DBRS Confirms Trilogy Energy Corporation at B with Stable Trends

DBRS has today confirmed both the Issuer Rating of Trilogy Energy Corporation (Trilogy or the Company) and the rating of its Senior Unsecured Notes (the Notes) at B with Stable trends. The recovery rating of the Notes is RR4. The Notes are effectively subordinated to the Company’s secured bank facility. The confirmation reflects the Company’s continued success in growing its production and transitioning away from lower-margin dry gas drilling to higher-margin liquids-rich gas (NGL) and oil drilling, while maintaining its key credit metrics within the B rating range.

Trilogy’s total production averaged 36,667 barrels of oil equivalent per day (boe/d) for the first half (H1) of 2013 (33,500 boe/d in 2012 and 28,000 boe/d in 2011). This growth was largely attributable to production growth from the Company’s Kaybob Montney oil play, which reached approximately 9,830 boe/d in 2012 and is expected to achieve 15,000 boe/d in 2013. Trilogy’s Kaybob Montney oil play is considered one of North America’s top-ranked plays in terms of profitability. Trilogy has also improved its production mix significantly over the past three years by allocating the majority of capex toward oil/NGL projects and achieving above-average production per well. As a result, the Company has become less susceptible to weak natural gas prices (on a gross basis, 45% of total production is from liquids in H1 2013, versus 29% in 2011).

Although the Company’s cash flows have increased steadily as production grew, its financial profile has remained weak primarily due to increasing debt levels to finance free cash flow deficits. The Company’s free cash flow deficits were mainly caused by large capex programs in 2011 and 2012 for the development of the Kaybob Montney oil play and related infrastructure. As a result, Trilogy’s debt-to-capital ratio increased to 58% in H1 2013 (45% in 2011); however, it remains in line with the current rating range. Trilogy’s other key credit metrics, including debt-to-cash flow and interest coverage ratios, improved considerably in H1 2013, reflecting higher commodity prices and production. In 2013, Trilogy is expected to continue to pursue a high level of capex to grow production ($350 million estimated), which will likely lead to a modest increase in leverage. Remaining credit metrics should remain relatively stable for the second half of 2013.

The Company faces ongoing challenges with maintaining the production reliability in its Kaybob Montney oil play and meeting its long-term target production growth in the Kaybob Montney oil play of 20,000 boe/d. The Kaybob area currently accounts for over 95% of Trilogy’s cash flow, increasing the Company’s geographic concentration risk.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS for use in the European Union.