Canadian Natural Resources Limited

Good morning. We would like to welcome everyone to the Canadian Natural Resources 2022 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 3rd, 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.

Thank you, Operator. Good morning, everyone. and welcome to Canadian Actual's third quarter 2022 earnings 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 Stainforth, our chief financial officer. Tim will first speak to highlights on our safe, reliable operations that continue to drive long-term shareholder value. This will include an overview of activities in the quarter, including specifics on our world-class assets and operations. Mark will then provide an update on our strong financial results, including our robust financial position, free tax regeneration, and increasing shareholder returns. To close, Tim will summarize our call prior to open up the line for questions. With that, I'll turn it over to you, Tim.

Thank you, Lance. Good morning, everyone. Our focus on cost control, our culture of continuous improvement, combined with our disciplined and balanced approach to capital allocation continues to drive strong operational and financial results as our 2022 capital program remains unchained at $4.9 billion, excluding acquisitions. In the third quarter, we achieved record total quarterly production of approximately 1.34 million BOEs per day, which included record natural gas production at approximately 2.13 BCF a day, all which received strong realized pricing in the quarter, averaging 657 per MCF as a result of our diversified sales strategy. We also had liquids production at approximately 983,700 barrels per day, reflecting strong operational performance across all our assets. including our long-life zero-decline oil sands mining and upgrading assets, which was 487,553 barrels per day of SCO, comprising approximately 50% of the company's total liquid production in the quarter. Our hard-valued SCO captured $8.87 US dollar price premium to WTI in the quarter, driving strong SEO pricing and generate significant free cash flow for the company. Subsequent to the quarter end on October 4th, the Pathways Alliance reached an important milestone, securing the right to continue exploration work for our CO2 injection hub, allowing us to advance to the next stage of evaluation. As a result, we are continuing to progress our stakeholder engagement detailed engineering work on our approximately 400-kilometer-long trunk line that will carry captured CO2 from the oil sands to the storage hub. We'd like to thank the Alberta government for their continued support as we work together on this ambitious GHG emissions reduction project. Additionally, we appreciate the federal government's recent public statements in support of Canadian oil and gas sector's role in global energy security along with the commitment to be competitive on a fiscal framework for carbon capture. Both these developments are important steps to help Canada's oil and sand industry meet its commitment of net zero GHG emissions by 2050, which will have the industry and governments investing approximately $24 billion between now and 2030 on the Pathways Foundational Carbon Capture Storage Project and other emission reduction projects. As well as a result of Canadian Naturals' effective and efficient operations and a progressive royalty and tax system in the provinces and Canada, payments to government have been significant for 2022. Total forecast payments from Canadian Naturals to Canadian governments from income taxes, property taxes and royalty is estimated to be approximately $11 billion in 2022, an increase of approximately $6 billion or 120% from 2021 levels. Additionally, our 2022 capital spend forecast of approximately $4.9 billion, excluding acquisitions, is an increase of approximately $1.4 billion, or 41% from 2021 levels, as we deliver responsibly produced energy to help meet global energy demand. As well, in 2022, we have returned approximately $4.9 billion to our shareholders through base dividend and special dividends. an increase of $2.8 billion, or 127% from 2021 levels. I will now do a brief overview of the assets starting with natural gas. Overall, Q3 2022 natural gas was approximately 2.13 BCF, which was a record for the company. Slight increase over Q2 2022. For North American operations, Q3 2022 natural gas production was approximately 2.12 BCF, versus the 2.09 BCF for Q2 2022, up primarily as a result of the company's strategic decision to invest in our drill-to-fill strategy, adding low-cost, high-value, liquid-rich natural gas production volumes, as well as authentic acquisition. Our Q3 2022 North American natural gas operating cost was $1.13 per MCF, which was down 2% when compared to Q2 2022 of $1.15. reflecting good operating performance as their teams continue to focus on operational excellence. Some area highlights are, at NIG, a six-well pad came on production in Q3 with very strong capital efficiency of approximately $2,700 per BOD. October 2022 monthly production from this pad averaged approximately 55 million cubic feet per day of natural gas and 3,200 barrels