Q3 2022 Canadian Natural Resources Ltd Earnings Call
Good morning.
You're welcome.
Natural resources.
Earnings Conference call and webcast.
After the presentation, we will conduct a question and answer session.
That will be given at that time.
This call is being recorded.
2022 at nine a M mountain time.
I would now like to turn the meeting over to your house for today's call Lance Kassam manager of Investor Relations.
Thank you operator, good morning, everyone.
Moving to Canadian Natural's third quarter 2022 earnings conference call.
Before we begin I'd.
To remind you of our forward looking statements and it should be noted that in our reporting this quarter is everything is in Canadian dollars unless I.
Otherwise stated.
Our reserves and production before royalties.
Additionally, I would suggest you review our comments on non-GAAP disclosures in our financial statements.
We think it's wondering if Tim Mckay, our president and Mark <unk>, Our Chief Financial Officer, Jim will first speak to highlights on our safe reliable operations that continue to drive long term shareholder value.
Including overview of activities in the quarter, including specifics on our world class assets and operations.
Mark will then provide an update on our strong financial results.
Leading our robust financial position free cash flow generation and increasing shareholder returns.
Jim will summarize our call prior to open up the line for questions with that I'll turn it over to you Tim Thank.
Thank you Lance good morning, everyone.
Focus on cost control, our culture of continuous improvement combined with our disciplined and balanced approach to capital allocation continues to drive strong operational and financial results as our 2022 capital program remains unchanged at $4 9 billion excluding acquisitions.
In the third quarter, we achieved record quarterly production of approximately 134 million Boe's per day.
Which included record natural gas production at approximately $2, one three bcf per day.
All of which received.
Strong realized pricing in the quarter, averaging $6 57 per Mcf as a result of our diversified sales strategy.
We also had liquids production at approximately 983700 barrels per day, reflecting strong operational performance across all our assets.
<unk>, our long light zero decline oil sands mining it up upgrading assets.
Which was 487553 barrels per day of SCO, comprising approximately 50% of the company.
Company's total liquid production in the quarter.
Our higher valued SCO captured.
$8 87 U S dollar price premium to <unk> in the quarter driving strong <unk>.
Fuel pricing and generate significant free cash flow for the company.
Subsequent to the quarter end on October four the.
Pathways Alliance reached an important milestone securing the right to continue exploration work.
For our Cotwo injection hub, allowing us to advance to the next stage of evaluation.
As a result, we are continuing to progress our stakeholder engagement detailed engineering work on our approximately 400 kilometer long trunk line that will carry captured cotwo in the oil sands to the storage side.
We'd like to thank the Alberta government for their continued support as we work together on this that vicious BHG emissions reduction project.
Additionally, we appreciate the federal government's recent public statements and supportive Canadian.
Oil and gas sectors role in global energy security, along with the commitment to be competitive on a physical framework for carbon capture.
Both these developments are important steps to health Canada's oil sand industry meet its commitment net zero <unk> emissions by 2050, which.
Which will have the industry and governments investing approximately 24 billion between now and 2030.
On the pathways foundational carbon capture storage project and other emissions.
<unk> projects.
As well as a result of Canadian natural's effective and efficient operations and a progressive royalty and tax system in the provinces in Canada payments to government have been significant for 2022.
Coal forecast payments from Canadian natural to Canadian governance.
Income taxes property taxes, and royalty is estimated to be approximately $11 billion in 2022, an increase of approximately 6 billion or 120% from 2021 level.
Additionally, our 2022 capital spend forecast of approximately $4 9 billion. Excluding acquisitions is an increase of approximately $1 4 billion or 41% from 2021 levels as we deliver responsibly produced energy to help meet global energy demand.
As well in 2022, we have returned approximately $4 9 billion to our shareholders through base dividend and special dividend, an increase of $2 8 billion or 127% from 2021 levels.
