CALGARY, ALBERTA–(Marketwired – Aug. 7, 2014) – Canadian Natural Resources Limited (TSX:CNQ) (NYSE:CNQ)
Commenting on second quarter results, Steve Laut, President of Canadian Natural stated, “Canadian Natural’s first half of the year was solid. We have effectively executed on our strategy and have grown production both organically and with the successful integration of acquired assets. As a result, Canadian Natural delivered record quarterly total liquids production, which included record production at our Horizon Oil Sands operations of approximately 119,200 barrels per day of synthetic light crude oil, record North America light crude oil and NGLs production, record Pelican Lake heavy crude oil production and record primary heavy crude oil production. These milestones, combined with strong natural gas production, contributed to record total production this quarter of approximately 817,500 barrels of oil equivalent per day.
Canadian Natural’s large, diverse asset base, defined growth plan and effective strategy to transition to long-life, low decline assets, allows us to retain optionality and remain flexible in our capital allocation. This flexibility has allowed us to take advantage of opportunistic acquisitions and allocate capital to the highest return projects. Canadian Natural’s large, diverse asset base, effective and efficient operations and proven strategy delivers increasing free cash flow. By effectively transitioning to longer life, low decline assets, Canadian Natural will generate increasing, more sustainable free cash flow, maximizing value for our shareholders.”
Canadian Natural’s Chief Financial Officer, Corey Bieber, continued, “The execution of our defined growth plan, combined with factors such as higher sales volumes in North America and strong netbacks, has led us to deliver record cash flow this quarter of approximately $2.6 billion. Canadian Natural is committed to maintaining financial discipline in all our operations, which further supports our increasing free cash flow generation. Operating costs declined this quarter over Q1/14 as a result of production growth and continued effective and efficient operations. Our dedication to disciplined capital allocation and cost control enables us to maintain a strong balance sheet. This quarter demonstrates how the Company is poised to continue to grow its balanced portfolio while remaining in an enviable position to return value to shareholders.”
QUARTERLY HIGHLIGHTS
Three Months Ended Six Months Ended --------------------------------------------- ($ Millions, except per common Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 share amounts) 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Net earnings $ 1,070 $ 622 $ 476 $ 1,692 $ 689 Per common share - basic $ 0.98 $ 0.57 $ 0.44 $ 1.55 $ 0.63 - diluted $ 0.97 $ 0.57 $ 0.44 $ 1.54 $ 0.63 Adjusted net earnings from operations(1) $ 1,150 $ 921 $ 462 $ 2,071 $ 863 Per common share - basic $ 1.05 $ 0.85 $ 0.42 $ 1.90 $ 0.79 - diluted $ 1.04 $ 0.85 $ 0.42 $ 1.89 $ 0.79 Cash flow from operations(2) $ 2,633 $ 2,146 $ 1,670 $ 4,779 $ 3,241 Per common share - basic $ 2.41 $ 1.97 $ 1.53 $ 4.38 $ 2.97 - diluted $ 2.39 $ 1.97 $ 1.53 $ 4.36 $ 2.97 Capital expenditures, net of dispositions $ 5,456 $ 1,893 $ 1,792 $ 7,349 $ 3,528 Daily production, before royalties Natural gas (MMcf/d) 1,634 1,175 1,122 1,406 1,136 Crude oil and NGLs (bbl/d) 545,169 488,788 436,363 517,134 462,615 Equivalent production (BOE/d)(3) 817,471 684,647 623,315 751,426 651,921 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(1) Adjusted net earnings from operations is a non-GAAP measure that the Company utilizes to evaluate its performance. The derivation of this measure is discussed in the Management’s Discussion and Analysis (“MD&A”).
(2) Cash flow from operations is a non-GAAP measure that the Company considers key as it demonstrates the Company’s ability to fund capital reinvestment and debt repayment. The derivation of this measure is discussed in the MD&A.
