Q2 2023 Canadian Natural Resources Limited Earnings Call
If this call is being recorded today August three 2023 at nine a M Mountain time.
Now, let's turn the meeting over to your host for today's call Lance Kaufman manager of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining Canadian Natural's second quarter 2023 earnings Conference call.
As always before we begin I'd like to remind you of our forward looking statements and it should be noted that in our reporting disclosures everything is in Canadian dollars unless otherwise stated.
And we report our reserves and production before royalties. Additionally, I would suggest you review our comments on non-GAAP disclosures in our financial statements.
With me. This morning are Tim Mckay, our president and Mark <unk>, our Chief Financial Officer.
Tim will first speak to how Canadian natural is targeting strong production in the second half of 2023, following the completion of planned turnarounds and through our strategic growth plan.
<unk>, who will touch on some highlights of our ESG achievements from our 2022 stewardship report to stakeholders that was released today.
Followed by specifics on our safe reliable and World class operations.
Mark will then summarize our financial results, our strong financial position free cash flow generation and significant returns to shareholders. So far this year.
To close Ken will summarize our call prior to opening up the line for questions with that I will turn it over to you Tim.
Good morning, everyone in the second quarter, we achieved quarterly production of approximately $1 9 million.
Good day.
Which included natural gas production at approximately two one bcf per day with liquids production at approximately 847000 barrels a day, both reflecting the operational impacts of the wildfires in Western Canada Third party pipeline outage as well as plant turnaround activities in the quarter.
The wildfires in Western Canada resulted in some assets being shut in at various times through the months of May and into July there was no significant damage to our assets and essentially all the production impacted by the wildfires has now been restored and we continued commodity actively monitor the situation.
We'd like to thank our field personnel and their families as well as first responders emergency response agencies for their efforts over the past few months.
As a result of strong execution on our thermal growth plan.
Three 2023 average.
Thermal production is now targeted to be approximately 280000 barrels a day as well as Q4, which represents growth of approximately 30000 barrels a day from Q4 2022 levels as.
As well, it's well timed with western Canadian select pricing improve.
Proving both year to date and forecasted to Maine's strong for the remainder of 2023.
Following the completion of the planned turnarounds at both of our World class oil sands mining and upgrading assets.
Production in July has been strong with a monthly average of approximately 513000 barrels a day, capturing SCO pricing that continues to be priced at a premium to <unk>.
Our 2023 capital budget has increased by about $200 million compared to the original budget in particular, the oil sands mining and upgrading has.
<unk> has increased by approximately $130 million, largely reflecting increased scope and third party costs relating to remaining activities to ensure safe and effective operations.
The remaining approximately $70 million remains relates to the North American E&P at thermal operations as a result of increased non op operated.
Activities and increased workover activities on properties as well as some inflationary pressures the 2000 2023 targeted.
Targeted capital program is approximately $5 4 billion or approximately a 4% increase.
Canadian natural continues to be a leader on environmental social and governance and has made it a priority towards collaborating with the industry and peers and governments to achieve meaningful ghd reductions in support of both Alberta, and Canada climate goals.
Today, our 2022 stewardship report to stakeholders was released which highlights several of our ESG accomplishments, including top tier safety performance.
Working together with 167 indigenous businesses in which approximately $684 million in contracts were awarded in 2022.
Additionally, we are in an investment leader in R&D as we increased investment by <unk>.
30% over 2021 levels.
With over $587 million invested in technology development deployment, focusing our reductions and embarked reducing our environmental footprint.
<unk> greenhouse gas emissions and productivity improvements I'll now do a brief overview of our assets starting with natural gas.
Overall Q2, 2023 natural gas production was approximately $2 one bcf.
Which was comparable to Q2 2022 production.
For North American operations Q2, 'twenty three production was slightly down at approximately two seven Bcf.
Versus Q2, 2022 production of 2.09 Bcf.
Primarily a result for the wildfires third party outage impacting the quarter by approximately 100 million cubic feet per day offset by a company's drill to fill strategy, adding low cost high value liquid rich natural gas production volumes.
During the quarter company drilled 21, net wells of which $6 five were brought on during the quarter meeting targeted grades.
