Summary

  • Canadian Natural Resources operator in natural gas, light crude oil, heavy crude oil, bitumen and synthetic crude oil.
  • The company has a diversified portfolio of assets in North America, the UK North Sea and Offshore Africa.
  • Canadian Natural has the largest undeveloped land base in the Western Canadian Sedimentary Basin (WCSB) supported by an extensive owned and operated network of pipelines and facilities.

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Company Overview

Canadian Natural Resources (NYSE:CNQ, TSX:CNQ) is an effective and efficient operator with a diversified portfolio of assets in North America, the UK North Sea and Offshore Africa, which enables it to generate significant value, even in challenging economic environments. The company continually strive for safe, effective, efficient and environmentally responsible operations while executing economic development of its diverse asset base.1

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The company's balanced mix of natural gas, light crude oil, heavy crude oil, bitumen and synthetic crude oil (SCO) represents one of the strongest and most diversified asset portfolios of any independent energy producer in the world. The Company has completed its transition to a long life low decline asset base through the development of its Horizon oil sands mine and acquisition of Athabasca Oil Sands Project (AOSP), its vast thermal in situ opportunities and the expansion of its world class polymer flood project at Pelican Lake. This transition forms the basis of the Company’s sustainable free cash flow.

Operation and Assets

Canadian Natural has a large, balanced and diversified asset base which facilitates flexible capital allocation decisions. The Company’s North America operations serve as the foundation of its business, with operations in the UK portion of the North Sea and Offshore Africa providing international exposure and greater diversification opportunities.  The company's significant ownership and operatorship in its core areas supported by extensive owned infrastructure, allows it to be effective and efficient operators. The company's strong financial position allows it to execute on value creation opportunities as they arise and to weather market volatility. The completion of its transition to a long life low decline asset base demonstrates its belief in value growth and will result in maximum shareholder value for years to come.2

North America

Canadian Natural has the largest undeveloped land base in the Western Canadian Sedimentary Basin (WCSB) supported by an extensive owned and operated network of pipelines and facilities.  The company's North America assets consist of conventional and unconventional natural gas, along with projects in light, medium and heavy crude oil, as well as in situ oil sands and oil sands mining and upgrading production.

Natural Gas

Canadian Natural is one of the largest producers of natural gas in Western Canada. The company's natural gas assets are strong, leveraged by a vast land base, a well-developed network of owned infrastructure and a deep, diversified range of drilling opportunities. Conventional and unconventional natural gas production is concentrated in five core regions: Northwest Alberta, Northeast British Columbia, the Foothills, Northern Plains and Southern Plains of Alberta and Saskatchewan.

Canadian Natural continues to access and develop new natural gas opportunities, focusing on growing an already strong portfolio of assets and optimizing existing production in the Montney and Deep Basin. 

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Crude Oil and NGLs

Canadian Natural is the largest producer of heavy crude oil in Canada with a competitive advantage through its vast land base. The company balance this heavy crude oil production with light crude oil, bitumen, synthetic crude oil (SCO), Pelican Lake medium crude oil and production of natural gas liquids. Production is balanced with project time horizons in the near, mid and long-term, focusing on value creation through a defined plan of economic growth.

Canadian Natural’s heavy crude oil production is focused on the Alberta-Saskatchewan border. The company benefit from an extensive land position, which allows for large scale drilling and development programs, while minimizing capital cost requirements. Costs are further managed through owning and operating centralized treating and sand handling facilities, maximizing their utilization and achieving economies of scale. Primary production of heavy crude oil typically recovers between 5%-15% of oil originally in place, leaving a vast unrecovered resource that will ultimately be developed through improved recovery techniques.

