Canadian Natural Resources Limited

Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources Earnings Results conference call and webcast. After the presentation, we will conduct a question and answer session. Instructions will be given at that time. Please note that this call is being recorded today, November 5, 2020, at 9 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Corey Beaver, Executive Advisor. Please go ahead, Mr. Beaver.

Thank you, Operator. Good morning, everyone, and thanks for joining our third quarter 2020 conference call. With me this morning is our President, Tim McKay, and Mark Steenthorpe, our Chief Financial Officer. Before we begin, I'd refer you to the special note regarding non-GAAP measures contained within our press release. These measures, used to evaluate the company's performance, should not be considered to be more meaningful than those determined in accordance with IFRS. I would also like to refer you to the comments regarding forward-looking statements contained in our press release, and also note that all amounts are in Canadian dollars and production and reserves are expressed as before royalties unless otherwise stated. With that, I'll now pass the call over to Tim.

Thank you, Corey. Good morning, everyone. Canadian Natural delivered top-tier operational results in the third quarter. 79% of our liquids production from our high-quality, long-life, low-decline assets, which were resilient in volatile pricing, and as a result of our operational excellence, ability to enhance margin, and capital discipline, we delivered significant substantial cash flow in the quarter. The strengths of Canadian natural business model are also applied to environmental, social, and governance to deliver industry-leading performance across the board, a significant factor in our long-term sustainability. Canadian natural and the entire Canadian oil and gas sector leads the world and has delivered game-changing environmental performance. In the third quarter, we published our 2019 stewardship report to stakeholders, and highlights from the report are total recordable injury frequency at 0.28, down 51% since 2015, awarded approximately $550 million in contracts to 150 indigenous businesses, three out of eight are female of our independent directors, corporate GHG emissions, down 16% from 2015. Oil science, mining, and in situ GHG intensity down 36% from 2016. At Quest, our 70% owned carbon capture facility, we reached the milestone in the third quarter with a cumulative 5 million tons of CO2 injected, equivalent to taking 1.25 million cars off the road annually. And we are a leading capture and sequester of CO2 in the oil and gas sector worldwide. These are just a few examples of our ESG excellence. In our oil sands operations, we can develop technologies using Canadian engineering to continue to move us closer to Canadian Natural's aspirational goal of reaching net zero emissions. Canadian Natural has multiple pathways to achieve net zero, with actions identified in the near, mid, and long term. And the strength of Canadian Natural's Canadian oil sands mining assets is that its long life, no decline, And with its manufacturing-like operations, it can have one of the clearest routes, if not the clearest route, the net zero of any global asset. Operationally, Canada Natural's third quarter results are quarterly production of 1.11 million BUEs with natural gas production of 1.36 BCF and liquids production of approximately 884,000 barrels a day as we maximize production as per our curtailment optimization strategy and effectively and efficiently conducted maintenance. Starting with natural gas, Q3 overall production was 1.36 BCF, a decrease from Q2 of 1.46, with North America Q3 natural gas at 1.34, as expected, down from Q2 of 1.43. We continued to focus on operational excellence, and our Q3 North American natural gas operating cost was strong at $1.14 per MCF versus Q2 of $1.11. We continue to add low-cost natural gas volumes, which has resulted in adding approximately 58 million cubic feet per day for approximately $2,000 per VOED, much less than our target of 3,000 per VOED. We remain on track to add 35 million cubic feet per day of natural gas volumes annually. In the third quarter, Canadian Natural realized the North American natural gas price of $2.25 per MCF, approximately 49% higher in Q3 2019. With the strong natural gas pricing, the company has reallocated capital within its existing budget to both septas and towns and areas, with the total program targeting at approximately 95 million cubic feet of natural gas and 2,900 barrels of NGL for less than $5,000 per BWE. Our Q3 North American light oil and NGL production was 79,600 barrels, down by approximately 3%, primarily as a result of natural declines and maintenance activities in the quarter. Q3 operating costs decreased to 1413 per barrel versus QT of 1441 per barrel. Overall, our international asset has Q3 production of 38,800 barrels a day, as expected. Offshore Africa was 17,500, which is comparable to Q2 at 17,400. Operating costs in Q3 were $12.32 U.S. per barrel versus Q2 $7.67 per barrel as a result of lifting schedule. In the North Sea, production averaged approximately 21,200 barrels a day in Q3 down from Q2 of approximately 26.6 primarily due to plant maintenance activities, cessation of balanced kyle field and natural field declines with operating costs of approximately $42.10 per barrel. Subsequent to the quarter end, we announced that the operator of the South African Block 11B and 12B made a second significant gas condensate discovery. The exploration well was drilled and counted 73 meters of net pay and is currently being tested, with deliverability results targeted by year-end 2020. Canada Natural has a 20% working interest and expects the cost of the wells to be fully carried per the farm-out agreements. Heavy oil production increased in Q3 to approximately 71,000 barrels a day versus second quarter of approximately 62,500 as we reinstated temporary control production related to low pricing. Q3 operating costs decreased to $15.96 per barrel from Q2 operating costs of $17.97, reflecting our focus on cost control. A key component of our long-life low-decline assets is our world-class Pelican Lake pool, where our leading-edge polymer flex continues to deliver significant value. Third quarter production was approximately 56,400 barrels a day, up from the second quarter of 55,700, primarily a result of reinstating well-servicing activities in the quarter, offsetting natural decline. Operating costs continue to be very strong at 576 per barrel versus Q2 of 631 per barrel. At Pelican, our team continues to drive operational excellence, and with our low decline and very low operating costs, Pelican Lake continues to have excellent netbacks. Our thermal team had a great third quarter with the thermal production record of 287,978 barrels a day, up from Q2 of approximately 213,000 barrels a day. Operating costs in Q3 were near our record low at 785 per barrel, down 23% versus Q2 operating costs of 1013. Some of the highlights from the third quarter, Kirby North's production was very strong at 42,400 barrels above our main plate capacity of 40,000. Jackfish was a record for Canadian natural at 122,346 barrels a day. These are just a couple examples of the great work done by our team. At our oil sands mining operations, Q3 was approximately 350,600 barrels as planned maintenance was conducted. with strong operating costs of $23.81 per barrel of SEO, as our teams are very focused on driving operational excellence. As part of the company overall strategy to maximize value and enhance margins, work at the Scotford Upgrader was completed and increased to capacity approximately 320,000 barrels a day. In late October, the Albin mine ran at rates of approximately 345,000 barrels a day of bitumen, and Scotford processed at approximately 323,000 barrels a day. As a result of mandatory curtailments, ASOP targets to resume full expanded capacity in December 2020. This additional capacity of ASOP will allow for increased margin enhancement in our oil sands mining upgrading segment, as well as substantive quarter-end plant maintenance with completed horizon, and it is currently at 260,000 barrels a day. I will now turn it over to Mark for a financial review.