North American Q2 'twenty three.
Gas operating cost was about 35, an mcf, which is up 17% compared to Q2 2022 of about 15.
Primarily due to higher service and power costs as well as the impact of lower production volumes, resulting from the wildfires and the third party outage. Our teams continue to focus on cost control and operational excellence.
For North American light oil and Ngls Q2 production was 102553 barrels a day down from Q2 2022 of 109907 barrels a day, primarily as a result of the wire wildfires and third party outages impacting liquids production by approximately.
<unk> 7600 barrels a day for the quarter.
Q2, 2023 operating costs were $18 three up from Q2 operating costs of $15 19, reflecting the impact of higher service and power costs and lower volumes.
Due to the wildfires and third party outage.
Our international assets in Q2 had oil production of 26520 barrels a day, which is comparable to Q2 2022 levels of 25907 barrels a day or international assets continue to generate good cash flow and value to the company.
Moving to heavy oil production was 76498 barrels a day in Q2 2023 up 15% from Q2 2022 of 66521 barrels a day, primarily due to strong drilling results offsetting natural field declines operating costs in Q.
Two were at $20 seven down 12% as compared to Q2 2022 operating cost of 22 86, primarily due to lower natural gas fuel costs.
During the quarter company drilled 24, net heavy oil wells of which 18 wells were multi laterals across our land base from Bonneville to administer.
And to the Clearwater area as well as six slot wells, which all results are on targeted budgeted rate.
I keep proponent of our long life low decline assets, a world class Pelican Lake pool, where the leading edge polymer flood continues to deliver snick significant value.
Q2, 2023 production was 47151 barrels a day down 8% versus Q2, 2022 average of 51112 barrels a day, reflecting the natural decline nature of the property as well as the polymer injection rates.
That were reinstated in February of 2023, the field is targeted to return to its historical decline rate of approximately 5% in the latter half of 2023.
Team continues to focus on mitigating cost pressures with Q2, 'twenty three operating cost of $8 55 per barrel an increase from our Q2 2022 operating cost of $7 99 per barrel, reflecting higher service and power costs as well as lower production volumes with our low decline and very low operating cost Pelican Lake continues to have X.
And FX.
And our thermal in situ areas.
Q2, 2023, we continue to leverage our continuous improvement culture, our expertise to deliver effective and efficient operations.
Q2, 2022 production was 238941 barrels a day down from Q2 2022 production of 249938 barrels a day as forecasted as a result of the planned turnaround at Primrose.
Q2 operating costs were $14 59 per barrel down approximately $4 when compared to Q2 2022 operating cost of $18 93, largely a result of lower natural gas costs I'll now update our thermal growth class.
At Primrose the company is targeting to grow production by approximately 25000 barrels a day, primarily from its two new Ccs pads.
TSS pads drilled in 2022, the production from these new pads, which targets strong quarterly production of approximately 100000 barrels a day for the area in the third and fourth quarter.
At Kirby the company is targeting to grow production by approximately 15000 barrels a day from Q4 2022 levels to approximately 65000 barrels a day in Q4 of 2023 as the company progress the development of the four Sag D pads in 2023.
The three remaining pads are targeted to ramp up to full production capacity over the first nine months of 2024 at a pace of one pad per quarter.
Jackfish production has been very strong averaging approximately 113000 barrels a day with minimal growth capitals since acquiring the asset.
Representing its long life low decline nature.
Production from these new pads are targeted to ramp up to their full production capacities. In Q3 2024 in Q4 of 2024, respectively supporting continued high utilization rates at Jackfish.
Thermal in situ production is target to increase in the second half of 2023, averaging approximately 280000 barrels a day and with the strip WCS differentials he'll add incremental cash flow.
And the company's World class oil sands mining and upgrading assets. We had Q2 production averaging 355246 barrels a day of SCO as previously announced the planned turnaround activities at the non operated cockpit upgrader and horizon as well as horizon were completed with Q2 operating <unk>.
Costs that were $31 28 per barrel.
Following the completion of the planned turnarounds at our World class mining asset upgrading.
