Q4 2022 Canadian Natural Resources Ltd Earnings Call
Speaker 1: Oh.
Speaker 2: Natural Resources 2022-4th quarter and year end earnings conference call-in webcast. After the presentation, we will conduct a question and answer session. Instructions will be given at that time. Please note that this calls being recorded to the day March 2nd, 2023 at 9AM Mountain Time.
Speaker 2: I would not like to turn the meeting over to your host for today's call, Lance Casson. Manager of Investor Relations.
Speaker 3: Thank you operator. Good morning everyone and welcome to Canadian Natural's fourth quarter and year end 2022 earnings conference call.
Speaker 3: Before we begin, I'd like to remind you our forward-looking statements and it should be noted that in our reporting disclosures, everything is in Canadian dollars and that's how that was stated. And we report reserves and production before real royalties. Additionally, I would suggest you review our comments on non-gap disclosures in our financial statements.
Speaker 3: With news morning's Tim at Kair President, Trevor Cassidy, Chief Operating Officer and Mark Elpaster, with M. Pi, www. organizeblvstor, and Mark date an
Speaker 3: Tim will start off by speaking to specifics of our safe reliable world-class operations that can continue to drive long-term shareholder value. Next, travel will provide highlights of our growing high-value reserves, and Mark will provide an update for strong financial results, including our robust financial position, substantial shareholder returns.
Speaker 3: and our free touch of policy that we are enhancing today.
Speaker 3: To close, Tim will summarize our call, part open up a line of questions. With that, I'll turn it over to you, Tim.
Speaker 3: Thank you, Lance. Good morning, everyone. Canadian Natural Delivered Strong Operational Results in 2022. As we achieve record annual production of approximately 1.28 million Buies per day, an increase of 4% over 2021 levels, which included approximately 933,000 barrels a day of liquid production.
Speaker 3: and record annual natural gas production of approximately 2.1 BCF per day.
Speaker 3: As a result of our diverse portfolio, which is supported by our robust long-life load decline assets primarily in the oil sense mining and thermal in situ, combined with our capital discipline we generated significant free cash flow.
Speaker 3: And as we continue balancing free cash flows to our four pillars of capital allocation, maximizing value for our shareholders.
Speaker 3: In 2022
Speaker 3: We exit with an F-depth of approximately 10.5 billion. We returned approximately 10.5 billion to our shareholders.
Speaker 3: And today we announced the further 6% increase in our dividend. In 2022, the company's toll-crued reserves increased by 6% to nearly 13.6 billion VOU.
Speaker 3: results in a 265% replacement of 2022 production. At an FDA and a metric.
Speaker 3: $8.39 per BUE. Fluid have changed.
Speaker 3: is further development cost.
Speaker 3: Notably, greater than 50% of the company's full proof reserves are high-value, zero-deply, FCO.
Speaker 3: As we continue to progress our ESG initiative.
Speaker 3: Progress??ages G-Initiative delivered industries it's
Speaker 3: Leading performance across the board, a significant factor in our long-term sustainability. In November 2022, we announced our new environmental GHG target to reduce scope 1 and scope 2, absolute emissions by 40% by 2035. As we leverage technology, innovation.
Speaker 3: to reduce her environmental footprint while ensuring safe, reliable, effective and efficient operations.
Speaker 3: We are working collaboratively through the pathway to alliance to achieve our goal of net zero in the oil sands.
Speaker 3: Equally as important.
Speaker 3: is that we work together with both federal and provincial governments to achieve climate goals in an economically sustainable manner.
Speaker 3: As well, Canadian natural is an industry leader in a ban on reclamation as we have abandoned over 3,000 wells in the last two years, each in the last two years. And at this pace, we could have ban on our current inventory of inactive wells in just 10 years.
Speaker 3: So I will now do a brief overview of RASET starting with natural gas.
Speaker 3: Overall, 2022, the annual natural gas production was approximately 2.1 BCF per day, which is a 23% increase over 2021 production level. For North American operations, 2022 annual natural gas production was approximately 2.08 BCF per day versus the 1.68 BCF.
Speaker 3: for 2021. 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.
Speaker 3: as well as off-p?estic acquisitions completed late 2021 and early 2022. On an annual basis, our 2022 North American natural gas operating cost was a dollar 19 per MCF. It increased a 3% from 2021, a dollar 15 per MCF. Primarily due to increased energy costs.
