DBRS Confirms Crew Energy Inc. at B, Stable

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Crew Energy Inc. (Crew or the Company) at B and with Stable trends. The recovery rating for the Notes remains unchanged at RR4. The rating is underpinned by the Company’s business profile that is consistent with a B rating. The Company’s primary focus is developing liquids-rich natural gas from the Montney formation in Northeastern British Columbia (NEBC). Following dispositions in 2014 and 2015, the Company’s average daily production increased 23% in 2016 to 23 thousand barrels of oil equivalent per day (mboe/d) and is expected, based on Company guidance, to rise slightly in 2017 to average 23 mboe/d to 24 mboe/d and to grow further in 2018. The Company’s current size is within the B range. The Company also has a significant inventory of drilling locations that can add production with additional development of the Montney. The Company’s capital and operational flexibility supports the rating as it operates the majority of its production and owns and operates the related gas processing facilities. However, the Company’s heavy concentration of reserves and production in NEBC and higher weighting of production toward lower valued natural gas (74% on a boe basis for the year to date September 30, 2017) are a constraint. The Company’s key financial metrics, notably the lease-adjusted debt/cash flow ratio of 3.04 times for the last 12 months ended September 30, 2017, are consistent with the B rating range. DBRS notes that the Company’s key financial metrics should improve further with additional production growth and higher anticipated prices for liquids production.

Crew’s liquidity is adequate and supported by a $235 million borrowing base credit facility. As at September 30, 2017, $31.7 million was drawn on the facility and $8.2 million in letters of credit were backed by the facility. The Company recently finished a semi-annual review with no change to the borrowing base. The facility revolves for a 364-day period and will be subject to the next 364-day extension by June 6, 2018. Earlier this year, the Company issued $300 million of new Notes due 2024. The proceeds were used to redeem $150 million of Notes due in 2020 and to reduce debt drawn on the credit facility thus enhancing the Company’s liquidity profile.

DBRS notes that based on a capital spending program of $235 million for 2017 ($202 million spent to date) the Company is expected to incur a free cash flow deficit (cash flow after capital spending) for the year in excess of $100 million. The projected deficit is expected to be funded by the issue of the 2024 notes and $49 million of asset sales which were completed earlier this year. DBRS anticipates the Company to use its capital expenditure flexibility in 2018 to mitigate additional sizable free cash flow deficits to preserve liquidity and maintain the Company’s key credit metrics commensurate with the rating. However, the Company’s cash flow is very sensitive to natural gas price changes and, to a lesser degree, changes in the price of crude oil and natural gas liquids. Should the price of West Texas Intermediate (WTI) weaken materially to USD 40 per barrel or less and the Company realizes a price on average for its natural gas sales volumes of $2/mcf or less for an extended period of time, DBRS may consider 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 under Related Documents 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: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2017), which can be found on www.dbrs.com under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.