Canadian Natural Resources Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 8 speakers on the call.

Operator

Good morning. We would like to welcome everyone to the Canadian Natural Resources 2023 First 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, May 4, 2023, at 8 am Mountain Time.

Operator

I would like to turn your meeting over to your host For today's call, Lance Casson, Manager of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Canadian Natural's Q1 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.

Speaker 1

With me this morning is Tim McKay, our President Mark Stainthorpe, our Chief Financial Officer. Tim will first speak to how Canadian Natural is a leader on environmental, social and governance, followed by specifics on our safe, reliable, world class operations, including details on targeted production growth from our long life, low decline assets to generate strong returns on capital and maximize shareholder value. Mark will then summarize our solid financial results, including significant returns to shareholders so far this year and our strong financial position. To close, Tim will summarize our call, party will open prior to opening up the call for questions. With that, I'll turn it over to you, Tim.

Speaker 2

Good morning, everyone. In the Q1, we achieved strong quarterly production of Approximately 1,320,000 BOEs per day, including record natural gas production at approximately 2.14 Bcf per day and liquids production of 9 100 and approximately 963,000 barrels a day, reflecting strong operational performance across our assets, including our long life zero decline wells hence, mining and upgrading assets, comprising approximately 50% of the total company's liquids production this quarter. Our hard value SEO captured approximately a $2 premium to WTI in the quarter, Driving strong SEO pricing and generating significant free cash for the company. Canadian Natural is a leader in environmental, social, governance and has made it a priority to work collaboratively with industry peers and governments to achieve meaningful GHG emission reduction in support of both Alberta and Canada's Climate Goals. The Alberta Government recently announced emission reduction and energy development plan built upon The province's long standing climate leadership and achievements in emissions reduction.

Speaker 2

We look forward to supporting the province and continuing to provide affordable, reliable, responsibly produced energy while reducing emissions and aspiring towards a net zero economy in 2050. Canadian Natural's current GHG goals support Alberta's climate plan where our large scale carbon capture and storage projects like pathways Overall, in Q1 2023, natural gas production was approximately 2.14 Bcf, which was a record for the 7% increase over Q1 2022. For North American operations, Q1 2023 Natural gas production was strong at approximately 2.13 Bcf per day, an increase of approximately 139,000,000 cubic feet over Q1 2022, primarily as a result of the company's strategic decision to invest in our drill to fill strategy, adding low cost, high value, Liquids Rich Natural Gas Production Volumes. During the quarter, the company drilled 21 net wells of which 19 were brought on in the quarter, meeting targeted rates. As well during the quarter, our 3rd party pipeline impacted both Natural gas by about $33,000,000 a day and associated liquids of approximately 3,500 barrels

Speaker 1

per day.

Speaker 2

For Q1, North American Natural Gas operating cost was $1.43 which is up 12% compared to Q1 2022 of 1.2 Our teams continue to focus on operational excellence and cost control. For North American light oil and NGL's Q1 production was 108,000 531 barrels per day comparable to Q1 2022, primarily a result of strong drilling results. Q1 operating costs were $18.62 per barrel, up from Q1 2022 operating costs of $15.24 per barrel, primarily due to increased power and service costs in the quarter. During the quarter, we drilled 16 net wells as part of our light oil development plant, which target to come on production in both Q2 and Q3 of this year. At Wembley, the company finished drilling a 5 well Light Oil has 5 well Light Oil Pad late in Q1, which is targeted to come on May 15 with initial production rates of approximately 4,000 barrels a day of liquids and 14,000,000 cubic feet per day of natural gas.

