Morningstar DBRS Confirms Chevron’s Issuer Rating at AA with Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed Chevron Corporation’s (Chevron or the Company) Issuer Rating at AA with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The confirmation and Stable trend reflect Morningstar DBRS’ view that no material changes to Chevron’s credit fundamentals are expected in the near term. The Issuer rating is based on Chevron's (1) exceptional size as one of the world's largest integrated energy companies; (2) large, low-cost oil and gas resource base; (3) well-diversified product mix and global geographic footprint; and (4) industry-leading operating efficiency and capital flexibility. The key business risk factors affecting the rating include (1) large planned return of cash to shareholders, (2) possibility of delays to or weaker-than-expected cash flows following capital expenditures on large expansions or new developments, and (3) exposure to operations in more politically sensitive geographic regions.

Chevron announced an agreement to acquire Hess Corporation (Hess) on October 23, 2023. On a pro forma basis, Morningstar DBRS estimates the potential acquisition of Hess to be slightly positive, but not material enough to change Chevron's business risk profile, which is already very strong. Since the purchase offer was first made, certain complications have arisen. Assuming the acquisition is finalized, the financial terms of the transaction may change and, therefore, could also change Chevron's financial risk profile. However, Morningstar DBRS notes that Chevron’s financial risk profile is currently strong and that it has adequate headroom to absorb Hess’ year-end 2023 debt. Morningstar DBRS is monitoring the situation as it evolves.

CREDIT RATING DRIVERS
Morningstar DBRS expects Chevron to maintain a net debt-to-capital ratio within its targeted range of 20% to 25% and for the Company’s key credit metrics to remain supportive of the rating. A positive credit rating action in the near term is unlikely since this would require a material improvement in the Company’s business risk profile, which is already very strong. Morningstar DBRS may consider a negative credit rating action if oil and gas prices, Chevron’s operating performance, and its credit metrics materially weaken for an extended period.

EARNINGS OUTLOOK
Looking ahead, Chevron expects a 5.5% increase in production to 3.29 million barrels of oil equivalent per day (boe/d) in 2024 (midpoint of its guidance) from 3.12 million boe/d reported in 2023. The forecast increase in production will largely be driven by organic growth in the Denver-Julesburg Basin and the incremental contribution from PDC Energy’s assets there, purchased in August 2023; organic growth in the Permian Basin; first production from projects in the Gulf of Mexico; and organic growth from other Company projects. Morningstar DBRS forecasts Chevron’s consolidated revenue to sequentially decline by 4%-5% to between $187 billion and $189 billion in 2024 because the increase in annual production that is incorporated is offset by a lower crude oil price assumption. Despite this, Morningstar DBRS expects ongoing efficiency gains to support the EBITDA margin at about 22% in 2024, unchanged from 2023. Morningstar DBRS’ base-case commodity price assumptions can be found in Morningstar DBRS’ commentary, “Oil and Gas Outlook: Slowing Economies and War are Driving Prices and Could Potentially Impact Credit Risk Profiles in 2024” dated January 17, 2024.

FINANCIAL OUTLOOK
Chevron’s 2024 total capital expenditure guidance is $15.5 billion to $16.5 billion for consolidated subsidiaries. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Chevron to generate significant free cash flow (i.e., cash flow after capex and dividends) surpluses in 2024 and 2025. At December 31, 2023, total debt was $20.8 billion. Although we expect Chevron to allocate the majority of its free cash flow surplus to share repurchases, we forecast the Company to remain below its long-term net debt-to-capital ratio target range of 20% to 25% through 2025. The Company’s liquidity position is adequately supported by cash, cash equivalents, and marketable securities totaling $8.2 billion at year-end 2023 and $8.1 billion of committed credit facilities, which were undrawn at December 31, 2023.

CREDIT RATING RATIONALE
Chevron’s upstream segment holds large, low-cost positions in prolific producing basins. Reinforcing that, the Company continuously focuses on cost-reduction measures, including ongoing pursuit of operating and capital efficiency gains and pruning relatively low-margin operations and developments from its portfolio of holdings. Although overweight to upstream activities, Chevron’s downstream operations often achieve higher margins during times of low oil and gas prices, partially offsetting the decline in upstream income. The Company’s large scale, diversified cash flow, and financial strength allow it to pursue major capital projects with promising returns.

This confirmation follows several operational accomplishments by Chevron in 2023, including the completion of the acquisition and integration of PDC Energy into the Company; increased production in the Permian Basin; progress towards the expansion at Tengizchevroil; achievement of first production on other projects in the Gulf of Mexico and in Australia, and; progress on its renewable strategy with the acquisition of a majority stake in ACES Delta, LLC, among others.

Morningstar DBRS forecasts Chevron to maintain a lease-adjusted debt-to-cash flow ratio less than 1.0 times (x), commensurate with the "AA" rating range and supporting the Stable trend. The Company’s liquidity position should remain strong, with committed credit facilities totaling $8.1 billion forecast to remain largely undrawn through the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Chevron. This factor is relevant because ever-increasing environmental regulations targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies. The impact from environmental regulations in any particular country is mitigated by Chevron's depth and diversity of supply sources. Additionally, the Company’s balance sheet strength and ongoing emission reduction initiatives provide it with the financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of Chevron, the BRA factors were considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of Chevron, the FRA factors were considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of Chevron, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2023; https://dbrs.morningstar.com/research/419228)

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

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

This is an unsolicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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