DBRS Confirms Ratings of Canadian Natural Resources Limited at BBB (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Long-Term Debt rating of Canadian Natural Resources Limited (CNRL or the Company) at BBB (high) and its Commercial Paper rating at R-2 (high), all with Stable trends. DBRS believes CNRL is in a good position to ride the challenging commodity price environment among its domestic peers. The rating confirmation incorporates DBRS’s expectation that key credit metrics will weaken materially in 2015, predominately driven by weak commodity prices. However, a negative rating action could be triggered if key financial metrics deteriorate beyond the ratings range on a sustained basis.

One key challenge for CNRL and its peers is adapting to what could be an extended period of low oil and natural gas prices that could continue to depress internally generated cash flow significantly. In the midst of this challenging period with the uncertainty about the timing of commodity price recovery, it is imperative for an oil and gas company to (1) preserve liquidity, (2) focus on both operating and capital efficiency and (3) maintain capital spending flexibility (capex) to adjust spending according to changing commodity prices. Applying the aforementioned three factors, DBRS believes CNRL could withstand the challenging environment better than many of its domestic peers.

In January 2015, CNRL announced plans to reduce its 2015 capital budget substantially to approximately $6.2 billion from the original budget of $8.6 billion, attributing to the Company’s capex flexibility. In March 2015, the Company further decreased its capital budget to $6.0 billion. Despite the capex curtailment, production volumes are expected to grow positively in 2015, benefiting from the past investments made in a longer-life, low-decline oil sands asset base that is expected to continue to ramp up production. After examining the Company’s asset portfolio, DBRS believes a further capex cut could be executed if necessary, particularly in conventional crude oil and natural gas resource plays in Western Canada. Furthermore, the Company has the flexibility to delay its Horizon Phase 3 expansion project. In light of the Company’s reasonable capex flexibility, DBRS expects free cash flow deficits to be manageable in the range of $0.5 billion to $1.0 billion per annum over the next three years even if oil prices fall further from the current level. CNRL has bolstered liquidity, as the Company entered into a new $1.5 billion three-year credit facility. As a result, available liquidity increased to approximately $4.1 billion in January 2015, which should be sufficient to fund cash flow deficits over the next several years under a prolonged weak commodity price scenario. However, key credit financial metrics, particularly debt-to-cash flow and interest coverage ratios, are expected to deteriorate to beyond the ratings range in 2015. A negative rating action could be taken if key credit metrics remain under pressure on a sustained basis.

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 Rating Companies in the Oil and Gas Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

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