Good morning. We would like to welcome everyone to the Canadian Natural Resources 2021 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 4th, 2021, at 9:00 A.M. Mountain Time. I would now like to turn the meeting over to your host for today's call, Mr. Corey Bieber, Executive Advisor. Please go ahead, Mr. Bieber.
Thank you, operator, and good morning, everyone, and welcome to Canadian Natural's third quarter 2021 corporate update conference call. Canadian Natural has had another very strong quarter financially and operationally. As I've commented before, I believe our asset base is unique among our peer group, underpinned by long- life, low- decline assets, and complemented by our conventional assets that allow significant flexibility and all of which can generate very significant free cash flow. Beyond our robust asset base, there is a corporate strategy that focuses on generating real returns for shareholders and a driven management team and a corporate culture that focuses on being effective and efficient. Over the years, Canadian Natural has clearly demonstrated its robustness, sustainability, and the strength of its business plan.
For 2021 and beyond, I believe we are one of the few companies capable of delivering meaningful economic growth, increasing returns to shareholders, and reducing absolute debt in a responsible manner. For today's call, Tim McKay, our President, will first provide a corporate update. Mark Stainthorpe, our Chief Financial Officer, will then provide an update on our 2021 financial outlook, as well as our strong financial position. Tim will then provide a summary prior to opening up for questions. Before we kick off, I'd like to remind you of our forward-looking statements. Of note in our reporting disclosures is that everything will be in Canadian dollars unless otherwise stated, and as well, we report our reserves in production before royalties. To that end, I would suggest that you review our comments on non-GAAP disclosures in our financial statements. With that, I'll turn it over to you, Tim.
Thank you, Corey. Good morning, everyone. Canadian Natural delivered strong operational results in the third quarter as we achieved quarterly production of approximately 1.238 million BOEs per day as a result of our robust long- life, low- decline assets, operational excellence, and with our capital discipline, we generated significant free cash flow. We balanced free cash flow to our four pillars of capital allocation, maximizing value for our shareholders. In the three quarters of 2021, we have reduced net debt by CAD 5.4 billion, returned approximately CAD 2.4 billion to our shareholders through dividends and share repurchases, maintained capital discipline, executed on opportunistic transactions which all add long-term value. Strengths of Canadian Natural's business model are also applied to environmental, social, and governance to deliver industry-leading performance across the board, a significant factor in our long-term sustainability.
Our safety record is top tier as a corporate total recordable industry frequency improved to CAD 0.021 in 2020, a reduction of 58% from 2016 levels. For the period from 2016 to 2020, North American E&P methane emissions are down 28%. In our oil sands operation, our GHG emissions intensity is down 38%. Corporately, in this period, we've taken equivalent of over 1 million cars off the road annually. Over and above this, we are the leading capturer and sequesterer of CO2 in the oil and gas industry worldwide. In June, we announced the Oil Sands Pathways to Net Zero initiative, an alliance of oil sands industry participants who have a goal of achieving net zero emissions in the oil sands operations by 2050.
This initiative of oil sands industry participants in Canadian Natural will further strengthen our leading ESG performance while delivering meaningful emission reductions, balancing sustainable economic development. We will require collaboration with the federal and Alberta government so that together we can achieve Canada's climate goals. Starting with natural gas, overall Q3 was approximately 1.7 Bcf a day, an increase from our Q2 production of approximately 1.6 Bcf, with North American Q3 natural gas production of 1.698 Bcf per day, up from the Q2 at 1.594 Bcf per day as the Pine River plant resumed operation, acquisitions, and strong drilling wells offset natural decline. We continue to focus on operational excellence in our Q3 North American natural gas operating costs was strong at CAD 1.14 per Mcf versus the Q2 of CAD 1.15 per Mcf.
At Townsend, production of 284 million cubic feet of natural gas was achieved in Q3, an increase of 7% over Q2. With the BC court decision, all development activities in the Townsend area have been temporarily suspended, with nine wells waiting facilities and pipeline permit approvals. Capital has been redeployed to our deep inventory of natural gas opportunities in Northwest Alberta, with similar strong drill-to-fill capital efficiencies and production volumes. With AECO strip pricing over CAD 5 a gigajoule, adding more value to our natural gas production as we target to exit 2021 in excess of 1.8 Bcf a day.
