DBRS Morningstar Confirms Crew Energy Inc. at B with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Crew Energy Inc. (Crew or the Company) at B. DBRS Morningstar also confirmed Crew’s Senior Unsecured Notes rating at B with a Recovery Rating of RR4. The trends are Stable.The ratings are underpinned by the Company’s (1) current size (production estimated to average at the midpoint of guidance 22,000 barrels of oil equivalent (boe)/day; (2) capital and operational flexibility, as the Company operates the majority of its production and related processing facilities; and (3) significant inventory of drilling locations that could provide a source of future production. The ratings are constrained by the Company’s heavy concentration of reserves and production in Northeastern British Columbia in the Montney play and higher weighting of production toward lower valued natural gas (71% on a boe basis for year-to-date September 30, 2019), although the Company has secured takeaway pipeline capacity and has been able to attain better pricing relative to spot gas prices in Western Canada.

The Company’s key financial metrics are within the rating range. However, DBRS Morningstar notes that the Company’s key leverage ratio has been rising in recent years as cash flow contracts due to weak commodity prices and the Company’s overall level of indebtedness have increased. Crew’s lease-adjusted debt-to-cash flow for the last 12 months ended September 30, 2019, was 4.14 times (x), within the B range, compared with 3.91x for F2018 and 2.95x for F2017.

To manage during the current weaker commodity price environment and address the market-access challenges facing all Western Canadian oil and gas producers, Crew is aligning capex with operating cash flow in order to mitigate possible free cash flow deficits and to preserve liquidity. The Company is also considering additional asset sales. Crew’s liquidity provides some cushion with $156 million of capacity available as at September 30, 2019 (factoring in $56.9 million drawn on the facility and $21.8 million for letters of credit backed by the facility), on a $235 million borrowing-base credit facility. The Company also recently completed a semi-annual borrowing-base review with its lenders with no change in the borrowing base. The facility revolves for a 364-day period and is subject to the next 364-day extension by June 4, 2020. Furthermore, the $300 million of Senior Unsecured Notes outstanding is not due to mature until March 2024.

Nonetheless, the Company’s cash flow is sensitive to natural gas price changes and, to a lesser degree, changes in the price of crude oil and natural gas liquids. In the current weak pricing environment, cash flow could well decline further, causing more pressure on the Company’s credit profile. Should the Company’s credit profile deteriorate much more, DBRS Morningstar could taking a negative rating action.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on www.dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada