Q3 2020 Canadian Natural Resources Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the Canadian National Natural Resources earnings results Conference call and webcast. After the presentation. We will conduct a question and answer session and instructions will be given at that time.
Please note that this call is being recorded today November 2020, Ninee I'm not in time.
I would now like to turn the meeting over to your host for today's call Corey deeper Executive advisor. Please go ahead Mr. Beaver.
Thank you operator, good morning, everyone and thanks for joining our third quarter 2020 conference call with me. This morning is our president Tim Mckay and Mark Stainthorpe, Our Chief Financial Officer.
Before we begin I'd refer you to the special note regarding non-GAAP measures contained within our press release Ethernet.
These measures used to evaluate the company's performance should not be considered to be more meaningful than those determined in accordance with <unk> for us.
I would also like to refer you to the comments regarding forward looking statements 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 stated.
With that I'll now pass the call over to Tim.
You Corey good morning, everyone Canadian natural delivered top tier operational results in the third quarter.
Only 9% of our liquids production from our high quality on life low decline assets, which resilience in volatile pricing and it was an adult our operational excellence to lead to enhance margins and capital discipline, we delivered netscout substantial cash flow in the quarter.
The strength of key natural business model are also applied environmental social and governance to deliver industry, leading performance across the board a significant factor in our long term sustainability.
Cannot true and the entire Canadian oil and gas sector leads the world and has delivered game changing environmental performance in the third quarter, we published or 2019 stewardship report to stakeholders and highlights for the park heart.
Total recordable injury frequency <unk> 0.28 down 51% since 2015 awarded approximately $550 million in contracts 250 individual businesses three.
Three out of eight of our into hurricanes or female of our independent directors corporate GHG emissions downstream.
16% from 2015, well science mining and in situ GHG can see down 36% from 2016.
Quest or 70% on carbon capture facility, we reached a milestone in the third quarter with a cumulative 5 million tons of C. O. Two injecting equivalent to taking 1.25 million cars off the road annually and.
We are a leading capture is question of C. O two in the oil and gas sector worldwide. These are just a few examples every S.T. excellence.
Oil sands operations.
Develop technologies using Canadian ingenuity to continue to move it closer can naturals aspiration goal of reaching net zero emissions.
Natural has multiple pathways to achieve net zero.
These actions identified in the near mid and long term and the strength of Canadian Natural's Canadian oil Sands mining assets is that its long life no decline and with its manufacturing like operations. It can have one of the clear throat, if not that clear as a group and that's true of any global asset.
Operationally can you.
Naturals third quarter results are.
Quarterly production of 1.11 million Beuys natural gas production at 1.36 Bcf and liquids production of approximately 884000 barrels a day as we maximize production, that's correct curtailment optimization strategy and effectively and efficiently conducted maintenance.
Starting with natural gas Q3 overall production was 1.36 Bcf a decrease from Q2 of 1.46, but North America Q3 natural gas at 1.34 as expected down from Q2 of 1.43, we continue to focus on operational excellence and our Q3 North American natural gas.
Cash operating cost was strong at about 14 per Mcf.
First Q2 like dollar 11, we.
We continue to add low cost natural gas volumes, which has resulted in adding approximately 58 million cubic feet per day for approximately $2000 per view EDI much less than our target of 3000 per b. We remain on track that 35 million cubic feet per day of natural gas volumes annually in the third quarter can you.
Natural realized the North American natural gas price up to 25 per Mcf, approximately 49% higher than Q3 2019.
With the strong natural gas pricing the company has reallocated capital within its existing budget to both sepsis and towns in areas with the total program targeting at approximately 95 million cubic feet of natural gas and 2900 barrels of NGL for less than $5000 per be read our.
Our Q3, North American light oil and NGL production was 79600 barrels.
By approximately 3% primarily result, natural declines and maintenance activities in the quarter Q3 operating costs decreased to 14 13 per barrel versus Q2 of 14 41 per barrel.
Overall, our international assets tests Q3 production of 38800 barrels a day as expected offshore Africa was 17500, which is comparable to Q2 at 17 for.
Operating costs in Q3 were 12 32 U.S. per barrel versus Q2 767 per barrel as a result of lifting schedule.
In the North Sea production averaged 20, approximately 21200 barrels a day in Q3 down from Q2 20, approximately 26, six primarily due to planned maintenance activities. The cessation of Pap, Kyle field and natural field declines with operating cost of approximately 42 10 per barrel.