(3) A barrel of oil equivalent (“BOE”) is derived by converting six thousand cubic feet (“Mcf”) of natural gas to one barrel (“bbl”) of crude oil (6 Mcf:1 bbl). This conversion may be misleading, particularly if used in isolation, since the 6 Mcf:1 bbl ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In comparing the value ratio using current crude oil prices relative to natural gas prices, the 6 Mcf:1 bbl conversion ratio may be misleading as an indication of value.
– Canadian Natural generated record cash flow from operations of approximately $2.63 billion in Q2/14 compared to approximately $1.67 billion in Q2/13 and $2.15 billion in Q1/14. The Company achieved record cash flow per share of $2.41, a 58% and 22% increase respectively from Q2/13 and Q1/14 levels. The increase in cash flow from Q1/14 reflects higher North America crude oil and NGLs, synthetic crude oil (“SCO”) and natural gas sales volumes, higher North America crude oil and NGLs netbacks, higher realized SCO prices and higher crude oil sales in Offshore Africa, offset by lower North America natural gas netbacks and the impact of a stronger Canadian dollar.
– Adjusted net earnings from operations for Q2/14 were a record $1.15 billion, compared to adjusted net earnings of $462 million in Q2/13 and $921 million Q1/14. Changes in adjusted net earnings reflect the changes in cash flow from operations as well as higher depletion, depreciation and amortization expense from Q2/13 and Q1/14 levels.
– Total crude oil and NGLs production for Q2/14 averaged a record of approximately 545,200 barrels per day (“bbl/d”), a 12% increase over Q1/14. The strong Q2/14 production performance was largely driven by:
— record SCO production at our Horizon Oil Sands (“Horizon”) operations,
— record North America light crude oil and NGLs production,
— record Pelican Lake heavy crude oil production,
— record primary heavy crude oil production, and
— thermal in situ production volumes exceeding the Company’s previously issued quarterly production guidance.
– During Q2/14 Horizon continued to achieve strong and reliable operating performance, with record quarterly SCO production of approximately 119,200 bbl/d, a 5% increase from Q1/14 levels. Horizon Q2/14 operating costs, including natural gas costs, declined to $36.61/bbl, 19% less than Q2/13 levels and 11% less than Q1/14 levels. Horizon production is targeted to be taken offline for approximately 25 days commencing in mid-August to advance the coker tie-in, originally planned for 2015. Horizon production levels are targeted to average approximately 127,000 bbl/d once the coker tie-in is complete.
– North America light crude oil and NGLs achieved record quarterly production of approximately 93,000 bbl/d in Q2/14. Production increased 46% from Q2/13 levels and 23% from Q1/14 levels, largely as a result of the successful integration of light crude oil and NGLs production volumes acquired to date, as well as a successful drilling program. The increase from Q2/13 levels also reflects the increased NGLs production associated with the Septimus project expansion completed in Q3/13.
– In Q2/14, Pelican Lake operations achieved record quarterly heavy crude oil production volumes of approximately 49,600 bbl/d, a 19% increase from Q2/13 volumes and a 3% increase from Q1/14 volumes. This is the sixth consecutive quarter of production increases, which reflects Canadian Natural’s continued success in developing, implementing and optimizing polymer flood technology at our Pelican Lake property.
– In Q2/14, primary heavy crude oil operations achieved record quarterly production of approximately 143,200 bbl/d. Primary heavy crude oil production increased 5% from Q2/13 levels and increased 1% from Q1/14 levels, due to strong results from the Company’s effective and efficient drilling program.
– Q2/14 thermal in situ production volumes were approximately 114,400 bbl/d, exceeding the Company’s previously issued guidance of 98,000 to 108,000 bbl/d, as a result of stronger than expected production volumes in Primrose North.
— At Kirby South, the reservoir is responding as expected, with Q2/14 production averaging approximately 15,000 bbl/d. Kirby South production is targeted to grow to facility capacity of 40,000 bbl/d by Q1/15.
