Q4 2022 Canadian Natural Resources Ltd Earnings Call
Okay.
[music].
Okay.
Okay.
Good morning, we would like to welcome everyone to the Canadian Natural resources 2022 fourth quarter and year end earnings conference call and webcast. After the presentation. We will conduct a question and answer session and instructions will be given at that time. Please note that this call is being recorded today March <unk> two.
23 at nine a M Mountain time, I would now like to turn the meeting over to your host for today's call Lance Cason manager of Investor Relations. Please go ahead.
Thank you operator.
Everyone and welcome to Canadian Natural's fourth quarter and year end 2022 earnings conference call.
Before we begin I'd like to remind you of our forward looking statements and it should be noted and in our reporting disclosures everything is in Canadian dollars unless otherwise stated.
Reserves and production before we don't royalties.
Additionally, I would suggest you review our comments on non-GAAP disclosures in our financial statements.
With me. This morning is Tim Mckay, our President <unk>, Chief operating officer nationally and Pete and Mark <unk>, Our Chief Financial Officer.
Tim will start off by speaking to specifics of our safe reliable World class operations that can lead to continue to drive long term shareholder value.
<unk> traveling will provide highlights of our growing high value reserves and Mark will provide an update our strong financial results, including a robust financial position substantial shareholder returns and our free cash a policy that we are enhancing today.
To close Tim will summarize our call prior to open up the line for questions with that I'll turn it over to you Tim.
Thank you Lance good morning, everyone.
Natural delivered strong operational results in 2022, as we achieved record annual production of approximately 128 million Boe's per day, an increase of 4% over 2021 levels, which included approximately 933000 barrels a day of liquids production and record annual natural gas production.
At approximately two one bcf per day.
As a result of our diverse portfolio, which is supported by our robust long life low decline assets, primarily in the oil sands mining and thermal in situ.
Combined with our capital discipline, we generated significant free cash flow.
And as we continued balancing free cash flow to our four pillars of capital allocation maximizing value for our shareholders.
In 2022.
We exited with net debt of approximately $10 5 billion returned approximately $10 5 billion to our shareholders $5 6 billion in share repurchases and $4 9 billion in dividends and today, we announced a further 6% increase in our dividend.
In 2022 companies told crude reserves increased by 6% to nearly $13 6 billion Boe.
Yes.
<unk> and <unk>.
265% replacement up 2022 production.
DNA metric.
$8 39 per Boe, including changes.
Further development costs.
Notably greater than 50% of the company's proved reserves are high value zero decline.
Oh.
As we continue to progress our ESG initiatives.
Deliver industry.
Leading performance across the board a significant factor in our long term sustainability.
In November 2022, we announced our new environmental GHT targets to reduce scope, one and scope two absolute emissions by 40% by 2035.
As we leverage technology innovation to reduce our environmental footprint, while ensuring safe reliable effective and efficient operations.
We are working collaboratively through the pathways alliance to achieve our goal of net zero in the oil sands.
Equally as important.
We work together with both federal and provincial governments to achieve climate goals and economically sustainable manner.
As well Canadian natural is an industry leader in abandonment and reclamation as we have abandoned over 3000 wells in the last two years each in the last two years and at this pace, we could have been in our current inventory of inactive wells in just 10 years.
I will now do a brief overview of our assets starting with natural gas.
Overall 2022 net annual natural gas production was approximately two one bcf per day, which is a 23% increase over 2021 production levels for North American operations 2022 annual natural gas production was approximately 2.08 Bcf per day versus the $1 six.
<unk> eight Bcf.
For 2021 up.
Up almost approximately 395 million cubic feet per day, primarily as a result of the company's strategic decision to invest in liquid rich natural gas areas through our drill to fill strategy, adding low cost high value liquid rich gas production as well as upgrade domestic app.
Positions completed late 2021 in early 2022.
On an annual basis, our 2022, North American natural gas operating cost was $1 19 per Mcf, an increase of 3% from 2021 and $1 15 per Mcf, primarily due to increased energy costs.
For the fourth quarter of 2021, North American natural gas production was approximately $2 one bcf versus 184 for Q4 2021 with operating costs.
<unk> 22 per Mcf versus $1 eight in 2020, once again, reflecting the higher cost for energy.
