Q2 2024 Canadian Natural Resources Ltd Earnings Call

everyone to Canadian National's 2024 Second Quarter Earnings Conference Call-In Webcast.

Speaker Change: After the presentation, we will conduct a question and answer session. Instructions will be given at that time. Please note, this call is being recorded today, August 1, 2024, at 9 a.m. Mountain Time.

Lance Casson: I would now like to turn the meeting over to your host for today's call, Lance Casson, Manager of Investor Relations.

Lance Casson: Thank you. Good morning, everyone, and thank you for joining Canadian Natural's second quarter 2024 Earnings Conference call.

Unknown Executive: As always, I'd like to remind you of our forward-looking statement. 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 royalty. Additionally, I would suggest you review our advisory section in our financial statements, which includes comments on non-GAAP disclosures.

Speaker Change: As always, I'd like to remind you of our forward-looking statements. 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.

Speaker Change: Additionally, I would suggest you review our advisory section in our financial statements that includes comments on non-GAAP disclosures.

Speaker Change: Speaking on today's call, we have Scott Stauth, our President, and Mark Stainthorpe, our Chief Financial Officer.

Speaker Change: Scott will provide highlights on our strong operational quarter that included completion of planned turnarounds, setting us up a robust target of production in the second half of the year. Mark will then summarize our excellent financial results including significant liquidity and returns to shareholders.

Speaker Change: To close, Scott will summarize prior to opening up the line for questions. With that, I'll pass it to you, Scott.

Scott: Thank you, Lance, and good morning, everyone.

Scott: The strength of a well-balanced and diverse portfolio combined with our ability to execute safe, effective, and efficient operations delivered an excellent second quarter for Canadian Natural.

Unknown Executive: Our team managed our planned maintenance activities very well and optimized production, resulting in a strong second quarter with production of 1.29 million BOEs per day, which is an increase of 8% compared to Q2 2023. Our thermal assets delivered strong production during the second quarter, primarily due to better than expected performance from the new pads, combined with early completion of plant turnarounds at Jackfish and Kirby. At Horizon, we successfully completed the final tie-ins related to the Reliability Enhancement Project, as well as planned turnaround activities. Through optimization efforts, our team completed the turnaround at Horizon in 28 days, two days earlier than budgeted.

Scott: Our team managed our planned maintenance activities very well and optimized production, resulting in a strong second quarter with production of 1.29 million BOEs per day, which is an increase

of 8% compared to Q2 of 2023.

Lance Casson: Our thermal assets delivered strong production during the second quarter, primarily due to better than expected performance from the new pads combined with early completion of planned turnarounds at Jackfish and Kirby.

Scott: At Horizon, we successfully completed the final tie-ins related to the reliability enhancement project, as well as plant turnaround activities.

Speaker Change: Through optimization efforts, our team completed the turnaround at Horizon in 28 days, two days earlier than budgeted.

Speaker Change: Subsequent to the quarter end, we achieved significant milestones at Horizon in July 2024, with production of the 1 billionth barrel of bitumen since operations began in 2009.

Unknown Executive: Supporting this milestone is the company's significant total proved SEO reserves of approximately 6.9 billion barrels with a reserve life index of 44 years as of year end 2023. Also, during July, SEO production of approximately 500,000 barrels per day was achieved, driven by strong production and horizon benefiting from the final tie-ins and commissioning of the reliability enhancement project. TMX is a significant accomplishment, adding much needed egress capacity and increasing exposure to global market prices for crude oil products.

Speaker Change: Supporting this milestone is the company's significant total approved SEO reserves of approximately 6.9 billion barrels with a reserve life index of 44 years as at year-end 2023.

Speaker Change: Also during July, SEO production of approximately 500,000 barrels per day was achieved, driven by strong production at Horizon, benefiting from the final tie-ins and commissioning of the Reliability Enhancement Project.

Speaker Change: The commissioning of TMX pipeline during the second quarter and the positive impact this incremental egress has had on the Canadian economy represents a significant achievement for Canada.

Speaker Change: The impact on the energy industry has been, and will continue to be, positive through the narrowing differential, heavy oil differentials, improved realized pricing, along with the development of more diverse market for Western Canadian crude oil.

Speaker Change: TMX is a significant accomplishment at a much-needed egress capacity and increase in exposure to global market pricing for crude oil products.