of liquids, exceeding budgeted rates and maximizing existing facility capacity. In Townsend, the 2-well pad came on production in July 2022 at a capital efficiency of approximately $4,800 per B.U.E.D. Production from this pad continues to be strong with an average October 2022 monthly production of approximately 20 million cubic feet of natural gas. For North American light oil and NGL, Q3 production was 109,255 barrels a day, comparable to Q2 2022, primarily as a result of strong drilling results and previous acquisitions. Q3 2022 operating costs were $16.68 a barrel, up 10% from Q2 operating costs at $15.19, primarily due to increased power costs in the quarter. Our drilling program continues to show strong results. At Wembley, a three-well pad came on production in July at a capital efficiency of approximately $6,000 per VUED, October 2022 monthly production from this pad averaged over approximately 2,000 barrels a day of liquids and 7 million cubic feet of natural gas. At Gold Creek, a two-well pad came on production in September at a strong capital efficiency of approximately $4,300 per BUD with strong October 2022 monthly average production of approximately 2,100 barrels a day of liquid and 16 million cubic feet of natural gas. Our international assets in Q3 had oil production of 24,493 barrels a day, which is down from Q2 2022 levels of 25,907 barrels, primarily due to planned and unplanned maintenance in the North Sea and offshore Africa. Our international assets continue to generate good free hash flow and value for the company. Moving to heavy oil, production was 68,933 barrels a day in Q3, up 4% from Q2. primarily due to strong drilling results in 2022. Operating costs in Q3 were lower at 21.30 per barrel versus our Q2 operating costs at 22.86 per barrel, primarily lower due to lower natural gas fuel costs and offset by higher trucking costs. Canadian Natural has one of the largest land bases of Clearwater rights at approximately 940,000 net acres, of which the company has drilled 14 net or multilateral clear water wells in the Smith area in Q3, bringing the total clear water wells drilled and on production year to date to 33 net wells. And the company's total clear water production in September averaged approximately 12,300 barrels a day, an increase of 8,400 barrels a day from the beginning of 2022. A key component of our long life low decline assets is our world-class Pelican Lake pool. where leading-edge polymer flood continues to deliver significant value. Q3 2022 production was 50,051 barrels versus Q2 average of 51,112 barrels, reflecting the low-decline nature of this property. The team continues to focus on mitigating cost pressures, and we had good Q3 2022 operating costs of $8.89 per barrel, An increase from our Q2 operating costs of $7.99, primarily due to the higher power costs in the quarter. With our low decline, very low operating costs, Pelican Lake continues to have excellent netbacks. In our thermal in situ areas in 2022, we continue to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations. In Q3 2022, production was 243,393 barrels a day, down from Q2 production of 249,930 barrels per day, primarily as a result of planned maintenance at Jackfish in the quarter. Q3 operating costs were $15.63 per barrel, down compared to Q2 operating costs of $18.93 per barrel, primarily a result of lower natural gas costs, offset by higher power costs in the quarter. At Kirby, the company is progressing as budgeted, with the three SAGD well development and is targeting to begin steaming on the first pad in Q1 2023 with full ramp up to production capacity in Q3 2023. At Primrose, the company completed drilling the two CCS pads on time and on cost. These two pads are targeted to begin steaming and come on production in Q3 of 2022, 23, sorry. The company's world-class oil sands mining and upgrading assets, we had a strong Q3 2022 production, averaging 487,553 barrels of SEO, with Q3 operating costs that were strong at $22.35 a barrel. Both the change in production and operating costs compared to Q2 was primarily a result of the Scotford and Horizon plan maintenance turnarounds in the second quarter. During this quarter, SEO prices were very strong, resulting in a premium pricing for SEO at $8.87 US per barrel above WGI, which added additional free cash flow. Subsequent to Q3 2022, the company's oil sands mining and upgrading assets experienced unplanned outages at both Horizon and at the Scotford Upgrader in the month of October, resulting in the Q4 targeted production range of 450,000 to 460,000 barrels of SEO. Both oil sands mining and upgrading assets are now up and running at full capacity, and at Horizon, we will be enhancing our piping integrity and maintenance programs to support safe and reliable operations. At Horizon, the 14-4 reliability enhancement project is progressing as planned and targets to extend major maintenance cycles from one per year to every second year, increasing the SEO production capacity by approximately 5,000 barrels a day in 2023, increasing to approximately 14,000 barrels a day in 2025. Now I will turn it over to Mark for a financial review.

