Approximately US$276 million of rated debt affected
Toronto, February 03, 2016 -- Moody's Investors Service, ("Moody's") downgraded Northern Blizzard Resources Inc.'s (Northern Blizzard) Corporate Family Rating (CFR) to B2 from B1, Probability of Default Rating to B2-PD from B1-PD and confirmed the senior unsecured notes rating at B3. The Speculative Grade Liquidity Rating was lowered to SGL-3 from SGL-2. The rating outlook is negative. This action resolves the review for downgrade that was initiated on January 21, 2016.
"The downgrade reflects the decline in Northern Blizzard's cash flows expected in 2016 and 2017, which will result in weaker cash flow based leverage metrics," said Paresh Chari, Moody's Analyst.
Downgrades:
..Issuer: Northern Blizzard Resources Inc.
.... Probability of Default Rating, Downgraded to B2-PD from B1-PD
.... Corporate Family Rating, Downgraded to B2 from B1
Outlook Actions:
..Issuer: Northern Blizzard Resources Inc.
....Outlook, Changed To Negative From Rating Under Review
Confirmations:
..Issuer: Northern Blizzard Resources Inc.
....Senior Unsecured Regular Bond/Debenture, Confirmed at B3(LGD5)
Ratings Lowered:
..Issuer: Northern Blizzard Resources Inc.
.... Speculative Grade Liquidity Rating to SGL-3 from SGL-2
RATINGS RATIONALE
Northern Blizzard's B2 Corporate Family Rating (CFR) reflects the high leverage (debt to EBITDA 5x; retained cash flow/debt of 12%) expected in 2017, which will still benefit somewhat from oil hedges. The rating also reflects Northern Blizzard's concentration in heavy oil coming from mature fields in western Saskatchewan that mostly require enhanced oil recovery (EOR) in order to increase production. The EOR developments include water flooding, polymer flooding and thermal projects that require a significant amount of development capital and entail higher operating expenses than conventional primary production. Moody's expects production will likely decline by roughly 10% in 2016 and 2017. The rating is also supported by Northern Blizzard's adequate liquidity position.
Northern Blizzard 's SGL-3 rating reflects adequate liquidity through 2016. As of September 30, 2015 Northern Blizzard had minimal cash and C$463 million available (after LCs) under its C$475 million borrowing base revolving credit facility, which will term out in July 2016 and mature one year later. Moody's expects positive free cash flow of about C$60 million in 2016. Moody's expects Northern Blizzard will be well within compliance with its two financial covenants through this period.
There are no other debt maturities in the next two years. Alternate liquidity is limited given that substantially all of the company's assets are pledged under the revolver.
In accordance with Moody's Loss Given Default (LGD) Methodology, the senior unsecured notes are rated B3, one notch below the CFR, reflecting the priority ranking of the C$475 million borrowing base revolving credit facility in the capital structure.
The negative outlook reflects Moody's expectation that Northern Blizzard's EBITDA and leverage will continue to worsen beyond 2017 without an improvement in realized prices.
The rating could be upgraded to B1 if retained cash flow to debt was likely to remain above 20% and if EBITDA to interest was above 4x.
The rating could be downgraded to B3 if retained cash flow to debt was likely to fall below 10%, EBITDA to interest was likely to decline towards 2x or if liquidity worsened.
Northern Blizzard is a Calgary, Alberta-based exploration and production company that produces roughly 20,000 boe/day of which about 90% is heavy oil.