— To date, the Kirby North Phase 1 (“Kirby North”) project has now received all regulatory permits. Targeted project capital for Kirby North is $1.45 billion, or approximately $36,000 per flowing barrel at a project capacity of 40,000 bbl/d. Detailed engineering on the Central Processing Facility is essentially complete and first steam-in is targeted for Q4/16, subject to regulatory requirements.
– Q2/14 total natural gas production was 1,634 MMcf/d, an increase of 46% and 39% respectively from Q2/13 levels and Q1/14 levels. The increase in natural gas production was as a result of property acquisitions and a concentrated liquids-rich natural gas drilling program. The increase from Q2/13 levels also reflects the increased natural gas production associated with the Septimus project expansion completed in Q3/13.
– During the first half of 2014, the Company closed approximately $3.6 billion in asset acquisition transactions, acquiring assets in areas adjacent or proximal to Canadian Natural’s current Canadian operations. These high quality assets were acquired at an average cost of $30,200 per flowing barrel and are weighted 79% natural gas and 21% liquids. In Q2/14 the assets, which include associated key strategic facilities, a royalty revenue stream and undeveloped land, were integrated into current operations. Canadian Natural is working to maximize efficiencies of the integrated operations while high grading development opportunities in the Company’s large and diverse portfolio.
– Canadian Natural continues its ongoing review of its royalty lands and royalty revenue portfolio. As part of this review a thorough process is taking place to integrate the newly acquired freehold mineral title and royalty lands with Canadian Natural’s previously existing royalty portfolio, which also consists of freehold mineral title and royalty lands. This review includes a detailed examination of Canadian Natural’s freehold and royalty land position, production volumes, product mix, associated cash flow and collection of payments. For example, as part of this review, to date the Company has identified 47 outstanding offset obligations with compensatory royalties owing to Canadian Natural and an associated offset drilling obligation. Canadian Natural is targeting to determine the best option to maximize value for its shareholders as it relates to its freehold and royalty lands by 2014 year end.
– As expected, heavy crude oil differentials narrowed during Q2/14, resulting in favorable price realizations for the Company. The WCS heavy oil differential as a percent of WTI (“WCS differential”) averaged 19% in Q2/14 compared to 20% in Q2/13 and 24% in Q1/14.
– In Q2/14, average North America Exploration and Production operating costs declined by approximately 8% for liquids and approximately 4% for natural gas, over Q1/14 levels, as a result of effective and efficient operations.
– Under the Company’s Normal Course Issuer Bid, year to date, Canadian Natural has purchased for cancellation 8,165,000 common shares at a weighted average price of $45.59 per common share.
– Canadian Natural declared a quarterly cash dividend on common shares of C$0.225 per share payable on October 1, 2014.
OPERATIONS REVIEW AND CAPITAL ALLOCATION
In order to facilitate efficient operations, Canadian Natural focuses its activities in core regions where the Company owns a substantial land base and associated infrastructure. Land inventories are maintained to enable continuous exploitation of play types and geological trends, greatly reducing overall exploration risk. By owning and operating associated infrastructure, the Company is able to maximize utilization of production facilities by processing its own or third party volumes, thereby increasing control over production costs. Furthermore, the Company maintains large project inventories and production diversification among each of the commodities it produces; light and medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen and SCO, natural gas and NGLs. A large diversified project portfolio enables the effective allocation of capital to higher return opportunities.
OPERATIONS REVIEW
Drilling activity Six Months Ended Jun 30 ---------------------------------------- 2014 2013 (number of wells) Gross Net Gross Net ---------------------------------------------------------------------------- Crude oil 470 425 471 459 Natural gas 48 38 29 23 Dry 6 5 10 10 ---------------------------------------------------------------------------- Subtotal 524 468 510 492 Stratigraphic test / service wells 353 352 321 321 ---------------------------------------------------------------------------- Total 877 820 831 813 ---------------------------------------------------------------------------- Success rate (excluding stratigraphic test / service wells) 99% 98% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- North America Exploration and Production Crude oil and NGLs - excluding Thermal In Situ Oil Sands Three Months Ended Six Months Ended --------------------------------------------- Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Crude oil and NGLs production (bbl/d) 285,740 266,110 241,402 275,979 239,014 ---------------------------------------------------------------------------- Net wells targeting crude oil 151 263 136 414 407 Net successful wells drilled 149 260 131 409 398 ---------------------------------------------------------------------------- Success rate 99% 99% 96% 99% 98% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
– North America crude oil and NGLs averaged record quarterly production of approximately 285,700 bbl/d in Q2/14, an increase of 18% from Q2/13 levels and 7% from Q1/14 levels.