Canadian Natural produces light crude oil and NGLs in all of the western Canadian core regions. While light crude oil recoveries are modest, as new technology and EOR techniques are implemented, recoveries from these mature assets are targeted to improve. The Company’s Pelican Lake asset is a large, contiguous, shallow medium crude oil pool initially developed for primary heavy crude production. Parts of the field were converted to waterflood, resulting in significant production and reserves increases. Building on that success, polymer flood was tested and subsequently introduced, again resulting in further increases in production and reserves. The application of the higher viscosity polymer flood increases oil recovery due to reduced fingering or breakthrough, which can happen during waterflooding.

Canadian Natural believes it holds some of the best oil sands assets in North America, particularly thermal in situ properties. These assets are located in two of the major oil sands deposits in Western Canada - the Athabasca and Cold Lake regions, and provide tremendous value and growth potential. The thermal in situ properties are developed using cyclic steam stimulation (CSS), steamflood and steam assisted gravity drainage (SAGD) techniques. The company's thermal operations now account for approximately 30 percent of its total crude oil production and are an integral part of its large, diversified and balanced asset base and its defined growth plan. The long life low decline nature of these in situ assets makes them amenable to technology investments, such as solvents, which have the potential to reduce Steam-to-oil Ratio and GHG emissions intensity by up to 50%.

Oil Sands Mining and Upgrading

Canadian Natural's no decline oil sands mining and upgrading assets form the basis of the Company's portfolio of long life low decline production. Rather than in situ production, these assets include a surface oil sands mine and bitumen extraction plant, complemented by on-site bitumen upgrading, ultimately producing high quality SCO. Canadian Natural holds extensive leases containing a massive resource base, with the mine and plant facilities expected to produce for decades to come without the production declines normally associated with conventional crude oil production.

International

Canadian Natural’s International operations provide a committed source of light crude oil production. The Company leverages its experience in mature, low-risk, development basins (similar to those found in the WCSB in North America) to those found offshore. International efforts are concentrated in two core areas – the UK portion of the North Sea, and in Offshore Africa, specifically Offshore Côte d’Ivoire.

North Sea

In the North Sea, attention is focused on prudent management of existing infrastructure and abandonment liabilities in a mature basin. Mature basin development is one of Canadian Natural’s core competencies and this area provides long-term development opportunities.

Offshore Africa

The Offshore Africa assets deliver high-value, light crude oil, providing development opportunities with significant exploration upside with some of the highest returning projects in the Company’s portfolio. Canadian Natural has capitalized on a unique government relations niche, while leveraging technical and operational expertise from the North Sea operations.

In Offshore Côte d’Ivoire, the Espoir development is produced from two reservoirs - East and West Espoir – located roughly 60 kilometers southwest of Abidjan, capital of Côte d’Ivoire. The field is developed through highly deviated wells and the use of water injection and other recovery techniques to achieve superior flow rates. The light crude is then processed, stored and offloaded via a floating production storage and off-take (FPSO) vessel.

Also in Offshore Côte d’Ivoire is the Baobab field. Baobab is located roughly 8 kilometers south of Espoir in deep water. As with Espoir, Baobab uses an FPSO to process, store and export the crude oil.

Canadian Natural has a 20% interest in Block 11B/12B offshore South Africa, approximately 200 km offshore between Mossel Bay and Port Elizabeth. The block is prospective for coalescing (deep water) basin floor fans, with amalgamated turbidite sand thickness potentially up to 150m based on seismic data, similar to that in the Forties Fan in the North Sea. As this is deep water with challenging sea conditions, Canadian Natural secured a world class partner for the deep water exploration of its Block 11B/12B with a 20% working interest and financial carry as well as bonus payments on commercial discovery.  The operator drilled the first exploratory well on the block in late 2014, achieving sufficient depth to retain the exploration right.  The operator secured an advanced drilling rig in late 2018 and re-entered the well in late 2018, reaching target depth in late January 2019. Subsequent to completion of drilling and analysis of the results, on February 7, 2019, the operator announced that the well encountered 57m of net gas condensate in the Lower Cretaceous reservoir. Following the discovery, further 3D seismic is targeted and along with additional drilling to delineate additional structures on the Block.

