Canadian Natural Resources Limited

Good morning, everyone.

and thank you for joining Canadian Natural's second quarter 2023 earnings conference call. As always, 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 are Tim McKay, our President, and Mark Stainthorpe, our Chief Financial Officer. Tim will first speak to how Canadian Naturals targeting strong production in the second half of 2023 following the completion of planned turnarounds and through our strategic growth plan. Additionally, he'll touch on some highlights of our ESG achievements from our 2022 stewardship report to stakeholders that was released today, followed by specifics on our safe, reliable and world class operations. Mark will then summarize our financial results, our strong financial position, free cash flow generation and significant returns to shareholders so far this year. 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.

Good morning, everyone. In the second quarter, we achieved quarterly production of approximately 1.19 million BUEs per day, which included natural gas production at approximately 2.1 BCF per day, with liquids production at approximately 847,000 barrels a day, both reflecting the operational impacts of the wildfires in Western Canada third-party pipeline outage as well as planned turnaround activities in the quarter. The wildfires in Western Canada resulted in some assets being shut in at various times through the months of May and into July. There is no significant damage to our assets and essentially all the production impacted by the wildfires has now been restored and we continue to actively monitor the situation. We'd like to thank our field personnel, their families, as well as first responders, emergency response agencies, for their efforts over the past few months. As a result of strong execution on our thermal growth plan, Q3 2023 average thermal production is now targeted to be approximately 280,000 barrels a day, as well as Q4, which represents growth of approximately 30,000 barrels a day from Q4 2022 levels. As well, it's well-timed with Western Canadian select pricing improving both year to date and forecasted to remain strong for the remainder of 2023. Following the completion of the planned turnarounds at both our world-class oil sands mining and upgrading assets, production in July has been strong with a monthly average of approximately 513,000 barrels a day, capturing SCO pricing that continues to be priced at a premium to WTI. Our 2023 capital budget has increased by about $200 million compared to the original budget. In particular, the oil sands mining and upgrading has increased by approximately $130 million, largely reflecting increased scope and third-party costs relating to slaining activities to ensure safe and effective operations. The remaining, approximately $70 million, relates to the North American E&P and thermal operations as a result of increased non-op operations activities and increased work over activities on properties as well as some inflationary pressures. The 2020-23 targeted capital program is approximately $5.4 billion or approximately a 4% increase. Canadian Natural continues to be a leader on environmental, social and governance and has made it a priority to work collaboratively with industry and peers and governments to achieve meaningful GHG reductions in support of both Alberta and Canada's climate goals. Today, our 2022 Stewardship Report to Stakeholders was released, which highlights several of our ESG accomplishments, including top-tier safety performance, working together with 167 Indigenous businesses in which approximately $684 million in contracts were awarded in 2022. Additionally, we are an investment leader in R&D as we increased investment by 30% over 2021 levels, with over $587 million invested in technology development, deployment, focusing our reductions in reducing our environmental footprint, including greenhouse gas emissions and productivity improvements. I'll now do a brief overview of our assets, starting with natural gas. Overall, Q2 2023 natural gas production was approximately 2.1 BCF, which was comparable to Q2 2022 production. For North American operations, Q2 2023 production was slightly down at approximately 2.07 BCF versus the Q2 2022 production of 2.09 BCF, primarily a result of the wildfires, the third-party outage impact in the quarter by approximately 100 million cubic feet per day offset by our company's drill-to-fill strategy, adding low-cost, high-value, liquid-rich natural gas production volumes. During the quarter, the company drilled 21 net wells, of which 6.5 were brought on during the quarter, meeting targeted rates. Our North American Q2-23 gas operating cost was $1.35 an MCF, which is up 17% compared to Q2-2022 of $1.15, primarily due to higher service and power costs as well as the impact of lower production volumes resulting from the wildfires and the third-party outage. Our teams continue to focus on cost control and operational excellence. For North American light oil and NGLs, Q2 production was 102,553 barrels a day, down from Q2 2022 of 