Canadian Natural Resources Limited

Good morning. We would like to welcome everyone to the Canadian Natural Resources 2022 Second 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, August 4, 2022, at 9 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance Casson, Manager of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Canadian Naturals' second quarter 2022 results conference call. Before we begin, I'd like to remind you of our forward-looking statements, and it should be noted that in our reporting disclosures, everything is in Canadian dollars unless otherwise stated, and we report our reserves and production before royalties. Additionally, I would suggest you review our comments on non-GAAP disclosures in our financial statements. With me this morning is Tim McKay, our President, and Mark Stainthorpe, our Chief Financial Officer. Tim will first provide highlights of our ESG achievements, evident in our 2021 stewardship report to stakeholders that was published today, and how strong execution and efficiencies so far this year have put Canadian Natural in a unique position to maximize value for our shareholders by executing on additional strategic growth opportunities. This will be followed by an overview of the quarter, including specifics of our world-class assets and operations. Mark will then provide an update on our strong financial position, substantial free cash flow generation, and increasing returns to shareholders. To close, Tim will summarize our call prior to opening up the line for questions. With that, I'll turn it over to you, Tim.

Thank you, Lance. Good morning, everyone. Canadian Natural delivered strong operational results in the second quarter of 2022. As we achieved quarterly production of approximately 1.21 million BOEs a day, which included record natural gas production of approximately 2.1 BCF a day. Liquids production was strong at approximately 860,000 barrels a day as planned maintenance was completed on our oil sands mining assets. This, combined with our capital discipline, generated significant free cash flow as we continue to balance free cash flow to our four pillars of capital allocation, maximizing value to our shareholders as we have returned approximately $6.4 billion to our shareholders through dividends and share repurchases. We continue to apply that same drive to ESG, environmental, social, and governance, for a significant factor in our long-term sustainability. As we move forward, we will continue to outline our path to lower carbon emissions across the asset base in our journey to achieve our goal of net zero GHG emissions in the oil sands by 2050. Canadian Natural is an R&D investment leader. We have increased our investments in R&D and technology development by 33% over 2020 levels, with $450 million invested in 2021. And this is targeted to grow with our participation in the Pathways Alliance. As well, Canadian Natural continues to work together with 144 Indigenous-owned businesses, through which $572 million in contracts were awarded in 2021. a 17% increase from 2020 levels. The All Sands Pathway to Net Zero initiative is now called the Pathway Alliance and was launched in June of 2021 with a clearly defined plan to achieve 22 megatons of annual emission reductions by 2030 and net zero emissions by 2050. The federal government's announcement Announced support through the investment tax credit, as well as additional support from the Alberta government, will be fundamental to achieving these reductions, and the tax credit is a positive approach where industry and government can co-invest in CCUS infrastructure to materially reduce Canada's GHG emissions. Environment and Climate Change Canada has recently proposed a GHG emission cap on the oil and gas sector. In our view, this cap is unnecessary and overly ambitious in light of our stated preference for governments and industry to continue to work together through the Pathways Initiative to achieve an already announced emission target reduction. It is important for all parties to continue to work together. Canadian Natural will continue to provide input to the government on the importance of balancing environmental and economic objectives, as well as being able to support Canada's allies with energy security. Canadian Natural has had a strong execution with its drilling program so far in 2022, resulting in the company drilling 22 net operated wells ahead of forecast, consisting of 11 net thermal in situ and 11 conventional E&P wells, with drilling costs on a per-well basis comparable to budget, with improved efficiencies mitigating some of the inflationary cost pressures. As a result, The 2022 capital expenditures will be adjusted, with base capital has increased by approximately 5% or $200 million over the original 2022 levels. It will now be targeted for approximately $3.845 billion, primarily due to the forecasted inflationary pressures in all operating areas for items such as steel, manufactured goods, services, and labor. Just treated growth capital will now target to be approximately 1,075 million, an increase of approximately 375 million over the original 2022 levels. With this increase, Canadian Natural targets to drill an additional 41 net conventional E&P wells and 15 net thermal in situ wells, which essentially backfills the latter half of the drilling program, which includes pipelines, facility, and additional non-op activity. We'll progress liquid-rich Montenay natural gas projects that will add capacity of approximately 140 million cubic feet of natural gas and 25,500 barrels a day of liquids in the future years, as well as long leads for thermal in situ offshore Africa, as well as incremental shovels and tailings pipe for Horizon. As a result, our guidance has been increased to 1295 to 1335,000 BUEs a day as a result of efficiencies gained and the increased capital in both conventional natural gas and E&P crude oil liquids. I will