Canadian Natural Resources Limited

Good morning. We would like to welcome everyone to the Canadian Natural Resources 2021 Third Quarter Earnings 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 4th, 2021 at 9 o'clock AM Mountain Time. I would now like to turn the meeting over to your host for today's call. Mr. Corey Bieber, Executive Advisor. Please go ahead, Mr. Bieber.

Thank you, operator, and good morning, everyone, and welcome to Canadian Naturals' third quarter 2021 Corporate Update Conference call. Canadian Naturals had another very strong quarter, financially and operationally. As I commented before, I believe our asset base is unique amongst our peer group, underpinned by long-life, low-decline assets, and complemented by our conventional assets that allow significant flexibility and all of which can generate very significant free cash flow. Beyond our robust asset base, there is a corporate strategy that focuses on generating real returns for shareholders and a driven management team and a corporate culture that focuses on being effective and efficient. Over the years, Canadian Natural has clearly demonstrated its robustness, sustainability, and the strength of its business plan. For 2021 and beyond, I believe we are one of the few companies capable of delivering meaningful economic growth increasing returns to shareholders, and reducing absolute debt in a responsible manner. For today's call, Tim McKay, our president, will first provide a corporate update. Mark Stainthorpe, our chief financial officer, will then provide an update on our 2021 financial outlook, as well as our strong financial position. Tim will then provide a summary prior to opening up for questions. Before we kick off, I'd like to remind you of our forward-looking statements. Of note in our reporting disclosures is that everything will be in Canadian dollars unless otherwise stated. And as well, we report our reserves in production before royalties. To that end, I would suggest that you review our comments on non-GAAP disclosures in our financial statements.

