Morningstar DBRS Upgrades Issuer Rating and Senior Unsecured Notes Credit Rating on Whitecap Resources Inc. to BBB From BBB (low); All Trends Are Stable

DBRS, Inc. (Morningstar DBRS) resolved the Under Review with Positive Implications status of Whitecap Resources Inc. (Whitecap or the Company) by upgrading the Issuer Rating and the Senior Unsecured Notes credit rating to BBB from BBB (low). All trends are Stable. Morningstar DBRS initially placed the Company's credit ratings Under Review with Positive Implications on March 11, 2025.

KEY CREDIT RATING CONSIDERATIONS
Whitecap closed the purchase of Veren Inc. (Veren) on May 12 that was initially announced on March 10, 2025. The credit rating upgrade reflects Morningstar DBRS' view that the acquisition materially improves Whitecap's business risk profile, which more than offsets a forecast modest increase in Whitecap's leverage. The upgrade also reflects the expectation that the combination of Whitecap and Veren's assets, located adjacent to one another and concentrated in the Alberta Montney and Duvernay, is likely to immediately yield good corporate, operating, and capital synergies. Looking ahead, additional synergies are likely to be derived through infrastructure optimizations.

These cost-related synergies should help Whitecap to gradually reduce higher initial leverage. Incorporating these expectations, Morningstar DBRS forecasts Whitecap's pro forma lease-adjusted cash flow-to-debt ratio to remain greater than 65% on a normalized basis. In summary, Morningstar DBRS believes that the acquisition will materially improve Whitecap's business risk profile and that its financial risk profile, although initially weaker, supports a one notch credit rating upgrade.

Whitecap has also entered into two agreements to dispose of certain non-strategic assets for aggregate consideration of $270 million, prior to any closing adjustments. The nonstrategic assets include approximately 8,000 barrels of oil equivalent per day (boe / d) (90% liquids) of medium oil production in southwest Saskatchewan and an 8.333% working interest in a natural gas facility in the Kaybob region. The dispositions are expected to close on or before June 30, 2025, subject to customary closing conditions, with the proceeds to be used for debt reduction.

CREDIT RATING DRIVERS
Although unlikely in the near term, a positive credit rating action would be possible assuming further material improvement in the Company's business risk profile, especially its production size and scale, proved reserves, and operating efficiency. Given the uplift that Whitecap's financial risk profile provides to the overall credit rating, a material weakening in oil prices that causes the Company's lease-adjusted cash flow-to-debt ratio to stay below 50% for an extended period could result in a negative credit rating action.

EARNINGS OUTLOOK
After accounting for the Veren combination and the non-strategic asset dispositions, Whitecap expects production to average 363,000-368,000 boe/d (62% liquids) for the second half of 2025. Despite the expectation for a reduction in unit operating costs from acquisition synergies, Morningstar DBRS forecasts a moderate reduction in net income in 2025 compared with 2024, the result of lower crude oil and natural gas price assumptions. Beyond 2025, Morningstar DBRS expects an increase in net income driven by higher forecast natural gas prices and continued gradual reduction in unit operating costs.

FINANCIAL OUTLOOK
Whitecap's total capex guidance for 2025 for the combined company is approximately $2.0 billion. On a combined basis and based on its base-case commodity price assumptions, Morningstar DBRS forecasts that Whitecap will generate near breakeven free cash flow (i.e., cash flow after capex and dividends) in 2025, with surpluses thereafter. At the close of the acquisition of Veren on May 12, 2025, the Company's total debt was approximately $3.5 billion. Based on its forecast, Morningstar DBRS expects the Company to maintain a lease-adjusted debt-to-capital ratio at around 25% through 2027. Whitecap also entered a new $3 billion unsecured four-year credit facility (the New Facility) with its syndicate of banks which replaced Whitecap's existing credit facility. With approximately $1.1 billion available on the New Facility at May 12, Whitecap has sufficient liquidity.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBBL
The CBRA reflects Whitecap's continued operational and development accomplishments including, among others, continual improvement in the long-term sustainability and profitability of light-oil weighted conventional assets; development of liquids-rich natural gas wells in both the unconventional Montney and Duvernay formations; and established partnerships and executed agreements to fund gas processing infrastructure projects; all augmented by the synergistic combination with Veren. However, price diversification for Whitecap's natural gas production is limited by lack of access to downstream natural gas transmission pipelines and remains a challenge.

Comprehensive Financial Risk Assessment (CFRA): AL
The CFRA reflects an increase in total lease-adjusted debt related to the Veren acquisition and a moderate decline in net income in 2025 compared with 2024. Beyond 2025, Morningstar DBRS forecasts an increase in net income, allowing Whitecap to gradually reduce its debt leverage. Morningstar DBRS believes the Company's financial risk profile supports the credit ratings.

Intrinsic Assessment (IA): BBB
The IA of BBB is within the Intrinsic Assessment Range and is based on the CBRA and CFRA, also taking into consideration current credit rating trend and peer comparisons, among other factors.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/454485.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factors had a relevant effect on the credit analysis: Morningstar DBRS considers the impact of both physical and transition risks associated with climate change with the transition risk deemed to be more substantial. Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant Environmental factor for Whitecap. This factor is relevant because ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada, including Whitecap.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Oil & Gas, Oilfield Services, and Pipeline and Midstream Energy Industries (May 6, 2025) https://dbrs.morningstar.com/research/453396

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025) https://dbrs.morningstar.com/research/447186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025)
https://dbrs.morningstar.com/research/454196

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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