Subsequent to quarter end, we announced the operator, South African block 11, B. and 12 me made a second significant gas condensate discovery.
Exploration well was drilled counted 73 meters of net pay and is currently being tested with deliverability results targeted by year end 2020.
Not sure I was a 20% working interest expects cost of the wells to be fully carried per that's farmout agreements heavy oil production increased in Q3 to approximately 71000 barrels a day versus second quarter of approximately.
52500, as we reinstated temporary continual production related to loan pricing.
Q3 operating cost decreased 15 96 per barrel from Q2 operating costs of 17 97, reflecting our focus on cost cuts.
A key component of our long life low decline assets is our world class Pelican Lake tool revenue.
Leading edge polymer flood continues to deliver significant value.
Third quarter production was approximately 56400 barrels a day up from the second quarter of 55700, primarily a result result, reinstating well servicing activities in the quarter offsetting natural decline operating costs continue to be very strong at 565 76 per barrel versus Q.
Due to a 631 per barrel and Pelican, our team continues to drive operational excellence and with our low decline and very low operating cost Pelican Lake continues to have excellent netbacks.
Our thermal team had a great third quarter with the thermal production record of 287970 barrels a day up from Q2 of approximately 213000 barrels a day operating costs in Q3 were near our record low 785 per barrel down 23% versus Q2.
Operating costs 10 13.
Some of the highlights from the third quarter Kirby North production was very strong at 42400 barrels above our nameplate capacity of 40000.
Fish was a record for Canadian natural at 120 to 346 barrels a day. These are just a couple examples for the great work done by our team.
At our oil Sands mining operations Q3 was three 350000, approximately 350600 barrels as planned maintenance was conducted with strong operating costs of 23 81 per barrel of SQL as our teams are very focused on driving operational excellence.
As part of the company overall strategy to maximize value and enhance margins work at the Scottrade Upgrader, which completed an increased capacity approximately 320000 barrels a day in late October the Albion Ron.
And ran at rates of approximately 345000 barrels a day of bitumen and Scotford process at approximately 200 323000 barrels a day as a result of noncore curtailments Hisel key targets to resume full expanded capacity in December 2020.
This additional capacity so Pete will allow for increased margin enhancement.
Sense mining upgrading segment as well substance at quarter end plan maintenance was completed at horizon and it is currently 260000 barrels a day I will now turn it over to Mark for a financial review.
Thanks, Tim.
Third quarter was strong operationally and financially as we delivered significant free cash flow of approximately 1 billion after capital and approximately $470 million after capital and dividends with adjusted funds flow of 1.74 billion.
These results reflect high planned maintenance and turnaround activity at both ryzen in scotford in the quarter.
Net earnings in the quarter were also strong at 408 million.
This clearly demonstrates the advantages of having a low cost structure with breakeven prices, including maintenance capital and the dividend at U.S., 30% to $31 W. T.
And a unique portfolio of assets with low decline supported by zero decline production from our mining assets, which provide high quality premium value synthetic crude oil production.
Our balance and diverse product mix limits, our exposure to one product with fourth quarter production targeting approximately 45% high value like crude oil synthetic crude oil and Ngls approximately a third heavy thermal crude oil and approximately a quarter natural gas on a b OE basis.
Importantly, approximately 80% of our liquids production is from long life, low decline assets, which require less maintenance capital providing sustainability through volatile prices.
Cash breakeven, including capital expenditures, plus current and dividend of approximately 30 to 31 U S per barrel.
Natural continues to take proactive and effective steps to ensure the health and safety are people working for us and we continue to enhance our COVID-19 program across the company. We are track to achieve our environmental targets and will continue to lower intensity as we work towards are aspirational goal of net zero and you're all set.
In queue for we are targeting over one six bcf of natural gas production, including a recent acquisition based on the current natural gas drip pricing, including the value of liquids or natural gas assets could January approximately 1.2 billion.
On an annualized basis in summary, we continue to focus on safe reliable operations, reducing our GHT intensity enhancing our top tier operations Ah hour high quality diverse assets are delivering top tier cash flow generation, we are unique sustainable robust and clearly.
Right the ability to deliver returns to shareholders by balancing are four pillars at.
That concludes our queue three call I will now open the line for questions.
To ask a question you will need to press star one on your telephone keypad to withdraw your question crashed pounder hash key.
Your first question comes from break party from RBC capital markets. Your line is open thanks.
Good morning, a couple of questions for you.
