March 20 - Fitch Ratings has affirmed Chevron Corporation (Chevron;
NYSE: CVX) ratings as follows:
--Issuer Default Rating (IDR) at 'AA';
--Senior unsecured notes at 'AA';
--Commercial paper at 'F1+';
--Short-term IDR at 'F1+'.
The Rating Outlook is Stable. Approximately $10.15 billion in debt is affected
by this action. Ratings for Chevron Funding Corporation's CP program were
withdrawn following that program's termination.
RATING RATIONALE: Chevron's ratings reflect the size and quality of the
supermajor's worldwide asset base; its large oil-heavy upstream portfolio (69.2%
of 2011's 2.67 million barrels of equivalent per day in output was
liquids, with very little indexed to landlocked WTI grade); the diversification
benefits of the integrated business model; Chevron's strong cash flow generation
capability, conservative financial management, and very low debt levels. Total
gross debt at Dec. 31, 2011 was just $10.15 billion on an asset base of $209.5
billion, while net debt was negative $9.92 billion adjusting for cash and
equivalents of approximately $20.07 billion at year-end 2011. Credit concerns
are minimal, and center primarily on high capex spending of the next several
years associated with Chevron's large megaprojects (Gorgon, Wheatstone) as well
as large Deepwater GoM projects (Jack/St. Malo, Tubular Bells, BigFoot),
although the company's record high current liquidity and free cash flow (FCF)
provide considerable headroom within the rating.
RECENT FINANCIAL PERFORMANCE: Chevron's latest 12 months (LTM) financial
performance has been very strong, prompted by high oil prices. As calculated by
Fitch, for the LTM period ending Dec. 31, 2011, Chevron generated EBITDA of
$52.4 billion versus $39.6 billion the year prior. Gross debt declined to $10.2
billion from $11.5 billion the year prior, resulting in debt/EBITDA leverage of
just 0.2 times (x), EBITDA/gross interest coverage of 182.0x and funds from
operations (FFO) interest coverage of 139.3x. FCF was $8.5 billion, comprised of
cash flow from operations of $41.1 billion, cash capex of $26.5 billion, and
common dividends of $6.14 billion. Under Fitch's conservative base case
assumptions of $87.50 /barrel WTI and $3.25/mcf natural gas, Fitch anticipates
the company will be meaningfully FCF positive in 2012 despite elevated levels of
capex spending ($32.7 billion including noncash equity affiliate spending and
exploration). Chevron's very strong liquidity, operator status on key projects,
and track record of paying down debt through the cycle provide comfort that debt
levels are likely to remain manageable for the rating category even in the event
of unexpected project cost overruns or lower oil prices.
UPSTREAM PERFORMANCE: Despite a 2011 production guidance miss, Chevron's
upstream operational metrics were very good, driven by an all-in Reserve
Replacement Rate (RRR) of approximately 188% (166% on an organic basis), as
calculated by Fitch. This is a reversal of the low (35%) RRR of 2010 and
highlights the lumpiness of reserve replacement associated with the company's
various longer lead projects. A major portion of 2011 reserve replacement was
associated with initial bookings on the 8.9 million tpa Wheatstone LNG project
(740 million boe) as well as acquisitions (248 million boe), primarily Atlas and
related Marcellus shale acreage. High reserve replacement favorably impacted
other metrics, including FD&A (one year--$16.14/boe; three year--$18.13/boe) and
reserve life (increasing to 10.1 years from 8.8 years). The company's liquids as
a percentage of reserves declined to 50.5% from 55.2%, however, this masks the
fact that LNG projects are contractually linked to oil, and thus should provide
oil-linked returns in the future. Fitch expects reserve additions will continue
to be lumpy going forward due to the increasingly infrastructure-heavy nature of
Chevron's projects and the SEC economic producibility test.
LIQUIDITY: Chevron's liquidity was strong at year end and was provided mainly by
internally generated funds, cash, marketable securities ($20.07 billion at Dec.
31, 2011) and its commercial paper funding vehicle, Chevron Corp ($12 billion).
The company also has $6 billion in committed unsecured bank credit lines which
are comprised of a series of bilateral agreements with a number of banks. These
commitments expire in 2016. There were no borrowings outstanding on these lines
at year end.
Near term maturities are manageable, with $17 million due in 2012, $20 million
due 2013, $2.02 billion due 2014, and nothing due 2015. There are no financial
covenants on other outstanding unsecured debt. Chevron also rolls forward a
shelf which allows it to issue debt at the parent level or parent-guaranteed
subsidiary level. Commercial paper balances at year-end 2011 were approximately
$2.5 billion. The company currently has a total of $12 billion in authorization
for existing CP programs.
OTHER LIABILITIES: Chevron's asset retirement obligations (ARO) rose modestly to
$12.77 billion from $12.49 billion in 2010, primarily due to revisions in
estimates. The unfunded status of its U.S. and international pensions increased
to $5.38 billion from $3.26 billion in 2010. In 2012, the company expects to
contribute $900 million to U.S. and international pension plans. Reserves for
environmental remediation at year-end 2011 declined to $1.40 billion, versus
$1.51 billion seen the year prior.
LITIGATION: Chevron remains the subject of a well-publicized $18 billion lawsuit
in Ecuador alleging environmental damages committed by a subsidiary of Texaco
during its time in that country. While an unfavorable ruling was handed down in
Ecuador last year, Fitch does not anticipate the decision will have a material
near-term negative credit impact on Chevron for several reasons: Chevron is
essentially judgment proof in Ecuador; a number of countercharges appear to have
weakened the plaintiffs' case and/or bargaining position; and Chevron's
formidable legal resources are expected to allow it to engage a legal strategy
of delay for an extended period, potentially reducing any settlement liability.
For comparison' sake, Fitch notes that the Exxon Valdez lawsuit was resolved
nearly 20 years after the incident in Prince William Sound in 1989, and the
award was reduced to approximately 20% of the original punitive award of $2.5
billion through a lengthy series of appeals ($507 million). Given its
prominence, Fitch will continue to monitor this situation for new developments.
CATALYSTS FOR FUTURE RATING ACTIONS: Possible catalysts for positive rating
actions include additional permanent reductions in balance sheet leverage.
Catalysts for a downgrade are limited and would include a change in philosophy
on the use of the balance sheet, a very large leveraging transaction or other
action which meaningfully increased leverage, or a major operational issue.
Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process other than through the medium of its
public disclosure. The ratings above were unsolicited and have been provided by
Fitch as a service to investors.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Updating Fitch's Oil & Gas Price Deck' (Aug. 10, 2011);
--'2012 Outlook: North American Oil & Gas' (Dec. 16, 2011);
--'2012 Outlook: North American Refining' (Dec. 16, 2011);
--'Fitch: Chevron Profile Unaffected by Ecuador Court Ruling' (Jan. 4, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
2012 Outlook: North American Oil & Gas
2012 Outlook: North American Refining