Speaker 2

This pad is part of the company's budgeted leveling well program in the Greater Wembley area. Our international assets in Q1, 2023 had oil production of 27,331 barrels a day, which is down from Q1 2022 levels of approximately 31,000 barrels a day, primarily due to the decline and maintenance in North Sea and Offshore Africa. Our international assets continue to generate good free cash flow and value for the company. Moving to Aviall, production was 77,690 barrels a day in Q1 2023, up 23% from Q1 2022, primarily due to strong drilling results in 2022. Operating costs in Q1 2023 were $21.47 per barrel, comparable to our Q1 2022 operating cost of $22 per barrel.

Speaker 2

During the quarter, the company drilled 42 net Heavy oil wells, of which 26 wells were multi well across our land base from Bonneville Lloydminster to the Clearwater area, with production results on target to budget. A key component of our long life low decline assets is our world class Pelican Pool, where our leading edge polymer plug continues to deliver significant value. Q1 production was 48,244 barrels a day, down 7% Q1, 2022 average of 51,991 barrels a day, reflecting the decline nature of the property. Polymer injection rates were reinstated in February 2023 and the field is targeted to return to its historical decline rate of approximately 5% in the second half of twenty twenty three. The team continues to focus on mitigating cost pressures and we had a good Q1, twenty twenty three operating costs of $9.63 per barrel, An increase from our Q2 2022 operating cost of $7.48 per barrel, primarily due to high power costs in the quarter.

Speaker 2

With our low decline and very low operating costs, Pelican Light continues to have excellent netbacks. In our thermal in situ operations in Q1, we We continue to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations. Q1 2023 production was 242,884 barrels a day, down from Q1 production Q1 2022 production of 261,743 barrels has forecasted as a result of natural decline. Q1 2023 operating costs were $15.94 per barrel, up when comparing to Q1 20 22 operating costs of 14 $35 per barrel, primarily a result of higher power costs and service costs, offset by lower natural gas costs. I'll now update on our thermal growth plan.

Speaker 2

At Primrose, the company is targeting to grow production by approximately 25,000 barrels a day from Q4 2022 to Q4 2023 levels, primarily from its results of the 2 CCS pads drilled in 2022. The first production cycle from these pads is targeted to begin in Q3 2023, which targets strong quarterly production at Primrose of Q4 2022 levels to approximately 65,000 barrels a day in Q4 2023 As the company progress its development of 4 SEGD pads in 2023, production from the first pad drilled in 2022 is targeted to ramp up to full production capacity in Q3 2023. The 3 remaining pads are targeted to ramp up to full production pads over the 1st 9 months of 2024 at a pace of 1 pad per quarter. At Jackfish, the production has been very strong averaging approximately 115,000 barrels a day with minimal capital since acquiring the asset, representing its long life loaded client nature. The company is currently drilling 2 side deep pads.

Speaker 2

Production from these pads is targeted to ramp up to full production capacities in Q3 of 2024 and Q4 of 2024, respectively, supporting our continued high utilizations at that facility. Subsequent to the quarter end, the company commenced planned turnarounds at Primrose East and Wolf Lake, which target to impact Q2 2023 production volumes by approximately 15,000 barrels a day and are reflected in the company's previous announced annual production guidance. The Thermal Institute production is targeted to increase in the second half of 2023 into 2024 with new pads that were drilled in 2022 and pads targeted to finish drilling in the first half of twenty twenty three. Production is targeted to grow by approximately 30,000 barrels a day from Q4 2022 to Q4 20.3, Averaging approximately 280,000 barrels a day and with the strip of WCS differentials tightening, This could add incremental cash flow. In the company's world class oil sands mining and upgrading assets, We had a Q1 production of approximately exactly of 458,228 barrels a day of SCO With Q1 2023 operating costs that were $25.06 per barrel.

