Q2 2021 Canadian Natural Resources Ltd Earnings Call
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Yeah.
Good morning, we would like to welcome everyone to the Canadian natural resources 'twenty 'twenty 1.
<unk> quarter earnings conference call and webcast.
After the presentation, we will conduct a Q&A question and answer session.
Sections will be given at that time. Please note that this call is being recorded today August 5th 2021at 9 a M mountain time, probably not like to turn the meeting over to your host for today's call Corey Bieber Executive advisor. Please go ahead Sir.
Thank you operator, and good morning, everyone and welcome to Canadian Natural second quarter 2021, corporate update conference call Canadian natural had another strong quarter financially and operationally as I commented before I believe our asset base is unique amongst our peer group underpinned by long life low decline assets and complemented by our <unk>.
<unk> assets that allow us significant flexibility all of which can generate significant free cash flow.
Beyond our robust asset base. There is a corporate strategy that focuses on generating real returns for shareholders and have driven management team and our corporate culture that focuses on being effective and efficient.
Over the years Canadian natural has clearly demonstrated its robustness sustainability and the strength of its business plan.
For 2021 and beyond I believe we're 1 of only a few companies capable of delivering meaningful economic growth, increasing returns to shareholders and reducing absolute debt in a responsible manner.
And as both Tim and Mark will discuss we are pleased to provide additional clarity on how our substantial future free cash flows will be dispersed amongst our 4 pillars.
For today's call Tim Mckay, our President will first provide a corporate update and Mark Steyn Thorp, Our Chief Financial Officer will then provide an update on our 2021 financial outlook as well as our strong financial position. Tim will then provide a summary prior to opening up for questions.
Before we kick off I'd like to remind you of our forward looking statements of note in our reporting disclosures is that everything will be in Canadian dollars, unless otherwise stated and as well we report our reserves and production before royalties I would also suggest you review our comments on non-GAAP disclosures, so with that I'll turn it over to you Tim Thank you Corey.
Good morning, everyone.
Natural delivered strong operational results for the second quarter.
We achieved quarterly production of approximately 142 million P lease per day.
As a result of our long life.
Bus low decline assets operational excellence and with our capital discipline generated significant free cash flow.
We balanced free cash flow to our 4 pillars of capital allocation maximizing value for our shareholders.
The first 2 quarters of 2021.
We have reduced net debt by.
$3.1 billion returned approximately $1.3 billion to our shareholders through dividends and share repurchases.
Maintained capital discipline.
Executed an artistic transactions, which will add long term value.
The strengths of Canadian natural business model are also applied to environmental social and governance to deliver industry, leading performance across the board.
Significant factor in our long term sustainability.
For the period from 2016 to 2020, and our oil sands operation Our G. H T intensity is down 38% North American E&P methane emissions are down 28% and.
Incorporated in this time, we have taken are equivalent to over 1 million cars off the road annually and over and above we are the leading capture and sequester of cotwo in the oil and gas sector worldwide. Our safety record is top tier corporate total recordable industry frequency improved to 0.0.0.21 and 2.
Thousand 20, a reduction of 58% from 2016.
In June we announced the oil sands pathway to net zero initiative and alliance of oil sand industry participants have a goal of achieving net zero emissions in the oil sands operations by 25th.
This is an important initiative in the oil sands industry participants that Canadian natural will further strengthen our leading ESG performance, while delivering meaningful and mission.
Emission reductions and balancing sustainable economic development.
Well the acquired collaborations with the federal and Alberta governments. So that together, we can help achieve candidates climate goals.
With the positive outlook for commodity prices for 2021, we have increased our annual capital budget by $275 million.
The breakdown is as follows our conventional and unconventional budget has increased by $120 million, primarily for additional drilling 78 wells and development activities with a targeted capital efficiency of approximately $8400 per flowing Boe.
And giving us a 2021 exit rate of approximately 14000 boe's per day.
