Morningstar DBRS Assigns Issuer Rating of BBB (low) With a Stable Trend to Whitecap Resources Inc.

DBRS, Inc. (Morningstar DBRS) assigned an Issuer Rating of BBB (low) with a Stable trend to Whitecap Resources Inc. (Whitecap or the Company).

KEY CREDIT RATING CONSIDERATIONS
The Company's Issuer Rating is supported by its higher-value light-oil production, which should remain consistent at about 65% of total production (expected to be near the high end of its 167,000 to 172,000 barrels of oil equivalent per day (boe/d) guidance range for full-year 2024); relatively low decline rates and an ability to quickly adjust capital expenditures (capex) and production to the prevailing commodity price environment; strong financial risk profile; and carbon capture projects that impart a favorable environmental, social, and governance (ESG) risk profile. Key challenges include Whitecap's small size relative to investment grade-rated peers and lack of natural gas processing infrastructure that would provide the Company with more price diversification. The Stable trend reflects Morningstar DBRS' expectation that Whitecap's financial risk profile will continue to provide strong support to the credit rating under Morningstar DBRS' base-case price assumptions, which are available in the "Oil and Gas Fundamentals Diverge: Geopolitical Uncertainty Supports Crude Prices, Excess Inventory Overhangs the Gas Market," commentary published on May 2, 2024.

CREDIT RATING DRIVERS
A credit rating upgrade would require a material improvement in the Company's business risk profile, especially its production size and scale, proved reserves, and operating efficiency. Given the uplift that Whitecap's financial risk profile provides to the overall credit rating, a material weakening in oil prices that causes the Company's lease adjusted debt-to-cash flow ratio to stay above 2.0 times (x) for an extended period could result in a negative credit rating action.

EARNINGS OUTLOOK
Whitecap expects up to a 10% increase in production in 2024, near the high end of its 167,000 to 172,000 boe/d guidance range in 2024, from an average of 156,500 boe/d in 2023. The forecast increase in production will be driven by organic growth across the Company's portfolio of liquids-rich unconventional Montney and Duvernay formation assets in Northwest Alberta and British Columbia as well as its light-oil, low-decline rate conventional assets in Central Alberta and Saskatchewan. Despite an expectation of strong production growth, Morningstar DBRS forecasts Whitecap's net revenue to slightly increase by about 1% to between $3.2 billion and $3.3 billion and EBITDA margin to remain nearly unchanged at about 60% in 2024. Lower crude oil and natural gas price assumptions will largely offset the increase in annual production and modest reduction in unit operating costs that Morningstar DBRS anticipates for 2024.

FINANCIAL OUTLOOK
Whitecap's 2024 total capex guidance is $1.0 billion to $1.1 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts that Whitecap will generate free cash flow (FCF; i.e., cash flow after capex and dividends) surpluses in 2024 through 2026. At June 30, 2024, the Company's total debt was $1.2 billion. Although Whitecap is expected to allocate a significant portion of its FCF surplus to share repurchases, Morningstar DBRS expects the Company to maintain a lease-adjusted debt-to-capital ratio below 20% through 2026. Whitecap has sufficient liquidity. As at September 19, 2024, the Company had about $1.0 billion drawn on its $2.0 billion unsecured credit facility, which matures on September 19, 2028.

CREDIT RATING RATIONALE
Whitecap holds significant positions in prolific, liquids-rich producing basins in Western Canada. Ongoing production from light-oil weighted conventional assets should provide Whitecap with a steady future base from which to increase liquids-rich production from its unconventional Montney and Duvernay assets.

The credit rating reflects Whitecap's operational and development accomplishments during the past year including, among others, continual improvement in the long-term sustainability and profitability of light-oil weighted conventional assets; development of liquids-rich natural gas wells in both the unconventional Montney and Duvernay formations; established partnerships and executed agreements to fund gas processing infrastructure projects; and advanced technical work on planned carbon capture, utilization, and storage projects that would increase the Company's carbon dioxide sequestration capacity.

Morningstar DBRS expects Whitecap to maintain a lease-adjusted debt-to-cash flow ratio below 1.0x, commensurate with the BBB (low) credit rating range and underpinning the Stable trend. With committed credit facilities totaling $2.0 billion, the Company's liquidity position should remain sufficient through the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781

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

(B) Weighting of FRA Factors
In the analysis of Whitecap, 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 Whitecap, 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, Oilfield Services, Pipeline, and Midstream Energy Industries (August 12, 2024), https://dbrs.morningstar.com/research/437739

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 following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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 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 had 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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