Actually in July has been very strong with a monthly average of approximately 513000 barrels a day, capturing strong SCO pricing.
After ryzen during the planned turnaround and as part as reliability enhancement project. The company completed two tie in to tie in of two furnaces in <unk>.
August both furnaces are targeted to be operational increasing SCO production capacity by approximately 5000 barrels a day, which is included in our company 2023 production guidance there.
The reliability enhancement project is targeted to add approximately 14000 barrels a day of additional S. U S steel capacity in 2025 as a result of shifting the maintenance schedule from once per year to once every two years, reducing downtime for maintenance activities and increasing overall reliability at horizon.
I'll now turn it over to Mark for a financial review.
Thanks, Tim and good morning, everyone.
In the second quarter of 2023, we generated strong financial results with adjusted funds flow of $2 7 billion and adjusted net earnings from operations of $1 3 billion, while major turnaround activity was completed in the quarter.
Balanced allocation to our four pillars continues including significant returns to shareholders in the quarter and so far this year up.
Up to and including August 2nd 2023 year to date returns to shareholders totaled $4 3 billion, including $2 9 billion in dividends and $1 4 billion in share repurchases.
Our commitment to increasing shareholder returns as evidenced in our sustainable and growing quarterly dividend, which was increased to <unk> 90 per share from <unk> 85 per share earlier. This year, marking 2023 is the 23rd consecutive year of dividend increases.
Subsequent to quarter end. The board has declared a quarterly dividend of <unk> 90 per share payable on October five 2023.
As planned maintenance activities were completed in Q2, we are targeting strong production volumes and free cash flow for the second half of 2023, as we move towards our $10 billion net debt level, we're 100% of free cash flow will be allocated to shareholders as defined in our policy.
And of note the second quarter marked a six year anniversary since the acquisition of 70% of the AOSP assets.
As part of the acquisition, we issued 97 6 million shares.
Shareholder returns through share repurchases since closing has been significant resulting in a reduction of approximately 123 million shares or 10% to less than $1 1 billion shares outstanding as of June 32023, fewer shares outstanding than before the acquisition.
Additionally, total corporate production has grown by roughly 50% or 442000, Boe's a day when comparing Q1 2017 to Q1 2023 and.
And since closing the acquisition, we have reduced debt by over $11 billion or about 50% significantly reducing our overall risk profile.
This demonstrates our focus on safe reliable production, a strong financial position and our culture of continuous improvement.
Finally, we are in a very strong financial position with debt to EBITDA at two seven times at the end of the quarter and we continued to maintain strong liquidity.
Revolving bank facilities cash and short term investments liquidity at the end of Q2 was approximately $5 6 billion.
When you combine our leading financial results with our top tier reserves and asset base.
This provides us with competitive advantages in terms of capital efficiency flexibility and sustainability, all of which drive material free cash flow generation and strong returns on capital.
With that I'll turn it over to you Tim for some final thoughts thanks.
Thanks, 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 require less 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.
Active and efficient operations, and our teams who deliver top tier results.
We have robust sustainable free cash flow and through our free cash flow allocation policy returns to shareholders are significant which includes our growing dividend, which has increased for 23 consecutive years. In summary, we continue to focus on safe reliable operations enhancing our top tier operations and we.
We'll continue to drive our environmental performance.
We're in a very strong position and being nimble enhances our capacity to create value for our shareholders.
We continue to apply that same drive to ESG.
Environmental social and governance, a significant factor in our long term sustainability as we move forward to lower our carbon emissions with our first target to reduce absolute scope, one and scope two emissions by 40% by 2035 from our 2020.
Baseline.
On our journey to achieve our goal of net zero Ghd your oil sands by 2015.
Canadian natural is delivering top tier free cash flow generation, which is unique sustainable robust and clearly demonstrates our ability to both economically grow the business deliver.
To deliver returns to shareholders by balancing our four pillars with that I will open the call to questions.
Okay.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question question Star followed by the one on your Touchtone phone you will hear me Tom.
Sure.
Would you like to withdraw your question. Please press star followed by chance.
Thank you.
Please go ahead.
Any key.
Yeah.