Canada Natural: Canada Natural's strong execution, effective and efficient operations combined with stronger realized prices drove significant free cash flow during the quarter despite planned turnarounds.

Unknown Executive: I will now run through our Q2 operational results. Liquid production in the second quarter averaged approximately 934,000 barrels per day, and natural gas production averaged approximately 2.1 BCF per day. This has lowered our cost per meter and increased our reservoir capture. The increase was the result of strong drilling results over the past year and lower production in the second quarter of 2023 caused by wildfires and third-party pipeline. Operating costs on our North American natural gas averaged $1.19 per mcf in the second quarter, which is down 12% compared to the second quarter of 2023, primarily due to lower energy costs. Second quarter thermal in situ operating costs averaged $10.95 per barrel, which is down 25% compared to the second quarter of 2023, primarily reflecting higher production volumes and lower energy costs.

Speaker Change: I will now run through our Q2 operational results.

Speaker Change: Liquids production in the second quarter averaged approximately 934,000 barrels per day, and natural gas production averaged approximately 2.1 BCF per day.

Speaker Change: on the conventional side of the business.

Speaker Change: Primary heavy oil production averaged approximately 79,100 barrels per day in the second quarter, which is a 3% increase compared to the production volumes in the second quarter of 2023, reflecting strong results from multilateral wells on our extensive heavy oil land base.

Speaker Change: which is the largest in Canada and includes the Manville and Clearwater Fairways.

Speaker Change: Primary heavy oil operating costs averaged $17.59 per barrel in the second quarter, which is down 12% from the second quarter of 2023, primarily reflecting lower energy costs.

Speaker Change: We are seeing excellent results on our multilateral wells, driven by our culture of continuous improvement and strong execution from the team.

Speaker Change: and the technical expertise of our team's average initial peak rates of multilateral on-stream in the first half of 2024 have increased 30% to 230 barrels per day per well, compared to our average initial peak rates of 175 barrels per day per well.

Speaker Change: Our Pelican Lake production averaged approximately 45,000 barrels per day in the second quarter, which is down 5% from the second quarter of 2023, reflecting low natural field declines from this long-life, world-class asset.

Speaker Change: Operating costs in our alloy crude oil and NGL operations averaged $13.75 per barrel in the second quarter, a decrease of 24% compared to the second quarter of 2023 due to higher production and lower energy costs.

Speaker Change: Concurrently, approximately 20% of our remaining 2024 planned natural gas wells will be drilled with production curtailed until the trend in natural gas prices improve.

Speaker Change: averaging just over 260,000 barrels per day. This is up 12% from our second quarter of 2023, driven by strong results from jackfish, Kirby North, and primrose pad developments.

Speaker Change: Plant turnarounds at Jackfish and Kirby North facilities were successfully completed ahead of schedule in Q2 of 24.

Unknown Executive: At Jackfish, the first of two SAG-D pads drilled in 2023 reached full production capacity in Q2 of 2024, which is ahead of schedule. The second pad is currently producing at full production capacity and is also ahead of schedule, originally budgeted for Q4 of 2024. The second pad is currently being drilled and is targeted to come on stream in Q2 of 2025. Operating costs on our oil sands mining and upgrading assets are top tier, averaging $25.95 per barrel in the second quarter, a 17% decrease compared to the second quarter of 2023.

Speaker Change: Additionally, we are targeting to drill one SAG-D pad at Jackfish in the second half of 2024, with production from this pad targeted to come on in Q3 of 2024.

Speaker Change: This pad was originally targeted for Q2.

Speaker Change: Again, the teams have done a good job of optimizing execution, advancing the first path through decoupling construction schedules.

Speaker Change: At Wolf Lake, we recently drilled one saggy pad, which is targeted to come on full production in Q1 of 2025.

Speaker Change: at Kirby North. We started injecting solvents in

Speaker Change: in late June 2024. Currently, all eight wells at our commercial scale solvent SAG-DPAD are receiving solvent.

Speaker Change: We will monitor solvent recoveries and production trends as we evaluate ongoing results.

Speaker Change: and our oil plant mining and upgrading operations.

Speaker Change: Second quarter SCO production averaged approximately 411,000 barrels per day, an increase of 16% compared to the second quarter of 2023.

