Canadian Natural Resources Limited

Good morning. We would like to welcome everyone to Canadian Nationals 2024 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, this call is being recorded today, August 1, 2024, at 9 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance Cassin, Manager of Investor Relations.

Thank you. Good morning, everyone, and thank you for joining Canadian Natural's second quarter 2024 earnings conference call. As always, I'd like to remind you of our forward-looking statements. 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 advisory section in our financial statements, That includes comments on non-GAAP disclosures. Speaking on today's call, we used Scott Stelter, President, and Mark Stainthorpe, our Chief Financial Officer. Scott will provide highlights on our strong operational quarter that included completion of planned turnarounds, setting us up for robust targeted production in the second half of the year. Mark will then summarize our excellent financial results, including significant liquidity and returns to shareholders. To close, Scott will summarize prior to opening up the line for questions. With that, I'll pass it to you, Scott.

Thank you, Lance, and good morning, everyone. The strength of our well-balanced and diverse portfolio combined with our ability to execute safe, effective, and efficient operations delivered an excellent second quarter for Canadian Natural. Our team managed our planned maintenance activities very well and optimized production, resulting in a strong second quarter with production of 1.29 million BOEs per day, which is an increase of 8% compared to Q2 of 2023. Our thermal assets delivered strong production during the second quarter, primarily due to better-than-expected performance from the new pads, combined with early completion of planned turnarounds at Jackfish and Kirby. At Horizon, we successfully completed the final tie-ins related to the reliability enhancement project, as well as planned turnaround activities. Through optimization efforts, our team completed the turnaround at Horizon in 28 days, two days earlier than budgeted. Subsequent to the quarter end, we achieved significant milestones at Horizon in July 2024 with production of the one billionth barrel of bitumen since operations began in 2009. Supporting this milestone is the company's significant total approved SEO reserves of approximately 6.9 billion barrels with a reserve life index of 44 years as at year end 2023. Also during July, SCO production of approximately 500,000 barrels per day was achieved, driven by strong production at horizon benefiting from the final tie-ins and commissioning of the reliability enhancement project. The commissioning of TMX pipeline during the second quarter and the positive impact this incremental egress has had on the Canadian economy represents a significant achievement for Canada. The impact on the energy industry has been and will continue to be positive through the narrowing heavy oil differentials, improved realized pricing along with the development of a more diverse market for Western Canadian crude oil. TMX is a significant accomplishment, adding much needed egress capacity and increasing exposure to global market pricing for crude oil products. Canadian Natural's strong execution, effective and efficient operations combined but stronger realized prices drove significant free cash flow during the quarter, despite planned turnarounds. I will now run through our Q2 operational results. Liquids production in the second quarter averaged approximately 934,000 barrels per day, and natural gas production averaged approximately 2.1 BCF per day. On the conventional side of the business, Primary heavy oil production averaged approximately 79,100 barrels per day in the second quarter, which is a 3% increase compared to the production volumes in the second quarter of 2023, reflecting strong results from multilateral wells on our extensive heavy oil land base, which is the largest in Canada and includes the Manville and Clearwater fairways. Primary heavy oil operating costs averaged $17.59 per barrel in the second quarter, which is down 12% from the second quarter of 2023, primarily reflecting lower energy costs. We are seeing excellent results on our multilateral wells, driven by our culture of continuous improvement and strong execution from the team. In 2024, we increased the average length of our multilateral heavy oil wells by 16% to approximately 9,900 meters compared to an average budgeted well length of approximately 8,500 meters. This has lowered our cost per meter and increased our reservoir capture. As a result of our optimized longer well designs and the technical expertise of our teams, average initial peak rates of multilateral on-stream in the first half of 2024 have increased 30% to 230 barrels per day per well, compared to our average initial peak rates of 175 barrels per day per well. Our Pelican Lake production averaged approximately 45,000 barrels per day in the second quarter, which is down 5% from the second quarter of 2023, reflecting low natural field declines from this long-life world-class asset. Operating costs at Pelican Lake were $8.92 per barrel in the second quarter, an increase of 4% compared to the second quarter of 2023, which was primarily due to lower production volumes, partially offset by lower energy costs. North American light crude oil and natural gas production averaged 108,000 barrels per day in the second quarter, which is up 5% from the second quarter of 23. The increase was a result of strong drilling results over the past year and lower production in the second quarter of 2023 caused by wildfires and third-party pipeline outage. Operating costs in our light crude oil and NGLs Operations averaged $13.75 per barrel in the second quarter, a