Speaker 2

During the quarter, SEO prices were strong resulting in premium pricing for SEO at approximately US2 dollars per barrel above WTI adding additional cash flow. Subsequent to Q1, 2023, as previously announced, the planned turnaround activities at the non operated Scotford Scotquare began April 10th, With the mines targeted to operate at reduced rates for approximately 73 days, impacting the 2023 annual production by approximately 8,300 barrels a day. For Horizon, the planned turnaround is targeted to begin May 16 with a full plant outage targeting for approximately 28 days impacting the 2023 annual production by approximately 21,600 barrels a day. At Horizon, The fourteen-four Reliability Enhancement Project is progressing as planned and tie ins are targeted to be complete during the turnaround. This project targets to extend major turnaround maintenance cycles from 1 per year to 1 every second year, increasing SCO production capacity by approximately 5,000 barrels a day in 2023 increasing to approximately 14,000 barrels a day in 2025.

Speaker 2

I will now turn it over to Mark for a financial review.

Speaker 3

Thanks, Tim. In the Q1 of 2023, We generated solid financial results with adjusted funds flow of $3,400,000,000 and adjusted net earnings from operations of $1,900,000,000 This drove material free cash flow in the quarter of $1,400,000,000 after dividends and base capital. Balanced allocation to our 4 pillars continues, including significant returns to shareholders in the quarter year to date. Up to including May 3, 2023, year to date returns to shareholders totaled $2,800,000,000 including $1,900,000,000 in dividends and $900,000,000 in share Our commitment to increasing shareholder returns is evident in our sustainable and growing quarterly dividend, which was increased to $0.90 per share from $0.85 per share in March 2023, marking 2023 as the 23rd consecutive year of dividend increases. Subsequent to quarter end, the Board has declared a quarterly dividend of $0.90 per share payable on July 5, 2023.

Speaker 3

As debt levels have decreased significantly over the last few years, returns to shareholders are targeted to increase in the near term as our free cash flow allocation policy states Once net debt reaches that $10,000,000,000 level, 100 percent of free cash flow will be allocated to shareholder returns. We're in a very strong financial position with debt to EBITDA at 0.5 times at the end of Q1 'twenty three and we continue to maintain strong liquidity. Including revolving bank facilities, cash and short term investments, liquidity at the end of Q1, 2023 was approximately 6,100,000,000 At Canadian Natural, we have several competitive advantages, including our diverse long life low decline production supported by our large high value reserves and effective and efficient operations. This combined with our people, culture and commitment to continuous improvement targets to continue to drive material free cash flow and strong returns on capital going forward. With that, I'll turn it back to you, Tim, for some final comments.

Speaker 2

Canadian Natural's advantage is our ability to effectively allocate cash flow to our 4 pillars and we have a well balanced diverse large asset base with a significant portion Long life, low decline assets, which require less maintenance capital to maintain volumes. We will continue to allocate cash flow to our 4 pillars in a disciplined manner to maximize value for our shareholders, which all is driven by effective capital allocation, Effective and efficient operations by our teams who deliver top tier run. We have a robust, sustainable Free cash flow and through our free cash flow allocation policy returns to shareholders are significant. Our dividend was increased by 13% in March, Marking 2023 as the 23rd year of consecutive increases and has a GAGR of approximately 21% over that time. In summary, we will continue to focus on safe, reliable operations, enhancing our top tier operations and will continue to drive Environmental performance.

Speaker 2

We are in a strong position and being nimble enhances our capacity to create value for our shareholders. We will continue to apply the same drive to ESG Governance, Social and Environment, a significant factor in our long term Sustainability. As we move forward to lower our carbon emissions with our first target to reduce our absolute Scope 1 and Scope 2 emissions by 40% by 2,035 from our 2020 baseline on our journey to achieve our goal of net 0 GHG in the oil sands by 2,050. 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

Speaker 4

our 4

Speaker 2

pillars. With that, I will open the call

Operator

One moment please for your first question. Your first question comes from Greg Pardy from RBC Capital Markets. Please go ahead.

Speaker 4

Yes, thanks. Good morning. Thanks for the rundown. Tim, how does the how does D and C program look in the second half just given the movement in commodity prices beyond the all the thermal that Feels like it's very much in motion right now and I'm thinking more about just generally shorter cycle time heavies versus drilling gas.