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Reserves

The following are reconciliation tables of the company gross total proved and total proved plus probable reserves using forecast prices and costs as at the effective date of December 31, 2020:

As of

December 31, 2020

Light and Medium Crude Oi

Primary Heavy Crude Oil

Pelican Lake Heavy Crude Oil

Bitumen (Thermal Oil)

Synthetic Crude Oil

Natural Gas

Natural Gas Liquids

Barrels of Oil Equivalent

unit(MMbbl)(MMbbl)(MMbbl)(MMbbl)(MMbbl)(Bcf)(MMbbl)(MMBOE)
Total Proved3151772652,4836,9629,46532612,106

Total Proved Plus

Probable

4632603954,1577,49615,92250015,925

Business Overview

Global benchmark crude oil prices decreased significantly in the first half of 2020 due to the erosion of global demand, reflecting the severity of COVID-19 and related economic conditions. In April 2020, in response to the collapse of crude oil prices, OPEC+ agreed to cut 9.7 MMbbl/d of production through July 2020. As the global economy improved in the latter part of the year, OPEC+ agreed to ease these production cuts to 7.2 MMbbl/d, as of January 2021. Furthermore, the initial rollout of the COVID-19 vaccine in the fourth quarter of 2020 had an overall positive impact on global demand for crude oil. Pricing improved in the fourth quarter of 2020 with WTI benchmark pricing averaging US$42.67 per bbl and the WCS Heavy Differential averaging US$9.30 per bbl. Subsequent to December 31, 2020, Saudi Arabia committed to reduce its production by 1.0 MMbbl/d, which had a further positive impact on crude oil pricing. 3

The Company continued to prioritize the optimization of higher value light crude oil, NGLs and SCO, representing approximately 47% of total corporate BOE production volumes for 2020. Optimization of production volumes continues to be a key focus of the Company at current commodity price levels.

Production costs throughout 2020 also reflected the impact of measures to promote social distancing and other precautionary measures related to COVID-19 at the Company's head office and field locations, both internationally and in North America. The Company continues to mitigate the impact of these costs through its focus on cost control and efficiencies across the asset base.

On March 27, 2020, in response to COVID-19, the Government of Canada announced the CEWS. The CEWS enables eligible Canadian employers who have been impacted by COVID-19 to apply for a subsidy of a specified amount of eligible employee wages. The Company was eligible for the subsidy in 2020 as its qualifying revenues declined by the specified amount as compared with the prior year reference period.

Product sales decreased 28% to $17,491 million for 2020 from $24,394 million for 2019 (2018 – $22,282 million). The decrease in product sales was primarily a result of lower WTI benchmark pricing due to decreased demand for refined products as a result of COVID-19. The decrease in realized pricing was partially offset by the impact of increased crude oil and NGLs sales volumes following the acquisition of Jackfish assets, increased thermal oil production at Kirby North, and high utilization rates and operational enhancements in the Oil Sands Mining and Upgrading segment. Crude oil and NGLs and natural gas pricing are discussed in detail in the "Business Environment", "Exploration and Production" and the "Oil Sands Mining and Upgrading" sections of this MD&A. Crude oil and NGLs and natural gas production volumes are discussed in detail in the "Daily Production" section of this MD&A.

For 2020, 5% of the Company’s crude oil and NGLs and natural gas product sales were generated outside of North America (2019 – 7%; 2018 – 7%). North Sea accounted for 3% of crude oil and NGLs and natural gas product sales for 2020 (2019 – 4%; 2018 – 4%), and Offshore Africa accounted for 2% of crude oil and NGLs and natural gas product sales for 2020 (2019 – 3%; 2018 – 3%).

The Company’s business approach is to maintain large project inventories and production diversification among each of the commodities it produces; namely light and medium crude oil and NGLs, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal oil), SCO and natural gas.