Our Q3 North American light oil and NGL production was approximately 89,000 barrels a day, down from Q2, primarily due to the unplanned third-party outage, which impacted our NGL production by approximately 8,400 barrels per day in the quarter. Q3 operating costs were CAD 16.19 per barrel, an increase from Q2 operating costs of CAD 14.39 per barrel. The company continues to advance its high value Montney light crude oil development at Wembley. 13 wells came on stream in Q3, with an additional five wells targeted to come on stream in Q4. The new crude oil battery is on stream ahead of schedule and below budgeted costs.
With our strong wells, we are targeting total production rates of more than 10,000 barrels a day of liquid and 30 million cubic feet of natural gas, representing an increase of approximately 1,500 barrels a day of liquid and 2 million a day of natural gas, giving the project strong on-stream capital efficiency of approximately CAD 6,800 per BOD. International E&P crude oil volumes averaged approximately 30,000 barrels a day in Q3, a decrease of 9% from Q2 levels. The changes in production from prior periods were primarily a result of planned maintenance activities and natural field declines. Crude oil operating costs increased from prior periods, primarily due to lower volumes as a result of the planned maintenance activities in the North Sea and offshore Africa, as well as increased C&G and energy costs in the North Sea.
Q3 heavy oil production was approximately 64,000 barrels a day versus 66,000 barrels a day in Q2, primarily a result of natural field declines, partly offset by new development activities. Q3 operating costs were CAD 19.51 per barrel, comparable to the Q2 operating costs of CAD 19.32 per barrel. At Smith, the additional six net horizontal multilateral wells that were targeting the Clearwater came on production in Q4 at approximately 2,100 barrels a day, exceeding the targeted rate of 2,000 barrels a day. The key component of our long- life, low- decline assets is our world-class Pelican Lake Pool, where our leading-edge polymer flood continues to deliver significant value. Third quarter production was approximately 54,000 barrels a day, down 2% from Q2 of 55,000 barrels a day, primarily due to natural field declines.
Operating costs continue to be very strong at CAD 5.90 per barrel versus the Q2 operating cost of CAD 6.90 per barrel. Our team at Pelican continues to drive operational excellence. With our low decline and very low operating costs, Pelican Lake continues to have excellent net backs. Our third quarter thermal production was 248,113 barrels a day, down 4% from Q2 of 258,551 barrels, primarily due to planned turnaround at Jackfish and natural field declines. Operating costs in Q3 were 4% higher at CAD 12.24 per barrel versus Q2 operating costs of CAD 11.78 per barrel, primarily due to the lower volumes in the quarter.
Results at Kirby from our ongoing solvent project continued to be positive, showing SOR and GHG intensity reductions of 45%, as well as solvent recoveries of approximately 85%. As a result, the company is progressing with the engineering and design of a commercial scale SAGD pad development at Kirby North. At Primrose, the second solvent injection pilot commenced operations in October in the steam flood area. This pilot targets to operate for a two-year period with targeted SOR and GHG intensity reductions of 40%-45% and solvent recoveries greater than 70%. At our oil sands operations, we had a strong third quarter with production at 468,126 barrels per day and a strong operating cost of CAD 19.86 per barrel of SCO.
Following the recent maintenance and turnaround activities across the oil sands, mining, and upgrade assets, top-tier performance and utilization continues to drive industry-leading operating costs. During the first nine months of 2021, since the completion of Scotford turnaround and expansion in 2020, the company has increased sales volumes by over 20,000 barrels a day of SCO. Oil sands mining and upgrading continues to be top tier, with production volumes in October of approximately 0.477 million barrels a day of SCO, as our teams continue to leverage our technical expertise, improve reliability, enhance our production at both sites, as well as finding operating efficiencies to drive our costs down with consistency. With that, I will now turn it over to Mark for a financial review.
Thanks, Tim. We delivered strong financial results in the third quarter as our business realized net earnings of over CAD 2.2 billion. Adjusted funds flow generation was significant at over CAD 3.6 billion, and free cash flow was approximately CAD 2.2 billion after capital and dividends, excluding acquisitions in the quarter. As a result of our significant free cash flow generation, net debt decreased to approximately CAD 15.9 billion at Q3, CAD 2.3 billion lower than Q2 levels. While the debt repayment in the quarter was significant, so were returns to shareholders with approximately CAD 1.1 billion returned through dividends and share repurchases. We continue to maintain strong liquidity, including revolving bank facilities, cash, and short-term investments. Liquidity at Q3 was approximately CAD 6.2 billion. Our long life, low decline assets support a sustainable, growing, and predictable dividend.