Our teams continue to focus on operational excellence and we had a successful natural gas drilling program, which included 15 net wells in Q4 2022, bringing the total of natural gas.
Wells drilled in the year to 72 net wells.
For North American light oil and NGL to 2020 annual production was approximately 110000 barrels a day up 16% from 2021, primarily as a result of strong drilling results annual operating costs were strong at $15 91 per barrel versus 21 operating costs.
<unk> 28, Q4 production was approximately was 112 989 barrels per day again up 16% when comparing to Q4 2021 with quarterly operating cost of $16 47 per barrel as compared to Q4, 'twenty one cost of $14 61 per barrel again prime.
The results of higher energy costs.
The company delivered strong execution and results and they are.
In the high value Montney light crude oil and deep basin for the balance of 2022 and as budgeted at goal of 32 net wells were brought on stream.
For international assets in 2022 had nano annual production of 27233 barrels a day.
<unk>, 14% decrease for 2021 levels, primarily due to maintenance activities in the north sea and natural field declines.
Offshore annual production was 14343 barrels per day versus 2021 of approximately 14000 barrels with annual operating cost in 2022 of 17 25 per barrel versus 2021 at $14 73 in the North Sea annual production averaged 12.
890 barrels in 2022.
One from the 2012 levels of 17633 barrels per day and that annual cost of approximately $89 per barrel.
As a result of the north sea regulatory and economic conditions, including the impact of higher natural gas and carbon prices going forward, we're accelerating our plan for the COPD an abandonment of the two ninian platforms by four to five years earlier than originally envisioned.
This follows the company's successful abandonment to the Ninian north platform using the single lift technology in 2020 tier.
Moving to heavier the 'twenty to 'twenty two annual production was approximately 67700 barrels a day in 2020.
The increase of 5% versus <unk>.
2021, reflecting strong drilling results increased development activity offset by natural field declines annual operating costs were $21 84 per barrel versus the 2021 operating costs of $19, 37%.
Seven per barrel.
Fourth quarter 2022 production was 72161 barrels per day, primarily result of strong drilling activity versus the Q4 2021 production of 64866 barrels a day.
Operating costs were $21 28 per barrel versus Q4 operating.
Operating costs in 2021 of $19 72 per barrel again impacted by higher energy costs.
In 2022, the company drilled a total of 127 net horizontal multilateral heavy oil wells, including 52 net wells at Smith and the Clearwater. The company's Clearwater production averaged approximately 13000 Boe's per day in Q4 of 2022 up approximately 90 to 100 Boe's per day.
The start of the year.
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.
The 2022 annual production was $50 333 barrels per day versus the 2021 average of <unk>.
<unk> 4390 barrels per day, a 7% decline.
The team continues to focus on operating costs with the annual operating costs of $8 36 per barrel an increase from our 2021 operating cost of $6 75 per barrels again, primarily result of increased entry costs.
During the year.
The fourth quarter 2022 production was approximately 48000 barrels a day down 9% from the fourth quarter of 2021 of approximately 53000 barrels a day.
This primarily is a reflection of the temporary injection reduction in Q4, 2022, and natural field declines and February injection rates have been fully restated in the polymer flood is expected to return to its historical low decline rate of approximately 5% in the second half of 2023.
Operating costs in Q4, 2022 were $9 14 per barrel versus Q4, 2021 of $6 78 per barrel with our low decline low operating cost Pelican Lake continues to have excellent Max net backs.
We had a good year in our thermal in situ operations in 2022, as we continued to leverage our continuous improvement culture, and our expertise to deliver effective and efficient operations. In 2022, we had annual production of approximately 252000 barrels a day versus 2021 levels of approximately.
<unk> 259000 barrels a day.
As a result of increased energy costs.
Q4, 2022 production was strong at 250 253188 barrels per day down 4% from Q4 2020 levels with operating costs of $17 20 per barrel, reflecting higher energy costs, when compared to Q4 2021 of $13 per barrel.
At Primrose, we finished drilling to CSS pads in Q4.
And we target to bring these pads on in early Q3 2023 at Kirby development to the Sag D. Pads is on track. The first pad began steaming late December 2022 and targets to wrap up.
<unk> capacity in Q3 2023.