Speaker 3: North American Natural Gas Proc production was approximately 2.1 BCF, versus 1.84 for Q4 2021. The operating cost of the $1.22 per MCF versus $1.8 in 2021.
Speaker 3: Once again, reflected in the higher cost of energy. Our chains 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 natural gas.
Speaker 3: well-strialled in the year to 72 net waves.
Speaker 3: For North American light oil and NGL, the 2022 annual production was approximately 110,000 barrels a day, up 16% from 2021, primarily as a result of strong drilling results. Annual operating costs were strong at 1591 per barrel versus 2021 operating costs of 1528.
Speaker 3: Q4 production.
Speaker 3: was approximately 112 989 barrels per day, again up 16% when comparing to Q4 2021. It was quarterly operating costs of 1647 per barrel as compared to Q4 21 costs of 1461 per barrel. Again, primarily results of higher energy costs.
Speaker 3: The company delivered strong execution and results in the high-value, mountain-like crude oil and deep basin for the mountains in 2022. And as budgeted, a total of 32 net wells were brought on stream.
Speaker 3: Fertranational assets in 2022 had an annual production of 27,233 barrels a day, a 14% decrease versus 2021 levels, primarily due to maintenance activities in the North Sea and natural field decline.
Speaker 3: Optional Annual Productions was 14,343 barrels per day versus 2021 of Approximately 14,000 barrels, with annual operating costs in 2022 of 17,25 per barrel versus 2021 at 14,73. In the North Sea, annual production average.
Speaker 3: 12,890 barrels in 2022 down from the 2020 levels of 17,633 barrels.
Speaker 3: per day and an annual offer of Christ's cost of approximately $89 per barrel.
Speaker 3: As a result of the North Sea Regulatory and Economic Conditions including the impact to higher natural gas and carbon prices going forward, we're accelerating our plan for the COP and abandonment of the two Minion platforms by four to five years earlier than originally envisioned.
Speaker 3: This follows the company's successful appointment to the Nenia North platform using the single-lib technology in 2022.
Speaker 3: Moving to Abial, the 2022 annual production was approximately 67,700 barrels a day in 2020. And I increased the 5% versus...
Speaker 3: 2021. Reflecting strong drilling results, increased development activity, offset by natural field declines. Annual operating costs for 2184 per barrel versus the 2021 operating cost of 1937 per barrel. Fort quarter, 2022 production.
Speaker 3: with 72,161 barrels per day, primarily result of strong drilling activity versus the Q4 2021 production of 64,866 barrels per day.
Speaker 3: Operating costs were 21.28 per barrel versus Q4 operating costs in 2021 of 1972 per barrel. Again, impacted by higher energy costs.
Speaker 3: In 2022, the company drilled the total of 127 net horizontal multi-lifes heavy oil wells, including 52 net wells that smelt in the clear water.
Speaker 3: The company has clear water production average approximately 13,000 buoys per day in Q4 2022. Approximately 9,100 buoys per day from the start of the year.
Speaker 3: A key component of our long-life, low-to-cline assets is our world-class, pelican-like pool. We're a leading edge polymer-fledged continues to deliver significant value.
Speaker 3: The 2022 annual production was 50,333 barrels per day versus the 2021 average of...
Speaker 3: 54,390 barrels per day, a 7% decline.
Speaker 3: The team continues to focus on operating costs with the annual operating costs of $8.36 per barrel, an increase from a 2021 operating cost of $6.75 per barrel. Again, primarily results of increased energy costs incurred during the year. Fourth quarter 2022 production.
Speaker 3: was approximately 48,000 barrels a day, down 9% from the fourth quarter of 2021, of approximately 53,000 barrels a day.
Speaker 3: This primarily is the reflection of the temporary injection reduction in Q4 2022 and natural field declines. In February , injection rates have been fully reshaded and 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.
Speaker 3: versus Q4 2021 of 678 per barrel. With our load decline, low operating cost, pelican-like continues to have excellent max net max.
Speaker 3: We had a good year in our thermal and situ operations in 2022 as we continue to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations.
Speaker 3: In 2022, we had annual production approximately 252,000 barrels a day versus 2021 levels of approximately 259,000 barrels a day.
