Morningstar DBRS Finalizes Provisional Credit Rating of B With a Recovery Rating of RR4 and a Stable Trend on Bonterra Energy Corp.'s New Senior Secured Second Lien Notes

DBRS Limited (Morningstar DBRS) finalized its provisional credit rating of B with a recovery rating of RR4 and a Stable trend on Bonterra Energy Corp.'s (Bonterra or the Company) $135 million Senior Secured Second Lien Notes (the Senior Notes). The recovery rating of RR4 suggests a recovery of 30% to 60% in a default scenario for the Senior Notes. There is no change to the Company's Issuer Rating of B with a Stable trend.

The Senior Notes are secured, ranking pari passu in right of payment to all existing and future senior indebtedness and senior in right of payment to all existing and future Subordinated Indebtedness and are guaranteed by all of Bonterra' current and future subsidiaries. The Senior Notes have standard covenants, including, but not limited to, limits on indebtedness, restricted payments, liens, and asset sales.

Bonterra intends to use the net proceeds from the Offering to redeem the Debentures and prepay amounts currently drawn under the Term Loan, along with related accrued interest and prepayment penalties, with the remainder, if any, to repay a portion of the amount then drawn under the Credit Agreement, to pay related transaction expenses and/or for general corporate purposes.

The credit rating is underpinned by Bonterra's (1) light oil-weighted production mix; (2) relatively diversified asset base; and (3) relatively strong financial risk profile, which, under Morningstar DBRS' base-case commodity price assumption, provides an uplift to the Issuer Rating. Bonterra's credit ratings are constrained by its small scale of operations (average annual production of 14,586 boe/d for Q3 2024) and relatively higher cost structure. For more information, please see the press release "Morningstar DBRS Assigns Issuer Rating of B With a Stable Trend to Bonterra Energy Corp," dated January 15, 2025.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors

The following Environmental factor(s) had a relevant effect on the credit analysis:Carbon and GHG costs factor is deemed relevant. 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 O&G companies.

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 (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 Bonterra, the BRA factors were considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of Bonterra, 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 Bonterra, 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, 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 methodologies have also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to ESG 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 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 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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