three months
Proceeds 967 221
Repayments (454) (180)
Net increase (decrease) in other borrowings 201 (85)
Purchases of common stock (404) (36)
Dividends paid to the company's stockholders
Common (479) (441)
Preferred (28) (28)
Dividends paid to minority shareholders (35) (40)
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Net cash used in financing activities (232) (589)
CASH AND CASH EQUIVALENTS
Effect of exchange rate changes (8) (6)
------- -------
Increase during period 34 53
Beginning of year 311 511
------- -------
End of period $ 345 $ 564
======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
-3-
TEXACO INC. AND SUBSIDIARY COMPANIES
CONDENSED STATEMENT OF CONSOLIDATED NONOWNER CHANGES IN EQUITY
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
--------------------------------------------------------------
(Millions of dollars)
(Unaudited)
----------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
NET INCOME $ 601 $1,551 $ 342 $ 571
Other nonowner changes in equity (net of tax)
Currency translation adjustment (2) (15) - 15
Minimum pension liability adjustment 2 - - -
Unrealized net gain (loss) on investments 7 (1) 2 10
------- ------ ------- ------
7 (16) 2 25
------- ------ ------- ------
TOTAL NONOWNER CHANGES IN EQUITY $ 608 $1,535 $ 344 $ 596
======= ====== ======= ======
TEXACO INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1. Formation of Equilon Enterprises LLC
- --------------------------------------------
On January 15, 1998, Texaco and Shell Oil Company reached agreement on the
formation and operational start-up, effective January 1, 1998, of Equilon
Enterprises LLC (Equilon), a Delaware limited liability company. Equilon is a
joint venture that combines major elements of the companies' Western and
Midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. Texaco owns 44 percent and Shell owns
56 percent of Equilon.
Beginning January 1, 1998, we are accounting for our interest in Equilon using
the equity method. Under this method, we reclassified the net amount of assets
and liabilities of the businesses contributed to Equilon to Investments and
Advances in the Consolidated Balance Sheet. We record our share of Equilon's
results of operations on a one-line basis to Equity in Income of Affiliates in
the Consolidated Statement of Income. Since Equilon is a limited liability
company, we record the provision for income taxes and related liability
applicable to our share of Equilon's income in our consolidated financial
statements. Additionally, we now record transactions between Texaco and Equilon
as outside third-party transactions. This change to the equity method of
accounting results in significant variances between the 1998 and 1997 periods in
the individual line captions appearing in our financial statements.
The carrying amounts at January 1, 1998, of the principal assets and liabilities
of the businesses we contributed to Equilon were $.2 billion of net working
capital assets, $2.8 billion of net properties, plant and equipment and $.2
billion of debt.
Summarized unaudited financial information for Equilon, for the six and three
month periods ended June 30, 1998, is presented below on a 100% Equilon basis
(in millions of dollars):
For the six months For the three months
ended June 30, 1998 ended June 30, 1998
------------------- -------------------
Gross revenues $12,095 $6,070
Income before income taxes $ 310 $ 198
In April, 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
the joint venture. In July 1998, we received $149 million from Equilon for
certain specifically identified assets transferred for value to Equilon.
- 4 -
Under the terms of a consent agreement accepted by the Federal Trade Commission
and similar agreements with the attorneys general of California, Hawaii, Oregon
and Washington, certain assets will be divested, including Shell's Anacortes,
Washington refinery, certain Texaco and Shell marketing assets in southern
California and Hawaii, and certain pipeline interests.
On August 10, 1998, Shell Oil Company sold its ownership in the Anacortes
refinery to Tesoro Petroleum Corporation, effective August 1, 1998. The total
cash purchase price was $237 million, plus $39.6 million for estimated working
capital, which will be adjusted at a later date to reflect actual net working
capital. Equilon is entitled to the net proceeds of the sale and any resulting
gain or loss.
Note 2. Formation of Motiva Enterprises LLC
- -------------------------------------------
Texaco, Shell Oil Company and Saudi Aramco reached agreement on the formation
and operational start up, effective July 1, 1998, of Motiva Enterprises LLC
(Motiva), a Delaware limited liability company. Motiva is a joint venture that
combines Texaco's and Saudi Aramco's interests and major elements of Shell's
Eastern and Gulf Coast U.S. refining and marketing businesses. Texaco's and
Saudi Aramco's interest in these businesses were previously conducted by Star
Enterprise (Star), a joint-venture partnership owned 50 percent by Texaco and 50
percent by Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Texaco
and Saudi Refining, Inc., each owns 32.5 percent and Shell owns 35 percent of
Motiva.
Beginning July 1, 1998, we are accounting for our interest in Motiva using the
equity method. Previously, our interest in Star was also accounted for on the
equity method of accounting. Accordingly, our investment in Motiva approximates
our previous investment in Star.
Note 3. Inventories
- -------------------
The inventory accounts of Texaco Inc. and consolidated subsidiary companies are
presented below (in millions of dollars):
As of
--------------------------------------
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Crude oil $ 232 $ 308
Petroleum products and petrochemicals 757 893
Other merchandise 37 59
Materials and supplies 188 223
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Total $1,214 $1,483
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Note 4. Contingent Liabilities
- ------------------------------
Information relative to commitments and contingent liabilities of Texaco Inc.
and subsidiary companies is presented in Notes 16 and 18, pages 57-58 and 61,
respectively, of Texaco Inc.'s 1997 Annual Report to Stockholders.
----------
In the company's opinion, while it is impossible to ascertain the ultimate legal
and financial liability with respect to contingent liabilities and commitments,
the aggregate amount of such liability in excess of financial reserves is not
anticipated to be materially important in relation to the consolidated financial
position or results of operations of Texaco.
- 5 -
Note 5. Caltex Group of Companies
- ---------------------------------
Summarized unaudited financial information for the Caltex Group of Companies,
owned 50% by Texaco and 50% by Chevron Corporation, is presented below on a 100%
Caltex Group basis (in millions of dollars):
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Gross revenues $8,555 $9,127 $4,249 $4,433
Income before income taxes $ 589 $ 639 $ 270 $ 319
Net income $ 426 $ 386 $ 222 $ 200
* * * * * * * * * * *
In the determination of preliminary and unaudited financial statements for the
six-month and three-month periods ended June 30, 1998 and 1997, our accounting
policies have been applied on a basis consistent with the application of such
policies in our financial statements issued in our 1997 Annual Report to
Stockholders. In our opinion, we have made all adjustments and disclosures
necessary to present fairly our results of operations for such periods. These
adjustments include normal recurring adjustments. The information is subject to
year-end audit by independent public accountants. We make no forecasts or
representations with respect to the level of net income for the year 1998.
* * * * * * * * * * *
SUPPLEMENTAL MARKET RISK DISCLOSURES
------------------------------------
Information relative to Texaco's market risk sensitive instruments by major
category at December 31, 1997 is presented in the Supplemental Market Risk
Disclosures on pages 69 and 70 of Texaco Inc.'s Annual Report to Stockholders.
Texaco's forward exchange contracts outstanding at June 30, 1998 of
approximately $2,167 million net buy contracts increased by $928 million from
the $1,239 million outstanding at December 31, 1997. This increase principally
resulted from the hedging of increased exposures to foreign currency denominated
net monetary assets and liabilities and from the hedging of increased exposures
related to foreign currency denominated capital projects. As of June 30, 1998, a
hypothetical 10% change in currency exchange rates would generate an increase or
decrease in fair value of approximately $217 million, compared to $124 million
at December 31, 1997. This would be offset by an opposite effect on the related
hedged exposures.
- 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Texaco's net income for the second quarter of 1998 was $342 million, or $0.61
per share, as compared with $571 million, or $1.05 per share, for the second
quarter of 1997. Net income for the first six months of 1998 was $601 million,
or $1.07 per share, as compared with $1,551 million, or $2.85 per share, for the
first six months of 1997. Both the 1998 and 1997 periods included special items.
Net income before special items for the second quarter of 1998 was $335 million,
or $0.60 per share, as compared with $440 million, or $0.81 per share, for the
second quarter of 1997. For the first six months of 1998, net income before
special items was $594 million, or $1.06 per share, as compared with $932
million, or $1.71 per share, for the first six months of 1997.
Continuing weak crude oil prices lowered second quarter results. Improved
margins and higher sales volumes in the international downstream and an 11
percent increase in worldwide production only partially offset the effects of
lower oil prices.
