Canadian Natural Resources Ltd. Downgraded To 'BBB' From 'BBB+' On Reduced Projected Cash Flow Metrics

  • S&P Global Ratings lowered its West Texas Intermediate (WTI) and Brent crude oil price assumptions on March 19, 2020, which initiated a global review of its rated oil and gas issuers.
  • We lowered our 2020 WTI price to US$25 from US$35 and we lowered our Brent price to US$30 from US$40.
  • As a result of our reduced price assumptions for the 2020-2022 forecast period, our projected cash flow metrics for Canadian Natural Resources Ltd. (CNRL) are materially reduced from our previous estimates.
  • Based on the weaker projected annual and five-year weighted-average funds from operations (FFO)-to-debt ratios, and the resulting weaker financial risk profile, S&P Global Ratings lowered its long-term issuer credit rating on CNRL to 'BBB' from 'BBB+'.
  • In conjunction with the downgrade, we also lowered our senior unsecured debt issue-level rating to 'BBB' from 'BBB+'. We rate the senior unsecured debt at the same level as the long-term issuer credit rating, because there are no material obligations ranking ahead of the senior unsecured debt, and no structural subordination exists.
  • As a result of CNRL's large near-term debt maturities, including the commercial paper (CP) outstanding at Dec. 31, 2019, relative to reduced total liquidity sources (largely due to lower projected FFO), we have also revised the liquidity profile assessment to adequate from strong. Our projected ratio of total liquidity sources relative to total spending, estimated at about 1.3x, is now below the minimum 12-month 1.5x threshold required to support a strong assessment.
  • Nevertheless, available sources of liquidity remain sufficient to support the requirements for the current short-term and CP ratings; therefore, we have affirmed our 'A-2' global scale short-term and CP ratings.
  • The stable outlook reflects our expectation that the updated five-year (2018-2022) FFO-to-debt ratio should remain in the upper half of the 20%-30% range, with estimated positive discretionary cash flow (DCF) providing further cushion for the rating.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. In spite of the diversification benefits of CNRL's upstream operations, the large portion of thermal and synthetic crude oil production in its product mix, with their manufacturing-like characteristics and largely fixed cost structure, results in less operating flexibility, compared with conventional oil and gas production, to substantially reduce production troughs in the hydrocarbon price cycle. As a result, oil sands revenues and cash flow generation will decrease at an accelerating pace at low price levels.
S&P Global Ratings' reduced crude oil and natural gas price assumptions have translated into lower projected FFO. Reduced forecast cash flows, in tandem with high fully adjusted debt (which includes 25% of North West Redwater Partnership's issued and outstanding debt), have weakened cash flow metrics below our previously stated downgrade trigger for the 'BBB+' rating.
The stable outlook reflects S&P Global Ratings' expectation that CNRL should be able to maintain its fully adjusted five-year (2018-2022), weighted-average FFO-to-debt ratio at the upper end of the 20%-30% range, while continuing to generate positive DCF. Projected cash flow metrics have significantly deteriorated from our previous estimates, due to both our reduced hydrocarbon price assumptions and the high debt in the company's capital structure. Nevertheless, we believe CNRL should be able to maintain its cash flow and leverage metrics at levels that will support the significant financial risk profile.
We could lower the rating to 'BBB-', if cash flow generation continued decreasing, and our estimate of the company's weighted-average FFO-to-debt ratio fell below 20%, and we believed cash flow measures would remain below this threshold.

We could raise the rating to 'BBB+', if the company were able to increase and maintain its five-year weighted-average FFO-to-debt ratio above 45%. Above this threshold, the financial risk profile and a 'BBB+' rating would accommodate higher levels of discretionary spending than is currently factored into our base-case assumptions. Alternatively, FFO-to-debt ratios in the 30%-45% range could also support a 'BBB+' rating, if the company also maintained financial policies focused on generating strong DCF, such that it sustained a weighted-average DCF-to-debt ratio above 10%.
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