Speaker Change: Operating costs under oil sands mining and upgrading assets are top tier, averaging $25.95 per barrel in the second quarter, a 17% decrease compared to the second quarter of 2023.

Speaker Change: This reflects higher production volumes from reduced plant maintenance activities and lower energy costs.

Speaker Change: At AOSP, due to the schedule optimization of the Scottford Upgrader in Q2,

Speaker Change: The planned September turnaround is now targeted to last 39 days compared to the previous 49-day schedule.

Unknown Executive: During this turnaround, Scottford Upgrader is expected to run at reduced rates, with the impact on annual production targeted to be approximately 9,000 barrels per day, a 2,000 barrel per day improvement compared to budget. We are executing near and medium-term projects, and evaluating longer-term projects to potentially bring value forward, including near-term production growth of the Scotford Upgrader. We generated adjusted funds flow of $3.6 billion and adjusted net earnings from operations of $1.9 billion, with $1.1 billion in dividends and $800 million in share buybacks through our NCIP.

Speaker Change: Our significant SEO reserves are world-class.

Speaker Change: We are executing near- and medium-term projects, evaluating longer-term projects to potentially bring value forward, including

Speaker Change: Near-term production growth at Scottford Upgrader.

Speaker Change: includes the de-bottling project, which is targeted to be completed during the planned turnaround, and targets to add incremental capacity at AOSP of approximately 5,600 barrels per day net to Canadian Natural.

Speaker Change: Our world-class assets are strategically balanced across commodity types so we can be flexible and capture opportunities throughout the commodity cycle to maximize value for shareholders.

Speaker Change: Our unique and diverse portfolio of assets is supported by long-life, low-decline assets which have large, low-risk, high-value reserves with low maintenance capital, making Canadian natural truly...

Speaker Change: a unique and resilient energy company.

Speaker Change: The strategic weighting of our capital program this year

Speaker Change: and in growth in the second half of the year.

Speaker Change: while we target strong production and free cash flow in the last six months of this year.

Speaker Change: Now with that, I'll turn it over to Mark for a financial review.

Mark Stainthorpe: Thanks, Scott, and good morning, everyone. In the second quarter of 2024, we achieved excellent financial results driven by strong operational execution and our relentless focus on continuous improvement initiatives across the company.

Mark Stainthorpe: We generated adjusted funds flow of $3.6 billion and adjusted net earnings from operations of $1.9 billion.

Mark Stainthorpe: This drove significant returns to shareholders in the quarter totaling $1.9 billion with $1.1 billion in dividends and $800 million in share buybacks through our NCIB program.

Unknown Executive: Our capital program for 2024 remains on track, and with increasing production volumes forecasted in the second half of 2024, we target to generate significant free cash flow and additional returns to shareholders as we continue to allocate 100% of free cash flow to shareholders. Liquidity remained strong, and including revolving bank facilities and cash, liquidity at the end of the quarter was approximately $6.4 billion. Our Culture of Continuous Improvement. Employee ownership alignment with shareholders and our operational expertise drive our teams to create significant value across all areas of the company.

Mark Stainthorpe: Subsequent to quarter end, the board has declared a quarterly dividend of 52.5 cents per share, payable on October 4th, 2024.

Mark Stainthorpe: Our financial position is very strong with net debt at $9.2 billion and debt to EBITDA at 0.6 times at the end of Q2'24. And during the quarter, we repaid at maturity a U.S. $500 million bond and a $320 million Canadian medium-term note.

Mark Stainthorpe: Liquidity remained strong and including revolving bank facilities and cash, liquidity at the end of the quarter was approximately $6.4 billion.

Speaker Change: Our culture of continuous improvement, employee ownership alignment with shareholders, and our operational expertise drives our teams to create significant value across all areas of the company.

Mark Stainthorpe: With that, I'll turn it back to Scott for some final comments.

Scott Stauth: Thanks, Mark. And again, in summary here at Canadian Natural, our disciplines focus...

Scott Stauth: is the core of what we do. Our culture of continuous improvement focused on cost control, effective and efficient operations and disciplined capital allocations continue to drive strong results while maintaining financial flexibility, maximizing value for our shareholders. With that, I will turn it over for questions.

Speaker Change: 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 touchtone phone. You will hear a prompt that your hand has been raised.

Speaker Change: Should you wish to decline from the polling process, please press the star followed by two. If you are using a speakerphone, please flip the handset before pressing any keys. Your first question comes from Nino Hulshof of TD Cohen. Please go ahead.

