Q2 2021 Canadian Natural Resources Ltd Earnings Call
Yeah.
Yeah.
Good morning, we would like to welcome everyone and the Canadian natural resources 'twenty 'twenty 1.
What are the earnings conference call and webcast.
After the presentation the will conduct the Q&A question and answer session and.
And so will be given at that time. Please note that this call is being recorded today August of 2021 and done.
And now some time, probably kind of life during the meeting and Ritchie of our Haynesville of today's call Corey Bieber, it's like.
And did the advisor. Please go ahead Sir.
Thank you operator, and good morning, everyone and welcome to Canadian Natural second quarter, 'twenty, and 'twenty, 1 and corporate update conference call Canadian natural had another strong quarter financially and operationally and as I commented before I believe our asset base is unique amongst your peer group underpinned by long life low decline assets and complemented by our conventional.
As Ed said it allows us significant flexibility all of which can generate significant free cash flow.
Beyond our robust asset base, there's a corporate strategy that focuses on generating real returns for shareholders and of driven management team and of corporate culture that focuses on being effective and efficient.
Over the years Canadian natural has clearly demonstrated its robustness and sustainability and the strength of its business plan for 2020, 1 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 and 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 your 4 pillars.
For today's call Tim Mckay, our President will first provide of corporate update.
And Mark <unk>, 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 of prior to opening up for questions.
And we kick off I'd like to remind you of our forward looking statements of note and are 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 of comments on non-GAAP disclosures, so with that I'll turn it over to you Tim. Thank you Cory good morning, everyone. Canadian natural delivered strong operational results from the second quarter as we achieved quarterly production of approximately 1 and 4.2 million per <unk>.
Per day.
As a result of our long life from.
Bust low decline assets operational excellence and with our capital discipline generated significant free cash flow.
The balance of free cash flow to our 4 pillars of capital allocation and maximizing value for our shareholders and.
The first 2 quarters of 2021.
We have reduced net debt by 3.
And $3.1 billion returned approximately $1.3 billion to our shareholders through dividends and share repurchases.
Maintained capital discipline and executed on 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.
And factor and our long term sustainability.
For the period from 2016 to 2020 and our oil sands operation of our THP intensity is down 38% North American E&P methane emissions are down 28%.
And Corporately and this time, we have taken the equivalent to over 1 million cars off the road annually and over and above we are the leading capture and sequester of Cotwo and the oil and gas sector worldwide are safe director of just top tier and corporate total recordable industry frequency improved to 0.0.0.21 and 2.
<unk> thousand 20 and reduction of 58% from 2016 months.
In June we announced the oil sands pathway natural initiative.
The oil sands industry participants have a goal of achieving net zero emissions and the oil sands operations by 'twenty 5.
And important initiative and the oil sands industry participants and Canadian natural will further strengthen our leading ESG performance, while delivering meaningful.
The emission reductions and balancing sustainable economic development.
And what we've acquired collaboration with the federal and Alberta government. So that together, we can help achieve candidates climate goals.
With the positive outlook for commodity prices for 2020, 1 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 of 78 wells and development activities with the targeted capital efficiency of approximately $8400 per flowing Boe.
And giving us the 2021 exit rate of approximately 14000 and Boe's per day 100.
10 ish million is related to long life low decline assets of which $75 million primarily relates to the additional scope completed and extended turnaround time to complete the horizon turnaround and the second quarter.
And $35 million of the 110 is for construction of 3 pads at Primrose 2 at Kirby North and 2 of Kirby, South which will support production additions and 2022 and beyond.
Our area of 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 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, and an estimated increase of about 50.
<unk> hundred jobs across Alberta, and British Columbia, the sketch 1.
Moving to the assets and starting with natural gas overall Q2 production was 1614 Bcf per day and increase from our Q1 production of 1.598 Bcf per day, with North America, and Q2 and natural gas production of 1591 Bcf up from Q1 of $1.501.
5.
Even though pine River approximately 100 million per day was down for the full quarter as of July 24th of the plant resumed operations and is currently producing approximately 100 million of day we.
We continue to focus on operational excellence and and our Q2, North American natural gas operating costs were strong and of $1.15 versus Q1 of the $1.24 per Mcf.
At Septimus and 5.
Net well pad came on stream and June has budgeted with total current rates limited to approximately 30 million of day of natural gas and.
And I had a strong capital efficiency of approximately $5000 per flowing Boe.
Septimus is now at full capacity at approximately 150 million of day of natural gas and 9000 barrels a day of liquids.
