Q3 2020 Canadian Natural Resources Ltd Earnings Call
[music] good morning, ladies and gentlemen, and welcome to the Canadian National Natural resources earnings.
<unk> results conference call and webcast.
After the presentation, we will conduct a question and answer session instructions will be given at that time. Please note that this call is being recorded today November <unk> 2020 at nine Am Mountain time.
I would now like to turn the meeting over to your host for today's call Corey Bieber Executive advisor. Please go ahead Mr. Beaver.
Thank you operator, good morning, everyone and thanks for joining <unk> 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.
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.
Thank you Corey good morning, everyone Canadian natural delivered top tier operational results in the third quarter.
79% of our liquids production from our high quality on life low decline assets, which were resilient and volatile pricing and it was an adult.
Operational excellence ability to enhance margins and capital discipline, we delivered significant substantial cash flow in the quarter.
The strength of cane 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 Jan.
Dan natural 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 stakeholders and highlights from the port our total recordable injury frequency 0.28 down 51% since 2000.
15 awarded approximately $550 million in contracts to 150 individual businesses trio.
Three out of eight of our into our into our female of our independent directors.
Corporate GHG emissions down 16% from 2015.
Sales science mining and in situ GHG kensie down 36% from 2016.
At quest or 70% owned carbon capture facility, we reached a milestone in the third quarter with a cumulative 5 million tons of Cotwo injected equivalent to taking 1.25 million cars off the road annually.
And we are a leading capture ann's question of sales too in the oil and gas sector worldwide.
These are just a few examples our SG excellence in.
In our oil sands operations, we can develop technologies used in Canadian ingenuity to continue to move it closer Canadian Natural's Aspirationally goal of reaching net zero emissions.
Hey, unnatural has multiple pathways to achieve net zero.
With 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 the clearest group to net zero of any global asset.
Operationally Canadian Natural's third quarter results are.
Quarterly production of 1.11 million Beuys with natural gas production of 1.36 Bcf and liquids production of approximately 884000 barrels a day as we maximize production as profit per our 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 with North America Q3 natural gas at 1.34 as expected down from Q2 of 1.43, we continued to focus on operational excellence and our Q3 North American natural.
Gas operating costs were strong at about 14 per Mcf.
First Q2 levels.
All are 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.
Much less than our target of 3000 per beauty and we remain on track that 35 million cubic feet per day of natural gas volumes annually in the third quarter Canadian 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 set to this and Townsend areas with toll program targeting at approximately 95 million cubic feet of natural gas and 2900 barrels of NGL for less than $5000 per B. Riley.
Our Q3 in North American light oil and NGL production was 79600 barrels.
Down by approximately 3%, primarily result, natural declines and maintenance activities in the quarter Q3 operating cost decreased to 14 13 per barrel versus Q2 of 14 41 per barrel.
Overall, our international assets as 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 30 to use 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 of 2000 approximate 26, six primarily due to planned maintenance activities. The substation bounce Kyle field and natural field declines with operating costs of approximately 42 10 per barrel.
Subsequent to quarter end, we announced the operator of South African block 11, and 12, we made a second significant gas condensate discovery.
Exploration well was drilled encountered 73 meters of net pay and is currently being tested with deliverability results targeted by year end 2020.
The natural as a 20% working interest expenses cost of the wells to be fully carried per the farmout agreements.
Heavy oil production increased in Q3 to approximately 71000 barrels a day versus second quarter of approximately.
62500, as we reinstated temporary continual production related to low pricing.
Q3 operating costs decreased 15, 96 per barrel for Q2 operating costs of 17 97, reflecting our focus on cost control.
A key component of our long life low decline assets is our world class Pelican Lake pool, where our 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 of research results to read stating while servicing activities in the quarter offsetting natural decline operating costs continue to be very strong at 565 76 per barrel versus Q.
[music] two of 631 per barrel.
Pelican, our team continues to drive operational excellence and with our low decline and very low operating costs 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 cost in Q3, we are near our record low at 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 Jackfish 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 ESCO 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 Scotford upgrader with 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 this'll key targets to resume full expanded capacity in December 2020.
This additional capacity so Pete will allow for increased margin enhancement in our oil sands mining upgrading segment as well subsequent quarter end planned maintenance was completed horizon and it's currently at 260000 barrels a day I will now turn it over to Mark for a financial review.
Thanks, Tim the third quarter with 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 Verizon and corporate 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 US 30 to $31 WT.
