Q1 2020 Earnings Call

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Thursday Thursday

Good morning, ladies and gentlemen, and welcome to the Canadian natural resources earnings results conference calls after the presentation will conduct a question-and-answer session instructions will be given at that time. Please note that this call is being recorded today, May 7th 2020 at 8 a.m. Mountain time. I would now like to turn the meeting over to your host for today's call Cory Bieber executive adviser, please go ahead mr. Reber. Thanks and enjoy the day.

Thank you operator. Good morning everyone and thank you for joining our first quarter 2020 conference call with me this morning are Tim McKay our president Scottsdale Chief Operating Officer for oil fans off. Victor Chief Operating Officer for exploration and production and Mark stainthorpe Chief Financial Officer. In order to facilitate today's call. We will be referring to a number of slides which are currently available on our website. I would encourage you to download this package to facilitate following along with the presentation further. I would ask that any detailed modeling questions be directed to investor relations office rather than be handled on this call before we begin. I would refer you to the special note regarding non-gaap measures contained in our press release. These measures used to evaluate the company's performance may not be considered to be more meaningful than those determined in accordance with IFRS. I would also like to refer you to the comments regarding forward-looking information.

Contained in our press release and also note that all amounts are in Canadian dollars and production and reserves are expressed as before royalties unless otherwise noted with that now pass the call over to a gym. Thank you. Very good morning everyone in q1 twenty-twenty Canadian deliberate top-tier operational results. We already unique Energy company as we all kind of repast economic long-life loaded coin assets a history of capital discipline and operational excellence and relative to most of our peers the ability to enhance margins on a few if any of our peers can deliver sustainable cash flow Canadian natural has a proven effective strategy and as a result can a natural is in a strong position and we are delivering in today's environment ensuring a sustainable dividend to our shareholders, which is robust in a volatile commodity price environment moving to slide six Canadian natural continues to be dead.

Active an effective take proactive and effective steps to ensure the health and safety of our people working for us. We continue to enhance our covid-19 program across the company and now have

Added the requirement of field Personnel in our camps to wear face masks and shared spaces our teams continue to do a great job and minimizing the impacts of covid-19 to our operations wage.

Moving to slide 7 k a natural had a very strong operational result as we achieved record quarterly production of 1.179 million per day and record liquids production month approximately 939000 barrels per day. We effectively executed or curtailment optimization strategy achieving the maximum allowable production under the government alberth guideline while prioritizing high-value production oil sands Mining and upgrading also had a strong quarter with March being a record production of approximately 478000 barrels a day of operating costs in the quarter. We're also very strong and will continue to improve our e&p liquids q1 operating costs $15.71 a barrel or 1090s per barrel and our industry-leading oilsands Mining and upgrading costs were impressive $27 per barrel wage.

1543 us per barrel more importantly, we are targeting an impressive 745 million dollars of operating costs improvements in twenty-twenty finally as a result of operational excellence. We had no asset impairments despite the low prices at the end of the quarter.

Friday as a reminder Canadian natural has a balance and diverse product mix with approx 48% That is light crude oil s e n g l n g e l on a daily basis limiting her exposure to one product or liquids production. 77% is long light blue decline asset which is sustainable through volatile prices as they require less money. We have 1.4 b c f or natural gas production 20% of our beliefs, which is well positioned to capture additional value with the strengthening natural gas prices.

Slide nine Canadian natural ability to deliver cash flow in today's environment starts with our large long-life slow decline asset base of approximately 750,000 Thursday, which has low maintenance Capital requirements and it's sustainable allowing us to withstand commodity price changes are Diversified products and assets are driven by are effective and efficient operation. Our area knowledge ownership and operatorship of infrastructure. We have 1.4 b c f and natural gas and our assets and with our assets ability to add low-cost production wage culture of continuous Improvement is unique among appears as our teams are focused on delivering margin growth across the asset base over and above what we see today.