This was evident through the period of challenging commodity prices in 2020, where we increased and maintained our dividend, then further increased it in March of 2021, marking the 21st year of dividend increases. Subsequent to the quarter end, the Board of Directors has approved a 25% increase to our quarterly dividend to CAD 0.5875 per share, payable on January 5th, 2022. This represents a CAD 0.47 per share annualized increase. It clearly demonstrates the confidence that the Board of Directors have in the sustainability of our business model, the strength of our balance sheet, and the company's effective and efficient operations, supported by our robust, long- life, low- decline asset base and associated low maintenance capital requirements.
With this increase, 2022 will mark the 22nd consecutive year of dividend increases for the company, and this 25% increase from our previous quarterly dividend is in excess of our historical dividend compound annual growth rate of 20% over the last 22 years. Last quarter, we discussed that effective July 1st, 2021, our free cash flow allocation policy authorized management to increase returns to shareholders through accelerated share repurchases under the company's normal course issuer bid by targeting the repurchase of approximately 1% of shares outstanding per quarter. This policy further states that once the company reaches an absolute debt level of CAD 15 billion, currently targeted to occur in Q4 2021, 50% of free cash flow will be targeted to share repurchases, with the remaining 50% of free cash flow allocated to further strengthening of our balance sheet.
Per this policy, the company repurchased approximately 12 million shares in the quarter. Year to date, as of November 3rd, we have repurchased a total of 21.5 million shares for CAD 940 million. Subsequent to quarter end and as an enhancement to the free cash flow allocation policy, the board of directors has authorized management to target absolute debt levels below CAD 15 billion, which is approximately 1x debt to EBITDA in the current price environment. To the extent debt is below CAD 15 billion, such amount will be available for strategic growth or acquisition opportunities when and if it makes sense. This enhancement reinforces our approach to the 50/50 free cash flow allocation and demonstrates our commitment to long-term shareholder value, supported by a strong financial position and increasing returns to shareholders through increasing dividends and share repurchases. With that, I'll turn it back to you, Tim.
Thank you, Mark. Canadian Natural's ability to deliver significant, sustainable free cash flow is driven by our effective, efficient operations, our high quality, long- life, low- decline assets that have low maintenance capital and significant reserves. We balanced our commodities in Q3 2021 with approximately 47% of our BOEs, light crude oil, NGL, SCO, 30% heavy and 23% natural gas, which gives us exposure to all improving commodity prices. Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars, and we will continue to allocate 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.
Our commitment on delivering returns to shareholders has been significant, totaling $3.1 billion year to date through dividends and share repurchases. Subsequent to the quarter end, the directors have approved a 25% increase to our quarterly dividend payable on January 5th, 2022. This will mark the 22nd consecutive year of dividend increases for the company and is a 25% increase from our previous quarterly dividends and is in excess of a historical CAGR growth of 20% over the last 22 years. In the third quarter, we set new environmental targets. By 2030, reduce absolute methane emissions by 50% from our 2016 baseline. By 2026, reduce in situ fresh water usage and mining fresh water usage intensity by 40% from our 2017 baseline.
As well, with our Oil Sands Pathways to Net Zero initiative, we will work with our industry partners to advance key milestones as we work towards our goal of net zero in the oil sands by 2050. In summary, we continue to focus on safe, reliable operations, reducing our environmental footprint, enhancing our top-tier operations. Canadian Natural is delivering top-tier cash flow generation. We're unique, sustainable and robust and clearly demonstrate the ability to deliver returns to shareholders by balancing our four pillars. That concludes our Q3 conference call. I will now open the line for questions.
At this time, I would like to inform everyone, in order to ask your questions, you may press star then the number one on your telephone keypad. Again, that's star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gregory Pardy from RBC Capital Markets. Your line is open.
Thanks. Good morning. Thanks for the rundown, guys. Maybe just the first question is on net debt, Mark. We're about midway through, you know, 4Q. How close are you to that CAD 15 billion number?
Yeah. Well, it's imminent, Greg. We're very close to that number of CAD 15 billion. You know, the way the free cash flow allocation policy works and the way, you know, or the significance of the free cash flow that we're generating in Q4 and certainly the outlook for 2022, you know, that balance sheet continues to improve in that scenario. Yeah, it's imminent and we're getting close. That's really why you see the enhancement to the policy, which really, you know, shows that we're getting to that target maybe a little earlier than originally expected.
Okay. That's really where I wanted to go. That's probably where most of the static is that we're picking up. The language in the release around, you know, if you're sub CAD 15 billion, that opens up opportunities in terms of growth or acquisitions. I'm trying to better understand, like, is this intended to just, you know, wave a big flag that, look, CAD 15 billion is the new number? Does this limit your flexibility? I'm just wondering what has changed in your game plan as a result of that policy language.