$110 million related to long life, low decline assets of which $75 million primarily relates to the additional scope completed an extended turnaround time to complete the horizon turnaround in the second quarter.
$35 million per 110 is for construction of 3 pads at Primrose 2 at Kirby North and 2 at Kirby, South which will support production addition.
Additionally, in 2022 and beyond.
Our area based dynamic program has been highly cost effective and as a result, we have added an additional $45 million to our 2021 capital budgets and.
And target to do an additional 800, well abandonments as we continue to prudently manage our liabilities and environmental footprint.
All of these additional expenditures will result in an estimated increase of about 1500 jobs across Alberta, British Columbia and Saskatchewan.
Moving to the assets and starting with natural gas overall Q2 production was 1614 Bcf per day, an increase from our Q1 production of 1598 Bcf per day with North American Q2, natural gas production of 1.591 Bcf up from Q1 of 1.581.
5.
Even though pine River approximately 100 million to date it was down for the full quarter as of July 24th the plant resumed operations and is currently producing approximately 100 million a day we.
We continue to focus on operational excellence and in our Q2, North American natural gas operating costs were strong at $1.15 versus Q1 of $1.24 per Mcf.
At Septimus.
Net well pad came on stream in June has budgeted with total current rates Ltd to approximately 30 million a day of natural gas.
To add a strong capital efficiency of approximately $5000 per flowing Boe.
Septimus is now at full capacity at approximately $150 million per day of natural gas and 9000 barrels a day of liquids.
And targets to remain at full capacity for the remainder of 2021 Townsend 6 well pad came on stream in June on time and cost with total creates approximately 55 million cubic feet of natural gas with strong capital efficiencies of approximately $4000 per flowing Boe.
Production on at Townsend is approximately 265 million cubic feet of natural gas.
Was achieved in the second quarter and remains on target to exit 2021 at a production rate of approximately 340 million cubic feet per day.
Looking to the second half of 2021 vehicles strip prices continues to look strong at over $303.50 per GJ, improving the economics of our natural gas projects, adding more value to our natural gas production as we revised our target natural gas guidance up to 1.6 to 8 Bcf per day to 1.7%.
Tcf and target to exit 2021 in excess of 1.8 bcf per day.
Our Q2, North American light oil and NGL production was 98559 barrels per day up 6% from Q1.2021, primarily.
As a result of the company's drilling and development activity Q2 operating costs decreased to $14.39 per barrel versus Q1 operating costs of $16.7 per barrel the.
The company continues to advance its high value Montney like crude oil development at Wembley. Our 13 net wells have been drilled to date head of schedule under cost.
Of the budgeted 18, net wells targeted to be Onstream in 2021.
Cost efficiencies have been realized on the wimberley drilling per pad targeting costs are 12% lower than budgeted levels, resulting in strong capital efficiencies of approximately $83 per flowing Boe once on stream.
Structure of the new crude oil battery a gathering system has been top tier and is approximately 45 days ahead of schedule and is now targeted to be onstream in mid August with costs targeted to be under budget by 11%.
This project is targeted fixed at 2021 with total production rates of approximately 8500 barrels a day of liquids and 30 million cubic feet of natural gas.
The international E&P crude oil production to average 32000, and 697 barrels per day in Q2.2021, a decrease of 26% from Q2, 'twenty levels and a 3% increase from Q1.2021 level.
The changes in production from prior periods was primarily a result of planned maintenance activities natural field declines and the permanent shut in of about cop fields in 2020.
Crude oil operating costs increased from prior.
Prior periods, primarily due to lower.
Lower volume and as a result of planned maintenance activities in the North Sea and offshore Africa, as well as increased gha and energy costs in the North Sea.
Q2, heavy oil production was up to approximately 66000 barrels a day versus the 62700 approximately 62007 hundred barrels a day in Q1, primarily as a result of the company's drilling and to a lesser extent increased development activities related to higher prices in the quarter.