And targets to remain at full capacity for the remainder of 2020 of wine and Townsend 6 well pad came on stream and June on time and cost with total of create to approximately 55 million cubic feet of natural gas the 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 acre strip prices continues to look strong and 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.
168 Bcf per day to 1.7 and 2 Bcf and targeted exit 2020, 1 and access 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 of drilling and development activities Q2 operating cost decreased to $14.39 per barrel versus Q1 operating costs of $16 zone per barrel.
The company continues to advance its high value Montney like crude oil development and wimbley with 13 net wells have been drilled to date head of schedule under cost of.
And of the budgeted 18, net wells targeted to be Onstream from 2021.
Cost efficiencies have been realized on the wimberley drilling and targeting costs of 12% longer the budgeted levels, resulting in strong capital efficiencies of approximately $300 per flowing Boe once on stream.
Construction of the new crude oil battery of gathering system has been top tier and is approximately 45 days ahead of schedule and and now targeted to be Onstream and mid August with costs and targeted to be under budget by 11%.
This project is targeted fix of 2021 with toll 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, and Q2, 2021 and a decrease of 26% from Q2 'twenty levels and of 3% increase from Q1.2021 level the.
The changes in production from prior periods is primarily a result of planned maintenance activities natural field declines and the permanent shut in of the Bath, Kyle fields and 2020.
Crude oil operating costs increased from prior.
Prior periods, primarily due to lower.
The lower volumes and as a result of planned maintenance activities and the North Sea and offshore Africa, as well as increased PHH and energy costs and the North Sea.
Q2, heavy oil production was up to approximately 66000 barrels a day versus the 62700 and approximately 62007 hundred barrels a day and Q1, primarily are the result of the company is drilling and to a lesser extent increased development activities related to higher prices and the quarter Q2 operating cost <unk>.
<unk> to $19.32 per barrel from Q1 operating costs of <unk> 89 per barrel at the company Clearwater play of Smith 6 net horizontal multilateral. So now on the screen production from these wells continues to be strong currently totaling approximately 200 barrels per day exceeding budget by 600 barrels per day as part of.
The additional capital the company is targeting to drill 70 additional heavy oil wells, which includes another pad of fixed net horizontal maltreat fallout of us at Smith and.
And we'll be thrilled 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, and our leading edge polymer flood continues to deliver significant value.
Second quarter production was 55221.2 and.
55212 barrels per day comparable to the first quarter of approximately 55005 hundred primarily as a result of the wealth drilling program activities and the quarter offset by natural field declines and operating costs continue to be very strong at 690 per barrel versus Q1 operating costs of 738 per barrel.
During the quarter. The company brought on stream 10, net wells, which has a current production capacity of approximately 300 barrels a day and low capital efficiencies of $9900.
Colors per flowing Boe.
Our team at Pelican continues to drive operational excellence and with our low decline and very low operating cost Pelican Lake continues tap of excellent and FX.
Our second quarter and thermal production was 258551 barrels a day down 3% from Q1.
Operating costs, and Q2 of 3% higher and $11.78 per barrel versus Q1 operating costs of $11.40 per day.
Primarily due to lower volumes and a quarter of.
Primrose and the steam flood area of solvent injection pilot is on track to commence in Q4.2001 and similar to the first pilot of Kirby South This is target Capri for 2 year period.
And 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 Scot free during the quarter with strong operating cost of $25.46 per barrel unless you're on.
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 of the Companys of oil sands mining and upgrading assets as a result of record monthly SCO production of approximately 495100 barrels a day was achieved and June 21, and increased from the previous record of approximately 490 <unk>.
800 barrels a day of SCO and December 2020, I will now turn it over to Mark for a financial review.
Thanks, Tim 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 and 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 $2.125 billion and the quarter.
We are also exercise of the par call option on our bonds due in November to repay early in August, resulting and interest cost savings and further absolute debt reduction.
Additionally, up to August force, we've returned over $1.5 billion to shareholders and 2021 by way of our dividend was increased in Q1 and through share repurchases.
Our long life low decline assets support of sustainable growing and predictable dividend.
This was evidenced through the period of challenging commodity prices and 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, we had approximately $680 million and commercial paper for which we reserved capacity under our revolving facilities.
Free cash flow generation in 2021 defined as adjusted funds flow of less budgeted capital and dividends is targeted to be substantial and using on annual average <unk> of approximately <unk> $66 a barrel of free cash flow is targeted to range between $7.2 billion to $7.7 billion.
As a result of the strong free cash flow and increasing balance sheet strength through 2020.1.
The board of 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 and 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 of the company's balance sheet.
