DBRS Morningstar Confirms Issuer and Unsecured Long-Term Debt Ratings on Canadian Natural Resources Limited at A (low) and Commercial Paper Rating at R-1 (low), Stable

DBRS Limited (DBRS Morningstar) confirmed Canadian Natural Resources Limited's (CNRL or the Company) Issuer Rating and Unsecured Long-Term Debt rating at A (low) as well as the Commercial Paper rating at R-1 (low). All trends are Stable. The rating confirmations reflect the Company's strong key credit metrics that support an A (low) rating. The Company's credit metrics have improved materially since 2020 as cash flow has rebounded primarily because of stronger crude oil prices as the negative economic impact from the Coronavirus Disease (COVID-19) pandemic has abated combined with the deployment of a large portion of the Company’s material free cash flow (FCF; cash flow after capital expenditures (capex) and dividends) surplus from the past two years to deleverage the balance sheet.

The ratings are underpinned by the Company's (1) significant production base of more than net 1.0 million barrels of oil equivalent per day; (2) long-life, low-decline oil reserves that require less capital to sustain production levels; (3) efficient and low-cost oil sands, heavy oil, and conventional oil and gas (O&G) operations; (4) capital and operating flexibility; and (5) well-diversified production mix. Factors that temper the ratings include the Company's exposure to the more volatile Western Canadian light-heavy oil price differential, high concentration of assets in Western Canada, and increasing environmental regulations and costs to reduce greenhouse gas (GHG) emissions.

Over 2022, the Company produced a FCF surplus of $9.16 billion before changes in working capital. The Company used a portion of the surplus to reduce total lease-adjusted debt to less than $13 billion at YE2022. This improved the key lease-adjusted debt-to-cash flow ratio to 0.68 times (x) in 2022 from 1.20x in 2021. The remaining FCF surplus went largely toward returning capital to shareholders.

The Company's estimated West Texas Intermediate (WTI) oil price per barrel (bbl) cash flow breakeven, after base maintenance capex and dividends, is in the low 40s, the lowest within its Canadian peer group. Based on DBRS Morningstar's average WTI oil price forecast of USD 65/bbl in 2023 and USD 60/bbl in 2024, cash flow is likely to decline from the elevated level in 2022. Factoring in the Company's $5.21 billion budgeted capex program for 2023, DBRS Morningstar projects a modest FCF surplus for the year. When net debt is between $10 billion and $15 billion, as it is now, the Company plans to allocate 50% of its FCF surplus to share repurchases and 50% to debt reduction after accounting for strategic growth capital and opportunistic acquisitions. When net debt reaches $10 billion, the Company plans to allocate 100% of its FCF surplus to shareholder returns. Net debt is defined as debt before adjustment for operating leases and net of cash. DBRS Morningstar anticipates, based on its base-case commodity price assumption, the Company's key lease-adjusted debt-to-cash flow ratio to stay below 1.5x (“A” range or better) over the next two years.

An upgrade over the near to medium term is unlikely. However, should oil prices weaken materially (below USD 45/bbl) and stay weak for an extended period, DBRS Morningstar may take a negative rating action. CNRL has sufficient liquidity with $5.52 billion undrawn on its revolving credit facilities as at March 31, 2023, and a reasonably spread out debt maturity schedule.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental Factors
DBRS Morningstar considered carbon and GHG costs as a relevant environmental factor for CNRL. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all O&G companies in Canada and in particular for CNRL, which has greater exposure to more carbon-intensive oil sands developments. Mitigating the impact on CNRL is its investment in three carbon capture and storage facilities in Alberta. DBRS Morningstar also notes CNRL is in a much better position today to face the challenges associated with reducing GHG emissions than it was two years ago. CNRL has deleveraged materially and built up the balance sheet strength to give it the necessary financial flexibility to navigate the energy transition.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodologies:

-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022; https://www.dbrsmorningstar.com/research/402196)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at:: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

DBRS Morningstar 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 [email protected].

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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