Total 2020 production before royalties averaged 1,164,136 BOE/d, an increase of 6% from 1,098,957 BOE/d in 2019 (2018 – 1,078,813 BOE/d).

Crude oil and NGLs production before royalties for 2020 averaged 917,958 bbl/d, an increase of 8% from 850,393 bbl/d for 2019 (2018 – 820,778 bbl/d). The increase in crude oil and NGLs production for 2020 from 2019 primarily reflected the acquisition of Jackfish assets, increased thermal oil production at Kirby North, and high utilization rates and operational enhancements in the Oil Sands Mining and Upgrading segment. Production for 2020 and 2019 reflected the impact of the Company's curtailment optimization strategy as a result of mandatory Government of Alberta curtailment, which was suspended effective December 1, 2020.

Natural gas production before royalties accounted for 21% of the Company's total production in 2020 on a BOE basis. Natural gas production for 2020 of 1,477 MMcf/d was comparable with 1,491 MMcf/d for 2019 (2018 – 1,548 MMcf/d).

Due to the uncertainty regarding COVID-19, the Company withdrew its 2020 corporate production guidance, however, annual 2020 crude oil and NGLs and natural gas production before royalties was within the previously issued corporate guidance range.

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Financial Highlights

Third Quarter 2021 Results

Net earnings for the nine months ended September 30, 2021 were $5,130 million compared with a net loss of $1,184 million for the nine months ended September 30, 2020. Net earnings for the nine months ended September 30, 2021 included net after-tax income of $336 million compared with net after-tax expenses of $252 million for the nine months ended September 30, 2020 related to the effects of share-based compensation, risk management activities, fluctuations in foreign exchange rates including the impact of a realized foreign exchange loss on repayment of US dollar debt securities, the foreign exchange gain on the settlement of the cross currency swaps, the gain on acquisitions, the loss (gain) from investments, and government grant income under the provincial well-site rehabilitation programs. Excluding these items, adjusted net earnings from operations for the nine months ended September 30, 2021 were $4,794 million compared with an adjusted net loss from operations of $932 million for the nine months ended September 30, 2020.4

Net earnings for the third quarter of 2021 were $2,202 million compared with $408 million for the third quarter of 2020 and $1,551 million for the second quarter of 2021. Net earnings for the third quarter of 2021 included net after-tax income of $107 million compared with net after-tax income of $273 million for the third quarter of 2020 and net aftertax income of $71 million for the second quarter of 2021 related to the effects of share-based compensation, risk management activities, fluctuations in foreign exchange rates including the impact of a realized foreign exchange loss on repayment of US dollar debt securities, the gain on acquisitions, the loss (gain) from investments, and government grant income under the provincial well-site rehabilitation programs. Excluding these items, adjusted net earnings from operations for the third quarter of 2021 were $2,095 million compared with $135 million for the third quarter of 2020 and $1,480 million for the second quarter of 2021.

Cash flows from operating activities for the nine months ended September 30, 2021 were $9,766 million compared with $3,444 million for the nine months ended September 30, 2020. Cash flows from operating activities for the third quarter of 2021 were $4,290 million compared with $2,070 million for the third quarter of 2020 and $2,940 million for the second quarter of 2021. The fluctuations in cash flows from operating activities from the comparable periods were primarily due to the factors previously noted related to the fluctuations in net earnings (loss) from operations, as well as due to the impact of changes in non-cash working capital.

Adjusted funds flow for the nine months ended September 30, 2021 was $9,395 million compared with $3,492 million for the nine months ended September 30, 2020. Adjusted funds flow for the third quarter of 2021 was $3,634 million compared with $1,740 million for the third quarter of 2020 and $3,049 million for the second quarter of 2021. The fluctuations in adjusted funds flow from the comparable periods were primarily due to the factors noted above related to the fluctuations in cash flows from operating activities excluding the impact of the net change in non-cash working capital, abandonment expenditures excluding the impact of government grant income under the provincial well-site rehabilitation programs, and movements in other long-term assets, including the unamortized cost of the share bonus program, accrued interest on subordinated debt advances to NWRP, and prepaid cost of service tolls.