With that, I'll turn it over to you, Tim. Thank you, Corey. Good morning, everyone. Canadian Natural delivered strong operational results in the third quarter as we achieved quarterly production of approximately 1.238 million BOEs per day, as a result of our robust, long life, low decline assets, operational excellence, and with our capital discipline, we generated significant free cash flow. We balanced free cash flow to our four pillars of capital allocation, maximizing value for our shareholders. In the three quarters of 2021, we have reduced net debt by 5.4 billion, returned approximately 2.4 billion to our shareholders through dividends and share repurchases, maintained capital discipline executed on optimistic transactions, which all add long-term value. Strengths of Canadian Natural's 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. Our safety record is top tier as our corporate total recordable industry frequency improved 0.021 in 2020. a reduction of 58% from 2016 levels. For the period from 2016 to 2020, North American EMP methane emissions are down 28%. In our oil sands operation, our GHG emissions intensity is down 38%. And corporately in this period, we've taken equivalent of over 1 million cars off the road annually. And over and above this, we are the leading capture and sequester of CO2 in the oil and gas industry worldwide. In June, we announced the Oil Sands Pathways Net Zero Initiative, an alliance of oil sands industry participants who have a goal of achieving net zero emissions in the oil sands operations by 2050. This initiative of oil sands industry participants and Canadian Natural will further strengthen our leading ESG performance while delivering meaningful emission reductions, balancing sustainable economic development, and we will require collaboration with the federal and Alberta governments so that together we can achieve Canada's climate goals. Starting with natural gas, overall Q3 was approximately 1.7 BCF a day, an increase from our Q2 production of approximately 1.6 BCF, with North American Q3 natural gas production of 1.698 BCF. BCF per day, up from the Q2 of 1.594 BCF per day, as the Pine River plant resumed operations, acquisitions, and strong drilling routes offset natural declines. We continue to focus on operational excellence, and our Q3 North American natural gas operating costs was strong at $1.14 per MCF versus the Q2 of $1.15 per MCF. At Townsend, production of 284 million cubic feet of natural gas was achieved in Q3, an increase of 7% over Q2. With the BC court decision, all development activities in Townsend area have been temporarily suspended, with nine wells, weighing facilities, and pipeline permit approvals. Capital has been redeployed to our deep inventory of natural gas opportunities in Northwest Alberta, with similar, strong, drill-filled capital efficiencies and production volumes. And with EcoStrip pricing over $5 a G-day, adding more value to our natural gas production as we target to exit 2021 in excess of 1.8 BCF a day. Our Q3 North American light oil and NGL production was approximately 89,000 barrels a day, down from Q2, primarily due to the unplanned third-party outage, which impacted our NGL production by approximately 8,400 barrels per day in the quarter. Q3 operating costs were $16.19 per barrel, an increase from Q2 operating costs of $14.39 per barrel. The company continues to advance its high-value Montney light crude oil development at Wembley. Thirteen wells came on stream in Q3, with an additional five wells targeted to come on stream in Q4. The new crude oil battery is on stream ahead of schedule and below budgeted costs. And with our strong wells, we are targeting total production rates of more than 10,000 barrels a day of liquid and 30 million cubic feet of natural gas. representing an increase of approximately 1,500 barrels a day of liquid and 2 million to 8 of natural gas, giving the project strong on-stream capital efficiency of approximately $6,800 per VUED. International E&P crude oil volumes averaged approximately 30,000 barrels a day in Q3, a decrease of 9% from Q2 levels. The changes in production from prior periods were primarily a result of planned maintenance activities and natural fuel declines. Crude oil operating costs increased from prior periods, primarily due to lower volumes as a result of the planned maintenance activities in the North Sea and offshore APCA, as well as increased GNG and energy costs in the North Sea. Q3 heavy oil production was approximately 64,000 barrels a day versus 66,000 barrels a day in Q2, primarily a result of natural fuel decline partly offset by new development activities. Q3 operating costs were $19.51 per barrel, comparable to the Q2 operating cost of $19.32 per barrel. At Smith, the additional six net horizontal multilateral wells that were targeting the Clearwater came on production in Q4 at approximately 2,100 barrels per day, exceeding the targeted rate of 2,000 barrels a day. A key component of our long-life flow decline asset is our world-class Pelican Lake pool, where our leading-edge polymer flood continues to deliver significant values. Third quarter production was approximately 54,000 barrels a day, down 2% from Q2 of 55,000 barrels a day, primarily due to natural fuel decline. Operating costs continue to be very strong at 590 per barrel versus the Q2 operating costs of 690 per barrel. Our team at Pelican continues to drive operational excellence, and with our low decline and very low operating costs, Pelican Lake continues to have excellent net value. Our third quarter thermal production was 248,113 barrels a day, down 4% from Q2 of 258,551 barrels, primarily due to planned turnaround at jackfish and natural field declines. Operating costs in Q3 were 4% higher at 12.24 per barrel versus Q2 operating costs of 11.78 per barrel, primarily due to lower volumes in the quarter. Results of Kirby salt from an ongoing solvent Projects continue to be positive, showing SOR and GHG intensity reductions of 45%, as well as solvent recoveries of approximately 85%. As a result, the company is progressing with the engineering and design of a commercial-scale sag-deep pad development at Kirby North. At Primrose, the second solvent injection pilot commenced operations in October in the steam flood area. This pilot targets to operate for a two-year period with targeted SOR and GHG intensity reductions of 40 to 45%, and solvent recoveries greater than 70. At our oil sands operations, we had a strong third quarter with production at 468,126 barrels per day and a strong operating cost of $19.86 per barrel of SCO. Following the recent maintenance and turnaround activities across the oil sands, mining and upgrade assets topped your performance and utilization continues to drive industry-leading operating costs. During the first nine months of 2021, since the completion of Scottford Turnaround and Expansion in 2020, the company has increased sales volumes by over 20,000 barrels a day of FCO. Oil sands mining and upgrading continues to be top tier with production volumes in October of approximately 477,000 barrels a day of FCO as our teams continue to leverage our technical expertise improve reliability, enhance our production at both sites, as well as finding operating efficiency to drive our costs down with consistency. With that, I will now turn it over to Mark for a financial review.