Unknown Executive: Thanks, and good morning, everyone. I'll start with a question on SEO given that, I guess, in 2025, there is no planned turnaround horizon given completion of the Reliability Management Project. So can you just give us a sense of what the trajectory is going to look like for Synthetic through the end of the year and into 2020?

Nino Hulshof: Thanks and good morning everyone. I'll start with a question on SEO given the

Speaker Change: Scott Stauth, Timothy McKay, Lance Casson, Mark Stainthorpe, Robin Zabek, Lance Casson,

Speaker Change: Then you also have the, I guess in 2025, there is no planned turnaround at horizon given completion of the Reliability Management Project. So can you just give us a sense of what the trajectory is going to look like for Synthetic through the end of the year and into 2025?

Speaker Change: I think, you know, our volumes are going to look pretty strong. I mean, the only, the only thing that you'll see is our planned turnaround, which we've reduced at Scott for, from 49 days down to...

Speaker Change: 39 days, no further production interruptions or plant maintenance activities at horizon. So you would expect strong SEO volumes for the remainder of the year with the exception of that plant turnaround.

Speaker Change: And then for 2025, is there anything that you can say there? I mean, it should be a pretty clean year across the board, presumably.

Unknown Executive: As you know, there will be no turnaround on Horizon next year. There will be a turnaround at Scottford next year, but not at Horizon. So it should be another strong year, with production rates at Horizon being approximately 28,000 barrels a day higher for next year.

Speaker Change: As you know, there will be no turnaround at Horizon next year, there will be a turnaround at Scott for next year, but not at Horizon, so it should be another strong year with correction rates at Horizon being approximately 28,000 barrels a day higher for next year.

Speaker Change: Perfect. And then maybe the second question would be on solvent, the solvent-enhanced oil recovery pilots at Kirby North and Primrose. Can you just give us a rundown on what you're currently seeing in terms of results, including...

Unknown Executive: Solvent recovery, and when do you think you'll be in a position to make a decision on whether to commit to that on a more commercial scale?

Speaker Change: Solvent recovery and when do you think you'll be in a position to make a decision on whether to commit to to that on a more commercial scale?

Speaker Change: Yeah, so as you know, we've recently placed a KNO6 pad on solvent injection at the end of July.

Speaker Change: We are seeing some early steam reduction results in and around the 20% range, so that's very positive this early in the game.

Speaker Change: Other than that, nothing significant to report out to you at this point in time or the following quarters. We'll continue to update everyone here in terms of where we're at.

Speaker Change: I would suspect by mid-next year, this time next year, we should be able to come out and report out in terms of how we see us taking the good results from this pad and extrapolating that out on future pads.

Unknown Executive: Your next question is from Greg Pardy of RBC Capsule Markets. Please go ahead.

Speaker Change: Thank you.

Speaker Change: Your next question is from Greg Pardee of RBC Capital Markets. Please go ahead.

Greg Pardee: Yeah, thanks. Good morning. Thanks for the rundown, Scott. We don't see too many flawless quarters, but this sure looked like it.

Greg Pardee: I'm kind of intrigued a little bit with what you're doing differently with the you know with the turnaround activity and the optimization. I know you referenced just in your comments where there's been some

Unknown Executive: decoupling of construction activities. But what if you start to kind of break down, you know, optimization and planning and so on, what maybe has changed? And what are you doing differently than in the past?

Speaker Change: decoupling of construction activities but what when you start to kind of break down what you know optimization and planning and so on what maybe what has changed and what are you doing differently than in the past?

Unknown Executive: Yeah, good question, Greg. So if you look at Jackfish, you know, essentially right from strong drilling results to the team doing a really good job of building the facilities and getting the pads on stream. That's our XX and our F pads.

Speaker Change: Sure, yeah, good question, Greg. So if you looked at, take a look at jackfish

Speaker Change: Essentially, right from strong drilling results to the teams doing a really good job of building the facilities and getting the pads on stream, that's our XX and our F pads.

Unknown Executive: Yeah, so for that project, you know, what's really important for Canadian Natural and for industry from that perspective is that we need to see a strong fiscal regime for our pathways project so that we can capture our CO2 emissions. So that is key for us. You know, we've got concepts and ideas in terms of working through the engineering stages of that project, but the fiscal regime for pathways is very important.

