DBRS Limited (DBRS Morningstar) placed the A (low) Issuer Rating and Senior Secured Bonds rating of North West Redwater Partnership (NWR or the Issuer) Under Review with Negative Implications. This follows directly from DBRS Morningstar’s decision on March 26, 2020, to place all its rated North American oil and gas issuers, including Canadian Natural Resources Limited (CNRL; rated BBB (high) by DBRS Morningstar), Under Review with Negative Implications in response to the recent extreme price declines and heightened volatility in the crude oil and petroleum-producing markets, as well as uncertainty regarding the length of time for which these conditions will persist. CNRL guarantees the payment obligations of Canadian Natural Resources Partnership (CNR), one of two toll-payer counterparties to the Tolling Agreement with NWR, with a 25% offtake obligation. The other counterparty to the Tolling Agreement is Alberta Petroleum Marketing Commission (APMC), a Crown agency of the Province of Alberta (Alberta), with a 75% offtake obligation. Although DBRS Morningstar downgraded Alberta’s Issuer Rating on March 19, 2020, to AA (low) with a Negative trend from AA with a Negative trend, DBRS Morningstar notes that this downgrade, in and of itself, did not prompt the rating action for NWR.
DBRS Morningstar views the rating of NWR as between the rating of CNRL and APMC because of contractual terms in the Tolling Agreement that commit the two toll payers to unconditionally pay their committed portion of the Issuer’s debt service regardless of facility completion, performance, or utilization on a several (not joint) basis. While each offtaker is only responsible for its own committed portion, DBRS Morningstar believes that APMC’s economic incentive to step in and take over CNR’s obligations should CNR default provides some support to the ratings under normal circumstances and allows the ratings to be between that of CNRL and Alberta.
DBRS Morningstar outlined its view of the impact of the current economic and oil price situation on the oil and gas sector extensively in its March 26, 2020, press release “DBRS Morningstar Places North American Oil & Gas and Oil Field Service Issuers Under Review with Negative Implications.” In addition to impacts on CNRL, any pressure on refining margin, as discussed in the press release, could put potential pressure on sales revenue of refined product from synthetic crude oil, which NWR has been utilizing to help supplement cash flow for commissioning costs associated with the delay in reaching the Commercial Operation Date (COD). However, NWR continues to make progress toward achieving COD and, in its February 2020 update, maintained its target to introduce bitumen feedstock in the coming months. DBRS Morningstar will continue to monitor the impact of Coronavirus Disease (COVID-19) on NWR’s progress toward COD.
The Under Review with Negative Implications status on CNRL is generally resolved with a rating action within three months. In the absence of other factors, this should also result in a resolution of NWR’s status. However, if heightened market uncertainty and volatility persists, DBRS Morningstar may extend CNRL’s Under Review status for a longer period of time. In such a case, NWR’s Under Review status may also be similarly extended.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
The principal methodologies are Rating Project Finance and DBRS Morningstar Criteria: Guarantees and Other Forms of Support, which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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