Canadian Natural Resources Limited (NYSE:CNQ) Q4 2023 Earnings Call Transcript
Canadian Natural Resources Limited (NYSE:CNQ) Q4 2023 Earnings Call Transcript February 29, 2024
Canadian Natural Resources Limited beats earnings expectations. Reported EPS is $2.34, expectations were $1.59. CNQ isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. We would like to welcome everyone to the Canadian Natural Resources 2023 Fourth Quarter and Year-End 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, February 29, 2024 at 09:00 AM Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance Casson, Manager of Investor Relations. Please go ahead.
Lance Casson: Thank you, operator. Good morning, everyone, and thank you for joining Canadian Natural's fourth quarter and annual 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. Speaking on today's call with me today are Tim McKay, Vice Chairman; Scott Stauth, President; Robin Zabek, Chief Operating Officer, Conventional E&P; and Mark Stainthorpe, our Chief Financial Officer. Tim will first speak to how our strategy and execution has resulted in strong corporate results.
Scott will deliver specifics on our record production and additional details on our safe, reliable and world class operations. Next, Robin will provide highlights of our growing high value reserves. And then Mark will summarize our strong financial results including increasing shareholder returns as we reached an important net debt milestone. To close, Scott will summarize prior to open up the line for questions. With that, I'll turn it over to you, Tim.
Tim McKay : Thank you, Lance. Good morning, everyone. Canadian Natural has a proven effective strategy and as a result in 2023, we delivered on our capital allocation strategy. We strengthened our balance sheet, we provided significant returns to shareholders, as well, we were strategic in developing our assets, achieving record annual production as well as growing our reserves organically on a both total proven and total proven plus probable basis with reserve replacement ratios of 166% and 194%, respectively. The strong execution in '23 sets us up to continue to deliver on our capital allocation strategy through our disciplined '24 capital budget of approximately $5.4 Billion. This budget is strategically weighted to longer cycle thermal development in the first half of 2024 and shorter growth in the second half of the year, targeting strong exit production levels.
As well it provides us with the flexibility to adjust to changing market egress and evolving market conditions, ensuring we are allocating capital effectively and maximizing value for our shareholders. Canadian Natural is committed to supporting Canada's and Alberta's climate goals and we continue to reduce our environmental footprint with our robust environmental targets, including net zero GHG emissions in the oil sands by 2050. We are uniquely positioned with a diverse, long life low decline assets which are ideal to apply technologies, to reduce GHG emissions and provide industry leading environmental performance. We believe, it’s important to continue to work together with the Canadian and the Alberta governments to make the Pathways Alliance a transformative industry collaboration and achieve meaningful GHG reductions in Canada.
We believe Canadian energy is one of the most responsibly produced sources of energy in the world and should be the preferred energy choice. I’ll now turn it over to Scott for a detailed review.
Scott Stauth: Thank you, Tim, and good morning, everyone. 2023 was a solid year for us with strong execution in our operations and record production levels across our diverse product mix generated significant free cash flow resulting in strong shareholder returns through our sustainable and growing dividend and significant share repurchases. We achieved record annual production of approximately 1.33 million BOEs per day, which included both record liquids production of 973,500 barrels per day and record total natural gas production of approximately 2.15 Bcf per day as a result of effective and efficient operations across all assets. Strong production in the second half of the year mitigated the impact of wildfires and unplanned pipeline outage and natural field declines as annual production is up 4% from 2022 levels or up 7% on a production per share basis.
I will now run through our asset highlights, starting with our robust natural gas assets. We had strong execution, including achieving record North American natural gas production averaging approximately 2.14 Bcf in 2023. And while this is up 3% on an annual basis from 2022, the increase on a Q4-to-Q4 basis is over 100 million Mcf per day. Operating costs in our natural gas averaged $1.27 per Mcf in 2023, which is up 7% from 2022, primarily as a result of higher service costs. We continue to focus on cost control and effective and efficient operations to offset cost pressures. North American light oil and NGL production averaged over 109,000 barrels per day in 2023 comparable to 2022 levels. Operating costs on our North American light crude oil and NGLs operations averaged $16.28 per barrel in 2023, an increase of 2% over 2022 levels reflecting higher service costs.