Speaker 3: Thermal annual operating costs for 1650 per barrel, up from 2021 levels of 1214 per barrel primarily as a result of increased energy costs.
Speaker 3: Q4 2022 production was strong at 250,000, 250,000, 180 barrels per day, down 4% from Q4 2020 levels.
Speaker 3: With operating costs of $17.20 per barrel reflecting higher energy cost when compared to 2.4 2021 of 1308 per barrel. At Primrose, you finished drilling two CSS pads and 2.4.
Speaker 3: and we target to bring these pads on in early Q3 2023. That Kirby is development to the four side deep pads is on track. The first pad began steaming late December 2022 and targets to wrap up the full production capacity in Q3 2023.
Speaker 3: which remaining three pads target for full ramp up in 2024. At Jackfish, the company is currently drilling a safety pad, which is target to be esteem in early Q4 2023, with the ramp up of full production capacity in 2024.
Speaker 3: As well as we continue to progress our engineering design of the commercial scale Salvent Site-D development at Kirby North and Target Commence Salvent Injection in early 2024.
Speaker 3: I can hear a natural world class, world class, world stands, mining and upgrading assets. We had an annual level.
Speaker 3: production averaging.
Speaker 3: 425,945 barrels a day of SEO, a decrease of 5% from 2021 levels. Primarily as a result, the bun plan downtime at both Scott Fruit and Horizon Tour in the
Speaker 3: We had annual 2022 operating costs averaging 2604 per barrel.
Speaker 3: versus 2021 operating cost of 20.991 per barrel.
Speaker 3: The company continues to focus on high reliability, cost control, as well as operational enhancement.
Speaker 3: At Earl Sam's mining operations, we had production of 428,784 in the fourth quarter of 2022, with a fourth quarter operating cost of 2548 per barrel. That's all. Her quarterly production was impacted as a result of the October unplanned maintenance that both Scottford and Arise.
Speaker 3: which we talked to in our November , Q3 2022 results. Then with the extreme cold weather in December , we had to complete multiple mining equipment repairs, resulting in the reduced rates at horizon for both December , 2022 and January , 2023.
Speaker 3: This event is targeted to impact G1 production by approximately 25,000 girls a day.
Speaker 3: Production is from the oil stands mining and upgrading assets, at which approximately 483,000 barrels a day in February 2023.
Speaker 3: The reliability and enhancement project that the horizon continues to progress well is now targeted to be 45 days ahead, increasing SEO production capacity earlier than originally a bunch of it.
Speaker 3: Impact of this project was approximately 5,000 barrels a day on an annual basis for 2023.
Speaker 3: increasing to approximately 14,000 barrels a day in 2025. As a result of the advancement of the reliability project and the reduced rates in Q1,
Speaker 3: and the thermal and oil sounds mining and upgrading 2023 production guide remains unchanged.
Speaker 3: For the second quarter, both Scottford and Horizon will start their plan 2023 turnaround. Scottford is targeted to start in April and reduced rates for 73 days, and Horizon is targeted for a full shutdown in May for 28 days.
Speaker 3: and will now turn it over to Trevor for a 2020-22 research review.
Speaker 3: Thank you to them and good morning. Consistent with previous years, 100% of Canadian natural reserves are externally evaluated and reviewed by independent, qualified reserve evaluators. Our 2022 reserve disclosure is presented in accordance with Canadian reporting requirements using forecasted commodity pricing and escalated costs.
Speaker 3: Canadian standards also require disclosure of reserves on a company working interest before royalty basis.
Speaker 3: As you just heard from Tim, Canadian Natural had another strong ear, and the results are also demonstrated in Canadian Natural's reserves.
Speaker 3: Total proof and total proof plus probable reserves increase 6% to 13.6 billion BUE and 18 billion BUE respectively.
Speaker 3: Of the 13.6 billion BLE of total proved reserves, 65% or 8.8 billion BLE are proved developed producing reserves.
Speaker 3: The strength and depth the Canadian natural assets are evident as approximately 77% of total pruders are long-life low decline reserves.
Speaker 3: Again, it's also important to note that approximately half of Canadian naturals total proofers are high-value no decline since that of crude oil at 6.9 billion BUE.
