Chevron's Pension Plan And Labor Force

May.28.14 | About: Chevron Corporation (CVX)

Summary

Chevron has a market cap of $233 billion and is responsible for about $16 billion in pension assets (at FYE 12/31/13).

Chevron's pension plan underperformed the S&P 500 in FY 13.

Assumptions regarding the pension plan play a major role in determining the funded status of pension plans.

In eight of the past ten years, actual asset returns for Chevron's pension plan equaled or exceeded 7.5%.

This article continues my theme of analyzing large multinational firms with major pension obligations. See this recent article on Disney (NYSE:DIS), General Electric (NYSE:GE), and AT&T (NYSE:T) for a peek at other employers.

As of December 31, 2013, Chevron (NYSE:CVX) had approximately 64,600 employees (including about 3,200 service station employees). Approximately 32,000 employees (including about 3,000 service station employees) were employed in U.S. operations.

The company has defined benefit pension plans for thousands of employees. The company typically prefunds defined benefit plans as required by local regulations or in certain situations where prefunding provides economic advantages.

The company also sponsors other post-retirement (OPEB) plans that provide medical and dental benefits, as well as life insurance for some active and qualifying retired employees. The plans are unfunded, and the company and retirees share the costs.

The company recognizes the over-funded or underfunded status of each of its defined benefit pension and OPEB plans as an asset or liability on the Consolidated Balance Sheet.

How Does the Pension Plan Affect the Balance Sheet?

Amounts recognized on the CVX balance sheet are shown below (and the negative amount shows that these are underfunded by the following dollar amounts):

Amounts in millions of $

US Pension Benefits

International Pension Benefits

Other Benefits

Net amount recognized at December 31, 2013

(870)

(1,552)

(3,138)

Net amount recognized at December 31, 2012

(3,745)

(2,162)

(3,787)

Click to enlarge

The reduction in the "Funded Status" was due to strong performance in the U.S. Pension plan investments and benefits paid of about $1.8 billion across all three plans.

Amounts recognized on a before tax basis in "accumulated other comprehensive loss" for the company's pension and OPEB plans were $5.5 billion in FY 13 and $9.7 billion in FY 12.

Chevron Didn't Keep Up With the S&P 500 in 2013

For the 10 years ending December 31, 2013, actual asset returns averaged 6.4% for the plan. The actual return for 2013 was about 7.5%. In eight of the past ten years, actual asset returns for this plan equaled or exceeded 7.5%.

For 2013, the company assumed expected long-term rate of return of 7.5% and a discount rate of 3.6% for U.S. pension plans. For the sake of comparison, below is a chart comparing Disney, Chevron and AT&T assumptions:

For FY 13

AT&T

Disney

GE

Chevron

Discount Rate

5.0%

5.0%

4.85%

3.6%

Investment Return Assumption

7.75%

7.5%

7.5%

7.5%

Click to enlarge

The determination of pension plan expense and obligations is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. Critical assumptions in determining expense and obligations for OPEB plans, which provide for certain healthcare and life insurance benefits for qualifying retired employees and which are not funded, are the discount rate and the assumed healthcare cost-trend rates.

How are the $15.7 Billion in Assets Invested?

Amounts in billions

US pension plans

International pension plans

Equity securities and mutual funds

$6.8

$2.1

Debt securities

(including cash and fixed income mutual funds)

3.1

2.1

Real estate

1.3

0.3

Click to enlarge

The Total Plan Assets of the U.S. Pension Plan at 12/31/13 was $11.2 billion and the Total Plan Assets for International Pension was $4.5 billion.

Conclusion

I conclude that Chevron's pension plan is not a major risk to the company given the size of the plans, the obligations involved and the earnings power of the company.

I feel that Chevron can still earn $13 per share in FY 14 given the strong production in the Gulf of Mexico, Africa and the strength of CP Chem. With the stock around $123, and a Trailing Twelve Month P/E ratio of 12x, the stock represents good value. I would accumulate on any weakness. The stock also yields 3.5%.

This article does not fully analyze the current drivers of the Chevron business, which are critical to valuing the stock. These issues include the prices for oil and natural gas, refining margins and the ability to operate in politically difficult business climates, including Venezuela and California. The company is also investing in some of the largest engineering projects in the world, including Gorgon and the Kitimat LNG project. See my article on Chevron in Canada for more detail on these operations. Lastly, I'm a Financial Analyst, and not an actuary. The above article is an opinion, and not investment counsel.

Disclosure: I am long CVX, DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.