DBRS Confirms Chevron Corporation at AA and Chevron Canada Capital Company at R-1 (middle)

Dominion Bond Rating Service (DBRS) has today confirmed the rating of Chevron Corporation (CVX or the Company) at AA and Chevron Canada Capital Company at R-1 (middle), both with Stable trends.

CVX completed its acquisition of Unocal Corporation (Unocal) in August 2005 in a 55% stock/45% cash transaction valued at $17.3 billion, including assumed debt. Key considerations for CVX with respect to the acquisition are as follows:

(1) The acquisition offsets CVX’s long-term declining trend in crude oil and natural gas production. CVX’s net production rose by 11% to 2.526 million barrels of oil equivalent per day (mmboe/d) in the first six months of 2006 (6M 2006) compared to 2.275 mmboe/d in 6M 2005. Over the medium term, CVX expects production to rise 3% annually through 2010, largely due to production from major projects in Angola (2006), Kazakhstan (2006-2007), Nigeria (2008), deepwater Gulf of Mexico (GOM) (2008) and Australia (2009-2010). The anticipated production growth is supported by the addition of Unocal’s base production plus growing production from Unocal’s projects in Azerbaijan, Bangladesh, deepwater GOM and Thailand, all of which commenced during 2005. Similar to its peers, as CVX expands into areas previously closed to outside investment, it faces rising potential business and political risk.

(2) CVX’s worldwide proved reserves rose by 5.8% in 2005, while liquids weighting fell to 67% in 2005 from 71% in 2004. The Company’s overall reserve profile was improved by the higher exposure to the prolific Asia-Pacific basin (to 25% in 2005 from 21% in 2004).

(3) The purchase price equated to $9.84 per boe, which is high relative to CVX’s historical costs, but reasonable in the context of recent acquisitions, rising finding and development costs, and high crude oil prices. Prior to 2005, most of CVX’s reserve replacement was through internal exploration and development activity, rather than property acquisitions.

(4) The Unocal acquisition had limited impact on CVX’s financial profile. CVX’s credit metrics remain very strong, with cash balances exceeding debt levels at June 30, 2006. Cash flow has been more than sufficient to fund capex, investments and dividends in recent years, with excess liquidity used to buy back common shares. The Company’s current common share buyback program, totalling $5 billion from inception in December 2005 to its likely completion by the end of 2006, is manageable within the context of its current ratings. CVX continues to benefit from very strong industry conditions in its key exploration and production and refining, marketing and transportation segments. However, its earnings and cash flow are sensitive to fluctuations in crude oil prices. CVX’s per unit production costs are rising, similar to industry trends, while poor internal reserve replacement performance in 2004-2005 (partly attributable to year-end price effects on reserves recognized under production-sharing contracts and the higher price paid for the Unocal acquisition) has resulted in above-average reserve replacement costs, especially in the United States.

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