DBRS Assigns Provisional Ratings to Crew Energy Inc.

DBRS has today assigned a provisional Issuer Rating of B with a Stable trend to Crew Energy Inc. (Crew Energy or the Company). DBRS has also assigned a provisional rating of B with a Stable trend and a provisional recovery rating of RR4 to Crew Energy’s proposed Senior Unsecured Notes (the Notes). The Notes, estimated at up to $250 million over the next 24 months, are effectively subordinated to the Company’s secured bank facilities (the Secured Bank Facilities). Proceeds from the Notes are to be initially used to pay down the Secured Bank Facilities, providing necessary liquidity for future development investments.

The assigned ratings reflect the Company’s (1) balanced production mix between liquids and natural gas (52% liquids and 48% natural gas in 2012), (2) growth opportunity in the Montney formation, (3) reasonable capital spending flexibility and (4) high operatorship of properties. Crew Energy’s balanced production mix mitigates concentration risk in one commodity and provides the Company with more diversified cash flow generation capabilities. In addition, the Company’s recent acquisitions and developments in the Montney area offer good growth opportunities. A recent assessment estimated that the Company’s Montney sections have approximately 15.2 billion barrels of oil equivalent (boe) initially in place (approximately 51% light oil and NGL and 49% natural gas), which could increase production substantially if developed successfully. However, Crew Energy’s growth strategy would likely result in significant capital spending over the medium term, including increased investments in infrastructure, processing plants and higher drilling activity. The high level of capex during this development stage will likely result in significant cash flow deficits, which could pressure the balance sheet going forward. DBRS expects Crew Energy to manage its growth strategy prudently and to curtail discretionary capital spending when needed to maintain its key credit metrics within the assigned rating category.

Crew Energy’s profitability has remained weak due to its exposure to the low natural gas pricing environment and volatile heavy/light pricing differentials. Although Crew Energy’s production mix between liquids and gas remains balanced, it is heavily weighted toward low-margin natural gas and heavy oil production (over 85% of 2012 production combined). Light and medium crude oil production, which typically generates higher margins, accounts for less than 5% of the Company’s production mix. This contributed to a below-average EBITDEA netback compared to the DBRS-rated universe. A sustained period of weak natural gas pricing and widening pricing differentials could have a significant impact on the Company’s cash flow and earnings.

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 Ratings Limited for use in the European Union.