And a unique portfolio of assets with low decline supported by zero decline production from our mining assets, which provide high quality premium value of synthetic crude oil production.
Our balanced and diverse product mix limits, our exposure to one product with fourth quarter production targeting approximately 45% high value light crude oil synthetic crude oil and NGL sales 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 requires less maintenance capital providing sustainability through volatile prices.
In the fourth quarter, we are targeting over 1.6 Bcf a day of natural gas production, including our recent acquisition.
Based on the current Q4 strip pricing, including the value of the liquids our natural gas assets are forecast to generate approximately $1.2 billion in annualized operating cash flow.
The operating flexibility of our asset base and the ability of our teams to execute the plans was evident in the quarter quarter as we balanced production within the asset base to increase funds flow and maximize value.
Our flexible capital allocation ensures long term free cash flow generation and continued balance sheet strength.
Net debt decreased by $1.1 billion compared to Q2 20 levels as free cash flow contributed to debt repayment in the quarter.
Liquidity remains strong at the end of Q3 with total availability of $4.2 billion, including cash and short term investments and we retired a $1 billion bond at maturity in August.
Our long life low decline assets and effective and efficient operations gives us the ability to sustain returns to shareholders over the long term. This.
This is demonstrated by the 20 consecutive years of dividend increases and reflects our culture of continuous improvement our ability to be effective and efficient and the relentless focus at Canadian natural in controlling our costs.
This all contributed to significant free cash management generation and strong financial results in the quarter.
With that I'll turn it back to you Jim.
Thank you Mark Canadian Natural's ability to deliver significant and sustainable cash flow is driven by our effective and efficient operations our drive continuous improvement and for 2020, we are on track for targeted savings of approximately $745 million.
As an example, Q3 29 2020, North American MPLX operating costs down 17% versus Q3 2019, as a result of our effective and efficient operations. The quality of our assets, we have a low free cash breakeven, including capital expenditures plus current and dividends of approximately 30.
To 31 use per barrel.
Canadian natural continues to take a 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 we'll continue to lower intensity as we work towards our aspirational goal of net zero and you also.
In Q4, we are targeting over 1.6 Bcf of natural gas production, including our recent acquisition based on the current natural gas strip pricing, including the value of liquids and natural gas assets could generate approximately $1.2 billion on an annualized basis in summary, we continue to focus on safe reliable operations.
Patients, reducing our GHG intensity enhancing our top tier operations, a high power high quality diverse assets are delivering top tier cash flow generation, we are unique sustainable robust and clearly demonstrate the ability to deliver returns to shareholders by balancing our four pillars.
Is it too early.
It's too early to say okay. Okay second question is.
Sorry, sorry go ahead.
Yes, we really didn't get a chance to test scotford here before curtailments here in November.
Okay, Okay understood and maybe just to come back to the last conference call and this is prepaying that pony, but a question for Mark.
I think you're thinking at that time was just like our our net debt should be kind of flat year over year.
If you exclude painted pone 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.
Yes, Thanks, Greg I mean, certainly the commodity prices are ever changing here and that was an august pricing kind of strip, but yes, I think if you exclude the acquisition from a capital perspective in Q4, 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 Q4.
Okay terrific. Thanks, guys.
Thank you.
Your next question comes from Neil Mehta from Goldman Sachs. Your line is open.
Hey, guys. Congrats on a good quarter here. The first question I had was around your natural gas business can you talk about how you see this fitting in strategically in the context 15 keys portfolio, whether you want to grow gas as a percentage of mix over time, and then you talk about at the script being.
1.2 billion dollar cash flow business can you kind of frame out what do you think the free cash flow is so help us understand the capex associated to fund that cash flow.
Yes, so just in the context of our natural gas volumes, obviously, what we target to do is add value long term and so whether it's gas oil.
Really.
With our asset base try and maximize value.
All the time so so if you look at this year.
We started off at 4.1 billion, we went down to 2.7, obviously that the original budget had more oil weighting.
We have is 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 2.7 billion into natural gas because it's a more value added at septimus and towns and so so you know from a.
There was no intent to grow one product or another every.
Every year, we look at it in every it 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 Tom.
Towns in here in the fourth quarter back to I mean, really a big part of that it's all there just free cash generation from.
Our operations. So it's it's it's really.
Okay. That's the only way to look at it in the short term yeah, no very clear on.
The follow up is just around capital spending.
