DBRS Morningstar Upgrades Rating on Crew Energy Inc. to B (high), Stable, from B, Positive, and Discontinues Rating on the Senior Unsecured Notes

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of Crew Energy Inc. (Crew or the Company) to B (high) with a Stable trend from B with a Positive trend. DBRS Morningstar has also discontinued the rating on the Senior Unsecured Notes (Notes) as a result of the early redemption of the remaining Notes outstanding. The upgrade in the Issuer Rating is because of the material improvement in the Company’s credit metrics resulting primarily from stronger commodity prices, higher production volumes and lower indebtedness.

Key factors supporting the rating are (1) the Company’s size (2023 production estimated at 31,000 barrels of oil equivalent per day (boe/d) based on the midpoint of Crew’s guidance); (2) capital and operational flexibility; and (3) significant inventory of economic drilling opportunities that enables the Company to maintain or grow production. Factors limiting the ratings include the 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 (78% on a boe basis in 2022) in the production mix. However, the Company has achieved better gas price realizations relative to Western Canadian spot prices. Crew has secured egress transportation capacity to sell gas into higher-priced markets across North America and has a higher heat content associated with its produced gas.

The Company's key credit metrics strengthened considerably in 2022 mainly from (1) liquids and natural gas prices continuing to rise from the weak Coronavirus Disease (COVID-19) pandemic-induced levels in 2020; (2) increased production volumes (a 26% increase) ; (3) lower unit operating costs; and (4) lower levels of debt. The Company generated a large free cash flow surplus (FCF; i.e., cash flow after dividend and capital expenditures (capex)) in 2022 of $149 million and garnered $130 million of cash from the disposition of noncore assets. The Company used the additional cash to reduce debt including redeeming $128 million of Notes and reducing drawings on the Company’s credit facility to nil. On April 28, 2023, the Company redeemed the remaining $172 million Notes outstanding with available cash on hand ($55 million at YE2022) and by drawing on the Company’s $200 million credit Facility.

Even though cash flow for 2023 is expected to moderate from last year’s elevated level, DBRS Morningstar expects the Company’s credit metrics to remain strong as debt is reduced further. The Company plans capex (before dispositions) of between $190 million and $210 million, which is modestly higher relative to last year. Based on DBRS Morningstar’s price forecast and average production volumes of 31,000 boe/d, a modest FCF surplus is anticipated. The Company recently put forward a plan to increase production to more than 60,000 boe/d in 2026 if market conditions are favourable. A further upgrade is not likely over the near term. However, should liquids and natural gas prices fall materially and remain weak for an extended period of time, a negative rating action could ensue.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental Factors
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/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022) https://www.dbrsmorningstar.com/research/402196

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577