Thanks, Tim. The third quarter was strong operationally and financially as we delivered significant free cash flow of approximately $1 billion after capital and approximately $470 million after capital and dividends with adjusted funds flow of $1.74 billion. These results reflect high plan maintenance and turnaround activity at both Rise and Enscoffred in the quarter. Net earnings in the quarter were also strong at $408 million. This clearly demonstrates the advantages of having a low-cost structure with break-even prices, including maintenance capital and the dividend, at U.S. $30 to $31 WTI, and a unique portfolio of assets with low decline, supported by zero decline production from our mining assets, which provide high-quality, premium-value synthetic crude oil production. Our balanced and diverse product mix limits our exposure to one product. with fourth-quarter production targeting approximately 45% high-value light crude oil, synthetic crude oil, and NGLs, approximately a third heavy thermal crude oil, and approximately a quarter natural gas on a BOE basis. Importantly, approximately 80% of our liquids production is from long-life, low-decline assets, which require less maintenance capital, providing sustainability through volatile prices. In the fourth quarter, we are targeting over 1.6 BCF a day of natural gas production, including our recent acquisition. Based on the current Q4 strip pricing, including the value of the liquids, our natural gas assets are forecast to generate approximately $1.2 billion in annualized operating cash flow. The operating flexibility of our asset base and the ability of our teams to execute the plans was evident in the quarter as we balanced production within the asset base to increase funds flow and maximize value. Our flexible capital allocation ensures long-term free cash flow generation and continued balance sheet strength. Net debt decreased by $1.1 billion compared to Q2 2020 levels, as free cash flow contributed to debt repayment in the quarter. Liquidity remained strong at the end of Q3, with total availability of $4.2 billion, including cash and short-term investments, and we retired a $1 billion bond at maturity in August. Our long-life, low-decline assets and effective and efficient operations gives us the ability to sustain returns to shareholders over the long term. This is demonstrated by the 20 consecutive years of dividend increases and reflects our culture of continuous improvement, our ability to be effective and efficient, and the relentless focus at Canadian Natural in controlling our costs. This all contributed to significant free cash generation and strong financial results in the quarter. With that, I'll turn it back to you, Tim.