Greg: Yeah, so for that project, you know, what's really important for Canadian Natural and for industry from that perspective?

Unknown Executive: The second piece is the egress out of the basin here. And so we're looking forward to additional Enbridge, DeBell & Leck, as well as TMX, to look at capturing those volumes that we bring on as

Unknown Executive: Okay, thanks very much.

Speaker Change: Okay, thanks very much.

Dennis Fong: Your next question is from Dennis Fong of CIBC. Please go ahead.

Speaker Change: Your next question is from Dennis Fong of CIBC. Please go ahead.

Unknown Executive: Hi, good morning, and thanks for taking my questions. My first one is a bit of a follow-on to Menno's question on Horizon and the cadence of production. As we think about, again, further optimization of the asset itself, how do you think your teams could potentially drive outperformance versus what you think is currently, we'll call it, quote unquote, stated capacity? And then, secondarily, what do you think the implications of that happen to be for driving the cost structure lower just from that project in general?

Dennis Fong: Hi, good morning, and thanks for taking my questions. My first one is a bit of a follow-on to Meadow's question on Horizon and the cadence of production.

Speaker Change: As we think about, again, further optimization...

Speaker Change: of The Acid Itself.

Speaker Change: How do you think your teams could potentially drive outperformance versus...

Unknown Executive: Yeah, good question. Dennis, I think if you look forward to the next few quarters here, where we'll have the opportunity to see what the impacts of the de-bottleneck project have truly been in terms of daily run rate and subsequent production that we'll report out. I think it's early for us to estimate what that might look like in terms of total capacity, but at the early stages, I can tell you it does look positive, but again, we need to see the components throughout the upgrader running at maximum rates here, and then we'll have a better idea, but we'll be able to report out a little bit better on that in the next quarter, Dennis.

Speaker Change: and subsequent, you know,

Speaker Change: I think it's early for us to estimate what that might look like in terms of the total capacity.

Speaker Change: At early stages, I can tell you it does look positive.

Speaker Change: But again, we need to see the components throughout the upgrader running at the maximum rates here, and then we'll have a better idea. But we'll be able to report out a little bit better on that in the next quarter, Dennis.

Unknown Executive: Great. I appreciate that context.

Dennis: Great, I appreciate that context. Shifting over to the Manville heavy oil and just your heavy oil

Dennis Fong: Shifting over to Manville heavy oil and just your heavy oil, your cold heavy oil production in aggregate, appreciate the incremental update in terms of the length of the multilaterals that you've been drilling. When we look historically through time, the CNQ has produced up to, I think about 145,000 barrels a day from just the conventional heavy oil assets in aggregate. Now, understand that's a long time ago, but understanding that there's a large kind of resource prize here, how do you think about developing the asset from kind of the current levels today and ongoing, especially given the large acreage position that you have both in Clearwater and in kind of the Lloydminster Manville heavy oil stack? Yeah, good.

Dennis: appreciate the incremental update in terms of length of multilaterals that you've been drilling. When we look historically through time, the CMQ has produced up to I think about 145,000 barrels a day.

Speaker Change: from just the conventional heavy oil assets in aggregate.

Speaker Change: kind of the Lloyd Minster Manville heavy oil stack.

Unknown Executive: Good question, Dennis. I think you'd look at it just from an overall corporate capital allocation strategy, and we'll direct our capital towards the projects that create the best returns for us based on cost and pricing received. If you look specifically at heavy oil and the introduction of the multi-lats in those areas, we'll continue to optimize the technology to put it to best use. We also continue to use our slant-well drilling in targeting certain zones.

Speaker Change: We'll continue to optimize the technology to put it to best use. We also continue to use our slant-well drilling in targeting certain zones.

Speaker Change: And, you know, again, it just really boils back to

Unknown Executive: And again, it just really boils back to how we allocate our capital within our corporate portfolio. So I can't tell you exactly how that's going to look over the next year. But with oil prices remaining in the range that they're currently at, and looking at the forward strip, I'd say you could consider that the current activity levels and the levels that we have budgeted for 2024 would likely continue into 2025.

Speaker Change: Can't tell you exactly how that's going to look like over the next year, but with oil prices remaining in the range that they're currently at.

Unknown Executive: Great. I really appreciate the color. I'll turn it back to Scott.