Crude oil and NGLs production before royalties for the third quarter of 2021 increased 8% to 952,839 bbl/d, from 884,342 bbl/d for the third quarter of 2020 and increased 9% from 872,718 bbl/d for the second quarter of 2021. Natural gas production before royalties for the third quarter of 2021 increased 25% to 1,708 MMcf/d from 1,362 MMcf/d for the third quarter of 2020 and increased 6% from 1,614 MMcf/d for the second quarter of 2021. Total production before royalties for the third quarter of 2021 of 1,237,503 BOE/d increased 11% from 1,111,286 BOE/d for the third quarter of 2020 and increased 8% from 1,141,739 BOE/d for the second quarter of 2021. Crude oil and NGLs and natural gas production volumes are discussed in detail in the "Daily Production" section of this MD&A.

In the Company's Exploration and Production segments, crude oil and NGLs realized prices averaged $68.06 per bbl for the third quarter of 2021, an increase of 70% compared with $40.14 per bbl for the third quarter of 2020, and an increase of 11% from $61.20 per bbl for the second quarter of 2021. The natural gas realized price increased 79% to average $4.13 per Mcf for the third quarter of 2021 from $2.31 per Mcf for the third quarter of 2020, and increased 30% from $3.17 per Mcf for the second quarter of 2021. In the Oil Sands Mining and Upgrading segment, the Company's SCO realized price increased 67% to average $81.54 per bbl for the third quarter of 2021 from $48.92 per bbl for the third quarter of 2020, and increased 7% from $76.19 per bbl for the second quarter of 2021. The Company's realized pricing reflects prevailing benchmark pricing. Crude oil and NGLs and natural gas prices are discussed in detail in the "Business Environment", "Product Prices – Exploration and Production", and the "Oil Sands Mining and Upgrading" sections of this MD&A.

In the Company's Exploration and Production segments, crude oil and NGLs production expense averaged $14.78 per bbl for the third quarter of 2021, an increase of 34% from $11.03 per bbl for the third quarter of 2020, and an increase of 7% from $13.75 per bbl for the second quarter of 2021. Natural gas production expense averaged $1.17 per Mcf for the third quarter of 2021, comparable with $1.18 per Mcf for the third quarter of 2020 and $1.19 per Mcf for the second quarter of 2021. In the Oil Sands Mining and Upgrading segment, production costs averaged $19.86 per bbl for the third quarter of 2021, a decrease of 17% from $23.81 per bbl for the third quarter of 2020, and a decrease of 22% from $25.46 per bbl for the second quarter of 2021. Crude oil and NGLs and natural gas production expense is discussed in detail in the "Production Expense – Exploration and Production" and the "Oil Sands Mining and Upgrading" sections of this MD&A.

Business Environment

Global benchmark crude oil prices increased significantly through the third quarter of 2021, partially in response to the OPEC+ decision to maintain substantially all of the production cut agreements implemented in the first half of 2020. Additionally, global demand for crude oil increased due to improved economic conditions, as the effects of COVID-19 became less impactful to the global economy. Improved economic conditions continue to positively impact the outlook for crude oil prices, although market conditions remain uncertain.

Commenting on the Company's third quarter 2021 results, Tim McKay, President of Canadian Natural stated "The company's diverse product mix is a competitive advantage, as the company can allocate capital to the highest return projects, without being reliant on any one commodity. The company's effective and efficient operations combined with disciplined capital allocation generates significant free cash flow, which delivers substantial shareholder returns through its sustainable dividend and ongoing share repurchases. The company's world class long life low decline assets, which have low maintenance capital requirements relative to the size and quality of the assets, delivered top tier Q3/21 operational and financial results with average production volumes of approximately 1,238 MBOE/d achieved in the quarter, representing increases of 11% and 8% over Q3/20 and Q2/21 levels respectively. The company's strong operational results during Q3/21 delivered robust quarterly adjusted funds flow of approximately $3.6 billion. After its disciplined capital program and dividend, the Company generated quarterly free cash flow of approximately $2.2 billion.5