Thank you, Mark. Canadian Natural's ability to deliver significant returns Sustainable cash flow is driven by our effective and efficient operations, our drive for continuous improvement, and for 2020, we're on track for targeted savings of approximately $745 million. As an example, Q3 2020 North American E&P liquid operating costs down 17% versus Q3 2019. As a result of our effective and efficient operations, the quality of our assets, we have a low free cash break-even, including capital expenditures, plus current dividend of approximately 30 to 31 U.S. per barrel. Canadian Natural continues to take proactive and effective steps to ensure the health and safety of our people working for us, and we continue to enhance our COVID-19 program across the company. We are on track to achieve our environmental targets and will continue to lower intensity as we work towards our aspirational goal of net zero in the oil sands. In Q4, we are targeting over 1.6 BCF for natural gas production, including our recent acquisition. Based on the current natural gas strip pricing, including the value of liquids, our natural gas assets could generate approximately $1.2 billion on an annualized basis. In summary, we continue to focus on safe, reliable operations, reducing our GHG intensity, enhancing our top tier operations. Our high quality diverse assets are delivering top-tier cash flow generation. We are unique, sustainable, robust, and clearly demonstrate the ability to deliver returns to shareholders by balancing our four pillars. That concludes our Q3 call. I will now open the line for questions.

To ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound or hash key. Your first question comes from Greg Pardee, From RBC Capital Markets, your line is open.

Thanks. Good morning. A couple of questions for you. Tim, maybe just to come back to the capacity growth at Scotford and then let's maybe just weave in Horizon. But do you see further low-cost debottlenecking capacity increases that you could do here either in 21 or 22? Is there so much low-hanging fruit there for you to go after?

Well, at Scotford... there is still some capacity there. That won't happen until 2022, but that we're working through with our partner. And then as far as Horizon, yes, there is opportunities to further enhance that. We're proceeding with some work into 2021 and again in 2022. But there is some value enhancements there that can happen as we continue to operate these facilities We're always looking for opportunities to enhance that production as well as lower our costs.

Okay, terrific. And just with Scotford, I mean, just rough order of magnitude similar to what you've just done at 20,000, or is it too early?

It's too early to say.

Okay. Okay. Second question is – sorry, go ahead, Tim.

Yeah, we really didn't get a chance to test Scotford here before curtailments here in November.

Okay, okay, understood. And maybe just to come back to the last conference call, and this is pre-Painted Pony, but question for Mark, you know, I think your thinking at that time was, is, look, our net debt should be, you know, kind of flat year over year. If you exclude Painted Pony and then just look at how things shake out through the balance of the year, would you still come close to that, do you think? I mean, you've obviously made good progress with this quarter.

