DBRS Confirms CNRL at BBB (high) and R-2 (high), Stable

DBRS has today confirmed the Unsecured Long-Term Debt and Commercial Paper ratings of Canadian Natural Resources Limited (CNRL or the Company) at BBB (high) and R-2 (high), respectively, both with Stable trends. The rating confirmation reflects the Company’s continued strong performance, driven mainly by a production mix weighted heavily toward higher-priced crude oil and natural gas liquids (NGLs), and despite the loss of production due to the coker fire at the Horizon oil sands project (Horizon) in early 2011. With production now having resumed at Horizon, operating cash flow is expected to rise sharply and be sufficient to fund capex and dividends for 2012.

Strong performance was largely a result of high crude oil prices in 2011. Despite a significant loss of cash flow from the Horizon project, the conventional oil and NGL operations contributed strong cash flow that covered most dividends and higher capex levels for the period. A modest cash flow deficit was funded with debt, which had minimal impact on the Company’s balance sheet. As a result, the Company’s financial metrics remained well within the rating category. Debt-to-capital of 29.6% and debt-to-EBITDA of 1.37 times for the nine months ended September 30, 2011 (9M 2011) were below or at the lower end of CNRL’s target ranges of 30% to 40% and 1.0 time to 2.0 times, respectively. Debt-to-cash flow of 1.65 times was also within the range that is expected by DBRS. Furthermore, the Company maintains financial flexibility through sizable unused credit facilities ($2.3 billion available at September 30, 2011), with manageable maturities over the next few years.

The Horizon upgrader fire in January 2011 resulted in the suspension of production and significantly diminished netbacks and cash flow for the oil sands project. The repair/rebuild costs of $396 million were funded through debt and are expected to be reimbursed through insurance proceeds. However, the Horizon fire, and its impact on results, exposes the operational risk facing CNRL. As large-scale projects come online, unanticipated disruptions such as the coker fire could have a significant recurring impact on the Company’s operations in the future. Production resumed in Q3 2011, and volumes are expected to return to pre-shutdown levels in Q4 2011. It is expected that the incremental earnings from Horizon should significantly boost cash flow levels for CNRL going forward.

CNRL has increased its capex budget to $7.2 billion in 2012 to further support its production growth plans ($6.1 billion in 2011 and $5.3 billion in 2010). DBRS expects CNRL’s 2012 cash flow to largely finance its capex and modest dividends. Any excess cash flow is expected to be deployed for modest debt reduction and, potentially, for modest-sized opportunistic acquisitions. DBRS expects the Company to prudently finance any shortfalls in order to maintain its balance sheet and credit metrics within DBRS’s BBB (high) rating range.

Conventional oil and NGL production levels have increased steadily since 2008. Despite the suspension of production at Horizon during most of 9M 2011, total production volumes in 2011 are expected to equal, if not slightly surpass, 2010 levels. Total production growth for 2012 is anticipated to be 24% for crude oil and 3% for natural gas, which is reasonable. The focus on growth in oil production is in line with CNRL’s plans to lessen the impact of low natural gas prices on its earnings, and capitalize on high crude and NGL prices. For the near to medium term, production levels are expected to increase across all geographic areas (average of 8% for each of the following three years), with the exception of the North Sea, where the Murchison platform is being prepared for abandonment in 2012. This is also in line with CNRL’s strategy, as the Company scales back production in the North Sea to limit the impact of the increase in profit taxes (increased from 50% to 62%) enacted by the U.K. government in March 2011.

Longer-term growth prospects are underpinned by Horizon’s expansions (engineering for Horizon Phases 2 and 3 is currently in progress) and ongoing in-situ developments (including Kirby South and North Phase 1 and 2). The latter could potentially reach 140,000 b/d by 2022, complementing the potential expansion to 250,000 b/d for Horizon in the longer term, significantly increasing the Company’s heavy oil production volumes.

The Company entered into a partnership agreement with North West Upgrading Inc. in Q1 2011 to move forward with detailed engineering regarding the construction and operation of a bitumen refinery. Sanctioning of the project is targeted for 2012. The partnership has also entered into a 30-year fee-for-service agreement to process bitumen supplied by the Alberta government. The partnership should help to lessen the impact of the widening heavy oil differential.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.