DBRS Confirms Canadian Natural Resources Limited 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 ratings confirmation reflects the Company’s (1) strong financial profile, (2) low-cost operations and (3) strong production growth profile. Despite these strengths, the Company’s rating is limited by (1) operational reliability at its Horizon operations; (2) significant capital expenditure (capex) to achieve growth, particularly related to capital intensive oil sands projects, which could pressure the balance sheet; and (3) a significant weighting toward heavy oil, exposing the Company to the volatility of the light/heavy crude oil differential.

The Company has benefited from strong crude oil pricing and oil/liquids production growth, which has resulted in improving credit metrics since 2008. Cash flow surpluses were used to reduce debt over the past three years, decreasing adjusted debt-to-capital to 27.5% as at June 30, 2012, from 43.6% as at December 31, 2008. Other key ratios have remained reasonable for the current rating category.

CNRL lowered capex by $680 million in Q2 2012, re-allocating spending from North American natural gas to more liquids and crude based projects. As a result, operating cash flow in 2012 is expected to be adequate to fully fund capex and dividends. The Company’s longer-term production growth is underpinned by Horizon’s expansion and ongoing in situ developments (including Kirby South and North Phase 1 and 2). In addition, the Company entered into a partnership agreement with North West Upgrading Inc. and has moved forward with detailed engineering plans regarding the construction and operation of a bitumen refinery. This refinery should help lessen the impact of the light/heavy crude oil differential. Board sanctioning of this project is targeted for 2012.

Horizon continues to be a concern due to its history of unreliability, despite having strong production results in Q2 2012. CNRL has taken steps to limit unplanned outages with the installation of a third preparation plant and associated hydro-transport unit. As a key earnings driver, DBRS expects CNRL to remain focused on Horizon’s operational reliability going forward.

Notes:
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.