With the remaining three pads targeting for full ramp up in 2024 at Jackfish companies currently drilling a safety pad, which is targeted steam in early Q4 2023 with the ramp up of full production capacity in 2024 as well, we're continuing to progress our engineering design of the.
<unk> scale solid safety development at Kirby, North and target to commence consolidate injection in early 2024.
Canadian Natural's World class oil sands mining and upgrading assets, we had an annual net production.
Production averaging.
425945 barrels a day of SCO, a decrease of 5% from 2021 levels, primarily as a result of unplanned downtime at both Scott fruit and horizon during the year.
We had annual 2022 operating costs averaged $26 four per barrel versus 2021 operating costs of 20 point.
<unk> 91 per barrel.
Company continues to focus on high reliability cost control as well as operational enhancements.
At our oil Sands mining operations, we had production of 428784 in the fourth quarter of 2022 with a fourth quarter operating costs of $25 48 per barrel of SCO.
Quarterly production was impacted as a result of the October unplanned maintenance at both Scott and Horizon, which we talked to in our November Q3 2022 results.
Then with the extreme cold weather in December we had had to complete multiple mining equipment repairs, resulting in reduced rates at horizon for both December 2022 and January 2023.
This event is targeted to impact Q1 production by approximately 25000 barrels a day.
Production from the oil sands mining and upgrading assets averaged approximately 483000 barrels a day in February 2023.
The reliability enhancement project at Horizon continues to progress well and is now targeted to be 45 days ahead, increasing SCO production capacity earlier than originally budgeted.
Impact of this project was approximately 5000 barrels a day on an annual basis for 2023.
Increasing to approximately 14000 barrels a day in 2025 as.
As a result of the advancement of the reliability project and the reduced rates in Q1.
The thermal and oil sands mining and upgrading 2023 production guidance remains unchanged.
For the second quarter, both Scottrade and horizon will start their planned 2023 turnarounds <unk> targeted to start in April at reduced rates for 73 days and horizon is targeted for a full shutdown in may for 2018.
I will now turn it over to Trevor for 2000 2022 reserves review.
Thank you, Tim and good morning, consistent with previous years, 100% of Canadian Natural's reserves are externally evaluated and reviewed by independent qualified reserve Evaluators are 2022 reserve disclosure is presented in accordance with Canadian reporting requirements, using forecasted commodity pricing and escalated costs.
Canadian standards also require disclosure of reserves on a company working interest before royalty basis.
You just heard from Tim Canadian natural had another strong year and the results are also demonstrated in Canadian Natural's reserves.
Total proved and total proved plus probable reserves increased 6% to $13 6 billion Boe and 18 billion Boe respectively.
As a $13 6 billion of total proved reserves, 65% or $8 8 billion BOE our proved developed producing reserves.
The strength and depth of Canadian Natural's assets are evident as approximately 77% of total proved reserves our long life low decline reserves.
Again, it's also important to note that approximately half of Canadian Natural's total proved reserves are high value no decline synthetic crude oil at $6 9 billion Boe.
Also worth noting that the company's total proved plus probable natural gas reserves increased 10% to 22, three tcf the largest natural gas reserves in Canada.
This provides Canadian natural with top tier long reserve life Index of 32 years for total proved in 42 years for total proved plus probable.
Finding and development costs and reserve replacements are key indicators of the strength of our assets in 2022 Canadian natural continue to achieve strong performance as reflected in our finding and development costs and reserve replacement metrics.
The corporate finding development and acquisition costs, including changes in future development costs are $8 39 per Boe for total proved.
And $7 62 per.
<unk> for total proved plus probable reserves.
Canadian natural Canadian natural replaced 2022 production by 265% for total proved and 334% for total proved plus probable reserves.
The net present value of future net revenues before income taxes, using a 10% discount rate and including the full company Arrow is approximately $151 billion for total proved reserves.
And approximately $184 billion for total proved plus probable reserves.
In summary, these strong results reflect the strength and depth of Canadian Natural's asset base.
The value of the Companys long life low decline reserves.
And our ability to execute and maximize value from our reserve base.
Thank you I'll now hand, it over to Mark for financial highlights.
Thanks, Trevor and good morning, everyone.
