Moody's Cuts Canadian Oil Sands' Rating to Junk Status

CALGARY, Alberta—The credit rating of Canadian Oil Sands Ltd., which was recently acquired by Suncor Energy Inc., was cut to speculative grade on Friday, making it the first large Canadian oil producer to receive a "junk" credit rating in at least a decade.

Citing a high cost structure and low oil prices, Moody's Investors Service slashed its assessment of Canadian Oil Sands' senior unsecured debt by three notches to "Ba3," down from the lowest level of investment-grade credit, or "Baa3."

Moody's also cut its rating of Canadian Oil Sands' parent Suncor by one notch from "A3" to "Baa1," which remains in the higher quality investment grade debt category. The ratings outlook for both companies is now "stable," Moody's said.

Industry leader Suncor earlier this month acquired 73% of Canadian Oil Sands' shares, giving it control of the company, which is the largest owner of the Syncrude oil-sands mining consortium. Together with its existing stake, Suncor now effectively owns 49% of Syncrude.

Representatives for Suncor and Canadian Oil Sands weren't immediately available for comment.

Canadian Oil Sands' status as an affiliate of Suncor kept its credit two notches higher than Moody's stand-alone assessment of the company, but the junk rating reflects Suncor's decision not to guarantee about $1.5 billion in outstanding debt.

"In the last 10 years, it's the first time" a large Canadian oil company has lost its investment-grade rating, said Terry Marshall, a senior vice president at Moody's.

Calgary-based Nexen Inc. and Talisman Energy Inc. teetered on the brink of junk status with "Baa3" ratings and negative outlooks before each was acquired by companies with stronger balance sheets, he said.

Chinese state-controlled energy giant Cnooc Ltd. bought Nexen in 2013 and Repsol SA of Spain purchased Talisman last year.

Moody's said that, with operating costs of 55 Canadian dollars (US$39.69) a barrel, Canadian Oil Sands is suffering negative cash flow at current spot market prices for its synthetic crude processed from oil-sands asphalt.

"COS will need to rely on its committed liquidity and voluntary support from Suncor to fund negative free cash flow of about $400 million through" 2017, Moodys' said, noting Syncrude has experienced a series of operational problems that reduced its output.

Moodys' said its decision to cut Suncor's rating reflected a deterioration in the company's cash flow from low oil prices, its high level of spending to complete a new multibillion-dollar oil-sands mine and its increased stake in "the operationally challenged Syncrude mine and upgrader," which producers synthetic crude oil.

Mr. Marshall said the downgrade for Suncor resulted more from the drop in crude prices rather than its controlling stake in Canadian Oil Sands. "It's weighing on Suncor, but Suncor itself would have got down one-notch in any event given the price environment," he said.

Write to Chester Dawson at [e-mail]

(END) Dow Jones Newswires

February 12, 2016 17:45 ET (22:45 GMT)

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