A number of rated Canadian midsize E&P companies have created substantial financial profile cushion that will likely limit rating downside as they pursue their announced organic growth projects. Companies like Paramount Resources Ltd. and Crew Energy Inc. have enhanced their financial position by repaying amounts drawn under their committed credit facilities and reducing long-term debt. As a result, S&P Global Ratings believes these companies can achieve their growth ambitions as they execute their development plans without jeopardizing their existing financial risk profiles and ratings during our current 2023-2025 cash flow forecast period. Beyond our current forecast period, the potential for upgrades would depend on the scale of absolute production growth, the scope of achieved product-mix diversification, the resilience of operating profitability, and continued adherence to supportive financial policies.

Existing Acreage Can Fuel Production Growth

While there have been several large-scale mergers and acquisitions (M&A) announced in the Canadian energy industry this year, many Canadian E&P companies have remained focused on organic growth while streamlining their asset portfolios through small-scale noncore asset dispositions. Some of the organic growth plans announced this year highlight the key differences in the Canadian landscape compared to the wave of M&As announced in the U.S. As noted in our recently published report "What’s Driving The New Wave Of U.S. E&P Consolidation?" (Oct. 19, 2023), the primary factors driving increased U.S. M&As stem from the accelerating depletion of producers' core inventory, leading to a need for consolidation to increase inventory of high-quality drilling locations and improve operating efficiencies. Canada, however, is one of the largest resource holders globally behind only Saudi Arabia and Venezuela.

The Government of Alberta estimates that using currently available technology and under the current economic conditions, there are 165 billion barrels of remaining established reserves in the oil sands deposits of Northern Alberta. An additional 250 billion barrels could potentially be recovered with more favorable economic conditions or new technology to extract and process. At Canada's current crude bitumen production of about 1.2 billion barrels per year, there are centuries of inventory remaining. While oil sands operations are expensive to build, they come with a multi-decade reserve life index given the very low decline rates associated with oil sands assets. Canada's conventional and shale production is a similar story. S&P Global Commodity Insights (S&PCI) estimates that as much as 50% of remaining Montney drilling locations are within the most productive, or Tier 1, inventory for the majority of producers. Additionally, abundant inventory remains in Canada's smaller plays like the Cardium, Duvernay, and Spirit River. S&PCI estimates that at 2022 run rates, most operators in these three plays have several years' (and in some cases, decades') worth of undeveloped drilling inventory remaining in core acreage. For example, S&PCI estimates that Paramount Resources Corp. has roughly 35 years of core inventory remaining in the Duvernay based on its 2022 run rate.

As a result of this vast undeveloped resource base, ample internal growth opportunities exist within core inventory for most Canadian E&P companies, providing significant capital-efficient growth prospects without the need to pursue M&As.

Cost-Effective Organic Growth With Limited Credit Risk

In our view, the growth projects outlined below, which we expect companies will primarily fund through internal cash flow generation, are also largely more capital-efficient on a US$ per daily flowing boe basis compared to announced transactions in North America this year. Here, we compare the total growth capital investment per daily flowing boe of incremental production for these projects versus announced acquisition costs per daily boe of production. All four projects are below the average transaction value of roughly US$50,000 per daily flowing boe (see chart 1).

Chart 1

We believe there are a number of rated Canadian E&P companies that will likely be able to maintain stable credit profiles as they exploit their existing acreage to grow.

International Petroleum Corp.

In conjunction with the release of its 2022 year-end financial statements, International Petroleum Corp. (IPC) announced the sanctioning of Phase 1 of its greenfield thermal bitumen project, Blackrod. The project represents the first greenfield oil sands project to be sanctioned in roughly five years. The in-situ facility, which will use steam-assisted gravity drainage technology to extract bitumen, will have 30,000 barrels per day (bbl/d) of capacity and with an expected cost of about US$850 million (C$1.1 billion). Roughly US$110 of the total announced capital cost is allocated to contingencies. After accounting for anticipated declines in some of IPC's more mature assets over the project's development period, we expect Blackrod to increase IPC's production to about 70,000 boe/d by 2028, or a roughly 40% increase relative to current production of about 50,000 boe/d. IPC intends to fully fund the project's development through cash on hand and forecast free cash flow generation from its current operations. At the end of the third quarter of this year, IPC had roughly US$540 million of cash on hand and a fully undrawn C$165 million revolving credit facility. The company also completed a US$150 million tap issue under its existing 7.25% US$300 million notes due February 2027 in the third quarter of this year. Although this increased the company's gross reported debt by 50%, we believe the proceeds from the add-on, substantial cash on hand, and undrawn revolver provides more than sufficient liquidity cushion to fund the anticipated growth plan and absorb any potential cost overruns and hydrocarbon price volatility without the need to further increase leverage.

