Q3 2021 Canadian Natural Resources Ltd Earnings Call
Good morning, we would like to welcome everyone to the Canadian Natural resources 2021 third quarter earnings conference call and webcast.
After the presentation, we will conduct a question and answer session instructions.
Instructions will be given at that time.
Please note that this call is being recorded today November 4th 2021 at nine o'clock a M mountain time.
I would now like to turn the meeting over to your host for today's call. Mr. Corey Bieber Executive advisor. Please go ahead Mr. Bieber.
Thank you operator, and good morning, everyone and welcome to Canadian Natural's third quarter, 2021 corporate update conference call Canadian.
Canadian Natural's had another very 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 conventional assets that allow us significant flexibility and all of which can generate very 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 a 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 there were one of the few companies capable of delivering meaningful economic growth, increasing returns to shareholders and reducing absolute debt in a responsible manner.
For today's call Tim Mckay, our President will first provide a corporate update.
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 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 to that end I would suggest that you review our comments on non-GAAP disk.
Closures in our financial statements with that I will turn it over to you Tim. Thank you Cory good morning, everyone. Canadian natural delivered strong operational results from third quarter as we achieved quarterly production of approximately one to three 8 million Boe's per day as a result of our robust long life low decline assets operate.
<unk> excellence and with our capital discipline, we generated significant free cash flow.
We balanced free cash flow to our four pillars of capital allocation maximizing value for our shareholders.
Three quarters of 2021, we have reduced net debt by $5 4 billion.
Turned approximately $2 4 billion to our shareholders through dividends and share repurchases.
Maintained capital discipline.
Executed on artistic transactions, which I'll add long term value.
The strengths of Canadian Natural's business model are also applied to environmental social and governance to deliver industry, leading performance across the board a significant factor in our long term sustainability are.
Our safety record is top tier is the corporate cool affordable industry frequency improved 0.0 to one and 2020, a reduction of 58% from 2016 levels.
For the period from 2016 to 2020, North American E&P methane emissions are down 28%.
In our oil sands operation, our <unk> emissions intensity is down 38% and correctly in this period, we've taken equivalent of over 1 million cars off the road annually.
And over and above this we are the leading capture and sequester of Cotwo and you all in oil and gas industry worldwide.
June we announced the oilsands pathway to necessarily initiative.
Alliance that Oilsands industry participants, who have a goal of achieving net zero emissions in the oil sands operations by 2050. This initiative of oil sands industry participants and Canadian natural will further strengthen our leading ESG performance, while delivering meaningful emission reduction.
Balancing 60 favorable economic development.
And we will require collaboration with federal in Alberta government. So that together, we can achieve candidates climate goals.
Starting with natural gas overall Q3 was approximately one seven Bcf a day an increase from our Q2 production of approximately one six Bcf with North American Q3, natural gas production for $1 698 Bcf per day up from the Q2 at 1.5 dollars 94 Bcf per day is the <unk>.
Pine River plant resumed operations acquisitions, and strong drilling offset natural declines we continue to focus on operational excellence and our Q3, North American natural gas operating costs strong above 14 per Mcf versus the Q2 dollars 15 per Mcf.
Townsend production of 284 million cubic feet of natural gas was achieved in Q3, an increase of 7% over Q2.
The BC Court decision all development activities and Townsend area had been temporarily suspended with nine wells waiting facilities and pipeline permit approvals.
Capital has been redeployed to our deep inventory of natural gas opportunities in northwest, Alberta with shrimp similar strong drill to fill capital efficiencies and production volumes and with eco strip pricing over $5 of G D, adding more value to our natural gas production as we target to exit 2021 and access.
<unk> at one eight Bcf a day.
Our Q3, North American light oil and NGL production was approximately 89000 barrels a day down from Q2, primarily due to the unplanned third party outage, which impacted our NGL production by approximately 8400 barrels per day in the quarter.
Q3 operating costs were $6 19 per barrel, an increase from Q2 operating cost of $14 39 per barrel.
The company continues to advance its high valued montney light crude oil development.
At Wembley.
13 wells came on stream in Q3 with an additional five wells targeted to come on stream in Q4.
The new crude oil battery is onstream ahead of schedule and below budgeted costs and with our strong wealth. We're targeting full production rates of more than 10000 barrels a day of liquids and 30 million cubic feet of natural gas.