now do a brief overview of the assets, starting with natural gas. Overall, Q2 2022, natural gas production was 2.1 BCF, which was a record for the company, a 5% increase over Q1 2022. For North American operations, Q2 natural gas production was 2.05 BCF versus the 1.99 BCF in Q1. primarily a result of the company's strategic decision to invest in our drill-and-fill strategy, adding low-cost, high-value, liquid-rich natural gas production volumes, as well as opportunistic acquisitions. Our Q2 2022 natural gas operating cost was strong at $1.15 at MCF, which is down 10% compared to Q1 2022 of $1.28. Good operating performance as our teams continue to focus on operational excellence. A couple area highlights are At Townsend, a six-well pad came on production in Q2 2022 with a strong capital efficiency of approximately $4,500 per BUD, with July monthly production of approximately 54 million cubic feet per day. At Edson, three wells came on late in Q1 of 2022 at about $2,800 per BUD, with total July production of approximately 32 million cubic feet per day and 560 barrels a day of liquids. Canadian Naturals diversified sales for a natural gas, realized natural gas pricing of $7.93 per MCF in Q2, a 51% increase above Q1 2022 levels and approximately 30% higher than the ACOB benchmark price in Q2, further improving the economics of our low-cost, drill-to-fill, liquids-rich natural gas projects. For North American light oil, an NGL Q2 production was 109,997 barrels, up 2% from Q1-22, primarily a result of strong drilling results and previous acquisitions. Q2-2022 operating costs were 15-19 barrel, comparable to Q1-22 operating costs of 15-24. At Wembley, nine liquid-rich Montney wells were on production, with July production approximately 8,200 barrels a day of liquids and 27 million cubic feet of natural gas, exceeding budget and maximizing the existing facility capacity with a capital efficiency of approximately $3,400 per BWED. Our international assets in Q2 had oil production of 25,097 barrels, which is down from Q1-22 levels, primarily due to unplanned maintenance in the New York City. Offshore Africa annual production Offshore Africa Q2 production was 15,119 barrels per day versus Q1 of 22, 15,742 barrels a day, with operating costs in Q2 at 15.73 per barrel. In the North Sea, production averaged only 10,788 barrels a day in Q2 versus Q1 of 15,961 barrels a day, and had operating costs of 84.38 per barrel. Our international assets continue to generate free cash flow and value for the company. Moving to heavy oil, production was 66,521 barrels a day in Q2, up 5% from Q1, primarily due to strong drilling results and increased development activity. Operating costs in Q2 were higher at $22.86 per barrel versus our Q1 operating costs of $22 a barrel. primarily a result of higher trucking-related costs. At Smith and the Clearwater Play, Canadian Natural drilled 12 horizontal multilat wells on four pads. Current production from these wells is approximately 4,400 barrels a day with a strong capital efficiency of approximately $6,300 per BUD. Canadian Natural has now drilled a total of 19 wells in 2022, with total company Clearwater production now in excess of 10,000 barrels a day, up from approximately 3,900 barrels a day at the start of 2022. As part of our strategic growth capital, we are delineating additional opportunities on our large, undeveloped Clearwater land base of approximately 940,000 net acres. A key component of our long-life, low-declined assets is our world-class Pelican Lake pool, where a leading-edge polymer flood continues to deliver significant value. Q2 production was 51,112 barrels a day versus Q1-22 average of 51,991 barrels a day, reflecting the low-decline nature of this property. The team continues to do a great job. We had good Q2 operating costs of $7.99 per barrel, an increase from our Q1-2022 operating costs of $7.48 per barrel. With our low-decline and very low operating costs, Pelican Lake continues to have excellent net fast. In our thermal in situ operations in 2022, we continue to leverage continuous improvement culture and our expertise to deliver effective and efficient operations. Q2 2022 production was 249,938 barrels a day down from the Q1 2022 production of 261,743 barrels a day, with Q2 operating costs of $18.93 per barrel. which is up when compared to Q1 of 2022, operating costs of $14.35, primarily as a result of increased energy-related costs. As part of our original thermal in-situ strategy growth plan released in January and as a result of efficiencies realized today, we are now targeting an additional 15 net in-situ wells originally targeted for 2023, totaling approximately $45 million in capital spend. which includes pipelines and facilities. Canadian Natural now targets to drill a total of 117 net in-situ wells in 2022. As well as part of our capital update, we are targeting to progress engineering and long leads for two thermal in-situ pads additions at Pike, targeting to add approximately 28,000 barrels a day of capacity by 2026. In the company's In the company's world-class oil sands mining and upgrading assets, we had Q2 production averaging 356,953 barrels a day of SCO, down from Q1 of 2022 levels primarily as a result of the Scotford and Horizon planned major turnarounds in the quarter. Q2 operating costs were at $33.76 per barrel of SCO, This increase was primarily driven by decreased production volumes due to turnarounds and increased energy-related costs. The planned turnaround at Horizon went very well, completed eight days ahead of our 32-day budgeted, and at the non-Scottford Upgrader, it went 17 days longer than the original target of 65 days. At Horizon, the reliability enhancement project is progressing as planned, And as part of the capital update, we target to add additional shovels, tailings, pipe at Horizon, supporting the reliability project. I'll now turn it over to Mark for a financial review.