Crew Energy Inc.

In December 2022, Crew Energy Inc. announced a four-year plan to increase production to roughly 60,000 boe/d upon completion, which represents about 100% growth from the company's current production of about 30,000 boe/d. The key driver of this growth is the expansion of the company's gas processing infrastructure in the Groundbirch area, anchored by the construction of an electrified 180 million cubic feet per day (mmcf/d) deep-cut gas plant. Crew has more than 2,500 identified potential drilling locations, only 219 of which are currently booked, which supports the goal to double production by the end of 2026. Management expects to execute this plan while maintaining a target of reported net debt to EBITDA (on an annualized basis) ratio of approximately one times or less through that period. The company anticipates total capital investments through 2026 to be between C$1.4 and C$1.5 billion and expects to make a final investment decision on the project in 2024. Earlier this year, Crew fully redeemed its remaining 2024 notes and its recently upsized C$250 million 364-day credit facility was only C$48.7 million (19.5%) drawn as of Sept. 30, 2023. While the company has indicated it would need to pursue financing to facilitate its growth plan, there is substantial downside cushion on its existing rating to support incremental debt of up to C$500 million within Crew's capital structure based on our current forecasts.

Obsidian Energy Ltd.

On Sept. 21, 2023, Obsidian Energy Ltd. announced a three-year corporate plan focused primarily on growth from its Peace River asset, which will grow production to 50,000 boe/d in 2026, an almost 70% increase from current production of about 30,000 boe/d. This growth will also contribute to material growth in the company's liquids weighting from an estimated 67% in 2024 to 76% in 2026, which we believe will likely support higher future per unit profitability. Obsidian expects significant inventory will also remain for future growth post 2026. The three-year plan anticipates drilling only 23% of its expected year-end 2023 un-risked locations at the Peace River asset and the company expects to have 43% of the total proved and probable (2P) locations for its light-oil assets remaining beyond 2026 from those identified at year-end 2022, which does not include any potential future locations beyond the five-year future development capital horizon. We estimate total capital expenditures for 2024-2026 of about C$1.25 billion, and we believe roughly C$600 million of this amount is related to maintenance capital spending at the company's light-oil assets over the three years. Based on our current oil and gas price assumptions, S&P Global Ratings expects the company to fund its full capital spending program through internal cash flow generation without compromising the existing rating.

Paramount Resources Ltd.

Paramount Resources Ltd.'s five-year corporate plan targets production of between 140,000 boe/d and 155,000 boe/d in 2028, about a 50% increase relative to estimated 2023 production. With about 50% of the company's annual capital spending of between C$850 million and C$1 billion geared toward growth, we estimate the total growth capital expenditures to increase production to the targeted 2028 level at roughly C$2.3 billion for 2024-2028, which includes both field development as well as infrastructure spending. This includes the planned new processing facility in the Willesden Green Duvernay area with ultimate capacity of 150 mmcf/d of raw gas and 30,000 bbl/d of raw liquids handling. Based on Paramount's significant acreage and estimates of full field development locations, management expects to sustain plateau production of between 140,000 boe/d 150,000 boe/d for 15-20 years through the organic development of its existing 2P reserves base. We expect Paramount to generate roughly C$1.2 to C$1.4 billion of funds from operations in 2024 and 2025 under our current price assumptions, which should more than cover both its forecasted maintenance and growth capital spending, as well as its C$215 million annual base dividend. The company's fully undrawn C$1 billion credit facility and lack of long-term debt also provide substantial flexibility to absorb unanticipated cost increases to these organic growth objectives.

Well Positioned To Fund Growth Objectives

While the outlined growth projects are small on a national scale, they represent material production growth for the Canadian midsize E&P companies we rate (see chart 2).

Chart 2

With the vast amount of debt repayment across the industry and within this group, there is substantial cushion on financial metrics to fund large organic growth opportunities, especially given the projects will likely be primarily funded through internal cash flow generation. We expect these companies' minimal long-term debt, largely undrawn credit facilities, and/or material cash on-hand will likely allow them flexibility to absorb weaker hydrocarbon pricing, cost overruns, or unanticipated market or operational events while pursuing these growth initiatives without compromising their current ratings (see table).

In our view, growth through organic development of existing contiguous acreage could have less integration and development risk than growth pursued through acquisitions. As a result, we see the projects as viable paths to strengthen certain business risk profile factors like operating scale and profitability with limited financial profile downside risk given the ample downside cushion in S&P Global Ratings' current and projected cash flow ratios, and these companies' total liquidity sources.

This report does not constitute a rating action.