109,907 barrels a day, primarily as a result of the wildfires and third-party outages impacting liquids production by approximately 7,600 barrels a day for the quarter. Q2 2023 operating costs were 18.03, up from Q2 operating costs of 15.19, reflecting the impact of higher service and power costs and lower volumes due to the wildfires and third-party outage. Our international assets in Q2 had oil production of 26,520 barrels a day, which is comparable to Q2 2022 levels of 25,000 907 barrels a day. Our international assets continue to generate good cash flow and value to the company. Moving to heavy oil, production was 76,498 barrels a day in Q2 2023, up 15% from Q2 2022 of 66,521 barrels a day, primarily due to strong drilling results offsetting natural fuel declines. Operating costs in Q2 were at $20.07, down 12%, as compared to Q2 2022 operating costs of $22.86, primarily due to lower natural gas fuel costs. During the quarter, the company drilled 24 net heavy oil wells, of which 18 wells were multilaterals across our land base from Bonneville to Lloyd Minister and to the Clearwater area. as well as six-slot wells, which all results are untargeted to budgeted rates. A key component of our long-life low-decline assets is our world-class Pelican Lake pool, where the leading-edge polymer flood continues to deliver significant value. Q2 2023 production was 47,151 barrels a day, down 8% versus Q2 2022 average of 51,112 barrels a day, reflecting the natural decline nature of the property as well as the polymer injection rates that were reinstated in February 2023. The field is targeted to return to its historical decline rate of approximately 5% in the latter half of 2023. The team continues to focus on mitigating cost pressures with Q2 2023 operating costs of $8.55 per barrel, an increase from our Q2 2022 operating costs of $7.99 per barrel, reflecting higher service and power costs, as well as lower production volumes. With our low decline and very low operating costs, Pelican Lake continues to have excellent netbacks. In our thermal in situ areas in Q2 2023, we continue to leverage our continuous improvement culture, our expertise to deliver effective and efficient operations. Q2 2022 production was 238,941 barrels a day, down from Q2 2022 production of 249,938 barrels a day, as forecasted as a result of the planned turnaround at Primrose. Q2 operating costs were $14.59 per barrel, down approximately $4 when compared to Q2 2022 operating costs of $18.93, largely a result of lower natural gas costs. I'll now update our thermal growth class. At Primrose, the company is targeting to grow production by approximately 25,000 barrels a day, primarily from its two new CCS pads, CSS pads drilled in 2022. The production from these new pads, which targets strong quarterly production of approximately 100,000 barrels a day for this area in the third and fourth quarter. At Kirby, the company is targeting to grow production by approximately 15,000 barrels a day from Q4 2022 levels to approximately 65,000 barrels a day in Q4 2023, as the company progressed the development of the four SAGD pads in 2023. The three remaining pads are targeted to ramp up to full production capacity over the first nine months of 2024 at a pace of one pad per quarter. At Jackfish, production has been very strong, averaging approximately 113,000 barrels a day with minimum growth capitals since acquiring the asset, representing its long-life, low-decline nature. Production from these new pads are targeted to ramp up to their full production capacities in Q3 2024 and Q4 of 2024, respectively, supporting continued high utilization rates at Jackfish. Thermal in situ production is targeted to increase in the second half of 2023, averaging approximately 280,000 barrels a day. And with the stripped WCS differentials, it'll add incremental cash flow. In the company's world-class oil sands mining and upgrading assets, We had Q2 production averaging 355,246 barrels a day of SCO. As previously announced, the planned turnaround activities at the non-operated Scotford Upgrader and Horizon, as well as Horizon, were completed with Q2 operating costs that were $31.28 per barrel. Following the completion of the planned turnarounds at our world-class mining and asset upgrading, production in July has been very strong. with a monthly average of approximately 513,000 barrels a day, capturing strong SCO pricing. At Horizon, during the planned turnaround and as part of the reliability enhancement project, the company completed two tie-in of two furnaces. In August, both furnaces are targeted to be operational, increasing SCO production capacity by approximately 5,000 barrels a day, which is included in our company's 2023 production guidance. The reliability enhancement project is targeted to add approximately 14,000 barrels a day of additional SCO capacity in 2025 as a result of shifting the maintenance schedule from once per year to once every two years, reducing downtime for maintenance activities and increasing overall reliability at Horizon. I'll now turn it over to Mark for a financial review.

Thanks, Tim, and good morning, everyone. In the second quarter of 2023, we generated strong financial results with adjusted funds flow of $2.7 billion and adjusted net earnings from operations of $1.3 billion, while major turnaround activity was completed in the quarter. Balanced allocation to our four pillars continues, including significant returns to shareholders in the quarter and so far this year. Up to and including August 2, 2023, year-to-date returns to shareholders totaled $4.3 billion, including $2.9 billion in dividends and $1.4 billion in share repurchases. Our commitment to increasing shareholder returns is evident in our sustainable and growing quarterly dividend, which was increased to 90 cents per share from 85 cents per share earlier this year, marking 2023 as the 23rd consecutive year of dividend increases. Subsequent quarter end, the Board has declared a quarterly dividend of 90 cents per share payable on October 5th, 2023. As planned maintenance activities were completed in Q2, We are targeting strong production volumes and free cash flow for the second half of 2023 as we move towards our $10 billion net debt level, where 100% of free cash flow will be allocated to shareholders, as defined in our policy. And of note, the second quarter marked the six-year anniversary since the acquisition of 70% of the AOSP assets. As part of the acquisition, we issued 97.6 million shares. Shareholder turns through share repurchases since closing has been significant. resulting in a reduction of approximately 123 million shares, or 10%, to less than 1.1 billion shares outstanding, as at June 30, 2023, fewer shares outstanding than before the acquisition. Additionally, total corporate production has grown by roughly 50%, or 442,000 BUEs a day, when comparing Q1 2017 to Q1 2023. And since closing the acquisition, we have reduced debt by over 11 billion, or about 50%, significantly reducing our overall risk profile. This demonstrates our focus on safe, reliable production, a strong financial position, and our culture of continuous improvement. Finally, we're in a very strong financial position with debt to EBITDA at 0.7 times at the end of the quarter, and we continue to maintain strong liquidity, including revolving bank facilities, cash, and short-term investments. Liquidity at the end of Q2 was approximately $5.6 billion. When you combine our leading financial results with our top-tier reserves and asset base, this provides us with competitive advantages in terms of capital efficiency, flexibility, and sustainability, all of which drive material-free cash flow generation and strong returns on capital. With that, I'll turn it over to you, Tim, for some final comments.

Thanks, 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-life, slow-decline assets, will require less capital 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 our teams who deliver top-tier results. We have robust, sustainable free cash flow, and through our free cash flow allocation policy, returns to shareholders are significant. which includes our growing dividend, which has increased for 23 consecutive years. In summary, we continue to focus on safe, reliable operations, enhancing our top-tier operations, and we will continue to drive our environmental performance. We are in a very strong position, and being nimble enhances our capacity to create value for our shareholders. We 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 with our first target to reduce absolute Scope 1 and Scope 2 emissions by 40% by 2035 from our 2020 baseline. On our journey to achieve our goal of net zero GHG in the oil sands by 2050. 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 will open the call to 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. Should you like to withdraw your question, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Greg Party at RBC Capital Markets. Please go ahead.

Yeah, thanks. Good morning. Thanks for the rundown, guys. A couple of questions for me. Maybe to start, Mark, maybe just on the NetDev side, Have you got a reasonable shot at getting to $10 billion by the end of this year based upon what you see in the production but also the commodity price landscape?

Yeah, Greg, thanks for the question. It is very dependent on those commodity prices, so if you do see some strength in the commodity prices towards the end of the year, I think there is a possibility we could get there at the end. I think with recent strip pricing, I forecast it to be still very early 2024.

Okay. Okay, conservative as we like. And then maybe just shifting gears over to Tim, I wanted to dig into just the $513,000 that you put up at Horizon AOSP, but maybe a little bit more in terms of reminding us what the capacity is now across the combined asset, and then perhaps how we should be thinking about operating costs on a go-forward basis.

Yeah, great. Good questions here. So, I mean, with Horizon and ASOP, obviously, the teams continue to work on opportunities to increase reliability and obviously deliver safe and effective operations there. So, you know, with that, you know, during the turnaround, there was increased scope in terms of work that we felt needed to be done on the upgrader. And, you know, I'm actually very proud of our teams in terms of the effort, the way they approached it and dealt with all the work that needed to be done with that, you know, asset. So, you know, we've seen a little bit of inflationary pressures, but, you know, in general, I think we're on the right track in terms of making sure that those assets run reliably and, you know, consistently each and every day. You know, in terms of capacities, Horizon on a capacity day is pretty well kind of in that 280, maybe a little bit more here. We'll see with the new furnaces. They are forecasted or targeted to come on in the next couple of weeks, so that will be a great test for us in terms of seeing that increase. And ASOP, obviously we've been creeping it up over time, and really it's been doing a little bit better than its capacity here on flight. I think it's really early here. The numbers look really strong here for July. I'd like to get through July and into August more, and we'll see if we can keep that sustained rate. It's really, really positive. Both sites have done a really good job here coming out of the turnarounds.

Okay. Thanks to both.

Thank you. The next question comes from Manav Gupta at UBS. Please go ahead.

Guys, just wanted to get some clarifications. You generally have a very informed view of apportionments, differentials, and if you could also help us understand from the perspective of the TMX startup how you're thinking about it.

Sure. As far as apportionment, we don't see it being an issue. From all indications, TMX will be making a call for line fill here in the fall here, August, September, October. So, you know, from that aspect, I look at it as a very positive and very constructive for Canada's oil, WCS, because if you can appreciate, one, you'll have the line fill, and I believe it's up around 5 million barrels of line fill for that line. And then on top of it, the heavy oil capacity, I believe, is a little over 500,000 barrels a day. So it's going to take 500,000 barrels a day of heavy to a different market. So to me, I find that the WCS piece will be very constructive here. Obviously, typically, historically, you know, the winter months – It does widen a bit, but I mean, let's face it, it's 20%. That is still very strong on a relative basis.

Perfect. And a quick follow-up here is you are making investments to grow volumes, both at oil sands as well as in-situ projects. I expect it to start up somewhere around 2025. Help us understand how those development projects are growing at this stage.

Well, really, if you're talking about the thermal piece and the reliability pieces, those are really the only pieces that we've got going into next year right now. We'll be starting the budget process here in the fall for other areas and decide on if we do more pad additions at Primrose or at Kirby. So it's a little early on the forecasting into 2024 and 2025.

Thank you so much.

Thank you. Next question comes from Dennis Fong at CIBC World Markets. Please go ahead.

Hi, good morning, and thank you for taking my questions. I'll start with the first one as maybe a bit of a follow-up to Manav's question. You've done a really good job in terms of ramping the production at Wolf Lake and Primrose to 90,000 barrels a day plus for this year. What's your ability to kind of further optimize that capacity? I believe at your investor day you outlined facility capacity towards 140,000 barrel a day level, it seems like that's really low-hanging fruit when you think about, again, driving off X and so forth. So just any kind of commentary around how you evaluate that and what the opportunity is there.

