DBRS Morningstar Upgrades Ratings on Crew Energy to B; Trends Remain Positive

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of Crew Energy Inc. (Crew or the Company) to B from B (low) and the rating on its Senior Unsecured Notes (the Notes) to B from B (low) with a recovery rating of RR4. All trends remain Positive. The upgrades are due to the material improvement in the Company's credit metrics primarily resulting from stronger commodity prices and higher production volumes. The Positive trends reflect the probability that the Company's credit metrics are likely to strengthen further, leading to another positive rating action.

Key factors supporting the ratings are (1) the Company’s size (2022 production estimated at 32,000 barrels of oil equivalent per day (boe/d) based on the midpoint of Crew’s guidance), (2) capital and operational flexibility, and (3) substantive inventory of economic drilling opportunities that enables the Company to maintain or grow production. Factors limiting the ratings include a high concentration of reserves and production in the Montney region in Northeastern British Columbia and a high percentage of lower-valued Western Canadian natural gas production (77% on a boe basis in 2021) in the production mix. However, the Company has achieved better gas price realizations relative to Western Canadian spot prices. Crew has egress transportation capacity available to sell gas into higher-priced markets across North America.

The Company's key credit metrics strengthened considerably in 2021 primarily because of (1) liquids and natural gas prices recovering sharply from pandemic-induced weak levels in 2020, (2) increased production volumes, and (3) lower unit operating costs. The Company’s lease-adjusted debt-to-cash flow ratio improved to 2.93 times (x), compared with 8.36x in F2020 and 4.49x in F2019. The Company's lease-adjusted EBIT interest coverage strengthened to 3.57x from -0.30x in F2020 and 0.77x in F2019. Both key metrics support the Company's ratings.

Crew stepped up capital expenditures (capex) in 2021 to take advantage of the recovery in commodity prices, favourable drilling and development costs, and available capacity on the Company's credit facility. Because of this, the $178 million capex in 2021 outpaced cash flow. As a consequence, the Company incurred a free cash flow (FCF: cash flow after capex and dividends) deficit before changes in working capital deficit of $50 million. The sale of heavy oil interests in the Lloydminster area for $8.2 million in net proceeds offset part of the deficit. At year end, the Company had reasonable liquidity, with $75.1 million drawn on its $150.0 million banking facility plus $7.9 million in letters of credit backed by the facility. The Company's Notes mature in two years (March 2024) and therefore embody some refinancing risk.

The Company plans to pull back capex to between $80 million and $95 million this year and target production in the 31,000 boe/d to 33,000 boe/d range. The aim is to (1) align production volumes with the Company's available processing and transportation capacity and (2) generate an FCF surplus and reduce financial leverage. Based on DBRS Morningstar's projections for liquids and natural gas prices (which are well below current market prices) and the Company’s guidance, the lease-adjusted debt-to-cash flow ratio could fall below 2.0x by year end, which could trigger another positive rating action.

ESG CONSIDERATIONS
DBRS Morningstar considered carbon and greenhouse gas costs as a relevant environmental factor. This factor is relevant because compliance with ever-increasing environmental regulations and standards limits the growth potential and adds costs for all oil and gas companies, including Crew. There were no social or governance factors with a significant or relevant impact on the credit ratings.

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 methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16,2021; https://www.dbrsmorningstar.com/research/383104) and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021; https://www.dbrsmorningstar.com/research/383238), 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).

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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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