First question comes from Greg Pardy at RBC capital markets. Please go ahead.
Thanks, Good morning, Thanks for the rundown guys a.
Couple of questions for me.
Maybe to start Marc maybe just on the on the net debt side have you got a reasonable shot at getting to $10 billion by the end of this year based upon what you see in the you know.
Production, but also the commodity price landscape.
Yeah, Greg Thanks for the question, it's you know.
It is very dependent on those commodity prices. So if you do see some strength in the commodity prices towards the end of the year I think there is a possibility we could get there at the end I think with recent strip pricing is forecasted to be still very early 2024.
Okay, Okay Conservative Conservatives as we'd like.
And then maybe just shifting gears.
Over to Tim I wanted to dig into the just the 513000 that you put up at horizon.
Horizon, AOSP, but maybe a little bit more in terms of reminding us what the capacity is now.
Across the combined asset and then perhaps how we should be thinking about operating costs on a go forward basis.
Yeah, Greg good questions here, so I mean with horizon and <unk> obviously.
The teams continue to work on opportunities to increase reliability, and obviously deliver a safe and effective operations there. So so.
With that.
During the turnaround.
There was an increased scope in terms of work.
Work that we felt needed to be done on the the upgrader.
And.
I'm actually very proud of our teams in terms of the effort the way they approached it and dealt with all the work that needs to be done with that.
Asset so we've seen a little bit of inflationary pressures.
But in general I think we're on the right track in terms of making sure that those assets run reliably and consistently.
Each and every day.
<unk> of capacities.
Horizon on a on a capacity day is pretty well kind of in that $2 80, maybe a little bit more here, we'll see with the new furnaces.
Our our forecasted are targeted to come on in the next couple of weeks. So that's will be a great test for us in terms of seeing that increase.
And.
Yes so.
Obviously, we've been creeping it up over time and.
Really it's been doing a little bit better than hits capacity here right. So I think it's really early here.
The numbers look really strong here for July I would like to get through July into August more.
And we'll see if we can keep that sustained rate, it's really really really positive both sites since <unk> done a really good job here coming out of their turnarounds.
Okay. Thanks to both.
Thank you next question comes from Manav Gupta at UBS. Please go ahead.
Yeah.
Guys just wanted to get some clarification you would generally have a very informed view of abortion mens differentials and if you could also help us understand from the perspective of the beer mix startup how youre thinking about it.
Sure.
As far as a portion of it we don't see it being.
An issue.
From all indications Tms.
<unk> will be making a call for line fill here and in the fall here August September October .
So from that aspect I look at it as a very positive.
I am very constructive for Canada's oil WCS.
Because if you can appreciate one youll have the line fill and I believe it's up around 5 million barrels of minefield for for that line and then on top of it the heavy oil capacity I believe is a little over 500000 barrels a day. So so it's going to take five.
500000 barrels a day of heavy to a different market. So so to me I find that the WCS.
Piece will be very constructive here, obviously typically historically the winter months.
It does widen a bit but I mean, let's face it the 20% that is still very strong on a relative basis.
Perfect and a quick follow up is you are making investments to grow volumes bullets at oil sands in situ projects.
It did start up somewhere around 25 help us understand how those development projects are growing at this stage.
Well.
Really.
You're talking about the thermal piece and a reliability pieces those are really the only pieces that we've got going into next year right now.
We have we'll be starting the budget process here in the fall to for other areas and decide on.
Do more.
Additions pad editions at Primrose or at Kirby. So it's a little early on the forecasting into 'twenty four 'twenty five.
Thank you so much.
Yeah.
Thank you. Our next question comes from Dennis Fong.
Michael Please go ahead.
Hi, Good morning, and thank you for taking my questions I'll start with the first one is maybe a bit of a follow up to <unk> question.
<unk> done a really good job in terms of ramping the production animal quake and Primrose to 90000 barrels a day plus for this year.
What's your ability to kind of further optimize that capacity on I believe at your Investor Day, you outlined.
The facility capacity towards the 140000 barrel a day level. It seems like that's really low hanging fruit. When you think about again driving opex and so forth. So just any kind of commentary around how you evaluate that and what the opportunity is there.