Operating costs increased to $19.32 per barrel from Q1 operating costs of $18.89 per barrel at the Companys Clearwater play at Smith 6 net horizontal multilateral. So now on screen production from these wells continues to be strong currently totaling approximately 2200 barrels per day exceeding budget rates by 600 barrels per day.
As part of additional capital the company is targeting to drill 70 additional heavy oil wells, which includes another pad of 6 net horizontal multi flow laterals at Smith.
And we'll be drilling and come on stream in Q4. This pad is also targeting strong productive rates of approximately 2000 barrels per day.
A key component of our long life low decline assets is our world class Pelican pool, our leading edge polymer flood continues to deliver significant value.
Second quarter production was 55221 to 50.
55212 barrels per day comparable to the first quarter of approximately $55500, primarily as a result of the wells drilling program activities in the quarter offset by natural field declines operating costs continue to be very strong at $6.90 per barrel versus Q1 operating costs at $7.38 per barrel.
During the quarter the company brought Onstream 10 net wells.
Which has a current production capacity of approximately 200 barrels a day and low capital efficiencies of 9900.
<unk> per flowing Boe.
Pelican continues to drive operational excellence and with our low decline and very low operating cost Pelican Lake continues tap excellent net backs.
Our second quarter thermal production was 258551 barrels a day down 3% from Q1.
Operating costs in Q2 were 3% higher at $11.78 per barrel versus Q1 operating costs of $11.40 per barrel.
Primarily due to lower volumes in the quarter as free.
The steam flood area.
<unk> injection pilot is on track to commence in Q4, 'twenty, 1 and similar to the first pilot of Kirby South This is target to operate for 2 year period.
At oil Sands mining operations, we had a strong second quarter with production of 361707 barrels per day inclusive of the planned maintenance at horizon and Scott crude in the quarter with strong operating cost of $25.46 per barrel.
Our teams continue to leverage technical expertise between the 2 sites services operating efficiency driving our costs down with consistency.
The company's focus on continuous improvement initiatives delivered high utilization and reliability at the company's oil sands mining and upgrading assets as a result, a record monthly SCO production of approximately 495100 barrels a day was achieved in June 21, an increase from the previous record of approximately 490.
800 barrels a day of SCO in December 2020, I will now turn it over to Mark for a financial review.
Thanks, Dan and good morning, everyone.
The second quarter was a strong operational and financially delivering net earnings of $1.55 billion significant adjusted funds flow of $3.5 billion and free cash flow of approximately $1.5 billion after capital and dividends in the quarter excluding acquisitions.
As a result of the significant free cash flow generation, our net debt balance at Q2 'twenty..1 of $18.2 billion is down $3.1 billion from the end of 2020 and the net debt reduction from Q1, 'twenty 1 was approximately $1.7 billion.
This debt reduction includes the full repayment and cancellation of our Devin acquisition term facility of $2 <unk> 5 billion in the quarter.
We have also exercised the par call option on our bonds due in November to repay early in August resulting in interest cost savings and further absolute debt reduction.
Additionally, up to August 4th we have returned over $1.5 billion to shareholders in 2021 by way of our dividend was increased in Q1 and through share repurchases.
Our long life low decline assets support our sustainable growing and predictable dividend.
This was evidenced through the period of challenging commodity prices in 2020, where we increased and maintained our dividend with a further increase in March of 2021, marking the 21st year of dividend increases.
We continue to maintain significant liquidity, including revolving bank facilities cash and short term investments liquidity at Q2, 'twenty..1 was approximately $5.6 billion and we had approximately $680 million in commercial paper for which we reserved capacity under our revolving facilities.
Free cash flow generation in 2021 defined as adjusted funds flow less budgeted capital and dividends is targeted to be substantial and using an annual average <unk> of approximately <unk> $66 a barrel free cash flow is targeted to range between $7.2 billion to $7.7 billion.
As a result of this strong free cash flow and increasing balance sheet strength through 2021.