Speaker 2

Yes. Good question, Greg. During this period here, we start to just relook at the forward pricing on both gas and And in the original plan, we had a very balanced program, approximately 10 rigs for Really for the rest of the year. So to me, it will be a question of the value that each commodity Great here over the next kind of short cycle. So intuitively, I would suspect that from a Capital allocation point of view, gas will not compete relative to oil in the short And so we may end up doing a few less gas wells, and then doing a few more oil wells.

Speaker 2

But that's still to be determined. But Just looking at the commodity prices today that would that could be what we'll end up doing.

Speaker 4

Okay, understood. Then maybe just shifting gears just for Mark. I mean, we're just getting the question, do you expect to get to the $10,000,000,000 net debt this year or just given the choppiness we're seeing in commodity prices, maybe that's more of a 'twenty four event?

Speaker 3

Yes. I mean, Greg, as you know, it's going to depend on where commodity prices settle out here. So, I don't think it's unrealistic to get there at the end of This year still, but if prices continue to decrease or stay low then it may push out early. I think the message though early into 2024. I think the message though is to Just remember that we're generating a lot of free cash flow now.

Speaker 3

So we're executing on the balanced approach to our 4 pillars and that does include of course some significant Returns to shareholders today, just increasing as we get there and it is in the near term.

Speaker 4

Okay. Thanks very much to both.

Speaker 2

Thanks, Craig.

Operator

Your next question comes from Dennis Fong from CIBC. Please go ahead.

Speaker 5

Hi, good morning and thanks for taking my questions. The first one really, as you see egress issues out of Western And Alleviate including additional potential access to the West Coast, how do you look at your portfolio of assets and maybe even the geographic diversification of of the production that you have, especially obviously giving evolving fiscal frameworks as well as some of the Focus capital allocation within Canada?

Speaker 2

Well, if you're Quickly talking to just Degrass, Dennis. In the short term, I would say it's very constructive for oil. I believe that the tightening in the WCS differential is in part a result of The egress not having an egress issue on the oil side and then with TMX coming on, I believe that he'll keep it tight because those barrels have To go off the West Coast or down to the Gulf Coast in the U. S. In terms of natural gas, With the maintenance that we see with TC Energy here over the summer here, it may be a little choppy And then strengthening towards the Q4.

Speaker 2

Obviously, with the incremental drilling that's happened in Western Canada, It is putting some pressure on the egress and as such will put some pressure on the local pricing in the short term.

Speaker 5

Great, great. Thanks. Maybe if we could shift a little bit more to Primrose and Blake, appreciate the incremental color you gave in your prepared remarks. When we think about the ramp up of production eventually from that region, How should we be thinking about operating costs, steam oil ratio, GHG emission impacts? And then I've got a second follow-up there on Primrose around solvents.

Speaker 5

Thanks.

Speaker 2

Sure. So with the incremental production that we have, Obviously, with the newer pads, your SORs will decrease. In a lot of these areas, we haven't drilled any SAGD pads or CCS wells for a number of years. So we'll see the SORs reduce, obviously production go up. And then intuitively with the lower SOR, you'll have lower operating costs.

Speaker 2

So that's usually the case. The one thing is the SAGD when you start steaming, it takes some time to ramp up and then it plateaus Giving you the lowest SOR at the full ramp up. Whereas the C, the cyclic types, your first cycle is your lowest SOR followed by 2nd and third and fourth cycle that progressively has a higher SOR. But in the short term when you're These wells are on stream. The SORs are very low and the operating costs are very good.

Speaker 5

Great. Thanks. And my follow-up is just around potential deployment of solvent within Primrose as well. You're obviously seeing How quickly could you convert some of the pilot information and some of the design there into kind of a broader, more commercial development at

Speaker 2

Yes. That's a good question, Tasset. So we are doing a commercial development at Kirby North, which is on the Site D side. And so we're really actually just stepping into it. To me, it's all about making sure that our designs And the economics are there that support the solvents.

