DBRS Confirms Canadian Natural Resources Limited at BBB (high), Stable Trends

DBRS Limited (DBRS) 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. The ratings are underpinned by the Company’s (1) significant size following the acquisition last year of a 70% interest in the Athabasca Oil Sands Project (AOSP); (2) long-life low decline reserve base; (3) low cost oil sands, heavy oil and conventional oil and gas production base; (4) improved capital and operating flexibility, particularly with completion of the Horizon Phase 3 expansion last year; and (5) extensive and diversified asset base with growth potential in a lower price environment. Factors tempering the rating include exposure to the volatility of the Western Canadian heavy-light oil price differential, high concentration of assets in Western Canada and higher financial leverage.

After completing the acquisition of interests in the AOSP project, the Company has prioritized reducing financial leverage incurred from the acquisitions. The Company’s lease-adjusted debt/cash flow ratio has declined from 4.37 times (x) as at the end of 2016 to 3.35x at the end of 2017 and 3.02x as at the last 12 months ended March 31, 2018. However, this ratio remains outside the BBB range, as does the lease-adjusted earnings before interest and taxes interest coverage ratio. The lease-adjusted debt/capital ratio is within the BBB range. Going forward, the Company plans to target a sizable proportion of free cash surpluses (cash flow after dividends and capital expenditures (capex)) to debt reduction. At DBRS’s base case forecast for a West Texas Intermediate oil price of USD 55 per barrel (bbl), a Western Canada Select price of USD 40/bbl, an Alberta spot natural gas price benchmark of 2.25/thousand cubic feet and Company capex guidance ($4.3 billion in 2018), CNRL can generate considerable excess free cash flow in 2018 (over $3.0 billion estimated by DBRS) and 2019. In combination with expected higher cash flow, the key credit metrics should improve further and support the Company’s BBB (high) rating.

The Company’s cash flow is sensitive to volatility in the price of oil and the heavy-light oil price differential. The base corporate decline rate (estimated at 9% per annum) helps mitigate this volatility. Nevertheless, if the price of WTI oil drops to the USD 40/bbl level or below and remains there for an extended period, the Company’s credit metrics would come under pressure. DBRS may then be compelled to take a negative rating action. In DBRS’s opinion, the Company has sufficient liquidity to manage price volatility. As at March 31, 2018, the Company had $3.8 billion available on its credit facilities and no significant future capital commitments. It also had publicly traded equity holdings with a book value of $0.8 billion, which could be monetized. Through the end of 2019, the Company has approximately $4.0 billion of debt maturing (including $0.64 billion of Commercial Paper) that could be funded with available sources of liquidity, anticipated free cash flow surpluses and/or accessing the capital markets.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2017), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018), which can be found on dbrs.com under Methodologies.

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 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.

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