Our fourth quarter financial results were strong and adjusted funds flow of $4 2 billion and adjusted net earnings from operations of $2 2 billion driving full year 2022, adjusted funds flow of $19 8 billion in annual adjusted net earnings of $12 9 billion.
Net earnings for 2022 were $10 9 billion, including a onetime noncash charge in Q4 of $651 million related to the acceleration of abandonment on two platforms in the North Sea.
These strong financial results drove material free cash flow in 2022, as we balance our four pillars, including returns to shareholders.
We returned a total of approximately $10 5 billion to shareholders through $4 9 billion in dividends and $5 6 billion through share repurchases equaling about 77 million shares repurchased in 2022, while at the same time, reducing our net debt level by $3 4 billion.
Subsequent to quarter end the board of directors has approved a 6% increase to our quarterly dividend to <unk> 90 per common share for <unk> 85 per common share. This follows the two dividend increases totaling 45% in 2022 and demonstrates the confidence that the board has in the sustainability of our business model the strength of our balance sheet and.
And the nature of our diverse long life low decline assets and high value Reserve 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.
Our strong financial position continues to get stronger.
Debt to adjusted EBITDA is at <unk> five times at the end of 2022, and we have reduced net debt by approximately $10 7 billion since the beginning of 2021, and we continue to maintain strong liquidity.
Including our revolving bank facilities cash and short term investments liquidity at the end of 2022 was approximately $6 9 billion.
As a result of these strong this strong financial position and having a sustainable cash flow profile, particularly when you compare our debt levels to the size diversity and long life low decline nature of our high value reserves, we've enhanced our free cash flow allocation policy as the board of directors has confidence in the sustainability and resilience.
Of the company to support accelerating incremental shareholder returns to 100% of free cash flow when the Companys net debt reaches 10 billion instead of the previous 8 billion net debt level.
Once the company's net debt reaches 10 billion the free cash flow allocation will be adjusted to define free cash flow as adjusted funds flow less dividends less total capital expenditures.
Based on strip prices today, and taking into account. The final 2022 tax installments in Q1 capital profile and our current shareholder return framework, including dividends and a significant share buyback program, we target to reach the 10 billion net debt level late this year.
Our disciplined approach to capital allocation, our focus on our strong financial position and our effective and efficient business model is unique and drives material free cash flow.
This provides significant returns to shareholders and long term shareholder value.
With that I'll turn it over to you Tim for some final comments. Thank you Mark.
Canadian Natural's advantage is our ability 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, which require less capital to maintain volumes.
We have balance in our commodities in 2020 to approximately 44% of our Boe's light crude oil and SCO.
9% heavy oil and 27% natural gas, which lessens our exposure to the volatility in any one commodity as we move through 2023.
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.
By our teams who delivered top tier results.
We have a robust sustainable free cash flow and through our free cash flow allocation returns to shareholders.
Have been significant for.
For 2020 to $4 9 billion in dividend.
Five six.
The $1 billion in share repurchases for a total of $10 5 billion.
21% approximate 21% over that time in summary, we will continue to focus on safe reliable operations enhancing our top tier operations and will continue to drive our environmental performance. We are in a strong position and being nimble enhances our capacity to create.
<unk> for our shareholders tier.
Natural delivering top tier free cash flow generation, which is unique sustainable and robust.
Clearly demonstrates our ability to both economically grow the business and deliver returns to shareholders by balancing our four pillars with that I will now open the call for questions.
Yes.
Thank you ladies and gentlemen, we will now begin the question answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press the star followed by the Q. If you are using a speakerphone.
Please lift the handset before pressing any Keith one moment. Please for your first question.
Your first question comes from Greg Pardy with RBC capital markets. Please go ahead, yes.
Yes. Thanks, good morning, Thanks for the rundown guys.
Couple of questions maybe just on.
Net debt and then unlocking the 100%.
Does the broadened free cash flow definition include acquisitions.
And then I guess related to that I'm, just curious as to how close you are to.
To the $10 billion, just given that I think you've got just a little over 2 billion of cash taxes due this quarter.
Yes, Thanks, Greg.
First off M&A wouldn't impact of Formula.
So that answers your first question and yes, I mentioned mentioned in my prepared remarks. There that you are right. We have the final tax installment of course due in Q1.
