DBRS Morningstar Changes Crew Energy Inc.’s Trends to Positive from Negative, Confirms Ratings at B (low)

DBRS Limited (DBRS Morningstar) changed all trends on Crew Energy Inc.’s (Crew or the Company) ratings to Positive from Negative and confirmed the Issuer Rating at B (low) and the Senior Unsecured Notes rating at B (low) with a Recovery Rating of RR4. The trend changes reflect DBRS Morningstar's assessment that the Company's key credit metrics are expected to improve materially through 2022 and 2023 because of a recovery in crude oil and natural gas prices and a projected notable increase in production volumes.

Crew’s ratings are underpinned by the Company’s (1) current size (Q1 2021 production averaged 26,258 barrels of oil equivalent (boe) per day (boe/d)); (2) capital and operational flexibility, as the Company operates the majority of its production and owns interests in the related processing facilities; and (3) significant inventory of drilling locations that provides a source of future production growth. The ratings are constrained by the Company’s heavy concentration of reserves and production in northeastern British Columbia in the Montney resource play and a higher weighting of lower valued natural gas (72% on a boe basis for the year 2020) in the production mix. DBRS Morningstar notes that the Company has been able to realize better pricing for its natural gas relative to many of its peers as a result of its diversified exposure to multiple gas markets and a successful hedging program.

The Company's key credit metrics weakened significantly in 2020 and were well below the B range due to the steep decline in crude oil prices, lower natural gas price realizations, and slightly weaker production volumes. The Company took steps to counter price pressures by cutting costs, reducing capital expenditures (capex), and suspending lower margin production for a brief period of time. The Company incurred a free cash flow (FCF; cash flow after capex and dividends) deficit before working capital changes of $46 million for the year. Crew used the net proceeds of $58 million from a strategic infrastructure transaction, whereby the Company reduced its interests in two natural gas processing facilities, to fund the FCF deficit as well as reduce the debt drawn on its credit facilities.

With a recovery in crude oil prices and strengthening natural gas prices, the Company has sharply stepped up its capex program this year with a budget (based on the midpoint of Company guidance) of $132.5 million, a 54% increase relative to 2020. As a consequence of higher capex, the Company expects production volumes to rise by 23% to average 27,000 boe/d in 2021 (based on the midpoint of guidance) and it targets further growth of 19% (at the midpoint of guidance) to average 32,000 boe/d in 2022. The Company also expects, with rising production volumes, per-unit costs will decline and netbacks will strengthen accordingly.

DBRS Morningstar’s base-case assumes commodity prices of (1) USD 53/barrel (bbl) for West Texas Intermediate oil over the balance of 2021 and USD 52/bbl in 2022 and 2023, and (2) $2.75/thousand cubic feet (mcf) for the spot price of natural gas in Alberta for the rest of 2021 and $2.50/mcf in 2022 and 2023. Based on these assumptions and combined with rising production volumes and lower unit costs, DBRS Morningstar expects the Company’s cash flow to increase considerably this year and through 2022 and 2023. However, because of higher capex planned this year, DBRS Morningstar expects a modest FCF deficit in 2021. With current commodity prices well exceeding DBRS Morningstar forecasts, FCF this year may be closer to breakeven. For 2022 and 2023, the Company plans to moderate the level of capex with the intent to generate FCF surpluses and direct surpluses to strengthening the balance sheet. The Company’s key credit metrics are anticipated to recover to within the B range.

DBRS Morningstar is of the view that the Company has sufficient liquidity to manage a modest FCF deficit. The Company’s credit facility was recently reconfirmed at $150 million. At the end of Q1 2021, the Company had drawn $56.9 million on the facility and had letters of credit of $11.7 million outstanding that were supported by the facility. Furthermore, the Company (1) has an option between June 2021 and June 2023 to enter into a 20-year natural gas processing agreement and convert an additional 11.43% interest in its two gas processing facilities for consideration of up to $37.5 million; (2) has hedged approximately 55% of this year’s projected natural gas production at $2.48/gigajoule (GJ; or $3.08/mcf calculated using Crew’s heat content factor) and approximately 35% of next year’s projected natural gas production at $2.46/GJ (or $3.05/mcf calculated using Crew’s heat content factor), which underpins the Company’s cash flow forecasts; and (3) does not have any financial maintenance covenants on the $300 million of Senior Unsecured Notes, which do not mature until March 2024.

Should the Company’s credit profile continue to strengthen in line with DBRS Morningstar projections, Crew’s ratings are likely to be upgraded by one notch. On the other hand, should oil prices plunge again and the Company’s key credit metrics drop significantly below DBRS Morningstar’s base-case expectations for an extended period, DBRS Morningstar may consider a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 (August 17, 2020; https://www.dbrsmorningstar.com/research/365808) and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020; https://www.dbrsmorningstar.com/research/366063), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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