During the second quarter of 1998:
o International downstream margins and volumes were strong;
o Worldwide daily production increased 11 percent;
o Year-to-date cash operating expenses per barrel decreased six percent; and
o Year-to-date stock repurchases totaled $400 million.
The combination of excessive crude oil inventories and slower demand growth
continues to keep downward pressure on prices. Recently announced production
cuts by certain oil producing nations should lead to a better supply/demand
balance and a recovery in prices. In this environment, we continue to
strategically position the company for long-term profitability by focusing on
increasing our reserve base.
Lower crude oil prices helped to improve downstream margins in the second
quarter. Texaco's increasing presence in Latin American markets and the
company's operational performance in Europe contributed to improved results.
Additionally, profitability has been maintained in the Caltex area of
operations, despite the highly volatile business environment.
Texaco, Shell Oil Company and Saudi Refining, Inc., a corporate affiliate of
Saudi Aramco, finalized agreements for the July 1, 1998 operational start-up of
Motiva Enterprises LLC. This U.S. downstream alliance combines Eastern and Gulf
Coast refining and marketing operations. Earlier in the year, Equilon
Enterprises LLC, a U.S. joint venture combining Texaco's and Shell's Western and
Midwestern downstream assets, began operations.
Results for 1998 and 1997 are summarized in the following table. Details on
special items are included in the functional analysis which follows this table.
(Unaudited)
-----------
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of Dollars)
Net income before special items $ 594 $ 932 $ 335 $ 440
------- ------ ------ ----
Gains on major asset sales 20 174 20 174
Tax benefits on asset sales 19 - 19 -
Alliance formation expenses (32) - (32) -
Financial reserves for various issues - (43) - (43)
U.S. tax issue - 488 - -
------- ------ ------ ----
7 619 7 131
------- ------ ------ ----
Total net income $ 601 $1,551 $ 342 $571
======= ====== ====== ====
- 7 -
OPERATING EARNINGS
PETROLEUM AND NATURAL GAS
EXPLORATION AND PRODUCTION
United States
Exploration and production earnings in the U.S. for the second quarter of 1998
were $120 million, as compared with $189 million for the second quarter of 1997.
For the first six months of 1998 and 1997, earnings were $227 million and $500
million, respectively. Results for 1998 included a second quarter special gain
of $20 million from the sale of an interest in a natural gas pipeline. Excluding
the special gain, results for the second quarter and first six months of 1998
totaled $100 million and $207 million, respectively. Results for 1997 included a
second quarter special charge of $43 million for the establishment of financial
reserves for royalty and severance tax issues. Excluding the special charge,
results for the second quarter and first six months of 1997 totaled $232 million
and $543 million, respectively.
U.S. exploration and production earnings in the second quarter and the first
half of 1998 were below last year's levels due to the continued deterioration of
crude oil prices. Average realized crude oil prices for the second quarter and
first half of 1998 were $10.72 and $11.26 per barrel; more than 36 percent lower
than the 1997 periods. The dramatic declines in price resulted from rising
inventory levels and slowing worldwide demand growth. Slightly higher natural
gas prices benefited second quarter 1998 results. For the first half of 1998,
average natural gas prices were $2.10 per MCF, $.26 lower than last year. The
lower natural gas prices were the result of milder weather, as well as increased
inventory levels in this year's first quarter.
Production increased 10 percent for the second quarter and 11 percent for the
first half of 1998. The increased production in the second quarter 1998 included
new production from the Arnold, Oyster and Barite South fields located in the
Gulf of Mexico. Both periods of 1998 included production from the Monterey
properties acquired in November of 1997.
The company continued to pursue new reserve opportunities in the Gulf of Mexico,
leading to higher exploration expenses this year. Exploration expenses for the
second quarter and first half of 1998 were $51 million and $147 million before
tax, $17 million and $71 million higher than the same periods of 1997.
International
Exploration and production earnings outside the U.S. for the second quarter of
1998 were $51 million, as compared with $240 million for the second quarter of
1997. For the first six months of 1998 and 1997, earnings were $91 million and
$396 million, respectively. Results for 1997 included second quarter special
gains of $161 million from the sales of a 15 percent interest in the Captain
Field in the U.K. North Sea, an interest in Canadian gas properties and an
interest in an Australian pipeline system. Excluding the special gains, results
for the second quarter and first six months of 1997 totaled $79 million and $235
million, respectively.