decrease of 24% compared to the second quarter of 2023 due to higher production and lower energy costs. North American natural gas production averaged 2.1 BCF during the second quarter, which is comparable to the second quarter of 2023, reflecting strong results from a monotony and deep basin wells, offset by natural field declines. Operating costs on our North American natural gas averaged $1.19 per MCF in the second quarter, which is down 12% compared to the second quarter of 2023, primarily a result of lower energy costs. As we outlined in our first quarter, we shifted certain natural gas development activity in 2024 to high-return multilateral heavy oil wells due to lower natural gas prices. Concurrently, approximately 20% of our remaining 2024 planned natural gas wells will be drilled with production curtailed until the trend in natural gas prices improve. We maintain optionality to bring these natural gas wells on production in late 2024 or early 2025 to align with improved natural gas prices, maximizing value for shareholders. Our 2024 corporate natural gas production guidance of 2.12 BCF to 2.23 BCF remains unchanged. In our thermal in situ operations, we achieved strong thermal production in the second quarter, averaging just over 260,000 barrels per day. This is up 12% from our second quarter of 2023, driven by strong results from Jackfish, Kirby North, and Primrose Tad developments. Second quarter thermal in situ operating cost averaged 1095 per barrel, which is down 25% compared to the second quarter of 2023, primarily reflecting higher production volumes and lower energy costs. Plant turnaround to Jackfish and Kirby North facilities were successfully completed ahead of schedule in Q2 of 24. At Jackfish, the first of two SAGD pads drilled in 2023 reached full production capacity in Q2 of 2024, which is ahead of schedule. The second pad is currently producing at full production capacity and is also ahead of schedule, originally budgeted for Q4 of 2024. The teams executed both of these Jackfish pads very well from drilling to on stream and both exceeded our previous production type curves. Additionally, we are targeting to drill one SAGD pad at Jackfish in the second half of 2024 with production from this pad targeted to come on in Q3 of 2025. At Permos, we finished drilling one CSS pad, which is targeted to come on production ahead of schedule in late Q4 of 2024. This pad was originally targeted for Q2 of 2025. Again, the teams have done a good job of optimizing execution, advancing the first pad through decoupling construction schedules. The second pad is currently being drilled and is targeted to come on in production in Q2 of 2025. At Wolf Lake, we recently drilled one sag deep pad, which is targeted to come on full production in Q1 of 2025. At Kirby North, we started injecting solvent in late June 2024. Currently, all eight wells at our commercial scale solvent sag deep pad are receiving solvent, and we target to increase solvent injection with subsequent reduction in steam injection over the coming months. We will monitor solvent recoveries and production trends as we evaluate ongoing results. In our oil sands mining and upgrading operations, second quarter SCO production averaged approximately 411,000 barrels per day, an increase of 16% compared to the second quarter of 2023. The increase in production reflected planned maintenance at Horizon that was successfully completed ahead of schedule compared to Q2 of 2023, which included planned turnarounds at both Verizon and AOSP. Operating costs on our oil sands mining and upgrading assets are top tier, averaging $25.95 per barrel in the second quarter, a 17% decrease compared to the second quarter of 2023. This reflects higher production volumes from reduced planned maintenance activities and lower energy costs. At AOSP, due to the schedule optimization of the Scotford Upgrader in Q2, the planned September turnaround is now targeted to last 39 days compared to the previous 49-day schedule. During this turnaround, Scotford Upgrader is expected to run at reduced rates with the impact to annual production targeted to be approximately 9,000 barrels per day, a 2,000 barrel per day improvement compared to budget. Our significant SCO reserves are world-class. We are executing near- and medium-term projects, evaluating longer-term projects to potentially bring value forward, including near-term production growth of the Scotford Upgrader, includes de-bottlenecking project, which is targeted to be completed during the planned turnaround, and targets to add incremental capacity at AOSP of approximately 5,600 barrels per day net to Canadian natural. Medium-term production growth includes Other oil sands mining and upgrading optimization projects, such as the NAPTA Recovered Tailings Treatment Project, which targeted to add approximately 6,300 barrels per day of production in late 2027. Longer term, combining our IPEP technology with paraffinic fraud treatment has the potential to add approximately 195,000 barrels per day of annual bitumen production. Our world-class assets are strategically balanced across commodity types so we can be flexible and capture opportunities throughout the commodity cycle to maximize value for shareholders. Our unique and diverse portfolio of assets is supported by long-life low-decline assets which have large, low-risk, high-value reserves with low-maintenance capital, making Canadian Natural truly a unique and resilient energy company. The strategic weighting of our capital program this year, adding growth in the second half of the year and exiting 2024 with strong production rates positions us well moving into 2025 while we target strong production and free cash flow in the last six months of this year. Now with that, I'll turn it over to Mark for a financial review.