Representing an increase of approximately 500 barrels a day of liquids and 2 million of cash.
Gas given the project strong upstream capital efficiency of approximately $6800 per <unk>.
International E&P crude oil volumes.
Volumes average approximately 30000 barrels a day in Q3, a decrease of 9% from Q2 levels.
Production from prior periods were primarily result of planned maintenance activities and natural field declines crude oil operating cost increased from prior periods, primarily due to lower volumes as a result of the planned maintenance activities in the North Sea and offshore Africa, as well as increased gmg and energy costs and the North Sea.
Q3, heavy oil production was approximately 64000 barrels a day versus 66000 barrels a day in Q2, primarily a result of natural field declines, partly offset by new development activity.
Three operating costs were $19 51 per barrel comparable to the Q2 operating cost of $19 32 per barrel as Smith. The additional six net horizontal multilateral wells that we're targeting at Clearwater came on production in Q4 at approximately 2100 barrels per day exceeding the targeted rate of 2000.
Well today.
A key component of our long life low decline assets is our world class Pelican Lake pool for our leading edge polymer flood continues to deliver significant value third.
Third quarter production was approximately 54000 barrels a day down 2% from Q2 of 55000 barrels a day, primarily due to natural field decline operating costs continue to be very strong at $5 90 per barrel versus the Q2 operating cost of $6 90 per barrel.
Pelican continues to drive operational excellence and with our low decline and very low operating cost pellet can lake continues to have excellent netback.
Our third quarter thermal production was 248113 barrels a day down 4% from Q2 of 258551 barrels primarily due to planned.
Turnaround at Jackfish, and natural field decline operating.
Operating costs in Q3 were 4% higher at 12 24 per barrel versus Q2 operating cost of $11 78 per barrel, primarily due to lower volumes in the quarter.
Results weaker results from our ongoing solvent.
Project continue to be positive showing SLR and ghd route density reductions at 45% as well as solid recoveries of approximately 85%.
As a result, the company is progressing with the engineering and design of a commercial scale Sag D pad development at Kirby North.
At Primrose second solvent injection pilot commenced operations in October and the steam flood area. This pilot targets Capri for two year period with targeted SLR and ghd intensity reductions of 40% to 45% and solvent recovery greater than 70.
At our oil Sands operations, we had a strong third quarter with production at 468126 barrels per day in.
The strong operating costs at $19 86 per barrel of NGL.
Following the recent maintenance and turnaround activities across the oil sands mining and upgrading assets top tier performance and utilization.
To drive industry, leading operating costs during the first nine months of 2001 since the completion of Scott turnaround and expansion in 2020. The company has increased sales volumes by over 20000 barrels a day of SCO.
Our oil sands mining and upgrading.
To be top tier with production volumes in October.
Of approximately 477000 barrels a day of SCO as our teams continue to leverage our text.
Nickel expertise improved reliability enhance our production at both sites as well as finding operating efficiency to drive our costs down with consistency.
With that I will now turn it over to Mark for a financial review.
Thanks, Tim.
We delivered strong financial results in the third quarter as our business realized net earnings of over $2 2 billion.
Adjusted funds flow generation was significant at over $3 6 billion and free cash flow was approximately $2 2 billion after capital and dividends excluding acquisitions in the quarter.
As a result of our significant free cash flow generation net debt decreased to approximately $15 9 billion at Q3, $2 3 billion lower than Q2 levels.
While the debt repayment in the quarter was significant so we're returns to shareholders with approximately $1 1 billion returned through dividends and share repurchases.
We continue to maintain strong liquidity, including revolving bank facilities cash and short term investments liquidity at Q3 was approximately $6 2 billion.
Our long life low decline assets support a sustainable growing and predictable dividend. This was evidenced through the period of challenging commodity prices in 2020, where we increased and maintained our dividend and further increased it in March of 2021, marking the 21st year of dividend increases.
Subsequent to the quarter end the board of Directors has approved a 25% increase to our quarterly dividend to <unk> 58, and three quarter cents per share payable on January five 2022.
This represents a 47 cents per share annualized increase.
This clearly demonstrates the confidence of the board of directors have in the sustainability of our business model the strength of our balance sheet and the company's effective and efficient operations supported by a robust long life low decline asset base and associated low maintenance capital requirements.