I will now do a brief overview of the assets starting with natural gas overall Q3, 2022 natural gas was approximately $2 one three bcf, which was a record for the company.
Increase over Q2 2022.
For North American operations, Q3, 2022 natural gas production was approximately $2 one two bcf versus the 2.09 Bcf for Q2 2022.
Primarily as a result of the company's strategic decision to invest in our drill to fill strategy, adding low cost high value liquid rich natural gas production volumes as well as a fantastic acquisition.
Our Q3.
2022, North American natural gas operating cost was $1 13 per Mcf, which was down 2% when compared to Q2 2022 of about 15.
Reflecting good operating performance as our teams continue to focus on operational ex <unk>.
<unk> highlights are at Nic a six well pad came on production in Q3 with very strong capital efficiency of approximately $2700 per <unk> October .
October 2022 monthly production from this pad averaged approximately 55 million cubic feet per day of natural gas and 3200 barrels of liquids exceeding budgeted rates and maximizing existing facility capacity Townsend.
Townsend a two well pad came on production in July 2022 at a capital efficiency of approximately $4800 per <unk> production.
Production from this pad continues to be strong with an average October 2022 monthly production of approximately 20 million cubic feet.
Natural gas.
For North American light oil and NGL Q3 production was 109255 barrels a day comparable to Q2 2022, primarily as a result of strong drilling results in previous acquisitions Q3, 2022 operating costs were $16 68, a barrel up 10% from Q2.
Operating costs of $15 19, primarily due to increased power cost in the quarter. Our drilling program continues to show strong results at Wembley a three well pad came on production in July at a capital efficiency approximately $6000 per Boe.
October 2022 monthly production from this pad averaged.
Approximately 2000 barrels a day of liquids and 7 million cubic feet of natural gas at Gold Creek, a two well pad came on production in September had a strong capital fixed deficiency of approximately $4300 per <unk> with a strong October .
2022 months, the average production of approximately 2100 barrels a day of liquids and 16 million cubic feet of natural gas.
Our international assets in Q3 had oil production of 24493 barrels a day, which is down from Q2 2022 levels of 25907 barrels primarily due to planned and unplanned maintenance in the North Sea and offshore Africa, our international assets continue to generate good free cash flow and value for the company.
Moving tabular production with 68933 barrels a day in Q3 up 4% from Q2, primarily due to strong drilling results.
In 2022 operating costs in Q3 were lower at $21 30, a barrel versus our Q2 operating costs at $22 86 per barrel.
Primarily lower due to natural gas fuel costs, and offset by higher trucking costs.
Canadian natural has one of the largest.
Baseline basis Clearwater rates at approximately 940000 net acres of which the company has drilled 2014.
Net multilateral Clearwater wells and the Smith area in Q3, bringing the total Clearwater wells drilled and on production year to date to 33 net wells and the company's toll Clearwater production in September averaged approximate 12300 barrels a day, an increase of 8400 barrels a day.
<unk> from the beginning of 2022.
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.
Q3 2022 production.
With 50051 barrels versus Q2 average of 51112 barrels, reflecting the low decline nature of this property.
The team continues to focus on mitigating cost pressures and we had good Q3.
2022 operating costs of $8 89 per barrel.
Increase from our Q2 operating cost of 799, primarily due to the higher costs in the quarter with our low decline very low operating cost Pelican Lake continues to have excellent netback.
And our thermal in situ areas in 2022, we continue to leverage our continuous improvement culture, and our expertise to deliver effective and efficient operations and.
In Q3, 2022 production was 243393 barrels a day down from Q2 production of 249930 barrels per day, primarily as a result of planned maintenance at jackfish and the quarter.
Q3 operating costs were $15 63 per barrel down compared to Q2 operating cost of $18 93 per barrel, primarily result of lower natural gas costs offset by higher power costs in the quarter.
At Kirby the company is progressing as budgeted.
The three <unk> development.
