CALGARY Jun 18, 2015 (Thomson StreetEvents) -- Edited Transcript of Canadian Natural Resources Ltd conference call or presentation Wednesday, June 17, 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 * Tim McKay Canadian Natural Resources Limited - COO * Lyle Stevens Canadian Natural Resources Limited - EVP of Conventional Operation * Corey Bieber Canadian Natural Resources Limited - CFO ================================================================================ Conference Call Participants ================================================================================ * Phil Gresh JPMorgan - Analyst * Greg Pardy RBC Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources conference call. (Operator Instructions) Please note that this call is being recorded today, Wednesday, June 17, 2015 at 9:00 AM Mountain Time. I'd 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] -------------------------------------------------------------------------------- Thank you, Chrissy. Good morning, everyone, and thank you for joining our 2015 open house conference call. With me this morning are Steve Laut, our President; Tim McKay, Chief Operating Officer; Lyle Stevens, Executive Vice President, Conventional Operation; and Corey Bieber, Chief Financial Officer. The conference call is being webcast this morning and we will be referencing slides in the call today that are found as part of the webcast or as in a PDF available on our website. The agendas for today's call can be found on slide 2. Before we begin, I'd like to refer you to slides 3 and 4 for the comments regarding forward-looking information contained in our press release, and also note all amounts are in Canadian dollars and production reserves are expressed as before royalties unless otherwise stated. Turning to slide 5, why is Canadian Natural having this call as opposed to the previously scheduled open house? Canadian Natural believes it has the most diversified, well-balanced portfolio of production, reserves, and related undeveloped land in its peer group. This asset portfolio consists of short-, mid-, and long-term opportunities, which are driven by the underlying economics to profitability develop these assets to create value for our shareholders. In assessing the targeted economic returns from these investments, we address the associated risks in order to assess the timing for investment, including commodity price volatility. Today's call focuses on our strategy, our cost effectiveness, an overview of our assets, and our financial strength. Subsequent to the completion of the government of Alberta's announced royalty review and certainties surrounding the other regulatory matters, we anticipate scheduling a further open house presentation to update our forward plans. I will now turn you over to Steve for the details of today's presentation. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [3] -------------------------------------------------------------------------------- Thanks, Doug, and good morning, everyone. Today I'll touch on five key elements that enable Canadian Natural to deliver value creation, and in my view, also sets us apart from the majority of our peer group. It starts with our strategy. It's proven, effective, and value-driven, unlocking the tremendous value of our assets and delivering increasingly more effective and efficient operations. Importantly, it allows us to withstand commodity price volatility and fiscal changes. Most importantly, Canadian Natural has delivered safe, effective, efficient, and environmentally responsible operations, top tier in our peer group. Tim will discuss our drive to continually improve our already top-tier performance. Our asset base is large, diverse, and well-balanced, providing us with significant capital allocation choice and the ability to effectively transition to a longer-life, low decline assets. Lyle will highlight the strength of our assets later in the call. Our balance sheet is strong, and as Corey will point out, we're in a very strong financial position. As a result, Canadian Natural generates strong cash flow, which is increasing, and will become even more sustainable as we complete the transition to long-life, low decline assets. Canadian Natural is in a very strong position. We are built to withstand commodity price volatility, and will, as we have each and every time, come out of this cycle stronger than we went in. Canadian Natural's strategy, slide 7, is simply to optimize capital allocation to maximize value by having a defined growth and value enhancement plan for every product and every basin we operate in. We balance our product mix between oil and gas; on the oil side, between light, heavy, and synthetic; our time horizons between near-, mid-, and long-term projects; and we balance capital allocation between organic projects and acquisitions; and we balance our sources of debt. Large, opportunistic acquisitions have always been a part of our strategy and the cornerstone of our strategy is to ensure effective and efficient operations aided by a high-quality land base, infrastructure, and area knowledge. Our strategy has stood the test of time, through good times and tough times, in a business where success is tough and consistent success is very tough to achievement. Canadian Natural's strategy, slide 8, is proven and effective. It's robust, allowing us to withstand commodity price changes and fiscal changes. Our strategy is nimble, allowing us to react to the market and capture opportunities, and flexible, as we execute the