Yeah, thanks, Greg. I mean, certainly the commodity prices are ever-changing here, and that was an August pricing kind of strip. But, yeah, I think if you exclude the acquisition from a capital perspective in Q4, we're going to generate strong free cash flow in the quarter. And if you exclude that, we'll be driving towards those levels. So that free cash flow, as you saw in Q3, going to debt repayment and, again, seeing strong cash flow at current share pricing in Q4. Okay, terrific.

Thanks, guys. Thank you.

Your next question comes from Neil Mehta from Goldman Sachs. Your line is open.

Hey, guys. Congrats on a good quarter here. The first question I had was around your natural gas business. Can you talk about how you see this fitting in strategically in the context of CNQ's portfolio and then whether you want to grow gas as a percentage of mix over time? And then you talk about at the Strip it being a $1.2 billion portfolio. cash flow business, can you kind of frame out what you think the free cash flow is to help us understand the capex associated to fund that cash flow?

Yeah. So just in the context of our natural gas volumes, obviously what we target to do is add value long term. And so whether it's gas, oil, we really, you know, with our asset base, try and maximize value all the time. So if you look at this year, you know, we start off at 4.1 billion, we went down to 2.7. Obviously, that original budget had more oil waiting, that it was greater pricing and better value for us. As we got into June, July, natural gas prices continued to strengthen. And obviously, we're reallocating capital within that context of the 2.7 billion. into natural gas because it's more value added at Septimus and Townsend. There's no intent to grow one product or another. Every year we look at it and all the time we're modifying our plan to maximize value. In terms of the free cash flow, it's really difficult to say we have a small program here at Septimus and Townsend Townsend here in the fourth quarter. But, I mean, really a big part of that is all just free cash generation from our operations. So it's really – that's the only way to look at it in the short term.

Yeah, very clear. The follow-up is just around capital spending. So a couple questions there. Are you guys still planning on doing an open house later this year? I guess it's probably virtually – Is that when we'll get a sense of 2021 spend? I know you mentioned a release in December. And any early thoughts and flavors, just given where the curve is, how it could look relative to the $2.7 billion this year?

Hey Neil, it's Mark. We're still working through that. Yeah, we do plan to have an announcement or release sometime in December around what the budget is for 2021. We're still working through how that will actually be communicated, whether it's a more full-blown presentation or not, but we'll get there. We're going through it right now, so it's too early to really kind of indicate directions. We've got to kind of work through the final touches on it.

Okay. All right, thanks, guys. Looking forward. Thank you.

Your next question comes from from Bank of America. Your line is open.

Thanks. Good morning. Tim, we finally have started to see some M&A in the space, both in the U.S. and Canada. For you, what do you think is triggering this mini wave? You have said no holes in the portfolio, but from a broader industry standpoint in North America, Do you see more consolidation, and what do you see as the main impediments for consolidation?

Yeah, I think we probably are in a time of consolidation. Obviously, there's some very healthy companies, and there's some companies that aren't so healthy. Obviously, you know, through the consolidation thing, there are opportunities to improve your operations, both on capital and capital and GNA and such. So, you know, I think on a prior basis, yes, there will continue to be some consolidation here over the next year as, you know, we've seen. You know, whether, you know, how it happens, who does it, that's always hard to say. You know, really, it's just, to me, just a cycle. And, you know, it's pretty common in these cycles that M&A does happen.

Okay, great. And Tim, on your international asset portfolio, and you have some good cash flow generating assets in North Sea and offshore Africa, how do you see that portfolio? Are there rooms to deepen or rationalize? How do you think about that portfolio?

No, we like our international assets. They're free cash generating. We've made several billions of dollars over the years out of those assets over time because they are free cash generation. No, we're very happy with them, and we'll just continue to invest prudently into those assets to continue to generate free cash flow.

Thanks.

You're welcome. Your next question comes from Minna Holschoff from TD Securities. Your line is open.