Manav Gupta: Your next question is from Manav Gupta of UBS. Please go ahead.

Speaker Change: Your next question is from Manav Gupta of UBS. Please go ahead.

Unknown Executive: Thanks guys and congrats on a strong quarter. Just trying to understand you have a very informed view on the differential here. We have seen a little bit of a widening here. And also, what we're seeing on the US side is that a number of US refiners are pulling back runs in CQ because of the weaker product margin. So your near-term outlook on the differential will be very helpful.

Unknown Executive: Yeah, and it's a very good question. And I think you mentioned one of the impacts, which is the wider crack spreads that the refineries are seeing. So that has an impact on the differential. The second thing that we're seeing is the drawdown on Alberta's inventory. So over the last hundred and four days, for us looking at the numbers, we can see a drawdown of approximately 150,000 barrels per day. So that's in excess of Western Canadian Basin Production.

Speaker Change: Yeah, and it's a very good question and I think you mentioned one of the impacts which is the wider crack spreads.

Speaker Change: that the refineries are seeing. So that has an impact on the differential.

Speaker Change: The second thing that we're seeing is the drawdown on Alberta inventory stock. So over the last hundred and four days, for us looking at the numbers, we can see a drawdown of approximately 150,000 barrels per day, so that's in excess of existing

Unknown Executive: So that's also having an impact. And I think you're also seeing additions of Mexican crude into the U.S. Gulf Coast. So that is also having an impact. So those three things combined, we're seeing, you know, you saw June at $11, and so now you're seeing 15, 15, and a half dollars right now. So I think those three things combined are having an impact.

Speaker Change: So, that is also having an impact. So, those three things combined, we're seeing, you know, you saw June at $11, and so now you're seeing $15, $15.50 right now. So, I think those three things combined are having an impact.

Unknown Executive: Thank you so much. I'll turn it over to you.

Neil Mehta: Your next question is from Neil Mehta of Goldman Sachs; please go ahead.

Unknown Executive: Yeah, thanks team, and solid results here. I just want to stay on the differential theme this time, talking about the gas side of the equation. Remind us again how you're thinking about natural gas in your portfolio. While it's obviously very weak right now, from a pricing standpoint, it's also a cost. So how do you think about the net impact? And just as we think about ECO specifically, how does pricing evolve from here as we think about that?

Speaker Change: Yeah thanks team and solid results here. I just want to stay on the differential theme this time talking about the gas side of the equation.

Speaker Change: Remind us again, you know, how you're thinking about natural gas in your portfolio while it's obviously very weak right now from a pricing standpoint, it's also a cost, so how do you think about the net impacts and just as we think about ACO specifically, how does pricing evolve from here as we think about the next couple of years?

Unknown Executive: Yeah, well, I think you're seeing, you know, obviously, we're seeing softer pricing right now. We have gone back to review with our teams and our management, and we elected to retain approximately half of the wells we have remaining planned for the rest of the year. So that'd be about 20 wells out of a total of 40 that we're going to basically drill complete but not put on production until we see those prices improve.

Speaker Change: Yeah, well, I think you're seeing, you know, obviously, we're seeing the software pricing right now. We have gone back to review with our teams and our management and we elected to

Speaker Change: Out of a total of 40 that we're going to basically drill complete but not put on production until we see those prices improve and you know, I think we're looking at

Unknown Executive: And, you know, I think we're looking at timing of that late in the fourth quarter or early in Q1, I think we should see the benefits of LNG Canada starting to commission and come online. So I think we'll see the prices start to turn around from there, and that's our view on where we see things going at this point.

Speaker Change: at this point in time.

Unknown Executive: Thank you, and then the follow-up is, and I know it's a little trickier to talk about some of this ESG-related stuff these days, but how are we tracking on the Pathways Project? What are the gating items here? How does political uncertainty fit into that as well? We're just trying to get a sense of how this is evolving.

Speaker Change: Thank you, and then the follow-up is

Speaker Change: and I know it's a little trickier to talk about some of the ESG-related stuff these days, but how are we tracking on the Pathways Project? What are gating items here?

Speaker Change: How does political uncertainty fit into that as well? We're just trying to get a sense of how this is evolving.

