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

DBRS has today confirmed the Senior Unsecured Notes and Debentures ratings of Chevron Corporation (CVX or the Company), Chevron Canada Funding Company (CCFC) and Chevron Funding Corporation (CFC) at AA, all with Stable trends. The Commercial Paper ratings for CVX 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 CVX. CCFC and CFC are the issuing entities within the CVX organization and currently have no long-term debt outstanding.

CVX’s ratings are supported by its very strong financial profile, the scale and diversity of the Company’s integrated operations, and its sizable portfolio of upstream growth projects. Challenges include relatively high reserve replacement costs, mature U.S. reserves and production and political risks related to the Company’s international operations.

CVX’s credit metrics remain very strong, with total debt-to-capital and total debt-to-cash flow of 10.9% and 0.52 times, respectively, for the 12 months ending (LTM) September 30, 2009, which compares favorably with other large multinational oil companies. Cash balances totaled $7.7 billion (including marketable securities) at September 30, 2009, resulting in a low net debt position as outstanding balance sheet debt totaled only $11.1 billion (including minority interests) at that date. CVX’s planned capex program is $21.6 billion in 2010 (including $1.6 billion for the Company’s share of equity affiliate expenditures), with approximately 80% of the total ($17.3 billion) budgeted for exploration and production (E&P). Until Q3 2008, cash flow was more than sufficient to fund capex, investments and dividends in recent years, with excess liquidity used to buy back common shares. Despite the subsequent sharp drop in energy prices, DBRS expects CVX’s financial profile to remain very strong, with suspension of common share buybacks compensating for reduced cash flow in the event of material energy price weakness in 2010. Based on the current production and energy pricing outlook, earnings could rise significantly from LTM September 30, 2009 levels in 2010.

The Company has a large portfolio of upstream growth prospects in diversified mature and developing regions. Over the medium term, CVX’s production levels are expected to be supported by increased production from its major capital projects, including the ramp-up of Frade (Brazil) and Tombua-Landana (Angola) to peak capacity in 2011. Growth is also expected to be supported by the commencement of operations from several major upstream developments over the medium term, including several fields in the U.S. Gulf of Mexico, Gorgon and Wheatstone in offshore western Australia, and other projects in Asia-Pacific and Africa. With the vast majority of E&P capex deployed internationally (80% in the nine months ending September 30, 2009 (9M 2009) and 76% planned for 2010), CVX remains focused on its more prolific regions outside mature North American basins.

Similar to its peers, CVX has experienced rapidly rising costs in its E&P operations. Between 2004 and 2008, the Company’s per unit production costs (including taxes) rose by 96% to $11.40 per barrel of oil equivalent (boe) and its three-year average reserve replacement costs rose by 172% to $18.43 per boe, reflecting rising energy and service costs, poor internal reserve replacement performance, especially in the United States, and the negative impact of higher prices on production volumes and reserves related to production sharing contracts (PSCs). This has been partially mitigated by stronger reserve replacement performance in Asia-Pacific, TCO (Kazakhstan) and other equity affiliates, although partially related to PSC impacts. Despite the rising trend, CVX’s production cost performance compares relatively favorably to some of its peers, although its reserve replacement performance compares less favorably. The Company is focused on cost reduction initiatives throughout the organization in order to reverse the upward pressure on costs given the significant decline in average WTI crude oil prices between Q2 2008 ($124 per barrel) and Q1 2009 ($43 per barrel), although these increased in Q2 2009 ($60 per barrel) and Q3 2009 ($68 per barrel).

CVX must manage a variety of political and business risks, including uncertainty regarding the stability of regulatory, legal, currency and taxation systems. For example, during the ramp-up of crude oil prices over the past few years, the national governments of a number of oil-producing nations increased taxation and/or royalty rates, or unilaterally changed the terms of PSCs. New contracts typically result in less favorable terms. In Venezuela (2% of 2008 production), CVX, among others, finalized an agreement during 2008 to grant the government majority control of the massive Orinoco heavy oil projects. In addition, Venezuela implemented a new 50% tax on crude oil priced above $70 per barrel. In Nigeria (6% of 2008 production), political unrest has resulted in production stoppages at several projects over the years, resulting in a drop in Nigerian production net to CVX in 9M 2009. Additionally, CVX has a relatively large proportion of its reserves in Kazakhstan (24% of proved reserves at TCO at year-end 2008), which represents concentration risk, although likely to decline as a percentage of the total going forward.

DBRS believes that CVX’s conservative financial profile, solid liquidity position and significant financial flexibility provide it with the ability 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 applicable methodology is Rating Oil & Gas Companies, which can be found on the DBRS website under Methodologies.

This is a Corporate rating.