Better than nothing(BMP) Moody's upgrades Strathcona's CFR to B1; affirms B3 notes
Moody's upgrades Strathcona's CFR to B1; affirms B3 notes
2023-12-15 21:18:31.924 GMT
Moody's upgrades Strathcona's CFR to B1; affirms B3 notes
Toronto, December 15, 2023 -- Moodys Investors Service (Moodys) upgraded
Strathcona Resources Ltd.s (Strathcona) corporate family rating (CFR) to B1
from B2, the probability of default rating (PDR) to B1-PD from B2-PD and
affirmed the B3 rating on the senior unsecured notes. The outlook was changed
to stable from positive.
"The upgrade reflects our expectation that Strathcona will sustain sufficient
liquidity to repay its term loan by February 2024, leading to stronger metrics
and better financial flexibility," said Whitney Leavens, Moodys analyst. "We
expect the company to remain focused on further debt reduction until reaching
its C$2.5 billion net debt target," she added.
The affirmation of the B3 senior unsecured rating positions the notes two
notches below the companys CFR, reflecting the priority ranking of the
sizeable C$2.3 billion first lien revolver. Moodys did not upgrade the notes
along with the CFR because the senior unsecured rating was already positioned
to reflect the previous positive outlook and strong asset coverage.
RATINGS RATIONALE
Strathconas B1 CFR is supported by: 1) strengthening credit metrics supported
by rising production levels and debt reduction; 2) low decline rate and
sustaining capital requirements underpinned by concentration in heavy oil and
oil sands assets; 3) a sizable production and proved developed reserves base;
and 4) good production diversification across three core areas providing
optionality around capital allocation.
The rating is constrained by: 1) a limited history of organic growth and short
track record operating its consolidated portfolio combined with rapid,
large-scale deals involving execution risks; 2) geographic concentration in
Western Canada, exposing the company to regional price discounts; and 3) an
aggressive funding strategy limiting financial flexibility to absorb earnings
volatility.
Strathconas liquidity is adequate. As of Q3 2023, we estimate that Strathcona
has about C$725 million in sources of liquidity through year end 2024,
consisting of minimal cash, about C$350 million available under the C$2.3
billion revolver expiring 2026 (pro-forma for the upsize following the
Pipestone Energy Corp. acquisition, assumption of Pipestone debt, and
discounting the $150 million headroom required under the revolver for
utilization toward repayment of the term loan) and about $375 million in free
cash flow from Q3 2023 through year end 2024 at Moodys midcycle prices. Uses
of liquidity include the term loan due February 2024, with about $350 million
outstanding pro-forma for the $175 million amortization in November 2023. The
senior unsecured notes mature in 2026. Moodys expects Strathcona to remain in
compliance with its three financial covenants. Alternate liquidity is limited,
as all assets are pledged to the first lien credit facilities.
The stable outlook reflects Moodys expectation that credit metrics and
liquidity will improve with ongoing debt reduction.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Strathcona maintains good liquidity while
demonstrating successful execution and the ability to grow production
organically at competitive costs while maintaining positive free cash flow and
RCF/debt above 40% and LFCR above 1.5x.
The ratings could be downgraded if RCF/debt is below 15%, if the LFCR is below
1x, or if Strathcona generates sustained negative free cash flow or the
companys liquidity profile deteriorates.
Strathcona Resources Ltd. is an oil and gas producer headquartered in Calgary
Alberta, with producing assets located across Western Canada. Strathcona is a
publicly traded company majority owned by private equity firm Waterous Energy
Fund.