Thanks, Tim. Good morning, everyone. Our second quarter financial results were very strong on the back of safe, effective, and efficient operations and a robust pricing environment, including a strong SEO premium to WTI. In Q2, net earnings were $3.5 billion, and adjusted funds flow were $5.4 billion, allowing for significant allocation to shareholder returns through dividends and share buybacks, further debt repayment, and to strategic growth opportunities, all providing long-term shareholder value. Returns to shareholders have been significant and increasing through 2022, as we have returned a total of approximately $6.4 billion to shareholders through $2.4 billion in dividends and $4 billion through share repurchase. equaling about 56 million shares year-to-date, up to and including August 3rd. Our base dividend is growing and sustainable and is supported by our long-life, low-decline assets. On March 2nd, 2022, the Board of Directors approved a 28% increase to our quarterly dividend to $0.75 per share or $3 per share annually. This continues the company's leading track record of 22 consecutive years of dividend increases with a significant compound annual growth rate of 22% over that period of time. Strong execution across the company's operations has resulted in substantial free cash flow generation driven by our large and balanced asset base with a top tier cost structure. As a result, our financial position continues to strengthen with net debt balances targeted to continue to decrease and we remain committed to being balanced on allocation to our four pillars. This includes incremental strategic capital to growth opportunities that provide incremental production, and to increasing returns to shareholders, where the Board of Directors approved a special dividend of $1.50 per share, payable on August 31, 2022, to shareholders of record on August 23, 2022, which is in addition to our regular quarterly dividend. At the same time shareholder returns have significantly increased in 2022, our strong financial position continues to get stronger. Net debt decreased to $12.4 billion in Q2, down $1.4 billion in the quarter, and is targeted to decline further through the year. As part of our financial strength, we continue to maintain strong liquidity, including revolving bank facilities, cash, and short-term investments. Liquidity at the end of Q2 was approximately $6.1 billion. We remain committed to our balanced approach to capital allocation as the uniqueness of our high-quality reserve base, long-life low-decline production, and leading cost structure drive substantial and sustainable free cash flow. This provides significant opportunity for value growth, increasing returns to shareholders, and further financial strength, setting Canadian Natural apart from the global peer group. With that, I'll turn it back to you, Tim.

