DBRS Confirms Crew Energy Inc. at B with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes (the Notes) rating of Crew Energy Inc. (Crew or the Company) at B with Stable trends. The recovery rating for the Notes remains unchanged at RR4. The ratings are underpinned by the Company’s (1) current size (production in 2018 estimated to average at the midpoint of guidance of 24,000 barrels of oil equivalent/day (boe/d); (2) capital and operational flexibility, as the Company operates the majority of its production and related processing facilities; (3) significant inventory of drilling locations that could provide a source of future production; and (4) key credit metrics that are consistent with the B rating range. Moderating the ratings is the Company’s heavy concentration of reserves and production in Northeastern British Columbia and higher weighting of production toward lower valued natural gas (75% on a boe basis for year-to-date September 30, 2018), although the Company has secured transportation capacity in order to diversify its natural gas sales and attain better pricing outside Western Canada. The Company’s key financial metrics, notably the lease-adjusted debt-to-cash flow ratio of 3.40 times (x) for the last 12 months ended September 30, 2018, are within B range. DBRS expects the Company’s key financial metrics to remain within the current rating category over the medium term.

Crew’s liquidity is adequate and supported by a $235 million borrowing base credit facility. As at September 30, 2018, $49.3 million was drawn on the facility; $29.4 million in letters of credit were also backed by the facility. The Company is finalizing a semi-annual borrowing base review with its lenders with no change to the borrowing base expected. The facility revolves for a 364-day period and will be subject to the next 364-day extension by June 5, 2019.

DBRS anticipates 2018 operating cash flow to primarily line up with the Company’s $90 million to $95 million planned net capital spending program (capital spending (capex) net of $10 million of dispositions completed earlier this year). Any modest deficit that may be incurred is expected to be funded by capacity available on Crew’s credit facility. DBRS also notes Crew’s ability to flex its capex. The Company has indicated plans to adjust its capital program in 2019 to align with operating cash flow in order to mitigate any possible sizable free cash flow deficits, preserve liquidity and maintain the Company’s key credit metrics commensurate with the rating. Nonetheless, the Company’s cash flow is sensitive to natural gas price changes and, to a lesser degree, a change in the price of crude oil and natural gas liquids. Should the price of West Texas Intermediate oil weaken materially to USD 40 per barrel or less and the Company realizes an average price for its natural gas sales of $2/thousand cubic feet or less for an extended period, DBRS may consider a negative rating action.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industry (August 2018) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (October 2018), which can be found on www.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 did have 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 addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.