Unknown Executive: Yeah, I'd say the three parties, the federal government, the provincial government, and the Pathways organization, are still working very diligently to try to come up with that financial regime package that will work for the investment to move forward. And again, it's, you know, it's a collaboration of those three parties; it takes time to work through all of the parameters that they're working with in terms of the cost structure. I'm still positive at this time that we're going to see something come together here. And I can tell you that there's a lot of effort, a lot of focus on the part of the CEOs and the representatives from the government to try to bring this forward and make it happen.

Speaker Change: Yeah, I'd say the three parties, the federal government, the provincial government, and the Pathways organization is still working very diligently to try to come up with that financial solution.

Speaker Change: regime package that will work for the investment to move forward.

Speaker Change: And again, it's a collaboration of those three parties. It takes time to work through.

Speaker Change: all of the parameters that they're working with in terms of the cost structure. I'm still positive at this time that we're gonna see something come together here. And I can tell you that there's a lot of effort, a lot of focus on part of the CEOs.

Speaker Change: and the representatives from the government to try to bring this forward and make it happen.

Unknown Executive: All right. Thanks.

Tim: All right. Thanks, Tim.

John Royall: Your next question is from John Royall of J.P. Morgan. Please go ahead.

Speaker Change: Your next question is from John Royal of J.P. Morgan. Please go ahead.

Unknown Executive: Hi, good morning. Thanks for taking my question. So my first question is, you're pretty meaningfully below $10 billion in net debt as of the end of the quarter, which I think was largely due to the working capital release and the sale of the PSK shares. However, cash flows are volatile, and it's difficult to be right at $10 billion on any given day. But should we expect that maybe you can return in excess of 100% in the second half, given you have this buffer right now at 9.2?

John Royal: Hi, good morning. Thanks for taking my question.

John Royal: So my first question is, you're pretty meaningfully below $10 billion in net debt at the end of the quarter, which...

John Royal: I think was largely due to the work in capital release and the sale of the PSK shares. Understanding cash flows are volatile and it's difficult to be right at the $10 billion on any given day, but should we expect that maybe you can return in excess of 100% in the second half, given you have this buffer right now at $9.2?

Mark Stainthorpe: Hi, John. It's Mark here. And yes, you're, I mean, you're correct.

Unknown Executive: There's the working capital that we've talked about from quarter to quarter will fluctuate us around that 10 billion level. And then the sale of the Prairie Sky shares will obviously reduce debt. But right now, and since the beginning of 2024, we've been at that sort of 100% of free cash flow allocation and shareholders framework. So you can see that you'll see that continue through the rest

Mark Stainthorpe: Hi John it's Mark here and yes you're I mean you're correct there's the the working capital that we've talked about from quarter to quarter will fluctuate us around that 10 billion level.

Speaker Change: and then the sale of the Prairie Sky share is obviously going to reduce debt. But right now and since the beginning of 2024, we've been at that sort of 100% of free cash flow allocation of shareholders framework. So you can see that, you'll see that continue through the rest of 2024.

Unknown Executive: Okay, great. And then can you speak about your current thinking on the M&A side? You know, we spoke about the small divestiture, just anything else you might look at on the divestiture side? Obviously, your balance sheet is where you want it to be. But anything else you might look to sort of prune there? And then, on the other side, how are you thinking about acquisitions from here?

Speaker Change: Okay, great. And then can you speak about your current thinking on the M&A side? You know, we spoke about the small divestiture. Just anything else you might look at on the divestiture side? Obviously, your balance sheet is where you want it to be, but anything else you might look to sort of prune there? And then just on the other side, how you're thinking about acquisition from here?

Unknown Executive: Yeah, I don't think I'm expecting activity to be pretty quiet and going forward here, and there isn't anything that, you know, comes to mind in terms of from that perspective. So I would think, as you know, we have the asset base that we have, the amount of reserves that we have, and the opportunities that we have within those various areas. We're really confident and confident about not having to do any acquisitions and having that strong internal growth here. So yeah, I don't have any other comments in terms of the M&A activity at this point.

Speaker Change: Yeah I don't I think expect activity to be pretty quiet and going forward here and there isn't anything that you know comes to mind in terms of

Speaker Change: from that perspective. So I would think that, like, as you know, we have the asset base that we have, the amount of reserves that we have and the opportunities they have within those, our various areas.

Mark Stainthorpe: We're really confident and confident about not having to do any acquisitions and and having that strong internal growth here so yeah it's I don't have any other comments in terms of the M&A activity at this point.

Patrick O'rourke: Your next question is from Patrick O'Rourke of ATB Capital Markets. Please go ahead.

Speaker Change: Thank you.

Speaker Change: Your next question is from Patrick O'Rourke of ATB Capital Markets. Please go ahead.

Unknown Executive: Good morning, guys. A very comprehensive rundown. A few things I was going to ask, actually, just going to ask, but I want to walk back to the gas station. You talked to, you spoke to the macro here. Over the last couple of years, you've reallocated capital from what was going to be directed to gasier assets over to oilier assets. Just kind of curious in terms of the price range for Acor, Hub, or whatever you're looking at it right now, what would be the price where we would see capital swing back to those gasier assets? Yeah, it's a good question.

Patrick O'rourke: Hey, good morning guys. Very comprehensive rundown. A few things I was going to ask, actually just going to ask, but I want to walk back to the GAPs.

Unknown Executive: Yeah, it's a good question, Patrick. I think, though, how you have to look at it is that in terms of Montany, you've got significant liquids production, which really drives the economics there. So it doesn't take much of a gas price from that perspective to have the economics go around to drill and complete those wells, where you get into the lower liquids production wells. I think we definitely need to see a little bit stronger activity, and stronger pricing than we're seeing right now. I can't give you the exact price, but it has to be better than it is now. If you look at the forward pricing, we can make it work with what we're seeing in the strip.

Speaker Change: Yeah, it's a good question Patrick. I think though how you're going to look at it is

Speaker Change: In terms of the Montaney, you've got significant liquids production, which really drive the economics there.

Patrick O'rourke: It doesn't take much of a gas price from that perspective to have the economics go around to drill and complete those wells.

John Royal: where you get into the lower liquids production wells.

Speaker Change: I think we definitely need to see a little bit stronger activity, stronger pricing that we're seeing right now. Can't give you the exact price, but it has to be better than it is now. If you look at the forward pricing, we can make it work at what we're seeing in the strip.

Unknown Executive: Okay, and then maybe to kind of build upon what John Royall was asking earlier, you did take the net debt down meaningfully below the $10 billion. Can you just clarify, in terms of free cash flow, do you consider those prior studies of funds from that to be free cash flow that you would distribute to shareholders when we're running our calculation here? And then, I don't know if you can speak to what kind of motivation for the timing of the sale of that asset was.

John Royal: Okay, and then just maybe to kind of build upon what John Royal was asking earlier, you know, you did take the net debt down meaningfully below the 10 billion dollars.

John Royal: Bye.

Speaker Change: Can you just clarify, in terms of free cash flow, do you consider those Prairie Skies, the funds from that, to be free cash flow that you would distribute to shareholders when we're running our calculation here? And then, I don't know if you can speak to what kind of the motivation for the timing of the sale of that asset was.

Unknown Executive: Yeah, no, you should think of the Prairie Sky shares sale as outside of the free cash flow because when you look at the free cash flow policy, it's adjusted funds flow from operations, less capital, less dividends. So it will, you know, we continue down that path of 100% free cash flow return to shareholders, but the Prairie Sky shares were outside of that. And then as far as, you know, for us, it was just a good time to sell, the right time to sell and capture that good value we have here from an investment over a period of

Unknown Executive: Yeah, no, you should think of the Prairie Sky share sale as outside of the free cash flow because when you look at the free cash flow policy, it's

Unknown Executive: Okay, thank you very much.

John Royal: [inaudible]

Speaker Change: and then as far as you know for us it was just a good time to sell the right time to sell and capture that good value we have here from an investment over the period here.

Speaker Change: Okay, thank you very much.

Unknown Executive: There are no further questions at this time. I will now turn the call over to the presenters for closing remarks.

Speaker Change: There are no further questions at this time. I will now turn the call over to the presenters for closing remarks.

Unknown Executive: Thank you, operator, and thanks to everyone for joining us this morning. If you have any questions, please give us a call. Thanks, and have a great day.

Speaker Change: Thank you, Operator, and thanks to everyone for joining us this morning. If you have any questions, please give us a call. Thanks, and have a great day.

Operator: This concludes today's presentation. Thank you for your participation. You may now disconnect.

Operator: This concludes today's presentation. Thank you for your participation. You may now disconnect.