Morningstar DBRS Confirms Crew Energy Inc.’s Issuer Rating at B (high) with Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Crew Energy Inc. (Crew or the Company) at B (high) with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The Company's key credit metrics strengthened further in 2023, despite liquids and natural gas prices declining in comparison with the year prior. This improvement was a result of the Company reducing its debt by redeeming its previously remaining $172 million Senior Secured Notes (the Notes) outstanding in April 2023. Total production decreased to 30,178 barrels of oil equivalent per day (boe/d) from 33,277 boe/d in 2022, as the Company slowed natural gas production because of the weaker natural gas market and increased its condensate production. This is expected to continue, as Crew is aiming to increase its condensate production by 15% and reduce its gas production by 5% in 2024 compared with 2023. In the longer term, the Company reiterated its plan to increase production to more than 60,000 boe/d by 2027 by moving forward with its Groundbirch project if market conditions are favourable.

CREDIT RATING DRIVERS
A rating upgrade is not likely in the medium term absent a material improvement in Crew’s business risk profile. Such an upgrade could occur if production increases materially. A negative credit rating action could ensue if liquids and natural gas prices fall materially and remain weak for an extended period of time, causing the Company's key credit rating metrics to weaken significantly as well.

EARNINGS OUTLOOK
Crew is guiding for an average production of 29,000 boe/d to 31,000 boe/d in 2024, with a liquids concentration of approximately 27%. This is higher than the liquids concentration of approximately 23% in 2023 because of the Company's expectation of a continuing weak natural gas market. Morningstar DBRS expects earnings in 2024 to be slightly lower compared with 2023, primarily because of lower crude oil and natural gas price assumptions. In the past, Crew’s hedging policy has helped it weather periods of low liquids and natural gas prices. The Company has hedged approximately 30% of its expected liquids production in 2024. Morningstar DBRS notes that its base-case natural gas price assumptions are higher than current spot prices. Given that the Company has hedged less than 2% of natural gas production, earnings may be modestly lower than forecast.

FINANCIAL OUTLOOK
Crew's 2024 total capital expenditure (capex) guidance is $165 million to $185 million. Based on its base-case commodity price assumptions, Morningstar DBRS expects Crew to be close to cash flow neutral in 2024 and 2025. After the early redemption of the remaining $172 million principal amount of the Notes in April 2023, Crew’s total debt at December 31, 2023, was $75.5 million, which consisted of a $74.3 million draw on its credit facility. Taking into account current weak natural gas prices, Morningstar DBRS expects the Company's key financial metrics will remain strong and support the credit rating.

CREDIT RATING RATIONALE
The credit rating confirmation and Stable trend reflect Morningstar DBRS' view that no material changes to Crew's fundamentals are expected in the near term and that the Company's financial risk profile will remain strong and continue to provide an uplift to the overall rating. The Issuer rating is underpinned by (1) the Company's size (2024 production estimated at 30,000 boe/d based on the midpoint of Crew's guidance); (2) capital and operational flexibility; and (3) significant inventory of economic drilling opportunities that enables the Company to maintain or grow production.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
The following Environmental factor(s) had a relevant effect on the credit analysis: Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Crew. This factor is relevant because the ever-increasing environmental regulations targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies. To address these concerns, Crew has set up its Governance and Environment, Health, Safety, and Sustainability Committee, which has oversight of the Company's ongoing ESG and sustainability performance. In addition, Crew has set a number of goals and targets relative to emissions, water, land and biodiversity, and abandonment and restoration.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Crew, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Crew, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Crew , the BRA and the FRA carry approximately equal weight.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (April 15, 2024), https://dbrs.morningstar.com/research/431177.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS did have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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