DBRS Places Canadian Natural Resources Limited Under Review – Developing after Offer to Acquire 70% Interest in Alberta Oil Sands Project plus Additional Interests in Northern Alberta

DBRS Limited (DBRS) has today placed the BBB (high) Issuer Rating, the BBB (high) Long-Term Debt rating and the R-2 (high) Commercial Paper rating of Canadian Natural Resources Limited (CNRL or the Company) Under Review with Developing Implications. This rating action follows the announcement that CNRL has entered into agreements, subject to regulatory approvals, to acquire 70% of the Athabasca Oil Sands Project (AOSP), including 70% of the Scotford upgrader, as well as additional working interests in other producing and non-producing oil sands leases. CNRL has agreed with Shell Canada Limited and certain subsidiaries (Shell) to acquire its 60% working interest in the AOSP, including an interest in the mining and extraction operations, north of Fort McMurray, Alberta; the Scotford Upgrader and the Quest Carbon Capture and Storage (CCS) project located north of Edmonton, Alberta; its 100% working interest in its Peace River/Carmon Creek thermal in-situ operations and its 100% working interest in the Cliffdale heavy oil field, as well as other oil sands leases. CNRL and Shell have also agreed with Marathon Oil Corporation (Marathon Oil) to jointly acquire its 20% share in the AOSP and related oil sands investments. The acquisitions do not include any interest in the 100% Shell-owned Scotford refinery or chemical plants. CNRL will be operator of the mining and extraction operations and Shell be continue to operate the Scotford Upgrader and the CCS project.

The total purchase price of the transactions accumulates to $12.74 billion as of the effective date, with closing targeted for mid-2017. The aggregate consideration for the acquisitions will comprise approximately 97.6 million shares of CNRL issued to Shell with a current market value of approximately $4 billion, a combined pre-adjustment cash payment at close of $8.24 billion to Shell and Marathon Oil, and a deferred payment of USD 375 million due to Marathon Oil in the first quarter of 2018. CNRL has arranged fully committed acquisition financing of $9 billion, comprising a $3 billion term loan facility and up to $6 billion in a bridge loan facility to bonds in the U.S. and Canadian debt capital markets. The current estimated production capability, before royalties, for the AOSP-acquired properties is approximately 196,000 barrels per day (bbl/d), with February production of approximately 188,000 bbl/d of mine production and upgrader output of approximately 195,000 barrels of oil equivalent (boe) per day from a 70% working interest in AOSP, along with approximately 13,800 bbl/d of heavy oil from the 100%-owned Peace River properties. Estimated proved reserves to be acquired are approximately 2.6 billion barrels.

DBRS notes that the acquisition further strengthens and broadens CNRL’s position as a top-tier producer and developer of oil sands in Canada. The acquisition complements CNRL’s other oil sands operations, particularly the Company’s nearby Horizon oil sands project. Based on the acquired AOSP production capability and heavy oil production and the midpoint of CNRL’s previous production guidance for 2017, the Company’s boe production increases by approximately 25% to about 1.1 million boe/d and the Company’s reserves increase by 44% to approximately 8.6 billion boe. Furthermore, CNRL believes working with Shell will provide significant near-term synergistic opportunities that can be achieved primarily by improving efficiencies at AOSP’s mining and upgrading operations.

The Company is also acquiring long-life, low-decline production assets with minimal to no reservoir risk. The ratio of long-life, low-decline production (based on 2017 forecast production) increases from approximately 60% to 70% and the Company’s reserve life increases from 22 to 27 years. The percentage of capex relative to cash flow to maintain production declines, thereby improving CNRL’s measure of capital efficiency and its ability to adapt to oil price volatility. However, because of the sizable addition of synthetic and heavy oil volumes to CNRL’s production portfolio, cash flow, absent hedging, will be more sensitive to changes in the price of light oil and the heavy-light oil price differential. Overall, DBRS’s opinion is that the acquisition favourably augments CNRL’s asset portfolio and improves the Company’s business risk profile.

Initially, CNRL is expected to incur higher financial leverage as a result of the acquisition. Based on Company estimates and strip pricing, pro forma total YE2017 debt (including the deferred payment) relative to pre-acquisition levels is estimated to increase by about 57% to $21.6 billion and pro forma debt-to-cash flow increases from approximately 2.1 times (x) to 2.5x. Assuming the price for WTI oil holds above USD 50/bbl through 2018, the acquired assets coupled with existing production assets yield significant discretionary cash flow (cash flow after capex) which the Company intends to use to rapidly reduce indebtedness. By 2018, debt-to-cash flow (based on Company estimates) could fall below 2.0x and be within a BBB rating range. However, should oil prices drop significantly below USD 50/bbl and without the benefit of hedges, achieving a debt-to-cash flow ratio less than 2.0x is at risk.

Overall, DBRS considers the impact of the acquisition on the Company’s key financial metrics to be somewhat negative near-term, but still expects metrics to recover to support a BBB (high) rating during 2018 based on the current price outlook and planned debt repayments. DBRS may still consider a negative rating action if the pricing outlook and/or debt repayments are significantly lower than currently expected and the recovery of the key credit metrics is pushed materially beyond 2018.

In conclusion, the acquisition on balance should support DBRS’s BBB (high) rating for CNRL. At the current time, DBRS has placed the rating Under Review with Developing Implications pending the closing of the transactions. With successful completion and assuming an outlook that continues to support a WTI oil price around or above USD 50/bbl, DBRS is likely to maintain CNRL’s BBB (high) Issuer Rating and Unsecured Long-Term Debt rating, and R-2 (high) rating for the Company’s Commercial Paper.

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 principal methodologies used are Rating Companies in the Oil and Gas Industry (September 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2017), which can be found on dbrs.com under methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.