transition to a long-life, low-decline assets, and most importantly, it leverages the strengths of the Company. Our strengths, slide 9, include our diverse and balanced asset base, our strong balance sheet, and our high-quality land, resource base, and infrastructure that we operate at high working interest. This provides us the capital allocation choices and flexibility between gas and oil, light, heavy, thermal, and mining operations, and in various jurisdictions, in Canada between BC, Alberta, Saskatchewan, and Manitoba, as well as internationally, in the North Sea and offshore Africa. We can and have allocated capital to opportunistic acquisitions, and importantly, returns to shareholders. All choices compete for capital. One of our more underrated strengths is the expertise and experience of our leadership and teams that work together in the Canadian Natural culture, a culture that provides us with a competitive advantage. It is focused, and demands execution and action, effectiveness, efficiency, and innovation. We learn and we learn quickly by working together, with our focus on value creation. Importantly, Management, staff are more aligned with shareholders than any of our peers. Canadian Natural is executing our strategy and we're leveraging our strengths, slide 10. We is have a top-tier track record of value creation and the same time we're effectively executing our transition to a long-life, low-decline asset mix, effectively positioning Canadian Natural for the next stage of value growth, which will see increased capital flexibility, increasing effective sufficiency, unlocking of our vast resource base, and see returns to shareholders take on an increased priority. It all starts with Canadian Natural's reserve base, Slide 11, at over 4.5 billion BOEs, Canadian Natural has the largest proven reserve base among our peer group, a reserve base that ranks with global industry players. It is balanced and it's delivering significant value. Canadian Natural is in a very enviable position and has a clear advantage compared to many of our peers when it comes to unlocking the value from our long-life, low-decline resources. Our reserve base is large, slide 12, but our long-life, low-decline resource base is even larger. If you add our resource potential, Canadian Natural's reserve base, which already ranks with global E&P companies, you can see that Canadian Natural has the resources to organically grow our reserve base, a long-life, low-decline reserve base, to a level that compares with leading global industry players. Few if any of our peers have the assets, the expertise, combined with a strong balance sheet, to withstand the low commodity price environment, or most importantly, the ability to fund the cost-effective element of our resource base. This allows Canadian Natural over time to increase our proved reserve base by a factor of 5; not only grow our value significantly, but increase the sustainability of this value. Of course, our primary goal of our strategy is value growth and the drive to ever increasing the economies of scale, effectiveness, and efficiency. Canadian Natural's strong, diverse, and balanced asset base allows us to effectively complete this transition while maintaining balance sheet strength, Slide 13, a transition that is drawing closer to completion. With Horizon Phase 2B on stream in 2016 and Phase 3 complete in 2017, and on stream in early 2018. At that time, we'll have over 60% of our oil production as long-life, low-decline production. A transition, slide 14, that is essentially funded by the strength of Canadian Natural's more typical E&P assets. Our long-life, low-decline assets include our leading-edge polymer flood at Pelican Lake, our vast thermal in situ oil sands development, and Horizon Oil Sands mining operations. Canadian Natural is in an enviable position, with strong conventional E&P assets, the vast long-life, low-decline assets, which, when we combined, provide Canadian Natural with many advantages, significant flexibility, and long-term sustainability. The strength of our typical E&P assets are the significant capital and flexibility they afford, on slide 15. We can quickly adapt to commodity price or fiscal changes and allocate capital to maximize returns. Our typical E&P assets have shorter payback periods; as a result, they tend to have a higher return on capital. Canadian Natural's typical E&P assets benefit from our high-quality land base and infrastructure, driving strong returns. We also maintain larger inventories so we can constantly high-grade our capital allocation, again, to maximize returns. In addition, typical E&P assets provide many capital exposure off ramps to curtail capital spending with minimal capital left stranded. Our typical E&P assets provide significant capital flexibility, shorter payback periods, and higher returns, which when combined with our long-life, low-decline assets, provide Canadian Natural with tremendous asset strength. Canadian Natural's long-life, low-decline assets have very low reserve replacement costs and substantial and sustainable production, slide 16. Long-life, low-decline assets are more tolerant to commodity price volatility, as costs to maintain production are low, with low production declines. Canadian Natural's long-life assets, particularly at Horizon, have very low reservoir risk and greater opportunity to leverage operational expertise through continuous improvement processes. And of course, with long-life assets, we have essentially no land expiry issues. To illustrate