DBRS Confirms Chevron and Subsidiaries at AA, R-1 (middle)

DBRS has today confirmed the Senior Unsecured Notes and Debentures ratings of Chevron Corporation (Chevron or the Company), Chevron Canada Funding Company (CCFC) and Chevron Funding Corporation (CFC) at AA, all with Stable trends. The Commercial Paper ratings for Chevron and CFC have also been confirmed at R-1 (middle), both with Stable trends. The ratings for CFC and CCFC are based on the guarantee of Chevron. Chevron’s ratings are supported by its very strong business and financial risk profile, the scale and diversity of the Company’s integrated operations and its sizable portfolio of attractive growth projects. Chevron, CCFC and CFC are the issuing entities of long-term debt within the Chevron organization and currently have no long-term debt outstanding. Offsetting challenges include rising reserve replacement costs and a declining reserve base in recent years, political risks from the Company’s international operations and lower production from its more mature U.S. asset base.

The Company’s credit metrics remain very strong as total debt-to-capital and debt-to-cash flow remained conservative at 7.6% and 0.23 times for the 12 months ending September 30, 2008 (as calculated by DBRS), which compares favorably with other large multinational oil companies. Cash balances stood at $11.0 billion (including marketable securities), putting the Company in a net cash position as outstanding balance sheet debt totaled only $7.2 billion (including minority interests). The Company expects capital expenditures, including the $2.6 billion for the Company's share of equity affiliate expenditures, to total $22.9 billion in 2008 ($15.8 billion spent as of September 30, 2008). Approximately 55% of the total ($12.7 billion) was budgeted for international exploration and production. The annual program includes $20.3 billion expected to be internally funded from operating cash flows. With operating cash flow significantly exceeding capital spending and dividends, the Company has also continued to direct a significant percentage of cash towards share repurchases (including $5.5 billion of net repurchases through the first nine months of 2008). In light of the sharp drop in commodity prices since the July 2008 peak for crude oil prices, DBRS believes Chevron will continue to manage its ongoing share buybacks within the context of its current ratings.

The Company has a large, diversified portfolio of upstream growth prospects in several mature and developing regions of the globe. Rising production from international exploration and development activities is expected to offset flat-to-declining production from mature North American and North Sea basins, where Chevron has been divesting certain of its mature properties, despite significant investment in the region, principally offshore Gulf of Mexico and the Athabasca Oil Sands Project (AOSP). While recognizing the inverse relationship of pricing on production and reserves, Chevron provided guidance of 3% production growth from 2005 through 2010, largely due to new or increasing production from major capital projects in the Middle East, West Africa, Asia-Pacific and deepwater Gulf of Mexico. The Company also expects to reverse the declining reserve trend in recent years, with reserve replacement expected to exceed 100% of production between 2008 and 2010 as the Company continues to book proved reserves related to these major projects as well as from base additions and contract extensions (e.g., the recent agreement with Saudi Arabia to extend Chevron’s operations in the Partitioned Neutral Zone to 2039).

Chevron’s per-unit production costs have increased significantly in recent years, reflecting industry trends, while poor internal reserve replacement performance has resulted in above-average reserve replacement costs, especially in the United States. Given the Company’s significant international presence, Chevron is also exposed to further political interference including rising state ownership, resource nationalization as well as sharply increased tax burdens, as evidenced in countries such as Venezuela. Cash flows and credit metrics have benefited from the acquisition of Unocal Corporation (Unocal) in August 2005 and the robust crude oil price environment thereafter. Earnings and cash flow, however, remain sensitive to fluctuations in crude oil and natural gas prices as well as volatile refined product margins given the Company’s sizable global downstream operations. In general, DBRS believes Chevron’s conservative financial profile, solid liquidity position and significant free cash flow generation provide the Company with the flexibility to maintain its strong credit profile over the medium term should energy prices continue to decline.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The ratings for CFC and CCFC are based on the guarantee of Chevron Corporation.