Speaker 3: Also worth noting that the company's total proof-plus-probable natural gas reserves increase 10% to 22.3 TCS, the largest natural gas reserves in Canada.
Speaker 3: This provides Canadian Natural with top tier, long, reserve-life index of 32 years for total proved and 42 years for total proved plus probable. Finding and development costs and reserve replacements are key indicators of the strength of our assets.
Speaker 3: In 2022, Canadian National Continued Chiefs Strong Performance as reflected in our finding in development costs and reserve replacement metrics.
Speaker 4: The corporate finding, development and acquisition costs, including changes in future development costs, are $8.39 per BUE for total-proved, and $7.62 per BUE for total-proved plus probable results.
Speaker 4: Canadian Natural Replace 2022 production by 265% for total proofed and 334% for total proof-plus probable reserves.
Speaker 4: And that present value of future net revenues before income taxes using a 10% discount rate and including the full company Aero is approximately $151 billion for total proved reserves.
Speaker 4: and approximately $184 billion dollars for total proof plus probable reserves.
Speaker 4: In summary, these strong results reflect the strength and depth of Canadian naturals' attributes.
Speaker 4: The value of the company's long life low decline reserves.
Speaker 4: 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.
Speaker 3: Thanks, Trevor. Any 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, and annual adjusted net earnings of 12.9 billion. That earnings for 2022 were 10.9 billion, including a one-time non-cash charge in Q4s.
Speaker 3: through share approaches.
Speaker 3: Equalling about 77 million shares we purchased in 2022, while at the same time reducing our net debt level by 3.4 billion.
Speaker 3: Subsequent to quarter end, the Board of Directors has approved a 6% increase to our quarterly dividend to 90 cents per common share from 85 cents per common share.
Speaker 3: 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 the nature of our diverse long-life load decline assets and high-value reserve base.
Speaker 3: 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.
Speaker 3: Our strong financial position continues to get stronger. Debt to adjusted EBITDA is at 0.5 times at the end of 2022. We have reduced net debt by approximately 10.7 billion since the beginning of 2021, and we continue to maintain strong liquidity.
Speaker 3: including revolving bank facilities, cash, and short-term investments, liquidity at the end of 2022 was approximately 6.9 billion.
Speaker 3: As a result of 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-declined nature of our high-value reserves, we even hast our free cash flow allocation policy. As the Board of Directors has confidence in the sustainability and resilience of the company to
Speaker 3: FUNS Flow, LESDividends, LESD Total Capital Expenditures.
Speaker 3: Based on strip prices today and taking into account the final 2022 tax installment 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 debt level late this year.
Speaker 3: Our discipline approach to capital allocation, our focus on a strong financial position, and our effective and efficient business model is unique and drives material free cash flow.
Speaker 3: This provides significant returns to shareholders and long-term shareholder value.
Speaker 3: With that, I'll turn over to you 10% final comments.
Speaker 3: I'll turn it over to you Tim for some final comments. Thank you Mark.
Speaker 3: The native natural advantages are our ability to effectively allocate cash flow to our four pillars.
Speaker 5: We have a well-balanced, diverse, large asset base, which a significant portion is long life load of client assets.
Speaker 5: which require less capital to maintain volumes.
Speaker 5: We are balanced in our commodities in 2022, approximately 44% of our B.O.E.'s light crude oil and F.C.O. 29% heavy oil and 27% natural gas, which lessens our exposure to the volatility in any one commodity as we move through 2023.
Speaker 5: We continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders.
Speaker 5: which is all driven by effective capital allocation effective in fishing operations.
Speaker 5: and our team who delivered top tier results. We have a robust, sustainable free cash flow, and through our free cash flow allocation returns to the Sherows have been significant.
Speaker 5: for 2022 4.9 billionths in dividend and 5.6.
Speaker 5: Billion and share repurchases for a total of $10.5 billion.
Speaker 5: And today, our dividend was increased by 6% for the 23rd consecutive year. It has a gag.
Speaker 5: of 21%, approximately 21% over that time. In summary, we will continue to focus on safe, reliable operations.
Speaker 5: enhancing our top tier operations and will continue to drive our environmental performance.
We are in a strong position and be in nimble enhances our capacity to create value for our shoulders.