Environmental, Social and Governance ("ESG") performance remains a priority. The company continue to invest in technologies and innovations designed to improve its environmental performance and reduce its environmental footprint. As previously announced, the Oil Sands Pathways initiative to achieve net zero greenhouse gas emissions by 2050 is an unprecedented initiative by the Canadian energy industry. Canadian Natural and Pathways alliance members are developing several technology pathways that when implemented will strengthen its leading ESG performance through meaningful emissions reductions while maintaining jobs in the oil sands sector and creating thousands of new construction and permanent jobs in the energy and cleantech industries. Collaboration with the federal and Alberta governments on this initiative will be critical for Canada to achieve its climate goals."

Canadian Natural's Chief Financial Officer, Mark Stainthorpe, added "During the third quarter of 2021 its robust business model delivered strong net earnings of over $2.2 billion and adjusted net earnings of approximately $2.1 billion. The company's diversified portfolio of world class assets combined with effective and efficient operations in a strong commodity price environment, allowed it to continue to enhance returns to shareholders by repurchasing shares and reducing debt at a faster rate than originally targeted. The Company's balance sheet continues to be a priority and was further strengthened during the quarter with ending net debt at approximately $15.9 billion, a reduction of approximately $2.3 billion compared to Q2/21. The company remain on track to meet its full year 2021 capital investment target of approximately $3.48 billion.

The company's commitment to returns to shareholders has been significant totaling $3.1 billion year to date through dividends and share repurchases. Subsequent to quarter end the Board of Directors has approved a 25% increase to its quarterly dividend to $0.5875 per share, payable on January 5, 2022. The increased dividend clearly demonstrates the confidence that the Board of Directors have in the sustainability of its business model, the strength of its balance sheet and the Company’s effective and efficient operations supported by its robust, long life low decline asset base and associated low maintenance capital requirements. With this increase, 2022 will mark the 22nd consecutive year of dividend increases for the Company, and this 25% increase from its previous quarterly dividend is in excess of its historical dividend compound annual growth rate of 20% over the last 22 years.

Effective July 1, 2021 its free cash flow allocation policy authorized management to increase returns to shareholders through accelerated share repurchases under the Company's Normal Course Issuer Bid (“NCIB”) by targeting the repurchase of approximately 1% of shares outstanding per quarter. This policy further states that once the Company reaches an absolute debt level of $15 billion, currently targeted to occur in Q4/21, 50% of free cash flow will be targeted to share repurchases, with the remaining 50% of free cash flow allocated to further strengthen its balance sheet. Per this policy, the Company repurchased approximately 12 million shares in the quarter and year-to-date as of November 3, 2021 Canadian Natural Resources has repurchased a total of approximately 21.5 million shares for approximately $940 million. Subsequent to quarter end, and as an enhancement to the free cash flow allocation policy, the Board of Directors has authorized management to target absolute debt at levels below $15 billion (approximately 1.0 times debt to EBITDA in the current price environment). To the extent debt is below $15 billion, such amount will be available for strategic growth/acquisition opportunities."

References

  1. ^ https://www.cnrl.com/about-cnq/corporate-profile
  2. ^ https://www.cnrl.com/operations/world-class-assets
  3. ^ https://www.cnrl.com/upload/report/134/04/2020-annual-report---teams.pdf
  4. ^ https://www.cnrl.com/upload/report/140/10/110421-interim_managements_discussion_and_analysis.pdf
  5. ^ https://www.cnrl.com/upload/report/139/01/q321-interim-print.pdf
Tags: US:CNQ CA:CNQ
Created by Asif Farooqui on 2021/12/20 14:21
     

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