DBRS Confirms Canadian Natural Resources Limited at BBB (high) and R-2 (high), Stable

DBRS has today confirmed the Issuer Rating and Unsecured Long-Term Debt of Canadian Natural Resources Limited (CNRL or the Company) at BBB (high) and the rating of its Commercial Paper at R-2 (high), all with Stable trends. The rating confirmation reflects the Company’s strong financial profile, which provides an adequate cushion for volatile heavy oil pricing differentials and continued high growth capital spending (capex).

CNRL continued to maintain a strong financial profile throughout 2012 and the first quarter of 2013, with debt-to-capital relatively stable at 27.7% (from 27.2% in 2011) and debt-to-cash flow at 1.50x in Q1 2013. Key credit metrics are well within the current rating category, leaving the Company with reasonable balance sheet flexibility. The Company continues to benefit from its diverse portfolio of long-life assets and strong oil production growth, resulting in improving credit metrics since 2008.

However, the Company faces exposure to commodity price volatility, particularly the light/heavy crude oil differential. In 2012, earnings before non-recurring items decreased to $2.0 billion from $2.8 billion, partially as a result of lower realized pricing from the widening of light/heavy differentials, despite the increase in production. This trend continued in Q1 2013, as the average differential of 34% negatively affected earnings. However, DBRS expects pricing differentials to continue, and some alleviation should be seen with the start-up of BP’s Whiting Refinery in Q3 2013.

The Company continued to incur high capex spending, at $6.1 billion in 2012, resulting in a cash flow deficit of $786 million, which was financed with incremental debt. In 2013, capex is expected to remain elevated at approximately $6.9 billion; deficits are therefore expected to continue to require external financing. Further, the CNRL partnership with North West Upgrading Inc. for the construction and operation of a bitumen refinery was sanctioned in late 2012. Although the Company has shown a disciplined, phased approach to its high capex SAGD expansion, the history of cost overruns and timing delays in the construction of upgraders in Alberta may expose the Company to potential cost overrun risk associated with the construction of the Redwater upgrader, with a negative impact on its balance sheet. The refinery is targeted to be built in three 50,000 barrels per day (b/d) phases, with the first phase expected to be completed by mid-2016. As reliability at the Horizon Oil Sands Project (Horizon) improves and the North West Redwater upgrader is completed, the Company’s downstream operations will act as a partial natural hedge, thus improving cash flow stability.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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