Thanks, Scott, and good morning, everyone. In the second quarter of 2024, we achieved excellent financial results driven by strong operational execution and our relentless focus on continuous improvement initiatives across the company. We generated adjusted funds flow of $3.6 billion and adjusted net earnings from operations of $1.9 billion. This drove significant returns to shareholders in the quarter, totaling $1.9 billion, with $1.1 billion in dividends and $800 million in share buybacks through our NCIB program. Our capital program for 2024 remains on track with increasing production volumes forecasted in the second half of 2024 we target to generate significant free cash flow and additional returns to shareholders as we continue to allocate 100 percent of free cash flow to shareholders in 2024. our commitment to increasing share returns is clear in our sustainable and growing quarterly dividend which on a post split basis was increased to 52.5 cents per share in march 2024 from 50 cents per share, marking 2024 as the 24th consecutive year of dividend increases. Subsequent to quarter end, the Board has declared a quarterly dividend of 52.5 cents per share, payable on October 4, 2024. Our financial position is very strong, with net debt at $9.2 billion and debt to EBITDA at 0.6 times at the end of Q2 2024. And during the quarter, we repaid at maturity a US $500 million bond and a $320 million Canadian medium-term note. Liquidity remains strong, and including revolving bank facilities and cash, liquidity at the end of the quarter was approximately $6.4 billion. Our culture of continuous improvement, employee ownership alignment with shareholders, and our operational expertise drives our teams to create significant value across all areas of the company. With that, I'll turn it back to Scott for some final comments.

Thanks, Mark. And again, in summary here at Canadian Natural, Our disciplined focus is the core of what we do. Our culture of continuous improvement focused on cost control, effective and efficient operations, and disciplined capital allocations continue to drive strong results while maintaining financial flexibility, maximizing value for our shareholders. With that, I will turn it over for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by 2. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Mino Halshof of TD Cohen. Please go ahead.

Thanks, and good morning, everyone. I'll start with a question on SEO, given the 500,000 barrel per day net combined rate you achieved in July. You talked about the Scottford upgrader turnaround, and then you also have the, I guess in 2025, there is no planned turnaround at Horizon given completion of the reliability enhancement project. So can you just give us a sense of what the trajectory is going to look like for synthetic through the end of the year and into 2025?

I think our volumes are going to look pretty strong. I mean, the only thing that you'll see is our planned turnaround, which we reduced at Scotford from 49 days down to 39 days. No further production interruptions or planned maintenance activities at Horizon. So you'd expect strong SEO volumes for the remainder of the year, with the exception of that planned turnaround.

