DBRS Confirms Crew Energy Inc. at B, Negative Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Notes (the Notes) rating of Crew Energy Inc. (Crew Energy or the Company) at B and maintained the trends at Negative. The recovery rating for the Notes remains unchanged at RR4. The Notes are effectively subordinated to the Company’s secured bank facility (the Credit Facility). The rating confirmations reflect DBRS’s assessment of the Company’s financial profile amidst the current weak commodity pricing environment, with current leverage levels being relatively lower than its DBRS-rated non-investment-grade peers. This provides the Company with somewhat more financial flexibility over the near term. The Company has funded its aggressive development initiatives in 2015 with a prudent mix of a $100 million equity offering, approximately $87 million of asset dispositions and moderate incremental debt. In 2016, DBRS expects the Company to significantly reduce capital expenditures (capex) and to spend within its operating cash flows, mitigating against any further material increase in debt levels and to preserve liquidity. However, continued deterioration in key credit metrics and/or liquidity would likely lead to a rating downgrade in 2016. This could be driven by a persistently weak commodity pricing outlook, the Company’s inability to curtail capex significantly and/or operational challenges.

On February 11, 2015, DBRS changed the trends of Crew Energy to Negative from Stable over concerns of weakening key credit metrics beyond current rating parameters under a weak crude oil and North American natural gas pricing environment. DBRS also noted that the B rating reflects the expectation that Crew Energy will maintain a reasonable production profile for the rating considering the heightened concentration risk in the Montney following the significant asset dispositions in 2014. For the nine months ended September 30, 2015 (9M 2015), Crew Energy’s key credit metrics have deteriorated as a result of the significant decline in commodity prices (approximately 52% decline in realized prices on a per barrels of oil equivalent (boe) basis before hedging) and production size (approximately 30% decline in daily production) on a year-over-year basis; however, key credit metrics remained supportive of a B rating category overall. For the last 12 months 2015, DBRS lease-adjusted debt-to-capital and debt-to-cash flow were 21.2% and 2.37 times (x), respectively, although DBRS lease-adjusted EBIT interest coverage was significantly weaker at 0.54x. Crew Energy partially mitigated against the weak earnings and operating cash flows with a significant hedging program in 2015 (realized $6.14/boe gain in 9M 2015), a $100 million equity offering in March 2015 and approximately $87 million in asset dispositions ($50 million in non-core Lloydminster assets and $37 million from the sale of a 50% interest in the new West Septimus facility). As a result, Crew Energy is expected to enter 2016 with relatively more financial flexibility than some of its DBRS-rated non-investment-grade peers. Crew Energy is expected to average approximately 22,000 boe/d (midpoint guidance) in Q4 2015, an increase over 9M 2015 production levels. The confirmation also incorporates DBRS’s assessment of the Company’s business risk profile that remains supportive of the current B rating, albeit being moderately weaker given the reduced size and scale and limited geographic diversification.

Nonetheless, a prolonged weak commodity pricing environment would be challenging for Crew Energy, which is reflected by the Negative trend. The Company’s profitability is relatively weak given its production mix, which is weighted heavily toward natural gas and heavy oil production. Regional natural gas prices have remained depressed, while the Company’s Lloydminster heavy oil production (3,741 bbl/d for the three months ended September 30, 2015) is exposed to the heavy/light pricing differentials in addition to the weak crude oil prices. DBRS expects the Company to significantly reduce capex in 2016 and to spend within its operating cash flows. However, if capex remains below sustaining levels consistently going forward, this could lead to a decline in production volumes and add further pressure on cash flows beyond 2016. As a result, should key credit metrics and/or the liquidity position deteriorate significantly beyond the current rating parameters or if the Company’s production profile is no longer expected to remain reasonable for a B rating, DBRS could downgrade the rating.

Crew Energy’s liquidity is supported by its $250 million Credit Facility, which matures in June 2016. As of September 30, 2015, the Company had drawings of $67.7 million and had issued letters of credit of $2.6 million. The current liquidity position is expected to sufficiently fund near-term capex, working capital and operations, given the expectation of significant capex reduction in 2016. The Credit Facility is subject to a semi-annual borrowing base review, with the last review completed in October 2015. The October borrowing base review resulted in a modest decrease to $250 million from $260 million. The next review is expected to be completed in early Q2 2016. The utilization of the Credit Facility is expected to be relatively low at 25% by year-end 2015; however, a lower commodity pricing outlook by the lenders in Q2 2016 versus the Q4 2015 review, combined with pressure on the determination of reserves based on current market conditions, could lead to a greater negative impact on the borrowing base. The rating confirmation also incorporates DBRS’s expectation that the Credit Facility will be extended at the time of the next review.

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: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuer, which can be found on our website under Methodologies.

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