Good morning, everyone. I just have one question on your in-pit extraction process, given the potential for a pretty significant reduction to bitumen emissions. Just looking at the press release, you talked about pilot work having slowed down because of COVID, but can you just give us an update on what the data looks like so far? Sort of your best guess on where things stand in terms of the timeline to commercialization, if everything goes according to plan, and maybe some high-level thoughts on how important this work is in the context of your net zero aspirational target. Thanks.

Yeah. I mean, IPEP is a great project. Obviously, we were piloting it. We wanted to pilot it again further this year to refine it. You know, from a sediment stacking perspective, it worked well. We needed to get a higher stackability in the higher finds areas. as well as recoveries on the high refined material was not as good as we wanted. So we wanted to do some refinement in the high fines area. That was supposed to happen this year. In the meantime, because we can't pilot it and the COVID seems to be dragging on a little longer, we've been doing basically commercial engineering with the people that were involved with IPAP just to keep that progressing there. You know, in terms of commercial ability, you know, we're looking to step into it. What it is is you would step into it over time, and I believe it was 2026 kind of time range, that we would start converting over to IPEP. So it was going to be a very methodical process in terms of converting over to IPEP starting in 2026 around.

Okay, so the the 2026 timeline still seems achievable?

I think so. Yes, we'd like to really get out there and, and do the final testing on the high fines material, just to ensure that we feel comfortable with where it's its ability. But yes, so far, that's still the plan.

And then in terms of the conversion, you'd be thinking sort of three to five years or a bit longer?

Yeah, 3 to 5. No, that's about the right time frame.

Perfect. Thanks, Tim.

Thank you.

Your next question comes from Manav Gupta from Credit Suisse. Your line is open.

Hey, guys. I think on the last earnings call, Tim, you specifically said that we will flex our thermal muscle in 3Q, and I think it was underappreciated how strong that muscle was because the volumes hit 287 and the cost went to 785, so Congratulations on that. My question here is that, sir, as we thought about thermal in situ for 4Q, we were thinking as horizon goes up, thermal in situ comes down because of the production curtailments. But now that the curtailments are gone, obviously thermal in situ might come down a little, but do you have to take it down all the way to 230, or could you run at a higher rate now that the production curtailments are gone?

Yes. So, yes, thank you for the comments on the thermal piece. Yeah, so for the month of November, obviously, thermal will be curtailed as well as ASOP and a few other properties. And then, you know, when we hit into December, we will start to increase production. Obviously, we'll take a look at – how much we would want to increase our thermal production based on pricing. You know, with the flexibility on the cyclic steam side, we may be better off to delay a cycle and move it into next year. So we're always looking at that and seeing how we can maximize value. But the production in general for December would go up.

Okay. And one follow-up, sir. Enbridge Line 3, what's the next important milestone or data point we can watch? And in your opinion, could this be a 2021 event, the startup of Enbridge Line 3?

Yeah, I understand that there's some information that's supposed to come out of the courts potentially next week, which would then kind of give them that kind of stepping stone into finishing Line 3. You know, hopefully that all proceeds there kind of in the mid-2021 timeframe. But I believe it's next week, but really you'd have to talk to Enbridge.

Thank you for digging my question. You're welcome.

Your next question comes from Matt Murphy from Tudor Pickering Holt. Your line is open.

Hi, thanks. Good morning. Maybe just a quick follow-up on Benno's question on IPEP and maybe broadly on capital associated with achieving net zero emissions over time. I guess just curious how you think about investment in emissions reduction technologies, for example, as part of the broader capital allocation process. Is it coming down to returns versus returns in competing for capital, or is some incremental consideration for the environmental side, for example?

Really, we try and balance both. Obviously, returns are extremely important, and so You know, if you look at something like IPEP, what was really so motivating to do that is, one, it reduced our GHG emissions. Secondly, it got rid of our tailings pond. And with that, we had a reduced liability in terms of reclamation. So, what we try and do is find projects which complement our operation at value long-term, as well as reduce our environmental footprint. So, we try and balance many different items and Our teams are very good at coming up with creative ideas to reduce our environmental footprint and add value. I think through our technology and innovation group under Joy, it is very structured in terms of pushing projects that give us returns rather than just to do a project.