<unk> directors has revised our share repurchase policy effective July 1.2021, and authorized management to increase returns to shareholders through incremental share repurchases of approximately 1% of shares outstanding or approximately 11 million shares per quarter.
Additionally, the new policy provides that once the company reaches an absolute debt level of $15 billion currently targeted to occur in Q4 of 21, 50% of free cash flow is targeted to be allocated to share repurchases with the remaining 50% allocated to further strengthening the company's balance sheet.
This provides balance to our 4 pillars of capital allocation with increased returns to shareholders further debt reductions the ability to provide economic resource development and execute on opportunistic acquisitions.
This clearly demonstrates the sustainability of our business model the ability of our unique long life low decline asset base with low maintenance capital requirements and effective and efficient operations to generate significant free cash flow.
With that I'll turn it back to you Tim.
Thank you Mark.
Canadian Natural's ability to deliver significant sustainable cash flow is driven by our effective and efficient operations are high quality long life low decline assets that have low maintenance capital and significant reserves.
Indian natural advantage is our ability to effectively allocate cash flow to our 4 pillars.
Balanced our commodities in Q2, 'twenty, 1 with approximately 43% of our Boe's light crude oil SCO, 34% heavy.
3% natural gas, which gives us exposure to oil improving commodity prices.
And we have increased our annual production guidance.
21220 million Boe to 1 to 67 million Boe's per day.
We will continue to allocate cash flow to our 4 pillars in a disciplined manner maximizing value for our shareholders, which is all driven by effective capital allocation effective and efficient operations and by our teams who deliver top tier results.
In March.
Dividend was increased by 11% and we have 21 years of consecutive dividend increases at a CAGR of 20% during that time effective July 1.2020. The board has authorized management to repurchase 1% of the common outstanding shares per quarter, and then once net debt below 15 billion allocate free cash flow.
Defined as adjusted fund flows less budgeted capital and dividend, 50% to repurchasing shares at 50% to strengthening our balance sheet.
As we have achieved our interim environmental targets, we have set new targets by 2030.
Methane emissions by 50% from 2016 baseline by 2026 reduce Institute.
Freshwater and mining freshwater river water usage intensity by 40% from our 2017 baseline as well with our oil sands pathway to net zero initiative, we will work with our industry partners to advance key milestones as we work towards our goal of net zero in the oil sands by 2050 and some.
Marie we continued to focus on safe reliable operations, reducing our environmental footprint enhancing our top tier operations Canadian natural is delivering top tier cash flow generation, we are unique sustainable and robust and <unk>.
Clearly demonstrates the ability to deliver returns to our shareholders by balancing our 4 pillars.
That concludes our Q2 call I will now open up the line for questions.
Yeah.
If you have a question press star 1 on your telephone keypad.
Yeah.
Your first question is from Greg Pardy with RBC capital markets.
Thanks, Thanks, good morning, and thanks for the rundown guys.
Couple of questions for the first 1 is just on horizon <unk> P. M. Just wondering how anomalous was the was the 495000 barrels a day in <unk>.
In June in or is that something that is setting up you know.
More of an achievable number on a sustained basis just curious there.
Yes, that's exactly what it's doing for us Greg in the last kind of 6 months here you've seen continuous improvement.
From the $4.91, roughly 2 to $4.95, and that's exactly what it's all about it's about little increments that we're doing on site on the 2 sites.
To improve our reliability improve enhance our.
Predictability on our production and so there you can over and over a long period of time you. The goal is to get closer and closer to those numbers on a sustainable basis.
Okay and.
Does that have much bearing on your operating costs or is this something where you it'll allow you to absorb either higher gas prices are higher power prices.
Yes.
Operationally.
Those incremental barrels are very very very low in terms of cost efficiencies. So.
Yes, it will help absorb some of the cost of fuel and some of the.
Commodity inflations were seeing with the various labor in and steal and such so yeah. It's actually just helps mitigate that and.
