DBRS Confirms Trilogy Energy Corporation at B (low), Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes (the Senior Notes) rating of Trilogy Energy Corporation (Trilogy or the Company) at B (low) and has maintained the trends at Negative. The recovery rating on the Senior Notes remains unchanged at RR4. With DBRS’s review of its portfolio of high-yield issuers (see DBRS commentary “DBRS Takes Rating Actions on High-Yield Oil & Gas Portfolio,” published on October 26, 2016), the Negative trend on Trilogy was maintained primarily as a result of the Company’s weaker liquidity profile and high financial leverage. As of September 30, 2016, the Company had $25 million of capacity available on its $300 million revolving senior secured credit facility. Subsequent to the quarter end, the Company completed a mid-year borrowing base review whereby the Company’s lender commitments were unchanged. In addition, Trilogy’s $300 million of Senior Notes mature in December 2019. Overall, DBRS views Trilogy’s liquidity buffer as thin.

The Company’s key credit metrics continued to erode further in 2016 as a result of the weaker oil and gas pricing environment and lower production volumes. The Company’s lease-adjusted debt-to-cash flow ratio for the last 12 months ending September 30, 2016, was 10.20 times, well outside the B rating category. The Company has indicated plans to dispose of assets to reduce the level of indebtedness and improve liquidity. Going forward, DBRS anticipates an improvement in Trilogy’s key credit metrics based on expected stronger liquids and natural gas prices for 2017 and 2018. If the price of WTI crude oil averages above USD 50/barrel and natural gas in Alberta exceeds an average of $2.80/thousand cubic feet, the Company’s lease-adjusted debt-to-cash flow ratio should recover to a level that is more consistent with a B (low) rating.

In addition, the current rating accounts for the Company’s current business risk profile, which is underpinned by Trilogy’s production and proved reserves size in the Montney/Duvernay resource plays of North West Alberta. It also considers the Company’s moderate capex flexibility, limited geographic diversification and lower netbacks caused by a higher weighting of natural gas in the production mix. The business risk profile has deteriorated modestly because of declining production levels since 2014 and an increasing percentage of natural gas in the production mix (approximately 70% versus 60% in 2014). DBRS recognizes that the decline in production and liquids has been largely a result of Trilogy’s capex curtailment below sustaining levels in order to protect its balance sheet and liquidity.

Should the Company substantially reduce the amount drawn on its facility with measures such as asset sales, and/or the Company significantly increases cash flow without adding to the level of indebtedness, DBRS may consider changing the trend to Stable. Conversely, if oil and natural gas prices weaken again to below USD 40/bbl for WTI oil and $2.50/mcf for Alberta gas for a period of time, thereby adding further pressure on the Company’s key credit metrics, and/or the Company draws down its remaining liquidity, DBRS would likely take a negative rating action.

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 (September 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.