Post by
Huntamun1234 on May 14, 2024 1:15pm
S+P Global Rating
-- Strathcona Resources Ltd. has steadily increased its production scale,
exiting 2023 with 186,000 barrels of oil equivalent (boe) per day of
production and net proved reserves of 1.15 billion boe, which enhances the
company's credit profile, in our view.
-- At the same time, the company repaid the outstanding amounts under the
term loan facility, alleviating associated refinancing risk. Based on
projected free cash flows and recent upsizing of the credit facility to C$2.5
billion, we believe the company will maintain sufficient liquidity over our
forecast period.
-- Accordingly, we revised the outlook to positive from negative.
-- We also affirmed our 'B+' issuer credit rating on Strathcona and 'BB-'
issue-level rating on the senior unsecured notes. The '2' recovery rating on
the senior unsecured notes remain unchanged.
-- The positive outlook reflects the potential for an upgrade if the
company continues to demonstrate consistent operating performance at current
production levels and lowers borrowings under the credit facility.
TORONTO (S&P Global Ratings) May 13, 2024--S&P Global Ratings today took the
rating actions listed above. We believe Strathcona's production scale and
reserves base is comparable with that of higher-rated peers, underpinning the
rating action. Strathcona's operational scale has increased rapidly, and we
expect production to average close to 200,000 boe per day by 2025 compared
with 68,000 boe per day in 2021, primarily fueled by the company's acquisitive
growth strategy. The acquisitions pursued over the past two years have been
complementary to existing assets, enabling the company to achieve scale in
each of its core operating areas (Lloydminster, Cold Lake, and Montney).
Most of the production is conventional heavy oil and thermal bitumen (about
two-thirds), resulting in higher cash flow and profitability volatility than
that of many rated peers focused on light oil production. However, we believe
the start-up of the Trans Mountain pipeline expansion project (590,000 barrels
of oil per day of additional egress capacity) will tighten heavy oil
differentials and reduce potential for widening heavy differentials over our
forecast period. At the same time, the company's natural gas and condensate
production provide a natural hedge to its heavy oil's fuel costs and diluent
blending requirements respectively.
We believe acquisitions may remain part of the growth strategy, but their pace
will likely subside in the near term as management focuses on optimizing
existing assets, debottlenecking, and pursuing brownfield expansions to grow
production. In addition, the company has a relatively large resource base,
with net proved reserves of 1.15 billion boe and a proved reserve life index
of more than 15 years that provides good visibility to low-risk, long-term
stable production. In our view, the increased scale is comparable with that of
higher-rated peers and is the key factor underpinning the positive outlook.
To support a higher rating, we would need Strathcona to demonstrate consistent
operating performance and maintain the current profitability assessment. Our
business risk assessment factors in the relatively high cost structure
compared with that of peers focused on light oil and natural gas development.
Although the company has a low decline rate and all-in finding and development
costs, its cash operating costs and EBIT breakeven are relatively higher than
peers' and are primarily attributed to the blending costs required for its
heavy oil/bitumen production.
We expect cash costs on a per boe basis will decrease as production increases
and benefits from optimization initiatives. The company, for instance, is
investing in expanding capacity at Meota, debottlenecking in Lindbergh (to
reduce steam oil ratio) and investing in a waste heat recovery project in
Orion to reduce operating costs. Accordingly, we believe Strathcona can
maintain our current profitability assessment (calculated on a five-year, unit
EBIT/thousand cubic feet basis) in the middle of our North American peer
group's range, assuming operating performance remains consistent.
We project strong credit measures, but Waterous Energy Fund's (WEF) ownership
constrains upside to our financial risk assessment. We estimate Strathcona to
exhibit solid leverage metrics over the next two years, but improvement to our
financial risk assessment remains constrained by our view of WEF as a
financial sponsor. Specifically, we project average adjusted funds from
operations (FFO) to debt above 60% and debt to EBITDA of close to 1.5x over
the next two years based on our current oil and gas price assumptions and
production estimate of 190,000-200,000 boe per day. Based on the company's
projected operating cash flow and capital spending needs, we project solid
free cash flow generation but expect it to be largely distributed to
shareholders once the company achieves its publicly stated debt target of
C$2.5 billion, which we believe will occur this year. We assume management and
owners will maintain moderate financial policies, especially when commodity
prices are weak, and continue to adhere to their long-term target of debt to
EBITDA below 1.5x.
While we believe the company has sufficient liquidity, the credit facility
remains largely drawn limiting flexibility to manage unexpected events. S&P
Global Ratings believes Strathcona's C$2.5 billion net debt target will
generate cash flow and leverage metrics appropriate for a 'BB-' credit rating.
Based on the projected free cash flow generation under our base case and
estimated availability of more than C$500 million under the credit facility,
we believe Strathcona will have sufficient liquidity over our forecast period.
Nevertheless, the current composition of the company's total debt, with the
drawn amount under its credit facility representing 76% of total reported debt
at Dec. 31, 2023, could constrain liquidity if an unanticipated market or
operational adverse event occurs. The company's C$2.5 billion term credit
facility remains largely drawn since it funded the acquisition of Serafina
Energy Ltd. in July 2022 for C$2.3 billion.
We believe material reduction in borrowings under the credit facility would
allow management additional flexibility to manage unexpected events. For
instance, the credit facility is a committed four-year term facility (March
2028 maturity) but has a springing maturity of May 2026 that comes into effect
if US$500 million of senior unsecured notes due August 2026 remain outstanding
at that point.
The positive outlook reflects significant growth in company's scale and
reserves over the recent years, and our expectation that the company will
maintain profitability as it focuses on optimizing its assets. We also expect
the company to generate strong credit measures, with adjusted FFO to debt
averaging above 60%. The outlook also reflects our expectation for positive
free cash flow generation and adequate availability maintained under the
credit facility. We assume the company will address the maturity on the senior
unsecured notes due August 2026 over the next year.
We could revise the outlook to stable over the next 12 months, if:
-- Profitability weakens;
-- The company outspends internally generated cash flows, hampering
liquidity; or
-- Adjusted FFO to debt falls below 45%, with limited prospects of
improvement. This could occur if hydrocarbon prices underperform our current
assumptions, and the company continues to pursue more aggressive financial
policies, such as debt-funded shareholder returns.
We believe the company's scale and reserves is comparable with that of peers
rated 'BB-'. Accordingly, we could raise the rating over the next 12-18
months, if Strathcona demonstrates consistent operating performance at current
production levels, maintaining profitability in the midrange of the global
peer group. In this scenario, we expect the company to maintain adjusted FFO
to debt above 45% and materially lower borrowings under the credit facility,
while adhering to its publicly stated C$2.5 billion net debt target.
Environmental and social factors are negative considerations in our credit
rating analysis of Strathcona. With the company's upstream operations largely
focused on heavy oil (close to 70% of projected average daily production), the
environmental risks associated with the greenhouse gas-intensive operations
are a material factor in our rating analysis.
The credit profile is also exposed to the social risks in the supply chain
that contribute to delays in completing new pipeline projects, which have
resulted in heightened heavy oil price differential volatility relative to
global benchmark prices in the past and stunted the oil sands sector's growth
prospects.
Governance is a moderately negative consideration, as is the case for most
rated entities owned by private-equity sponsors. We believe the company's
financial risk profile points to corporate decision-making that prioritizes
the interests of the controlling owners. This also reflects the generally
finite holding periods and a focus on maximizing shareholder returns.