– In Q2/14, primary heavy crude oil operations achieved record quarterly production of approximately 143,200 bbl/d, an increase of 5% from Q2/13 levels and an increase of 1% from Q1/14 levels. Strong performance combined with effective and efficient operations and a vast inventory of over 8,000 locations enables Canadian Natural to remain an industry leading primary heavy crude oil producer. Canadian Natural continued with its large and cost efficient drilling program, drilling 122 net primary heavy crude oil wells in Q2/14.
– Canadian Natural’s primary heavy crude oil assets provide strong netbacks and a high return on capital in the Company’s portfolio of diverse and balanced assets. In Q2/14 operating costs declined, as the Company achieved expected efficiencies in sand handling.
– In Q2/14, Pelican Lake operations achieved record heavy crude oil quarterly production volumes of approximately 49,600 bbl/d, a 19% increase from Q2/13 volumes and a 3% increase from Q1/14 volumes. This is the sixth consecutive quarter of production increases, which reflects Canadian Natural’s continued success in developing, implementing and optimizing polymer flood technology at our Pelican Lake property. Industry leading Pelican Lake operating costs of $8.92/bbl in Q2/14 represent a 20% decrease in operating costs from Q2/13 levels and an 8% decrease from Q1/14 levels. The increasing polymer flood production response combined with continued optimization and effective and efficient operations have driven cost improvements.
– North America light crude oil and NGLs achieved record quarterly production of approximately 93,000 bbl/d in Q2/14. Production increased 46% from Q2/13 levels and 23% from Q1/14 levels, largely as a result of the successful integration of light crude oil and NGLs production volumes acquired to date, as well as a successful drilling program. The increase from Q2/13 levels also reflects the increased NGLs production associated with the Septimus project expansion completed in Q3/13.
– The Company drilled 13 net light crude oil wells in Q2/14. Canadian Natural’s light crude oil drilling program will continue to utilize and advance horizontal multi-frac well technology to access new reserves in pools across the Company’s land base.
Thermal In Situ Oil Sands Three Months Ended Six Months Ended --------------------------------------------- Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Bitumen production (bbl/d) 114,414 82,077 90,051 98,335 99,419 ---------------------------------------------------------------------------- Net wells targeting bitumen 3 11 27 14 60 Net successful wells drilled 3 11 27 14 60 ---------------------------------------------------------------------------- Success rate 100% 100% 100% 100% 100% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
– Q2/14 thermal in situ production volumes were approximately 114,400 bbl/d, exceeding the Company’s previously issued guidance of 98,000 to 108,000 bbl/d, as a result of stronger than expected production volumes in Primrose North. Canadian Natural remains a leader in effective and efficient thermal operations; with total Primrose thermal operating costs, including energy costs, of $10.20/bbl for Q2/14.
– At Kirby South, the reservoir is responding and the wells are performing as expected, with Q2/14 production averaging approximately 15,000 bbl/d and Q3/14 production is targeted to average approximately 18,000 bbl/d. In Q2/14, 39 well pairs had been converted to full SAGD production, and 10 well pairs are progressing through the steam circulation phase to initiate the SAGD process.
– Subsequent to Q2/14, Kirby South experienced temporary mechanical issues at its associated steam generating facility, which has temporarily restricted steam generation capacity. Canadian Natural is working to resolve these issues and targets to incrementally increase steam circulation again as of August 2014. As a result of the temporary steam capacity restriction, the production ramp up to facility capacity of 40,000 bbl/d is now targeted for Q1/15.
