Capital Resources, Uses and Liquidity
The following discussion of capital resources, uses and liquidity should be read in conjunction with the consolidated financial statements included in this report.
Sources and Uses of Cash
The following table presents the sources and uses of our cash and cash equivalents from 2005 to 2007. The table presents capital expenditures on a cash basis. Therefore, these amounts differ from the amounts of capital expenditures, including accruals, that are referred to elsewhere in this document. Additional discussion of these items follows the table.
| 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| (In millions) | |||||||||
| Sources of cash and cash equivalents: Operating cash flow — continuing operations |
$ | 6,162 | 5,374 | 5,297 | |||||
| Sales of property and equipment | 76 | 40 | 2,151 | ||||||
| Net credit facility borrowings | 1,450 | — | — | ||||||
| Net commercial paper borrowings | — | 1,808 | — | ||||||
| Net decrease in short-term investments | 202 | 106 | 287 | ||||||
| Stock option exercises | 91 | 73 | 124 | ||||||
| Other | 44 | 36 | — | ||||||
| Total sources of cash and cash equivalents | 8,025 | 7,437 | 7,859 | ||||||
Uses of cash and cash equivalents: Capital expenditures |
(6,158 | ) | (7,346 | ) | (3,813 | ) | |||
| Net commercial paper repayments | (804 | ) | — | — | |||||
| Debt repayments | (567 | ) | (862 | ) | (1,258 | ) | |||
| Repurchases of common stock | (326 | ) | (253 | ) | (2,263 | ) | |||
| Dividends | (259 | ) | (209 | ) | (146 | ) | |||
| Total uses of cash and cash equivalents | (8,114 | ) | (8,670 | ) | (7,480 | ) | |||
Increase (decrease) from continuing operations |
(89 | ) | (1,233 | ) | 379 | ||||
| Increase from discontinued operations | 655 | 370 | 38 | ||||||
| Effect of foreign exchange rates | 51 | 13 | 37 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 617 | (850 | ) | 454 | ||||
Cash and cash equivalents at end of year |
$ | 1,373 | 756 | 1,606 | |||||
| Short-term investments at end of year | $ | 372 | 574 | 680 | |||||
Operating Cash Flow — Continuing Operations
Net cash provided by operating activities ("operating cash flow") continued to be our primary source of capital and liquidity in 2007. Changes in operating cash flow are largely due to the same factors that affect our net earnings, with the exception of those earnings changes due to such noncash expenses as DD&A, financial instrument fair value changes, property impairments and deferred income tax expense. As a result, our operating cash flow increased in 2007 primarily due to the increase in earnings as discussed in the "Results of Operations" section of this report.
During 2007 and 2006, operating cash flow was primarily used to fund our capital expenditures. Excluding the $2.0 billion Chief acquisition in June 2006, our operating cash flow was sufficient to fund our 2007 and 2006 capital expenditures. During 2005, operating cash flow was sufficient to fund our 2005 capital expenditures and $1.3 billion of debt repayments.
Other Sources of Cash
As needed, we utilize cash on hand and access our available credit under our credit facilities and commercial paper program as sources of cash to supplement our operating cash flow. Additionally, we invest in highly liquid, short-term investments to maximize our income on available cash balances. As needed, we may reduce such short-term investment balances to further supplement our operating cash flow.
During 2007, we borrowed $1.5 billion under our unsecured revolving line of credit and reduced our short-term investment balances by $202 million. We also received $341 million of proceeds from the sale of our Egyptian operations. These sources of cash were used primarily to fund net commercial paper repayments, long-term debt repayments, common stock repurchases and dividends on common and preferred stock.
During 2006, we borrowed $1.8 billion under our commercial paper program and reduced our short-term investment balances by $106 million. These sources of cash were largely used to fund the $2.0 billion acquisition of Chief in June 2006. Also during 2006, we supplemented operating cash flow with cash on hand, which was used to fund scheduled long-term debt maturities, common stock repurchases and dividends on common and preferred stock.