Yeah, very good question there, Dennis. And obviously, you know, the drill-to-fill opportunities are obviously ranked quite highly So the team is progressing additional pads at Primrose, Kirby, where we could do those incremental volumes going into next year. Usual cycle time is about a year. So once we start sanctioning those pads, obviously they're not cheap. They would roughly be almost $170 million per pad. So it's a pretty big project, and they take about a year's cycle time. As we go into our budget process there, I can say that they are highly ranked as well as some of the SAGD opportunities and looking forward here into next year. So to your point, they are low-hanging fruit in terms of adding volumes.

Great. Great. Thanks for that context. And then the second question I have, switching more over to the oil sands side, and you mentioned it briefly in, I guess, your answer there to – Greg's question was just related to this kind of go-around. We saw a little bit of scope change as well as, I guess, maybe incremental found work. As you think about stretching the time between periods of planned maintenance, how are you managing the potential for additional found work or changes in scope as you kind of run through?

Yeah, that's a very good question. And, you know, really the key is having a very good Preventative Maintenance Program and Asset Integrity Program. And so I'm actually very proud of our team and the way we're approaching this. What they do is if they find any kind of concern, whether it's piping or equipment, they basically risk assess it. They go through a very detailed process in terms of will that piece of equipment make it until the next turnaround, Or is it something that has to be dealt with today? And, you know, I look at this last turnaround at Horizon. I mean, at both ASOP and Horizon, we saw, you know, some inflationary costs. But at Horizon, we have, like I said, a very detailed program. I'm very proud of the way they approached it because they saw potential issues that would potentially decrease our reliability or decrease our utilization there. And as you know, any... downtime at something like Horizon is very costly. They looked at it. They did that work during the turnaround very effectively. To me, the key in the oil sands is reliability. If you can produce reliably every day, you can make very good returns. Obviously, if you miss something, either through your PM program or your integrity program, it can be very costly in terms of unplanned downtime. So I look at it. It's setting us up well for that two-year run by them doing thorough reviews of our piping, of our equipment, to make sure it can run reliably.

Great, great. Thanks. I appreciate you answering those questions. I'll turn it back. Thank you.

Thank you. The next question comes from Manuel Holschoff at TD Securities. Please go ahead.

Thanks and good morning, everyone. I'll start with a question on the acceleration of the timeline for ramp up of new thermal capacity. You talked about strong execution, but was there anything that really stood out as driving that better than expected outcome? And I guess I'm asking that in the context of what still looks to be a fairly challenging operating environment.

Yeah, you know, all the way along, which is a very good question, because really we've always said that the key to delivering good cost control is having, you know, a very tight execution plan and then sticking to the plan. And so, you know, the one thing with thermal is it's very condensed, so we have, you know, it's in all proximal areas, and it's very much the same pad ads by having a very structured pad ad design. You can do it cost effectively. So what we're seeing is the first pad, it took more time and then as we keep doing these pad ads, the teams are learning ways to do the construction better and more cost effectively and timely. So, you know, it's just by doing things one after another, you can continually improve. And that's kind of been our mantra all the way along is that by keeping things simple, keeping them effective, you can continuously improve those operations.

Terrific. And then moving on to natural gas drilling activity, I was just looking at the numbers year on year. It looks like you're effectively tracking right in line with last year in terms of net wells drilled. What does the rest of the year look like in terms of planned activity? I know you typically address this in the presentation, but I don't see the update on the site yet, so I'm going to ask that question. And then, how many rigs are currently active relative to the beginning of the year, to the extent that we can comment on that?

Sure. Well, today we have eight rigs. If you go back Q1, I said we'd probably be in the 9 to 10 rate. The rigs, so we're a little less today, but to me that's just a timing issue per se. But my feeling is, and we've reduced the natural gas count, I see us continuing with that, and to me the costs on the natural gas side for drilling completions, the fracking, you know, we're, in my mind, pressured here in the first quarter. And then to that other side, pricing has come off. So I think, you know, those will have opportunities maybe later in the year. And, you know, we'll see how it looks here as we go into the, you know, more in towards the fourth quarter. But I don't feel any pressure to accelerate natural gas volumes in the market here today.

