DBRS Confirms Canadian Natural Resources Limited at BBB (high)/R-2 (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 confirmations of the ratings reflect CNRL’s (1) significant production base (pro forma Q1 2019 gross production of about 1.16 million barrels of oil equivalent/day including the acquisition of Devon Canada Corporation’s (Devon) assets; (2) long-life low decline reserves; (3) efficient and low cost oil sands, heavy oil and conventional oil and gas production base; (4) high level of capital and operating flexibility after completing the Horizon Phase 3 Expansion in late 2017; and (5) well-diversified production mix. Factors moderating the ratings include the Company’s exposure to the volatile Western Canadian heavy-light oil price differential plus a high concentration of assets in Western Canada.

CNRL is focused on producing free cash flow surpluses (cash flow after capital spending (capex) and dividends) and balancing the allocation of surpluses between debt reduction and share repurchases. The Company’s lease-adjusted debt/cash flow ratio has improved to 2.46 times (x) at the end of 2018, from 3.35x at the end of 2017, and was 2.57x as of the last 12 months (LTM) ended March 31, 2019. This ratio remains outside the BBB range. The lease-adjusted earnings before interest and taxes interest coverage ratio of 5.42x over the LTM is at the lower end of the BBB range. The acquisition of assets from Devon, which is expected to close at the end of June 2019, initially causes a minor upturn in financial leverage. However, financial leverage is then anticipated to resume declining. At DBRS’s base case oil and natural gas price forecasts and the Company’s 2019 capex guidance of $3.8 billion (including capex associated with the acquisition of Devon’s assets), CNRL should be able to generate a sizable free cash flow surplus in 2019 (close to $4.0 billion estimated by DBRS) that can be deployed to initially fund the acquisition and the balance split between share repurchases and debt reduction. Consequently, the Company’s key credit metrics are likely to improve further and support the Company’s BBB (high) ratings.

The Company’s cash flow is sensitive to the volatile heavy-light oil price differential and to the West Texas Intermediate (WTI) oil price overall. Should the price of WTI oil drop to the low forties for an extended period, the Company’s credit metrics would come under pressure and DBRS may have to take a negative rating action. As a buffer, the Company has sufficient liquidity ($4.1 billion available on its credit facilities as at March 31, 2019) and it holds publicly traded investments with an estimated market value of approximately $0.6 billion that can be monetized. Also, the Company’s low decline rate reduces the amount of capex required to maintain production. The Company has approximately $1.7 billion of debt maturing (including $667 million of Commercial Paper) in 2019.

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 2018), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

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.

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

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