DBRS Confirms Northern Blizzard Resources Inc. at B (low), Negative Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the rating of the Senior Unsecured Notes (the Notes) of Northern Blizzard Resources Inc. (NBR or the Company) at B (low). DBRS has maintained all trends as Negative. The Recovery Rating on the Notes has been confirmed at RR4. The confirmation of the B (low) rating signifies DBRS’s opinion that NBR’s key credit metrics and business profile are consistent with its current rating. The B (low) rating also considers NBR’s sufficient liquidity position and the Company’s price hedges through 2017, which should augment cash flow and mitigate the price volatility in the current weak, albeit improving, oil price environment. The maintenance of a negative trend accounts for the continued erosion in credit metrics through the first part of 2016.

The Company’s lease-adjusted debt-to-cash flow ratio rose to 2.94 times (x) for the 12 months ending March 31, 2016, from 2.45x at year-end 2015. The lease-adjusted EBIT interest coverage was weak over both periods. The Company’s cash flow is sensitive to a change in the price of oil. In-the-money hedges have provided a significant cushion to cash flow during the recent weak price environment thus mitigating the pressure on the Company’s financial profile. The recent strength in the price of oil has also been beneficial. However, if the price of oil returns to lower levels, NBR may not be able to add hedges at prices as favourable, which could have a negative impact on future cash flow and cause a further weakening in the Company’s credit metrics.

The Company has good financial and capital flexibility and has adjusted capital spending and the payment of cash dividends for a lower pricing environment. Free cash flow (after capital spending and cash dividends) in 2015 and for the first quarter of 2016 was positive. Free cash flow has been deployed to reduce debt. Based on the recently announced updated 2016 capex budget of $55 million (up from $40 million previously) and supported by the positive hedges, DBRS anticipates NBR will be able to generate a free cash flow surplus in 2016. Should the price of oil stabilize at a level in excess of USD 50/bbl, DBRS will likely change all trends back to Stable.

The Company has also maintained sufficient liquidity to withstand a period of weak pricing. Liquidity is supported by a borrowing base facility of $300 million (down from $475 million following the recent borrowing base review) and as of June 8, 2016, the facility was undrawn. Furthermore, refinancing risk is low, since the USD 276.2 million (CAD 359.8 million) of Notes do not mature until February, 2022.

NBR is concentrated on the production of lower-margin heavy oil (91% of total 2015 boe/d production) in Saskatchewan. Relative to its peers, NBR is more exposed to the heavy/light oil price differential. This risk has been partially mitigated with hedging of both the price of WTI oil and the heavy/light price differential. The Company is projecting in excess of 19,000 boe/d in 2016, virtually all oil. For 2016, NBR has hedged 11,500 bbls/d (about 60% of total estimated production) at an average price of CAD 79.50/bbl (about USD 61/bbl) for WTI oil and 11,500 bbls/d of the WTI/WCS differential, at an average of CAD 18.87/bbl. In 2017, the Company has hedged 10,000 bbls/d at an average WTI price of CAD 66.19/bbl (about USD 51/bbl) and 8,000 bbls/d of the WTI/WCS differential at an average of CAD 18.28/bbl.

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 methodology is Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.