– To date, the Kirby North project has now received all regulatory permits. Targeted project capital for Kirby North is $1.45 billion, or approximately $36,000 per flowing barrel at a project capacity of 40,000 bbl/d. The Kirby North project includes 56 well pairs and expansion infrastructure for future growth. Detailed engineering on the Central Processing Facility is essentially complete and first steam-in is targeted for Q4/16, subject to regulatory requirements.
– During Q2/13, bitumen emulsion was discovered at surface at 4 separate locations in the Company’s Primrose development area, 3 at Primrose East and 1 at Primrose South. The cleanup of all 4 sites is complete and the Company has confirmed there is no on-going contamination of the aquifer. Subsequent to Q2/14, Canadian Natural submitted the initial causation review report relating to seepage to surface at Primrose to the Alberta Energy Regulator (“AER”) for review. An independent technical expert review panel (the “Panel”) reviewed the causation report and submitted its findings to the AER. The Panel concurs with the main contributing factors outlined by Canadian Natural. Further details can be found on the Company’s website at www.cnrl.com.
– Concurrent with the causation review, Canadian Natural has developed methods to prevent seepages for all potential failure mechanisms. This includes the remediation of legacy wellbores, modified steaming strategies, enhanced monitoring techniques and proactive response strategies. Canadian Natural believes that reserves recovered from the Primrose area over its life cycle will be substantially unchanged.
– As a result of the thorough and ongoing investigation process undertaken by Canadian Natural in relation to the Primrose seepage to surface, as well as a detailed review process by the Panel, the implementation of a low pressure steamflood at Primrose East has been delayed longer than previously anticipated. This, in conjunction with the temporary mechanical issues at Kirby South, has resulted in the Company revising 2014 annual thermal production guidance to 112,000 to 122,000 bbl/d.
Natural Gas Three Months Ended Six Months Ended ------------------------------------------ Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Natural gas production (MMcf/d) 1,606 1,147 1,092 1,378 1,108 ---------------------------------------------------------------------------- Net wells targeting natural gas 13 25 8 38 24 Net successful wells drilled 13 25 8 38 23 ---------------------------------------------------------------------------- Success rate 100% 100% 100% 100% 96% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
– North America natural gas production averaged 1,606 MMcf/d for Q2/14, an increase of 47% and 40% respectively from Q2/13 levels and Q1/14 levels. The increase in natural gas production was as a result of property acquisitions and a concentrated liquids-rich natural gas drilling program. The increase from Q2/13 levels also reflects the increased natural gas production associated with the Septimus project expansion completed in Q3/13.
– In Q2/14, Canadian Natural completed natural gas and light crude oil property acquisitions in areas adjacent or proximal to the Company’s current operations. The Company has commenced optimization of these assets with facility consolidations, well reactivations and facility turnarounds. Canadian Natural will advance development opportunities and continue the fabrication of the Ferrier central processing modules. These activities target to enhance production while reducing the operating costs on the acquired assets.
– Subsequent to Q2/14, as a result of forest fires in British Columbia and Alberta, and third party facility turnarounds in British Columbia, natural gas production was impacted by approximately 130 MMcf/d for approximately 31 days. The impacted production volumes are reflected in the Company’s guidance.
International Exploration and Production
Three Months Ended Six Months Ended --------------------------------------------- Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Crude oil production (bbl/d) North Sea 12,615 16,715 18,901 14,654 18,838 Offshore Africa 13,164 10,791 18,055 11,984 17,089 ---------------------------------------------------------------------------- Natural gas production (MMcf/d) North Sea 5 7 4 6 3 Offshore Africa 23 21 26 22 25 ---------------------------------------------------------------------------- Net wells targeting crude oil 1.7 - 1.0 1.7 1.0 Net successful wells drilled 1.7 - 1.0 1.7 1.0 ---------------------------------------------------------------------------- Success rate 100% - 100% 100% 100% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
– International crude oil production averaged approximately 25,800 bbl/d during Q2/14, a 6% decrease from Q1/14 levels, and below the Company’s previously issued guidance of 27,000 to 31,000 bbl/d. This decrease was primarily as a result of unplanned downtime at Tiffany. Turnaround activities, planned for 25 days and originally scheduled for Q3/14, were advanced and completed in Q2/14. The Q2/14 production impact was approximately 4,500 bbl/d; production will not resume until mid Q3/14 as a result of a third party pipeline outage.
