DBRS Confirms Chevron Corporation at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Notes and Debentures rating of Chevron Corporation (Chevron or the Company) at AA with a Stable trend. The confirmation reflects Chevron’s exceptional ability to withstand the current low commodity pricing environment, which is supported by (1) a substantial, well-diversified upstream portfolio with production of approximately 2.6 million barrels of oil equivalent (boe/d); (2) significant downstream operations that act as a natural hedge in periods of low commodity prices; (3) a reasonable financial risk profile; and (4) a strong liquidity position. The rating action also incorporates Chevron’s high capital requirements over the near term and the relatively higher business risks associated with its operations in politically sensitive areas and deepwater operations.

The Stable trend incorporates DBRS’s expectation of Chevron’s key credit metrics, specifically debt-to-cash flow and interest coverage ratios, weakening well beyond the AA rating category in the near term, given the current low commodity pricing environment and the Company’s high capex program. However, material deterioration of key credit metrics beyond the current rating range on a sustained basis, which could be a result of significant unforeseen cost overruns associated with its major growth projects and/or a prolonged period of weak commodity prices, may lead to a negative rating action.

Chevron entered the current pricing downturn with low leverage and a stronger financial risk profile than most of its peers, providing the Company with greater financial flexibility under a weak pricing environment. However, Chevron’s capex program ($31 billion budgeted in 2015, excluding $4 billion by affiliated companies) remains relatively high over the near term, as the Company continues to invest in significant growth projects, including Liquefied Natural Gas and deepwater developments ($14 billion budgeted in 2015). These growth initiatives are expected to ramp up production to 3.1 million boe/d by 2017, but they will likely result in significant free cash flow deficits and a continued increase in leverage in 2015 and 2016. In the six months ended June 30, 2015, two of Chevron’s key credit metrics, adjusted debt-to-cash flow and EBIT-interest coverage, weakened well beyond the AA rating category. Chevron plans to partially mitigate this funding pressure through $15.0 billion of asset divestitures budgeted from 2014 to 2017 ($10.6 billion has been completed as of June 30, 2015), by achieving notable operating and capital cost savings ($3.0 billion identified to date) and by discontinuing its share repurchase program (approximately $5.0 billion in 2014). However, should there be a sustained deterioration of key credit metrics, this may result in a negative rating action.

The Company’s liquidity position is expected to adequately support the free cash flow deficits over the near term, underpinned by $12.5 billion of cash and cash equivalent on hand and $8.0 billion of committed credit facilities.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.