And then for 2025, is there anything that you can say there? I mean, it should be a pretty clean year across the board, presumably.

Yeah, as you know, there will be no turnaround on horizon next year. There will be a turnaround at Scottford next year, but not at horizon. So it should be another strong year with production rates at horizon being approximately 28,000 barrels a day higher for the next year.

Perfect. And then maybe the second question would be on solvent, the solvent-enhanced oil recovery pilots at Kirby North and Primrose. Can you just give us a rundown on what you're currently seeing in terms of results, including solvent recovery? And when do you think you'll be in a position to make a decision on whether to commit to that on a more commercial scale?

Yeah, so as you know, we've recently published place the KNO6 pad on solvent injection at the end of July. We are seeing some early steam reduction results in and around the 20% range, so that's very positive this early in the game. Other than that, nothing significant to report out to you at this point in time. Over the following quarters, we'll continue to update everyone here in terms of where we're at. I would suspect by mid next year, This time next year, we should be able to come out and report out in terms of how we see us taking the good results from this pad and extrapolating that out on future pads.

Thank you. Your next question is from Greg Party of RBC Capsule Markets. Please go ahead.

Yeah, thanks. Good morning. Thanks for the rundown, Scott. We don't see too many flawless quarters, but this sure looked like it. I'm kind of intrigued a little bit with what you're doing differently with the turnaround activity and the optimization. I know you referenced just in your comments where there's been some decoupling of construction activities, but what When you start to kind of break down, you know, optimization and planning and so on, maybe what has changed and what are you doing differently than in the past?

Sure, yeah, good question, Greg. So if you look at, take a look at Jackfish, you know, essentially right from strong drilling results to the teams doing a really good job of building the facilities and getting the pads on stream, that's our XX and our FPADs. Both of those pads, the execution was strong, but what really stood out on both of those pads was the production profile. The ramp-up of production exceeded their previous type curves, so we're very pleased with those results as they came in stronger than we had expected. And then over at Permros, we have decoupled the two pads, 71C and 162. We brought forward 71C. because we were able to decouple the execution plans from the facility construction perspective and focus on bringing on volume sooner than we would have otherwise. So it was really coming through good planning of the teams with the focus being on optimizing the production opportunity as soon as possible. So just working through the schedules from a continuous improvement perspective, Greg.

Okay. Okay. Thanks. Thanks for that. And then this is, I mean, the longer dated stuff and so on, but in terms of IPAP and, and PFT, I mean, there's, there's conceivably quite a big prize there, 195,000, like in total, as, as, as you mentioned, what are the pieces, you know, that would need to be in place in order for the companies to, to, to start to move towards that?

Yeah. So for that project, uh, You know, what's really important for Canadian natural and for industry from that perspective, for that matter, is that we need to see a strong fiscal regime for our pathways project so that we can capture our CO2 emissions. So that is key for us. You know, we've got concepts and ideas in terms of working through the engineering stages of that project, but The fiscal regime for pathways is very important. The second piece is the egress out of the basin here, and so we're looking forward to additional Enbridge, Dubonlec, as well as TMX to look at capturing those volumes that we bring on in the future.

Okay. Thanks very much.

Your next question is from Dennis Fong of CIBC. Please go ahead.

Hi, good morning, and thanks for taking my questions. My first one is a bit of a follow-on to Menno's question on horizon and the cadence of production. As we think about, again, further optimization of the asset itself, How do you think your teams could potentially drive outperformance versus what you think is currently, we'll call it, quote, unquote, stated capacity? And then secondarily, what do you think the implications of that happen to be for driving cost structure lower just from that project in general?

