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Edited Transcript of CNQ.TO earnings conference call or presentation 9-May-19 2:00pm GMT

Q1 2019 Canadian Natural Resources Ltd Earnings Call

Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Natural Resources Ltd earnings conference call or presentation Thursday, May 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Corey B. Bieber

Canadian Natural Resources Limited - Executive Advisor

* Mark A. Stainthorpe

Canadian Natural Resources Limited - CFO & Senior VP of Finance

* Steve W. Laut

Canadian Natural Resources Limited - Executive Vice Chairman

* Timothy Shawn McKay

Canadian Natural Resources Limited - President & Director

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Conference Call Participants

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* Asit Kumar Sen

BofA Merrill Lynch, Research Division - Research Analyst

* Fai Lee

Odlum Brown Limited, Research Division - Equity Analyst

* Greg M. Pardy

RBC Capital Markets, LLC, Research Division - MD and Co-Head Global Energy Research

* Jon Morrison

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Joseph J. Gemino

Morningstar Inc., Research Division - Equity Analyst

* Manav Gupta

Crédit Suisse AG, Research Division - Research Analyst

* Neil Singhvi Mehta

Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst

* Philip Mulkey Gresh

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Philip Ross Skolnick

Eight Capital, Research Division - MD of Energy Research

* Roger David Read

Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Canadian Natural's Q1 2019 Earnings Results Conference Call. (Operator Instructions)

Please note that this call is being recorded today, May 9, 2019, at 8 a.m. Mountain Time.

I would now like to turn the meeting over to your host for today's call, Corey Bieber, Executive Advisor, Capital Markets of Canadian Natural Resources. Please go ahead, Mr. Bieber.

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Corey B. Bieber, Canadian Natural Resources Limited - Executive Advisor [2]

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Thank you, operator. Good morning, everyone, and thank you for joining our First Quarter 2019 Conference Call.

With me this morning are Steve Laut, our Executive Vice Chairman, who will briefly discuss our strategic focus on creating shareholder value and highlight some of the factors that set us apart from our peers. Steve will also provide an update on Canadian Natural and industry's efforts on the environmental front where significant performance achievements are not well understood.

Tim McKay, our President, will provide a more detailed update on the quarter as well as discuss our ongoing projects and operations. Then Mark Stainthorpe, our Chief Financial Officer, will provide an update on our robust financial position.

Before we begin, I would refer you to the special note regarding non-GAAP measures contained in our press release. These measures are used to evaluate the company's performance, and should not be considered to be more meaningful than those determined in accordance with IFRS. I would also refer you to the comments regarding forward-looking statements contained in our press release. And also note that all amounts are in Canadian dollars and production and reserves are expressed as before royalties, unless otherwise stated.

Finally, Q1 2019 also reflected implementation of the new standard for accounting for leases. I would point you to our financial statements and MD&A for detailed impacts of the standard on our results.

With that, I'll now pass the call over to Steve Laut.

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Steve W. Laut, Canadian Natural Resources Limited - Executive Vice Chairman [3]

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Thanks, Corey, and good morning, everyone. And thank you for joining the call this morning. Canadian Natural's long life low decline asset base combined with our effective and efficient operations make Canadian Natural very robust. As a result, we generate significant free cash flow. Adjusted funds flow was $2.2 billion in Q1, up significantly. As we move through the year, at the current strip, we target our quarters to only get stronger, generating very robust free cash flow.

Canadian Natural's ability to generate significant and sustainable free cash flow sets us apart from our peers. Canadian Natural is very disciplined in our cash flow allocation between our 4 pillars, the balance sheet, return to shareholders via dividends and share buybacks, resource development and opportunistic acquisitions to maximize value for shareholders. We have vast high-quality, undeveloped assets with significant value-adding and growth opportunities, and we remain disciplined on execution for these opportunities. Timing depends on improvements in market access, fiscal competitiveness and regulatory effectiveness and efficiency.

There's lots of discussion out there about the government of Alberta's curtailment program; some for, some against. To be clear, Canadian Natural strongly supports curtailment as it has normalized markets and saved thousands of jobs for Albertans. Regardless of whether you are for or against curtailment, let's be very clear that the root cause of curtailment is lack of market access. This is the issue that needs to be addressed, and we should not become distracted by curtailment issues. There are issues that can and I believe will be solved in the implementation of curtailment. But the root cause is lack of market access.

Now one of the biggest rationales opponents to pipeline access have strongly put forward was the negative impacts on climate change. Although this had some merit 10 years ago, it's far from the truth today. In fact, if you believe that action needs to be taken on global climate change, you should and must advocate for greater market access via pipelines for Canadian oil and natural gas, as this will make a significant impact on reducing global climate change.

Because when it comes to environmental performance, Canadian Natural and, indeed, the entire Canadian oil and gas sector has delivered game-changing performance. Canadian Natural's and Canada's oil and gas sector recognize the need to reduce greenhouse gas emissions, and we've been able to leverage technology and Canadian ingenuity, delivering impressive results.

Canadian Natural ourselves invested $3.4 billion in R&D since 2009, and the third largest for all industries in Canada. Essentially Canada's oil and gas sector has taken what was branded as high intensity oil in 2009, and have made it what I would call the premium oil on the global stage, all in 10 years. And the Canadian oil and gas sector is committed to do even better in the future.

For instance, at Canadian Natural's Horizon Oil Sands Mining and Upgrading operations, we have reduced our greenhouse gas emissions intensity by 37%. At today's production levels, that's equivalent to taking 665,000 cars off the road. In our primary heavy oil operations, we reduced our methane vent volumes by 78% through technology and continuous improvement. That's equivalent to taking 903,000 cars off the road at 2018's production level. Canadian Natural also captures and sequesters a large amount of CO2 in Canada, and we're the fifth largest for oil and gas industry in the world, equivalent to taking 576,000 cars off the road annually.

With just these 3 projects, Canadian Natural's taken the equivalent of over 2 million cars off the road, equivalent to 5% of the entire vehicles in Canada. And this is just what Canadian Natural has done. The entire industry has achieved similar equally impressive results.

Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high intensity oil on a wells-to-combustion basis in 2009, to below the global average. This is an impressive Canadian success story. It is a basis or the root cause that has generated a tremendous opportunity for Canada. For instance, if the rest of the world achieved what Canadian oil and gas industry has in terms of flaring, then greenhouse gas emissions would be reduced by 23%, equivalent to taking 110 million cars off the road. For reference, that's more than 3x the number of vehicles on the road today in Canada.

The one LNG plant Canada has approved, when on stream is equivalent to taking 40 coal-fired power plants off line, equivalent to reducing Canada's greenhouse emissions by 10%, or greater than BC's total emissions. Canada has the capacity to build at least 5 of these LNG plants, which would be equivalent to reducing Canada's greenhouse gas emissions by 50%.

Canadian Natural and the entire Canadian oil and gas sector has delivered game-changing environmental performance, and we have room to do even more. It's not 2009 anymore. Canadian oil and gas is now what I would call from a climate change as well as all other ESG metrics perspective, the premium product, something all Canadians should be proud of.

If you view climate change from a global perspective, as climate change is a global issue not a national issue, then it makes sense that having more Canadian oil and natural gas on the global market will reduce greenhouse gas emissions. If you believe action needs to be taken on climate change, then you must advocate for greater market access for Canadian oil and natural gas. It's very clear that delivering Canada's oil and natural gas to global markets should be a climate change and economic priority for Canada.

The long life low decline nature of oil sands assets allows producers to continue to leverage technology, further reducing our environmental footprint and drive ever-increasing effective and efficient operations. Canadian Natural and the Canadian oil and gas sector has made that happen, and we continue to progress further improvements.

The value of Canada's oil sands is very important to Canada and Canadian Natural. We believe the oil sands will ultimately stand the test of volatile oil prices and any potential demand forecast scenario as we believe the oil sands will have the lowest environmental footprint and lowest total cost.

At Horizon, we've taken operating costs from over USD 40 a barrel to roughly USD 15 a barrel. And importantly, there are no reserve replacement costs, a fundamental factor in Canadian Natural's strategy to invest in oil and gas, oil sands and be a leader in research and development.

Canadian Natural is doing an excellent job when it comes to reducing our environmental footprint and balancing the 4 pillars of cash flow allocation to maximize shareholder value. There are very few E&P companies that can deliver substantial sustainable and growing free cash flow, and at the same time deliver production growth per share, top-tier effectiveness and efficiency, a defined cash flow allocation program to maximize value for shareholders and drive ever-increasing returns on equity and returns on capital employed as well as increasing return to shareholders and at the same time both strengthen the balance sheet and reduce our environmental footprint.

Canadian Natural is robust, sustainable and clearly a unique E&P company.

With that, I'll turn it over to Tim.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [4]

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Thank you, Steve. Good morning, everyone. The strength of our assets and our ability to execute shows in our 2019 first quarter results, as we continue to effectively allocate capital to maximize free cash flow and value for our shareholders.

I will now do a brief overview of the assets. Starting with natural gas, our overall first quarter production of 1.51 Bcf was up from Q4 2018 of 1.48 Bcf, primarily a result of good uptimes in all areas. North American operations was 1.45 Bcf, with operating costs of $1.30, which was comparable to Q1 2018.

Pine River plant continues to run at a restricted rate at approximately 90 million cubic feet per day, and we finally received regulatory approval May 3, and will proceed to close and take over operatorship, driving our costs down in Q2.

At Septimus, Q1 we commenced a small drill-to-fill program of 5 net wells, and have targeted them to be on production late Q2, adding 30 million cubic feet and 2,100 barrels of NGLs, which will fill the plant to capacity. The Septimus Montney liquid rich is very robust due to low-cost tie-in, very low operating costs of $0.36 Mcfe, which will further enhance with incremental volumes resulting in high netbacks.

In the first quarter, Canadian Natural operations realized strong natural gas price of $2.88 per Mcf, as a result of our diversified natural gas sales portfolio, which 37% is used internally, 34% is exported and only 29% is exposed to April pricing.

Q2 2019 natural gas guidance is targeted to be 1.5 to 1.53 Bcf a day.

In Q1 2019, our North American light oil and NGL reflects curtailed volumes at approximately 95,600 barrels a day, down 3% from Q4 2018, which was also voluntarily curtailed, but of 3% when compared to Q1 2018, with operating costs of $15.86 per barrel, comparable to Q1 2018 levels.

In the greater Wembley area, we continue to drill and derisk our significant Montney oil development opportunities on our 155 net sections of land, which could support 363 wells over time, creating significant value for our shareholders. 10 wells are on production and had strong initial rates of over 580 barrels per day of liquids, in the area. Information from the strategic wells continues to help the company derisk our large premium land base in the area.

