DBRS Confirms Trilogy Energy Corporation at B with Stable Trends

DBRS has today confirmed the Issuer Rating of Trilogy Energy Corporation (Trilogy or the Company), along with the rating of its Senior Unsecured Notes, at B, with a Stable trend. The recovery rating of the Senior Unsecured Notes (the Notes) remains at RR4. The Notes are effectively subordinated to the Company’s secured bank facility. The confirmation reflects Trilogy’s ability to maintain its key credit metrics in line with the B rating range, given its current size and production profile. The confirmation also factors in Trilogy’s adequate liquidity position, which is expected to be sufficient to finance its planned capital expenditures (capex) and operations for the foreseeable future.

For the first half (H1) of 2014, Trilogy’s average gross production remained relatively flat at 34,670 barrels of oil equivalent per day (boe/d), compared to full-year 2013, as production was negatively affected by lower capital spending toward the end of 2013 and an unplanned pipeline outage. However, the Company’s current production size remains reasonable for the B rating range. Given current drilling results to date, the Company is expected to average 36,000 boe/d for the full-year 2014, with natural gas liquids (NGL) and crude oil production accounting for a larger proportion of production relative to H1 2014 (with a target of 45% for the full-year 2014, versus 40% in H1 2014). Growth in H2 2014 is expected to be primarily from the Company’s Kaybob Montney oil play as the Company continues to spend a significant portion of its capex in the region. Under the current commodity pricing environment, an increase in higher-margin NGL and crude oil production should improve earnings and operating cash flows going forward.

Trilogy’s financial profile remains supportive of the current rating, as growth initiatives were funded with a reasonable mix of debt and equity ($200 million equity issuance in late 2013). As a result, although the Company generated a significant free cash flow deficit in H1 2014, the impact on the Company’s leverage was not material. Key credit metrics for the remainder of 2014 are expected to benefit from lower capex (approximately 76% of planned capex spent in H1 2014) and an expected increase in higher-margin liquids production. The Company’s ability to successfully execute on its growth plans is expected to improve the Company’s financial risk profile going forward. In the event that commodity prices weaken significantly, DBRS expects the Company to preserve its liquidity and maintain its credit metrics within the current rating range by curtailing its capex program and/or prudently financing any cash shortfalls. Trilogy is expected to have adequate liquidity to finance capex and operations in the foreseeable future, supported by its $725 senior secured credit facility ($261 million available as of June 30, 2014).

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.

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

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

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