This provides balance to our 4 pillars of capital allocation with increased returns to shareholders further debt reductions and the ability to provide economic resource development and execute on opportunistic acquisitions.
This clearly demonstrates the sustainability of our business model and 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 and our high quality long life low decline assets that have low maintenance capital and significant reserves.
Canadian natural advantage is our ability to effectively allocate cash flow to our 4 pillars. The.
And we balanced our commodities and Q2 'twenty, 1 with approximately 43% of our Boe's light crude oil SCO, and 34% heavy and 23% and natural gas, which gives us exposure to haul improving commodity prices and.
And we have increased our annual production guidance to $1.220 million Boe's to 1 to 6.7 million Boe's per day.
We will continue to allocate cash flow to our 4 pillars, and a disciplined manner maximizing value for our shareholders.
It's all driven by effective capital allocation.
This hub and efficient operations and by our teams who deliver top tier results in March.
The dividend was increased by 11% and we of 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 is below 15 billion allocate free cash flow.
The defined as adjusted fund flows less budge.
The capital and dividend, 50% to repurchasing shares and 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, the baseline by 2026 reduce institute freshwater.
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 the goal of net zero and the oil sands by 2015 and <unk>.
We continue 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 robust and clearly demonstrates the ability to deliver returns to our shareholders by balancing our 4 pillars.
That concludes our Q2 call and I will now open up the line for questions.
And.
Yeah.
If you have a question star 1 on your telephone keypad.
The first question is from Greg Pardy with RBC capital markets.
Thanks, Thanks, good morning, and thanks for the rundown guys cut.
Couple of questions for the first 1 is just on Horizon day with P. M. Just wondering how anomalous was the was the 495000 barrels a day and.
In June and and 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 force, Greg and the last kind of 6 months here, you've seen and continuous improvement.
From the 491 roughly to the 495 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 and proof 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, it fell.
Operationally the.
And 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 the the.
Commodity inflations were seeing with the <unk>.
Various.
Labor and and and steel and such so yeah, it's actually just helps mitigate that and and.
And drive those costs continue and the town and the oil sands.
Okay, perfect and last 1 from me you made changes.
With the northwest Upgrader site, and we understand the financial bearing and so forth, but what what's happening there operationally.
It's it's you know you've got and an equity interest we hear about it frequently but we don't really have a good view as to what's going on and are you guys, becoming more operationally involved and the northwest upgrader.
Yes, I would say that that's correct. So what we've done as we exit costs of <unk> 1 of our operational persons from horizon, who is very capable of help.
Debt that operation of it become more reliable.
And I get higher utilization and obviously it takes some time, but yes, we have just Canada, the Canadian natural person into that rule and we're going to help the that operation and proof that which we expect over time, we will.
Generate some cash.
Okay terrific, thanks very much.
Okay great.
Yeah.
Yeah.
Okay.
Okay.
Yeah.
Yeah.
Yeah.
The next question is from Neil Mehta with Goldman Sachs.
Good morning, guys a lot of cash in the guidance here this morning, and get to see the couple of questions related to that the.
First 1 is.
Capital spending.
And you guys picked up the.
And that level this year on the back of some financing that came through any early flavors around 2022.
Should we be thinking and that $3.5 billion to 4 billion fairway or do you think that there's upside or downside to that number.
And then I had a follow up question around the dividend.
Yeah, it's too early.
And we traditionally do our capital of budget here in the fall, where we ranked call of the different commodities and then look at what the port pricing at that time, and and try and be prudent with our capital budget. So it's too early to say I mean, if you go back and time, when we started 2021 and our capital budget was based on 45 couple of UTI and.
<unk> so the.
Little bit of increase and capital spending to me is just the competition the opportunity here just to.
Further and some additional capital of keeps some of the activities that we're doing very well.
Going here.
The more efficiently so.
To me, it's just too early to say on that.
And your view of sustaining Capex again, and that just remind us of Tim where do you think the level is to keep production flat.
Well, it's in that 3 to 3 of the half always depends on the types of activities, we do and not here.
And 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 at the thoughts given the amount of cash.
And the ER and the model and the back half of the year of doing another dividend raise later this year.
And just just thoughts on the dividend growth profile on the go forward basis.
Hi, Neal it's mark Thanks for the question it's.
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 and 2020 on it and going into 2022 of its significance. So there'll be plenty of opportunity for the board to look at that and continue that growing.
The dividend strategy the free cash flow allocation policy. That's come out here is really because of that debt repayment is accelerated so much in 2021, the the $15 billion target and in Q4.
