DBRS Comments on Downgrade of Chevron Corporation’s Ratings

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Unsecured Notes and Debentures of Chevron Corporation (Chevron or the Company) to AA (low) from AA (see DBRS press release titled, “DBRS Takes Rating Actions on Investment-Grade Oil & Gas Portfolio”). The trend has been changed to Stable from Negative. The downgrade reflects the erosion in the Company’s key credit metrics as a result of the weaker pricing environment coupled with a low probability, based on DBRS’s pricing forecast (DBRS assumes a mid-cycle West Texas Intermediate (WTI) oil price forecast of $50 per barrel (bbl) to $60/bbl), that the Company’s key credit metrics will recover within two years to a range in line with an AA rating. For the last 12 months ended June 30, 2016, Chevron’s lease-adjusted debt-to-cash flow ratio was 3.10 times and its lease-adjusted debt-to-capital ratio was 25.3%, both below the AA rating category. Factoring in the Company’s cash and cash equivalents of $9.0 billion, the net debt-to-cash flow ratio was 2.30 times.

The Company has taken steps to mitigate the free cash flow deficit (cash flow less capital spending and dividends) by curtailing capital spending. However, the deficit remains sizable this year as the reduction in cash flow has outpaced the reduction in capital spending. Asset sales of $5 billion to $10 billion planned through the end of 2017 ($1.4 billion completed in the first half of 2016) should mitigate the impact of cash outflows.

At a WTI oil price in excess of $50/bbl DBRS estimates Chevron is near cash flow neutrality and coupled with planned asset sales in 2017 debt levels should stabilize or decline. As a result, DBRS is changing the trend to Stable from Negative. Nevertheless, debt levels are likely to stay elevated relative to the Company’s underlying cash flow and the key credit metrics remain outside the range for an AA-rated entity, resulting in the one notch downgrade to AA (low).

The Company has adequate liquidity with (as at June 30, 2016) $9.0 billion of cash and cash equivalents, and $8.0 billion in undrawn committed credit facilities. The Company is also one of the largest non-government-controlled oil companies in the world and the current AA (low) rating is underpinned by the Company’s (1) significant scale (close to 2.6 million barrels of oil equivalent per day of production), (2) vertical integration as a result of its global downstream presence, (3) good production growth opportunities and (4) highly diversified asset base with operations in more than 20 countries around the globe.

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

The applicable methodology is Rating Companies in the Oil and Gas Industry (September 2016), which can be found on our website under Methodologies.

This rating was not initiated at the request of the rated entity.

DBRS did not have access to the accounts and other relevant internal documents of Chevron Corporation.

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