Chevron posts record $18.7 billion profit

David R. Baker, Chronicle Staff Writer

Saturday, February 2, 2008

Soaring oil prices lifted Chevron Corp.'s annual profit to $18.7 billion in 2007, the fourth consecutive year that the San Ramon company made record amounts of money.

Chevron, America's second-largest oil company, reported Friday that its annual profit jumped 9 percent from 2006, as crude oil prices reached their highest levels in 26 years. Sales topped $220.9 billion, up 5 percent from the year before.

Chevron's profit served as yet another milestone in this decade's historic increase in energy prices, one that has seen the cost of crude oil triple while gasoline prices have hit record heights.

Other companies have made even more. Exxon Mobil, the country's largest oil company, reported on Friday that its 2007 profit hit $40.6 billion, a 3 percent increase from 2006, while sales passed $404 billion. No American business has ever scored a higher profit.

And yet, Chevron's year-end report also highlighted problems at the 128-year-old company. In an interesting twist, some of those problems are the result of the same high oil prices that have benefited Chevron overall.

The company's American gasoline refineries, for example, actually lost money in last year's third and fourth quarters after earning hefty profits in the spring. Although drivers may find it hard to believe, ample supplies of gasoline throughout the country late last year kept Chevron from raising its retail prices enough to keep up with the surge in crude oil prices. Consumer advocates, meanwhile, argue that drivers are spending far too much. Regular gasoline now costs an average of $2.99 per gallon nationwide, 83 cents more than it did a year ago.

"The major oil companies' incredible profits, boosted by multibillion-dollar tax subsidies to the industry, are ultimately clobbering taxpayers," said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights.

Chevron also cut its forecast for the amount of oil and natural gas it expects to produce in 2008 - again, due in part to high prices. In many of the countries where Chevron operates, the local governments get to keep more of the oil produced when prices rise. The company now expects to produce about 2.65 million barrels of oil and natural gas per day, compared with the earlier projection of 2.8 million barrels per day.

"It's a double-edged sword," said oil industry analyst Philip Weiss, with the Argus research firm. "The price goes up, but Chevron gets less oil."

Finally, the company came nowhere close to replacing all of the oil and natural gas it pumped out of the ground in 2007. Chevron's worldwide reserves of oil and natural gas, which grow whenever a company develops or buys a new field, grew enough to replace just 10 to 15 percent of what the company produced.

Chevron Chief Executive Officer David O'Reilly told Wall Street analysts Friday not to worry about the low reserve replacement rate. The company has oil fields under development that will add to those reserves in coming years, he said.

"We're confident that the resources are there, but it's a matter of timing for booking these reserves," O'Reilly said.

Still, Wall Street keeps a close eye on the size of oil companies' reserves, seeing them as an important gauge of the companies' future health. Even though Chevron's annual profit of $8.77 per share easily topped analysts' expectations - which averaged $8.35, according to Thomson Financial - the company's stock on Friday drifted down 76 cents, or .91 percent, to close at $82.49.

Replacing reserves has grown more difficult for all big oil companies as old oil fields decline, new ones grow harder to find and petroleum-rich countries decide to develop more of their own resources.

"The fact of the matter is we're operating in a tough environment," said analyst Justin Perucki, with the Morningstar research company. "Countries want greater control of their reserves, and for a company of Chevron's size, it's going to be really tough to hit that magic 100 percent reserve replacement number."

E-mail David R. Baker at dbaker@sfchronicle.com.

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