With this increased 2022 will mark the 20 <unk> consecutive year of dividend increases for the company and this 25% increase from our previous quarterly dividend is in excess of our historical dividend compound annual growth rate of 20% over the last 22 years.
Last quarter, we discussed that effective July one 2021, our free cash flow allocation policy authorized management to increase returns to shareholders through accelerated share repurchases under the company's normal course issuer bid by targeting the repurchases of approximately 1% of shares outstanding per quarter.
This policy further states that once the company reaches an absolute debt level of $15 billion currently targeted to occur in Q4 2021, 50% of free cash flow will be targeted to share repurchases with the remaining 50% of free cash flow allocated to further strengthen our balance sheet.
For this policy the company repurchased approximately 12 million shares in the quarter and year to date as of November <unk>, we have repurchased a total of 21 5 million shares for $940 million.
Subsequent to quarter end and as an enhancement to the free cash flow allocation policy. The board of directors has authorized management to target absolute debt levels below 15 billion, which is approximately one times debt to EBITDA in the current price environment.
And to the extent that is below 15 billion such amount will be available for strategic growth slash acquisition opportunities when it when and if it makes sense.
This enhancement reinforces our approach to the 50 50 free cash flow allocation and demonstrates our commitment to long term shareholder value supported by a strong financial position and increasing returns to shareholders through increasing dividends and share repurchases.
With that I'll turn it back to you Tim.
Thank you Mark Canadian Natural's ability to deliver significant sustainable free cash flow is driven by our effective efficient operations, our high quality long life low decline assets that have low maintenance capital and significant preserves the.
We balanced our commodities in Q3 2021 with approximately 47% of our Boe's like crude oil NGL, SCO, 30% heavy and 23% natural gas, which gives us exposure to all improving commodity prices.
Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars, and we will continue to allocate to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation effective and efficient operations and by our teams who delivered top tier results.
<unk>.
Commitment on delivering returns.
Shareholders has been significant totaling $3 1 billion year to date through dividends and share repurchases.
Okay.
Subsequent to the quarter and the directors have approved a 25% increase to our quarterly dividend payable on January five 2022.
This will mark the 22nd year consecutive year of dividend increases for the company and has a 25%.
Percent increase from our previous quarterly dividend and is it in excess of our historical CAGR growth of 20% over the last 22 years.
In the third quarter, we set new environmental targets.
By 2030 reduce absolute methane emissions by 50%.
From our 2016 baseline by 2026 reduced in situ freshwater usage and mining freshwater 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 your oil sands by 2050 and.
In summary, we continue to focus on safe reliable operations, reducing our environmental footprint enhancing our top tier operations.
Natural is delivering top tier cash flow generation, we are unique sustainable and robust.
Clearly demonstrate the ability to deliver returns to shareholders by balancing our four pillars.
That concludes our Q3 conference call I will now open the line for questions.
At this time I would like to inform everyone in order to ask your questions. You May Press Star then the number one on your telephone keypad.
Again, Thats star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Greg Pardy from RBC capital markets. Your line is open.
Thanks. Thanks, Good morning, Thanks for the rundown guys.
Maybe just the first question is on net debt Mark we're about midway through for Q, how how close are you to that $15 billion number.
Yes, well its eminent Greg we're very close to that number.
15 billion and you know the way the free cash flow allocation policy works in the way.
The significance of the free cash flow that we're generating in Q4 and certainly the outlook for 2022 that can that balance sheet continues to improve in that scenario. So yes. It's imminent, we're getting close and Thats really why you see the enhancement to the policy.
Which really shows that we're getting to that target maybe a little earlier than originally expected.
Okay, and Thats really where I wanted to go that's probably where most of the static is that we're picking up so the language in the release around.
If you're sub 15 that.
That opens up opportunities in terms of growth through acquisitions.
I'm trying to better understand does that like is this intended to just.
Wave a big flag look $15 billion is the new number.
But does this limit your flexibility I'm just wondering what has changed in your game plan as a result of that policy language.
I think you got to think of it as Greg because nothing has changed as far as the long term planning I mean, the the $15 billion was the targets we had set before and like I say, we're getting there sooner. This just provides some flexibility and I think reinforces what we've been saying as far as continued.
<unk> returns to shareholders and balance sheet strength going forward with the significance of the free cash flow and you have to remember that free cash flows generated.
Because of the long life assets, the low decline and favorable maintenance capital requirements of those assets, which we think sets us apart.