Thank you, Mark. Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars. We have a well-balanced, diverse, large asset base with a significant portion long life, low decline, which requires less capital to maintain. We continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective efficient operations, and by our teams who deliver top-tier results. We have a robust, sustainable free cash flow. Through our free cash flow allocation policy, returns to shareholders are significant. Our dividend was increased by 28% for the 22nd consecutive year in March and has a GAGR of over 22% over that time. Year-to-date and up to including August 3rd, Canadian Natural has returned approximately $6.4 billion to shareholders through approximately $2.4 billion in dividends and $4 billion through share repurchases. In August, the Board of Directors approved an increase to returns to shareholders by declaring special dividend of $1.50 per share, payable on August 31st to shareholders of record on August 23rd, 2022. In summary, we'll continue to focus on our safe, reliable operations and enhancing our top-tier operations. We'll continue to drive our environmental performance. We are in a very strong position being nimble and enhances our ability to create value for our shareholders. Canadian Natural is delivering top-tier free cash flow generation, which is unique, sustainable, robust, and clearly demonstrates our ability to both economically grow the business and deliver returns to shareholders by balancing our four pillars. With that, I'll now open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Dennis Fong of CIBC World Markets. Please go ahead.

Hi, good morning, and thanks for taking my questions. I think I'm going to start with just the capital allocation perspective of things. Having announced this $1.50 per share special, how should we be thinking about and understanding that you continue to allocate 50-50 between buybacks and debt repayments? How should we be thinking about potential future special dividend and what was kind of some of the prior catalysts that drove this decision here today?

Hi, Dennis. It's Mark. I think the best way to answer that is we are committed to our balanced allocation, as Tim and I talked about today, on the free cash flow. And that includes shareholder returns. And that's shown in our track record and, as you mentioned, our free cash flow allocation policy. And our board will continue to review incremental returns to shareholders going forward as part of our quarterly process and as part of our free cash flow allocation policy.

Great, thanks. Maybe the follow-up that I have here is around the Pike asset. You discussed two thermal in-situ ads at Pike. Obviously now that you've consolidated the working interest at that asset, Is it more along the lines of that you're sourcing steam from one of your existing either Kirby South or Jackfish, or is there kind of a new central processing facility and steam generation capacity in that region to kind of tackle that 28,000 barrels a day?

Yes, Dennis, it's Tim McKay here. Yeah, with the pike assets, as you indicated, we've consolidated that and we're now 100%. And so with that, we're able to leverage the Jackfish and Kirby facilities to to basically use existing assets to increase the production. So, yeah, it's very cost-effective, as you know, doing PATADs versus greenfield facilities. So, yes, with the facilities we have in the area, we're able to leverage that and do these PATADs into those various facilities.

Great. Thanks. I'll turn it back. Thanks. Okay. Thank you.

Thank you. The next question comes from Greg Party of RBC. Please go ahead.

Thanks, and thanks for the rundown. A couple of operating questions, Tim, probably more aimed at you, but I guess the first one is just on your in-pit extraction. Just reading the release, it looks as though you're a bit more serious on that, and then also interested in whether you're pursuing autonomous haul trucks just in AOSP Horizon.

Yeah, the in-pit extraction It's just work in progress. Obviously, with most of these projects, you have to do a lot of engineering work up front. To me, it's just normal course. If there's an opportunity there, we'll bring it forward to the board for their blessing. Right now, it's not in our plan. The teams at both mining sites are looking at a lot of different options to increase our production. Whether it's paraffinic, or increasing the SEO production on both sites. The teams are always looking for creative ways to increase production and lower costs. So that's really what it's all about in terms of our jobs.

Okay, and just related to that, just autonomous haul trucks, are you going down that road?

You know, it may be an option in the future, but if you look at our efficiencies on our trucks and... The way we operate, it's not necessarily a good option today. Our people are very safe. We have very high efficiency on our trucks. So at this time, it's an option. It's available maybe in the future, but right now our teams are doing such a great job, it really doesn't make sense at this time.

Okay, and just a regional second question, and I guess would have been on just your oil sands mining OPEX, right? I mean, the plan a few years ago and numbers you've hit before have been around 20 Canadian a barrel. Gas prices are a lot higher. Diesel is higher and everything else. Like, when you're kind of running, you know, down the fairway with Horizon AOSP in the world we're living in now, how should we think about OPEX?

Well, when you look at the underlying problems, the teams are actually doing a very good job in managing the cost we can control. And so, you know, I look at it, we'll probably be in the low 20s as an average. But really, you know, if you look at the underlining fuel costs, they were basically double. They were $1.50. Now they're close to $3 just in that piece. But the underlying costs, the teams are doing very good. And, you know, if we – Get the production volumes, keep it reliable on both sites. It really is down in the low 20s.

