CALGARY Aug 6, 2015 (Thomson StreetEvents) -- Edited Transcript of Canadian Natural Resources Ltd earnings conference call or presentation Thursday, August 6, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Doug Proll Canadian Natural Resources Limited - EVP * Steve Laut Canadian Natural Resources Limited - President * Corey Bieber Canadian Natural Resources Limited - SVP, Finance & CFO ================================================================================ Conference Call Participants ================================================================================ * Greg Pardy RBC Capital Markets - Analyst * John Braun Societe Generale - Analyst * Phil Gresh JPMorgan - Analyst * Neil Mehta Goldman Sachs - Analyst * Menno Hulshof TD Securities - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources Q2 2015 Conference Call. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, Thursday, August 6 2015 at 9 o'clock AM Mountain Time. I would now like to turn the meeting over to your host for today's call, Doug Proll, Executive Vice President of Canadian Natural Resources. Please go ahead, Mr. Proll. -------------------------------------------------------------------------------- Doug Proll, Canadian Natural Resources Limited - EVP [2] -------------------------------------------------------------------------------- Good morning and thank you for joining our second quarter 2015 conference call. Today, we will review the financial and operating results and including -- and providing an update of our ongoing projects and operations. With me this morning are Steve Laut, our president and Corey Bieber, our Chief Financial Officer. Before we begin, I would like to refer you to the comments regarding forward-looking information 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. I would like to make a few comments before turning the call over to Steve and Corey. In response to volatile and sharply changing commodity prices, we have increased our focus on reducing our cost structures, both operating and capital, while maintaining safety and environmental standards and ensuring that our ability to be nimble in allocating capital is enhanced. This focus includes not only immediate cost savings, but also implementing changes to our processes that will last through commodity price cycles. This strategy has resulted in significant savings to-date which is apparent in our first half 2015 operating results. At Canadian Natural, we have a proven effective value-driven strategy. We delivered cash flow from operations of almost CAD2.9 billion or CAD2.63 per share in the first half of this year, albeit down from the first half of 2014, due to lower commodity prices. We continue to execute on our capital programs within our available cash flow. We focus on safe, effective, efficient and environmentally responsible operations resulting in reliable operating performance across our diverse asset base and providing strong cost control management. Canadian Natural is committed to new technology and development and sustainable environmentally responsible operations. We have a large, well-balanced portfolio of assets with significant exposure to light and heavy crude oil, as well as significant natural gas upside, while continuing the transformation to long life, low decline assets. Steve will provide an update on Horizon 2B and Phase 3 progress, where we will increase production capacity to 250,000 barrels a day, targeted for 2018, reduce operating cost to the CAD25 to CAD27 per barrel level and of course complete the project spend. Our balance sheet is strong. We maintain strong lines of liquid resources and we have maintained our current quarterly dividend payment. And we are increasing sustainable cash flow from operations. Thank you, and I will now turn the call over to Steve. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [3] -------------------------------------------------------------------------------- Thanks, Doug. And good morning everyone. Canadian Natural is in a strong position. The resilience of our strong, diverse and well balanced asset base, robustness of our business model and the effectiveness of our strategies combined with our ability to execute these strategies has allowed us to quickly react to a low commodity price environment. Canadian Natural is built to withstand low commodity prices. In 2015, Canadian Natural is committed to lowering the cost structure in a methodical and structured manner. We're committed to complete Horizon Phase 2/3 on schedule and on budget. We're also committed to maintaining the optionality of our balanced and diverse asset base, ensuring we can act quickly to change. Most importantly, we're committed to maintaining balance sheet strength, creating value and delivering returns to shareholders. In the second quarter, we delivered record natural gas production at 1.78 Bcf a day, exceeding production guidance and up 9% over Q2 2014. Well production was strong and we expect to deliver annual well production at the midpoint of guidance, despite the [forced outage] impact of both Kirby and Primrose and the extra days required to complete the Horizon outage. Canadian Natural's operations continue to be effective and efficient. We've been able to achieve significant cost savings compared to our operating costs in 2014, as well as into 2015. We've done that