I think you gotta think of this, Greg, as nothing has changed as far as the long-term planning. I mean, the CAD 15 billion was a target that we had set before. Like I say, we're getting there sooner. This just provides some flexibility and I think reinforces what we've been saying as far as continued increasing returns to shareholders and, you know, balance sheet strength going forward with the significance of the free cash flow. You have to remember that free cash flow is generated because of the long- life assets with low decline and favorable maintenance capital requirements of those assets, which we think sets us apart.
Okay. Terrific. Last one from me, if you wouldn't mind. I'm just wondering on Kirby in terms of scale, timing or cost. Tim, can you address any of that? Like how big is this and when do you think it would come on?
Yeah. Well, the first thing is we're just doing the engineering and design of the pad today. So, we're looking. It'd probably start construction in two years.
Okay.
The cost, it's too early.
Too early. Okay. Thanks very much.
Yeah.
Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.
Good morning and congrats, guys, on that dividend bump. The first question is just to tie into Greg on M&A, and you guys have done a good job over the last couple of years being opportunistic around M&A and creating value that way. Just how do you see the landscape for potential acquisitions? Do you think this is a buyer's market or a seller's market right now?
Really, we don't see really too much difference here today. You know, as you know, we don't have any gaps in our portfolio, however, we always look at opportunities in our core areas. If they look like they can create value for our shareholders, then we're optimistic on those opportunities. Really don't see any change.
Okay. And the follow-up here is just on the Canadian oil macro. We have seen WCS differentials wind out a little bit, which is surprising in light of Line 3 coming online. Well, just what are your thoughts on differentials here, and how do you see them moving into 2022 as you have some Canadian production coming back, some heavy OPEC barrels coming into the market, but a better egress situation?
Yeah. Traditionally, if you look historically, the WCS differential always widens out in December. Obviously, change in demand, people have their inventory adjustments that they do in December. You know, they're still very good, and we don't see it really changing that much into next year. You know, I would say it's still gonna be in the sub 20% going into next year. Historically, they've always widened out in that November, December, and then tighten back up in the new year.
Thanks, guys.
Your next question comes from the line of Menno Hulshof from TD Securities. Your line is open.
Good morning, everyone, and thanks for taking my question. Your stock is effectively at all-time highs as of this morning, which is pretty incredible given where things stood 18 months ago. My question is, would you ever reconsider your 50% free cash flow allocation to buybacks with the stock where it is? How much does the entry point and where we stand in the cycle come into play when it comes to how aggressively you want to buy back your stock?
Yeah. Thanks, Menno. It's Mark. You know, right now, that's the policy. As we get to that CAD 15 billion, you know, the 50/50 allocation. What you see from us obviously is the balanced approach. Tim talked about the four pillars, but we have a balanced approach across increasing dividends, which you saw the increase today, buybacks, debt repayment, and, you know, economic resource development. I foresee that that balance continues going forward.
Okay. Perfect. One more for you, Mark, I believe. Can you just give us a sense of what the cash tax profile is going to look like into 2022 on the strip?
Well, Menno, it'll just depend on, of course, your price forecasting, not only a strip on benchmark, but on, you know, other things like royalties. We do have payouts, of course, happening in some of the royalty projects that we can get IR to walk through that'll help kind of manage down to that exact tax. You're good. You know, we are a taxpayer, and you see it coming in, you know, in 2021 into 2022.
Okay. Thanks a lot, Mark.
Yeah.
Your next question comes from the line of Philip Gresh from J.P. Morgan. Your line is open.
Yes. Hi, good morning. First question would just be thoughts on capital spending as we look out to 2022. Any kind of early goalposts you could share with us?
Hi, Phil. No early goalposts yet. We're just still working through our budget. As you know, we have a large, high quality asset base that we have numerous opportunities on. We're just going through the process of looking at it and deciding on where we wanna allocate capital to generate the strongest returns. We're just still in that process.
Okay. My second question, just one additional follow-up, I guess, on the debt targets. With the wording in the release and the way you're framing it around the CAD 15 billion. Is that meant to say that you kind of view that as more of like an efficient level of leverage to hold for a company of this size and, you know, with the flat production profile and things that, you know, in other words, you're not gonna have like another secondary leverage target at some point that'll be CAD 10 billion instead of CAD 15 billion or just any additional color there would be interesting. Thank you.