In Southeast Saskatchewan and the Manitoba, for 2019, we drilled 9 net wells. The current production approximately 85 barrels per day per well. These wells are not subject to curtailments and highlight our capital flexibility and the strength of our asset for the company to execute to maximize value.

Overall, our international assets had another strong quarter, generating significant value and free cash flow for the company. Q1 Offshore Africa production was 22,155 barrels a day, similar to Q4 2019, as the last producer well at Baobab was completed and came on late March at about 1,200 barrels a day net, meeting expectations.

CDI operating costs in Q1 were very strong at $9.79 per barrel versus $10.14 for Q1 2018. In the second quarter, we targeted to drill one gross exploration well at Kossipo, which, if successful, will set us up for another development opportunity in CDI, with the potential gross capacity of 20,000 barrels a day tied into our Baobab FPSO.

In South Africa, the operator is looking to proceed with the second exploration well in 2020, and, contingent with results, an additional 2 more exploration wells could be drilled.

The North Sea Q1 average was 25,714 barrels a day in Q1 up from Q4 2018, primarily result of planned maintenance at 3 sites in the fourth quarter and are successful 2018 drilling program. The 2019 drilling program is going very well, with the first well coming on stream the first part of April and exceeding our budgeted rate of over 3,900 barrels a day, with 3 more gross producers to be drilled this year.

Operating costs were strong at $39.68 per barrel, which is down 9% from last year.

Q2 international production guidance is 49,000 to 53,000 barrels a day, which reflects our 21-day turnaround on the Ninian Central in the quarter.

Heavy oil production was 68,473 barrels per day, down from Q4 of 79,678 barrels a day as we further curtailed production in the first quarter.

Operating costs were very strong when considering the impacts of the curtailed production. The first quarter operating costs of $17.30 as compared to Q1 2018 operating costs of $17.03 per barrel, slightly higher, reflecting seasonal energy cost and curtailed production volumes.

A key component of our long life low decline transition is our world-class Pelican Lake pool, where our leading edge polymer flood is driving significant reserves and value growth. In Q1 2019, our production was 61,200 barrels a day versus a Q4 average of around 62,400 barrels a day, as we see the polymer flood starting to stabilize the decline. Pelican continues to have very strong operating costs in Q1 at $6.69 per barrel, down 5% from our Q1 2018 operating cost of $7.07 per barrel.

In April, we consolidated operations reducing [one-oil] (inaudible) as we target to reduce operating cost by approximately $6 million per year, enhancing our already low operating cost.

In the second quarter we will convert 3 additional pads under water flood to polymer flood, which will further enhance long-term value at Pelican.

With our low decline, very low operating cost, Pelican Lake continues to have an excellent netback and recycle ratio.

In thermal, Q1 production was approximately 94,150 barrels per day versus Q4 of approximately 102,100 barrels a day, as we further curtailed production.

At Kirby South, the first quarter production was steady at 29,692 barrels a day, with excellent operating costs of $12.31 per barrel, including fuel, reflecting higher energy costs and lower production volumes.

At Primrose, first quarter production was curtailed further to 62,000 barrels a day versus 68,100 for Q4. Operations at Primrose continue to be effective and efficient with the first quarter operating costs of $20.23 per barrel, up from Q1 2018 of $16.61, primarily a result of production curtailment and higher fuel cost.

At Kirby North, the company's 40,000 barrel-a-day SAGD project, it's now steaming as the commissioning of the plant was gone extremely well and targeting first oil late Q2, ramping up to 40,000 barrels a day in late 2020. Cost performance was on budget, and a great job was done by our team.

At Primrose, completion of facility construction at our highly profitable pad adds, continues [to be on] cost, ahead of schedule, with planned steaming in Q3 2019, and is targeted to add 26,000 barrels a day in the first 12 months on production.

Thermal Q2 production guidance is 100,000 to 106,000 barrels a day.

Our Oil Sands Mining operations had another excellent quarter as both teams and sites leveraged synergies safely and increasing reliability and reducing cost. At our Oil Sands Mining operation in the first quarter, we produced 416,206 barrels a day, while our industry-leading operating costs were very impressive at $21.46 per barrel on an unadjusted basis, as our teams had an excellent quarter. We continue to capture synergies between the two sites, leveraging technical expertise services, buying power as well as operating efficiency.

Canadian Natural teams are very focused on operational excellence. With the mandated Alberta curtailment, our teams at Horizon advanced the [plant, taking] maintenance from April to late March to help mitigate the monthly curtailment impact.

Turning to Scotford. Repairs to the process furnace in the North Ugrader are underway, while operations at the base upgrader plant, the South Upgrader were not impacted by fire. The planned 38-day turnaround began on April 14 at the Scotford Upgrader, during which time the South Upgrader will be restricted processing at approximately 140,000 barrels a day of SCO. Upon completion of the planned maintenance, May and June average net production for the Albian mines is targeted to be approximately 171,500 barrels a day versus the company's previous targeted net curtailed production volumes of approximately 178,500 barrels a day, down approximately 7,000 barrels a day. The cost to repair the North Upgrader is estimated now to be $15 million gross and is targeted to be fully operational early June.

The company continues to optimize other assets in Alberta to mitigate the impacts of curtailment on its production. The production volumes reduced to the ASOP will be allocated across the company. Great work is being done by our teams to lessen the impact of the monthly curtailment on the company.

As we previously talked about, work on Horizon South lease is on track, and we target to save over $500 million verse advancing our original North Pit plan. As well IPEP pilot continues as we continue to make enhancements to improve its performance.

