DBRS Assigns Provisional Rating of B (low), Stable, to Northern Blizzard Resources Inc.

DBRS has today assigned a provisional rating of B (low) with a Stable trend to the Issuer Rating and the proposed Senior Unsecured Notes (the Notes) of Northern Blizzard Resources Inc. (NBR or the Company). DBRS has also assigned a provisional rating of RR4 to the Notes. The proposed Notes of up to USD 425 million are subordinated to the Company’s $600 million secured bank facilities. The Company intends to use $200 million of the total proceeds to pay out the owners as special dividends.

The ratings reflect: (1) NBR’s healthy cash flow generation capability from its current production at approximately 18,400 barrels of oil equivalent per day (boe/d) (93% heavy oil, 7% natural gas) in LTM 2013; (2) good production growth prospects; (3) reasonable capital spending flexibility and adequate liquidity; and (4) reasonable netbacks. The key to the Company’s medium-term cash flow generation capability will largely be driven by the successful expansion of its current production to about 25,000 boe/d by 2015, assuming oil prices remain at current levels. Should West Texas Intermediate (WTI) oil prices drop to below $80/barrel (bbl) and/or the light/heavy oil pricing differentials widen to above $30/bbl for a prolonged time period, DBRS expects NBR to curtail capex to maintain its credit metrics within the assigned rating category. In addition, any lengthy project delays and significant cost overruns that require substantial external funds could result in a negative rating action. The assigned ratings factor in the Company’s good cash flow from its current production and low maintenance capex (only 50% to 60% of cash flow is required to sustain production at 20,000 boe/d). This is a result of reasonable netbacks (EBITDA netbacks of $30/boe) and low production decline rates (approximately 15%), which compare favourably with the Company’s peers, who are typically engaged in non-conventional production.

NBR’s financing strategy for future production growth is to mainly use internally generated cash flow with modest borrowings (assuming no additional dividend distribution post-NBR’s planned special dividend payments of $200 million upon closing of the Notes). NBR’s key credit metrics are expected to weaken significantly following the special dividend payment. However, the key credit ratios are expected to remain commensurate with the assigned rating range for the foreseeable future. In addition, the Company’s current liquidity remains adequate to finance its short-term working capital requirements. DBRS expects NBR to prudently manage its growth strategy to maintain the credit metrics within the assigned rating category should a substantial cash flow shortfall occur.

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

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

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 methodologies are Rating Companies in the Oil and Gas Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.