DBRS Confirms Petro-Canada at A (low) and R-1 (low)

DBRS has today confirmed the ratings on the Commercial Paper and Unsecured Notes and Debentures of Petro-Canada (the Company) at R-1 (low) and A (low) respectively, and the rating on the Senior Notes of PC Financial Partnership at A (low), all with Stable trends. The confirmation for PC Financial Partnership is based on the guarantee of Petro-Canada, which has maintained a strong cash flow and financial profile, and a reasonable operational performance.

The Company’s balance sheet ratios compare well with its peers, and cash flow in 2007 should cover expected capital spending of $4.1 billion as well as dividends. Petro-Canada has a strong liquidity position with about $1.1 billion of cash on hand at September 30, 2007, and profitability should remain strong given the high oil-price environment.

In the U.K. North Sea, the Buzzard field came on stream in January 2007, and reached plateau production of 59,800 b/d (net to Petro-Canada) in the third quarter of 2007, representing about a 20% increase over 2006 Company-wide production. The Company estimates Buzzard will add $350 million of cash flow (which partially incorporates below-market historical hedges) in 2008, reflecting its first full year of operations. This incremental production and cash flow combined with Petro-Canada’s current strong financial profile should support Petro-Canada’s aggressive future expansion plans at Fort Hills.

The Company’s significant investments in the oil sands business, including its recent agreement to purchase an additional 5% interest in the Fort Hills oil sands project (which would bring the Company’s total stake to 60%, subject to closing), as well as Syncrude and MacKay River expansions, should provide substantial growth underpinned by long-life reserves with minimal exploration risk. The Company’s Fort Hills project is moving towards sanctioning (a decision is expected by the third quarter of 2008), with the design basis completed in June 2007. The first phase of the project will include a mine, a bitumen-extraction plant and upgrading facilities, and is expected to produce about 140,000 barrels per day (b/d) before royalties (84,000 b/d net to Petro-Canada’s interest) of synthetic crude oil by 2012. When all phases of the Fort Hills project are completed, before royalty production is expected to reach 280,000 b/d of synthetic crude or 168,000 b/d net to Petro-Canada’s interest by 2015. This would represent an increase of about 40% over the first nine months before royalty production in 2007. Petro-Canada’s longer-term target is to grow its oil sands business (including MacKay River, Syncrude and other bitumen leases) to 350,000 b/d (before royalties) by 2017 compared with 58,000 b/d forecasted for 2007.

Petro-Canada has also taken an integrated approach to its oil sands business and is converting its Edmonton refinery to handle oil sands-based feedstock for a capital investment of $2.0 billion (to be completed in Q4 2008). This allows the Company to fully participate along the value chain, and expansion in the downstream segment adds cash flow diversity.

Preliminary cost exposure for Fort Hills Phase 1 is $18.8 billion ($9.1 billion of capital expenditures net to Petro-Canada including FEED engineering), which will likely translate into significant total capital spending of $4 billion to $5 billion annually ($3.4 billion in 2006) over the next few years to support growth initiatives, which could put pressure on Petro-Canada’s financial profile, particularly if commodity prices were to significantly weaken. Petro-Canada will have less capital flexibility as it executes construction of its oil sands projects, but this should be manageable. DBRS believes metrics such as debt-to-capital and debt-to-cash flow should remain within the Company’s target ranges of 25% to 35% and under 2.0 times, respectively, based on a scenario that assumes a US$50 WTI oil-price environment and a 20% project cost overrun for Fort Hills. Given the fixed nature of Petro-Canada’s capital spending once the Fort Hills project is sanctioned, DBRS expects the Company would make portfolio decisions and other measures as appropriate to manage financial risk.

Key considerations for Petro-Canada’s credit profile going forward include the following:

(1) The Company’s significant growth capital-spending requirements as well as potential for cost escalation and project delays over the next five years, due to demands on labour and materials, as well as the environmental impact of completing projects in Alberta. (2) The Company’s exposure to crude oil price volatility. (3) The impact of higher royalties announced by the government of Alberta on profitability of existing projects as well as the pace of future capital investment.

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

The rating for PC Financial Partnership is based on the unconditional and irrevocable guarantee of Petro-Canada.