Our light oil, NGL and natural gas production was impacted by wildfires and a third-party pipeline outage in the early part of the year, which partially offset the growth from our capital-efficient drill-to-fill strategy on our liquids-rich Montney and Deep Basin assets. Primary heavy oil production of approximately 77,700 barrels per day in 2023, which is up 15% from 2022, reflecting strong results from our multilateral heavy oil wells in both the Mannville and Clearwater fairways. Primary heavy oil operating costs averaged $19.85 a barrel in 2023, which is down 9% from 2022 levels, primarily reflecting lower energy costs. Our Pelican Lake production averaged just over 46,000 barrels per day in 2023, which is down 5% from 2022, reflecting the long-life, low-decline nature of this world-class polymer flood asset.
Our operating cost at Pelican Lake remained strong, averaging $8.58 per barrel in 2023. In our thermal operations, we achieved record thermal in situ production in 2023, averaging 262,000 barrels per day, an increase of 4% from 2022. Thermal production also finished the year strong, averaging approximately 278,000 barrels per day in Q4. The growth in our thermal production was driven by strong execution on our thermal development plan, including capital accretion pad additions in Primrose and Kirby that came on production in 2023, partially offset by natural field declines. 2023 operating cost averaged $13.17 per barrel, which is down 20% compared to 2022, primarily on lower energy costs. At Primrose, we are drilling two cyclic steam pads this year, which are targeted to come on in production in Q2 2025.
We are also drilling a SAGD pad at Wolf Lake, which is targeted to come on production in Q1 of 2025. At Kirby, two of the four previously drilled SAGD pads have now reached their full production capacities with the two remaining pads targeted to ramp up the full production capacity in mid-2024. At Jackfish, two SAGD pads that were drilled in 2023 are targeted to ramp up to their full production capacities in Q3 and Q4 of this year, supporting continued high utilization rates at the Jackfish facilities. We are targeting to drill an additional SAGD pad in Jackfish in the second half of this year with production from this pad targeted to come on production in Q3 of 2025. We also have a commercial scale solvent SAGD pad development in Kirby North, which is approximately 80% complete now, and we are targeting to begin solid injection mid-2024.
We continue to use solvent enhanced oil recovery pilot in the steam flood area at Primos to optimize solvent efficiency and to further evaluate the commercial development opportunity. We have planned turnarounds in Jackfish and Kirby in the second quarter, which are targeted to impact Q2 2024 production by approximately 17,100 barrels per day, which is included in our production guidance disclosed with our 2024 capital budget. In our Oil Sands mining operations, we achieved strong results in 2023 at a world-class oil sands mining and upgrading assets, getting new production, annual record production levels with SCO production averaging approximately 451,000 barrels per day in 2023 and just over 500,000 barrels per day in Q4. We've been able to achieve these strong record production levels as we focus on continuous improvement and increase overall reliability through safe, reliable and effective and efficient operations.
Operating costs in oil sands mining and upgrading assets are top tier and averaged $24.32 in 2023, which is down 7% from 2022, primarily reflecting higher production volumes and lower energy costs. As previously noted in our 2024 budget, at Horizon, we have a turnaround planned in Q2 2024 with a full plant outage targeted for approximately 30 days. The estimated impact to Q2 quarterly average production is approximately 89,000 barrels per day and remains unchanged from budget. We will be completing the remainder of the tie-ins on reliability enhancement project during the planned turnaround at Horizon in Q2 of this year. This project will allow us to skip a turnaround in 2025, as we shift the downtime related to the maintenance activities once every two years instead of once every year.
So in 2025, we are targeting increased capacity by approximately 28,000 barrels per day or approximately 14,000 barrels per day on a 2-year average basis of incremental high-value SCO production. At AOSP, we have two turnarounds this year at the non-operated Scotford upgrader. The upgrader will operate at reduced rates. The first turnaround was originally targeted for 10 days in April 2024, but it has now been moved into March. Some additional scope has been added which will extend the duration of this maintenance period to 17 days, but there's no change to the estimated production impact of approximately 10,000 barrels per day as production rates are targeted to run higher with the addition -- the scope additions compared to the original targeted 10-day production rate.
This change will now shift the production impact into Q1 '24 instead of Q2. The second turnaround at the Scotford Upgrader is targeted to begin in September 2024 and progress for a duration of 49 days, no change from what was previously announced with our budget. Total combined annual impact from production from the turnarounds at Scotford and AOSP will remain unchanged in the budget at approximately 12,400 barrels per day. We also have a debottlenecking project at the Scotford Upgrader, which is planned to be completed during the Q4 2024 turnaround and is targeted to add incremental capacity of approximately 5,600 barrels per day net to Canadian Natural. Beyond this, as previously announced with our 2024 budget, we have the Naphtha recovery unit tailings treatment project, which is targeted to add approximately 6,300 barrels per day of SCO in late 2027.
