DBRS Confirms Ratings of Petro-Canada & Subsidiary at A (low) & R-1 (low)

Dominion Bond Rating Service (DBRS) has today confirmed the Unsecured Notes & Debentures and Commercial Paper of Petro-Canada (the Company) at A (low) and R-1 (low), respectively, and the Senior Notes of PC Financial Partnership at A (low), all with Stable trends. The rating confirmation for PC Financial Partnership is based on the unconditional and irrevocable guarantee of Petro-Canada.

The ratings confirmations are based on the Company’s strong cash flow and financial position which are both expected to continue through 2007. The Company has significantly transformed its oil and gas operations through international investments, oil sands development, and North American natural gas initiatives over the past few years as it sought ways to offset its mature and declining western Canadian conventional business. However, the repositioning is a multi-year process, and Petro-Canada has taken on longer lead-time projects that require significant initial capital while providing limited near-term cash flow. This has contributed to poor near-term internal reserve replacement performance and a low reserve life index of only eight years (6.3 years for conventional proved reserves) at the end of 2005, which is below peer averages.

The Company’s significant investments into the oil sands business, through its purchase of an interest in the Fort Hills oil sands project in 2005, as well as Syncrude Canada Limited and MacKay River expansions, should provide substantial growth underpinned by long-life reserves with minimal exploration risk. Petro-Canada’s longer term target is to grow its oil sands business to 200,000 barrels per day (b/d) in 2011-2012 compared with 47,000 b/d in 2005. The Company has also taken an integrated approach to its oil sands business and conversion of its Edmonton refinery to handle only oil sands-based feedstock for $1.6 billion (to be completed in 2008), which will allow the Company to participate along the full value chain. Like its competitors in the region, the Company faces the significant challenge of escalating costs and project delays as a result of very tight resource constraints. Petro-Canada is also expanding its North American natural gas platform including, potentially, investments in liquefied natural gas (LNG), which should better position the Company longer term to benefit from positive supply/demand fundamentals. In the near term, political risk for Petro-Canada has likely decreased, given the Company’s divestment of its producing assets in Syria, but will be an ongoing challenge over the medium term as the Company looks abroad for growth.

The U.K. North Sea will also be a near-term source of substantial growth for Petro-Canada, with the Buzzard field development on schedule to start up in late 2006 and reach plateau levels of 60,000 b/d (net to Petro-Canada) in 2007. Significant up-front investments in development projects have also resulted in increased finding and development costs without associated growth in reserves or production. Higher acquisition costs have also added to higher reserve replacement costs, which stood at $17.79 per boe (three-year average for conventional reserves) at the end of 2005, an increase of 82% since 2003. This trend is expected to be reversed in 2006 as development projects come on stream. Petro-Canada has said that it remains on track to grow production from 2005 levels by 8% to 11% per year through 2008. The Company’s balance sheet ratios compare well with its peers, and cash flow in 2006 should be roughly equal to expected capital spending of $3.5 billion. Profitability should remain strong given the healthy oil and gas price environment affording the Company the opportunity to continue its repositioning efforts.

Note:
All figures are in Canadian dollars unless otherwise noted.