And then when you look at the capital profile and of course, our dividends and current share buyback program, which has significant based on the current free cash flow allocation.
We target that net debt somewhere late this year.
Okay late 'twenty three yes correct.
Okay.
Okay, Great and then.
Maybe just shifting gears.
Little bit related to pathways, but we're certainly hearing a lot more from from you guys as it relates to.
IPad, Ben and solvents and so forth.
Those initiatives now being prioritized.
Given the pathways initiative going on as well just curious.
Hi, Greg it's Tim here.
Good question so.
Really.
For iPad.
To go forward do you really need to.
Gas conservation or the <unk>.
Conservation or pathways to be up and running so.
At this time that the main focus is delivering on the phase one program. So.
Currently we are drilling.
Wells today.
Testing the.
<unk> doing all that work, we're continuing with the engineering of the pipeline and as well as.
The gas.
Collection system. So it's really a lot of work being done.
<unk>.
To that piece.
Okay understood. Thanks, very much okay.
Your next question comes from.
<unk> <unk> from TD Securities. Please go ahead.
Thanks <unk>.
Good morning, everyone I'll start with the Clearwater it looks like.
Production averaged 13000 barrels a day in Q4 and it just eyeballing things Youre targeting 17 to 18000 barrels per day for 2023.
Does that guidance still sound about right.
Are there any interesting trends that are jumping out at the moment.
What could the Clearwater look like in 2024 with the uplift on market access through Tms.
Yes.
You might be a little aggressive on the on the snip piece there.
What we're seeing is that.
As most times you always find.
Opportunities and.
Challenges in terms of the.
The development and of course, we've always said that these developments are smaller in nature you have to be.
Very methodical in the development piece and so while it Smith is great it's doing very well.
As we move to the other Clearwater items.
We'll have to take a wait and see on on.
Those results. So that's really all I can say is that we're seeing that you need a fairly thick.
Reservoir, probably in the five meters to really make the economics.
But what we're seeing is on the heavy oil side towards Bonneville.
Those ones were actually pretty well.
<unk> Smith, then and some of the Clearwater. Please just due to the access piece.
Thanks, Tim and I'll, just move on to the to the North Sea. It's clearly a very small part of the portfolio now you wrote off.
Many and citing an increasingly challenging commercial outlook.
Described it in light of that and with one of your Canadian peers exiting the region entirely how are you thinking about your remaining north sea in Cote d'ivoire assets within the portfolio longer term.
Yes.
The North Sea I mean, we've always plan for.
C L P and the upon them until those platforms. If you recall, we are bound and merchants and we did ninian north last year.
So.
We're quite good at handling those.
Sure.
That abandonment of these platforms and so to me its just all part of managing your portfolio.
Every field asset does have a life shelf life. So.
To me.
Just continue on in the North sea with the with that program.
And really it just gets smaller and the code of war and Youll pay about <unk> I mean, they still have lots of opportunity here we are planning.
Another phase at both <unk> and baobab.
We're just doing the work there and they will probably be executed into the next year.
But no those assets they still got lots of life left and it's just a matter of.
Doing it doing it right.
Thank you I'll turn it back.
Your next question comes from John Royall with Jpmorgan. Please go ahead.
Hey, guys. Good morning, Thanks for taking my question.
Can you talk about your thought process.
A little more aggressive on the returns of capital here.
Moving to the $10 billion floor versus the 8 billion core and then also removing the lower bound on the 80% to 100%.
And then.
I think markets.
Twice that.
This year on achieving 10 billion.
I think on the <unk> call you had said.
$23 8 billion so.
I assume that's more just about the.
The strip coming down but is there any other moving pieces in that bridge.
Okay, So hey, John it's Mark.
Onto the second question first it's largely related to commodity prices. So there's really nothing else that's going on there.
Second on your on your question just around the change in the policy and kind of timing of that today.
Every quarter, our board reviews, our free cash flow policy and we look at our financial position, we look at it against a lot of metrics to ensure we are doing the right things.
With our debt level decreasing over $10 billion in the last couple of years at the same time, we've been able to grow production and as Trevor talked about increase our reserves and Trevor mentioned it remember that over 50% of the total proved reserves are high value zero decline synthetic crude oil reserves, so a much more sustainable.
Environment for free cash flow so.