Thanks, Tim. We delivered strong financial results in the third quarter as our business realized net earnings of over $2.2 billion. Adjusted fund flow generation was significant at over $3.6 billion. and free cash flow was approximately $2.2 billion after capital and dividends, excluding acquisitions, in the quarter. As a result of our significant free cash flow generation, net debt decreased to approximately $15.9 billion at Q3, $2.3 billion lower than Q2 levels. While the debt repayment in the quarter was significant, so were returns to shareholders, with approximately $1.1 billion returned through dividends and share purchases. We continue to maintain strong liquidity including revolving bank facilities, cash, and short-term investments, liquidity at Q3 was approximately $6.2 billion. Our long-life low-decline assets support a sustainable, growing, and predictable dividend. This was evident through the period of challenging commodity prices in 2020, where we increased and maintained our dividend, then further increased it in March of 2021, marking the 21st year of dividend increases. Subsequent to the quarter end, the Board of Directors has approved a 25% increase to our quarterly dividend to 58.75 cents per share, payable on January 5th, 2022. This represents a 47 cent per share annualized increase. This clearly demonstrates the confidence that the Board of Directors have in the sustainability of our business model, the strength of our balance sheet, and the company's effective and efficient operations supported by a robust, long life, low decline asset base and associated low maintenance capital requirements. With this increase, 2022 will mark the 22nd consecutive year of dividend increases for the company. And this 25% increase from our previous quarterly dividend is in excess of our historical dividend compound annual growth rate of 20% over the last 22 years. Last quarter, we discussed that effective July 1st, 2021, our free cash flow allocation policy authorized management to increase returns to shareholders through accelerated share repurchases under the company's normal course issuer bid by targeting the repurchase of approximately 1% of shares outstanding per quarter. This policy further states that once the company reaches an absolute debt level of $15 billion, currently targeted to occur in Q4 2021, 50% of free cash flow will be targeted to share repurchases, with the remaining 50% of free cash flow allocated to further strengthen of our balance sheet. For this policy, the company repurchased approximately 12 million shares in the quarter, and year-to-date, as of November 3rd, we have repurchased a total of 21.5 million shares for $940 million. Substant quarter end and as an enhancement to the free cash flow allocation policy, The Board of Directors has authorized management to target absolute debt levels below $15 billion, which is approximately one times debt to EBITDA in the current price environment. And to the extent debt is below $15 billion, such amount will be available for strategic growth loss acquisition opportunities when and if it makes sense. This enhancement reinforces our approach to the 50-50 free cash flow allocation and demonstrates our commitment to long-term shareholder value, supported by a strong financial position and increasing returns to shareholders. through increasing dividends and share repurchases. With that, we'll turn it back to you, Tim.

Thank you, Mark. Canadian Natural's ability to deliver significant, sustainable free cash flow is driven by our effective, efficient operations, our high-quality, long-life, low-decline assets that have low-maintenance capital and significant reserves. We balanced our commodities in Q3 2021 with approximately 47% of our BOEs, like crude oil, NGL, SCO, 30% heavy, and 23% natural gas, which gives us exposure to all improving commodity prices. Mayonatural's advantage is our ability to effectively allocate cash flow to our four pillars, and we will continue to allocate to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective and efficient operations, and by our teams who deliver top-tier results. A commitment on delivering returns to shareholders has been significant, totaling $3.1 billion year-to-date through dividends and share repurchases. Subsequent to the quarter end, the directors have approved a 25% increase to our quarterly dividend payable on January 5, 2022. This will mark the 22nd consecutive year of dividend increases for the company and is a 25% increase from our previous quarterly dividends and is in excess of a historical dagger growth of 20% over the last 22 years. In the third quarter, we set new environmental targets. By 2030, reduce absolute methane emissions by 50% from our 2016 baseline. By 2026, reduce in situ freshwater usage and mining freshwater usage intensity by 40% from our 2017 baseline. As well, With our oil sands pathway to net zero initiative, we will work with our industry partners to advance key milestones as we work towards our goal of net zero in the oil sands by 2050. In summary, we continue to focus on safe, reliable operations, reducing our environmental footprint, enhancing our top-tier operations. Neonatural is delivering top-tier cash flow generation. We are unique, sustainable, and robust, and clearly demonstrate the ability to deliver returns to shareholders by balancing our four pillars. That concludes our Q3 conference call. I will now open the line for questions.

At this time, I would like to inform everyone, in order to ask your questions, you may press star, then the number one on your telephone keypad. Again, that's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Greg Party from RBC Capital Markets. Your line is open.

Thanks. Thanks. Good morning. Thanks for the rundown, guys. Maybe just the first question is on net debt, Mark. We're about midway through 4Q. How close are you to that $15 billion number?

Yeah, well, it's imminent, Greg. We're very close to that number. of $15 billion. And, you know, the way the free cash flow allocation policy works and the way, you know, or the significance of the free cash flow that we're generating in Q4 and certainly the outlook for 2022, that can, you know, that balance sheet continues to improve in that scenario. So, yeah, it's imminent. We're getting close. And that's really why you see the enhancement to the policy, which really, you know, shows that we're getting to that target maybe a little earlier than originally expected.

Okay, and that's really where I wanted to go. That's probably where most of the static is that we're picking up. So the language in the release around, you know, if you're sub-15, that opens up opportunities in terms of growth or acquisitions. And I'm just trying to better understand, is this intended to just, you know, wave a big flag? Look, $15 billion is the new number. But does this limit your flexibility? I'm just wondering what has changed in your game plan as a result of that policy language?

