Chevron Corp. Outlook Revised To Negative On Weaker-Than-Expected Financial Performance In 2020, Ratings Affirmed

  • S&P Global Ratings has lowered its oil and natural gas price assumptions and now forecasts that Brent will average $30 per barrel while West Texas Intermediate (WTI) averages $25 per barrel for the remainder of 2020.
  • We expect integrated oil and gas company Chevron Corp.'s financial measures to be weak for the current rating in 2020.
  • We are revising our outlook on Chevron to negative from stable and are affirming our 'AA' long-term issuer credit rating and senior unsecured issue-level rating on the company.
  • The negative outlook reflects the company's weaker-than-expected financial performance in 2020, including funds from operations (FFO) to debt of less than 60% and debt to EBITDA of more than 1.5x, and the potential that we will downgrade it if it's credit measures do not improve next year. Our rating assumes that Chevron has the ability to limit the downside to its performance in 2020 and support an improvement in 2021 and beyond.
NEW YORK (S&P Global Ratings) March 23, 2020—S&P Global Ratings today took the rating actions listed above.
The drop in oil prices will result in weak financial measures for the current rating.  The negative outlook reflects the significant decline in our oil price assumptions due to the unprecedented reduction in demand stemming from the coronavirus, as well as the cessation of OPEC+'s production limits and the resulting price war between Saudi Arabia and Russia. In particular, we expect crude oil prices to be significantly lower on average in 2020, including WTI at $25 per barrel and Brent at $30 per barrel. Therefore, we expect Chevron's near-term financial measures to be weak for the current rating before recovering along with our price assumptions in 2021. Specifically, we expect the company's FFO to debt to average below 60% while its debt to EBITDAX remains above 1.5x in 2020 before materially improving in 2021, when we forecast average prices of $45 per barrel for WTI and $50 per barrel for Brent. Our ratings also assume that Chevron will implement cost reductions of up to $1.0 billion, further improve its margins by up to an additional $1.0 billion, and retain the ability to moderate the pace of its share repurchases and capital spending to maintain its balance sheet.
The negative outlook on Chevron reflects its weaker-than-expected financial performance under our revised price assumptions, especially in 2020 when its FFO to debt may fall below 50%. That said, we expect its cash flows and financial performance to improve materially in 2021 and beyond, along with our price assumptions, leading it to increase its FFO to debt back above 60%. Our forecast assumes that Chevron will maintain modest financial policies. We note that the company has a limited number of major long-term projects at this time, which provides it with some flexibility to adjust its capital spending if needed, and can moderate the pace of its share repurchases. Nevertheless, the combination of reduced demand from the coronavirus and the price war between Saudi Arabia and Russia has led to a highly volatile market subject to extreme price swings that create a very high degree of uncertainty for the financial performances of companies across the industry.
We could lower our ratings on Chevron if its financial measures do not recover in 2021 such that we expect its FFO to debt to remain below 60% and its debt to EBITDAX to exceed 1.5x. This would likely occur if crude oil prices fail to improve substantially or the company pursues a more aggressive financial policy than we currently anticipate. The failure of OPEC+ to reassert production limits to support crude oil prices and/or prolonged economic weakness due to the coronavirus that leads to significantly reduced demand beyond 2020 could keep crude oil prices, and the company's operating cash flow, below the necessary levels to support our expected improvement in its cash flow.
We could revise our outlook on Chevron to stable if its financial performance improves such that we expect its FFO to debt to average comfortably above 60% while its debt to EBITDA remains below 1.5x for a sustained period. This would likely occur due to a combination of better production management by OPEC+ and a strong economic recovery following the containment of the coronavirus.
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