And it's targeting to begin steaming on the first pad in Q1 2023 with full ramp up to full production capacity in Q3 2023.
Primrose the company completed drilling the two Ccs pads on time and on costs. These two pads are targeted to begin steaming come on production in Q3 of 2022.
23, sorry.
The company's world class oil sands mining and upgrading assets.
We had a strong Q3 2022 production, averaging 487553 barrels of SCO.
Q3 operating costs that were strong at $22 35, a barrel.
With the change in production in operating cost compared to Q2 was primarily a result of the Scott <unk> at Horizon planned maintenance turnarounds in the second quarter.
During this quarter as steel prices were very strong, resulting in a premium pricing for SCO at $8 87 per barrel above <unk>, which added additional free cash flow.
Subsequent to Q3 2022, the company has oil sands mining.
And upgrading assets experienced unplanned outages at both horizon and and at the Scott for the Upgrader and the month of October .
<unk> in the Q4 targeted production range.
450000 to 460000 barrels of SCO.
Both oil sands mining and upgrading assets are now up and running at full capacity and our horizon, we will be enhancing our piping and take any tegra <unk> and maintenance programs to support safe and reliable operations.
Ryzen the 14th for reliability.
It has been project is progressing as planned and targets to extend the major maintenance cycles from one per year to every second year, increasing the SCO production capacity by approximately 5000 barrels a day in 2023, increasing to approximately 14000 barrels a day in 2025.
Now I will turn it over to Mark for a financial review.
Thanks, Tim and good morning, everyone. Our third quarter financial results were very strong with effective and efficient operations driving adjusted funds flow of $5 2 billion and adjusted net earnings from operations of $3 5 billion, while our capital program for 2022 remains on track.
Returns to shareholders have been significant and increasing throughout 2022 as we have returned year to date, a total of approximately $10 billion to shareholders through a $4 9 billion in dividends and 5 billion through share repurchases equaling about 71 million shares repurchased year to date up to including from November 2nd.
Our dividend is growing and sustainable and is supported by our long life low decline assets, which deliver significant and sustainable free cash flow.
Subsequent to quarter end the board of directors has approved a 13% increase to our quarterly dividend to <unk> 85 per common share from <unk> 75 per common share.
This represents the second dividend increase in 2022 and demonstrates the confidence that the board has in the sustainability of our business model the strength of our balance sheet and the nature of our diverse long life low decline asset base.
This continues the company's leading track record now with 23 consecutive years of dividend increases with a significant compound annual growth rate of 21% over that period of time.
When compared to the beginning of 2021, our dividend has doubled to the current rate of $3 40 per share annually and has been sustainable through all cycles.
This of course is in addition to the special dividend of $1 50 per share we paid in Q3.
Our strong financial position continues to get stronger debt to EBITDA is at <unk> five times at Q3 with that targeted to decline further throughout the year.
As part of our financial strength, we continue to maintain strong liquidity, including revolving bank facilities cash and short term investments liquidity at the end of Q3 was approximately six 5 billion.
Our disciplined approach to capital allocation maximizes shareholder value and our free cash flow allocation policy is unique and balanced providing significant returns to shareholders and a strengthening balance sheet, all while continuing to grow our business.
With that I'll turn it back to you Tim.
Thank you Mark.
Canadian Natural's advantage is our affiliate to effectively allocate cash flow to our four pillars, we have a well balanced diverse large asset base, which a significant portion is long life low decline assets required less maintenance capital to maintain volumes.
We continue to allocate cash flow 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 deliver top tier results.
We have a robust sustainable free cash flow and through our free cash flow allocation policy returns to shareholders are significant.
Our dividend will increase by 13%, marking 2023 is our 23rd year of consecutive increases.
It has a CAGR of approximately 21% over that time.
Year to date Canadian natural has returned approximately $10 billion to shareholders through approximately $4 9 billion in dividends and $5. One two share repurchases in summary, we will continue to focus on safe reliable operations and enhancing our top tier operations and we will continue to drive our environment.