the power of long-life assets, particularly in a low commodity price environment, slide 17 illustrates the capital required to keep production flat for our long-life, low-decline portfolio, and our typical E&P assets. As you can see, the declines are significantly less and the capital required to replace production declines is very low compared to our typical E&P assets. To highlight this benefit, in 2015, if all our production came from typical E&P assets, we would require an additional CAD900 million of capital to keep production flat. In 2018, when Horizon Phase 2/3 is on stream, this impact is even more dramatic, with an additional CAD1.2 billion required to keep production flat, if all production was from typical E&P assets. Over a five-year period, that saves CAD6 billion, roughly our total capital spend in 2015. This is a key advantage, particularly in a low commodity price environment when capital is limited, providing Canadian Natural a significant advantage in terms of maintaining cash flow and balance sheet strength. Another benefit of long-life, low-decline resources is reservoir and reserve replacement risk. Slide 18 compares our Horizon production profile, which is flat for 50 years, with no reservoir risk or reserve replacement risk. Compared to the Permian, where about 9,000 horizontal wells would need to be drilled over time, with ever-increasing reservoir and reserve replacement risk to produce the same reserves at Horizon. Canadian Natural has a proven and effective and value-driven strategy, slide 19; strong, well-balanced, and diversive assets; and great team focused on effective and efficient operations. We deliver safe, effective, and efficient operations and a strong balance sheet. Canadian Natural is in a very strong position. Going forward, slide 20, we're assuming that the royalty, regulatory, and environmental burdens will be reasonable, allowing for investment and job creation. Clearly, in Alberta, we will have a royalty review, and we look forward to participating in the process. Ultimately though, we believe everyone recognizes that Alberta needs to remain competitive with BC, Saskatchewan, and Manitoba in Canada, and the Bakken, Permian, Eagle Ford, and Marcellus in the US. We expect commodity prices to be range-bound for a significant period of time, with WTI trading in the $60 to $75 range, and you see today we're about $59, about $1 below the range. We expect AECO gas pricing between CAD2.50 and CAD3.50 a GJ, and today we're about CAD2.62, just above the bottom end of the range. The macro risks we face, slide 21, are commodity pricing, where we have not fully recovered to the bottom end of our expected ranges and potentially more volatility lies ahead. Fiscal and regulatory changes are also risks, particularly here in Alberta, but I'll note that in the UK, reduced taxation by 20% earlier this year, so in some cases, fiscal or regulatory change can have a positive impact. There may be additional positive news in the UK, but we aren't expecting positive changes in the other jurisdictions we operate in. These risks erode returns on capital, reduce the inventory of E&P projects, and lowers and cash flow earnings. As a result, there's less capital invested and jobs created. Of course, the capital that is invested will be in the areas with the highest returns. All in all, these risks will have an impact on value growth. Specifically in Alberta, slide 22, where there's increased taxation and uncertainty around royalty and regulatory burdens going forward. The industry, as you would expect, is concerned, as we have seen in these changes in the past, 2007 in Alberta, and 2011 in the UK, end up being lose-lose situations, where both the industry and the governments have both lost. Adjusting the royalty, taxation, and regulatory burdens is complex and the risk of getting it wrong is high, as we saw in 2007 in Alberta and 2011 in the UK. In the UK North Sea, the increased taxation stifled capital investment. As a result, production declined significantly, resulting in significant less revenue for government and significant job losses. The UK is trying to rectify this situation to gain revenues and create jobs. Hopefully it's not too late. We believe the Alberta government understands this complexity and wants a strong and healthy oil and gas industry. We look forward to working together with the government during this period of review. That being said, we have significant capital flexibility and we will allocate capital to manage any changes that may be forthcoming. In 2015, Slide 23, Canadian Natural is committed to lowering the cost structure in a methodical and structured manner. We're committed to completing Horizon Phase 2/3 and to maintaining our balanced asset base optionality, ensuring we can act quickly to change. Most importantly, we're committed to maintaining balance sheet strength, creating value, and delivering returns to shareholders. The overall Horizon Phase 2/3 expansion, slide 24, is going very well. Completion of Phase 2/3 expansion will double production at Horizon from 125,000 barrels a day to 250,000 barrels a day, significantly increasing production and reducing operating costs, and the sustainability of Canadian Natural's production profile. Canadian Natural takes a balanced approach to capital allocation, slide 25, and will continue to do so, as our production ramps up at Horizon and the capital allocated for Horizon expansion ends. We will allocate capital to resource development, returns to shareholders through dividends