Yeah. Thanks, Phil. I think the one thing obviously is you look at it as a long-term target. Certainly there's different scenarios that you go through when you're budgeting and planning, so that changes, you know, how you look at it. Right now, a long-term target of CAD 15 billion, as I mentioned, looks like about 1x debt to EBITDA in that range today. You know, we're getting there very quickly. Right now the free cash flow allocation policy again just focuses on both returns to shareholders and continued balance sheet strength. You know, as we go forward, you'll continue to see that capital discipline and that balanced approach.
Okay, thank you.
Your next question comes from the line of Dennis Fong from CIBC World Markets. Your line is open.
Hi, good morning, and thanks for taking my questions. The first one here is, I guess, historically, Canadian Natural has discussed two potential projects at Horizon. One which was a light oil debottlenecking project, and the second is a potential PFT Brownfield bolt-on component to Horizon. Obviously you've seen very strong production between both Horizon and AOSP, and given obviously the strong production and financial performance, you guys are approaching payout. I was curious as to how some of the, we'll call it optimization projects that you've done kind of over the past few years may have changed your outlook on some of these debottlenecking projects. Secondarily, how are you guys looking at the potential of moving forward with some of these now that you are very close to hitting your net debt target as well as we're obviously in a very strong oil price environment currently?
Dennis, good questions there. You know, with Horizon and at AOSP, our teams have done a tremendous job looking at what opportunities we have currently on the ground. That's part of the reason we're seeing such strong production performance out of the oil sands mining. As we look ahead, those projects are changing 'cause we're finding different ways to get extra volumes, different ways to get higher reliability and looking at different opportunities that may actually further enhance what we can do on those sites. You know, they're still kind of in our range of opportunities, but they're gonna look different than what we had originally envisioned.
That's just because the teams have done such a great job there in terms of ramping up the production and creating a higher reliability out there. You know, going forward we've still got similar projects that the teams are working on, but it's looking different than what we had originally envisioned.
Great. I guess I know those were. I don't wanna say put on the back burner, but there's a lot of engineering work essentially to have been done on those over the past several years. Have the economics of those projects moved forward in your mind? I just wouldn't mind potentially an incremental update on IPP as well, and kind of where you're proceeding with that. Those would be my questions. Thank you.
Okay. Dennis, the work has continued to progress actually on both sites in terms of looking at what opportunities we could do and to enhance the volumes and enhance our operating costs on both sides. We have not slowed down. Our teams have been doing a lot of background work. Obviously, part of it is, you know, if they compete for capital, and that's part of what we do in terms of managing our long-term outlook. With IPP, again, it's still part of our portfolio. The team is working on enhancements to that project as well, and we're still advancing it. It's just a matter of deciding if it's something we wanna do at this time or keep it, do additional work to further enhance the economics of it.
It's just a lot of work. You know, this last year with the COVID, a lot of the what I would call on- the- ground work was shut down as we went down to essential personnel. A bunch of work would still need to be done to absolutely proven up that process. It is still progressing, at least on the engineering side of how we can enhance that opportunity.
Great. Thank you for answering my question.
You're welcome.
Your next question comes from the line of Roger Read from Wells Fargo. Your line is open.
Yeah, thanks. Good morning. All right. Probably just a little bit of a follow-up from Phil's question earlier thinking about CapEx in 2022. Can you give us an idea as we think about what your, you know, your very modest decline rate and sort of a minimum level of CapEx for 2022 or a maintenance level of CapEx in 2022 would be?
Yeah. Well, our decline is around 10%. You know, it's really not too much different than it has been historically into that CAD 3 billion, a little over CAD 3 billion range. You know, for the most part, it's in that range. It depends on obviously what kind of commodities we want to do. It's still in that range.
Yeah. Thanks. That's helpful. Then, almost everywhere else in the world dealing with exceptionally high gas prices, certainly higher in Canada, but not quite stretched. Just curious as you're looking at both gas as a positive and a negative for your businesses, how you're managing around that, if you are at all.
Yeah, we're in a very fortunate position where we're long natural gas, so, you know, while it is a cost to us, it is also a benefit on the commodity side. You know, for the most part, very fortunate that way.
Yeah. I was just curious, is there anything you've done to mitigate on the usage side at all, or has it not risen to that level yet?
We're constantly looking for enhancements to reduce it. You see it in the thermal side through solvents. We've got steam generation opportunities that we're advancing. Horizon and COGEN. Absolutely, there is always opportunities to lower our fuel consumption, and the teams are very focused on that.
Great. Thank you.
Yep.
There are no more questions at this time. Presenters, please continue.
Thank you, operator, and thank you to those who joined us on the call and webcast this morning. If you do have any follow-up questions, please don't hesitate to give our teams a call. Thanks, and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.