Canadian natural strategy includes flexible and effective Capital allocation and our ability to be nimble to capture the opportunities. Our strategy is simply to optimize our location to maximize value for shareholders. Our teams are focused and their containers to drive efficiencies across the company with improved pricing or operating cash flow from our natural gas assets contribute, approximately seven hundred million dollars over the next twelve months as a result of our effective and efficient operations quality of our assets. We have a low free cash brakes including Capital expenditures plus current events have approximately 30 to $31 per barrel. I will now talk to the robustness of our assets slide 12 today and natural reserves for the highest among peers showing the strength and depth of our assets with approximately twenty-seven years reserve life index of which 84% represents long life.

low decline Reserves

All sounds mining Reserve index is an oppressive forty plus years. Not only slide thirteen. Not only do we have the largest proven develop producing Reserve Base when compared with our low cost structure effective and efficient operations make our PDP reserves with us giving us the highest value among peers slide fourteen similar wage compared to our peers with our PDP and proven undeveloped reserves who have massive when compared When comparing to our peers. Once again, reflecting the strength of our local wage structure and effective and efficient operations slide fifteen as a result of a unique asset base can a natural corporate decline in slow at approximately 10% off with approx 62% of our production being long life low decline or zero declined production requiring much less maintenance Capital to maintain production making our cash flow more predictable.

And sustainable an actual corporate maintenance capital is top-tier in 2019 at approximately $6 us per b b u e which is was approximately 75% lower than the pure average.

We have for 2023 used it to $4 and approximately $4.50 which gives Canadian natural a huge advantage over our peers and supports our industry-leading free cash flow and reflects through a busness of our asset base.

Flight 17 further when comparing our Breakeven price with dividends. We are taught tear tear when compared to our Global. An impressive result again an indicator of the back of her assets and our top-tier operations in the oil sands. We're all friends minding an upgrade operations continue to be top tier and is approximately 40% lower than other operations wage, which reinforces why Canadian natural is unique and has a strong position in a low price environment.

I will now talk to our capital and operational discipline by Twenty and natural has a relatively balanced Capital spending throughout twenty-twenty and at the end of q1. We're only spent Thirty 1% of our Capital since the beginning of the year. We've been able to continue to modify our Capital program and reduce our spending forecast, which is now targeting 2.68 billion down almost approximately 1.4 billion as well, which was focused on continuous Improvement effective and efficient operations. We continue to find Opportunities to drive our office down and are continually working with our service providers to find other savings. We are targeting significant Savings of approximately 745 million dollars for twenty twenty.

Flight 22 as you can see our teams have been focused on all of our costs. We have many opportunities and the drive to reduce the total cost and our company which now targeted at one point four billion of capital reduction and point eight billion of margin enhancements. We are focused on delivering Excellence a toll free cash flow enhancement of 2.2 billion months via natural. He's been a strong position. These challenging times are assets are a bust our culture working together ensures. We are effective efficient Innovative and Nimble with our Capital value for our shareholders with that. I will turn it over to mark for a financial review. Thanks Dan. I'd like to just take a few minutes and discuss the strengths of our financial position.

on Slide

For Canadian natural has a long history of capital discipline. We accomplish this by strategically allocating cash flow through our four pillars to maximize stakeholder value.

Returns to shareholders through dividends share repurchases balance sheet strength and discipline resource development and opportunistic acquisitions.

He's allocations change based on the economic environment and is a strength of Canadian natural the ability to be nimble and flexible and manage our business real-time supports our unique and Advantage asset base and strong business model.

Flight 25 the board of directors has shown confidence in the company's assets and ability to deliver strong and sustainable Cash Flow by maintaining the current quarterly dividend at 42.5 cents per common share with low brake even pricing the dividend remain sustainable.

Supporting this little break even is strong operating cash flow from our large a natural gas production that is benefiting from increased prices.

In q1 20 strong safe reliable production provided significant adjusted funds flow in excess of q1 capital program and dividend.

By 26 Canadian natural has demonstrated flexibility through adjusting our capital budget to the current environment with an annual reduction of 1.4 billion from the original budget to the correct point seven billion or 34% reduction.

Our balance sheet remains strong with significant liquidity at the end of q1 of about five billion dollars including cash of approximately 1.1 billion in the quarter. We have maintained a strong investment-grade credit ratings supported by a unique asset base that was resilient through commodity price Cycles.