It comes fast so I think that the the additional returns to shareholders just gives more balance.
Of the capital allocation of our 4 pillars on going through the rest of the year here.
And so I think that dividend gets revisited at on a regular time and in that predictable period.
Okay perfect. Thanks, guys.
Okay.
Yeah.
Your next question is from my need good day.
<unk> Suisse.
Hey, guys. The first of all of you always have a very informed view on a portion of men's.
The address capacity as it relates to the line 3.
Where the inventories are and are working.
What are you on near term outlook for the Essentials is if you could.
Give us some of those details.
Sure.
If you look at today of.
<unk> is high record high as actually hit around 52, 2% to 54% there is some maintenance being done and underlying <unk> III.
But obviously every barrel and is flowing the.
On the the inventory levels and Alberta have been pretty steady at the 35 range. So.
And then of course, the differentials have been extremely.
Strong at less than 20% of.
On <unk>, so we look going ahead.
With the the view that our line 3.
We'll come on and Q4.
Give us that extra capacity and.
And as T M X continues to progress.
And 2023.
You don't expect that line to come on and as well so we're very.
Positive today here that things are moving and the right direction.
Okay, and a quick clarification here so the.
Revised guidance of discretionary without the supposed dividend cash flow went from $5.706.227 to 7.7 B.
Besides the change and oil price day, what does that anything else, which drove the increase cost of production or it was the.
And as simple as changing price day.
Oh, no. It's most of the change and price deck as well as continued reliable operations and targeted for the rest of the year.
Thank you for the diversification and thank you for taking my questions.
Thank you.
Your next question is from Roger read with Wells Fargo.
Yes, good morning.
Just the would like to follow up a little bit on some of the.
I guess, let's call them medium to longer term goals on the emissions.
Emissions reductions.
And we think the Capex get spent on those or is it already happening and you're going to be parceled out kind of on a ratable basis.
To the 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 and improve returns.
Overall, better cash flow like just trying to think about it as something other than a of regulatory driven of the what are some of the the other upside opportunities there.
Yeah.
It's early to say, we we've only really started at the high level.
The conceptual basis on the on the trunk line and the sites that are calling and.
Our teams have evaluated different technologies.
<unk> technologies in terms of what we think because most of the cost efficient in terms of.
Reducing our cotwo on site so.
Right now it's very early in the and the process.
We got it to a lot of engineering work, we have to 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 and the oil sands by 2050.
And to me, it's just we had a step to it and as we've talked.
<unk> talked about the SP moved through the process, we'll come up with the milestones and get more clarity on on cash costs and how they are allocated between the different partners. The.
The initiatives. So it's just really too early to to have that the economic model to today.
Well no I appreciate that on the Oilsands. So I was the only thinking more about the the targets to 2030 the reduction of the methane.
Kris and freshwater usage.
I appreciate 2050.
I'm pretty sure on what we hear of holding you to account the debt.
And anyway.
Yeah. So on the methane reductions you know what the.
The teams our field operations teams have done a fabulous job and the field.
Using some of the laser the latest technologies in terms of identifying.
Leaks and and the opportunities of fugitive emissions to reduce it so actually yes and then.
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 and the freshwater is the same on obviously the more water we reached.
Cycle, it will be less energy and more efficient on the operations and so that's what the goals of the teams and the working to progress on those opportunities, but they're all very.
Very economic and and very complementary to our operating costs.
Okay.
Okay, great. Thank you.
Your next question is from the new Wholesales with TD Securities.
Good morning, everyone. I just have 1 on shareholder returns you are clearly committed to a 50% free cash flow allocation of buybacks. Once the the $15 billion of debt is achieved and that obviously precludes the variable and special dividends, which are getting quite of bit of play and the U S.
Can you just remind us of how you think about the different shareholder return mechanisms of philosophically and whether variable on special dividends could ever become a part of the conversation or is that just too much of a stretch.
Yes, I think metal and 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.
So that today has been the focus of course dividends and these allocations returns to shareholders and board decisions.
But that's really how we see the dividend and it just fits the way.
<unk> gone about it fits really well with with our our asset base and you know of returns to shareholders through.
And through share buybacks gives us the opportunity to return more value.
As we generate growing free cash flow and if you look at 2020 I mean, we were 1 of very few companies. The grew our dividend and maintain the balance sheet. So the assets of very amenable to a predictable and 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.
Sorry, Thank you very much operator, and thank you those of the joined US today on the call. If you do have any questions. Please don't hesitate to give us the follow up thank you goodbye.
That concludes today's conference you may now disconnect.
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