International exploration and production earnings for the second quarter and
first half of 1998 declined from 1997 as a result of lower crude oil prices.
Average realized crude oil prices were $11.42 per barrel for the quarter, and
$11.68 for the first half of 1998, decreasing 32 percent for the quarter and 36
percent for the first half.
Production increased 13 percent for the second quarter and 16 percent for the
first half of 1998. Volumes in the U.K. North Sea increased from the Captain,
Erskine and Galley fields. The Galley field began production in the second
quarter of this year. Production also increased in the Partitioned Neutral Zone
and Colombia, and as a result of our first quarter 1998 acquisition of a 20
percent interest in the Karachaganak field in Kazakhstan. Also, exploratory
expenses in both periods were lower.
- 8 -
MANUFACTURING, MARKETING AND DISTRIBUTION
United States
Manufacturing, marketing and distribution earnings in the U.S. for the second
quarter of 1998 were $64 million, as compared with $100 million for the second
quarter of 1997. For the first six months of 1998 and 1997, earnings were $111
million and $106 million, respectively. Results for 1998 included a second
quarter special charge of $32 million for alliance formation expenses, mainly
our share of announced employee severance programs. Excluding the special
charge, results for the second quarter and first six months of 1998 totaled $96
million and $143 million, respectively. Results for 1997 included a second
quarter special gain of $13 million from the sale of credit card operations.
Excluding the special gain, results for the second quarter and first six months
of 1997 totaled $87 million and $93 million, respectively.
In the U.S. downstream, earnings for 1998 reflect the change in operations from
the formation of Equilon Enterprises LLC, Texaco's downstream alliance with
Shell Oil Company.
During this year's second quarter, margins benefited from lower crude oil
prices. Refining operations improved in the West and Midwest, while in the East,
results were adversely affected by downtime at several plants.
For the first half of this year, lower crude prices benefited product and
lubricant margins. Crude oil trading operations also contributed to higher
results. However, in the first quarter, weather conditions weakened demand for
heating oil on the East Coast and gasoline on the West Coast. Also, first
quarter refining results were affected by maintenance at the Martinez and Wood
River plants.
Earnings for 1997 included the adverse effects of intense competition that
squeezed margins in the West Coast marketplace, primarily in the first quarter.
Refinery fires late in 1996 and early in 1997 negatively affected product yields
and caused casualty loss expenses.
International
Manufacturing, marketing and distribution earnings outside the U.S. for the
second quarter of 1998 were $194 million, as compared with $132 million for the
second quarter of 1997. For the first six months of 1998 and 1997, earnings were
$376 million and $236 million, respectively.
Refining margins improved in the U.K. and Panama due to lower crude costs.
Improved marketing results reflected increased sales volumes and higher margins,
primarily in the U.K., Brazil and other Latin America areas where operations
have expanded. Scandinavian earnings improved following the 1997 price war in
Norway.
In the Caltex area, higher 1998 earnings were a result of lower crude costs and
partial recovery of the fourth quarter 1997 currency losses in Korea. However, a
significantly higher volume of product was sold into the lower margin export
market.
NONPETROLEUM
Nonpetroleum losses for the second quarter of 1998 were $2 million, as compared
with earnings of $1 million for the second quarter of 1997. For the first six
months of 1998, there were no earnings, as compared with earnings of $13 million
for the first six months of 1997.
- 9 -
CORPORATE/NONOPERATING RESULTS
Corporate and nonoperating charges for the second quarter of 1998 were $85
million, as compared with charges of $91 million for the second quarter of 1997.
Corporate and nonoperating charges for the first six months of 1998 were $204
million, as compared with earnings of $300 million for the first six months of
1997. Results for 1998 included a second quarter special item of $19 million for
tax benefits attributable to the sale of an interest in a subsidiary. Excluding
the special gain, charges for the second quarter and first six months of 1998
totaled $104 million and $223 million, respectively. Results for the first six
months of 1997 included a first quarter special benefit of $488 million
associated with an IRS settlement. Excluding this benefit, corporate and
nonoperating charges totaled $188 million for the first six months of 1997.