<unk>, we were in a strong position and being nimble enhances our capacity to create value for our shareholders.
We will continue to apply that same drive DSG, environmental social and governance, a significant factor in our long term sustainability as we move forward to lower our carbon emissions across the asset base and our journey to achieve our goal of net zero <unk> emissions in the oil sands by 2050.
Canadian natural is delivering top tier free cash flow generation, which is unique sustainable and robust.
Clearly demonstrates our ability to both economically grow the business deliver it turns to shareholders by balancing our four pillars with that I will now open the call to questions.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on intentional sound.
Here at <unk> request.
And your questions people in that area.
Received should do we should decline in the building process.
I'd like to.
If you are using a speaker please lift the handset before pressing any keys.
One moment. Please for your first question. Your first question comes from Greg Pardy with RBC. Please go ahead.
Yes. Thanks, good morning, Thanks for the rundown guys.
Tim I was wondering could we just dig a little bit into the just to the two outages I mean, good to hear that the both plants are back up and running and so on but was there anything unique or specific in terms of like it's pretty odd rates that you guys have to it seems like this quarter.
Yeah. So.
The first one which is probably the major portion of it was at horizon than.
What it was is a drain line of copper coker charge pump.
Basically had some corrosion erosion issues.
And so.
Well, we change out these pumps periodically.
It wasn't identified that this was a risk and so.
It caused a little bit of an outage.
Obviously.
RPM program, we're going to be doing a little more taking into when we change these pumps out to make sure. The integrity of these drain lines are.
Our pristine so that we can deliver safe and reliable operations.
So that was really the big piece there with <unk>.
Horizon.
And then with the Scottrade piece, obviously, we don't operate that facility.
Again, it was a corrosion on a water line.
Successfully.
Managed to put a.
Device around it to stop leaking and again the learnings from these.
Obviously are.
You can apply them across not only in that horizon, Pat and Scott for it so.
Yes. It is very unique for us to have these kinds of outages, but at the same time.
One thing, we do very well as learned from these.
Opportunities and start.
Start delivering even better so.
Is it.
It was quite rare and quite unique.
Okay understood. Thanks for that and then the second question just on pathways.
What is.
What does the runway timeline look like in terms of you know.
Increasing spending on this obviously theres credits and there may be additional incentives to come but wood wood spending in earnest in an installation of hardware and so forth is that really in the 2025 through 2030 corridor.
So how we should think about it.
While the spending actually starts this year, where theres a lot of environmental work.
Obviously, we would like to submit.
The regulatory pieces as soon as possible hopefully here in 2023.
And then with that you would look to order.
Type for the trunk lines so.
There is a lot of work being done by approximately 200 different individuals between all the company's tax design the project so.
Obviously with the only getting it on a month to go today.
There's a lot of work being done but the whole.
As we start to put together the plan.
Let's start to signal that.
And to the into the.
Into that.
But it really is a lot of work happening right now obviously, we're trying to do it as quickly and as effectively as we can.
Okay. Thanks, very much Jim thank.
Thank you Greg.
Thank you. Your next question comes from Dennis Fong, which ABC worth market. Please go ahead.
Hi, good morning, and thanks for taking my question. The first one is just on the solvent project that you have in Europe for Marlin since you.
Asset.
The 50% or 40% 45%.
Yes.
<unk> you mentioned it has been quite impressive I was just curious as to what maybe some of the milestones or benchmarks you might have to further rollout.
Salt Lake programs, the other area of the Primrose, especially just given kind of some of the initial successes that you're seeing there.
Yes, <unk>, it's really just a time everything is on track we believe it's.
Working very well.
And probably by the fall of next year would be when we believe that we'll have enough information to say, we can go more to a commercial scale.
So that one actually is looking very positive, but it's early.
And that and then as well if you recall at Kirby.
Going to a commercial scale pad at Kirby north here in the near future. So.