Okay terrific.
Last one for me if you wouldn't mind I'm just wondering on Kirby in terms of scale timing or cost. Tim can you can you address any of that like how big is this and when do you think would come on.
Yeah, well. The first thing is we're just doing the engineering and design of the of the pad today. So so we're looking at probably start construction in two years.
Okay, and the coffee it's too early.
Okay. Thanks very much.
Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.
Morning, and congrats guys on that dividend.
First question is just to tie into Greg on M&A and you guys have done a good job over the last couple of years being opportunistic around M&A and creating value that way just how do you see the landscape for.
For potential acquisitions and do you think this is a buyer's market or a seller's market right now.
Really we don't see really too much difference here today.
As you know, we don't have any gaps in our portfolio.
However, we always look at opportunities in our core areas.
If they are if they looked like they can create value for our shareholders and we were opportunistic on those opportunities but.
I really don't see any change.
Okay.
And.
The follow up here is just on the Canadian oil macro we have seen WCS differentials widen out a little bit which is surprising in light of.
Line three coming online.
Just what are your thoughts on differentials here and how do you see them moving into 'twenty. Two as you have some Canadian production coming back some heavy heavy OPEC barrels coming into the market, but a better egress situations.
Yes.
Traditionally if you look historically the WCS differential always widens out in December obviously change into band people have their inventory adjustments that they do in December so.
There's still very good and we don't see it really changing that much into next year. So I would say, it's still going to be in the sub 20% going into next year, but.
Historically, they've always wide note in that November December and then tightened back up in the new year.
Thanks, guys.
Your next question comes from the line of Menno <unk> from TD Securities. Your line is open.
Yes.
Good morning, everyone and thank you for taking my question. So your stock is effectively at all time highs as of this morning, which is.
Pretty incredible given where things stood out 18 months ago. So my question is would you ever reconsider your 50% free cash flow allocation to buybacks with the.
Stock, where it is and how much does the entry points and then where do we stand in the cycle come into play when it comes to.
How aggressively you want to go buy back your stock.
Yes, Thanks, Menno, it's Mark <unk>.
Now that's that's the policy and as we get to that $15 billion. You know the 50 50 allocation what you see from US obviously is the balanced approach Tim.
Tim talked about the four pillars, but we have a balanced approach across increasing dividends, which you saw the increase today buybacks debt repayment and Ed.
Economic resource development so.
I foresee that that balance continues going forward.
Okay, Perfect and then one more for you Mark I believe can you just give us a sense of what the cash tax profile is going to look like into 2022 on the strip.
Well not all of it will just depend on and of course your price forecasting not only a strip on benchmark, but on other things like royalties. So.
So we do have payouts of course happening in some of the royalty projects that we can get IR to walk through that will help us.
Kind of manage down to that exact tax.
But youre going you know we are a taxpayer and you see it coming in.
In 2021 and 2022.
Okay. Thanks, a lot mark.
Yes.
Your next question comes from the line of Phil Gresh from JP Morgan Your line is open.
Yes, Hi, good morning, first question would just be thoughts on capital spending as we look out to 2022.
Any kind of early goalposts, you could share with us.
Hi, Phil No no early goalposts, yet, we're just still working through our budget and as you as you know we have a large high quality asset base.
We have numerous opportunities on so.
Going through the process.
Looking at it and deciding on where we want out of allocation.
Capital to generate the strongest returns so we're just still in that process.
Okay.
And then my second question just one additional follow up I guess on the debt targets.
Okay.
With the wording in the release and the way you're framing it around $15 billion.
Is that meant to say that you kind of view that as more like an efficient level of leverage to hold for a company of this size and with a flat production profile and things that.
In other words youre not going to have like another secondary leverage target at some point there'll be $10 billion instead of 15 billion or just any additional color there it would be interesting. Thank you.
Yes, Thanks, Phil I think the one thing obviously as you'd look at it as a long term target.
Certainly there's different scenarios that you you go through when you're budgeting and planning so that changes how you look at it right now our long term target of $15 billion as I mentioned, it looks like about one times debt to EBITDA in that range today.
And we're getting there very quickly and and right now the free cash flow allocation policy again just.
Our focus is on both returns to shareholders and continued balance sheet strength.
And you know as we go forward, you'll continue to see that capital discipline and that balanced approach.
Okay. Thank you.
