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Debt held by Canadian Natural Resources under review by credit rater

Canadian Natural announced a $12.7-billion cash-and-stock deal for oil sands assets held by Royal Dutch Shell PLC and Marathon Oil Corp., taking advantage of the industry downturn to snap up new production at a hefty discount.

Jeff McIntosh/THE CANADIAN PRESS

Credit rater DBRS Ltd. has placed debt held by Canadian Natural Resources Ltd. under review, warning that weak oil prices could hamper its ability to reduce leverage.

The move comes after Canadian Natural announced a $12.7-billion cash-and-stock deal for oil sands assets held by Royal Dutch Shell PLC and Marathon Oil Corp., taking advantage of the industry downturn to snap up new production at a hefty discount.

DBRS said the transaction, the richest asset deal in the oil sands yet, will increase by nearly 60 per cent total debt held by CNRL to $21.6-billion by the end of the year, while debt-to-cash flow will climb to 2.5 times from 2.1 previously. It could be harder for the company to improve those metrics should oil prices drop significantly below $50 (U.S.) a barrel, the rating agency said in a note. On Friday, U.S. crude was hovering just shy of $49 a barrel.

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CNRL said it aims to quickly repay debt tied to the acquisition, which gives it significant exposure to synthetic crude oil. "However, because of the sizable addition of synthetic and heavy-oil volumes to CNRL's production portfolio, cash flow, absent hedging, will be more sensitive to changes in the price of light oil and the heavy-light oil price differential," DBRS said in a note.

The agency said it may consider a negative rating action if either crude prices or debt repayments are lower than currently expected and the recovery in key measures of credit is pushed "materially" beyond 2018. It currently maintains a BBB rating on Canadian Natural.

The company said it would finance the acquisition with $9-billion (Canadian) in loans and shares valued at $4-billion. Executives said they expect to pare debt with increased cash flow as companywide production climbs above one million barrels a day, a 25-per-cent increase from 2017 levels.

"We can see a clear path to again having the financial muscle and metrics we enjoyed in a $100 (U.S.) oil world," chief financial officer Corey Bieber told analysts on Thursday.

The company has racked up debt as it plows money into its expanding Horizon bitumen mine through more than two years of downturn.

Moody's Investors Service Inc. said the acquisition of Shell assets was credit negative for Canadian Natural, though it affirmed the company's Baa3 rating, and said its outlook remained "stable."

However, it said the company faces $4.1-billion (Canadian) in maturities through April, 2018, and would likely tap debt markets or sell ownership stakes in either PrairieSky Royalty Ltd. or Inter Pipeline Ltd. to cover an anticipated shortfall.

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Still, analyst Paresh Chari said in a note the higher leverage as a result of the Shell deal is offset by expected increases in total production and cash flow, assuming oil prices in the range of $40 (U.S.) to $60 a barrel.

Video: Carbon price not behind Shell’s oil sands sale: McKenna (The Canadian Press)
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About the Author

Jeff Lewis is a reporter specializing in energy coverage for The Globe and Mail’s Report on Business, based in Calgary. Previously, he was a reporter with the Financial Post, writing news and features about Canada’s oil industry. His work has taken him to Norway and the Canadian Arctic. More

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