That there is no show stoppers that we can see today.
But it's obviously.
Making sure.
That we understand it and then as we put them into a commercial scale operation.
That it continues to meet what we expect.
Great.
Just as a quick follow up to that.
Are some of the build outs for the deployment.
At a commercial scale already incorporated in front of your either sustaining our strategic capital or would that be potentially incremental.
Versus what we have for this year.
Kirby North is in our plan today.
Obviously if the.
The criminals one works very well then we would look to modify our plan in the future, but obviously it isn't into our capital next year, because we don't have the results of the pilot.
Great Great and then if you wouldn't mind just a quick question on the Clearwater you're seeing.
Frankly, very strong ramp up of production. There I was just curious as to how we should be thinking about the production and infrastructure as.
As well as our processing capabilities that you have within the region, obviously being able to leverage off of Pelican is helpful.
If you wouldn't mind, providing a little bit more color on that side. Thanks.
Yes, Theres really no show stoppers obviously.
Pelican, we have ample capacity to to handle the production and.
The gas handling is.
Yeah.
Directed to our culling less gas plant, which has been in existence for many years. So.
There is no showstoppers to me it's more about.
Just.
Following through with our development plans and delivering the production growth in the Clearwater.
Great. Thanks.
Thank you guys.
Thank you.
Your next question comes from Menno <unk> with TD Securities. Please go ahead.
Thank you and good morning, everyone, maybe I'll start with a follow up for Dennis says.
Clearwater question would you be in a position to walk us through some of the details on well design cost and IP rates based on the <unk>.
<unk> 33 wells, you've drilled to date and more generally how is that playing currently competing for capital.
It competes very good from a capital basis.
The wells generally are roughly in.
The range of about 275 to 300 barrels a day.
The drilling costs are very good.
And in a sense that.
Because it's a very tight.
Multilateral slow area.
Youre able to control your costs and learn from as you drill the wells moving forward. So.
From a economic point of view it competes very well to me, it's just about managing the business in the area.
So that you don't start to.
Escalate the costs so.
Obviously, if you look back in time, when we had heavy all.
And I have a large heavy oil project you basically started to escalate the cost pieces.
Quite rapidly so so to me it's just more.
The pace of development is important to make sure that we.
We don't see.
Salary that the cost piece and.
Yeah.
So whether they are actually doing quite quite quite well in terms of costs.
On a Boe basis.
You're probably looking in that.
You know $2500 maybe.
Maybe $2000 or <unk> <unk>, so from a compete point of view.
Competes extremely well.
Our our base.
Thanks for the detail, Tim and then just moving on to the Horizon reliability enhancement project and the goal. There is as you talked about is to to move that major turnaround in a while from one to two years.
It looks like Youre getting at least some of the benefit of that next year since you're guiding to.
A 5000 barrel per day capacity bonds on synthetic but maybe you can confirm whether that's correct and how horizons turnarounds are going to get states from here on in and then the final piece is a lot of questions in your policies, but the final pieces.
There are not the the plan is to get the AOSP on that every second year track as well.
Okay. So the first question related to horizon, So what what.
What is.
Is actually happening at horizon as some of the equipment. We installed this last year during the turnaround and so that gives us a little bit of a bump.
Bump in terms of reliability and capacity into next year.
And then what happens is when we do the second turnaround here at Horizon in 2023 additional equipment.
Gets installed and then basically.
<unk>.
Commission and everything else there next year. So so it's just doing it in a methodical way so that we see these and commence happen and then obviously.
The reason why you see in 2025, because that is when the year you actually would not do that turnaround. So so it's just basically has.
Consolidated equipment certain pieces are commissioned and we should get that benefit overtime.
As far as our ESOP.
So in terms of the upgrade of their what they do is.
Similar but different what they do is they have two different pieces of equipment. They take one down one year and then the second piece of the next year and then I believe the third year they have a full bag.
Big outage so.