During 2005, we generated $2.2 billion in pre-tax proceeds from sales of property and equipment. These consisted of $2.0 billion related to the sale of non-core oil and gas properties and $164 million related to the sale of non-core midstream assets. Net of related income taxes, these proceeds were $2.0 billion. During 2005, we also reduced short-term investment balances by $287 million. These sources of cash were used primarily to repurchase $2.3 billion of common stock.
Capital Expenditures
Our capital expenditures consist of amounts related to our oil and gas exploration and development operations, our midstream operations and other corporate activities. The vast majority of our capital expenditures are for the acquisition, drilling or development of oil and gas properties, which totaled $5.7 billion, $6.8 billion and $3.6 billion in 2007, 2006 and 2005, respectively. The 2006 capital expenditures included $2.0 billion related to the acquisition of the Chief properties. Excluding the effect of the Chief acquisition, the increase in such capital expenditures from 2005 to 2007 was due to inflationary pressure driven by increased competition for field services and increased drilling activities in the Barnett Shale, Gulf of Mexico, Carthage and Groesbeck areas of the United States. Additionally, capital expenditures also increased on our properties in Azerbaijan where we achieved payout of certain carried interests in the last half of 2006.
Our capital expenditures for our midstream operations are primarily for the construction and expansion of natural gas processing plants, natural gas pipeline systems and oil pipelines. These midstream facilities exist primarily to support our oil and gas development operations. Such expenditures were $371 million, $357 million and $121 million in 2007, 2006 and 2005, respectively. The majority of our midstream expenditures from 2005 to 2007 have related to development activities in the Barnett Shale, the Woodford Shale in eastern Oklahoma and Jackfish in Canada.
Debt Repayments
During 2007, we repaid the $400 million 4.375% notes, which matured on October 1, 2007. Also during 2007, certain holders of exchangeable debentures exercised their option to exchange their debentures for shares of Chevron common stock prior to the debentures' August 15, 2008 maturity date. We have the option, in lieu of delivering shares of Chevron common stock, to pay exchanging debenture holders an amount of cash equal to the market value of Chevron common stock. We paid $167 million in cash to debenture holders who exercised their exchange rights. This amount included the retirement of debentures with a book value of $105 million and a $62 million reduction of the related embedded derivative option's balance.
During 2006, we retired the $500 million 2.75% notes and the $178 million ($200 million Canadian) 6.55% notes. We also repaid $180 million of debt acquired in the Chief acquisition.
During 2005, we spent $0.8 billion to retire zero coupon convertible debentures due in 2020 and $400 million 6.75% notes due in 2011 before their scheduled maturity dates. We also spent $0.4 billion to repay various notes that matured in 2005.
Repurchases of Common Stock
During the three-year period ended December 31, 2007, we repurchased 55.2 million shares at a total cost of $2.8 billion, or $51.49 per share, under various repurchase programs. During 2007, we repurchased 4.1 million shares at a cost of $326 million, or $79.80 per share. During 2006, we repurchased 4.2 million shares at a cost of $253 million, or $59.61 per share. During 2005, we repurchased 46.9 million shares at a cost of $2.3 billion, or $48.28 per share.
Dividends
Our common stock dividends were $249 million, $199 million and $136 million in 2007, 2006 and 2005, respectively. We also paid $10 million of preferred stock dividends in 2007, 2006 and 2005. The increases in common stock dividends from 2005 to 2007 were primarily related to 25% and 50% increases in the quarterly dividend rate in the first quarters of 2007 and 2006, respectively. The increase from 2005 to 2006 was partially offset by a decrease in outstanding shares due to share repurchases.
Liquidity
Historically, our primary source of capital and liquidity has been operating cash flow. Additionally, we maintain revolving lines of credit and a commercial paper program, which can be accessed as needed to supplement operating cash flow. Other available sources of capital and liquidity include the issuance of equity securities and long-term debt. During 2008, another major source of liquidity will be proceeds from the sales of our operations in West Africa. We expect the combination of these sources of capital will be more than adequate to fund future capital expenditures, debt repayments, common stock repurchases, and other contractual commitments as discussed later in this section.