Maybe just to come back to the to the capacity growth would scoff burden then, let's maybe just we've been horizon, but do you see further low cost debottlenecking capacity increases that you could do here either in 21 or or 22 is there is there much is there so much low hanging fruit there for you to to go after.
Well.
<unk> there is still some some capacity there that won't help until 2022, but.
That we're working through with our partner and then as far as horizon, Yes. There is opportunities to further enhance that we're proceeding with some work into 2021 and again in 2022, but there is there is some value enhancements there that can happen as as we.
Continue to operate these facilities, we're always looking for opportunities to.
Enhance that production as well as lower our costs.
Okay terrific and just with Scott for it I mean, just rough order of magnitude similar to what you've just done it 20000 or or is that too early.
It's too early to say, okay. Okay second question reasons.
Sorry, sorry go ahead.
Really didn't get a chance to test scot-free here before curtailments here in November.
Okay. Okay I understood, maybe just to come back to the last conference call in and this is pretty painted pony, but question for Mark you know I think you were thinking at that time was just look for our net debt should be you know kind of flat year over year.
If you exclude painted pony and then just look at how things shake out.
Through the balance of the year would you still come close to that do you think I mean, you've obviously made good progress with this quarter.
Yeah. Thanks, Greg I mean, certainly the commodity prices are ever changing here and that was on August pricing kind of stripped but yeah. I didn't give you exclude the acquisition from a capital perspective in queue for we're going to generate strong free cash flow in the quarter and if you exclude that will will be driving towards those levels. So that free cash flow as you saw in Q3.
Going to debt repayment and again seeing strong cash flow at current strip pricing in queue for.
Okay terrific. Thanks, guys.
Thank you.
Your next question comes from Neil May Test from Goldman Sachs. Your line is open.
Hey, guys congrats on a good quarter here.
First question I had was round your natural gas business can you talk about how you see this fitting in strategic green the context of <unk> portfolio, and then whether you want to grow gas as a percentage of mix overtime and then you talk about at the script it being a $1.2 billion cash flow business can you kind of frame out what do you think.
The free cash flow is so I'll help us understand the capex associated to fund that cash flow.
Yeah. So it's just in the context of our natural gas volumes, obviously, what we target to do is add value longterm and so whether it's gas oil.
Really.
With our asset piece try and maximize value.
All the time so so if you look at this year.
Start off at 4.1 billion, we went down to two seven obviously that original budget had more oil waiting.
Greater pricing and better value for us.
As we got into June July natural gas prices continue to strengthen and obviously reallocating capital within that context of the two 7 billion into natural gas because it's more value added at septimus in towns and so so.
There is no intent to grow one product or another every.
Every year, we look at it and every it'd all the time.
Modifying our plan to maximize value.
In terms of the free cash flow.
It's really difficult to to say, we have a small program here at Septimus and.
And town.
Towns in here in the fourth quarter, but I.
I mean really big part of that it's all just free cash generation from.
Our operations so it's really.
That's the only way to look at it in the short term yeah.
Very clear.
The follow up is just around capital spending uhm. So a couple of questions. There are you guys still planning on doing the open house later this year I guess I'll be virtually is that when we will get a sense of 2021 spend I know you mentioned some Ah released in December.
And in any early thoughts and flavors, just given where the curve is how it could look relative to the $2.7 billion. This year.
Hey, Neil it's Mark.
We're still working through that yes, we do plan to have an announcement or release sometime in December.
Around what the budget is for 2021.
We're still working through how that will actually be communicated whether it's.
More or full blown presentation or not but we will get there we're going through it right now so it's too early to really.
Kind of indicated directions, we got to kind of work through the final touches on it.
Okay, Alright, thanks, guys looking for thank.
Thank you.
Your next question comes from a message send some bank of America.
Okay. Your line is open thanks.
Good morning.
We finally have started to see some M&A in the space within the U S and Canada.
Can for you what do you think is triggering this many way you have said no holes in the portfolio, but from a broader industry standpoint, North America, you see more consolidation.
What do you see as the me.
Main impediments for consolidation.
Yes, I think we've.
We probably are in a time of of <unk>.
Consolidation obviously.
There is some very healthy companies and.
And there's some companies are so healthy obviously through the consolidation thing.
There are opportunities to improve your operations both on capital and.
And G&A and such so so.
I think on a broader basis, yes that will continue to be some consolidation here over the next year is.
We've seen.
Whether how it happens.
Who does it that's always hard to say.