This project also provides environmental benefits, including a 6% reduction in Horizon's Scope 1 emissions and lower reclamation costs over the life of the Horizon project. Now, I will turn it over to Robin to speak to our year-end reserves.
Robin Zabek: Thank you, Scott, and good morning, everyone. As in previous years, 100% of Canadian Natural reserves are externally evaluated and reviewed by independent, qualified reserve evaluators. Our 2023 reserves disclosure is presented in accordance with Canadian reporting requirements, using forecast prices and escalated costs on a before royalties company working interest basis. As you just heard from Scott, Canadian Natural had another strong year, which is also demonstrated by the company's reserves. For 2023, total proved reserves increased by 2% to 13.9 billion BOE, of which 8.8 billion BOE are proved developed producing reserves. Total proved plus probable reserves increased by 3% to 18.5 billion BOE. The strength and depth of Canadian Natural's assets are a competitive advantage which is evidenced by our reserve's life.
Notably, approximately 75% of total proved reserves are from long life, low decline assets with approximately 50% of total proved reserves consisting of high-value synthetic crude oil with a zero decline and a reserve late index of 44 years. As a result of Canadian Natural's unique world-class assets, our corporate total proved reserve life index is 32 years, and our total proved plus probable reserve life index is 43 years. In 2023, the strength of Canadian Natural's assets and results also continue to be reflected in the key indicators of finding and development costs and reserve replacement. Corporate finding, development and acquisition costs, including changes in future development costs are $9.25 per BOE for total proved reserves and $8.28 per BOE for total proved plus probable reserves.
Additionally, as Tim noted, in 2023, Canadian Natural replaced production by 166% on a total proved basis and 194% on a total proved plus probable basis. The net present value of future net revenue before income tax using a 10% discount rate and including the full company asset retirement obligation is approximately $154 billion for total crude reserves and approximately $186 billion for total proved plus probable reserves. In summary, our 2023 reserves reflect the strength and depth of Canadian Natural's assets, the value of the company's long life low decline reserves and our proven ability to execute. I will now hand over to Mark for the financial highlights.
Mark Stainthorpe: Thanks, Robin, and good morning, everyone. The fourth quarter of 2023 was a strong financial quarter as we generated adjusted funds flow of $4.4 billion and adjusted net earnings of operations of $2.5 billion. The fourth quarter contributed to what was a very strong year in 2023 with impressive results as we achieved record production, disciplined capital allocation and robust financial results. For example, in 2023, we grew our production by 7% per share, grew our 2P reserves by 7% per share, paid just under 5% in dividend yield, purchased $3.3 billion in shares under our NCIB program and reached $10 billion in net debt earlier than originally targeted. This shifts our free cash flow allocation to now target 100% of free cash flow in 2024 being returned to shareholders in the form of dividends and share buybacks.
These results are driven by safe, effective and efficient operations and a unique asset base to deliver significant free cash flow. Subsequent to quarter end, the Board of Directors has approved a 5% increase to our base quarterly dividend to $1.05 per common share, demonstrating the confidence the Board has in the sustainability of our business model, our strong balance sheet, and the strength of our diverse long-life, low-decline reserves and asset base. We have increased our dividend for 24 consecutive years, with a compound annual growth rate of 21% over that time. Additionally, the Board has approved, subject to shareholder and regulatory approval at our May annual meeting, a proposal to split the company's shares on a 2-for-1 basis. Our financial position is very strong with debt-to-EBITDA at 0.6x at the end of 2023, and we continue to maintain strong liquidity.
Including revolving bank facilities, cash and short-term investments, liquidity at the end of 2023 was approximately $6.9 billion. With our disciplined 2024 capital budget, low maintenance capital requirements and a long-life, low-decline asset base, we target to deliver strong returns on capital with robust free cash flow while continuing to provide significant returns to shareholders in 2024. With that, I'll turn it over to you, Scott, for some final comments.
Scott Stauth: Thanks, Mark. In closing, 2023 was a strong year for Canadian Natural, both operationally and financially, providing significant returns to our shareholders. We will continue to focus on safe, reliable operations as well as enhancing our top-tier operations, and we will continue to drive top-tier environmental performance. I would also like to say a special thank you to Tim McKay for all his outstanding service and leadership at Canadian Natural, and in his new role as Vice Chairman, Tim will continue to support the management team. As you all know, Canadian Natural has a history of a well-established leadership succession plan that ensures we are maintaining our culture and delivering top-tier performance. With that, I will turn it over for questions.
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