DBRS Morningstar Removes Ratings of Canadian Natural Resources Limited from Under Review–Negative, Confirms at BBB (high), Negative

DBRS Limited (DBRS Morningstar) removed the ratings of Canadian Natural Resources Limited (CNRL or the Company) from Under Review with Negative Implications. At the same time, DBRS Morningstar confirmed CNRL’s Issuer Rating, Unsecured Long-Term Debt rating, and Commercial Paper rating at BBB (high), BBB (high), and R-2 (high), respectively. All trends are Negative.

On March 26, 2020, DBRS Morningstar had placed all ratings of CNRL Under Review with Negative Implications. This was in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, (3) the impact of production cuts recently implemented by OPEC Plus, and (4) measures taken by the Company to adjust for the weaker price environment. Today’s rating actions follow DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.

The rating confirmations account for CNRL’s (1) significant production base, which was 1.18 million barrels of oil equivalent/day in Q1 2020; (2) long-life, low-decline oil reserves; (3) efficient and low-cost oil sands, heavy oil, and conventional oil and gas production; (4) high level of capital and operating flexibility; and (5) well-diversified production mix. The key business factors tempering the ratings include the Company’s exposure to the volatile Western Canadian light-heavy oil-price differential and high concentration of assets in Western Canada.

The Company’s cash flow is sensitive to the heavy-light oil-price differential and changes in the price of West Texas Intermediate (WTI) oil. As a result of the recent severe decline in crude oil prices, the Company’s key credit metrics have been under significant pressure and, at current oil-price levels, are well below the BBB range. The Company has taken steps to reduce operating and overhead costs, decrease capital spending, and protect the balance sheet to manage through the current challenging environment. The Company has cut planned 2020 capex to $2.68 billion from its original plan of $4.05 billion and targeted $0.75 billion of annual operating cost savings this year. Also, the Company believes the current level of dividends can be sustained through the commodity price cycle. Because of the Company’s long-life, low-decline oil reserves (Company-estimated corporate decline rate of 10% per annum), less capital is required to sustain production levels. The Company estimates its free cash flow (FCF; cash flow after capex and dividends) WTI breakeven oil price to be approximately USD 31.00/barrel (bbl), which would be the lowest among its peers.

CNRL has sufficient liquidity. At the end of March 2020, the Company had $5.0 billion of available liquidity, which includes capacity on its unsecured revolving credit facilities and $1.1 billion of cash and cash equivalents. In addition, the Company has other sources of liquidity to draw on. The Company also has $1.9 billion of bonds maturing this year.

DBRS Morningstar expects CNRL’s key credit metrics under its base-case commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) to be weak in 2020 before recovering in 2021 and strengthening further in 2022. DBRS Morningstar assumes a more normalized operating environment by 2022 and anticipates the price of WTI oil reaching the USD 50.00/bbl level, the bottom end of DBRS Morningstar’s deemed midcycle pricing scenario. DBRS Morningstar projects a modest FCF deficit in 2020 with projected FCF surpluses growing in 2021 and 2022. The Company is prioritizing the use of FCF surpluses for debt reduction and targeting to reduce indebtedness to approximately $15 billion (excluding capitalized operating lease obligations). At the end of March 2020, total debt, including $1.75 billion of capitalized operating leases, was $24.4 billion.

In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to a more normalized operating and pricing environment. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an overall BBB (high) rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices will fall short of DBRS Morningstar’s base-case price assumptions and that CNRL’s overall financial risk profile will not support the current ratings. The Negative trends are a reflection of this risk, which DBRS Morningstar currently deems to be elevated.

DBRS Morningstar will likely change the trends to Stable if the demand/supply fundamentals in crude oil markets continue to improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics will recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 23, 2019); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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