Really it's just.
To me just a cycle.
And it's pretty common.
And the cycles.
That emanate does happen.
Okay, great and.
Tim on your international asset portfolio.
And you have some good cash flow generating assets and not see an offshore Africa. How do you see that portfolio are their rooms to deepen or rationalize how do you think about that portfolio.
No, we like courage capital assets.
They are free cash generating.
We made several billion dollars over the years out of those those assets over time, because they are free cash generation.
We're very happy with them and we'll just continue to invest prudently into those assets to continue to January free cash flow.
Thanks.
Well.
Your next question comes from Minto, who saw some television securities. Your line is open.
Good morning, everyone I just have one question on your in pit extraction process given the.
Potential for a pretty significant reduction to the bedroom and emissions.
Just looking at the press release, you talked about pilot work, having slowed down because of Covid, but can you just give us an update on what the data looks like so far.
Of your best guess on where things stand in terms of the the timeline to commercialization if everything goes according to plan and maybe some high level thoughts on how important. This work is in the context of your net zero aspirational target Ikea.
Is is a great project, obviously, we're piloting it we wanted to pilot again further this year to refine it.
Hmm.
Sediment stacking perspective, it worked well.
We needed to get a higher stock ability in the higher fines.
Areas as well as recoveries on the higher fine material was was.
Not as good as we want it. So so we wanted to do some refinement in the high find verea that was supposed to happen this year.
In the meantime, because we can't pilot it in the Kobe seems to be dragging on a little longer.
We've been doing basically commercial commercial.
Commercial engineering with the people that were involved with AIPAC.
Just to keep progressing there in terms of commercial ability.
We are looking to step into it put it as as you would step into it over time and I believe it was 2026 kind of time frame that we'd start converting over type. So it was going to be a very.
Methodical process in terms of converting over to AIPAC, starting at 2026 years around.
Okay. So the the 2026 timeline still seems achievable.
I think so yes, we'd like to really get out there and and and.
And do the final testing on the high fines material just too.
Ensure that we feel comfortable with where it's ability but.
Yes, so far that still the plan.
And then in terms of the conversion you'd be thinking sort of three to five years or.
Yes order bit longer.
Three to five.
Spoke to a timeframe.
Perfect. Thanks, ma'am thank.
Thank you.
Your next question comes from Minaj Gupta, Some credit Suisse. Your line is open.
Hey, guys I think on the last openings call Tim used specifically set that we've been flex up I wanted muscle in thank you and I think it was under appreciated how strong that muscle was because the volumes it'll 87 and the cost meant does that we need to buy so congratulations on that my question here is is.
That's.
As the part of our policy and <unk>, we were thinking as hot item goes up Tomlin Insitu comes down because of the production curtailments, but now that the 10 minutes are gone.
I'll just need common in seeking like unbound on this little but do you have to take it down to all they need to do told me all could you run into higher right now that come with the production like aliens Hogan.
Yes. So so yes. Thank you for the comments on the third piece.
Yeah. So for the month of November obviously thermal will be curtailed as well as their soapy.
And a few other properties and then when we hit into December.
We will start to increase production.
Well, obviously, we will take a look at.
How much we'd want to increase our thermal production based on pricing.
With the flexibility on the.
The cyclic steam side, we may be better off to delay a cycle and move it into next year. So so we're always looking at that and seeing how we can maximize value, but the production in general for December would go up.
Okay, and one follow ups and drink 19, what's the next important milestone on data point, we can watch and in your opinion could this be a 2021 event, let's talk about love Edenbridge nine three.
Yes.
I understand that there is a.
Some information that supposed to come out of the courts potentially next week.
Which would then.
Kind of give them that.
Kind of stepping stone into finishing.
<unk> so.
Hopefully that all proceeds they're kind of in the mid 2021 timeframe. So.
But I believe it's next week, but really you would have to talk 10 bridge.
Thank you for taking my question.
You're welcome.
Your next question comes from Matt Murphy, Some tuner Pickering Holt Your line is open.
Hi, Thanks. Good morning, maybe just a quick follow up on Meadows question, I, Pap and maybe broadly on capital associated with achieving net zero ambitions over time I guess, just curious how you think about investment in emissions reduction technologies. For example, as part of the the broader capital allocation process is it coming down to returns.
Versus returns and competing for capital or some.
Incremental consideration for the environmental side for example.
Really we try and balance both obviously returns are extremely important and so if you look at something like iPad what was really.
