Morningstar DBRS Places CNRL’s Credit Ratings Under Review 

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(Morningstar DBPS, 8.Oct.2024) — DBRS, Inc. (Morningstar DBRS) placed all credit ratings of Canadian Natural Resources Limited (CNRL or the Company) Under Review with Negative Implications.

On 7 Oct. 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 $6.5bn ($8.775bn at foreign exchange = 1.35), before closing adjustments (the Acquisition). The Acquisition will be financed with a fully committed $4bn term loan facility, along with existing cash and committed bank facilities. At 30 Sep. 2024, CNRL had approximately $6.2bn 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

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.

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ENERGY ANALYTICS INSTITUTE (EAI) https://energy-analytics-institute.org

Energy Analytics Institute (EAI), formerly LatinPetroleum (dba LatinPetroleum.com), is a Houston-established private organization. Since 1999, EAI has been a leader in energy news coverage of Latin America in particular. Coverage, run out of Latin America, now spans the world and encompasses nearly all energy and energy-related sectors.

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