I think you've got to think of this, Greg, because nothing has changed as far as the long-term planning. I mean, the $15 billion was a target that we had set before, and like I say, we're getting there sooner. This just provides some flexibility and I think reinforces flexibility. what we've been seeing as far as continued increasing returns to shareholders and balance sheet strength going forward with the significance of the free cash flow. You have to remember that free cash flow is generated because of the long life assets, the low decline and favorable maintenance capital requirements of those assets, which we think sets us apart.

Okay, terrific. And last one for me, if you wouldn't mind. I'm just wondering on Kirby in terms of scale timing or cost. Tim, can you address any of that? How big is this, and when do you think it would come on?

Yeah, well, the first thing is we're just doing the engineering and design of the pad today. So we're looking to probably start construction in two years. Okay. It's too early.

It's too early. Okay, thanks very much.

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

Good morning, and congrats, guys, on that dividend bump. The first question is just to tie into Greg on M&A, and you guys have done a good job over the last couple of years being opportunistic around M&A and creating value that way. Just how do you see the landscape for potential acquisitions, and do you think this is a buyer's market or a seller's market right now?

Really, we don't see really too much difference here today. As you know, we don't have any gaps in our portfolio. However, we always look at opportunities in our core areas. If they look like they can create value for our shareholders, then we're optimistic on those opportunities, but really don't see any change.

Okay. The follow-up here is just on the Canadian oil macro. We have seen WCS differentials wind out a little bit, which is surprising in light of Line 3 coming online. What are your thoughts on differentials here, and how do you see them moving into 22 as you have some Canadian production coming back, some heavy OPEC barrels coming into the market, but a better egress situation?

Yeah. Traditionally, I feel like historically the WCS differential always widens out in December. Obviously, change in demand, people have their inventory adjustments that they do in December. So, you know, they're still very good, and we don't see it really changing that much into next year. So, you know, I would say it's still going to be in the sub-20% going into next year. But historically, they've always widened out in that November, December, and then tightened back up in the new year. Thanks, guys.

Your next question comes from the line of Menno Hulshof from TD Securities. Your line is open.

Good morning, everyone, and thanks for taking my question. So your stock is effectively at all-time highs as of this morning, which is pretty incredible given where things stood 18 months ago. So my question is, would you ever reconsider your 50% free cash flow allocation to buybacks with the stock where it is, and how much does the entry point and where we stand in the cycle come into play when it comes to how aggressively you want to buy back your stock?

Yeah, thanks, Benno. It's Mark. You know, right now, that's the policy, and as we get to that $15 billion, you know, the 50-50 allocation, what you see from us, obviously, is the balanced approach. Tim talked about the four pillars, but we have a balanced approach across increasing dividends, which you saw the increase today, buybacks, debt repayment, and economic resource development. So I foresee that that balance continues going forward.

Okay, perfect. And then one more for you, Mark, I believe. Can you just give us a sense of what the cash tax profile is going to look like into 2022 on the strip?

Well, it will just depend on, of course, your price forecasting, not only a strip on benchmark, but on other things like royalties, So we do have payouts, of course, happening in some of the royalty projects that we can get IR to walk through that will help kind of manage down to that exact tax. But, you know, we are a taxpayer, and you see it coming in, you know, in 2021 and to 2022. Okay.

Thanks a lot, Mark.

Yeah.

Your next question comes from the line of Phil Gresh from J.P. Morgan. Your line is open.

Yes, hi, good morning. First question would just be thoughts on capital spending as we look out to 2022. Any kind of early goalposts you could share with us?

No, no early goalposts yet. We're still working through our budget. And as you know, we have a large, high-quality asset base that we have numerous opportunities on. So, We're just going through the process of looking at it and deciding on where we want to allocate capital to generate the strongest returns. So we're just still in that process.

Okay. And my second question, just one additional follow-up, I guess, on the debt targets. With the wording in the release and the way you're framing it around the $15 billion, Is that meant to say that you kind of view that as more of like an efficient level of leverage to hold for a company of this size and, you know, with the flat production profile and things that, you know, in other words, you're not going to have like another secondary leverage target at some point that'll be $10 billion instead of $15 billion or just any additional color there would be interesting. Thank you.

Yeah, thanks, Phil. I think the one thing, obviously, is you'd look at it as a long-term target. Certainly, there's different scenarios that you go through when you're budgeting and planning, so that changes how you look at it. Right now, a long-term target of $15 billion, as I mentioned, looks like about one times debt to EBITDA in that range today. We're getting there very quickly. Right now, the free cash flow allocation policy, again, just focuses on both returns to shareholders and continued balance sheet strength. As we go forward, you'll continue to see that capital discipline and that balanced approach.