We continue to advance engineering in a disciplined manner at Horizon to preserve our growth opportunities of 75,000 to 95,000 barrels a day as we wait for clarity on market access.

Oil Sands Mining Q2 SCO production guidance is 400,000 to 440,000 barrels a day.

As we talked about last quarter, Canadian Natural continues to strongly support the government decision to curtail production, as differentials for both WCS and synthetic oil in Q1 have stabilized to more normal level. The outcome of this decision has been very positive for all Albertans, Alberta producers and the benefits are widely distributed across Canada and Alberta through jobs, taxes, royalties and equalization payments that, without curtailment, there would have been significant job losses.

For the first quarter, WCS differentials were around 20% of WTI, similar to historic normals in Q4 2017 when WTI was around $55 a barrel and the WCS differential was around $12 per barrel. This is in spite of an apportionment saying it's 40%. Again confirming our view the nomination process is dysfunctional.

Today, Canadian Natural is shipping oil by rail at approximately 14,000 barrels a day, which is very economic as the WCS is trading at the U.S. Gulf at a $2 premium to WTI. However, the safest and lowest impact to the environment is improve market access by building additional pipeline.

In March, the NEB issued its report, which most importantly confirm Canada's needs for pipeline and that the over nomination process has resulted in high levels of apportionment and contributes to depressed pricing. For example, the report for December 2018 showed more than 13 million barrels of oil was nominated. However, the total amount oil supply available for export was 5.4 million.

Canadian Natural will be working with the Alberta government, regulators and the industry to try and improve the system. A commonsense solution does exist to address the dysfunction in the current system. While curtailment continues, we will optimize our turnaround schedules, pit-stops, to minimize the impact. We are participating in the secondary market to buy curtailment allotment, as other companies go on their turnaround schedules.

Going forward, conventional production declines will start to impact Alberta. And with limited activity, it could be in the range of 45,000 barrels a day and maybe higher. Rail will increase and NWR will start taking incremental heavy oil volumes at 50,000 barrels a day in 2019.

I can say, through the great work done by our teams post the change, we're able to mitigate some of the impact to Canadian Natural in the first quarter on both volumes and operating costs and will continue to be effective and efficient in managing our production and our costs.

Canadian Natural's advantage is our ability to effectively allocate cash flow to the 4 pillars in light of market conditions. In the first quarter 2019, you have seen us deliver on maximizing value by optimizing our allocation to the 4 pillars. We continue to execute with excellence and safe, effective and efficient operator. We are in a very strong position, being nimble, which enhanced our capacity to create value for our shareholders as we continue to high-grade opportunities in the company. We will continue to focus on safe, reliable operations, enhancing our top-tier operations. We will continue to balance the optimization of our capital allocation, deliver free cash flow and strengthen the balance sheet that Mark will highlight further in the financial review. Mark?

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Mark A. Stainthorpe, Canadian Natural Resources Limited - CFO & Senior VP of Finance [5]

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Thanks, Tim. Canadian Natural's sound operational execution resulted in a strong financial quarter. Net earnings of just under $1 billion and adjusted funds flow of over $2.2 billion were achieved in the quarter, up significantly from Q4 '18, partly as a result of a more normalized pricing environment.

Our prudent capital program for 2019 in the first quarter resulted in about $295 million invested, on track for the full year base budget guidance of $3.7 billion.

Free cash flow delivered in the quarter was very robust, and we will continue with our free cash flow allocation policy in 2019 which we adopted late last year.

As previously disclosed and approved by the board in March, the dividend was increased 12% to a yearly $1.50 per share. This represented the 19th consecutive year of dividend increases. Additionally, share buybacks totaled over $240 million in the quarter, or 6.65 million shares purchased for cancellation. Together with the dividend, returns to shareholders were over $640 million in the first quarter. Subsequent to the quarter and with more clarity on free cash flow in 2019, a further 4.05 million shares have been purchased to May 8, for cancellation, for an aggregate total of approximately $160 million.

Our debt metrics and liquidity remain strong and are targeted to get even stronger throughout 2019. Debt to adjusted EBITDA at Q1 was 2.2x, and debt to book capital was approximately 39%, well below our bank financial covenant of 65%.

At strip pricing, these metrics are currently targeted to exit 2019 in the 1.5x range for debt to EBITDA and the 35% range for debt to book capital.

Available liquidity represented by bank facilities and cash at Q1 was over $4.2 billion, providing flexibility to manage through the business cycle.

Canadian Natural is clearly in a strong financial position, supporting our abilities to drive increasing shareholder value.

With that, I'll turn back to you, Tim.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [6]

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Thank you, Mark. In summary, we're delivering sustainable top-tier free cash flow. Canadian Natural has many advantages. Our balance sheet is strong and will continue to strengthen. We have a well-balanced, diverse large asset base. A significant portion of our asset base is long life low decline assets which require less capital to maintain volumes. We have a balance in our commodities, with approximately 54% of our BOEs light crude oil and SCO, 22% heavy, 24% natural gas in Q1, which lessens our exposure and volatility to any one commodity.

Canadian Natural will continue to allocate cash flow to our 4 pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective and efficient operations by our teams to deliver top-tier results.

We have, as previously announced, increased our dividend by 12%. It is our 19th consecutive year of dividend increases. Share purchases year-to-date have been 10.7 million shares. Combined with the 2018 shares of 30.9, a cumulative total of almost 42 million shares or approximately $1.7 billion have returned to our shareholders.