And drive those costs continuing to be down in the oil sands.
Okay, perfect and last 1 for me you made changes.
With the northwest Upgrader site, we understand the financial bearing and so forth, but what what's happening there operationally.
It's it's you know you've got an equity interest we hear about it frequently but we don't really have a good view as to what's going on are you guys, becoming more operationally involved at the northwest upgrader.
Yes, I would say that that's correct. So what we've done is we've Scott.
<unk> 1 of our operational persons from Horizon, who is very capable it helped.
Debt that operation to become more reliable.
Get higher utilization and obviously it takes some time, but.
Yes, we havent discounted.
Canadian natural person into that rule, and we're going to help that operation improve which we would expect over time, we will.
Some some cash.
Okay terrific, thanks very much.
Okay great.
Yeah.
Yeah.
Yeah.
Okay.
Yeah.
The next question is from Neil Mehta with Goldman Sachs.
Good morning, guys a lot of cash in the guidance here this morning.
Couple of questions related to that.
First 1 is capital spending.
You guys picked up.
That level this year on the back of some financing that came through any early flavors around 2022 shall we be thinking in that $3.5 billion to 4 billion fairway or do you think that theres upside or downside to that number and then I had a follow up question around the dividend.
Yeah, it's too early.
Traditionally do our capital budget here in the fall, where we ranked called the different commodities and then look at what's the port pricing at that time in and try and be prudent with our capital budget. So it's too early to say I mean, if you go back in time.
When we started 2021 and our capital budget was based on 45, <unk> and $2.50. So.
A little bit of increase in capital spending to me, it's just a complicated opportunity here just to.
Feather in some additional capital it keeps some of the activities that we're doing very well.
Going here.
More efficiently so.
To me, it's just too early to say on that.
And your view of sustaining Capex again, just to remind us Tim where do you think the level is to keep production flat.
Well, it's in that 3 to 3 and a half always depends on the types of activities, we do in and out here.
This year it was 3 and so to me, it's just generally in that range.
Okay. Okay and then the follow up is just around the dividend as you said you have a long track record of raising it any thoughts given the amount of cash in the yeah in the model in the back half of the year doing another dividend raise later this year.
And just just thoughts on the dividend growth profile on a go forward basis.
Hi, Neal it's mark Thanks for the question.
The dividend as you mentioned has increased 21 straight years, its been growing and its predictable and the board has typically always raise that and done it in the March timeframe.
As you see the free cash flow in 2021 and going into 2022 its significance. So there'll be plenty of opportunity for the board to look at that and continue that growing <unk>.
Dividend strategy, the free cash flow allocation policy. That's come out here is really because of that debt repayment has accelerated so much in 2021, the $15 billion target in Q4.
Kim comes fast so I think that the the additional returns to shareholders just gives more balance.
The capital allocation of our 4 pillars going through the rest of the year here. So.
So I think that dividend gets revisited at a regular time and in that predictable period.
Perfect. Thanks, guys.
Okay.
Your next question is from my need good day.
Credit Suisse.
Hey, guys first of all you always have a very informed view on abortion lens.
If this capacity as it relates to line 3 where.
Where the inventories are and what your near term outlook for differentials as if you could give.
Give us some of those details.
Sure.
If you look at today.
Apportionment.
Hi record highs actually have their own 52, 2% to 54% there is some maintenance being done on the line 3.
But obviously every barrel is flowing.
The inventory levels in Alberta have been pretty steady up to 35 range. So.
And then of course, the differentials have been extremely.
Strong at less than 20%.
<unk>, So we look going ahead.
With the the view that line 3 will.
Will come on in Q4.
Give us that extra capacity and.
And as <unk> continues to progress.
In 2023.
You don't expect that line to come on as well so we're very.
Positive today here that things are moving in the right direction.
Okay, and a quick clarification here so the revised guidance of discretionary that disposal dividend cash flow went from $5.7 6 point due to 7 point to 7.7.