So couple of questions. There are you guys still plan on doing the open house later this year I guess, how the virtually is that when we will get a sense of 2021 spend I know you mentioned some release 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, Neal it's Mark we're still working through that yes, we do plan to have an announcement or a release in sometime in December around.
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 right now so it's too early to really.
Kind of indicate directionless, we've got to kind of work through the final touches on it.
Okay. All right. Thanks, guys looking forward. Thanks.
Okay.
Your next question comes from his seat Sanchez from Bank of America. Your line is open.
Thanks, Good morning.
Tim We finally have started to see some M&A in the space both in the Us and Canada.
Can for you what do you think is triggering this mini wave.
You have said no holes in the portfolio, but from a broader industry standpoint in North America do you see more consolidation.
What do you see as the main impediments for consolidation.
Yes, I think.
Probably are in a time of.
Consolidation obviously there.
Theres, some very healthy companies.
And there is some companies are so healthy.
Mostly through the consolidation thing.
There are opportunities to improve your operations both on capital and.
Oh Gee in AG and such so so I.
I think on a broader basis, yes, we will continue to be some consolidation here over the next year as well.
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 in these cycles.
M&A does happen.
Okay great.
And Tim on your international asset portfolio.
And you have some good cash flow generating assets in North Sea and offshore Africa. How do you see that portfolio are there rooms to deepen or rationalize how you think about that portfolio.
We like her intangible assets.
Free cash generating.
We made several billions of dollars over the years out of those those assets over time, because they are free cash generation.
No, we're very happy with them and we'll just continue to invest prudently into those assets to continue to generate free cash flow.
Thanks.
Well.
Your next question comes from Menno Hulshof from TD 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 Cobiz, but can you just give us an update on what the data looks like so far.
One 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 operational target. Thanks, Yeah. I mean I kept this is a is a is a great project. Obviously, we're piloting it we wanted to.
Pilot is again further this year to refine it.
From.
Sediment stacking perspective, it worked well.
We needed to get a higher stack ability in the higher fines area.
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 various.
That was supposed to happen this year.
In the meantime, because we can't pilot and the Cobi seems to be dragging on a little longer.
We've been doing basically commercial.
Commercial engineering with the people that were involved with iPad.
Just to keep that progressing there in terms of commercial mobility.
We are looking to step into it what it is you would step into it over time and I believe it was 2026 kind of type range that we'd start converting over to high pump. So it was going to be a very.
Methodical process in terms of converting over to IP.
Starting at 20.6 is around.
Okay. So the 2026 timeline still seems achievable.
I think so yes, we'd like to really get out there and do the final testing on the high finance material just to ensure that we we feel comfortable with where its its suitability but.
I guess, so far that's still the plan.
And then in terms of the conversion you'd be thinking sort of three to five years or.
This order bit longer.
Three to five.
Thats about right timeframe.
Perfect. Thanks, Jim Thank.
Thank you.
Your next question comes from Manav Gupta from Credit Suisse. Your line is open.
Hey, guys I think on the last earnings call. Dan you, specifically said that maybe then flex up Pomona muscle into Q and I think it was under appreciated how strong that muscle was because the volumes is leaking settling into cost linked to 70 by so congratulations on that my question here is.
Is that so.
As part of our policy and C fault or do you leave us thinking as horizon Global Tel money on fuel comes down because of the production curtailments, but now that the curtailments all gone.
I'll just any comments you might come down a little but then you have to think about and all of the need to do Tony could you run at a higher rate now that Thomas did that that production curtailments have gone.
Yes. So so yes. Thank you for the comments on the thermal piece.
Yes, so for the month of November obviously thermal will be curtailed as well as the Airseal peak.
In a few other properties and then when we hit into December.
We will start to increase production you will well, obviously, we'll take a look at.
How much we would want to increase our thermal production based on pricing.
With the flexibility on that the the cyclic steam side.
We may be better off to delay a cycle and move it into next year. So so we are always looking at that and seeing how we can maximize value to their production in general for December would go up.
Okay, and one follow up so.
And reaching 19, what's the next important milestone on data point and you can watch and in your opinion could this be a 2020 one event the stock up envisioning three.
Yes.
I understand that there is a.
Some information that's supposed to come on to the courts potentially next week.
Which would then.
Given that.
Kind of stepping stone into finishing.
And three so.
Hopefully that'll proceeds there kind of in the mid 2021 timeframe. So.
But I believe its next week, but really you'd have to talk to 10 bridge.
Thank you for taking my question.
Well.