through better effectiveness, efficiency and innovation. Operating costs were down from Q2 2014 to Q2 2015; 22% at Pelican Lake, 13% at Canadian light oil production, 15% in primary heavy oil and 20% in Horizon, with 14% in North American natural gas. And because of the cyclic nature of Primrose production, it's not meaningful to compare to quarter to quarter. That being said, annual thermal operating costs are targeted to be down 13% in 2015. As a result, we will be towards the lower end of our operating cost guidance for 2015 with the exception of Horizon, where we're lowering our operating costs guidance CAD1 a barrel to CAD30 to CAD33 a barrel. This is on top of the first [CAD1] per barrel reduction in our cost guidance earlier this year. Canadian Natural's balance sheet remains strong and we maintained significant capital flexibility, effectively allocating capital and keeping our transition to a longer life, low decline asset base intact. In 2015, we've exercised our capital flexibility, deferring CAD2.4 billion of capital spending and generating another CAD150 million of capital optimization announced in March. In May, we announced another CAD300 million in capital cost reductions and today we're announcing another CAD245 million reduction in capital costs for the remainder of the year. These cost reductions reflect additional cost savings from our program, the result of our ability to optimize our execution, enhance productivity, wide scope projects, leverage technology, as well as lower energy and material costs. As a result, on a combined basis, including deferrals, we've taken out over CAD3 billion from original 2015 budget. The 2015 capital budget is set at CAD5.5 billion. CAD2.15 billion is allocated to the execution of Horizon Phase 2/3 expansion, the major component of our transition to a longer life low decline asset base, capital spending that delivers no additional production in 2015. And from a production perspective, our annual oil and gas production guidance remains unchanged. Importantly, using strip pricing of CAD51.49 WTI for 2015 and [ACO] pricing at [CAD2.71] and at the midpoint of production guidance, Canadian Natural generates CAD6 billion in cash flow. Dividends are CAD1 billion, and with the current capital program of CAD5.5 billion, we'll utilize CAD500 million of our balance sheet to fund the CAD2.15 billion of capital allocated to Horizon Phase 2/3 expansion. Our balance sheet remains strong and is projected to end the year at 37% debt to book and debt-to-EBITDA at [2.6]. We're also committed to monetizing Canadian Natural's royalty assets, assets that generate CAD96 million on an annualized Q1 basis. We target this monetization in 2015. However reflects [rollon] timing to ensure we maximize value for shareholders. This provides Canadian Natural with additional balance sheet flexibility. Canadian Natural is built for low commodity price cycles. Our focus on effectiveness, efficiency and innovation is well underway and we're just getting into our stride. As we progress through 2015, we'll continue to strength our capacity to deliver value through the commodity price cycle. So touching on each of the assets, starting with E&P assets, natural gas production in North America was up 7% Q2 2015 over Q2 2014 at a record level of 1.71 Dcf a day. It's driven largely by acquisitions and our horizontal liquids-rich programs in the Montney and Deep Basin in 2014. For 2015 program is at 20 wells versus 76 in 2014. And production growth for 2015 will be 11%. Production growth in our light oil NGL assets continue to perform -- production from our light oil NGL assets in Canada continue to perform to expectation. Our 2015 drilling program is down to 7 wells from 101 wells in 2014 and quarter-over-quarter production is down 4%. In our light oil operations, we have stopped all drilling in the high-tax North Sea basin. In March 2015, the UK government reduced the supplementary charge on oil and gas profits from 32% to 20% effective January 1, 2015. In addition, the legislation reduced the PRT rate from 50% to 35% effective January 2016. They also replaced the existing brownfield allowance program with a new investment allowance effective April 1, 2015, which should be more administratively effective. These changes are welcome and enhance the competitiveness of development activity in North Sea. However, at current commodity price levels, these projects do not compete for capital in Canadian Natural's portfolio. In offshore Africa, our Espoir and Baobab drilling programs are underway, and we're achieving execution efficiencies and excellent results. At Espoir, the first two wells are in production at 4,500 barrels a day net, well above expectations, with costs tracking below control estimates. Drilling and control operations are very effective and the 10 well program will be completed in 2016, and the production target from this program is 5,900 barrels a day net. At Baobab, the first well is on-stream at 2,000 barrels a day net, exceeding expectations. Drilling and completion operations are also going very well at Baobab, and we expect to complete the six gross well program in early 2016 on schedule. The Baobab program is targeted to add 11,000 BOEs a day. We drilled 40 wells in our primary heavy oil assets in the first half of 2015 versus 346 wells we drilled in the first half