Canned natural is delivering top-tier free cash flow generation, which is unique, sustainable, and robust. And 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. Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touch-tone phone. You will hear a three-tone 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 two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, prayer first question.
Your first question comes from Greg Party with RBC Capital Markets. Please go ahead.
Yeah, thanks. Good morning. Thanks for the rundown guys.
A couple of questions maybe just on net debt and then unlocking 100%. Does the broad and free cash flow definition include acquisitions?
And then I guess related to that, I'm just curious as to how close you are to the 10 billion, just given that I think you've got just a little over 2 billion of cash taxes do this quarter.
Yeah, thanks, Greg. First off, M&A wouldn't impact the formula. So that answers your first question. And yeah, I mentioned in my prepared remarks there that you're right. We have the final tax install, of course, doing Q1. And then when you look at the capital profile and of course, our dividends and current share by back program, which is significant.
a little bit related to pathways, but we're certainly hearing a lot more from you guys as a relates to IPAP and Solvents and so forth. Are those initiatives now being prioritized just given the pathways initiative going on as well? I'm all just curious.
Hi Greg, it's Tim here. Good question. So really, you know, for a high-pap and that to go forward, you really need that gas conservation or the CO2 conservation or pathways to be up and running. So, you know, at this time that the main focus is delivering.
on the Phase I program. So, you know, currently we're drilling a couple of wells today, testing the formation, 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 to that piece.
Okay, understood. Thanks very much. Your next question comes from...
Menow Hallshoff from TD Securities, please go ahead.
Thanks and good morning everyone. I'll start with the clear water. It looks like...
production average 13,000 barrels a day in Q4 and it's just eyeballing things. You're targeting 17,000 to 18,000 barrels per day for 2023. Does that guidance still sound about right? Are there any interesting trends that are jumping out at Smith at the moment and what could the clear water look like in 2024 with the uplift on?
market access through GMX? Yeah, I think you might be a little aggressive on the Smith piece there. You know, what we're seeing is that, you know, we're as most times, you always find opportunities and challenges in terms of, you know, the development.
to take a weight and see on those results. So that's really all I can say. We're seeing that you need a fairly thick reservoir, probably in the five meters to really make the economics. And what we're seeing is on the heavy all side towards Bonneville.
Those ones are actually pretty well or pretty competitive with Smith and some of the clear water plays just due to the access piece.
Thanks, Jim. 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. NINION citing an increasingly challenging commercial. I would look, I think, as I described it. In light of that, and with one of your kidney and peers exiting the region entirely, how are you thinking about your remaining?
nor C in coat of wire assets within the portfolio longer term.
Yeah, I mean, the North Sea. I mean, we've always planned for COP and the abandonment of those platforms. If you recall, we abandoned Merchison. We did NINI in North last year. So, you know, we're quite good at handling those that abandonment of these platforms. And so, to me, it's just all part of managing
and Bayabab, Esplare. I mean, they still have lots of opportunity here. We are planning another phase at both Esplare and Bayabab. 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 right. Thank you. I'll turn it back. Your next question comes from John Royal with JP Morgan. Hey guys, good morning. Thanks for taking my question. Can you talk about your thought process of getting a little more aggressive on the returns of capital here and?
moving to the $10 billion floor versus the $8 billion floor, and then also removing the lower bound on the 80 to 100%. And then I'm timing, I think Mark had said twice that it would be wait this year on achieving $10 billion. I think in the three-q call you had said, wait $23 to get to $10 billion.
nothing else that's going on there. But second on your question just around the change in the policy and kind of timing of that today. And you know 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're doing the right things.
With, you know, 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, you know, Trevor mentioned it, remember that, you know, over 50% of the total proof reserves are high value zero declines synthetic crude oil reserves, so a much more sustainable.
environment for free cash flow. So when you put all that together the board determined that now 10 billion remains a very conservative debt level and provides that sort of ample flexibility and liquidity and you know you can couple that in with why it my greats now to just 100% of the free cash flow.
Great. Thank you. And then sort of staying on the same line. If you could speak a little about the definitional change for free cash flow available to distribute and maybe just I'm trying to sort of understand how it you know and recognize that we have some other movie pieces that we just talked about.