Okay, thanks very much.

Thank you. The next question comes from Doug Legate from Bank of America. Please go ahead.

Hello, this is David Fernandez in for Doug. Just wanted to touch on first on the realization front on the gas side, particularly robust in the quarter. Can you provide maybe some color around the mix with regard to like the diversified points of sales and your ability to kind of optimize the portfolio to redirect the volumes to premium pricing locations?

Yeah, Dave, you know, we've always, on the natural gas side, taken a diverse product diversification portfolio. So if you look at our total portfolio, 37% is set for export. So that's really all it is, is, you know, we've diversified our portfolio, which we've always indicated it was the best way to maximize value, not just for the fact that markets do change at times. And as a result, we're seeing those benefits here this last quarter.

Got it. And on the capital raises, the increase in MOT and the lead activity, can you maybe perhaps speak on beyond kind of just like the broader support of natural gas price environment? Are there any underlying takeaways with regard to your view around the regulatory front, particularly as it relates to your Montney acreage in B.C. versus Alberta, and how that might have affected into your plans?

You know, the B.C. issue there, we're confident that the B.C. government will sort that out here over the next while here. But at this time, it's not impacting us. The Farrow Creek piece that we have, it's all on site. It's really just liquid handling so that they can handle the liquid-rich Montanese. Really, there will be no impact in the short term. The Knobstick is a grassroots facility which leverages all our Montanese Grand Prairie acreage. Right now, it has no impact to us so far, and we're confident that the BC government will have it sorted out.

Got it. I appreciate the call. Thank you for taking my questions.

Thank you.

Thank you. The next question comes from Manal Halsav, TD Securities. Please go ahead.

Thanks. Good morning, everyone. I'll start with a question on the clear water issue. You mentioned that you have a ton of runway with 940,000 net acres current production in that 10,000 barrel per day range at the moment, which is obviously very small in the context of the broader portfolio. But what is your plan for the asset for the next couple of years? And how much do you realistically think you can scale it up with TMX becoming fully available in 2024?

Yeah, well, you never want to speculate on the future. in terms of pricing and that piece. But for the Clearwater, what's really nice about it is we have a lot of acres, a lot of it very consolidated. So really during the winter here, late fall, winter, we have a program to delineate various areas which we think are comparable to what we have at Smith. So it's just early days. The teams have been working behind the scenes on various opportunities. And what's really also unique about it is we're able to leverage our facilities in the Pelican area of good infrastructure that we can leverage off of. So it's just a great opportunity. It's just one of those, another opportunity in our portfolio.

Okay. So fair to say it's the first call on capital within your conventional oil-weighted business?

It looks to be a very good opportunity.

Okay. Thanks, Tim. And just to wrap things up on – sorry – just on turnarounds. You just completed Scotford and Horizon. And so my question is, what should we be expecting for turnaround activity in 2023? And more specifically, are there any out-of-cycle larger turnarounds that we should be aware of? And I'm thinking along the lines of the tie-in of the VDU and DRU furnaces at Horizon as an example.

Yeah, it's early to say, but I would suspect Horizon would be very similar to this year, so that 24- to 30-day outage. And you're right, they'll be doing the final tie-ins and work related to the BDU there. And then at Scotford, they should be off-cycle for next year, so it should be pretty minor what they need to do at Scotford.

Perfect.

Thanks, Tim. Thank you. The next question comes from Neil Meta of Goldman Sachs. Please go ahead.

Hi, this is Carly Davenport on for Neil. Thanks for taking the questions. I wanted to just start on the CapEx side. Can you talk a little bit about the $200 million ad that was mainly due to inflation and any read across for how those pressures could evolve? into next year, and then what kind of steps you're taking to mitigate inflation more broadly across the portfolio?