With that, I will open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first questions comes from Manav Gupta from Credit Suisse.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [2]

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Congrats on a good quarter. It's difficult to make $1 billion in oil sands alone, and you showed again why you are the best in the business. My question here first is, you are right that the process of nomination is broken here and you are working with the government here. Like what is the resolution? What's the timeline of resolution? When can we hear anything on that entire process being fixed, sir?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [3]

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Yes. With the election and the change of government, obviously we've got to reinitiate a lot of the discussions that were started with the previous administration.

I think the key point here is that a real barrel produced in Alberta needs to have access, equal access into the market. And with the current system where you can nominate double times what is actual real barrel, the air barrels have to come out of the system. Within the system, those post-apportionment barrels get traded at a discount. So if you look at Q4, October, the differentials on the spot market blew out about $17. What we saw here in the first quarter is through the curtailment, that difference between the monthly index and the spot is very tight. And so we're not getting that big discount on the post-apportionment barrel. So curtailment is working. It's been very effective. It's creating jobs. It's, you know, taxes. And it's just we have to fix the nomination system.

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Manav Gupta, Crédit Suisse AG, Research Division - Research Analyst [4]

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And a quick follow-up, sir. You highlighted how you lowered the cost all the way from $40 to $15. There are some higher cost assets available in the market, which are being very publicly open for sale. I'm just trying to understand, given everything that's going on, is there's any interest in those assets?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [5]

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Yes. Well, we've never commented on acquisitions or potential acquisitions. I think if you look at Canadian Natural, we have no gaps in our portfolio. We're very strong. We're very good at what we do in our areas. So we don't need to do acquisitions. But at the same time, we're not afraid to do acquisitions if we can leverage our ability to add value to the company.

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Operator [6]

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Your next question comes from Neil Mehta from Goldman Sachs.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [7]

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The first question I had was just on price realizations. It looked like the price realizations came in better than what we would have anticipated, particularly on the heavy side. Is there anything you can point to on what you were doing around blending? Or was there any one-off dynamics that would have contributed to the premium heavy pricing?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [8]

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No. Everything is really the same. We don't change that piece. But what I can say is what you may be seeing is the difference in the post-apportionment spot barrels. If you look back in Q4, because of the nomination system and because of that post-apportionment discount, we were getting back 40% of our oil. And it was being discounted even further than the market index. For example, in October, it was $17. Now when you look at Q1, those differentials between the monthly index and to the post-apportionment have tightened. And so when they've tightened again, you're not seeing that big disconnect between the month index and the post-apportionment barrels.

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Neil Singhvi Mehta, Goldman Sachs Group Inc., Research Division - VP and Integrated Oil & Refining Analyst [9]

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Okay. That's helpful. And then the follow-up is just around capital returns. How should we think about the level of share repurchase? I think you had a strong buyback number in the first quarter, but it was still below the 50% that you typically target post-dividend. It looks like you're picking up the pace in April. But just any guidance here on the cadence in your confidence around the ability to hit 50%? And what scenario would you even go above that?

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Mark A. Stainthorpe, Canadian Natural Resources Limited - CFO & Senior VP of Finance [10]

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Yes. Hey, Neil. It's Mark. And just to recap. Remember that the free cash flow allocation policy adopted late last year takes the adjusted funds flow less our budgeted capital, less our current dividend, and then 50% is allocated to the balance sheet through debt repayment, 50% to share buybacks. That's the formula that we're striving for. Now of course that is a forward-looking exercise. So we have to look at it over a longer period of time. So what you're seeing is, as the free cash flow becomes more clear, you're seeing more get allocated to those share buybacks. So we'll be prudent and effective in how we do it. But that is something that is a forward look that needs to happen over time.

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Operator [11]

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Your next question comes from Phil Gresh from JP Morgan.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [12]

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I think first question would just be a follow-up to Neil's, maybe worded a little differently. Obviously working capital was a pretty big headwind in the quarter as oil prices went up, similar to your peers. But I'm curious how you think about what will happen with working capital for the rest of the year. And I realize that's not part of your return of capital formula. But is that something that you would be looking to leverage to pay down debt, given the build in debt in the first quarter?

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Mark A. Stainthorpe, Canadian Natural Resources Limited - CFO & Senior VP of Finance [13]

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Yes. Thanks, Phil. It's Mark again. Yes. So if you look at the working capital, that's right. That's partly why you don't see the allocation to debt in the quarter because the working capital built up. So you'll see that work itself out through the year as we go through that 50-50 the cash flow allocation.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [14]

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And so you would expect this $1 billion working capital build to reverse [solely] for the year or partially? Or just generally, how do you think about that?

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Mark A. Stainthorpe, Canadian Natural Resources Limited - CFO & Senior VP of Finance [15]

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What it is, Phil, is it's the timing of payments, right? So when you look at what December pricing was that comes in as a receivable for January, it gets built up. So depending on what pricing does and differentials do, will depend on what that receivable working capital will look like. So if you have a steady stream here to the end of the year on pricing, you'll see that come in, flat-line out.

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Philip Mulkey Gresh, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [16]

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Right. Okay. And then second question just on CapEx. It sounds like you're obviously still pretty committed to a $3.7 billion budget for this year. Curious what, if anything, would make you reconsider that at this point, given that we're approaching almost the midpoint of the year? And more broadly, how you think about the project opportunities at Horizon and at what point you might consider those?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [17]

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Yes. So we're still, I would say, call it in a holding pattern until we see clarity on market access. Really what we would like to see is those dates firm, potentially maybe shovels in the ground, before we start to adding capital to our budget. In the meantime, we're doing all the [preparatory] work at Horizon, thermal. And on the conventional side, to be able to execute projects should market access become clear.