Yeah, good question, Dennis. I think if you look forward over the next few quarters here where we'll have the opportunity to see what the impacts of the de-bottleneck project have truly been in terms of a day run rate and subsequent production that we'll report out. I think it's early for us to estimate what that might look like in terms of the total capacity. At early stages, I can tell you it does look positive, but again, we need to see the components throughout the upgrader running at the maximum rates here, and then we'll have a better idea. But we'll be able to report out a little bit better on that in the next quarter, Dennis.

Great. I appreciate that context. Shifting over to the Manville heavy oil and just your heavy oil, your cold heavy oil production in aggregate, appreciate the incremental update in terms of length of multilaterals that you've been drilling. When we look historically through time, the CNQ has produced up to, I think, about 145,000 barrels a day from just the conventional heavy oil assets in aggregate. Now, understand that's a long time ago, but understanding that there's a large kind of resource prize here, how do you think about developing the asset from kind of the current levels today and ongoing, especially given the large acreage position that you have both in the clear water and in kind of the Lloydminster, Manville heavy oil stack?

Yeah, good question, Dennis. I think you'd look at it just from an overall corporate capital allocation strategy and we'll direct our capital towards the projects that do create the best returns for us based on cost and pricing received. If you look specifically at heavy oil and the introduction of the multi-lats in those areas, We'll continue to optimize the technology to put it to best use. We also continue to use our slant well drilling in targeting certain zones. Again, it just really boils back to how we allocate our capital within our corporate portfolio. I can't tell you exactly how that's going to look like over the next year. But with oil prices remaining in the range that they're currently at, looking at the forward strip, I'd say I think you could consider that the current activity levels and the levels that we have budgeted for 2024 would likely continue on into 2025.

Great. Really appreciate the color. I'll turn it back there, Scott.

Thank you. Your next question is from Manav Gupta of UBS. Please go ahead.

Thanks, guys, and congrats on strong quarter. Just trying to understand, you have a very informed view on the differential there. We have seen a little bit of a widening here, and also what we are seeing on the U.S. side is a number of U.S. refiners are pulling back runs in CQ because of the weaker product margins. So your near-term outlook on the differentials will be very helpful.

Sure. Yeah, and it's a very good question, and I think you mentioned one of the impacts, which is the wider crack spreads that the refineries are seeing. So that has an impact on the differential. The second thing that we're seeing is a drawdown on Alberta inventory stock. So over the last 104 days, for us looking at the numbers, we can see a drawdown of approximately 150,000 barrels per day. So that's in excess of existing Western Canadian Basin production. So that's also having an impact. And I think you're also seeing additions of Mexican crude into the U.S. Gulf Coast. So that is also having an impact. So those three things combined, we're seeing, you know, you saw June... at $11, and so now you're seeing $15, $15.50 right now. So I think those three things combined are having an impact.

Thank you so much. I've done it over. Thank you.

Your next question is from Neil Mecha of Goldman Sachs. Please go ahead.

Yeah, thanks, team, and solid results here. I just want to stay on the differential theme, this time talking about the gas side of the equation. Remind us again how you're thinking about natural gas in your portfolio. While it's obviously very weak right now, from a pricing standpoint, it's also a cost. How do you think about the net impacts? As we think about ACO specifically, how does pricing evolve from here as we think about the next couple of years?

Obviously, we're seeing the softer pricing right now. We have gone back to review with our teams and our management, and we elected to take approximately half of the wells we have remained planned for the rest of the year. So that would be about 20 wells out of a total of 40 that we're going to basically drill complete, but not put on production until we see those prices improve. And I think we're looking at timing of that late in the fourth quarter or early in Q1. I think we should see the benefits of LNG Canada starting to commission and come online. So I think we'll see the prices start to turn around from there and that's our view on where we see things going at this point in time.

Thank you. And then the follow-up is, and I know it's little trickier to talk about some of this the ESG related stuff these days but how are we tracking on the on the pathways project what are gating items here how does you know political uncertainty fit into that as well and I would trust trying to get a sense of how this how this is evolving yeah I'd say the three parties federal government provincial government and the pathways organization is still working very diligently

to try to come up with that financial regime package that will work for the investment to move forward. And again, it's a collaboration of those three parties. It takes time to work through all of the parameters that they're working with in terms of the cost structure. I'm still positive at this time that we're going to see something come together here. And I can tell you that there's a lot of effort, a lot of focus on part of the CEOs and the representatives from the government to try to bring this forward and make it happen.