Speaker 2

So SAGD side, we feel very comfortable. And what we would do is as We progressed that development. We do one pad at a time. So you can't because of the nature of The area, you can't do all or nothing in terms of development or your inflationary cost would be astronomical. Down at Primrose, Once the pilot is complete, we'll make that assessment and then look to do to expand that there.

Speaker 2

But it really is about stepping in, making sure that we achieve the goals that we want to maximize returns.

Speaker 5

Great. Thanks. I'll

Speaker 1

turn it back.

Speaker 2

Thank you.

Operator

Your next question comes from Neil Mehta from Goldman Sachs. Please go ahead.

Speaker 6

Yes. Thanks so much. The first question is just sort of the M and A environment. To the extent the market choppiness continues, you guys have done a great job being countercyclical In picking up assets and recognizing you have no gaps in your portfolio, but do you see an opportunity to be proactive in countercyclical To the extent these conditions worsen?

Speaker 2

Yes. It's really good question, Neil. And If you look at our track record, it's really been all about when we do an M and A, it's about how much value, long term value That's an acquisition add. So, it's really not even about countercyclical. It's really about What value can we achieve through that acquisition?

Speaker 2

So that's really all I can say is we're not in the market, but Any acquisition we do and you've seen it in the past is how much incremental value does it create long term for our shareholders.

Speaker 6

Okay. That makes sense. The follow-up is just on some of the pipeline movements here and updates That has been pretty active in the last couple of weeks. So the first one would be around the mainline. Do you think that The pending agreement has a potential to tighten up WCS differentials.

Speaker 6

And then on as it relates to GMX, any of the cost overruns here, how much of it do you see as being potentially push through onto

Speaker 3

the suppliers? Thank you.

Speaker 2

Thanks, Neil. Two very good questions. First on the Enbridge one, it's difficult to say. I think But it's positive as the parties have got together and agreed on a fair tolling agreement. We'll see what that does.

Speaker 2

I think in just general having more egress available is really the driving force before differentials. In terms of TMX, we're committed shipper on there for 94,000 barrels a day And no different than Enbridge, you go through the process to make sure the cost and the toll piece is correct for that service. So it's to me it's just no different than Enbridge. You have to step through that process to understand the costs and what is allocated

Operator

Your next question comes from Menno Olsav from TD Securities. Please go ahead.

Speaker 7

Thanks and good morning everyone. I just have one question on Hi, PEP, especially given some of the negative press on tailings ponds of late. Can we get an update on the timeline for getting the Demonstration plant up and running and then realistically when can we expect it to be deployed commercially and then maybe you could also speak to whether you're fully Committed to moving IPEP and PFT forward together at this stage?

Speaker 2

Yes. I mean, those are good questions. Those are For IPEP, we'd still have to do another more commercial sized demonstration path. So IPEP is a great opportunity. But from the work that we've been doing in the background, our engineers Believe that if you were to do IPEP, then you would need to do really something else like paraffinic and actually to 2 items at the same time because it is a large cost to go that way.

Speaker 2

In terms of tailings that I We have a very good program. We have a very robust group out there making sure that our tailings are compliant. To me, it's as always, I mean, we're always looking for opportunities to continuously improve our environmental performance, whether it's in Water, tailings, GHG and we have a great team of engineers and people working our technology innovation group that are Looking at all the opportunities that we can do to reduce our environmental footprint everywhere in the company.

Speaker 7

Thanks, Tim. That's all I had.

Operator

Presenters, there are no further questions at this time. Please Proceed with your closing remarks.

Speaker 1

Thank you, operator, and thank you for joining us this morning. If you have any follow-up questions, please give us a call. Thanks, and have a great day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and ask that you may disconnect your lines. Thank you.

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