DBRS Morningstar Upgrades Chevron Corporation to AA with a Stable Trend

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of Chevron Corporation (Chevron or the Company) by one notch to AA from AA (low) with a Stable trend. At the same time, DBRS Morningstar discontinued the rating for Chevron’s Senior Unsecured Notes and Debentures; the decision to withdraw the rating of the Senior Unsecured Notes and Debentures was made at DBRS Morningstar’s discretion and is unrelated to the credit profile of Chevron.

The drivers behind the ratings upgrade are the considerable improvement in the Company’s credit profile since the oil-price crash in 2016 and expected further improvement over the next two to three years that supports a AA rating. In 2018, the Company’s lease-adjusted debt-to-cash flow ratio improved to 1.19 times (x) from 2.09x the previous year. The lease-adjusted EBIT interest coverage ratio also improved to 17.22x in 2018 from 5.15x in 2017. The strengthening of the Company’s credit metrics is attributable to the significant recovery in cash flow coupled with a reduction in the level of total indebtedness. Overall debt (before operating leases) has declined to $34.5 billion as at the end of 2018 and further to $32.9 billion as at the end of September 30, 2019, from $46.1 billion as at YE2016. The Company has been able to reduce debt as a result of a sizable free cash flow (FCF) surplus (cash flow after capital expenditures (capex) and dividends) in 2018 and year-to-date 2019 combined with proceeds from asset sales. The Company is also deploying FCF surpluses to fund common share repurchases.

Chevron’s rating is further underpinned by its strong business profile, which includes (1) a substantial and well-diversified upstream portfolio with production of ~3.0 million barrels of oil equivalent per day; (2) significant downstream integration (1.7 million barrels per day of refining capacity) that provides a natural hedge, particularly during a weak crude oil pricing environment; (3) operational and capital efficiencies; and (4) an adequate liquidity position. The rating also takes into account Chevron’s relatively higher business risks, associated with its operations in politically sensitive geographic regions and exposure to higher-risk deepwater operations.

DBRS Morningstar estimates that ~52% of Chevon’s long-term capital markets debt (including 2019 maturities) matures by YE2021. In DBRS Morningstar’s opinion, Chevron’s debt maturity profile is manageable given its adequate liquidity and access to capital markets. DBRS Morningstar anticipates Chevron to stay FCF positive through 2021 with capex to remain relatively flat and cash flow to increase modestly based on DBRS Morningstar’s 2020–21 Brent oil-price forecast of $60 per barrel (/bbl), increasing production and further improving the cost structure. However, in DBRS Morningstar’s unlikely stress-case scenario where crude oil prices weaken to $40/bbl for an extended period, causing significant pressure on the Company’s credit metrics, DBRS Morningstar may take a negative rating action.

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 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 info@dbrs.com.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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