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Operator [18]

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Your next question comes from Greg Pardy from RBC Capital Markets.

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Greg M. Pardy, RBC Capital Markets, LLC, Research Division - MD and Co-Head Global Energy Research [19]

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Wanted to jump maybe just into maybe a bit more of the macro and then your market access strategy if things don't go as planned with pipelines. But maybe just the first -- Steve, you made the comment around curtailments being very effective in terms of tightening spreads, and we 100% agree with that. The mechanism there though, I think when originally envisioned had been more along the lines of very significant reductions in terms of Alberta storage.

Just wondering if you can maybe tie the two together? Because I mean the last number we have on storage, of course, because the data's not publicly available, is still pretty elevated. I'm just wondering how much of a concern that might be in terms of differentials and whether those numbers should just naturally come down over the course of the year?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [20]

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Yes. It's Tim here. So there's a couple of things in there. One, going back to where we started with the curtailment, the original proposal was to use companies' capacity, a 6-month average of what they could produce. The next step was, they went to this peak production piece, which, in my mind, was not well thought out, as these 1-month peaks aren't representative of what the companies can produce. So that would have helped in terms of if you look at companies that could make their curtailment volumes and companies that couldn't make their curtailment volumes in Q1.

Canadian Natural is one of the few companies that had the capacity to meet all its curtailment volumes. Going from there, we saw rail pullback with the differentials. And again, between the WTI price and the differentials, the crude by rail, for some operators, wasn't as economic as going through the pipe. And as such, they pulled back on the rail. As things have strengthened here on the WTI price, differentials, the premium of $2 WCS in the Gulf, it is very economic to ship more oil by rail. And we expect that will happen here over the year.

In terms of declines, there is low activity out in Alberta. And if you just say that 45,000 barrels will start to decline, and NWR will come up and running and start taking oil out of the market at some point. But [tractionally], there are a lot of positives headed here towards the summer. The turnaround season has begun. And as such, ourselves and many other producers will start to take volumes off that will further draw down the inventories.

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Greg M. Pardy, RBC Capital Markets, LLC, Research Division - MD and Co-Head Global Energy Research [21]

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Okay. Thanks, Tim. That's helpful. I mean you guys are very long-term in nature. So wondering how you're thinking about plan B in terms of market access. So I think we're as optimistic as anybody around Trans Mountain, and then ideally Line 3 being on sometime early in the second half of next year. If that doesn't happen, then how do you think about growth and balance between how much you're investing in Canada versus externally? And is the bridging mechanism around rail potentially going to become more important? Like I'm sure you've thought about this just given the size and the presence that you play in the basin.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [22]

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Yes. Well again, if you look at it today, we are shipping oil by rail, 14,000 barrels a day. And I think the first thing that Alberta has to do and wrap it's head around is the nomination process. If you look at the nomination process, I think that has to be number one before you can even step into rail, because all it's doing is pushing real barrels out of the pipeline and actually forcing discount on other producers. So I think that's the first step.

Next step is rail. And for us, we all participate in that market. But we have to have the right deal and it has to be flexible. But we're not afraid to do more rail. But it has to be for the right reason and the right economic reason to add value for the company.

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Greg M. Pardy, RBC Capital Markets, LLC, Research Division - MD and Co-Head Global Energy Research [23]

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Tim, last one for me then is, just with the mainline going from common carrier to presumably contracted statuses, is that something that you would see alleviating -- well, it would obviously change the whole makeup on how this works? But is that something that CNQ would be interested in signing up for?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [24]

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Well, without knowing all the terms of what that would look like, my initial impression would be it would be very difficult to just go to that one area. Right now, we would like to have multiple exit points versus being stuck to one pad, too. So I think it's going to be very difficult for us to get onboard with something like that, without having potentially multiple dropout points going down to the Gulf. We don't want to be held hostage to one area.

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Operator [25]

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Your next question comes from Phil Skolnick from Eight Capital.

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Philip Ross Skolnick, Eight Capital, Research Division - MD of Energy Research [26]

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Just want to go back to the M&A question. I understand you say you don't have any gaps in the portfolio or anything. But what is it that you look for when making an acquisition? Do you take into consideration market access, especially given what's going on today in tax pools, et cetera? Particularly given there is one visible [package] that's out there right now.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [27]

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Well, the thing we look at is, how do we add value to the company long term? And so if you look at ASOP, we had Horizon, we had an extremely great team up there driving our cost, increasing reliability in a safe, reliable way. And we were able to leverage our knowledge for the ASOP operations. And you're seeing that the huge benefits that have today for the company, and it has created long-term value to the company. So that's probably the key thing. We always look at these things of how we could add long-term value to the company.

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Philip Ross Skolnick, Eight Capital, Research Division - MD of Energy Research [28]

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Okay. Thanks. And just finally, in terms of the Albian which started with the Scotford Upgrader going through a 38-day turnaround, are you producing any dil bit out of the Albian? And if so, are you like storing that right now? So does that mean sales in June, July could be greater than production?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [29]

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No.

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Steve W. Laut, Canadian Natural Resources Limited - Executive Vice Chairman [30]

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We're essentially pacing the upgrader.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [31]

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Yes. Yes, it's just pacing the upgrader. There's no change to the operation there. But what I can say is the damage at the upgrader is what I would call very minimal. And I expect everything to be back to normal here the first part of June.