Okay, thank you.

Your next question comes from the line of Dennis Fong from CIBC World Market. Your line is open.

Hi, good morning, and thanks for taking my questions. The first one here is, I guess historically, Canadian National has discussed two potential projects at Horizon. one which was a light oil to bottlenecking project, and the second is a potential PFT brownfield bolt-on component to Horizon. Obviously, you've seen very strong production between both Horizon and AOSP, and given, obviously, the strong production and financial performance, you guys are approaching payouts. So I was curious as to how some of the, we'll call it, optimization projects that you've done kind of over the past few years may have changed your outlook on some of these deep bottlenecking projects? And secondarily, how are you guys looking at the potential of moving forward with some of these now that you are very close to hitting your net debt target, as well as we're obviously in a very strong oil price environment currently?

Yeah, so that's good questions here. So, you know, with Horizon and at ASOP, our teams have done a tremendous job looking at what opportunities we have currently on the ground, and that's part of the reason we're seeing such strong production performance out of the Old Sands mining. And so, as we look ahead, those projects are changing, because we're finding different ways to get extra volumes, different ways to get higher reliability, and looking at different opportunities that may actually further enhance what we can do on those sites. You know, they're still kind of in our range of opportunities, but they're going to look different than what we had originally envisioned. And that's just because the teams have done such a great job there in terms of eking up the production and creating a higher reliability out there. So in the Ford, we've still got similar projects. that our teams are working on, but it's looking – it would be different than what we had originally envisioned.

Great, great. And then I guess I know those were – I don't want to say put on the back burner, but there's a lot of engineering work essentially continued to be – to have been done on those over the past several years. Have the economics of those projects move forward in your mind? And then I just wouldn't mind potentially an incremental update on IPAP as well and kind of where you're proceeding with that. And those would be my questions. Thank you.

Okay. So the work has continued to progress actually on both sites in terms of looking at what opportunities we could do and to enhance the volumes and enhance operating costs on both sides. So we have not slowed down. Our teams have been doing a lot of background work. Obviously, part of it is, you know, if they compete for capital, and that's part of what we do in terms of managing our long-term outlook. With IPAT, again, it's still part of our portfolio. The team is working on enhancements to that project as well. And we're still advancing it. It's just a matter of deciding if it's something we want to do at this time or keep it, do additional work to further enhance the economics of it. So it's just, it's a lot of work. You know, this last year with the COVID, a lot of the, what I would call on the ground work was shut down as we went down to essential personnel. So a bunch of work would still need to be done absolutely proven up that process, but it is still progressing, at least on the engineering side, of how we can enhance that opportunity.

Great. Thank you for answering my question.

You're welcome.

Your next question comes from the line of Roger Reed from Wells Fargo. Your line is open.

Yeah, thanks. Good morning. All right, probably just a little bit of a follow-up from Phil's question earlier, thinking about CapEx and 22. Can you give us an idea, as we think about what your very modest decline rate and sort of a minimum level of CapEx for 22 or a maintenance level of CapEx in 22 would be?

Yeah, well, our decline is about 10%. And, you know, it's really not too much different than it has been historically into that $3, a little over $3 billion range. So, you know, for the most part, it's in that range. It depends on, obviously, what kind of commodities we want to do. But it's still in that range.

Oh, thanks. That's helpful. And then... almost everywhere else in the world dealing with exceptionally high gas prices, certainly higher, uh, in Canada, but not, not quite stretched. Um, just curious as you're looking at both gas as a positive and a negative for your businesses, um, how you're managing around that if you are at all.

Yeah, we're in a very fortunate position where we're long natural gas. So, uh, um, you know, while it is a cost to us, uh, is also a benefit on the commodity side. So for the most part, very fortunate that way.

Yeah, I was just curious, is there anything you've done to mitigate on the usage side at all, or is it not risen to that level yet?

Oh, we're constantly looking for enhancements to reduce it. You see it in the thermal side through solvents. We've got steam generation opportunities that we're advancing. Oh, yeah, Horizon and CoGen, absolutely. There's always opportunities to lower our fuel consumption, and the teams are very focused on that.

Great. Thank you.

There are no more questions at this time. Presenters, please continue.

Thank you, Operator, and thank you to those who joined us on the call and webcast this morning. If you do have any follow-up questions, please don't hesitate to give our teams a call. Thanks and have a great day.

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