Thanks, Tim, and good morning, everyone. Our third quarter financial results were very strong, with effective and efficient operations driving adjusted funds flow of $5.2 billion and adjusted net earnings from operations of $3.5 billion, while our capital program for 2022 remains on track. Returns to shareholders have been significant and increasing throughout 2022, as we have returned year-to-date a total of approximately $10 billion to shareholders through $4.9 billion in dividends and $5 billion through share repurchases, equaling about 71 million shares repurchased year-to-date up to and including November 2nd. Our dividend is growing and sustainable and is supported by our long life, low decline assets, which deliver significant and sustainable free cash flow. Subsequent to quarter end, the board of directors has approved a 13% increase to our quarterly dividend to 85 cents per common share from 75 cents per common share. This represents the second dividend increase in 2022 and demonstrates the confidence that the board has in the sustainability of our business model, the strength of our balance sheet, and the nature of our diverse, long-life, low-declined asset base. This continues the company's leading track record, now with 23 consecutive years of dividend increases with a significant compound annual growth rate of 21% over that period of time. When compared to the beginning of 2021, our dividend has doubled to the current rate of $3.40 per share annually and has been sustainable through all cycles. This, of course, is in addition to the special dividend of $1.50 per share we paid in Q3. Our strong financial position continues to get stronger. Debt to EBITDA is at 0.5 times at Q3, with debt targeted to decline further throughout 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 Q3 was approximately $6.5 billion. Our disciplined approach to capital allocation maximizes shareholder value, and our free cash flow allocation policy is unique and balanced, providing significant returns to shareholders and a strengthening balance sheet, all while continuing to grow our business. 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, which a significant portion is long-lived low-decline assets, where it requires less maintenance samples to maintain volumes. We continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective and efficient operations, and by our teams who deliver top-tier results. We have a robust, sustainable free cash flow, and through our free cash flow allocation policy, returns to shareholders are significant. Our dividend will increase by 13%, marking 2023 as our 23rd year of consecutive increases, and has a GAGR of approximately 21% over that time. Year-to-date, Canadian Natural has returned approximately $10 billion to shareholders through approximately $4.9 billion in dividends and $5.1 billion to share repurchases. In summary, we'll continue to focus on safe, reliable operations and enhancing our top-tier operations and we will continue to drive our environmental performance. We are in a strong position, and being nimble enhances our capacity to create value for our shareholders. We will continue to apply that same drive to ESG, environmental, social, and governance, a significant factor in our long-term sustainability as we move forward to lower our carbon emissions across the asset base and our journey to achieve our goal of net zero GHG emissions in the oil sands by 2050. Canadian Natural is delivering top-tier free cash flow generation, which is unique, sustainable, and robust, and clearly demonstrates our ability to both economically grow the business, deliver returns to shareholders by balancing our four pillars. With that, I will now open the call to questions.

Thank you, sir. Ladies and gentlemen, we now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order that they are received. Should you issue the client in the polling process, please press star followed by two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Greg Pardee with RBC. Please go ahead.

Yeah, thanks. Good morning. Thanks for the rundown, guys. Tim, I was wondering, could we just dig a little bit into the two outages? I mean, good to hear that both plants are back up and running and so on. But was there anything unique or specific in terms of, like, it's pretty odd, right, for you guys to have two issues like this in a quarter?

Yeah. So, you know, the first one, which is probably, you know, the major portion of it was that Horizon. And what it was is a drain line off a Coker charge pump. basically had some corrosion, erosion issues. And so, you know, while we change out these pumps periodically, it wasn't identified that this was a risk. And so it caused a little bit of an outage. Obviously, you know, in our PM program, we're going to be doing a little more digging into when we change these pumps out to make sure the integrity of these drain lines are maintained. are pristine so that we can deliver safe and reliable operations. So that was really the big piece there with Horizon. And then with the Scotford piece, obviously we don't operate that facility, but again, it was a corrosion on a water line that they successfully managed to put a device around it to stop the leaking. And again, you know, the learnings from these, you know, obviously are, you know, you can fly them across not only at Horizon but in Scotford. So, you know, yeah, it is very unique for us to have these kind of outages. But at the same time, one thing we do very well is learn from these opportunities and start delivering even better. So it was quite rare and quite unique.

Okay, understood. No, thanks for that. And the second question is on pathways. What is, you know, what does the runway timeline look like in terms of, you know, increasing spending on this? Obviously, there's credits and there may be additional incentives to come. But would spending in earnest and installation of hardware and so forth, is that really in the 2025 through 2030 corridor? Here's how we should think about it.

