DBRS Morningstar Confirms Ratings on Crew Energy Inc. at B (low); Trends Remain Negative

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Crew Energy Inc. (Crew or the Company) at B (low). DBRS Morningstar also confirmed Crew’s Senior Unsecured Notes rating at B (low) with a Recovery Rating of RR4. All trends are Negative. The ratings are underpinned by the Company’s (1) current size (2020 production estimated to average (at the midpoint of guidance) 21,500 barrels of oil equivalent (boe) per day); (2) capital and operational flexibility, as the Company operates the majority of its production and owns interests in the related processing facilities; and (3) significant inventory of drilling locations that provides a source of future production growth. The ratings are constrained by the Company’s heavy concentration of reserves and production in Northeastern British Columbia (NEBC) in the Montney play and the current higher weighting of production toward lower-valued natural gas (71% on a boe basis for year-to-date (YTD) September 30, 2020), although DBRS Morningstar notes that the Company has been able to attain better pricing relative to spot gas prices in western Canada because of its diversified exposure to multiple gas markets and successful hedging program.

As a result of the significant weakness in liquids prices this year and the continued weakness in natural gas prices, the Company’s key financial metrics over the last twelve months (LTM) ended September 30, 2020 (LTM 2020) are well below the B range. Crew’s lease-adjusted debt-to-cash flow for the LTM 2020 has risen to 8.30 times (x), compared with 4.49x for F2019 and 3.91x for F2018. Furthermore, the lease-adjusted EBIT interest coverage has deteriorated to -0.42x for the LTM 2020 from 0.77x in 2019 and 1.16x in 2018.

After spending $45 million on capital expenditures (capex) during the first nine months of 2020, due to the extreme weakness in commodity markets, Crew has guided for capex of $40 to $45 million for Q4 2020 with the recent strengthening in natural gas prices as supply/demand fundamentals in North American markets improve. During 2021, the Company expects to align capex with an anticipated improvement in natural gas and liquids pricing with spending targeted to higher natural gas weighted development activities in the Montney region of NEBC.

Crew has managed its liquidity position reasonably well. As a result of a strategic infrastructure transaction involving interests in its two natural gas processing facilities in 2020, the Company has received total net proceeds of $58 million that have been used to reduce debt and fund capex. As part of the transaction, Crew committed to multiyear natural gas processing agreements. The Company also has an option (between June 2021 and June 2023) to enter into a 20-year natural gas processing agreement and convert an additional 11.43% interest in the two facilities for up to $37.5 million. At the end of Q3 2020, Crew had drawn $42.1 million on its banking facility, with $12.1 million in letters of credit also backed by the facility. A semiannual borrowing base review has recently been completed and the bank facility was reconfirmed at $150 million after a reduction from $235 million at the last semiannual borrowing base review in early June. The Company's Senior Unsecured Notes do not mature until March 2024 and do not have any financial maintenance covenants.

Based on DBRS Morningstar's revised commodity price forecast, the Company's credit metrics are expected to be very weak for 2020 before recovering in 2021 and strengthening further in 2022, supported by expectations of stronger natural gas price realizations through 2021 and 2022 and expected stronger liquids pricing by 2022. In assessing Crew’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 normal operating and pricing environment by 2022. On this basis, and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports a B (low) rating. The risk, in DBRS Morningstar’s view, is that a recovery in liquids and natural gas prices could fall well short of DBRS Morningstar’s base-case price assumptions. 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 liquids and natural gas 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, should liquids and natural gas price realizations fall well below DBRS Morningstar’s base-case expectations and, as a result, the Company’s key credit metrics do not support a B (low) rating, DBRS Morningstar will likely take a negative rating action.

ESG CONSIDERATIONS
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 17, 2020); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020); and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (August 24, 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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