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Philip Ross Skolnick, Eight Capital, Research Division - MD of Energy Research [32]

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Okay. Perfect. And then finally, just how should we think about this gas injection test? What do you look for, for success? And what would lead to a full-scale development? And how large can that be?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [33]

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The gas injection at Septimus?

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Philip Ross Skolnick, Eight Capital, Research Division - MD of Energy Research [34]

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Yes.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [35]

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Yes. Well, in theory, we'll know here probably in the next 6 months. But in theory, by injecting gas there, we'll be able to enhance our liquids recovery out of the Montney. And in theory, if it works, it'll be very substantial, as we're the largest Montney landholder. So with that, we're doing -- we feel very confident with the opportunity. We're actually doing engineering work on another site that we'll potentially pilot here in the next year or two as well. So we're looking forward to that opportunity.

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Operator [36]

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Your next question comes from Joe Gemino from Morningstar.

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Joseph J. Gemino, Morningstar Inc., Research Division - Equity Analyst [37]

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You may have touched on this a little bit. But can you expand a little further in how you think about bringing your growth projects online, Kirby and Primrose, with these production cuts in effect and there's the potential for them to be extended into next year with the Line 3 delay?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [38]

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Yes. So specifically on Kirby, the thing you have to look at is there are declines across the basin. Rail is coming into Alberta and it will take away incremental barrels. And NWR will be on production here this year and taking 50,000 barrels a day. So beyond that, when you look at Kirby, it is a nice slow ramp-up. In Alberta it will add 300 direct jobs. It's an incremental production. And I think it's very important for Alberta in terms of direction, in terms of positive signals to the market.

With Primrose, Primrose is the pad adds. They're very economic, and we can turn them on or turn them off. So while we're still targeting Primrose to start steaming and potentially producing in the Q4, that one, it's an optionally, so that it's the same number of people. It's not too much different than another well to a different field. So whereas, Kirby is very important I think to Alberta in terms of jobs and growth long term.

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Joseph J. Gemino, Morningstar Inc., Research Division - Equity Analyst [39]

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Great. That's helpful. And if I could follow. There's been a lot of talk about Enbridge's priority access. Do you have any thoughts on where Canadian Natural's fits into those discussions?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [40]

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Again, preliminary, we're not in favor of it. The issue we see is that by not having multiple exit points from along the line, we would be held hostage into that one area. And so for us, we would love to have a pipeline with good access to the Gulf Coast where you have a competitive market and you could sell your barrels at market price versus a discount.

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Operator [41]

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Your next question comes from Asit Sen from Bank of America Merrill Lynch.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [42]

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You've been very clear on your capital budget being at $3.7 billion, unless you see clarity on market access. Just wondering if you could remind us on the Horizon growth project economics, both in the PFD and the debottlenecking and what the economics look like based on your work currently? And what's the lead time for such project to ramp-up?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [43]

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So the current forecast is really 2 years from today is the timing for Horizon. And again, we're doing the engineering work. We're doing the cost estimates. And neither project has been sanctioned. But the paraffinic piece, which is kind of a dil bit piece, was 45,000 to 55,000 barrels a day for 1.4 billion. And as for the Stage II, the SCO-1, we're still doing the work to work out those costs and the execution plan.

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Asit Kumar Sen, BofA Merrill Lynch, Research Division - Research Analyst [44]

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Thank you. And if I could go back again to the market access and the diff situation. Sorry to put you in the spot. But what's your, since you have access to much more information than we do, what's your best guess in terms of the roadmap and timing to normalization of heavy oil or light oil diffs? What's the pathway?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [45]

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Well, I see the pathway kind of in a two-step thing. I think the first piece is we have to fix the nomination system. Having these barrels, these air barrels affecting or distorting the market, first and foremost to me, has to be fixed. Second piece is that once you fix the system, then you would probably get a better system in terms of people could do the economics on rail and then figure out if it's the right opportunity to move oil to the Gulf Coast. And I kind of see it as a two-step process here.

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Operator [46]

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Your next question comes from Roger Read from Wells Fargo.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [47]

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Just wanted to catch up. On the curtailment, maybe a slightly different path here. I think we all understand the immediate goal of the curtailment. But as we look at the kind of longer-term plan for getting improved access, part of which would likely have been increased rail capacity, any views you have that you can share with us on how you think that has helped? As we think about takeaway capacity at the end of this year and into 2020, certainly the timeframe before we'll see any meaningful improvement in pipeline capacity beyond what is already known, right? The volumes at Northwest Refinery will take, the Line 3 expansion and so forth.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [48]

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Yes. So going forward, we believe that with all between the declines, the rail, and you have to remember the Alberta government is in for 120,000 barrels a day as well, an the Northwest Upgrader. The curtailments will probably decrease over time.

But I can't emphasize enough, unless the nomination rules get changed, we're still going to have air in the system and we're still, as an industry, as Albertans, suffer from job losses and from a huge discount on our oil not getting world prices, unless we fix the system. And I think that has to be one of the first priorities is to fix the nomination system so that Alberta and Alberta Canadian companies can get world price for their product. And as a result of that, then it translates into jobs, royalties, taxes and all the benefits that are actually shared across Canada by having market access.

