Morningstar DBRS Places Canadian Natural Resources Limited's Credit Ratings Under Review

DBRS, Inc. (Morningstar DBRS) placed all credit ratings of Canadian Natural Resources Limited (CNRL or the Company) Under Review with Negative Implications. On October 7, 2024, CNRL announced that it had entered into an agreement with Chevron Canada Limited (Chevron), an indirect subsidiary of Chevron Corporation (rated AA, Stable). The agreement was to acquire Chevron's Alberta assets for a total cash payment of USD 6.5 billion ($8.775 billion at foreign exchange = 1.35), before closing adjustments (the Acquisition). The Acquisition will be financed with a fully committed $4.0 billion term loan facility, along with existing cash and committed bank facilities. At September 30, 2024, CNRL had approximately $6.2 billion of liquidity, including cash. The assets to be acquired include Chevron's (1) 20% working interest in the Athabasca Oil Sands Project (AOSP) plus interests in additional undeveloped oil sands leases, and (2) 70% operated working interest in the Duvernay light oil and liquids-rich gas formation play located in the Kaybob region of Alberta.

The Acquisition adds approximately 122,500 barrels of oil equivalent per day (boe/d) of production -- 62,500 boe/d at AOSP and 60,000 boe/d from Duvernay -- and 1.448 billion barrels of oil equivalent (boe) of proved and probable reserves. The Duvernay boe/d consists of 179 million cubic feet per day of natural gas and 30,000 barrels per day of liquids. Pro forma the Acquisition, CNRL's H1 2024 production increases by about 9% to 1.43 million boe/d and pro forma YE2023 proved and probable gross reserves increase by about 8% to 19.95 billion barrels.

Morningstar DBRS views the Acquisition as a very good fit with CNRL's existing operations. The Company's operated working interest in AOSP increases to 90% from 70% and the Duvernay assets are complementary to CNRL's Deep Basin and Montney operations. Morningstar DBRS estimates no significant change to CNRL's hydrocarbon production mix from the proposed purchase. While slightly positive, the Acquisition is likely not material enough to change the Company's business risk profile, which is already strong.

Notwithstanding these potentially positive impacts, the Under Review with Negative Implications credit rating action reflects a significant initial increase (approx. 80%) in CNRL's debt and uncertainty about the timing to pay the additional debt down given vagaries about future energy prices. Morningstar DBRS also notes that the Company expects to increase capital expenditures and to increase the quarterly dividend by 7% postclose of the Acquisition. To facilitate debt repayment, CNRL will allocate 60% of free cash flow to shareholders and 40% to the balance sheet until net debt declines to $15 billion.

Although Morningstar DBRS expects CNRL's free cash flow to remain strong, the Company's key credit metrics could weaken to a level that does not support the Company's A (low) Issuer Rating. Morningstar DBRS intends to resolve the Under Review with Negative Implications status once CNRL's financing plan is finalized and regulatory approvals have been secured. When resolved, Morningstar DBRS may assign a Negative trend to the Company's credit ratings or, at maximum, a one-notch credit rating downgrade.

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 greenhouse gas (GHG) costs as a relevant environmental factor for CNRL. This factor is relevant because the 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 with an emissions reduction strategy that is focused on carbon capture, utilization, and storage projects; reduction in methane emissions; and technological innovation.

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 Factors in Credit Ratings at (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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 & Gas, Oilfield Services, Pipeline, and Midstream Energy Industries (August 12, 2024), https://dbrs.morningstar.com/research/437739.

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 methodologies have 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 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 https://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