So when you put all that together and the board determined that now $10 billion remains a very conservative debt level and provides that sort of ample flexibility and liquidity and you.
You couple that in with Wyatt.
Migrates down to just 100% of the free cash flow.
Great. Thank you.
Just staying on the same lines.
You can speak a little about the definitional change.
Our free cash flow available to distribute in.
And maybe just.
I'm trying to sort of.
Understand how it recognizing we have some other moving pieces that we just talked about.
How it might affect future returns to shareholders.
So how much growth Capex you expect to be in this business. Once you got sort of on the over side of your current growth program.
Okay.
In terms of.
Capital.
I believe that the major moving pieces between the definition before.
Okay.
Yes, Yes, John let me just like when you look at the change in the definition you really have to think about it. It's really just a natural progression of the formula if youre going to have net debt of $10 billion and 100% of free cash flow being returned to shareholders and capital needs to be funded from the free cash flow distributions, otherwise you would always fluctuate up and down from the 10 billion. So.
It's really just a natural progression of how the formula needs to work.
Understood. Thank you.
Your next question comes from Doug Leggate.
Bank of America. Please go ahead.
John Abbott on for Doug Leggate.
Thank you for taking our questions.
Our first question is what are you seeing on gas and we'll use will you maintain your gas growth projections.
Or is there anything that would cause you to slow down growth.
Yes, there is.
Youre aware that there is a little bit of pressure on natural gas prices coming into this summer and.
Maybe partly into next year so.
We constantly.
Continue to high grade our opportunities so while I don't see anything materially different I do see that.
By.
At the end of this year, we could end up doing a few less gas wells and a few more oil wells. So.
I would suspect that.
As we get into breakup Herbert will view, our go forward plans and adjust quarterly too to always continue to high grade our opportunities.
Very helpful and then for our second question is.
What are you thinking about as far as how you see the potential acquisition and divestiture markets at this period of time.
M&A.
And in my opinion is.
There's a little bit.
Disconnect between the buyer and sellers I think.
It looks too expensive in my opinion to be in the market.
And that's why we're focused on organically growing.
$1 <unk>, we we've been quite successful.
And we have lots of running room in our inventory of assets. So therefore.
It's a good time to sit back.
<unk> worked through our assets and develop R.
Our opportunity is production cost effectively.
Understood. Thank you very much for taking our questions.
Thank you.
Your next question comes from Dennis Fong with CIBC World markets. Please go ahead.
Great. Thanks for taking my questions. The first one is just around <unk>.
Average in term debt I know the company, obviously has a lot of available liquidity and the maturities are frankly already been pushed out given your I guess campaign.
Repurchasing kind of near term notes, how should we be thinking about some of the medium to longer term.
Term note structures as we go forward and when do you think is maybe the appropriate capital mix of capital structure mix as we think about things going forward.
Hey, Dennis it's Mark.
Good question.
When you look at our bonds outstanding today, we've got about $11 4 billion of Canadian equivalent bonds outstanding and.
And we build a maturity profile to make sure we had the opportunity to pay down absolute debt as we knew the free cash flow was coming.
So you've seen that over the last couple of years, where we've been able to pay down bonds and sometimes pay them early as you pointed out. So we do have some maturities here at the end of this year Theres about $400 million remaining on our one Canadian bond and somewhere in the neighborhood of just over 800 million through the first half of next year, So that gives us the opportunity to.
Potentially pay down that debt.
And get to a place where your bonds are in that $10 billion sort of neighborhood. So given the net debt sort of level that we're looking to achieve here that kind of all goes around to make sense on how you build that capital structure.
Great Great I appreciate that answer on my next question is shifting gears more of the upside is at Primrose.
Your Investor Day, you highlighted we'll call it the <unk>.
Productive capability at that asset how should we be thinking about.
The.
The ability to get to those higher production levels, and how does that interrelate potentially to.
We'll call it positive data that you received from your initial pilot on the solvent side of things and then maybe what are the next steps. After you kind of feel more comfortable with the database.
Sure.
And the steam flood area of Primrose is.
We are doing that solvent to.
Pilot, there and yes, it does look encouraging and so what it does for us is.