We have a strong track record of returns to shareholders through dividends and share repurchases as mentioned have maintained the current dividend level.

Share repurchases have been suspended since March eleventh and the board of directors did not renew our NCI program which expires in May 2020 at this time.

switching to slide twenty-seven

our financing strategy includes maintaining balance sheet strength while maximizing Financial flexibility. The design considers cash flows debt maturities and liquidity coupled with flexibility with discipline Capital programs that Target to maximize Returns on Capital employed.

We target strong investment-grade credit ratings, which facilitate access to Capital markets balance sheet strength is core to Canadian natural. We believe the balance sheet is strong today and we will continue to focus on our financial position as we progress the commodity price cycle.

Our Financial Focus includes continuous dialogue with all three of our rating agencies to make sure they understand the uniqueness of our asset base and our business plan and just as importantly our flexibility to execute or revise the plunge. We also maintain a flexible capital structure. That's not overly reliant on any one source of funding with a focus on managing maturities. And as part of our robust financial position. We maintain a home equity to support delivering on our financial plan.

528 we have a strong and very supportive banking group comprised of world-class Canadian US Asian and European financial institutions.

We extended to twenty $22 and up side by 250 million a Term Loan in twenty-twenty providing additional liquidity and as mentioned total liquidity at the end of q1 was strong at 5 billion in cash of approximately 1.1 billion.

Flight 29 in the context of our massive Reserve Base. We have one of the lowest overall debt proved net reserves and as mentioned before these reserves are high-quality long life and life line providing additional support to debt levels.

It's like 30 beyond our strong adjusted funds full capital and operating flexibility. We also have other leavers to provide additional liquidity and support we have in the money cross currency swaps Thursday well as liquid investments in third parties.

We have seen very strong support from our banking group demonstrated through the extension and up size of the term Loan in 2020 as well. We have been approached by Banks and our banking group to provide additional liquidity if requested off its allows us to be opportunistic and accessing additional liquidity and debt couple of Market opportunities. If so, desired finally, we evaluate our business real time with current forecasts, including cash flow production and capital to ensure continued effective and efficient financial management.

On slide Thirty-One, we target sustainable dividend growth through the cycle and have done. So for the last twenty years. We are advantaged by our long life flow decline production be effective and efficient operations and low cost structure that provide low break-even costs and sustainability through the cycle battle. Pass it back to you Kim for summary. Thanks Mark Joseph Murray Canadian natural continues to take a proactive and affect the steps to ensure the health and safety of our people working for us. We continue to enhance our covid-19 program across the company and our safety performance trip down 20% since 2018 and 30% reduction for our contractors slide thirty-four as many as you gave me a natural has the aspirational goal of Net Zero and you all sounds and we remain committed to our environmental goals and in confident we can achieve them last December we stayed at home.

From Joel school at 25% reduction in greenhouse-gas emissions by 2025 your target reducing methane emissions in the business by 20% by 2025. Wow, well reducing or in freshwater intensity 50% and our fresh water river intensity in the mining by 30% both by 2022.

Slide thirty-five and natural is robust and with our long-life low decline assets. We are built for the long-term. Our teams are focused on reducing costs and deliver safe reliable production. We are focused on all of our production streams to maximize values and cash flow for the company while ensuring we maintain credit rating and liquidity.

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He announced his ability to deliver cash flow is driven by effective efficient operations a high-quality long-life low decline assets that have low maintenance costs and significant reserves that Joe million in a volatile price environments as WTI price has improved there is even more upside for our shareholders.

I Diversified products and assets are driven by effective and efficient operations our area knowledge ownership and operatorship of infrastructure. We have 1.4 b c f a natural gas and have the ability to add low cost production with strengthening natural gas prices are culture of continuous Improvement is unique among appears as a teens are focused on delivering margin growth wage is the asset base and as we move forward into twenty-twenty and Beyond we see these opportunities to further enhance or effective and efficient operations.