of 2014. We target drilling 179 wells in 2015 versus 896 wells in 2014. In addition, we are shutting roughly 4,000 barrels of heavy oil production from heavy oil wells that are high cost. Not surprisingly, yearly production is targeted to be off roughly 11% in 2015 versus 2014. Heavy oils are some of the most flexible capital and can easily be dialed back up or ramped back up again if we choose. At Pelican Lake, production is strong, up 5% from Q2 2014 at 52,000 barrels a day, with industry-leading operating cost at CAD6.98 a barrel in Q2, down 22% quarter-over-quarter, generating significant cash flow, even at these lower commodity prices. Pelican Lake production will increase by 5% in 2015 with no wells drilled. The polymer flood at Pelican Lake is a clear example of how Canadian Natural leverages technology to unlock reserves, enhance production at lower operating costs to bring on long-life, low-decline production. Pelican Lake is an important part of our transition to our long-life, low-decline asset base and will add significant and sustainable production in the near, mid and long term. Our thermal in situ assets are also an important part of our transition to long-life, low-decline assets. Our thermal production is largely influenced by the cyclic nature of Primrose operations. In Q2 we entered into the lower part of production cycle with production at 105,108 barrels a day. The [forced fires] at Primrose caused production curtailment, impacting Q2 Primrose volumes by 13,000 barrels a day. The Primrose East Area 1 steam flood is performing as expected with current production at 11,000 barrels a day, on track to our expected 15,000 barrels a day plateau, confirming the validity of steam flooding in Primrose East Area 1. Kirby South production is at 32,000 barrels a day with excellent thermal efficiencies. The SOR is at [2.6] per well in [the safety mode] talk to your thermal efficiency for safety operations. Q3 thermal production guidance is between 128,000 and 142,000 barrels a day, as we're coming out of the low portion of the cycle at Primrose. Turning to Horizon, the cornerstone of our transition to long life low decline assets. The second quarter was an important quarter for Horizon. As you will recall, we moved the turnaround originally planned for the fall of this year into 2016. As we're ahead of schedule at Phase 2B expansion, allowed us to bring on some components of the expansion ahead of schedule, creating synergies for the turnaround when moved into the spring of 2016. We also further optimized the schedule by moving the outage, [remained] to address the work required before the spring 2016 turnaround into June, in the fall this year, allow us to further capture opportunities to optimize the fractionating tower. All good news, reflecting ever increasing strength of our operations and maintenance teams at Horizon. Although we had a few hiccups coming back from the turnaround in June and July, run rates have been very strong since that time. Q2 production was 96,607 barrels a day, below expectations, as it took us longer to address some ground work in the fractionator tower. This additional work was not expected but not uncommon. July production came in at 124,187 barrels a day and current run rates for the last two-thirds of July and August have been very strong in the mid-130s. Q3 production is targeted between 124,000 and 131,000 barrels a day. And the yearly production guidance for Horizon remains unchanged at 121,000 to 131,000 barrels a day. We target utilization rates in the 92% to 96% range and it's best to look at utilization over long periods of time. For the first seven months of 2015, Horizon utilization rates have been 93.4%, exceeding Canadian Natural's industry leading 2014 utilization rates of 89% and 2013 rates of 87%. We still have room to improve and our expectation is that we will continue to improve, even though we're running at utilization rates that are top in class compared to other [Canadian] peers in Fort McMurray. Horizon operating costs in Q2 were excellent, coming in at CAD29.25 a barrel normalized for the turnaround, down slightly from the CAD29.73 a barrel in Q1 and down significantly 19% from the CAD36.61 a barrel achieved in Q2 of 2014, as a result of our continued focus and effective and efficient operations as well highlighting the significant impact higher volumes have on offering costs, which bodes well for the anticipated reduction in operating cost, we target with Horizon Phase 2/3 expansion. Operating cost guidance for Horizon has been reduced for the second time in 2015, down CAD1 a barrel to CAD30 to CAD33 a barrel, roughly 20% less than 2014 costs. This is a cost savings of CAD360 million in the year, if you compare to 2014 unit rate costs. The overall Horizon Phase 2/3 expansion is going very well. As we announced earlier this year, we'll take advantage of some portions of Phase 2 being completed ahead of schedule, currently at 62% complete. The entire work can now be completed early and tie in to coincide with the remaining turnaround scope in May 2016, when we can capture execution synergies, lower costs, and improved production. Besides execution synergies, 2016 will also be positively impacted as we will spruce roughly an additional [4,000] barrels a day after May 2016 and when the remainder of Phase 2B equipment is to be