Yeah.
Very good question there.
And obviously.
They drilled the field.
Opportunities are obviously ranked quite highly.
The team is progressing additional pads set primrose.
Kirby.
Where we could do those incremental volumes going into next year usual cycle time as about a year.
So once we start sanctioning those pads, obviously, they're they're not cheap.
There are approximately it would be almost a one.
$170 million per pad, so, it's a pretty big project and they take about a year cycle time, so as we go into our R. R.
Uh huh.
Process, there I can say that they are highly ranked as well as some of the Sag D opportunities looking forward here into next year.
So to your point they are low hanging fruit in terms of adding volumes.
Great.
Great. Thanks for that context, and then the second question I have switching more Moreover to the oil sands side and you mentioned it briefly and I guess your answer there to Greg's question, which was related to this kind of go around we saw always scale change as well as I guess, maybe incremental found work as you think about stretching the tie in between.
Planned maintenance how are you managing the potential for additional bond work or a change in scope as you as you kind.
To run through.
Yeah, that's a very good question and <unk>.
You know it.
It's really the key is having a very good preventative maintenance program and asset integrity program and so I'm actually very proud of our team and the way we're approaching this.
What they do is if they find.
Any kind of concern on.
Whether it's piping or equipment.
They basically risk assess it they go through a very detailed process in terms of will that.
Piece of equipment and make it until the next turnaround or is it something that has to be dealt with today and.
I look at this last turnaround at Horizon, I mean, both ESOP and horizon, we saw some inflationary costs, but.
At Horizon, we have like I said, a very detailed program.
I'm very proud of the way they they approached it because they saw a potential issues that would potentially decrease our reliability or decrease our utilization there and as you know any.
Downtime something like Horizon is very costly so.
You know they they looked at it.
Did that work during the turnaround.
Very very effectively so.
To me the key in the oil Sands is reliability. If your if you can produce reliably everyday you can make a very good returns are obviously, if you missed something either through your PM program or your integrity program. It can be very costly in terms of unplanned downtime. So.
I look at it it's setting us up well for that two year run.
By them doing thorough reviews of ours or other piping of our equipment to make sure. It can run reliably.
Yeah.
Great great. Thanks, I appreciate you answering those questions I'll turn it back.
<unk>.
Thank you. The next question comes from mono.
TD Securities. Please go ahead.
Thanks, and good morning, everyone I'll start with the.
Question on the acceleration of the timeline for ramp up of new thermal capacity you talked about strong execution, but was there anything that really stood out as driving that better than expected outcome.
I guess I'm asking that in the context of what still looks to be a fairly challenging operating environment.
Yeah.
You know all all the way along.
Which is a very it's very good question, because really we've always said that.
The key to delivering our.
Good cost control is having very tight execution plan and then sticking to the plan and so.
The one thing with thermal is it's a very.
Condensed so we have it's an all approximal areas.
And it's very much the same.
<unk>.
By having a very structured Pat add design you can do it cost effectively so what we're seeing is.
The first pad it took more time and then as we keep doing these pad adds the.
The teams are learning on ways to do the construction better and more cost effectively and timely so so.
It's just by doing things one after another you can continue to improve and that's that's kind of been our mantra all the way along is that.
By keeping things simple keeping them effective you can continuously improve those operations.
Terrific and then moving on to natural gas drilling activity.
The thing that numbers year on year, it looks like you're effectively tracking right in line with last year in terms of net wells are drilled where what does the rest of the year look like in terms of planned activity. I know you typically addresses in the presentation, but I don't see the update on the sorry, yes, so I'm going to ask that question and then how many rigs are currently active relative to.
The beginning of the air to the extent you can comment on that.
Sure well today, we have eight rigs if you go back Q1, I said, we'd probably be in the nine to 10 right.
Rigs.
So a little less today, but to me that's just a timing issue per se.
But.
It.
My feeling is and we've reduced.
The natural gas Comped I see us continuing with that and you know to.
To me.
The costs on the natural gas side for drilling completions the fracking.
We're in my mind pressured here in the first quarter and then to the other side pricing has come off so I think you know.