Lowering our steam demand and let's just say our steam demand is roughly reduced by 50%. It frees up capacity to expand into more areas. So you can do more areas at the same time. So so that what that does because we have the excess capacity available at primrose, but we don't have the <unk>.
Steam capacity, you can actually use that extra steam capacity that youll make available to increase production. So it's just it's an opportunity.
We've got a I guess, a little more time before we go.
Go forward on it but it does look very encouraging and so hopefully that answer your question Dennis.
Great. Thanks, I'll turn it back.
Thank you.
Your next question comes from Mike Dunn with Stifel Firstenergy. Please go ahead.
Thanks, Good morning, everyone.
Just had a question about your operating cost specifically related to electricity and Western Canada here can you.
One of the gentlemen, maybe frame for me maybe mark.
What the year over year impact was.
Other 2022 versus 2021 on your electricity costs.
In Western Canada, or even second half 'twenty two versus first half of 'twenty two.
Yes, Mike I don't have those numbers in front of me what I can say it's hit as you are aware it significantly changed over the year.
And.
But I don't have those numbers available as I think you could follow up with Lance to get those but I don't have our power prices in front of me today.
Okay, maybe just a follow up but I don't.
We have come off your year to date Q4.
Tom.
Is that.
Looking material to your to your Opex in terms of our quarter over quarter change.
I wouldn't say, it's all material but.
Similar to last year as natural gas and power prices increased.
We're seeing that that same effect coming down in the first quarter. So.
Our prices to your point have come off as well as natural gas and there is somewhat interrelated right.
Yes.
Yes, it will.
<unk> will help the operating cost side going in so far this year.
Okay, Great Yeah, I think I have a good handle on your natural gas impact on Opex, but I'll follow up offline. Thanks for your time everyone.
Thanks, Mike.
Your next question comes from Roger read with Wells Fargo. Please go ahead.
Yes. Thank you good morning.
Maybe coming back to the question about capital structure, and maybe thinking about it from a standpoint of.
Maybe a mid cycle pricing, what's the right way to think about.
The capital structure and.
Cash returns to shareholders. So what I'm trying to get at is how did you really determine 10 billion is the right number.
What are you what are your base assumptions on.
Commodity prices in the.
<unk> see us differential.
And how should we think about this on.
Just sort of the immediate of 'twenty, three but maybe a little longer timeframe.
Hi, Roger it's Mark.
Think of it on a lot of different cases, and make sure that we're evaluating it on different price points and we do that to make sure things like our dividend is sustainable through all cycles. So when you look at that level of $10 billion again with a company our size and the type of reserve base.
And then you can look at history of like 2020, again, we talked about it today, but we were call it $10 7 billion higher than that and could manage through those lower commodity price cycles. So when you. When you continue to evaluate what your debt levels look like against those metrics.
As we continue to grow.
Youre able to actually sustained higher debt levels, but we feel it's the right place to be to be in a conservative spot like we are at about $10 billion.
So we look at it.
Valuation.
Capital structure, and free cash flow and sustainability of things like our dividend at all different price points. As you recall, we have a very low breakeven given the low decline each of our assets in a low cost structure.
Yes, I, followed that I guess.
I understand tens conservative when we look at certainly the history of the company in the industry, but.
What defines $10 billion is conservative in your mind and I'll, just say as opposed to say $5 billion or $15 billion like what what is is it strictly the dependability of the dividend in kind of all price scenarios or is there some other component involved.
Well I think there is several components involved again, one is making sure that the dividend is sustainable through those cycles. So your debt level needs to be able to manage through those cycles.
And as I've mentioned before I think this is just a very conservative approach.
At this time and we've come out of lower commodity prices in 2020, and and to be Conservative is I think the right place to be at this stage and it still generates.
Significant free cash flow returns to shareholders right now on the 50 50 split and obviously, that's getting enhanced and augmented as we come until late 2023.
Okay, and then just a final follow up.
I'm fine with share repurchases as a use of cash, but when you look at.
Base dividend share repurchases other alternatives variable dividend something like that what's the evaluation process there that lead you more towards.
I'm going to assume share repurchases over other options.
While we look at a lot of factors and Trevor mentioned it in his prepared remarks, if you look at net asset value intrinsic value you can look at it on an historical multiple basis, we feel buying back shares is a very good opportunity right now.
I appreciate it thank you.
