DBRS Confirms Chevron Corporation at AA with a Stable Trend

DBRS has today confirmed the rating of Chevron Corporation’s (Chevron or the Company) Senior Unsecured Notes and Debentures at AA, with a Stable trend. The confirmation is based on results and corporate developments in the first six months ended June 30, 2012 (H1 2012).

Chevron’s financial profile remained very strong in H1 2012, as strong energy pricing helped to support strong cash flow. Credit metrics were positively impacted, as adjusted debt-to-capital decreased to 9.9% (from 10.5% at year-end 2011), and debt-to-cash flow improved to 0.25 times (x) for the last 12 months ended June 30, 2012 (LTM). The Company repurchased $2.5 billion in shares in H1 2012, and increased dividends in June 2012.

Capital and exploratory expenditures (capex) of $29.7 billion (not including $3.0 billion for equity affiliates, which does not require cash outlay by Chevron) are budgeted for 2012 to fund its production growth initiatives of 4% to 5% between 2014 and 2017. Coupled with dividend payments of $6.9 billion estimated by DBRS for 2012, these amounts represent a significant cash outflow for the Company. Based on H1 2012 results, these amounts are expected to be funded by operating cash flow, with excess cash earmarked for further share repurchases (between $0.5 billion and $2 billion budgeted for both Q3 and Q4). As a result of the high spending, a significant decline in prices could result in modestly weaker credit metrics; however, DBRS expects that Chevron would have sufficient flexibility in its substantial capex or share buyback programs to withstand a declining price environment. DBRS views Chevron as one of a few multinational operators with the ability to withstand economic downturns.

Given its production weighting toward crude oil (68%), Chevron’s earnings and cash flow remain susceptible to the price volatility of energy markets. However, given the Company’s size, and the integrated nature of its operations, Chevron’s refining operations benefit from reduced feedstock costs (as in Q2 2012).

On March 15, 2012, Chevron voluntarily requested authorization to suspend operations at the Frade field deepwater operation in Brazil as a result of new small seepages identified. This follows initial seeps identified in November 2011. The Brazilian federal district prosecutor has filed two civil lawsuits seeking $10.7 billion in damages for each of two seepages and an injunction to stop Chevron’s activities in Brazil. Although the ultimate exposure to these lawsuits is unknown at the current time, a significant adverse judgment could have a negative impact on Chevron’s key credit metrics. However, DBRS views the Company’s strong balance sheet as sufficient to manage the potential financial risk associated with the litigation.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.