Those will have opportunities maybe later in the year end.
We'll see what.
How it looks here as we go into the more towards fourth corner, but I don't feel any pressure to accelerate.
Natural gas volumes in the market here today.
Thanks, Tim I'll turn it back.
Thank you.
Thank you. Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Yeah, good morning, Tim and team.
Two quick questions here first on managing.
Inflationary forces can talk about.
Where youre seeing areas of pressure in areas of relief and then put that in the context of the $200 million.
Nah budget pump this year would you talk a little bit in the prepared remarks about.
Yeah.
Big ones here that I see today, our labor and labor continues to be.
Pressured.
With that I would say the supply side and equipment deliveries are pressured and what we're doing today is we have to order.
Ah shall we say further ahead for activities in the future and so that supply piece is as difficult.
The transportation piece was inflated as well in terms of trying to get the.
Stuff out of the port of Vancouver in that so.
We're seeing what I would call a little incremental pieces, obviously food costs.
Power costs have gone up so.
To me all of that has to kind of work through your system because.
Our manufacturers.
Vessels or equipment.
You see the increased power costs due to increased labor costs.
And you can't today.
Offset at one to one.
On the <unk> on the other side you know as things.
Things start to <unk>.
Level out you will find again efficiencies, but you know in the short term those those cost pressures roll through.
The whole.
<unk> systems so.
To me, it's just managing what you can going forward.
Yeah. Thanks, Tim and then the follow up is just on S. E. You talked a little bit with Manav about that'd be yes outlook, but SCL. It continues to trade very firm at a premium relative to W. P. I.
Imagine part of it is it's just the higher distillate cut in vivo margins are strong, but any perspective, you can provide on how you think about the outlook for syncrude pricing would be great too.
I think it's very constructive as well and to your point with the high distillate.
Cut.
It can it will trade at a premium and.
Ken I, just look at it to the whole oil.
Oil site in my mind looks very constructive here for Western Canada because.
Incremental capacities, even on the light oil side.
You get another three.
300000, or so of incremental egress.
People have to actually you know.
Look at where they go with their volumes in terms of trying to get the best price for it. So I just look at both the WCS and Seo.
<unk> is being very constructive here going into the fall.
Thank you Sir.
Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Next question from Doug Leggate Bank of America. Please go ahead.
Hey, guys. This is actually clay on for Doug. Thanks for taking the question here.
I've only got one because a lot of things have already been touched but this is also a follow up on <unk> I understand that you guys are a contracted shipper entering and are involved in the tariff negotiation. Just wondering if you can walk through the resolution timeline and also maybe give us an idea of the cash flows and how that would shrink during bind Bill you guys. The way I'm thing.
Thinking about it is you'll obviously be placing barrels into the system, but it's not clear to me that the cash would be realized on a real time basis or there'll be some lag.
Yeah, well on the second part of that question.
There's likely to be some lag on the cash flows realized that's right because youll be using some barrels for fulfill.
And then on the first question.
With the Cemex.
So the way the process works is the.
The.
Decision maker is the cer's towards the Canadian energy regulator and so what they did is I think yesterday came out with the.
Questions not only for <unk>, but a process here in terms of.
Supplying information to the Canadian energy regulator, and so with that.
To me it will just be under the process that they define and if.
I would say, it's going to take a few months maybe but.
But really its out of our hands in terms of.
The actual timing to me.
<unk> does what it's supposed to do and take a firm look at both sides. The information. Each site provides and then makes a decision in appropriate time. So you know.
From that aspect to me it's.
Just normal business in terms of how we have to work under.
Under the Canadian Energy Regulator's rules.
I appreciate that and just to be clear the tariff will be defined before landfall starts is that right.
We don't know.
I can't say that considerably because.
The line fill.
Could start here maybe in August September we don't have control of that either so.
You know really.
That would be a better question, maybe for Jim Exxon when they expect to see that the landfill.
Got it I appreciate the answers guys. Thank you.
Okay. Thank you.
Thank you at this time there are no further questions and you May proceed.
Thank you operator, and thank you everyone for joining us. This morning, if you have any follow up questions. Please give us call. Thanks and have a great day.