commissioned on the original schedule in the fall 2016 that commissioning will be smoother. As a result, the ramp up to full 45,000 barrels a day in fourth quarter will likely add an additional 10,000 barrels a day to the originally planned fourth quarter 2016 production volumes. Operating costs will also be lower than planned in 2016 as a result of the higher production volumes. Phase 3, the final 80,000 barrels a day portion of expansion will take us to 250,000 barrels a day in production, is on track and 59% complete at the end of Q2. We target mechanical completion in late 2017. At this point, we do not see Phase 3 moving ahead of targeted schedule, as we've seen the full Phase 2A and Phase 2B. We're also not at this point anticipating any increase in name plate design capacity at 45,000 barrels a day for Phase 2B and 80,000 barrels a day for Phase 3 as we've seen in Phase 2A. The day Horizon will fully come on stream is getting very close, with Phase 2B coming on in stages earlier than expected in 2016 for 45,000 barrels a day and Phase 3 for the final 80,000 barrels a day complete by the end of 2017, delivering 250,000 barrels a day of long-life, no-decline, sustainable, high value and high net back production for decades to come. Horizon expansion is a key part of transition to long-life, low-decline asset base and will add significant and sustainable production for decades to come. In a CAD70 world, we anticipate Horizon will add CAD3.3 billion of cash flow over capital requirements per year. And for reference, in a CAD50 world, Horizon will deliver CAD1.6 billion of cash flow over capital requirements per year. Canadian Natural has a strong, diversified and balanced asset base that contains significant upside. In 2015, we'll focus our development of [outside] with a focus on Horizon and Cote d'Ivoire. We are, however, preserving our resource base that contains significant upside, which as prices stabilize, we'll be able to develop in a disciplined, cost-effective manner when we choose. Our thermal assets have roughly 11 billion barrels to develop in a cost effective manner. Pelican Lake has 550 million barrels to develop and we have over 8,000 primary heavy oil locations in inventory. Significant liquids-rich gas lands with over a million acres in the Montney and very large positions in the liquids-rich Deep Basin, plus nearly 500,000 acres in the Duvernay. Significant upside that our strategy allows us to maintain and develop in a cost effective manner on a schedule that optimizes value for Canadian Natural shareholders. And most importantly, we're committed to maintaining balance sheet strength, creating value, and delivering return to shareholders. Canadian Natural is built to withstand low commodity price cycles. We have been here many times before, and each and every time, we've come out of the cycle stronger than we went into the cycle. I expect this cycle to be no different. With that, I'll turn it over to Corey to discuss our strong financial position. Corey? -------------------------------------------------------------------------------- Corey Bieber, Canadian Natural Resources Limited - SVP, Finance & CFO [4] -------------------------------------------------------------------------------- Thank you, Steve and good morning everyone. Looking at the quarterly results and against the backdrop of a 44% drop in WTI crude pricing in Q2 of 2015 versus Q2 of 2014, Canadian Natural incurred a net loss of CAD405 million. This loss was largely driven by the CAD579 million charge taken to income in respect of the 20% increase in operating income tax rates applied against our future tax liabilities. This means all things being equal, future cash flows will be reduced by CAD575 million by extension or reinvesting CAD579 million less back into the growth of the business. Based on third-party research from an Edmonton based consulting firm, this lower level of future reinvestment likely equates to above 4,100 fewer positioned years of our direct, indirect and induced employment in future years. Of course, future cash flows and results will be similarly impacted. Adjusting for these and other non-operational items, the Company generated adjusted net earnings of CAD178 million on cash flow of CAD1.5 billion, slightly in excess of total capital expenditures of CAD1.3 billion. Our financial strength is bolstered by significant available liquidity. During the second quarter, we successfully renewed and extended our committed bank facilities four and five year terms, while at the same time increasing the size by CAD359. Our primary covenant under these loans was also changed from a debt to EBITDA test to have debt to capitalization test or consistent with our US peers and most of our Canadian large cap peers. In the debt capital markets, we repaid an MTN and reopened a 2020 maturity. As a result of all these transactions and amendments, at the end of Q2 2015, we had approximately CAD3.3 billion of available bank balance. Second quarter of 2015 continued to demonstrate Canadian Natural's financial and operational resilience and flexibility. Following a very significant reduction in commodity pricing, Canadian Natural was very quick and nimble in its reactions. In total, and including the most recent CAD245 million capital cost savings reduction and since the original 2015 capital budget issued last