and share buybacks, strengthening the balance sheet, and opportunistic acquisitions if they make sense and add value. Returns to shareholders are important to Canadian Natural, slide 26. That importance is reflected in returns to shareholders that have been increasing at a 44% CAGR since we brought on Horizon Phase 1 in 2009, the first major step in our transition to a long-life, low-decline asset mix. Canadian Natural is in great shape, slide 27. We have a proven effective value-driven strategy to not only grow production significantly, but increase the sustainability of our production. It all starts with our safe, effective, efficient, and environmentally responsible operations of our diversified and balanced reserve base, the largest in our peer group, a reserve base that ranks with global industry players and delivers strong cash flow. Canadian Natural's strategy is proven, effective, and value-driven, a strategy that sees us continue to develop our vast high-quality resource base in a very disciplined manner, effectively transitioning to a long-life, low-decline asset base, unlocking significant value of sustainable cash flow for shareholders. Our balance sheet is strong, with a capacity to capture opportunities and weather commodity price volatility. Most important of all, we have the people, the expertise, and the experience to execute our programs and operate effectively and efficiently. As a result, we expect not only to survive this low commodity price cycle, but come out of the cycle even stronger than we entered the cycle. A significant part of that strength comes from our safe, effective, efficient, and environmentally responsible operations that Tim will now walk you through. Tim? -------------------------------------------------------------------------------- Tim McKay, Canadian Natural Resources Limited - COO [4] -------------------------------------------------------------------------------- Thank you, Steve, and good morning, everyone. Slide 29, Canadian Natural continues to focus on enhancing our operations to keep our people and assets safe, as well as we have environmentally responsible operations. We focus on delivering effective and efficient operations year after year. Canadian Natural's advantage is our people, our assets, and a culture that continues to drive to be an industry leader. Slide 30, at Canadian Natural, safety is a core value. We are committed to continuous improvement in our safety program. We continue to reduce recordable injury frequency in all areas, as we strive for no harmed people, no safety incidents. Slide 31, Canadian Natural continues to drive environmental excellence. We continue to be proactive and our operations meet or exceed all regulatory requirements. We are working to reduce greenhouse gas intensity across our operations. In fact, at Horizon, we have reduced the intensity by 12% when compared to 2013. Our 2015 abandonment program of approximately 500 wells is very focused in delivering safe and compliant abandonments of old well bores. This last winter by doing an area-based abandonment program of 129 wells, we saw a 34% cost reduction, saving approximately CAD4 million. By doing it differently, most of these cost reductions are sustainable for long-term. Canadian Natural is proactive in managing our liabilities, and in the period between 2010 to 2013, we abandoned over 3,300 wells, making up 29% of the industry total. Slide 32, Canadian Natural is the largest oil and gas R&D investor. Last year, we spent a total of CAD450 million. We are using technology to reduce our environmental footprint, reduce both our operating and capital costs, enhancing productivity, and unlocking reserves. Moving to slide 33, our three-year average finding and development costs are top tier when compared to our peers. Slide 34, also when compared to our peers, 70% of our reserves are developed, we carry modest proven undeveloped reserves, and still we delivered top-tier finding and development costs. Slide 35 in primary heavy oil our operating costs are industry-leading. Our attention to detail ensures our operations are effective and efficient each and every year, independent of commodity price changes. Slide 36, in our thermal areas, once again, we continue to have top quartile operating costs year after year. Our experienced field personnel are focused on maximizing value in our thermal operations. We ensure the steam we generate and the fluids we treat is done most cost-effectively. Slide 37, at Pelican Lake, we continue to drive efficiencies in our operations with operating costs now under CAD10 a barrel. Slide 38, while our natural gas operating areas include a huge portfolio of properties across western Canada, we continue to be better than our peers. In fact, at Septimus, in the deep basin areas, our operating costs are top quartile. At Septimus, we have operating costs of CAD0.24 an Mcfe, while in the deep basin, we have operating costs of approximately CAD0.62 per Mcfe. Slide 39, finally, at Horizon, we continue to be an industry leader with our effective and efficient operations. Our leadership is focused on all aspects of our operations from shovel to final sales of [SCO]. By using lean Six Sigma, we have very much made Horizon a manufacturing plant. As you can see, since Q4 of 2012, we have continued to improve our operating costs by being deliberate and pragmatic, ensuring we have sustainable operating cost improvements Slide 40, we have reliable operations, which results in high utilization rates. While our first quarter