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Roger David Read, Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst [49]

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Yes. I understand that. I guess my question is what has curtailment done to help on that front? I mean it's a temporary bandage on a particularly bad wound; I get that part. But the overall goal here has to be to improve takeaway capacity to, as you say, deal with the nominations issue. So maybe more specific on my question, has curtailment done anything to change any of those 2 main factors that you've cited here? Have you seen any progress on the political front with that?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [50]

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Yes. Well with the change in government here, there's been really no change because everything went on a holding pattern. We expect here in the next month, that we'll reinitiate those discussions. A few of the government officials have reached out to us after the election to reinitiate some of the discussions that we had previously. So we expect over the coming months that people will start to be engaged.

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Operator [51]

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Your next question comes from Fai Lee from Odlum Brown.

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Fai Lee, Odlum Brown Limited, Research Division - Equity Analyst [52]

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You've [given] a lot of factual arguments on your progress and commitment to addressing ESG issues and greenhouse gas emissions. However for a lot of politicians and industry opponents, I get the impression that their ESG concerns, beliefs and arguments are anchored more on emotions rather than logic.

Do you have any thoughts on potential strategies on how Can Natural and the rest of the industry can communicate a positive ESG message to people not necessarily easily persuaded by factual arguments?

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Steve W. Laut, Canadian Natural Resources Limited - Executive Vice Chairman [53]

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Yes. I think what you see in the industry and Canadian Natural ourselves try to do this, we work together with CAPP and other associations to get that factual message out there. I think we are seeing good results. And if you look at the [polling] results, majority of Canadians are in favor of pipelines. They see the pipeline issue as a crisis that needs to be solved and they recognize the great work that the Canadian oil and gas industry has done to reduce our emissions intensity and overall environmental performance. That message is getting there. It's taking some time. As you pointed out, it's a very emotional message on some of the detractors side. But I think in the long term, things are going our way.

Also, on C69, I think you're seeing the Senate actually listen and make significant amendments to Bill C69. And we'll see how that works through the process. But you can now see that there is being progress made. So it's much more positive than maybe it looks out there from all the emotional rhetoric.

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Operator [54]

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Your next question comes from Jon Morrison from CIBC Capital Markets.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [55]

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Tim, just a point of clarification and going back to your comments around apportionment. Is it your view that there continues to be physical space on the mainline in the past couple months, and that's ultimately why Canadian barrels continue to clear added tariff pricing? Because your point, it's a bit tough to reconcile the tight diffs that are holding kind of across grades, the reported to apportionment numbers and Canadian storage that appears to effectively been in stock since kind of late January, plus or minus a little.

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [56]

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Yes, it is a little bit confusing in the sense that there's a lot of things going on. I think the first there is the pipe is full. And so that piece we feel fairly confident that that piece is happening. But I guess what's happening on the post-apportionment side is that the supply balance is probably very close. So we haven't seen a increase and we really haven't seen much of a decrease. And part of it has been the rail has been fluctuating. Part of it is the Alberta government has increased the curtailment, I don't know -- lessened the curtailment I guess over the last few months. So what we're seeing is there's a lot of levers that are kind of in the mix. So it is very confusing. But I think the bottom line is we're seeing is that there's a supply balance, balance, and, therefore, that incremental barrel, if it gets -- the supply goes to high, we will get impacted.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [57]

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And so that's where you basically believe that over-nominated barrels are being filled by spot purchases that largely line up with production? And that's why storage really isn't making a change, and that's not being used as a mechanism to sell the line at this point?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [58]

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You're absolutely correct.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [59]

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Okay. Is it fair to assume that even if we saw mainline recontracting conversations, get solidified over 2019 that the changes aren't effectively going to take hold until January 2021? And then depending on what happens with incremental egress, maybe it's a bit of a moot point?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [60]

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I'm not going to speculate on that whole thing. I think it's a fair ways away from going anywhere in industry today. So until we see some solid details of exactly what would be proposed, I wouldn't even want to speculate on the timing or anything.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [61]

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Maybe just a last one for me on the broader M&A focus. Given that there's no strategic need for you guys to buy anything, given the portfolio that you have, does it imply that the likelihood of doing anything really just becomes a function of price and accretion? And then secondarily, if we don't have more visibility than anything on Line 3, are you comfortable taking on more upstream production if it doesn't have strong market access? Or you'd ultimately need to see progress in one of the other two lines to really take comfort on anything of scale on size?

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Timothy Shawn McKay, Canadian Natural Resources Limited - President & Director [62]

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I think in any kind of M&A, that's a key thing for us is, how do we add value and what does it do for the company on a long term? And value is a lot of different items that include what we can do in terms of operating efficiency, operating cost, increasing volumes and how it really creates value for the company. So that is the key thing, is we really in any kind of M&A is want to know how it can add value to the company for long term.

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Operator [63]

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Our last question comes from David Clark with Mizuho.

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Corey B. Bieber, Canadian Natural Resources Limited - Executive Advisor [64]

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Dave? Hello?

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Operator [65]

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David Clark, your line is open.

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Corey B. Bieber, Canadian Natural Resources Limited - Executive Advisor [66]

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Okay. Well, with that, operator, I'd like to thank you and thank everyone for attending our conference call this morning, and would like to reiterate that Canadian Natural's large diverse asset base continues to drive significant shareholder value. The ability of Canadian Natural's teams to deliver effective and efficient operations with top-tier performance is contributing to substantial and sustainable free cash flow. And this, together with defective capital allocation, contributes to achieving Canadian Natural's goal of maximizing shareholder value.

As always, if you do have any further questions, please don't hesitate to give us a shout. And thank you again. We'll look forward to our 2019 second quarter conference call in early August. Thank you and goodbye.

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Operator [67]

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This concludes today's conference call. You may now disconnect.