We don't operate it but historically, that's what we've kind of seen is that they do.
Certain pieces.
Every second year, followed by a bigger turnaround outage.
Thanks, Dan I'll turn it back.
Thank you.
Thank you. Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Hi, Thanks for taking the time this is Nick <unk> on for Neil Mehta.
First on Capex is there any sort of additional commentary you can provide around next year's spend as we think about the higher cost environment, how much incremental production growth and then if we should be thinking about any upward revisions to maintenance capital.
Yes.
For 2023, we're still going through our budgeting process and so it's a little early there but to your point we are seeing.
Still cost pressures.
Productivity pressures and so we're walking through that.
Today, but.
I don't see any big Showstoppers I just think that.
As we get busier.
Into next year and.
Companies start to.
Have a little more activity.
There's there's pressures on productivity.
And pressures on costs so.
Little early to say, but.
I don't see any major differences from this year to next year, just those two items.
Okay. Thank you for that and then on the gas side understand close to 40% I think is export it to markets outside of ache out as you ramp gas volumes in the 23 and 25 time frame how should we be thinking about the marketing side relative to the current sales mix.
Yes.
Our marketing team obviously.
We have longer term plans of what we can do in terms of the natural gas market. So I would model it very similar to that going forward.
Obviously.
<unk>.
Are looking ahead and I think you see it in our gas pricing.
That we are looking ahead in terms of whether it's outages, whether it's export capacity that's needed.
We're always looking ahead for opportunities to diversify.
Sales portfolio, so I would potentially look at it along the same lines of what we have today, which is roughly 37% but.
Yeah. We're always looking ahead, we're always diversifying and we're always making sure that.
We have a strategy for our natural gas.
Great. Thanks, so much.
Yes.
Thank you. Your next question comes from John Royall with Jpmorgan. Please go ahead.
Hey, guys. Good morning, Thanks for taking my question.
Have any thoughts at this point on when you would expect to hit your $8 billion net debt for I think you did kind of mathematically you pushed it out this quarter just with the payment of the special dividend.
How do you think about that decision between doing further incremental returns like you did with the special versus kind of working your way down towards that floor level.
Hey, John its Mark here, Thanks for the question.
Yeah. When you think about the capital allocation, it's really a function of being balanced and I think you've seen that with significant debt repayment of course dividends.
Increasing on a base dividend as well as especially you mentioned and then of course, we have a significant share buyback program ongoing. So it's really more of a balanced approach on how we do that.
And you're right you push out the debt balance. So now when we were looking before it was kind of a Q4 Q1.
But now of course with a special in Q3 that will push out timed later into.
Into next year now it really depends of course on your price forecasting.
There is significant sensitivity to some of those items. So it really depends on on what youre thinking on price forecast.
Okay. Thank you and then just another one on gas.
Rewards producer, maybe you can speak to your view on.
The fundamentals in Canadian gas and prices going into <unk> next year.
Well, if you can share there.
Well, obviously, what we've seen is.
Some of the export capacity pieces have taken longer to get into service. So.
To me.
Theres a lot of activity on the natural gas side I think the results for ourselves have been extremely good.
Other companies have similar a similar good results. So I think it will put a little pressure on it depending on the timing of some of these expansion.
Projects so.
I actually haven't seen the maintenance outages scheduled here for next year, but.
What we've seen is with the increase.
Gas.
And depending on what kind of maintenance is being done on the line. It can put some undue pressure on vehicle price here into next year, So it's difficult to say.
Directionally, though it looks like more gas.
It's going to put more pressure on the system and so the timing of these.
Expansion and.
Incremental volume expansions.
Are important.
That's very helpful. Thank you.
Okay.
Thank you.
There are no further questions at this time you May proceed.
Thank you operator, and thank you to those who joined US. This morning. If you have any follow up questions. Please give us a call thanks and have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you participating and ask that you. Please disconnect your lines.
Yeah.