DBRS Confirms Ratings of Canadian Natural Resources Limited

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 the Company’s Commercial Paper rating at R-2 (high). All trends are Stable. DBRS has also removed all of CNRL’s ratings from Under Review with Developing Implications where they were placed on March 9, 2017. The rating actions follow the May 31, 2017, close of CNRL’s acquisition of an aggregate 70% interest in the Athabasca Oil Sands Project (AOSP), including a 70% interest in the Scotford upgrader and the Quest Carbon Capture and Storage Project, as well as additional working interests in producing and non-producing oil sands leases from both Shell Canada Limited (Shell Canada) and Marathon Oil Corporation (Marathon Oil). The aggregate consideration comprised (1) 97.56 million common shares of CNRL issued to Shell Canada, (2) a combined pre-adjustment cash payment of $8.24 billion to Shell Canada and Marathon Oil and (3) a deferred payment of USD 375 million to Marathon Oil that is due in the first quarter of 2018.

The cash payment for the acquisition was funded by a $3 billion three-year term loan facility and recent unsecured note offerings of $1.8 billion in the Canadian capital markets and USD 3.0 billion in the U.S. market. The acquisition adds (1) net 196,000 barrels/day (bbls/d) of mined bitumen capability from the AOSP project and about 13,800 bbls/d of heavy oil production and (2) approximately 2.1 billion barrels of net proven reserves. As a reference point, CNRL’s first quarter production (excluding the acquisition) was net 797,529 barrels of oil equivalent (boe) per day, and year-end 2016 proven reserves were net 5.3 million boe.

DBRS notes that the acquisition strengthens and broadens CNRL’s position as a top-tier producer and developer of oil sands in Canada. At the same time, CNRL initially incurs higher financial leverage. Pro forma total debt (including the deferred payment) rises by 53% to approximately $25 billion at March 31, 2017. Cash flow with the contribution from the acquired assets does not rise proportionately. As a result, the pro forma debt-to-cash flow ratio increases to a level well beyond the BBB range. Assuming the price of West Texas Intermediate (WTI) oil is over USD 50/bbl through 2018, CNRL can produce significant positive free cash flow (cash flow after capex and dividends) to apply to debt reduction. By 2018, CNRL’s debt-to-cash-flow ratio based on DBRS’s estimates should decline to a level commensurate with the BBB range. However, the Company’s cash flow is highly sensitive to oil price changes and the light/heavy oil differential. If the price of WTI oil drops well below USD 50/bbl for an extended period, reaching a debt-to-cash flow ratio within the BBB range would be at risk.

In addition to considering the impact of the acquisition, the confirmation of DBRS’s ratings reflects CNRL’s (1) existing long-life low decline reserve base, (2) leading position as a low-cost operator of oil sands projects and conventional oil and gas in Canada, (3) increasing capital spending flexibility as the phase 3 expansion at the Horizon Oil sands project reaches completion and (4) extensive and diverse asset base with growth potential even in a lower price environment. However, should oil prices erode materially and/or debt repayments are significantly lower than expected thus deferring recovery in the Company’s key credit metrics, DBRS may be compelled to take a negative rating action.

Notes:
All figures are in Canadian dollar 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 are Rating Companies in the Oil and Gas Industry (September 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on dbrs.com 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.