So motivating to do that is one reduced or GHT emissions.
Secondly, it got rid of our tailings pond and with that we had a reduced liability in terms of reclamation. So so what we try and do is find projects, which complement our operation had value long term as well as producer environmental footprint. So.
We try and balance many different items and.
Our teams are very good at.
Coming up with creative ideas to reducer, environmental footprint and add value. So.
I think.
Through our technology and innovation group under Joy.
Is very structured in terms of pushing.
Projects that give us returns.
Rather than just to to.
A project.
Thanks to them and maybe just a quick follow up.
For Mark on the on the comments on meaning lard, maintaining largely flatten that that year over year I think one of the key moving pieces that we talked about previously was so I'm working capital movements over the course of the second half of the year I'm. Just wondering if you could remind us how you're thinking about the progression of cash from that come out what component in the fourth quarter. Thanks.
Yeah sure I mean, it's all.
Always difficult to to predict the changes of worrying cap as we go through it'll depend a little bit on on pricing and how December looks as far as receivables as we get paid in the following quarter. So you did see I'll pick up from it in Q3, which we kind of expected.
And contributing to that ability to repay that along with the free cash flow.
So it's difficult to predict but but outside of that again with the assets the ability to.
[noise] to generate free cash flow in the fourth quarter will be evident I think even Ah.
Lower commodity prices given the low breakeven.
Thanks, guys.
Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Roger Roger read from Wells Fargo. Your line is open.
Okay. Thank you and good morning.
Just what I'd like to maybe understand going back to I think it was but ask question a little bit on.
You know moving crude down and increasing production in December we seem fairly tight W. C. S. W. Ti differentials as you think about your 31 dollar break even and potentially wider differentials I think <unk>, rather whether or not you incur.
Kris production somebody else is what do you think is kind of your tolerance for a wider WCS differential as you increase production in queue.
I would guess more like early 21, more so than than the end of the 20th.
Yeah. If you look at what's going on here last year or two really there hasn't been any.
Significant production ads not on the.
The heavy oil thermal side and so.
What we've seen here.
Basically from March two essentially November whereas decline in oil storage.
Berta.
Think it went down to ground close to 20 million barrels.
Obviously with curtailment coming up as well as maintenance being completed whether it's horizon ESOP or.
The other properties.
In northern Alberta mining properties.
Typically reduce the higher.
Production during the winter months, obviously because of the weather and obviously, if you're going to run in the winter you have to be able to run all winter. So.
Could be some pressure, but if storage levels were down at around 22.
1 million barrels.
Pipelines essentially.
With storage was going down.
September and October.
<unk> a portion of it was 12 and 18%, which makes zero sense. So the obviously, there's still game of chip being done on the apportionment side, but.
I think.
Rather than just company is running out production there I don't really see a lot of production ads other than just people trying to run a maxwell capability of their properties.
No I mean that makes sense.
So should we think about it than moores whenever the marketplace is what the market takes or not worry so much about spit.
Specific differential and I'm thinking of what.
Ultimately kind of pushed the whole curtailment was obviously quite.
Quite to collapse in in the market. So do you think.
If we were to go above $15 equal will be a little more careful or call back or.
After all it's the oil market and we'll all just push until we pushed her.
Her and get pushed back the other way.
Yeah, I just look at it nobody really has added any capacity so.
Other than.
Really random production I don't see it.
Being really a long term thing.
During the winter months, if you're going to revenue operations, you're going to run kind.
Kind of had a good rate not necessarily full depending on the pricing, but once March hits.
Turnaround activities begin again and.
That pressure comes off so I really look at it as a short term blip of maybe some gaming chip in terms of apportionment and diff.
Differentials, but.
Really there has not been significant amount of supply on it's just all going to be how companies run during the winter months and obviously, what's really important is our pipelines to continue to run safely and reliably over the winter months.
In the past couple of years.
There was some incidents on the pipeline site.
Right around on November timeframe that put the pressure on the differentials.
Okay I appreciate it thank you yep.
Yeah.
There are no further questions at this time I was trying to call back over to the presenters.
Thank you operator, and thank you everyone for attending a conference call. This morning, Canadian Natural's large diverse asset base continues to drive significant shareholder value the ability of our teams to deliver effective and efficient operations with top tier performances contributing to substantial and sustainable free cash flow. This together with effective capital allocation contributes to.
Your overall goal of maximizing shareholder value. If you have any further questions. Please don't hesitate to give us a shout, thanks and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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