While the spending actually starts this year, there's a lot of environmental work. Obviously, we would like to submit the regulatory pieces as soon as possible, hopefully here in 2023. And then with that, you would look to order pipe for the trunk line. So there's a lot of work being done by approximately 200 different individuals between all the companies to expedite the project. Obviously, you know, with only getting it all a month ago today, there's a lot of work being done. But the whole, as we start to put together the plan, we'll start to signal that out into our plan. But it really is that there's a lot of work happening right now. Obviously, we're trying to do it as quickly and as effectively as we can.

Okay. Thanks very much, Tim.

Thank you, Greg.

Thank you. Your next question comes from Dennis Fung with CIBC World Market. Please go ahead.

Hi, good morning, and thanks for taking my questions. The first one is just on the solvent project that you have in your thermal in situ assets. 50% or 40% to 45%, depending on what timeline, I guess, reduction in GHG emission intensity is quite impressive. I was just curious as to what maybe some of the milestones or benchmarks you might have to further roll out the solvent program to other areas of Primrose, especially just given kind of some of the initial success that you're seeing there.

Yeah, at Primrose, it's really just time. Everything is on track. We believe it's – working very well, and probably by the fall of next year would be when we believe that we'll have enough information to say we can go more to a commercial scale. So that one actually is looking very positive, but it's early in that. And then as well, if you recall, at Kirby, we're going to a commercial scale pad at Kirby North here in the near future. So that... There's no showstoppers that we can see today, but it's obviously just making sure that we understand it, and then as we put them into a commercial-scale operation, that it continues to meet what we expect.

Great. Great. Just as a quick follow-up to that, are some of the build-outs for the deployments at a commercial scale already incorporated in some of your either sustaining or strategic capital, or would that be potentially incremental versus what we have for this year and next?

The curvy north is in our plan today. Obviously, if the Primrose one works very well, then we'd look to modify our plan in the future. But obviously, it isn't into our capital next year because we don't have the results of the pilot.

Great. Great. And then if you wouldn't mind, just a quick question on the clear water. You've seen, frankly, very strong ramp up of production there. I was just curious as to how we should be thinking about the production infrastructure, as well as the processing capabilities that you have within the region. Obviously, being able to leverage off of Pelican is helpful, but just if you wouldn't mind providing a little bit more color on that side. Thanks.

Yeah, there's really no showstoppers. Obviously, Pelican, we have ample capacity to handle the production, and the gas handling is being directed to our Collingwood gas plant, which has been in existence for many years. So there is no showstoppers. To me, it's more about just following through with our development plans and delivering the production growth in the Clearwater.

Great, thanks.

Thank you, guys. Thank you. Your next question comes from Mano Halshaf with TD Securities. Please go ahead.

Thank you, and good morning, everyone. Maybe I'll start with a follow-up to Dennis's Clearwater question. Would you be in a position to walk us through some of the details on well-designed cost and IP rates based on the 33 wells you've drilled to date, and more generally, how is that play currently competing for capital?

It competes very good from a capital basis. The wells generally are roughly in the range of about 275 to 300 barrels a day. The drilling costs are very good in the sense that because it's a very tight multilateral flow area, you're able to control your costs and learn from as you drill the wells moving forward. So from an economic point of view, it competes very well. To me, it's just about managing the business in the area so that you don't start to escalate the costs. So obviously, if you look back in time when we had heavy oil and a large heavy oil project, you basically started to escalate the cost pieces quite rapidly. So to me, it's just more, you know, the pace of development is important to make sure that we don't accelerate the cost piece. And, you know, they're actually doing quite well in terms of costs. On a BOED basis, you're probably looking in that $2,500, maybe $2,000 of BOED. So from a compete point of view, it competes extremely well across our base.

Thanks for the detail, Tim. And then just moving on to the Horizon Reliability Enhancement Project, and the goal there is you know, as you talked about, is to move that major turnaround interval from one to two years. It looks like you're getting at least some of the benefit of that next year, since you're guiding to a 5,000 barrel per day capacity bump on synthetic, but maybe you can confirm whether that's correct and how Horizons turnarounds are going to get staged from here on in. And then the final piece, a lot of questions in here, apologies, but the final piece is whether or not the plan is to get the AOSP on that every second year track as well.

Okay. So the first question related to Horizon. So what is actually happening at Horizon is some of the equipment we installed this last year during the turnaround. And so that gives us a little bit of a bump in terms of reliability and capacity into next year. And then what happens is when we do the second turnaround here at Horizon in 2023, additional equipment gets installed and then basically commissioned and everything else there next year. So it's just doing it in a methodical way so that we see these increments happen. And then obviously, the reason why you see it in 2025, because that is when the year that you actually would not do that turnaround. So it's just basically as we install the equipment, certain pieces are commissioned, and we get that benefit over time. As far as ASOP, ASOP, in terms of the upgrader there, what they do is similar but different. What they do is they have two different pieces of equipment. They take one down one year, and then the second piece the next year. And then I believe the third year they have a full big outage. So, you know, we don't operate it, but historically that's what we've kind of seen is that they do certain pieces every second year followed by a bigger turnaround outage.

Thanks, Tim. I'll turn it back.

Thank you.

Thank you. Your next question comes from Neil Matai with Goldman Sachs. Please go ahead.

Hi, thanks for taking the time. This is Nicolette Slusser on for Neil Mehta. So just first on CapEx, is there any sort of additional commentary you can provide around next year's spend as we think about the higher cost environment and with incremental production growth? And then if we should be thinking about any upward revisions to maintenance capital?

Yeah, you know, for 2023, we're still going through our – budgeting process, and so it's a little early there, but to your point, we are seeing still cost pressures, productivity pressures, and so we're walking through that today, but I don't see any big showstoppers. I just think that as we get busier into next year and companies start to have a little more activity, there's pressures on productivity and pressures on costs. So it's a little early to say, but I don't see any major differences from this year to next year, just those two items.

Okay, thank you for that. And then on the gas side, understand close to 40%, I think, is exported to markets outside of ACO. As you ramp gas volumes in the 23 and 25 timeframe, How should we be thinking about the marketing side relative to the current sales mix?

Yeah, you know, our marketing team, obviously, you know, we have longer-term plans of what we can do in terms of the natural gas market. So I would model it very similar to that going forward. Obviously, you know, we are looking ahead, and I think you see it in our gas pricing that – that we are looking ahead in terms of whether it's outages, whether it's export capacity that's needed. We're always looking ahead for opportunities to diversify our sales portfolio. So I would potentially look at it along the same lines of what we have today, which is roughly 37%. But, yeah, we're always looking ahead and we're always diversifying and we're always making sure that we have a strategy for our natural gas.

Great. Thanks so much.

Yep. Thank you. Your next question comes from John Royal with J.D. Morgan. Please go ahead.

Hey, guys. Good morning. Thanks for taking my question. Do you have any thoughts at this point on when you would expect to hit your $8 billion net debt floor? I think you did kind of mathematically push it out this quarter just with the payment of the special dividend. How do you think about that decision between doing further incremental returns like you did with the special versus kind of working your way down towards that floor level?

Hey, John, it's Mark here. Thanks for the question. Yeah, you know, when you think about the capital allocation, it's really a function of being balanced. And I think you've seen that with significant debt repayment, of course, dividends, increasing on a base dividend, as well as the special you mentioned. And then, of course, we have our significant share buyback program ongoing. So it's really more of a balanced approach on how we do that. And you're right, you push out the debt balance. So now when we were looking before, it was kind of Q4, Q1. But now, of course, with the special in Q3, that'll push out later into next year. Now, it really depends, of course, on your price forecasting. There's significant sensitivity to some of those items. So it really depends on what you're thinking on price forecasting.

Okay, thank you. And then just another one on gas. As such a large producer, maybe you can speak to your view on the fundamentals in Canadian gas and prices going into 4Q and next year. Just any outlook you can share there.

Well, obviously, what we've seen is some of the export capacity pieces have taken longer to get into service. So to me – you know, there's a lot of activity on the natural gas side. I think the results for ourselves have been extremely good, and I suspect other companies have similar good results. So I think it will put a little pressure on it, depending on the timing of some of these expansion projects. And I actually haven't seen the maintenance outages scheduled here for, uh, next year. But, uh, you know, what we've seen is, uh, with the increase, uh, gas, uh, and depending on what kind of maintenance is being done on the line, it can put some, uh, undue pressure on, uh, the eco price here into next year. So it's, it's difficult to say, uh, directionally though, it looks like more gas, uh, um, is going to put more pressure on the system. And so the timing of these, uh, expansions and, and, uh, incremental volume expansions are important.

That's very helpful. Thank you.

Thank you. There are no further questions at this time. You may proceed.

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

Ladies and gentlemen, this concludes your conference call for today. We thank your participation and ask that you please disconnect your lines.