– In Q2/14, the Banff/Kyle FPSO in the central North Sea returned to the field and subsequently resumed production in late July 2014. Combined net production of approximately 3,500 bbl/d was suspended in 2011 after the infrastructure suffered significant storm damage. The wells are currently being reinstated in a controlled manner with net production rates targeted to increase to approximately 5,000 bbl/d once fully operational.
– During Q4/13 the Company contracted a drilling rig for a 6 well (3.5 net) drilling program at the Baobab field in Cote d’Ivoire. This rig is expected to arrive no later than Q1/15 to commence an approximate 16-month light crude oil drilling program, which is targeted to add 11,000 BOE/d of net production when complete.
– During Q2/14, Canadian Natural contracted a drilling rig to undertake the 12-month light crude oil infill drilling program at Espoir, Cote d’Ivoire. The development of Espoir is targeted to commence in the second half of 2014 with a 10 well (5.9 net) drilling program. This program is targeted to add 5,900 BOE/d of net production when complete.
– Canadian Natural previously acquired two exploration blocks in Cote d’Ivoire which are prospective for deepwater channel/fan structures similar to Jubilee crude oil discoveries in Offshore Africa. In Q2/14, an exploratory well was drilled on Block CI-514, in which the Company has a 36% working interest. The well encountered a series of sands approximately 350 metres thick which contain a hydrocarbon column of approximately 40 metres of light crude oil with 34 degree API gravity. The well, which demonstrated the presence of a working petroleum system, was plugged and the data gathered will be evaluated to determine the extent of the accumulation and the future appraisal plan. These results enhance the prospectivity of Canadian Natural’s Block CI-12, located approximately 35 km west of Canadian Natural’s current production at Espoir and Baobab.
– Canadian Natural has a 50% interest in an exploration right located in the Outeniqua Basin, approximately 175 kilometers off the southern coast of South Africa. Subsequent to Q2/14, on July 21, 2014, the operator commenced drilling the first exploratory well. Canadian Natural is carried on the first US$150 million in gross costs. The targeted drilling time is approximately 120 days.
North America Oil Sands Mining and Upgrading – Horizon
Three Months Ended Six Months Ended --------------------------------------------- Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Synthetic crude oil production (bbl/d) 119,236 113,095 67,954 116,182 88,255 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
– During Q2/14 Horizon continued to achieve strong and reliable operating performance, achieving record quarterly SCO production averaging approximately 119,200 bbl/d, a 5% increase over Q1/14 levels. July 2014 SCO production remained strong, averaging approximately 112,700 bbl/d. Horizon production is targeted to be taken offline for approximately 25 days commencing in mid-August to advance the coker tie-in, originally planned for 2015. Horizon production levels are targeted to average approximately 127,000 bbl/d once the coker tie-in is complete.
– As a result of the continued effective and efficient operations, Horizon Q2/14 operating costs, including natural gas costs, declined to $36.61/bbl, 19% less than Q2/13 levels and 11% less than Q1/14 levels. Operating costs are targeted to continue to decline with the phased expansion of production capacity.
– Canadian Natural continues to deliver on its strategy to transition to a longer life, low decline asset base while providing significant and growing free cash flow. Canadian Natural’s staged expansion to 250,000 bbl/d of SCO production capacity continues to progress on track and within sanctioned cost estimates.
– Overall Horizon Phase 2/3 expansion is 42% physically complete as at Q2/14:
— Reliability – Tranche 2 is 99% physically complete. This phase will increase performance, overall production reliability and the Gas Recovery Unit will recover additional SCO barrels in 2014.