November, Canadian Natural [has done] 2015 cost savings or capital deferrals amounting to about CAD3.1 billion or 36%. Conversely, based upon midpoint levels of guidance, we anticipate annual production growth of 11% over 2014 levels, a very significant achievement in light of how capital reinvestment is altered. In my opinion, few companies would be able to effectively execute this type of capital flexibility in such a short period of time. Just as importantly, defined growth plan remains largely intact with the Horizon major project program continuing to help drive our path to a more sustainable, low decline, long life asset base. As Steve noted, at current pricing and production guidance, we would expect to generate approximately CAD6 billion of cash flow. Excluding the Horizon major project spend, the capital associated with generating this cash flow is approximately CAD3.35 billion. After spending approximately CAD1 billion on the Corporate dividend program, our remaining free cash flow from ongoing operations were CAD1.65 billion, creating a slight balance sheet drop of CAD500 million to reach the targeted Horizon major project spend of CAD2.15 billion. Based upon strip pricing, foreign exchange rates and midpoint production guidance, we would currently anticipate ending 2015 at about 2.4 times and 2.6 times debt to EBITDA on a trailing 12 month basis. Our new covenant debt to book capitalization is targeted to exit around 37%. This is well within any covenant and quite reasonable given the current stage in the pricing cycle. No value attributed to the potential monetization of the ever-growing royalty revenue streams (inaudible). I'd refer you to our press release to find a more facts identified with respect to these revenue streams. I believe that we have prudently and methodically managed both capital to preserve value and create value to-date and allow for optionality to generate incremental value to shareholders throughout the business cycle. In summary, I believe Canadian Natural is financially strong and has a well-thought out plan for achieving future -- achieving the path to low decline long life asset base. Thank you and back to you, Steve. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [5] -------------------------------------------------------------------------------- Thanks Corey. And we'll open the line up now for questions, Heather. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Phil Gresh, JPMorgan. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- First question is just around the capital budget, appreciate all the additional color on 2015. Just I was hoping maybe if you give us perhaps some initial thoughts on what 2016 could look like given, number one, the projects that are underway, and number two, kind of the macro environment right now and maybe it's framing kind of the minimum and a maximum or just some general thoughts. Thanks. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [3] -------------------------------------------------------------------------------- Thanks for the question and I'll give you the answer that we had said last call. As you know here in Alberta there is a royalty review that will be going on. There's also a greenhouse gas review going on. So for us to make any kind of estimates on 2016 until that review is completed and we know what the royalty is going to be and if there is going to be any greenhouse gas charges, if there are remaining increases over the increase we have today, we can't make any kind of projection of what 2016 will look like. That being said, I think we'll still be committed to getting Horizon completed and we are seeing significant cost reductions and I think we'll be able to see when we go to 2016 that our capital cost to complete the remainder of the work at Horizon will be less than we originally anticipated. And we'll look into that right now, but I think there could be a drop in cost that way. Other than that we really can't give you any other commitment. I think you'll probably see more drilling in Cote d'Ivoire. But other than that we have to wait and see how the world shakes out. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Maybe just could you tell us what Horizon would be for next year at this point, given that it's locked in? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [5] -------------------------------------------------------------------------------- It's not totally locked in yet, so we are still working the on cost reduction. So we'll wait until we come out with the budget. At that time we will give you a better color. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- And on Horizon, a clarification question, the reduced operating cost guidance, is that factoring -- is that on an adjusted basis or is that on an unadjusted basis? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [7] -------------------------------------------------------------------------------- That's on an unadjusted basis. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- And as we look at the long-term trajectory, you mentioned the [25 to 27] target. The performance has been very strong year-to-date. Would you say that if there is an underlying base level that could actually be lower than the [25 to 27]? I realize it's early for that question, but the base levels continue to come in below. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [9] -------------------------------------------------------------------------------- I think that's a very good question, and although it's too early to commit, I think the sort of the bias would be it would be lower. We're seeing very good efficiencies, very good effectiveness, we're getting good utilization in run times. We expect when we get on Phase II and III that reliability will actually go up from where we are today. So all those things are positives, as you go forward, but we are bringing on new sets of equipment and so let's see how that all works as we get there, but right now I'd say the bias would be it'd be lower rather than higher. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [10] -------------------------------------------------------------------------------- Last one is, just maybe you could talk about what the demand feels like out there for the royalty lands in light of the recent transaction that was done and your general degree of patience around this in terms of monetizing the opportunity? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [11] -------------------------------------------------------------------------------- Yes, as you know, we're very patient. We're looking here to maximize value for shareholders. Sometimes being patient pays off and we're doing that. I would say, my view is the demand is still very, very strong if not stronger than it has been. And so -- there's lots of people knocking on our door. So, demand is there. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Neil Mehta, Goldman Sachs. -------------------------------------------------------------------------------- Neil Mehta, Goldman Sachs - Analyst [13] -------------------------------------------------------------------------------- So as we think about where you are in the capital spending cycle a couple of years from now, the Company should be generating a sizable amount of free cash flow. So with that in mind of framing that is, one, your perspective on dividend growth and how you think about getting growth over the next couple of years? -------------------------------------------------------------------------------- Corey Bieber, Canadian Natural Resources Limited - SVP, Finance & CFO [14] -------------------------------------------------------------------------------- Thanks Neil. That's a very good question, we get asked this quite a bit and really what the answer is has been the same. We try to balance the utilization of that cash flow and how we allocate that cash flow. So we balance the cash flow between resource development, our returns to shareholders through dividends and buybacks, opportunistic acquisitions and balance sheet strength and we will try to take a balanced approach as we have always. So we'll look at that as we go forward. If you look at our own resource development, I think obviously -- we think we have a pretty optimal capital program, considering the commodity price we are in today. As commodity prices go up, we'd be able to allocate more capital, but we still have additional cash flow to allocate then. So we're not going to see that taking up a lot of the unutilized cash flow. We'll come back to dividends and share buybacks, but opportunistic acquisitions is another use for that cash flow and we're not averse to doing acquisitions and we're good at it. That being said, we don't see any gaps in our portfolio, and so we don't really need to do anything. Our balance sheet, we like to make sure we have a strong balance sheet, and particularly coming out of this cycle, I think you'd see some cash flow allocate to balance sheet, to strengthen that even further, which then leads us back to dividends and share buybacks. And as you noticed, we'll have a bias towards that. Management is biased towards return to shareholders. And if you look back at history, while we can't promise anything, if you look back in 2009 when Horizon Phase 1 came on, the first phase, our return to shareholders increased dramatically after that point. So, we can't promise anything, but if history is any prediction of future, I think you'd see more allocation to return to shareholders. -------------------------------------------------------------------------------- Neil Mehta, Goldman Sachs - Analyst [15] -------------------------------------------------------------------------------- And then a question on the differential. It was relatively tight in the second quarter. We've seen signs that they are widening back out. Do you feel like the differential, as it sits right now, is close to transportation economics and closer to normal? And then, what are the pluses and minuses that you guys are thinking about as you try to [guess] where the differential could go? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [16] -------------------------------------------------------------------------------- The differentials are about CAD14 or CAD15 of WTI right now. That's a little wider than we did anticipate in this price environment and that's driven largely by the fact there's about 150,000 barrels a day of demand off, due to turnarounds and work in refineries. We expect most of that demand to come back here by the end of the third quarter and so we should see differentials again narrow. -------------------------------------------------------------------------------- Neil Mehta, Goldman Sachs - Analyst [17] -------------------------------------------------------------------------------- And last question for me, it just the tailwind of currency with the dollar strengthening against the Canadian dollar, how does that impact your business from a cost perspective, the way you approach production and just running the business broadly? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [18] -------------------------------------------------------------------------------- No, it doesn't really impact the way we run the business at all. We're focused, as you know, most of our costs, especially on the operating cost side are in Canadian dollars. Some of the equipment we've to buy is going to be in US dollars, but most of that major expansion is in Horizon. And a lot of that equipment has already been procured. So, we are really not impacted too much by the strengthening US dollar. So it's a positive for Canadian-based companies. -------------------------------------------------------------------------------- Corey Bieber, Canadian Natural Resources Limited - SVP, Finance & CFO [19] -------------------------------------------------------------------------------- Just to add a little bit to that; CAD0.01 change in FX is in that CAD55 million to CAD60 million increase on net cash flow? -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [21] -------------------------------------------------------------------------------- Quick ones for me, but maybe this is a follow-up on Horizon cost. Steve, I think in the past, you guys talked about 100,000 of flowing as the capital intensity. Would that still have been the baseline to which you're measuring the new cost you're seeing? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [22] -------------------------------------------------------------------------------- The baseline is below 100,000 barrels a day what we said and we are seeing that we may be able to get a bit lower than that as we go forward. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [23] -------------------------------------------------------------------------------- So Steve, how much is it below 100,000, is it a lot below 100,000 or is it --? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [24] -------------------------------------------------------------------------------- We're looking in sort of -- I would say the 90,000 to 95,000 barrels. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [25] -------------------------------------------------------------------------------- So that will be the base. Okay, that's helpful. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [26] -------------------------------------------------------------------------------- Remember Greg, we're building -- normally we're building a mining operation, extraction operation and a fully upgraded thing, so that's for a [34 degree API] well. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [27] -------------------------------------------------------------------------------- The second question is just around the 4,000 barrels a day shut in. We know it's primary heavy. Can you give us just an idea where that was? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [28] -------------------------------------------------------------------------------- It's scattered throughout Northeastern Alberta, and around (inaudible) area. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [29] -------------------------------------------------------------------------------- And the last question is just around your gas side -- what's Canadian gas production. How should we think about that into next year? I mean, obviously you didn't drill a lot of wells in the second-quarter period, but you probably drilled more gas wells than I expected. But how should we think about decline rates and so on and what the game plan is with gas into 2016? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [30] -------------------------------------------------------------------------------- I think, Greg, we're going to wait until we see what the royalty system is going to be and what the greenhouse gas system will be before we set our budget for 2016. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [31] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [32] -------------------------------------------------------------------------------- Also we have some great wells to drill in BC and Septimus and other areas in BC that are liquids-rich that can add a lot of production, relatively low cost. Although you're not asking this question, I expect you might ask it. We're seeing significant cost reductions, at Septimus our completion costs are actually down 40% from where we were in 2014. So, we are driving innovation and cost reductions. So, the development of BC liquids-rich Montney gas looks pretty good. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Menno Hulshof, TD Securities. -------------------------------------------------------------------------------- Menno Hulshof, TD Securities - Analyst [34] -------------------------------------------------------------------------------- Just to go back to the -- for year-to-date CapEx cuts, how much of the CAD3.1 billion would be related to improving capital efficiencies versus cuts to flexible capital? -------------------------------------------------------------------------------- Corey Bieber, Canadian Natural Resources Limited - SVP, Finance & CFO [35] -------------------------------------------------------------------------------- I think the way to look at it Menno is, out of CAD3.1 billion, the first CAD2.4 billion was largely deferrals. And then the next, say, CAD300 million was -- about half deferrals and the rest have all been cost reductions, enhancements and productivity and some reductions in -- the rates -- contractors charges and just better effectiveness and rate scoping. -------------------------------------------------------------------------------- Menno Hulshof, TD Securities - Analyst [36] -------------------------------------------------------------------------------- And then just to follow up on Greg's question on shut-ins. Do you have any other production shut in outside of the heavies and given pricing, can we expect that number to grow into the end of the year? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [37] -------------------------------------------------------------------------------- On the heavy oil side, Menno, we don't have any more shut-in and I don't expect we'll have any more shut-in for the rest of year at this price level. As far as other shut-ins, nothing really shut in, other than the shut in gas, because of the transportation issues with [TCPL] doing that [work] on the line, which has affected the whole industry in Northwestern Alberta, and in BC. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- (Operator Instructions) [John Braun], Societe Generale. -------------------------------------------------------------------------------- John Braun, Societe Generale - Analyst [39] -------------------------------------------------------------------------------- Maybe you addressed this and I missed it, but with Horizon you extended the -- you extended the time that you were doing planned maintenance. What is necessary [to that] work, what did you find that caused you to make a more protracted turnaround there? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [40] -------------------------------------------------------------------------------- So what we did [part of the turnaround], with some of the outage we moved into the spring from the fall, with some work that has to be done, check pressure, vessel valves, it's tough to make sure that they are compliant, you got to do those on time. So we moved those ahead. We also took that opportunity to change the trays in the fractionator tower, because by having more optimal trays, we expected to get better production, which we have. But we went in there because of the fractionator tower was designed for tune of 50,000 barrels a day. We had a buildup of coke in the bottom trays that we had anticipated. It hadn't affected the pressure in the tower yet, but it would've if we hadn't gone in there. That coke as you can imagine is fairly hard and it took us a long time to get it out of there, as we had to put guys in there with jackhammers to do it all. -------------------------------------------------------------------------------- John Braun, Societe Generale - Analyst [41] -------------------------------------------------------------------------------- The oil in the (inaudible) that's generating free cash flow, what are your thoughts on M&A now, would you ever -- as I've asked you before -- go south of the [49th parallel], go to the US? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [42] -------------------------------------------------------------------------------- So you know, John, it's going to be the same answer, I know you asked the question maybe hoping I'll answer it differently one of these times, but as you know, we don't have any gaps in our portfolio and we don't see any gaps. So what we're looking at is, only things that are very opportunistic that fit with us, that we can see that we can add value right away. So right now we don't see any of that. And it's probably too early to be doing any of that anyway. So at this point in time we don't anticipate much [out]. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- There are no further questions at this time, I will turn the call back over to our presenters. -------------------------------------------------------------------------------- Doug Proll, Canadian Natural Resources Limited - EVP [44] -------------------------------------------------------------------------------- Thank you ladies and gentlemen for attending our conference call, Canadian Natural has a very strong and diverse asset base, a complementary balance of production and a strong well developed plan for the systematic development of this asset base. We do concentrate on safe, efficient reliable operations and a strong financial position, supported by a readily available liquid resources. And finally, Canadian Natural Is responding to lower commodity prices by focusing on reducing cost structures and implementing changes to processes to ensure these changes are long lasting. If you have any further questions, please give us a call. Thank you again, and we look forward to our third quarter conference call in early November. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- This concludes today's conference call, you may now disconnect.
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