Their natural continues to be effective and efficient in our Capital allocation and Nimble to capture opportunities to maximize value for our shareholders Thursday. We have a history of capital discipline operational excellence. We have robust economic long life slow decline assets and relatives most of our. Ability enhancer. Marja with a free cash flow break-even had approx 3231 per barrel. We are delivering cash flow that is sustainable and most importantly allocating Capital to drive increasing returns home in a volatile price environment that concludes our q1 presentation. I will now open the line for questions.

Thank you to ask question. You will need to press star one on your telephone to withdraw your question. Press the pound key. Please stand by while you and a roster. All right, and your first question from Salon of Greg party?

Thanks. Thanks a good morning a couple of quick ones for maybe the first is you mentioned the 745 million your Target and could you talk about some of the steps you're taking or things that you're changing or will change in terms of achieving that number?

Okay, great. Thanks. So with the 7:45 what that is is every area every team has goals and objectives to to get to so often, you know, we've talked about it many times in the past. We're very focused on for DX we use what we call fits, which is a field Improvement Technique. We have rails which are rolling actionless. So so what it is, it's a combination of looking at what we do whether it's capital or operating and see what we can do differently to improve our efficiency to drive our costs on top of that. We've been, you know, very I would say proactive in terms of our cost structures. So, you know early March there would indicate that we're reducing our salaries here as a company and I can say that, you know, all our companies that we work with. In fact all Alberta companies feel the pinch. Yep.

Have here in Alberta and are working.

Extremely well with I think are all companies not are not only ourselves in terms of looking for opportunities of how they can be more effective and efficient in their operations as well as what they can do to lower our costs. They recognize we are in it together and we've had excellent response from many of our vendors and service providers. Okay. Thanks for that the 250 million of capex reduction. Where's that coming from? It's a blend between oil sands and operations. So so what it is is as we go through Thursday, we're looking at all items into saying what is potentially preferable or what is not even really needed in this type of environment.

Okay, last one for me is has your sustaining Capital permanently gone down with the re-engineering of your cost structure going through now.

Did you know that's a interesting question it really will depend on the the price forecast great. Cuz really what we're seeing is many of our vendors and service providers office. As I said earlier are working with us and many other companies and they understand how important it is to get our cost structure down. So yes, some of it will be permanent and yes, some will be not permanent in since you know wages and such if prices recover you'll lose some of that that wage part but most part that many service providers are looking for opportunities to become more efficient effective in their worry way they do work as well as ourselves. So there's It's a combination.

Thanks very much. Thank you, Greg.

And your next line of questioning comes the line of Benny Wong. Good morning, Betty. Hey, good morning. Good morning everyone. Thanks for taking my question. And I hope everybody on the line. That's healthy. But first question is is on a dividend, you know, obviously there's been a lot of focus on it and not just for seeing you but also for many other companies, can you maybe walk us through the rationale for maintaining your dividend just kind of through this downturn and what gives you confidence you're going to be able to maintain it while you know, a lot of your peers both in Canada internationally or or reducing off and just so we can kind of think about it go forward. You know, how bad would it need to get before that something that warms a hard. Look is it is it a certain oil price level or lovers level just curious in terms of how you guys are thinking about that?

Yeah, any so before we start I'll pass it on to Mark. I you have to look at the underlying assets. This company has in the uniqueness. We we are a top tier cake active efficient operation as well as we have very good assets. So so I think for the start of it you have to start there in understanding how good we are in terms of operational excellence. So, you know with that passive and tomorrow for further comment. Yeah. Hi Benny. You know what? I think what Tim says is being on so I think it speaks to the the resilience and sustainability of the assets and the and the board understands the box sets their ability to generate free cash flow sustainably even in low commodity price environments. So, you know that coupled with with low cost structures wage makes the dividend sustainable in in low commodity price environment. So so the board has shown confidence in that today.

Right. I appreciate appreciate the thoughts second is really a lot of focus in the market around, you know inventory.

T-Mobile and reaching congestion levels both in the US and Canada and and, you know, we're starting to see some creative ideas, but industry in terms of how to address it. Um, you know, I would appreciate some of the details in terms of your gadgets storage and Logistics ability. Just curious if you can maybe expand on that in terms of how how you guys think you