Thanks, Tim. I'll turn it back.

Thank you.

Thank you. Next question comes from Neil Mehta at Goldman Sachs. Please go ahead.

Yeah, good morning, Tim and team. Just two quick questions here. First on managing inflationary forces, can you talk about where you're seeing areas of pressure and areas of relief, and then put that in the context of the $200 million budget bump this year, which you talked a little bit in the prepared remarks about.

Yeah, the big ones here that I see today are labour and labour continues to be pressured. With that, I would say the supply side and equipment deliveries are pressured and what we're doing today is we have to order, shall we say, further ahead for activities in the future and so The supply piece is difficult. The transportation piece was inflated as well in terms of trying to get the stuff out of the ports of Vancouver and that. So we're seeing what I would call little incremental pieces. Obviously, food costs, power costs have gone up. So to me, all that has to kind of work through your system because our manufacturers of vessels or equipment I do see the increased power costs. They do increase the labor costs. And you can't today offset it one-to-one. On the other side, as things start to level out, you will find, again, efficiencies. But in the short term, those cost pressures roll through the whole system. So to me, it's just a matter of ensuring efficiency. what you can going forward.

Yeah, thanks, Tim. And then the follow-up is just on SEO. You talked a little bit with Manav about the WCS outlook, but SEO continues to trade very firm at a premium relative to WTI. I would imagine part of it is just the higher distillate cut and diesel margins are strong, but any perspective you can provide on how you think about the outlook for Syncrude pricing would be great, too.

Yeah, I think it's very constructive as well. And to your point with the high disc lit cut, you know, it can, it will trade at a premium. And, you know, again, I just look at it, the whole oil side, in my mind, looks very constructive here for Western Canada because, you know, incremental capacities, even on the light oil side, you know, you get another, you know, 300,000 or so of incremental egress You know, people have to actually, you know, look at where they go with their volumes in terms of trying to get the best price for it. So I just look at both WCS and WCO as being very constructive here going into the fall. Thank you, sir.

Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. Next question from Doug Liggett at Bank of America. Please go ahead.

Hey, guys. This is actually Clay on for Doug. So, thanks for taking the question here. I've only got one because a lot of things have already been touched, but this is also a follow-up on TMX. I understand that you guys are a contractor shipper and are involved in the tariff negotiation. Just wondering if you can walk through the resolution timeline and also maybe give us an idea of the cash flows and how that would trend during line fill. Because the way I'm thinking about it is you'll obviously be placing barrels into the system, but it's not clear to me that the cash will be realized on a real-time basis or if there will be some lag.

Yeah, well, on the second part of that question, there's likely to be some lag on the cash flows realized. That's right, because you'll be using some barrels for fill.

And then on the first question, you know, with the TMX, So the way the process works is the decision maker is the CER, so it's the Canadian Energy Regulator. And so what they did is, I think yesterday they came out with the questions, not only for TMX, but a process here in terms of supplying information to the Canadian Energy Regulator. And so with that, to me, it will just be under the process that they define. And if, you know, I would say it's going to take a few months maybe, but really it's out of our hands in terms of the actual timing. To me, the CER does what it's supposed to do and take a firm look at both sides, the information each side provides. and then makes a decision in appropriate time. So, you know, from that aspect, to me, it's just normal business in terms of how we have to work under the Canadian Energy Regulator's rules.

I appreciate that. And just to be clear, the tariff will be defined before line fill starts. Is that right?

We don't know. I can't say that definitively because, you know, the line fill... could start here maybe in August, September. We don't have control of that either. So, you know, really, that would be a better question maybe for TMX on when they expect to see the line fill.

Got it. I appreciate the answers, guys. Thank you.

Okay, thank you.

Thank you. At this time, there are no further questions, and you may proceed.

Thank you, Operator. And thank you, everyone, for joining 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 you for participating and we ask that you please disconnect your lines.