— Directive 74 includes technological investment and research into tailings management. This project remains on track and is physically 27% complete.
— Phase 2A is a coker expansion which will utilize pre-invested infrastructure and equipment to expand the Coker Plant and alleviate the current bottleneck. The expansion is 92% physically complete with current progress tracking ahead of schedule. The coker tie-in was originally scheduled to be completed in mid-2015; however, due to strong construction performance and the early completion of the coker installation, the Company has accelerated the tie-in to commence August 2014. Horizon SCO production levels are targeted to increase by approximately 12,000 bbl/d with the completion of the coker tie-in.
— Phase 2B is 33% physically complete. This phase expands the capacity of major components such as gas/oil hydrotreatment, froth treatment and the hydrogen plant. This phase is targeted to add another 45,000 bbl/d of production capacity in late 2016.
— Phase 3 is on track and on schedule. This phase is 32% physically complete, and includes the addition of supplementary extraction trains. This phase is targeted to increase production capacity by 80,000 bbl/d in late 2017 and will result in additional reliability, redundancy and significant operating cost savings.
— The projects currently under construction continue to progress on track and within sanctioned cost estimates.
– On the Phase 2/3 expansion Canadian Natural has committed to approximately 65% of the Engineering, Procurement and Construction contracts. Over 60% of the construction contracts have been awarded to date, with 85% being lump sum, ensuring greater cost certainty.
MARKETING
Three Months Ended Six Months Ended --------------------------------------------- Jun 30 Mar 31 Jun 30 Jun 30 Jun 30 2014 2014 2013 2014 2013 ---------------------------------------------------------------------------- Crude oil and NGLs pricing WTI benchmark price (US$/bbl)(1) $ 102.98 $ 98.61 $ 94.23 $ 100.81 $ 94.28 WCS blend differential from WTI (%) (2) 19% 24% 20% 21% 27% SCO price (US$/bbl) $ 103.87 $ 96.45 $ 99.10 $ 100.18 $ 97.18 Condensate benchmark pricing (US$/bbl) $ 105.15 $ 102.53 $ 101.50 $ 103.85 $ 104.32 Average realized pricing before risk management (C$/bbl) (3) $ 87.03 $ 79.68 $ 75.10 $ 83.68 $ 67.94 Natural gas pricing AECO benchmark price (C$/GJ) $ 4.44 $ 4.52 $ 3.41 $ 4.48 $ 3.16 Average realized pricing before risk management (C$/Mcf) $ 5.06 $ 5.69 $ 4.05 $ 5.32 $ 3.78 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(1) West Texas Intermediate (“WTI”).
(2) Western Canadian Select (“WCS”).
(3) Average crude oil and NGLs pricing excludes SCO. Pricing is net of blending costs and excluding risk management activities.
-------------------------------------------------------------- SCO Dated Brent Condensate premium/ premium/ premium/ WTI WCS Blend (discount) (discount) (discount) Benchmark Pricing Differential from WTI from WTI from WTI Pricing (US$/bbl) from WTI (%) (US$/bbl) (US$/bbl) (US$/bbl) ---------------------------------------------------------------------------- 2014 April $ 102.03 22% $ (2.56) $ 5.59 $ 1.91 May $ 101.79 19% $ 4.09 $ 7.82 $ 3.36 June $ 105.15 18% $ 1.03 $ 6.51 $ 1.20 July $ 102.39 19% $ (2.43) $ 4.24 $ (3.30) August(i) $ 97.57 23% $ (3.31) $ 6.13 $ (4.29) September(i) $ 96.76 22% $ (2.42) $ 7.94 $ (2.72) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
(i) Based on current indicative pricing as at August 1, 2014.
– The Company crude oil and NGLs average realized pricing increased in Q2/14 over Q2/13 and Q1/14 levels due to strong benchmark pricing and narrow WCS differentials.