All right. Thanks, Tim.

Your next question is from John Royal of J.P. Morgan. Please go ahead.

Hi. Good morning. Thanks for taking my question. So my first question is, you're pretty meaningfully below $10 billion in net debt as of the end of the quarter, which I think was largely due to the working capital release and the sale of the PSK shares. Understanding cash flows are volatile and it's difficult to be right at the $10 billion on any given day, but should we expect that maybe you can return in excess of 100% in the second half, given you have this buffer right now at 9.2%?

Hi, John. It's Mark here. And yes, I mean, you're correct. There's the working capital that we've talked about from quarter to quarter will fluctuate us around that $10 billion level. And then the sale of the Prairie Sky share is obviously going to reduce debt. But right now, and since the beginning of 2024, we've been at that sort of 100% of free cash flow allocation of shareholders framework. So you'll see that continue through the rest of 2024.

Okay, great. And then can you speak about your current thinking on the M&A side? You know, we spoke about the small divestiture. Just anything else you might look at on the divestiture side? Obviously, your balance sheet is where you want it to be, but anything else you might look to sort of prune there? And then just on the other side, how you're thinking about acquisitions from here?

Yeah, I think we expect activity to be pretty quiet going forward here, and there isn't anything that, you know, comes to mind in terms of, from that perspective. So I would think that, like, as you know, we have the asset base that we have, the amount of reserves that we have and the opportunities they have within those, our various areas, we're really confident and confident confident about not having to do any acquisitions and having that strong internal growth here. I don't have any other comments in terms of the M&A activity at this point. Thank you.

Your next question is from Patrick O'Rourke of ATB Capital Markets. Please go ahead.

Hey, good morning, guys. Very comprehensive rundown. A few things I was going to ask, actually just get asked, but I want to walk back to the gas. You spoke to the macro here. Over the last couple of years, you've reallocated capital from what was going to be directed to gas your assets over to oilier assets. Just kind of curious in terms of sort of the price range for ACOR Hub or however you're looking at it right now, what would sort of be the price where we would

Yeah, it's a good question, Patrick. I think, though, how you've got to look at it is in terms of the Montney, you've got significant liquids production, which really drive the economics there. So it doesn't take much of a gas price from that perspective to have the economics go around to drill and complete those wells. Where you get into the lower liquids production wells, I think we definitely need to see a little bit stronger activity, stronger pricing that we're seeing right now. Can't give you the exact price, but it has to be better than it is now. If you look at the forward pricing, we can make it work at what we're seeing in the strip.

Okay. And then just maybe to kind of build upon what John Royal was asking earlier, you know, you did take the net debt down meaningfully below the $10 billion. Can you just clarify in terms of free cash flow, do you consider those previous types of funds from that to be free cash flow that you would distribute to shareholders when we're running our calculation here? And then I don't know if you can speak to what kind of the motivation is for the timing of the sale of that asset was?

Yeah, no, you should think of the Prairie Sky shares sale as outside of the free cash flow, because when you look at the free cash flow policy, it's adjusted funds flow from operations, lesser capital, lesser dividends. So it will, you know, we continue down that path of that 100% free cash flow return to shareholders, but the Prairie Sky shares were outside of that. And then as far as, you know, For us, it was just a good time to sell, the right time to sell, and capture that good value we have here from an investment over a period here.

Okay. Thank you very much.

There are no further questions at this time. I will now turn the call over to the presenters for closing remarks.

Thank you, Operator, and thanks to everyone for joining us this morning. If you have any questions, please give us a call. Thanks, and have a great day.

This concludes today's presentation. Thank you for your participation. You may now disconnect.