Toronto, April 21, 2022 -- Moody's Investors Service ("Moody's") upgraded Canadian Natural Resources Limited's (CNRL) senior unsecured ratings to Baa1 from Baa2. The rating outlook is stable.
"CNRL's expected debt reduction of about 45% since year end 2020 will lead to a resilient balance sheet and strong debt metrics going forward," said Moody's analyst Paresh Chari. "We expect the company's free cash flow will fund debt repayment, its sizable dividend program, share repurchases and production growth, while maintaining retained cash flow to debt over 50%."
Upgrades:
..Issuer: Canadian Natural Resources Limited
....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2
....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2
....Senior Unsecured Shelf, Upgraded to (P)Baa1 from (P)Baa2
Affirmations:
..Issuer: Canadian Natural Resources Limited
....Senior Unsecured Commercial Paper, Affirmed P-2
Outlook Actions:
..Issuer: Canadian Natural Resources Limited
....Outlook, Remains Stable
RATINGS RATIONALE
This rating action reflects CNRL's diversified and resilient asset base with capital optionality, its significant and continued debt reduction, and strong capital efficiencies, which strengthen CNRL's financial profile improving its ability to withstand the negative credit impacts from carbon transition risks. CNRL is a top class operator with a strong track record of operational excellence, a durable asset base, and a strong focus on reducing debt with free cash flow, all of which will allow it to weather volatile pricing environments. While the financial performance of CNRL will continue to be influenced by industry cycles, compared to historical experience Moody's expects future profitability and cash flow in this sector to be less robust at the cycle peak and worse at the cycle trough because global initiatives to limit adverse impacts of climate change will constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources. Moody's expects this shift to occur over a period of decades and that global oil demand will continue to grow through at least the latter half of the 2030's.
CNRL's Baa1 rating is supported by: 1) its significant size and scale, with production of around 1.1 million boe/d and proved developed reserves of around 8 billion boe; 2) its long-lived and low decline oil sands assets; 3) a low operating cost base, and maintenance costs that allow the company to withstand commodity downturns; 4) significant free cash flow generation that is reducing debt leading to strong debt metrics (over 50% RCF/debt in 2023) under our medium term oil prices (US$50 to US$70/bbl); and 5) the roughly 40% of production that is light synthetic crude oil, 20% natural gas, and 3% international products that help mitigate regional heavy oil price weakness and volatility. The rating is constrained by: 1) its significant concentration in western Canada that exposes almost all of its production to regional commodity prices and to potential pipeline constraints for its heavy oil production; 2) large shareholder distributions; and 3) increasing regulatory risks facing upstream companies as the world moves towards cleaner energy.
CNRL's financial policies have improved with the company using free cash flow to materially reduce debt since 2020. CNRL had an aggressive financial strategy evident by the history of debt-funded acquisitions and a prior history of weak liquidity management that is now excellent. The good operating and management track record, and solid financial policies contribute to the company's G-2 governance Issuer Profile Score. Social opposition to oil pipeline projects has been material, and had led to egress constraints and wide Canadian heavy oil differentials due to delays or cancellations of projects. As a result of the Line 3 replacement pipeline coming on stream in October 2021, pipeline constraints have been alleviated and heavy oil differentials have remained narrow, improving CNRL's cash flow. CNRL's Credit Impact Score was changed to a CIS-3 from a CIS-4 as a result of the Line 3 coming into service and because of improved financial policies.
CNRL has excellent liquidity. Sources total about C$10 billion compared to uses of around C$2.4 billion through mid-2023. At December 31, 2021, CNRL had C$744 million of cash and full availability under its C$4.85 billion of committed revolvers (C$2.4 billion matures June 2024 and C$2.4 billion June 2025). We also expect about C$5 billion in free cash flow through mid-2023. CNRL's US$2.5 billion US market commercial paper program (P-2), with nil outstanding at year end 2021, is backstopped by the revolvers reducing availability. We expect CNRL to be well in compliance with its sole financial covenant. CNRL repaid a C$1 billion debenture due in February 2022 with cash. In 2023, CNRL has a US$1 billion note due in January, a $1.15 billion term loan due in February and C$500 million debenture due in November.
The stable outlook reflects our expectation for retained cash flow to debt to be above 50% through 2022 and 2023, with a modestly growing production profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if CNRL can generate RCF/debt of 75% in a $55/bbl WTI oil price environment while maintaining LFCR of at least 2x, and manage growth and shareholder returns in a manner that doesn't impede further debt repayment.
The ratings could be downgraded if RCF/debt falls below 35% or LFCR is sustained below 1.5x.
CNRL is an independent exploration and production companies with about 1.1 million barrels of oil equivalent (boe) per day (all production and reserves are net of royalties) of production, over 11 billion boe of proved reserves, and around 8 billion boe of proved developed reserves as of 2021.
The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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Paresh Chari
Associate Managing Director
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