I believe that's the major moving piece between the definition before and today. 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 you're going to have net debt at 10 billion and 100% of free cash flow being returned to shareholders, then capital needs to be funded from the free cash flow distribution.
on Abbott, on for Doug Leggett. Thank you for taking our questions.
Our first question is, what do you see on gas and will you maintain your gas growth projections?
This question is, what do you see on gas and will you maintain your gas growth projections? Or is anything that would cause you to slow down growth?
Yeah, there is as you're aware that there is a little bit of pressure on natural gas prices coming into the summer and maybe partly into next year. So, you know, we constantly continue to high grade our opportunities.
So, you know, while I don't see anything materially different, I do see that, you know, by the end of this year, we could end up doing a few less gas wells and a few more oil wells. So, you know, I would suspect that, you know, as we get into breakup here, we will view our goal-forward plans and adjust accordingly to always continue to high grade our opportunities.
Very helpful. And then for our second question, what are you thinking about as far as how you see the potential acquisition in the investor's or market at this period of time? Eminee, in my opinion, is there's a little bit disconnect between the buyer and sellers, I think.
sit back, work through our assets and develop our opportunities production cost effectively.
Understood. Thank you very much for taking our questions. You're welcome. Thank you. Thank you.
Your next question comes from Dennis Fong with CIBC World Records. Please go ahead. Great, thanks for taking my questions. The first one is just around leverage and term debt. I know the company obviously has a lot of available liquidity.
And the maturity is, of course, already been pushed out, given your campaign of repurchasing your term notes. How should we be thinking about some of the beginning to longer term term note structures as we go forward? And what do you think is maybe the appropriate capital mix or capital structure mix as we think about things going forward?
Hey Dennis, it's Mark. You know, a good question. It's, when you look at our bonds outstanding today, we've got about 11.4 billion of Canadian equivalent bonds outstanding. And we build a maturity profile to make sure we have 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 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. There's about 400 million remaining on our one Canadian bond and someone in the neighborhood of just over 800 million through the first half of next year. So that gives us the opportunity to, you know, to potentially pay down that debt.
and get to a place where your bonds are in that 10 billion sort of neighborhood. So, you know, 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. My next question is, Shaking Gears, more of the op side is at Primrose. I know it. I know it.
receive from your initial pilot on the solve inside of things. And then maybe what are the next steps after you kind of feel more comfortable with the data that you have?
Sure, in the steam flight area of Primrose, as you're aware, we are doing that solvent pilot there and yeah, it does look encouraging and so what it does for us is by lowering our steam demand and let's just say our steam demand is roughly...
reduced by 50 percent, it frees up capacity to expand into more areas. So you can do more areas at the same time. So that's what that does because we have the excess capacity available at Primrose, but we don't have the excess steam capacity. You can actually use that extra...
steam capacity that you make available to increase production. So it's just an opportunity, but you know we've got a little more time before we go forward on it, but it does look very encouraging and so hopefully that answered your question to us.
No, great. Thanks. I'll turn it back. Thank you. Your next question comes from Mike Dunn with T-Full-First Energy.
I'll turn it back. Thank you. Your next question comes from Mike Dunn with Steeple for Thenergie. Please go ahead.
Thanks, good morning everyone. Just had a question about your operating costs specifically related to electricity in Western Canada here. Can you...
One of you gentlemen maybe framed for me, maybe Mark, maybe what the year-over-year impact was either 2022 versus 2021 on your electricity costs in Western Canada or even second half 2022 versus first half 2022.
Yeah, Mike, I don't have those numbers in front of me. What I can say is it has you're aware it's significantly changed over the year. But I don't have those numbers available. I think you can follow up with lamps to get those. But I don't have our power prices in front of me today.
Okay, maybe just to follow up, but I don't know if I have to come off your date. It's just Q4.
Is that looking material to your OPEX in terms of a quarter over quarter change?
Yeah, I wouldn't say it's all material, but similar to last year as natural gas and power prices increased, we're seeing that same effect coming down in the first quarter. So power prices to your point have come off as well as natural gas. And there's somewhat interrelated, right? Yeah. Yeah.
Yes, it will help operating costsides going in so far this year. Okay, great. I think I have a good handle on your natural gas impact on OPEX, but I'll follow up with the plants. Thanks for your time, everyone. Thanks, Mike.
