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

DBRS, Inc. (Morningstar DBRS) confirmed Canadian Natural Resources Limited's (CNRL or the Company) Issuer Rating and Unsecured Long-Term Debt rating at A (low) and its Commercial Paper rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
CNRL's operating performance in 2023 was in line with Morningstar DBRS' expectations. Despite the impact of wildfires in the first half of 2023, total equivalent production for the entire year was 4% higher relative to 2022. While energy commodity prices were approximately 18% lower in 2023 relative to 2022, the Company produced a free cash flow (FCF; cash flow after capital expenditures (capex) and dividends) surplus of $5.97 billion before changes in working capital. A large portion of the surplus went toward returning capital to shareholders while a modest amount was used to reduce total lease-adjusted debt. While the Company's key credit metrics weakened modestly in 2023 because of lower commodity prices, they remained sufficient for supporting the credit ratings. CNRL reached its net debt target of $10 billion at year-end (YE) 2023. Therefore, the Company plans to allocate 100% of its FCF surplus in 2024 to share repurchases. Net debt is defined as debt before adjustment for operating leases and net of cash. Consequently, Morningstar DBRS expects lease-adjusted debt to remain at or near current levels.

CREDIT RATING DRIVERS
A positive credit rating action is unlikely in the medium term since this would require a material improvement in the Company's business risk profile, which is already very strong. A negative credit rating action is possible if oil prices weaken materially and the Company's debt-to-cash flow ratio stays above 1.50 times for an extended period.

EARNINGS OUTLOOK
The midpoint of the Company's 2024 targeted gross production (before royalties) is 1,355 million barrels of oil equivalent per day (MMboe/d), which is approximately 2% higher relative to 2023 average gross production. Based on Morningstar DBRS' base-case West Texas Intermediate (WTI), Western Canadian Select, and New York Mercantile Exchange price assumptions of USD 75/barrel (bbl), USD 60/bbl, and USD 2.50/thousand cubic feet, respectively, for 2024, Morningstar DBRS expects the Company's EBITDA and EBIT to decline modestly relative to 2023.

FINANCIAL OUTLOOK
With a budgeted capex program of $5.4 billion in 2024 and based on a WTI oil price averaging USD 75/bbl, USD 60/bbl, and USD 60/bbl in 2024, 2025, and 2026, respectively, Morningstar DBRS expects CNRL to generate FCF surpluses, albeit smaller surpluses relative to 2022 and 2023. Since the Company achieved its net debt target of $10 billion at YE2023, Morningstar DBRS expects the Company to allocate 100% of its FCF surplus in 2024 to share repurchases. Based on Morningstar DBRS' base-case commodity price assumptions, it expects CNRL's key credit metrics to remain supportive of the Company's credit ratings.

CREDIT RATING RATIONALE
The credit ratings are underpinned by the Company's (1) significant production base of more than net 1.1 MMboe/d; (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 operations; (4) capital and operating flexibility; and (5) well-diversified production mix. Factors that temper the credit ratings include (1) the Company's exposure to the more volatile Western Canadian light/heavy oil price differential, (2) its high concentration of assets in Western Canada, and (3) increasing environmental regulations and costs to reduce greenhouse gas (GHG) emissions.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considers the impact of both physical and transition risks associated with climate change, with the transition risk deemed to be more substantial. Morningstar DBRS 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 oil and gas companies in Canada, and in particular for CNRL, which has greater exposure to more carbon-intensive oil sands developments. CNRL is addressing the challenge and has set a target to reduce Scope 1 and Scope 2 GHG emissions by 40% by 2035 (relative to a 2020 baseline). CNRL is also targeting net zero GHG emissions at its oil sands operations by 2050 through the Pathways Alliance. CNRL's emissions reduction strategy is focused on carbon capture, utilization, and storage projects; reduction in methane emissions; and technological innovation. Morningstar DBRS notes that CNRL has deleveraged materially over the last three years and built up its balance sheet strength to give it the much-needed financial flexibility to navigate the energy transition.

There were no Social or Governance factors that had a significant or relevant 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 CNRL, the BRA factors were considered in the order of importance contemplated in the methodology.

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

(C) Weighting of the BRA and the FRA
In the analysis of CNRL, the BRA carries greater weight than the FRA.

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 of 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 following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

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 credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429