– The WCS differential averaged 19% during Q2/14 compared with 20% in Q2/13 and 24% in Q1/14. The WCS differential averaged 21% for the six months ended June 30, 2014, compared with 27% for the six months ended June 30, 2013. During Q2/14 the WCS differential tightened from Q1/14 reflecting normal seasonal variations and increased demand as a result of third party refinery expansions. The Company expects the WCS differential to continue to reflect seasonal demand fluctuations, changes in transportation logistics, and refinery utilization and shutdowns.
– Subsequent to Q2/14, the WCS differential averaged 19% in July 2014, and the indicative WCS differential for August 2014 is approximately 23% and September 2014 is approximately 22%.
– Canadian Natural contributed 183,000 bbl/d of its heavy crude oil stream to the WCS blend in Q2/14. The Company remains the largest contributor to the WCS blend, accounting for over 56% of the total blend this quarter.
– SCO pricing during Q2/14 increased 5% from Q2/13 due to increased benchmark pricing and 8% from Q1/14 due to planned third party upgrader turnarounds.
– During Q2/14, AECO natural gas prices increased 30% over Q2/13 levels and decreased 2% from Q1/14 levels. Natural gas prices increased from the comparable period in 2013 due to increased winter weather related natural gas demand. The colder than normal winter resulted in natural gas storage inventories falling below five-year lows in the US and Canada.
NORTH WEST REDWATER UPGRADING AND REFINING
The North West Redwater refinery, upon completion, will strengthen the Company’s position by providing a competitive return on investment and by adding 50,000 bbl/d of bitumen conversion capacity in Alberta which will help reduce pricing volatility in all Western Canadian heavy crude oil. The Company has a 50% interest in the North West Redwater Partnership. Work is progressing and site preparation and deep underground construction is underway.
FINANCIAL REVIEW
The Company continues to implement proven strategies and its disciplined approach to capital allocation. As a result, the financial position of Canadian Natural remains strong. Canadian Natural’s cash flow generation, credit facilities, US commercial paper program, diverse asset base and related capital expenditure programs and commodity hedging policy all support a flexible financial position and provide the appropriate financial resources for the near-, mid- and long-term.
– The Company’s strategy is to maintain a diverse portfolio balanced across various commodity types. The Company achieved production of approximately 817,500 BOE/d for Q2/14 with approximately 98% of production located in G8 countries.
– Canadian Natural has a strong balance sheet with debt to book capitalization of 33% and debt to EBITDA of 1.3x at June 30, 2014.
– Canadian Natural maintains significant financial stability and liquidity represented by bank credit facilities. As at June 30, 2014, the Company had in place bank credit facilities of $5,802 million, of which $2,225 million, net of commercial paper issuances of $534 million, was available.
– During Q2/14, the Company issued $500 million of 2.60% medium-term notes due December 2019 and $500 million of 3.55% medium-term notes due June 2024. Proceeds from the securities were used for general corporate purposes and repayment of bank indebtedness.
– The Company’s active commodity hedging program protects investment returns, ensures ongoing balance sheet strength and supports the Company’s cash flow for its capital expenditure programs. Details of the Company’s commodity hedging program can be found on the Company’s website at www.cnrl.com.
– Under the Company’s Normal Course Issuer Bid, Canadian Natural has purchased year to date 8,165,000 common shares for cancellation at an average price of $45.59 per common share, which includes 2,700,000 common shares purchased subsequent to June 30, 2014 at a weighted average price of $48.76 per common share.
– Canadian Natural’s Board of Directors has declared a quarterly cash dividend on common shares of C$0.225 per share payable on October 1, 2014.
OUTLOOK
The Company forecasts 2014 production levels before royalties to average between 531,000 and 557,000 bbl/d of crude oil and NGLs and between 1,550 and 1,570 MMcf/d of natural gas. Q3/14 production guidance before royalties is forecast to average between 505,000 and 532,000 bbl/d of crude oil and NGLs and between 1,645 and 1,675 MMcf/d of natural gas. Detailed guidance on production levels, capital allocation and operating costs can be found on the Company’s website at www.cnrl.com.