Yeah, see, so there is cost pressures. Primarily, you know, if I look ahead here, it's on the manufacturing side where you use a lot of steel, so your vessels, pipe, equipment manufacturing. So, you know, we see probably the highest pressure in that part and then less pressures on, of course, labour pieces and nits and bits there. So it's kind of broadly across, more focused, I would say, to the facility side at this point. Having said that, I look at our drilling, completions, pipelines and facility teams. They're doing a great job finding efficiencies and opportunities to mitigate a lot of the pressures. And so I look at the drilling costs for the first half of the year. You know, they were within kind of 1%, 2% of the per well cost. So, you know, while they're over, they've done a lot of work to try and mitigate those costs. So it's just, it's really broad brush. You know, it's always hard looking ahead what that number will be by going into next year. But, you know, today I think our teams are doing a really good job mitigating as much of the inflationary pressures as they can.

Great. That's a really helpful color. And then the follow-up would just be on the outlook for the incremental production ads that you talked about in 2023 and 2025. Could you just talk a bit about how you arrived at the optimal split between the liquids versus gas production ads and how we should think about the split of spend between the two more broadly going forward?

Yeah, what we always do is we just rank our projects from the highest return opportunities. And then, of course, with that, we had essentially 13 rigs working. So what there was is just a combination of what's the capability of the rigs, where are they in their location, and how could we optimize that to keep our costs down and maximize value in terms of that commodity in that area. You know, let's say, for example, in the heavy oil area, there's certain rigs that only can do certain types of work, and therefore what maximized value? So it's really, you know, kind of a two-fold opportunity. One is to understand what the rig's capable of, proximity, and what's the maximum value we could get out of those rigs.

Great. Thanks for the time.

Thank you.

Thank you. The next question comes from John Royal, JP Morgan. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. Just to follow up on the OPEX at the mine in the second quarter, I was looking at a dollar millions basis, not on the per barrel. Looks like it's up about 10% over 1Q, and you guys mentioned energy costs, but I'm wondering if there's any portion of that that's related to the maintenance overruns. I'm just trying to think through kind of how to think about the second half from a total OPEX perspective at the mine. I don't know if anything kind of hit in 2Q that wouldn't repeat.

No, really what it is is it's all barrels. And, you know, as you recall, you know, one of our mantras is safe and reliable operations. And so, you know, if you look at it, if the facilities are running reliably, you know, we're in excess of 480,000 barrels a day. So, you know, in that quarter, you know, with the downtime for the planned maintenance, a lot of those costs are still fixed. So you carry them through your turnaround. So, you know, in the case of Horizon, they did a great job in terms of, you know, getting through, you know, the turnaround very efficiently. And then on, you know, Scotford, they had a few issues around longers. But no issues. Really, on the oil sands mining, a huge portion is just efficiencies and maximizing value of barrels.

Thank you. Then, just curious on your thoughts on the SCO premium to WTI right now. I know there's been some maintenance and synthetic crude has a high distillate cut. Any other drivers that I should be thinking about there? How do you expect that to shape up in the back half of the year?

Yeah, I think you're exactly right with cracks beds and the distillants. So, you know, we got an extremely good premium here this last quarter. It is softening with the crack spreads tightening. So, you know, September, I believe, is closer to about $7 to $8 premium. But, yeah, to me, it's just, you know, the supply-demand equation. And, you know, with the synthetic, you know, with the cuts, being so high that, you know, it was receiving a premium. So, you know, I suspect it will tighten a bit, and at the same time, Heavy Oil could, you know, tighten a little bit as well.

Thank you very much.

Thank you.

Thank you. The next question comes from Manath Gupa of Credit Suisse. Please go ahead.

Hey, guys. My first question here is, If you could help us a little more on how to model the royalty rate for the oil sands now that Horizon is in a post-payout. I think this quarter was a little bit of an anomaly given the number of barrels produced. So anything you could help us out with, you know, how we can model the royalty rate per barrel on a go-forward basis?

Hi, Manav. It's Mark. You're right. Now that Horizon's in payout and was in payout for the whole quarter in Q2, I think a good way to look at it, although the royalty is based on a bitumen price, which we do publish in our MD&A, a good way to look at it is, you know, from Q2 to Q3, I would expect the rate, the royalty rate based on sort of gross pricing to be about consistent as you go through. Of course, the sliding scale rate will change with WTI pricing. In the current environment, I guess we've come off a little, but in the recent environment, we've been at the maximum rates. So I think at a starting point, if you look at the rate based on SEO or gross revenue, you'll see that it's pretty consistent now from Q2 to Q3. And we can help with that, but that's kind of a good starting point.