Corporate and nonoperating results for the second quarter and first half of 1998
included increased interest expense due to higher debt levels. Additionally,
results for 1998 included expenses for Texaco's corporate advertising campaign
introduced in the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash, cash equivalents and short-term investments were $393 million at June
30, 1998, as compared with $395 million at year-end 1997.
During 1998, our operations provided cash of $1,123 million. We raised an
additional $711 million from net borrowings and $113 million from asset sales.
We spent $1,503 million on our capital and exploratory program and paid $542
million in dividends to common, preferred and minority shareholders.
At June 30, 1998, our ratio of debt to total borrowed and invested capital was
34.6%, as compared with 32.3% at year-end 1997. At June 30, 1998, our long-term
debt included $1.6 billion of debt scheduled to mature within one year, which we
have both the intent and ability to refinance on a long-term basis. We maintain
revolving credit facilities with commitments of $1.7 billion, which were unused
at June 30, 1998.
Major debt activity during the first six months of 1998 follows:
o Borrowed $300 million at 6% for seven years and $153 million of
Medium-Term Notes.
o Borrowed $150 million at 5.92% for seven years to cover expenditures at
our Erskine field in the U.K. North Sea.
o Borrowed $131 million for four years and entered into an associated
LIBOR-based floating rate swap to cover expenditures at our Tartan Field in
the U.K. North Sea.
o Borrowed $94 million from the issuance of Zero Coupon Notes due 2005.
o Increased commercial paper by $400 million, to a total of $1.3 billion at
June 30, 1998.
o Repurchased approximately $200 million of 10.61% Notes that we assumed in last
year's acquisition of Monterey Resources.
During the first quarter of 1998, we purchased about $100 million of common
stock in the open market. This completed a program under which we purchased $650
million of our common stock during the last two years. On March 30, 1998, we
announced that we will purchase up to an additional $1 billion of our common
stock, subject to market conditions, through open market purchases or privately
negotiated transactions. Under this additional program we purchased about $300
million during the second quarter of 1998 and an additional $80 million in July
1998.
In April 1998, we received $463 million from Equilon, representing
reimbursement of certain capital expenditures incurred prior to the formation of
Equilon. In addition, we received $149 million from Equilon in July 1998 for
certain specifically identified assets transferred for value to Equilon.
We consider our financial position to be sufficiently strong to meet our
anticipated future financial requirements.
- 10 -
NEW ACCOUNTING STANDARDS
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires that we report
information about our business segments on the same basis used internally when
assessing performance and allocating resources. We will adopt SFAS 131 for our
1998 audited financial statements. Presently, we disclose in our audited
financial statements information about geographic segments only. We expect that
our business segments will be substantially similar to those we presently
identify in the Management's Discussion and Analysis section of our Forms 10-K
and 10-Q.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure about Pension
and Other Postretirement Benefits." We are required to adopt SFAS 132 for our
1998 audited financial statements and will modify our disclosures accordingly.
SFAS 132 does not affect how we measure expense for pension or other
postretirement benefits.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective in the first quarter 2000. SFAS 133
establishes new accounting rules and disclosure requirements for derivative
instruments. We will be assessing the impacts of SFAS 133.
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Capital and exploratory expenditures were $1,881 million for the first half of
1998 and $1,798 million in 1997.
In the U.S. upstream, development continued in the deepwater Gulf of Mexico.
Expenditures in 1998 also increased for enhanced oil recovery projects using
advanced thermal recovery techniques which raised production from the acquired
Monterey properties and other core producing fields. Exploratory expenses
increased as the company continued its program to grow oil and gas production
and reserves.
Internationally, slightly higher upstream expenditures included our investment
in the Karachaganak venture in Kazakhstan, a discovered reserve opportunity.
Development work continued in the U.K. North Sea, Indonesia and other promising
areas, while exploratory spending decreased in China.
Lower international downstream expenditures in the Caltex marketing areas were
due to higher 1997 service station investments in Hong Kong.
Texaco continues to carefully assess investment projects given the current and
projected industry environment. The company anticipates some adjustment in
spending by deferring non-critical projects into future periods should the
current low crude price environment persist.
YEAR 2000
- ---------
The Year 2000 ("Y2K") problem concerns the inability of information and
technology-based operating systems to properly recognize and process
date-sensitive information beyond December 31, 1999. This could result in
systems failures and miscalculations which could cause business disruptions.
