DBRS Morningstar Removes the Rating of Chevron Corporation from Under Review–Negative, Confirms at AA, Negative Trend

DBRS Limited (DBRS Morningstar) removed the Issuer Rating of Chevron Corporation (Chevron or the Company) from Under Review with Negative Implications, where it was placed on March 26, 2020. At the same time, DBRS Morningstar confirmed Chevron’s Issuer Rating at AA with a Negative trend.

When DBRS Morningstar placed the rating of Chevron Under Review with Negative Implications, it was in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions on May 15, 2020, to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, and (3) the impact of production cuts recently implemented by OPEC Plus. The rating action follow DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.

Chevron’s rating is underpinned by its strong business profile, which includes (1) a substantial and well-diversified upstream portfolio with production of approximately 3.1 million barrels of oil equivalent per day, (2) significant downstream integration (1.75 million barrels per day of refining capacity) that typically provides a natural hedge during a weak crude oil pricing environment, (3) operational and capital efficiencies, (4) a favourable production growth profile, and (5) a positive liquidity profile. The rating also considers Chevron’s relatively higher risks, associated with its operations in politically sensitive geographic regions and exposure to higher-risk deepwater operations.

Chevron has benefitted in previous oil price downturns from its integrated business model, as a lower cash flow contribution from upstream operations was buffered by relatively more stable and typically stronger cash flow contribution from downstream operations, including refining. However, the current crisis has resulted in the Company's cash flows being exposed to both weak pricing and a significant decline in demand and refined-product margins at the same time. In response, Chevron is taking several measures to preserve cash, support balance sheet strength, and protect the dividend. The Company has (1) reduced organic capital and exploration spending by 30% from its original budget to $14 billion, (2) targeted operating cost reductions of more than $1 billion by YE2020, and (3) suspended the $5 billion annual share buyback program. With these revisions, at a $30/barrel (bbl) average Brent price for the next two years, the Company indicated that it can maintain its net debt ratio at less than 25%, cover its capex budget, and sustain dividends at their current level.

Chevron has sufficient liquidity to navigate through the current weak price environment. As at March 31, 2020, the Company reported a cash balance of $8.5 billion and undrawn credit facilities of $9.75 billion. After the first quarter, the Company issued $8 billion of new notes to further shore up liquidity. The Company also has a well-spread-out debt maturity schedule.

DBRS Morningstar expects Chevron’s key credit metrics under the base-case commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) to be weak in 2020 and below the AA range. While the various cost-saving measures will help mitigate the erosion in the Company's financial performance, DBRS Morningstar nonetheless projects a modest free cash flow (FCF) deficit in 2020. With an anticipated return to FCF surpluses in 2021and 2022 as the price of crude oil recovers (based on DBRS Morningstar's forecast), the Company's credit metrics are projected to gradually improve in 2021 and strengthen further in 2022. DBRS Morningstar assumes a more normalized operating environment will be reached by 2022 and anticipates West Texas Intermediate recovering back to the $50/bbl level, the bottom end of DBRS Morningstar’s midcycle pricing scenario.

In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to more normalized market conditions. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an AA rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices falls short of DBRS Morningstar’s base-case price assumptions and that Chevron's overall financial risk profile will not support the current rating. The Negative trend reflects this risk, which DBRS Morningstar deems to be elevated.

DBRS Morningstar will likely change the trend to Stable if the demand/supply fundamentals in crude oil markets continue to improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and/or the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 23, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

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 for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577