Besides the change in oil price debt was that anything else, which drove the increase cost of production or it was just simple as changing price day.
No. It's most of the change in price deck as well as continued reliable operations targeted for the rest of the year.
Thank you for that diversification and thank you for taking my questions.
Thank you.
Yeah.
Your next question is from Roger read with Wells Fargo.
Yes, good morning.
I would like to follow up a little bit on some of the gas.
I guess, let's call them <unk>.
The longer term goals on the.
<unk> reductions.
When do you think the Capex get spent on those or is it already happening is it going to be parceled out kind of on a ratable basis.
Keep a very engineers of targets and then the other part of that question is.
What do you think some of the ancillary benefits are in terms of improved operations improve returns.
Overall better cash flow is like just trying to think about it as something other than a regulatory driven at that 1.
Some of the other upside opportunity share.
Yeah.
It's early to say, we we've only really started at the high level.
Conceptual basis on the on the trunk line and the sites that are going in our teams have evaluated different technologies in terms of what we think is the most cost efficient in terms of.
Reducing our cotwo onsite so.
Right now it's very early in the process Oh, we got it to a lot of engineering work.
2 basically.
On the engineering side come up with the appropriate cost estimates so to me, it's just too early to per I.
I mean, the real benefit at the end of the day is what we're looking to do is to be net zero in the oil it sounds by 2050.
And to me, it's just we have to step through it and as we've.
About that as we move through the process, we'll come up with milestones and give more clarity on on cash costs and how they are allocated between the different partners.
Initiatives. So it's just really too early to to have that economic model too.
Hey.
Well no I appreciate that on the oil sand side I was only thinking more about the the targets to 2030 the reduction in methane.
The decrease in crush water usage.
I appreciate 2050.
I'm pretty sure I won't be here are holding you to account the debt anyway.
Yeah, Yeah, so on the methane reductions.
The teams our field operations teams have done a fabulous job in the field.
We're using a somewhat laissez latest technologies in terms of identifying.
Leaks and and.
Opportunities are fugitive emissions to reduce it so actually yeah.
And we will see more benefit because more natural gas will be sold obviously some of the sites that we feel we can consolidate economically and get that benefit. So yes. There was actually some there is economic benefit to those in the freshwater is the same obviously the more water we risk side.
Cool.
P less energy and more efficient on the operations and so that's what the goals of the teams and working to progression of those opportunities, but they're all are very economic and very complementary to our operating costs.
Okay, great. Thank you.
Yep.
Okay.
Your next question is from Menno <unk> with TD Securities.
Good morning, everyone I just have 1 on shareholder returns, you're clearly committed to a 50 per cent free cash flow allocation of buybacks once the the $15 billion of debt is achieved.
Obviously precludes a variable and special dividends, which are getting quite a bit of play in the U. S. Can you just remind us of how you think about the different.
Shareholder return mechanisms that philosophically and whether variable or special dividends could ever become a part of the conversation or is that just too much of a stretch.
Yes, I think mental when we look at the asset base and the long life low decline predictable cash flow. It really supports that sustainable growing year after year type of dividend.
That today has been the focus of course dividends and these allocations returns to shareholders or board decisions.
But that's really how we see the dividend it just fits the.
The way, we've gone about it fits really well with with our our asset base and returns to shareholders through share buybacks gives us that opportunity to return more value as we generate growing free cash flow.
If you look at 2020 I mean, we were 1 of very few companies that grew our dividend and maintain the balance sheet. So the.
Assets are very amenable to a predictable growing dividend.
Perfect. Thanks, a lot.
There are no further questions I'll turn the call back to Mr. Bieber.
Thank you very much operator and.
Alright, Thank you very much operator, and thank you those that joined US today on the call. If you do have any questions. Please don't hesitate to give us a follow up thank you.
Goodbye.
That concludes today's conference you may now disconnect.