DBRS Confirms Chevron and Subsidiaries at AA and 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 production and reserve replacement costs, difficulty replacing United States (U.S.) reserves through the drill bit and political and business 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 9.3% and 0.36 times, respectively, for the 12 months ending (LTM) September 30, 2010. This compares favourably with other large multinational oil companies.

Cash balances totaled $11.0 billion (excluding $3.5 billion of time deposits) at September 30, 2010, resulting in a net cash position as outstanding debt totaled only $10.6 billion at that date. In November 2010, CVX announced the acquisition of Atlas Energy, Inc. (Atlas Energy, see below) for $3.2 billion of cash and pro forma net debt of approximately $1.1 billion. On a pro forma basis, the acquisition would modestly increase CVX’s net debt-to-capital and net debt-to-cash flow ratios from negative 0.4% and negative 0.01 times, respectively, to 3.8% and 0.13 times, respectively, still very strong levels.

CVX’s planned capex program for 2011, at $24.0 billion (or $26.0 billion including its share of expenditures by affiliated companies, 87% for upstream), is 20% higher than the 2010 budget of $20.0 billion (or $21.6 billion including its share of expenditures by affiliated companies, 80% for upstream). In October 2010, CVX announced a common share repurchase program targeting $500 million to $1 billion per quarter beginning in Q4 2010. Despite these developments, DBRS expects the Company’s net debt-to-capital ratio to remain well below 10% through year-end 2011, even if internal cash flow is insufficient to fully fund its 2011 capex program, common dividends, share repurchases and working capital needs.

The Company has a large portfolio of Upstream exploration and development growth prospects in diversified mature and developing regions. CVX projects 2010 production of 2.75 million barrels of oil equivalent per day (mmboe/d) based on the average West Texas Intermediate (WTI) price of $78 per barrel in the first nine months of 2010 (9M 2010), 1.7% higher than 2009, and is targeting production growth of 1% per year from 2010 to 2014 and 4% to 5% per year from 2014 to 2017. This forecast implies production of 2.86 mmboe/d in 2014 and 3.2 mmboe/d to 3.3 mmboe/d in 2017 and is based on an assumed $62 per barrel WTI price throughout the period. (DBRS estimates that, based on the Q3 2010 average of $76 per barrel, production would be flat in 2011 compared with 2010.) With the vast majority of Upstream capex deployed internationally (84% in 9M 2010) and 76% planned for 2011), CVX remains focused on its more prolific regions outside North America.

The Atlas Energy acquisition, which is expected to close in Q1 2011, provides CVX with approximately 850 billion cubic feet of proved natural gas reserves, with approximately 80 million cubic feet per day of natural gas production (equivalent to approximately 142 million barrels of oil equivalent (boe) and 13,333 boe per day (boe/d), respectively. The assets are primarily located in southwestern Pennsylvania’s Marcellus Shale basin, adding to the Company’s recent shale gas acquisitions in Poland, Romania and Canada.

Similar to its peers, CVX has experienced rapidly rising costs in its Upstream operations. Between 2005 and 2008, the Company’s per unit production costs (including taxes) rose by 68% to $11.40/boe, reflecting a heated industry environment and rising energy and service costs, and its three-year average reserve replacement costs rose by 55% to $18.43/boe, reflecting poor internal reserve replacement performance, especially in the U.S., and the impact of volatile crude oil prices on production volumes and reserves related to production sharing contracts (PSCs).

While per unit production costs (including taxes) declined by 12% in 2009, mainly reflecting the impact of the economic downturn and CVX’s cost cutting measures combined with increased production and lower per unit costs, the latter mainly in the U.S. and Africa, DBRS expects the upward trend to resume in a stabilized to rising crude oil price environment. With respect to three-year average reserve replacement costs, while CVX’s ratio decreased by 12% in 2009 ($16.19/boe in 2007–2009; $18.43/boe in 2006–2008), this measure would have risen by 3% to $19.04/boe without the first-time recognition of Synthetic Oil (Canada) reserves. Given ongoing project developments and the Atlas Energy acquisition, DBRS expects CVX’s reserve replacement to exceed 100% of production on average over the medium term, albeit on a lumpy basis as the Company books proved reserves related to major projects in its core regions. Consequently, combined with ongoing cost-reduction initiatives, reserve replacement costs are expected to improve but remain high relative to historical levels.

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 until Q3 2008, 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 resulted in less favourable terms. In Nigeria (9% of 2009 production), political unrest has resulted in production stoppages at several projects over the years, although production has recently benefitted from achievement of peak production at the Agbami project in August 2009. Additionally, Kazakhstan represents a relatively large proportion of CVX’s reserves (21% of proved reserves at Tengizchevroil (TCO) at year-end 2009) and production (13% in 2009). CVX’s exposure to these risks is higher than some of its peers given its higher share of production (63%) from non- Organization for Economic Cooperation and Development (OECD) countries. However, DBRS notes that, given the high levels of debt and deficits in some developed countries, the above-noted risks are also rising in those countries.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on the DBRS website under Methodologies.

The ratings of Chevron Funding Corporation and Chevron Canada Funding Company are based on the guarantee of Chevron Corporation.