Equipment that uses a date, such as computers and operating control systems, may
be affected. This includes equipment used by our customers and suppliers, as
well as by utilities and governmental entities that provide critical services to
us.
Many of our systems and related software are already Y2K compliant. We have an
ongoing Y2K compliance program. This program is actively reviewing all hardware
and software associated with our mainframe computers, personal computers and
client/servers, telecommunications and embedded systems found in equipment
throughout our producing, refining, transportation and marketing operations.
This program consists of identifying and inventorying all software applications
and systems, making required modifications, and testing. There are similar
ongoing compliance programs in our major affiliates.
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Based on information currently available, we estimate that the costs to modify
our systems to achieve Y2K compliance will not exceed $75 million, of which
about $20 million has been spent through June 30, 1998.
We are also gathering information about the Y2K readiness of utilities and
governmental entities and of our customers and suppliers. Since we cannot state
with certainty whether our operations will be materially adversely affected by
their compliance problems, we are developing contingency plans in order to
minimize the negative impacts on Texaco if they are not Y2K ready.
Our goal is to have all critical Texaco systems Y2K compliant during the first
half of 1999. This should allow time before the millennium change to validate
the system modifications and complete contingency plans for customers, suppliers
and others who may not be Y2K compliant. While there can be no assurance that
all such modifications and plans will be successful, we do not expect that any
disruptions will have a material adverse effect on our overall financial
position, results of operations, or liquidity.
The foregoing constitutes a "forward-looking statement" within the meaning of
Section 27A of the Securities Act of 1933. It is based on management's current
expectations, estimates and projections, which could ultimately prove to be
inaccurate. Factors which could affect our ability to be Y2K compliant by the
end of 1999 include the failure of customers, suppliers, governmental entities
and others to achieve compliance, the inaccuracy of certifications received from
them, and a shortage of necessary programmers, hardware and software.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Reference is made to the discussion of Contingent Liabilities in Note 4 to the
Consolidated Financial Statements of this Form 10-Q, Item 1 of Texaco Inc.'s
Form 10-Q for the quarterly period ended March 31, 1998 and to Item 3 of Texaco
Inc.'s 1997 Annual Report on Form 10-K, which are incorporated herein by
reference.
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Item 5. Other Information
- -------------------------
(Unaudited)
-----------
For the six months For the three months
ended June 30, ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(Millions of dollars)
FUNCTIONAL NET INCOME
- ---------------------
Operating earnings
Petroleum and natural gas
Exploration and production
United States $ 227 $ 500 $ 120 $ 189
International 91 396 51 240
------ ------ ------- ------
Total 318 896 171 429
------ ------ ------- ------
Manufacturing, marketing and distribution
United States 111 106 64 100
International 376 236 194 132
------ ------ ------- ------
Total 487 342 258 232
------ ------ ------- ------
Total petroleum and natural gas 805 1,238 429 661
Nonpetroleum - 13 (2) 1
------ ------ ------- ------
Total operating earnings 805 1,251 427 662
Corporate/Nonoperating (204) 300 (85) (91)
------ ------ ------- ------
Total net income $ 601 $1,551 $ 342 $ 571
====== ====== ======= ======
CAPITAL AND EXPLORATORY EXPENDITURES
- ------------------------------------
Exploration and production
United States $ 899 $ 781 $ 423 $ 429
International 551 546 261 264
------ ------ ------- ------
Total 1,450 1,327 684 693
------ ------ ------- ------
Manufacturing, marketing and distribution
United States 183 152 95 92
International 228 308 129 207
------ ------ ------- ------
Total 411 460 224 299
------ ------ ------- ------
Other 20 11 6 7
------ ------ ------- ------
Total $1,881 $1,798 $ 914 $ 999
Exploratory expenses included above
United States $ 147 $ 76 $ 51 $ 34
