DBRS Confirms Crew Energy Inc. at B with Stable Trends

DBRS has today confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Crew Energy Inc. (Crew Energy or the Company) at B with Stable trends. The Recovery Rating of the Notes remains at RR4. The confirmation reflects DBRS’s expectation that Crew Energy will maintain a reasonable production profile for the B rating while keeping its key credit metrics in line with the current rating category despite its aggressive growth plans in the Montney region. The confirmation also reflects the expectation that Crew Energy will have sufficient liquidity to finance its capital expenditures (capex) and operations for the foreseeable future.

Crew Energy continues to focus primarily on growth in the Montney region, as reflected in its significant land acquisitions since December 2012 and the high level of capex, which includes investments in infrastructure, the construction of new processing facilities and a significant increase in drilling activities. This growth initiative is expected to be funded by a mix of debt and proceeds from the recent divestitures of its Princess and Deep Basin, Alberta assets (total gross cash proceeds of approximately $372 million). Although the sale of currently producing assets resulted in a material decrease in production volumes (forecasted production exit of 22,000 barrels of oil equivalent per day (boe/d) to 23,000 boe/d in 2014 versus the 2013 average of 27,451 boe/d, Crew Energy’s production size is still reasonable for its current rating. The Montney region is expected to provide the Company with good growth prospects going forward to offset the decrease in production volumes this year; however, the high funding requirement, increase in geographic concentration risk and some execution uncertainty remain key challenges for the Company over the medium term.

The Company’s key credit metrics for the first six months ended June 30, 2014, are reasonable for the current rating and were supported by higher operating cash flows and moderately lower debt levels following the sale of its Deep Basin, Alberta assets. Over the medium term, the Company’s aggressive growth plan will likely result in significant free cash flow deficits, which could pressure the balance sheet and likely weaken key credit metrics moderately. Relatively low leverage levels to date for the current rating category, however, provide Crew Energy with some flexibility to increase its leverage to fund its planned growth capex. 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 current rating category. Crew Energy is also expected to have adequate liquidity, supported by credit facilities (to be amended to $280 million following the completion of the Princess assets sale; approximately $249 million available as of June 30, 2014) to finance capex and operations over the near term.

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 methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and 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.