Fitch Affirms Chevron's IDR at 'AA/F1+'; Outlook Stable

Fitch Ratings has affirmed the following Issuer Default Rating (IDRs) and outstanding debt ratings of Chevron Corporation (Chevron; NYSE: CVX):

Chevron Corporation

-- Long-term IDR at 'AA';
-- Senior unsecured notes at 'AA';
-- Commercial paper at 'F1+';
-- Short-term IDR at 'F1+'.

Union Oil Company of California (Unocal - Chevron)

-- Unocal unsecured notes at 'AA'.

Chevron Funding Corporation

-- Commercial paper at 'F1+';
-- Short-term IDR at 'F1+'.

The Rating Outlook is Stable.

Chevron's ratings reflect the size and quality of the supermajor's worldwide asset base; its oil-heavy upstream portfolio (approximately 69% of 2009 upstream production was liquids); the diversification benefits of the integrated oil business model; Chevron's strong cash flow generation capability, conservative financial management, and very low debt levels. Total gross debt at Dec. 31, 2009 was just $10.51 billion on an asset base of $164.6 billion, while net debt was just $1.7 billion. As calculated by Fitch, debt/boe of proven upstream reserves was just $0.95/boe (allocating 25% of debt to non-E&P segments). Credit concerns are minimal, and center primarily on high capex spending and shareholder distributions, as well as the possibility of acquisition-related event risk.

For the LTM ending Dec. 31, 2009, Chevron had debt/EBITDA leverage of 0.4x, interest coverage of 92.3x, and negative free cash flow (FCF) of $5.77 billion, although this was the result of its policy to 'invest through the cycle' during the low commodity prices of 1H'09. Note that on a quarterly basis, FCF turned positive in 2H'09 ($1.54 billion) in line with higher crude oil prices. Looking forward, Fitch anticipates Chevron will be modestly FCF negative in 2010 using Fitch's conservative base case assumptions of $70/WTI and $4.00/mcf natural gas. However, Fitch does not anticipate that Chevron would not need to do any additional borrowing under these price assumptions, as any deficits could easily be funded out of Chevron's large existing cash balances. The fact that Chevron is the operator at many of its projects gives Chevron ample operational flexibility to throttle back capex in the event of a future significant leg down in oil prices.

Chevron's 2009 upstream metrics were good. Worldwide E&P output was 2.68 million boepd including equity affiliates, a 7% increase year-over-year. Total proven reserves increased by 1% in 2009 and stood at 11,315 million boe. 61.4% of reserves were proven developed at YE 2009, while Chevron's reserve life was 11.6 years. Chevron's all-in one-year reserve replacement rate (RRR) was 115% in 2009 versus 149% the year prior, and 108% on a three-year basis. 2009 Finding, Development & Acquisition (FD&A) costs were $12.55/boe, a solid number given Chevron's orientation towards oil and deepwater offshore projects, both of which tend to result in higher FD&A costs per boe. 2009 reserve bookings were impacted by the higher-prices through Chevron's Production Sharing Contracts (PSCs) which generally move inversely to oil prices. In 2009 Chevron saw PSC-related reserve debookings in Indonesia and Azerbaijan, as well as a 184 million barrel price-related PSC debooking by an equity affiliate in Kazakhstan. Approximately 26% of Chevron's consolidated reserves were PSC-linked at YE 2009 versus 32% in 2008. Notable reserve additions in 2009 included the booking of reserves from Chevron's 20% stake in the AOSP Oil Sands project (allowed under revised SEC rules), as well as increases on the natural gas side from the gigantic Gorgon project (offshore Australia natural gas fields, 3 planned LNG trains with capacity of 15 million tonnes per annum; Chevron operator), which drove the bulk of Chevron's gas-related reserve gains. Excluding PSC effects, Chevron's 2009 RRR rate would have been 145%.

Chevron's liquidity was strong at year-end and was provided mainly by internally generated cash, cash and marketable securities balances ($8.82 billion at Dec. 31, 2009) and its two commercial paper funding vehicles, Chevron Corp ($12 billion) and Chevron Funding Corp ($2.5 billion). Note that the $2.5 billion facility is a carve-out of the main facility, so total board authorized CP does not exceed $12 billion. The company also has $5.1 billion in committed unsecured bank credit lines which are comprised of a series of bilateral agreements with a number of banks. There were no borrowings outstanding on these lines at Dec. 31, 2009. Near term maturities are manageable and include $30 million due in 2010, $19 million 2011, $1.5 billion in 2012, and nothing in 2013. There are no financial covenants on outstanding unsecured debt. Chevron also rolls forward a shelf which allows it to issue debt at the parent level or parent-guaranteed subsidiary level.

Other liabilities are manageable. Chevron's Asset Retirement Obligations (ARO) rose to $10.18 billion at YE 2009 versus $9.39 billion at YE 2008. The unfunded status of its pension declined slightly to -$3.84 billion in 2009 from -$3.97 billion seen the year prior, primarily due to improved returns on assets and higher employer contributions. Estimated 2010 pension contributions are $900 million. Reserves for environmental remediation at YE 2009 were $1.7 billion and are primarily linked to remediation efforts in US and international downstream.

Chevron is the subject of a well-publicized $27 billion lawsuit in Ecuador alleging environmental damages committed by a subsidiary of Texaco during its time in that country. The case, which was brought forth in 2003, is being held in an Ecuadorean court. Although an unfavorable ruling could take place at any time, Fitch does not anticipate a material near-term negative credit impact on Chevron for several reasons, including the fact that Chevron is essentially judgment proof within Ecuador (assets include only a small lubes plant in that country). Fitch anticipates any legal proceedings in the US would likely be a long and drawn out affair given Chevron's formidable legal resources and stated intention to defend itself vigorously. For comparison' sake, note 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.

Chevron Corporation is a large integrated oil company with 2009 upstream production of 2.68 million boepd (barrels of oil equivalent per day) and year-end proven hydrocarbon reserves of 11,315 million boe. Chevron's downstream portfolio includes interests in 17 refineries with an aggregate refining capacity of 2.16 million bpd and approximately 22,000 branded retail stations. Chevron's chemicals assets are held through CPChem, a joint venture with ConocoPhillips Corporation which holds interests in 34 worldwide manufacturing facilities and four research centers. Chemicals interests also include the Oronite lubes and fuel additives business. Other assets include midstream assets, power generation, and mining, among others. Chevron also controls a 41 tanker fleet to move crude and products around the world held on a short term (<1 year) charter basis.

In rating this issuer, Fitch used the following master criteria, all of which are available on www.fitchratings.com:

-- Corporate Rating Methodology (Nov. 24, 2009);
-- E&P Rating Methodology (Oct. 16 2009);
-- Credit Rating Methodology for Refiners (Nov. 9, 2007).

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.

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