Morningstar DBRS Confirms Issuer and Unsecured Long-Term Debt Ratings on Canadian Natural Resources Limited at A (low) and Commercial Paper Rating at R-1 (low); Changes All Trends to Negative

DBRS, Inc. (Morningstar DBRS) resolved the Under Review with Negative Implications status of Canadian Natural Resources Limited (CNRL or the Company) by confirming the Issuer Rating and Unsecured Long-Term Debt rating at A (low) as well as its Commercial Paper rating at R-1 (low) and changing all trends to Negative. Morningstar DBRS initially placed the Company's credit ratings Under Review with Negative Implications on October 8, 2024.

KEY CREDIT RATING CONSIDERATIONS
The confirmations reflect Morningstar DBRS' view that CNRL's purchase of Chevron Canada Limited's (Chevron) Alberta assets (the Acquisition) is a very good fit with the Company and its expectation that the Acquisition will materially add to CNRL's free cash flow (FCF) generation. The Acquisition was finalized on December 6, 2024, and includes Chevron's 20% working interest in the Athabasca Oil Sands Project (AOSP) and a 70% operated working interest in light crude oil and liquids-rich Duvernay assets. While slightly positive, the Acquisition is not material enough to change the Company's business risk profile, which is already strong.

Despite these positive impacts, there has been a significant initial increase (approximately 80%) in CNRL's debt and there is uncertainty about the timing to pay the additional debt down given vagaries about future energy prices. Morningstar DBRS notes that CNRL announced a 2025 capital budget that is an approximate 20% increase versus the prior year and increased the quarterly dividend by 7% beginning in January 2025. To facilitate debt repayment, CNRL will allocate 60% of FCF to shareholders and 40% to the balance sheet until net debt declines to $15 billion.

Morningstar DBRS has changed the trends to Negative mainly because of the initial increase in debt leverage, with the lease-adjusted debt-to-cash flow ratio forecast to be at or above 1.50 times (x) through 2026. Morningstar DBRS' forecast incorporates base-case commodity price assumptions that can be found in the commentary "Marketplace Frets Over Burgeoning Trade War and Negative Implications for Crude Oil Demand, Weighing on Oil Prices," dated February 13, 2025.

On January 29, 2025, CNRL and Shell Canada Limited (Shell) announced an asset swap related to AOSP that does not include any exchange of cash. This transaction is not included in the Company's 2025 budget or production guidance issued on January 9. Assuming the financial terms of the transaction do not change, Morningstar DBRS estimates this transaction to be incrementally positive but not material enough to change Morningstar DBRS' ratings of A (low) with a Negative trend. CNRL's 2025 production guidance will be revised upon closing of the transaction.

CREDIT RATING DRIVERS
While the confirmation of the ratings reflects Morningstar DBRS' view that CNRL's cash flow generation should remain strong, the Negative trend reflects the Company's heightened debt leverage post-Acquisition and its exposure to the ups and downs of crude oil and natural gas pricing, creating uncertainty about how quickly acquisition-related debt can be repaid. As a result, if oil prices materially weaken and CNRL's operating performance deteriorates below current expectations causing the Company's lease-adjusted debt-to-cash flow ratio to stay above 1.50x for an extended period, a negative rating action would likely occur. Conversely, a positive credit rating action, such as moving the trend to Stable, may occur if the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently less than 1.50x.

EARNINGS OUTLOOK
The midpoint of the Company's 2025 targeted gross production (before royalties) is 1,533 million barrels of oil equivalent per day (MMboe/d), which is estimated to be 12% higher relative to 2024 average gross production. The forecast increase in total production will largely be driven by the incremental contribution from the AOSP and Duvernay assets acquired from Chevron and, secondarily, high utilization at Horizon Oil Sands with no planned turnaround in 2025. Morningstar DBRS forecasts CNRL's net revenue to sequentially increase by 1%-3% to between $36 billion and $37 billion in 2025 with the increase in annual production that is incorporated to be partially offset by a lower crude oil price assumption. Based on Morningstar DBRS' base-case West Texas Intermediate (WTI), Western Canadian Select, and New York Mercantile Exchange price assumptions of USD 65/barrel (bbl), USD 50/bbl, and USD 3.50/thousand cubic feet, respectively, for 2025, Morningstar DBRS expects the Company's EBITDA and EBIT to decline modestly relative to 2024.

FINANCIAL OUTLOOK
CNRL's budgeted 2025 capital expenditure (capex) guidance is $6.15 billion. Based on its base-case commodity price
assumptions, Morningstar DBRS forecasts the Company to generate a significant FCF (i.e., cash flow after capex and
dividends) surplus in 2025. As of September 30, 2024, total debt was $10.0 billion. Post closing of the Acquisition, Morningstar DBRS estimates total debt to be in the range of $18.0 billion to $19.0 billion (assuming an exchange rate of USD 1 to CAD 1.44). CNRL is targeting to allocate 60% of future FCF to shareholders and 40% to the balance sheet until net debt declines to $15 billion. Net debt is defined as debt before adjustment for operating leases and net of cash. Consequently, Morningstar DBRS forecasts the lease-adjusted debt-to-cash flow ratio to be at or above 1.50x through 2026. Further, Morningstar DBRS estimates the lease-adjusted debt-to-cash flow ratio to decline to below 1.50x at a total debt level of about $16.0 billion. CNRL has sufficient liquidity. On September 30, 2024, the Company had $721 million of cash and cash equivalents and available committed credit facilities totaling $5.45 billion.

CREDIT RATING RATIONALE
The credit ratings are underpinned by the Company's (1) significant production base of more than 1.5 MMboe/d (gross basis); (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 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 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 (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 CNRL, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of CNRL, 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 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 one or more sections of the Morningstar DBRS Global Corporate Criteria https://dbrs.morningstar.com/research/447186 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
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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