DBRS Confirms Chevron Corporation at AA (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes and Debentures (Senior Notes and Debentures) rating of Chevron Corporation (Chevron or the Company) at AA (low) with Stable trends. The confirmations are supported by Chevron’s relatively strong business profile that includes (1) a substantial and well-diversified upstream portfolio with production of approximately 2.6 million barrels of oil equivalent per day; (2) significant downstream integration (that provides a natural hedge particularly during a weak pricing environment) and (3) a strong liquidity position. The rating confirmation also reflects Chevron’s relatively higher business risks associated with its operations in politically sensitive areas and exposure to higher risk deepwater operations.

On October 7, 2016, DBRS downgraded Chevron’s Issuer Rating and the Senior Notes and Debentures rating by a notch to AA (low), and at the same time, the trends were changed to Stable from Negative. The downgrade reflected the erosion in the Company’s key credit metrics as a result of the weak price environment coupled with a low probability (based on DBRS’s mid-cycle pricing case of $50 to $60 per barrel (bbl) for Brent oil) that the Company’s key credit metrics would recover to align with a AA rating within two years. For the past 12 months ended September 30, 2016, Chevron’s lease-adjusted debt-to-capital ratio was 3.37 times (x), and the lease-adjusted debt-to-capital ratio was 29.2%, both well below the AA rating range. When factoring in the Company’s sizable cash balance of $7.7 billion, the net debt-to-cash flow ratio was 2.62x, still below the AA rating range.

The Company has incurred large free cash flow deficits (cash flow after capex and dividends) since 2014 because of (1) a high level of committed capital spending tied to Liquefied Natural Gas developments coupled with (2) declining cash flows as a result of weak oil and natural gas prices. As these projects have largely reached completion, capital spending requirements are contracting and capital flexibility is improving. The Company has provided capex guidance of $19.8 billion for 2017 and a range of $17 billion to $22 billion for 2018 compared with planned capex of about $25 billion for 2016 and $29.5 billion spent in 2015. The Company also plans $5 billion to $10 billion of dispositions through the end of 2017.

At a Brent oil price above $50/bbl and including asset sales per guidance, DBRS estimates that Chevron’s cash flow inflows balance with outflows in 2017, supporting DBRS’s trend change to Stable from Negative in early October. However, Chevron’s financial leverage relative to underlying cash flow in a $50/bbl to $60/bbl band still remains elevated relative to its AA (low) rating. DBRS notes the higher financial leverage is offset by the Company’s strong business profile. Should commodity prices again weaken materially (below $40/bbl) and remain low for an extended period of time, DBRS may be compelled to take further negative rating actions.

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 (September 2016), which can be found on our website under Methodologies.

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

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

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