International 84 116 39 59
------ ------ ------- ------
Total $ 231 $ 192 $ 90 $ 93
====== ====== ======= ======
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(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
Exploration and Production
- --------------------------
United States
- -------------
Net production of crude oil and natural
gas liquids (000 BPD) 449 385 447 385
Net production of natural gas - available
for sale (000 MCFPD) 1,721 1,666 1,703 1,677
Total net production (000 BOEPD) 736 663 731 665
Natural gas sales (000 MCFPD) 3,908 3,700 3,934 3,561
Average U.S. crude (per bbl) $11.26 $18.29 $10.72 $16.95
Average U.S. natural gas (per mcf) $ 2.10 $ 2.36 $ 2.05 $ 2.02
Average WTI (Spot) (per bbl) $15.26 $21.38 $14.62 $19.97
Average Kern (Spot) (per bbl) $ 8.31 $15.07 $ 7.75 $14.11
International
- -------------
Net production of crude oil and natural
gas liquids (000 BPD)
Europe 154 116 149 118
Indonesia 155 147 156 153
Partitioned Neutral Zone 106 92 105 94
Other 69 67 67 68
------ ------ ------ ------
Total 484 422 477 433
Net production of natural gas - available
for sale (000 MCFPD)
Europe 251 207 245 172
Colombia 196 156 185 173
Other 118 93 112 83
------ ------ ------ ------
Total 565 456 542 428
Total net production (000 BOEPD) 578 498 567 504
Natural gas sales (000 MCFPD) 721 574 665 528
Average International crude (per bbl) $11.68 $18.22 $11.42 $16.91
Average U.K. natural gas (per mcf) $ 2.64 $ 2.73 $ 2.64 $ 2.59
Average Colombia natural gas (per mcf) $ 0.91 $ 1.09 $ 0.92 $ 1.12
Worldwide
- ---------
Total net production (000 BOEPD) 1,314 1,161 1,298 1,169
- 14 -
(Unaudited)
-------------------------------------------------
For the six months For the three months
ended June 30, ended June 30,
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATING DATA
- --------------
Manufacturing, Marketing and Distribution
- -----------------------------------------
United States
- -------------
Refinery input (000 BPD)
Western U.S. 377 413 396 418
Eastern U.S. 323 332 333 328
----- ----- ----- -----
Total 700 745 729 746
Refined product sales (000 BPD)
Gasolines 530 505 554 512
Avjets 168 92 164 94
Middle Distillates 184 215 188 216
Residuals 107 72 119 59
Other 165 119 181 117
----- ----- ----- -----
Total 1,154 1,003 1,206 998
International
- -------------
Refinery input (000 BPD)
Europe 371 341 367 335
Caltex 428 411 419 414
Latin America/West Africa 64 59 70 55
----- ----- ----- -----
Total 863 811 856 804
Refined product sales (000 BPD)
Europe 582 495 602 494
Caltex 589 574 586 561
Latin America/West Africa 444 391 460 406
Other 51 55 56 74
----- ----- ----- -----
Total 1,666 1,515 1,704 1,535
- 15 -
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
-- (2) Copy of the Asset Transfer and Liability Assumption Agreement
dated as of July 1, 1998, among the parties, for the
formation of Motiva Enterprises LLC.
-- (11) Computation of Earnings Per Share of Common Stock.
-- (12) Computation of Ratio of Earnings to Fixed Charges of Texaco on
a Total Enterprise Basis.
-- (20) Copy of Texaco Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (including portions of
Texaco Inc.'s Annual Report to Stockholders for the year 1997)
and a copy of Texaco Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998, as previously filed
by the Registrant with the Securities and Exchange Commission,
File No. 1-27.
-- (27) Financial Data Schedule.
(b) Reports on Form 8-K:
During the second quarter of 1998, the Registrant filed Current Reports on
Form 8-K for the following events:
1. April 1, 1998 (date of earliest event reported: March 30, 1998)
Item 5. Other Events -- reported that Texaco announced a stock
repurchase program for up to $1 billion.
2. April 23, 1998 (date of earliest event reported: April 23, 1998)
Item 5. Other Events -- reported that Texaco issued an Earnings Press
Release for the first quarter 1998.
3. April 29, 1998 (date of earliest event reported: April 28, 1998)
Item 5. Other Events -- reported that stockholders of Texaco approved
an amendment to the company's Rights Agreement dated March 16, 1989.
The amendment extends the expiration date of the Rights Agreement
until May 1, 2004.
- 16 -
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Texaco Inc.
---------------------
(Registrant)
By: R.C. Oelkers
---------------------
(Comptroller)
By: R.E. Koch
---------------------
(Assistant Secretary)
Date: August 11, 1998
---------------
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