Your next question comes from the line of Dennis Fong from CIBC World markets. Your line is open.
Hi, good morning, and thanks for taking my questions.
The first one here is.
I guess historically your Canadian natural has discussed two potential projects at horizon, one which was a light oil Debottlenecking project and the second is potential FTE brownfield.
Bolt on component too to horizon.
Obviously, you've seen very strong production between both horizon AOSP and given obviously the strong production and financial performance you guys are approaching payout. So I was curious as to how some of the.
We'll call it optimization projects that you've done kind of over the past few years me have changed.
Your outlook on some of these.
Debottlenecking projects and secondarily, how are you guys looking at the potential of moving forward with some of these now that you are very close to hitting your net debt target as well as where we're obviously in a very strong oil price environment currently.
Yes, so good questions here, so with horizon an ESOP.
Our teams have done a tremendous job looking at what opportunities. We have currently on the ground and that's part of the reason, we're seeing such strong production performance out of the oil sands mining and so as we look ahead.
Those projects are.
Our changing because we're finding different ways to get extra volumes different ways to get higher reliability and looking at different opportunities that may.
Actually further enhance what we can do in those sites. So.
There.
They're still in our kind of in our.
Range of opportunities, but theyre going to look.
Different than what we had originally envisioned and that's just because the teams have done such a great job. There in terms of of eking up the production and creating a higher reliability of theirs. So so you know and affordably, we're still got similar projects.
That.
The teams are working on but it's looking at it would be different than what we had originally envisioned.
Great Great and then I guess I know those were I don't want to put on the backburner, but theres a lot of engineering work essentially continue to being.
<unk> had been done on those over the past several years.
The economics of those projects move forward in your mind, and then I just wouldn't mind potentially any incremental update on iPad as well.
Where you are proceeding with that and those are my questions. Thank you.
Okay fantastic so.
Work has continued to progress actually on both sites in terms of looking at what opportunities, we could do into enhanced the volumes and enhance our operating costs on both sides. So we have not slowed down our teams have been doing a lot of background work.
Obviously part of it is if they compete for capital and Thats part of what we do in terms of managing our long term outlook.
With iPad again, its still part of our portfolio. The team is working on enhancements to that project as well.
And where it still advancing it to just a matter of deciding if its something we wanted to do at this time or keep it.
Doing additional work to further enhance the economics of it. So it's just it's a lot of work.
This last year with the Covid a lot of the what I would call on the groundwork with shutdown as we went down to essential personnel. So so a bunch of work, we still need to be done.
Absolutely proven up at that time.
Process, but it is still progressing at least on the engineering side of how we can enhance that opportunity.
Great. Thank you Bryan answering my question Youre.
Youre welcome.
Your next question comes from the line of Roger read from Wells Fargo. Your line is open.
Yeah. Thanks, good morning.
Alright, probably just a little bit of a follow up.
From Phil's question earlier thinking about Capex in 'twenty two can you give us an idea as we think about what you're you're very modest decline rate and sort of a minimum level of capex for 'twenty, two or a maintenance level of capex in 'twenty two would be.
Yes, well, our our decline is about 10%.
<unk>.
It's really not too much different than it has been historically into that three little over $3 billion.
Range so.
For the most part it's in that range. It depends on obviously, what kind of commodities, we want to do.
But it's still in that range.
Yeah. Thanks, that's helpful and then.
Almost everywhere else in the world dealing with the exceptionally high gas prices certainly higher in Canada, but not not quite stretched just curious.
As you are looking at both gas as a positive and a negative for your businesses.
How you are managing around that yes, if you are at all.
Yes, we're in a very fortunate position, where we're long natural gas so.
While it is a cost to us.
It is also a benefit on the commodity side so.
At.
For the most part are very fortunate that way.
Okay.
Yes, I was just I was just curious is there anything you've done to mitigate on the usage side at all or is it not risen to that level yet.
Oh, we're constantly looking for enhancements to reduce it you see it in the thermal side.
Through solvents, we we've got steam generation opportunities that we're advancing.
Horizon Cogent to absolutely there is always opportunities to lower our fuel.
<unk> and the teams are very focused on that.
Great. Thank you.
Yes.
There are no more questions at this time presenters. Please continue.
Thank you operator, and thank you to those who joined US on the call and webcast. This morning. If you do have any follow up questions. Please don't hesitate to give our teams a call. Thanks and have a great day.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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