Yes, it will help operating side going in so far this year. Okay, great. Yeah, I think I have a good handle on your natural gas impact on optics, but I'll follow up with Lance. Thanks for your time, everyone. Thanks, Mike. Thanks, Mike. Your next question comes from Roger Reed.
with Wells Fargo. Please go ahead. Yeah, thank you. Good morning. Maybe come 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 billions, the right number? ...ugly?
What are your base assumptions on commodity prices in the WCS differential and how should we think about this on not just sort of the immediate of 23 but maybe in a little longer time frame? Hi Roger, it's Mark. We think of it on a lot of different cases.
And then you can look at history of like 2020, again, we talked about it today, but we were, you know, call it $10.7 billion higher in debt and could manage through those lower commodity price cycles. So when you continue to evaluate what your debt levels look like against those metrics.
As we continue to grow, you know, you're able to actually sustain 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 and evaluate, you know, 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-break even given the low decline age of our assets and low cost structure. Yeah I follow that. I guess in I understand tens conservative when we look at you know certainly the history of the company in the industry but
What defines 10 billion as conservative in your mind? And I'll just say, as opposed to say, 5 billion or 15 billion. Like, what 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's 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 be managed through those cycles. And as I mentioned before, I think this is just a very conservative approach at this time. And you know, we've come out of lower commodity prices in 2020 and you know, to be conservative is I think the right place to be...
When you look at base dividend.
share repurchases, other alternatives, variable dividends, something like that. What's the evaluation process there that leads you more towards? I'm going to assume share repurchases over other options.
What we look at a lot of factors and Trevor mentioned in his prepared remarks, if you look at net asset value and intrinsic value, you can look at it on a historical multiple basis so we feel buying back shares is a very good opportunity right now.
look at a lot of factors and Trevor mentioned it in his prepared remarks. If you look at net asset value and intrinsic value, you can look at it on a historical multiple basis. We feel buying back shares is a very good opportunity right now. Appreciate it. Thank you.
Thanks Roger. Your next question comes from Greg Party with RBC Capital Markets. Please go ahead. Yeah thanks. Mark at the at the risk of frustrating with my question. I just want to make sure I understand things of how a few other people ask me at the same time.
So should we think about once you hit that $10 billion level in net debt that effectively thereafter it's kind of a new world where you're at this 100% payout. And the reason I ask is that if acquisitions aren't included in the free cash flow generation definition, but they include net debt.
Then I'm just wondering how do you avoid hip hopping, you know, back and forth between that level? How should I think about that? Well, you should think about it as that we're driving down to $10 billion at that, so we'll go to 100%.
and free cash flow going to shareholders. I suppose down the line if there's an acquisition to mention 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.
I suppose down the line if there's an acquisition and Tim mentioned that you know 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.
Your next question comes from Neil. Matt, have with Goldman Sachs.
Yeah, thank you so much. I had a couple 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 are the gating factors to get to FID? And what's your best guess on when we get the project at Final Investment Decision? Thank you.
Yeah, 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 the provincial government and federal government and our 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 want certainty on the rules and as well as 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 walls, we're doing the engineering, we're doing all the land work.
of financial structure here in Canada competes against other jurisdictions. So to me, I am encouraged with the developments that were significantly and preventively that we'll be able to have something that works for industries in terms of
Okay, all right. We'll 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 tie in your views on TMX because that will matter for 24 in theory.
Sure, I mean with the WCS differential, I think in our last 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-reserved piece coming to market. You know, since that time, as we...
stopped and potentially go back into injection. And the product is on demand. You're going to see some oil out of, let's say Mexico, go to its own refinery. So I feel it's very constructive for the WCS piece.
Obviously, there's also many factors, gas price, reliability, refineries that could impact it. But I'm very encouraged by that for here in 2023. You know what, TMX, 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 the WCS and in general, you dress out of Western Canada because it gives you optionality. You know, as you saw when there is a pipeline.
issue today on the e-graph side, whether it's line 3 or another line, it does put some pressure on the pricing here in Alberta. So with TMX, I would think that what it will do is stabilize those pricing so that they're more a reflection of the true market.
Thanks. You're welcome. There are no further questions at this time. Please 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. Have a great day. Ladies and gentlemen, this concludes your conference call for today. We thank you.