Your next question comes from Matt Murphy from Tudor Pickering Holt Your line is open.
Hi, Thanks. Good morning, maybe just a quick follow up on Michael's question on iPad, App and maybe broadly on capital associated with achieving net your ambitions over time I guess just curious how you think about investment in emissions reduction technologies. For example, as part of the broader capital allocation process is it coming down to returns.
Since the returns in competing for capital or something.
Some incremental consideration for the environmental side for example.
Really if we try and balance both obviously returns are extremely important and so if you look at something like IPO what was really so.
So motivating to do that is one it reduced our GHG emissions.
Secondly, it it got rid of our tailings pond and with that we had to reduce liability in terms of reclamation. So so what we try and do is find projects, which complement our operation add value long term as well as producer environmental footprint. So.
We try and balance many different items and.
Our teams are very good at to come.
Coming up with creative ideas to reduce or environmental footprint and add value. So.
You know I think through.
Through our technology and innovation group under Joy.
That is very.
Structured in terms of pushing.
Projects that give us returns.
Rather than just to.
Okay project.
Just thanks, Tim It and maybe just a quick follow up for.
For Mark on the on the comments on non meaning large maintaining largely flat net debt year over year I think one of the key moving pieces that we talked about previously was some 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 on what component in the fourth quarter. Thanks.
Yes sure of assets I mean, it's always difficult to to predict the changes in working cap as we go through to 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 a pickup from it in Q3, which we kind of expected.
And contributing to that ability to repay debt along with the free cash flow.
So it's difficult to predict but but outside of that again with with the assets the ability to.
To to generate free cash flow in the fourth quarter will be evident I think even at lower commodity prices given the low breakevens.
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.
Thank you good morning.
Well.
I guess, what I'd like to maybe understand going back to I think it was but odds question a little bit on.
Moving crude down an increasing production in December which seems fairly tight WCS the key.
Differentials.
As you think about your.
31 dollar break even and potentially wider differentials I think rather whether or not you increase production somebody else is what do you think is kind of your tolerance for a wider WCS differential as you increase production in Q.
I would guess more like early 21, more so than than the end of 2000.
Yes, you know if you look at what's going on here over the last year or two really there hasn't been any scenario.
And if can production assets not on the.
The heavy oil thermal side and so.
What we've seen here.
Basically from March to essentially November was the decline in oil storage in Alberta I.
I think it went down to around close to 20 million barrels.
Obviously with curtailment coming off.
Well as maintenance being completed whether its horizon SLP or.
The other properties.
In northern Alberta mining properties.
So typically we do see a higher.
Production during the winter months, obviously, because it's the weather and obviously, we're going to run into what you have to be able to run whole winter. So.
There could be some pressure, but its storage levels were down at around 22.
A million barrels.
Pipelines essentially.
Okay.
Storage was going down.
September and October.
Chronically a portion of it was 12 and 18% to which makes zero sense. So that obviously, there's still game a chip being done on the apartment side, but.
I think.
Other than just a company is running no production there I don't really see it a lot of production adds that other than just people trying to run at the maximal capability of their properties.
No I mean that makes sense.
So I mean should we think about at them more as whatever the marketplace is what the market takes are not worry so much about a.
Specific differential and I'm thinking or what.
Ultimately kind of push the whole curtailment was obviously.
Quite the collapse and in the market.
So do you think you know as we if we want to go above say $15 equal it will be a little more careful or pull back or.
Hey, after all it's the oil market and we'll all just push until we pushed her and get pushed back the other way yes.
Yes, I just look at it nobody really has added any capacity so.
You know other than you know.
Really brentano production I don't see it to.
Being really a long term thing you know again during the winter months, so if you're going to run your operations are going to run kind.
Kind of a good rate not necessarily full depending on the pricing.
But once March hits.
Turnaround activities begin again, and you know that pressure comes off so I really look at it as a short term blip of maybe some gamesmanship in terms of apportionment and defer.
Differentials, but.
You know it really there has not been a 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.
You know there was some incidents on the pipeline side.
Right around the November timeframe that to put the pressure on the differentials.
Okay. Appreciate it thank you yeah.
Yeah.
There are no further questions at this time I'll turn the call back over to the presenters.
Thank you operator, and thank you everyone for attending our 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 performance is contributing to substantial and sustainable free cash flow is together with effective capital allocation can.
Rebates to our overall goal of maximizing shareholder value.
Do you have any further questions. Please don't hesitate to give us a show thanks and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.