Thank you. And my quick follow-up here is when we look at the egress situation, like in your opinion, are we like four or five quarters away from the point where DMX expansion could still come online? Is that the timeframe we should be looking at?

Really, for Trans Mountain, you need to speak to them. We are just like you. We get the updates from time to time, and as far as we know, it's still on for that Q423.

Thank you so much for taking my questions.

Thank you. The next question comes from Roger Reed of Wells Fargo. Please go ahead.

Hey, good morning.

All right, Porter.

Just wanted to, and I apologize, missed the beginning of the call because of some conflicts and other coverage. But so if you addressed it or the question has been asked, I apologize. But I just wanted to understand is you've set up for some modest production growth. There's obviously been some pipeline constraints adjusted for some pipeline improvements. Just wondering how you're set up for the ability to export as needed and whether or not you see a situation developing here where you could actually end up with some excess as an overall statement between Canada and the lower 48.

Is that in terms of the natural gas piece, Roger?

Oil. Oil only was my main focus.

Okay. It's always a little difficult to forecast every individual company's forecast in terms of how it will impact the export pieces, but if I look ahead, it looks pretty reasonable for this year. Going into 2023, depending on the commodity prices, it'd be very good timing to have Trans Mountain come on. A lot of our projects, if you look on the thermal side, they take really one to two years for the oil to start to ramp up and peak. If the biggest piece is along the thermal side, we'll see that ramp up over the next few years, and hopefully by then TMX is on and covers off that growth.

Okay. And then one other question along the production side is you've come through the various turnarounds and some of the other maintenance. You know, a lot of these facilities are fairly young still. Just curious, are you seeing, you know, operational improvements post-turnaround or deep bottlenecking that's helping out?

Yeah. The teams on the oil sands mining site, I've been really impressed with. how they keep looking for opportunities to improve our operations and find incremental capacities. Yes, through the reliability project, we'll see an incremental of 5,000 barrels a day next year, which goes to 14,000 in 2025. Underlying that, they are looking at more opportunities to heat that up. You know, as the teams do the work and do the engineering, which is a lot of work, I shouldn't underestimate the work that these guys do on both sites to find those opportunities. But as they work through the details, you know, the teams push them forward for sanction, and we look to obviously every barrel is a low-cost barrel in addition. So they're very economic, provided the costs are good.

Okay, great. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. Our next question comes from Patrick O'Rourke of RBC Capital Markets. Please go ahead.

Good morning, guys. Thanks for taking my question. A lot of what I had to ask has already been covered off, but I'm wondering, in terms of the M&A markets and the outlook for potential acquisitions, I know there's no real gaps in the portfolio in any way, but you've been pretty inquisitive over the last several years. Are there any opportunities out there, and what's your sort of overall feel for the M&A market? I know we saw a pretty large transaction this week on the private side.

Yeah, the M&A market is always interesting. Obviously, you know, with the volatility of pricing, there's always a, you know, what I would call a bid-ask disconnect because it is very difficult to look forward and say what is a good price and what is a good opportunity. Currently, I don't really see anything that we have no gaps. In general, we try and find good opportunities to have a lot of growth potential for the future to maximize value. So I really don't see too much there, and I think the bid-ask today is not that great an environment to do any M&A.

Okay, great. And then a lot of folks on the liquid side, but in terms of the gas side here, obviously LNG markets and waterborne prices are pretty strong. Any intent to look to participate in those in the future with your large gas portfolio?

You know, there are opportunities once they're up and running. Our gas marketing folks generally are talking with a lot of different groups in a lot of different ways and always looking for some diversification as long as it maximizes the value of the product. So they're always working with different parties to look for opportunities on the natural gas side. As you saw with our realized pricing in the second quarter, they've done a really good job.

Okay, thank you very much.

Thank you. There are no further questions at this time. I will turn the call back to Mr. Casson for closing remarks.

Thank you, Operator, and thank you to those who joined us this morning. If you do have any follow-up questions, please give us a call. Thanks, and have a great day.

Thank you. This does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.