Thanks, Tim. And maybe just a quick follow-up for Mark on the comments on maintaining largely flat net debt year-over-year. I think one of the key moving pieces that we talked about previously was some marketing capital movements over the course of the second half of the year. I'm just wondering if you could remind us how you're thinking about the progression of cash from that component in the fourth quarter. Thanks.

Yeah, sure, Matt. I mean, it's always difficult to predict the changes in working cap as we go through. It'll depend a little bit on pricing and how December looks as far as receivables as we get paid in the following quarter. So you did see a pickup from it in Q3, which we kind of expected, and contributing to that ability to repay debt along with the free cash flow. So it's difficult to predict, but outside of that, again, with the assets, the ability to – to generate free cash flow in the fourth quarter will be evident, I think, even at lower commodity prices given the low break-evens. Thanks, guys.

Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Roger Reed from Wells Fargo. Your line is open.

Thank you. Good morning. I guess what I'd like to maybe understand, going back to I think it was Manav's question a little bit on, you know, moving crude down and increasing production in December, we've seen fairly tight WCS to WTI differentials. As you think about your $31 break even and potentially wider differentials, you know, I think whether or not you increase production, somebody else is. What do you think is, you know, kind of your tolerance for a wider WCS differential as you increase production into, I would guess, more like early 21 more so than the end of 20?

Yeah, you know, if you look at what's gone on here, you know, the last year or two, really, there hasn't been any significant production ads, not on the heavy oil thermal side. And so, you know, what we've seen here is, basically from March to essentially November, was a decline in oil storage in Alberta. I think it went down to around close to 20 million barrels. Obviously, you know, with curtailment coming up, as well as maintenance being completed, whether it's Horizon ASOP or, you know, the other properties in northern Alberta, mining properties. So, you know, typically we do see higher – production during the winter months, obviously, because it's of the weather. And obviously, if you're going to run in the winter, you have to be able to run all winters. So, you know, there could be some pressure. But if, you know, the storage levels were down at around 22 million barrels, you know, the pipelines, essentially, you know, when storage was going down, September and October, you know, ironically, apportionment was 12% and 18%, which makes zero sense. So obviously, there's still game of chip being done on the apportionment side. But I think other than just companies running out production there, I don't really see a lot of production ads other than just people trying to run at the maximum capability of their properties.

No, I mean, that makes sense. So, I mean, should we think about it then more as whatever the market takes is what the market takes and not worry so much about a specific differential? And I'm thinking of what, you know, ultimately kind of pushed the whole curtailment was obviously quite the collapse in the market. So do you think, you know, if we were to go above, say, $15, people will be a little more careful or pull back or – hey, after all, it's the oil market and we'll all just push until we push too far and get pushed back the other way.

Yeah, I just look at nobody really has added any capacity. So, you know, other than, you know, really running out production, I don't see it being really a long-term thing. You know, again, during the winter months, if you're going to run your operations, you're going to run, you know, kind of at a good rate, not necessarily at full, depending on the pricing. But once March hits, you know, turnaround activities begin again, and, you know, that pressure comes off. So I really look at it as a short-term blip of maybe some gamemanship in terms of apportionment and differentials. But, you know, really there has not been a significant amount of supply. It's just all going to be how companies run during the winter months. And obviously what's really important is our pipelines to supply. continue to run safely and reliably over the winter months. You know, in the past couple of years, you know, there was some incidents on the pipeline side, you know, right around the November timeframe that put the pressure on the differentials.

Okay. Appreciate it. Thank you. Yeah.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, operator, and thank you, everyone, for attending our conference call this morning. Canadian Natural's large, diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver effective and efficient operations with top-tier performance is contributing to substantial and sustainable free cash flow. This, together with effective capital allocation, contributes to our overall goal of maximizing shareholder value. If you have any further questions, please don't hesitate to give us a shout. Thanks, and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.