Thanks Roger.
Your next question comes from Greg Pardy with RBC capital markets. Please go ahead, yes.
Yes, thanks, Mark at the at the risk of <unk>.
Frustrating with my question I, just wanted to make sure I understand things have had a few other people asked me at the same time.
So should we think about once you hit that 10 billion dollar level of net debt that.
Effectively thereafter, it's kind of a new world, where you are at this 100% payout.
The reason I ask is that if acquisitions arent included in the free cash flow generation.
Definition, but they include net debt.
And I'm just wondering how do you avoid hip hopping.
Back and forth between that level, how should I think about that well you should think about it is that we are driving down to $10 billion net debt. So we will go to a 100% free cash flow going to shareholders I suppose down the line. If there is an acquisition and Jim mentioned that.
That's not really something right now, but if there is then in your net debt goes up then you will revert back to the 50 50 threshold until you get back to $10 billion. That's how you should think of it okay. Okay. Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Okay.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yes. Thank you so much I had a couple of macro follow up questions.
The first is around pathways I know you've got a lot of people dedicated to this project just give us a lay of the land what what are the gating factors to get to <unk> and what's your best guess on when we get the project.
At final investment decision. Thank you.
Yes.
That's a good question obviously.
We need to.
Make sure it all makes sense and part of that is making sure that we have.
<unk> government and federal government.
And industry working together in terms of a structure for carbon capture obviously, it's a big undertaking it's a big cost.
And with the Big cost you one certainty on the rules and as well as the.
The financial structure of how to do it.
And so I think that's probably the number one item going forward.
In the meantime, we're drilling the wells, we're doing the engineering, we're doing all the land work Dia's.
To progress that.
To date, there has been no showstoppers, but obviously as you saw in the U S.
With the inflation reduction Act.
They moved ahead of Canada and part of it is you have to have a competitive.
Financial structure here in Canada competes against other jurisdiction so that to me.
I am encouraged.
With the developments that we're seeing both federally and provincially debt.
Will be able to have something that works for four industries in terms of.
Carbon capture.
Going forward.
Okay, Alright, well look for more clarity there and then.
On WCS differentials they blew out at the beginning of the year late last year and they've come in.
Be curious on your view on the trajectory of WCS from here and maybe talk.
Hi in your views on <unk>, because that will matter $4 24 in theory. Thank you.
Sure I mean, the WCS differentials I think.
Yes.
Call there.
We said that there is pressure on the WCS widening in the short term part of it was seasonal part of it was natural gas prices and part of it was the SPR.
<unk> piece.
Coming to market.
Since that time.
Also indicated that we would see tightening coming into 2023.
<unk>.
That has proved to be correct.
Obviously natural gas prices have.
Reduced.
The <unk> are looking.
Quit or stopped and potentially go back into injection.
And.
The product is on demand youre going to see.
Some will.
Mexico go to its own refinery so tight.
I feel it's very constructive for the WCS piece, obviously there's.
Many factors gas price reliability refineries that will impact that could impact it but I'm very encouraged by.
Hi.
We're here in 'twenty two 'twenty three.
<unk>.
I have not heard any new updates other than it's progressing.
Coming on late this year or starting to mechanically be complete late this year.
Which again to me is a positive piece for both WCS and <unk>.
In general the EPS out of Western Canada, because it gives you optionality.
As you saw with the.
Sure.
When there is a pipeline issue.
Today on the <unk> side, whether it's.
Line three or another line.
It does put some pressure on the on the pricing here in Alberta, and so with Tms site.
That's what it will do is stabilize those pricing so that they are more a reflection of.
The <unk> market.
Thanks.
Youre welcome.
There are no further questions at this time. Please proceed.
Thank you operator, and thank you to those who joined US this morning.
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 for participating and ask that you. Please disconnect your lines.
Okay.
Okay.
Okay.
[music].
Yes.
Paul.
Okay.
Sure.
Yes.
Yes.
[music].
Thank you.
[music].
Absolutely.
Okay.
Yes.
[music].
Okay.
Paul.
Okay.
Yes.
Okay.
[music].
Yes.
Okay.
Sure.
Yes.
Yes.
Yes.
Yes.
Thank you.
Okay.
Okay.
Okay.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
Sure.
Yes.