DBRS Morningstar Downgrades Ratings on Crew Energy Inc. to B (low), Negative Trend; Removes Under Review with Negative Implications Status

DBRS Limited (DBRS Morningstar) downgraded Crew Energy Inc.’s (Crew Energy or the Company) Issuer Rating to B (low) from B and the rating on its Senior Unsecured Notes (the Notes) to B (low) from B with a recovery rating of RR4. All trends are Negative. DBRS Morningstar also removed Crew Energy’s ratings from Under Review with Negative Implications, where they were placed on March 26, 2020.

DBRS Morningstar placed Crew Energy’s ratings Under Review with Negative Implications in response to the extreme decline in prices 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 pandemic on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, and (3) the impact of production cuts recently implemented by OPEC+. The downgrade accounts for DBRS Morningstar’s expectation that Crew Energy’s key credit metrics will be weak and below the threshold to support a B rating under DBRS Morningstar’s revised commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary titled “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”).

Based on its price forecast, DBRS Morningstar expects the Company’s credit metrics to remain weak through 2021 before recovering and strengthening by 2022. Crew Energy has taken a number of actions to mitigate the severe commodity price declines, including reducing capital spending in 2020 (company guidance of $35 million to $40 million versus net capital expenditures of $95 million in 2019) and reducing overhead and operating costs. Based on its outlook, DBRS Morningstar expects natural gas prices in Western Canada to be relatively more steady through 2022. Since approximately 70% to 75% of the Company’s production mix (depending on the level of shut-in production) is natural gas, this should provide some relief from the downward pressure on revenue caused by weak crude oil and liquids prices. Crew Energy’s guidance for production this year is 20,000 barrels of oil equivalent per day (boe/d) to 22,000 boe/d which, at the midpoint, is 8% lower than average production volumes in 2019. The Company shut in up to 4,300 boe/d of lower-margin production during a period in May and continues to manage production due to volatile and weak commodity prices.

In spite of the pressure on cash flow and the key credit metrics, Crew Energy has managed its liquidity position reasonably well. As a result of a strategic infrastructure transaction announced earlier in 2020 involving interests in the Company’s two natural gas-processing facilities, Crew Energy received initial proceeds of $35 million in Q1 2020 that it used to primarily reduce debt. The Company expects to receive additional net cash proceeds of $23 million in Q4 2020, which it will also use primarily for debt reduction. As part of the transaction, Crew Energy committed to multiyear natural gas-processing agreements. The Company also has an option, exercisable between January 2021 and June 2023, to dispose of up to an additional 11.43% interest in the two facilities for consideration of up to $37.5 million. If the option is exercised, Crew Energy would be required to enter into a 20-year processing commitment with the purchaser. At the end of Q1 2020, the Company had drawn $31.0 million on its revolving bank credit facility with $11.4 million in letters of credit that the facility also backs. Crew Energy recently completed a borrowing base review of its facility and, given the weak price environment, the capacity will likely be reduced from the borrowing base of $235 million at year-end 2019. Furthermore, $300 million of Notes do not mature until March 2024 and there are no financial covenants on the Notes.

Supporting the B (low) rating are the Company’s (1) capital and operational flexibility as it operates the majority of its production; (2) significant inventory of drilling locations that could provide a source of future production; and (3) ability to optimize pricing for its natural gas production with takeaway pipeline capacity secured to access U.S. markets in addition to its ability to sell in Western Canada if pricing is better. The limitation on the ratings, in addition to the weak credit metrics, is the Company’s heavy concentration of reserves and production in Northeastern British Columbia in the Montney liquids-rich natural gas resource play.

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, Crew Energy’s credit profile supports the downgrade to B (low) from B. In DBRS Morningstar’s view, the risk is that a recovery in crude oil and liquids prices falls short of DBRS Morningstar’s base-case price assumptions and that Crew Energy’s overall financial risk profile will not support a B (low) rating. The Negative trends reflect 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 and liquids markets continue to improve, leading to greater confidence that commodity prices and consequently the Company’s key credit metrics recover in line with DBRS Morningstar’s base-case assumptions. Conversely, if oil prices and Crew Energy’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar may 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 Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 22, 2019), 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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