of 2015 was extremely good, we expect over many periods that our average utilization rate to be in the low 90%s, which is much better than our industry-leading utilization rate over the last five years. We are focused on continuing to improve that trend; each percentage gain means extra barrels, which adds significant value to our bottom line. Slide 41, on the G&A side, we have top-quartile net G&A costs. Our teams are fit for purpose, they understand how to enhance our operations and deliver value to our shareholders. On Slide 42, as a result of delivering reserves, capital efficiencies, effective operations, and G&A, we have a very good recycle ratio when compared to our peers. Slide 43, Canadian Natural's advantage is high working interest and we operate most of our production. Combined with our large high-quality land base, we can leverage our size to gain efficiencies and translate those savings across our areas quickly and effectively. Our teams are focused on value creation through working together. Ideas to improve our costs are quickly adopted throughout our Organization; as new technology emerges, they are applied to enhance our cost and delivery. Slide 44, in this period of low commodity prices, it gives our teams more time to work collaboratively with our contractors and suppliers. Each piece of our business is reviewed. Can we improve our execution, productivity? Do we have the right scope? Can we leverage more technology? Can doing it differently reduce our costs, improve production, or recoveries? Slide 45, as well, it's an opportunity to ensure our design's specification scope and the use of technology is fit for purpose, ensuring we have turned over every rock for cost optimization without compromising safety or reliability. On Slide 46, Canadian Natural has a culture of touch the steel. We encourage our people to know and understand the business, see it for yourself, look to challenge old ways, and look for opportunities to improve our execution, work processes, increase productivity in the field and office, ensure we have the right people, and we are effective and efficient in every piece of our business. On Slide 47, this is also a great time to work with all levels of government and regulators to reduce duplication, streamline reporting, and if possible, timelines for approvals. By working together with governments and regulators and understanding the challenges and opportunities in the industry, we all can be a part, ensuring we have a competitive and healthy business environment. Finally, we are working together with our suppliers, contractors, and service providers. How can we work better together? By asking how we can both be more effective and efficient, it's a win-win, as we need to ensure our suppliers, contractors, and service providers stay healthy and we can continue to have a healthy supply chain. On slide 49, we have realized significant cost savings of approximately CAD300 million when comparing Q1 2015 to Q1 2014, and as we move through the year, we expect to show more savings each quarter. While some of these savings are a function of commodity prices, we are focused on a sustainable cost reduction. On slide 50, in 2015, as added focus in all areas, our teams methodically going through their areas looking for low cost production and reserve adds. Priority is given to the properties we have recently acquired and reviewing everything in the area ensuring we are optimized in all aspects of our business. Slide 51, here is an example in our western area. While the task is big, to review each and every well, pool, and area, we are finding opportunities. This is the kind of detail that makes Canadian Natural an industry leader. Through these reviews in western area in the first quarter, we were able to add approximately 3,400 BOEs a day at a very low CAD789 per BOE/d. On Slide 52, the key takeaway for today is Canadian Natural is committed to safe, environmentally responsible operations. We have a track record of efficient and effective operations year after year. We have a culture that looks for opportunities to make our Company stronger, ensuring every dollar we spend adds real value to the Company's bottom line. Thank you and I will now turn it over to Lyle Stevens. -------------------------------------------------------------------------------- Lyle Stevens, Canadian Natural Resources Limited - EVP of Conventional Operation [5] -------------------------------------------------------------------------------- Thanks, Tim. Good morning, everyone. As I review our assets, there's several key themes that I want to ensure that you capture. Our asset base is very deep and balanced, as significant development opportunities for all our products, which include natural gas, light oil, heavy oil, thermal crude oil, and synthetic crude. The Company has a balanced portfolio of opportunities. We have short-, mid-, and long-term projects all proceeding, and as we have shown this year, our program is flexible and we will make the tough decisions to maximize value for our shareholders. As I go through this review of our assets, you'll see that in every case, we have strong development potential that is created by our large undeveloped land base. We also structured our land base to maximize value by owning our facilities and infrastructure and operating the vast majority of our production. I'll start with Canadian Natural's primary heavy oil on slide 55. These assets provide significant growth and value for our shareholders, where our efficient operations and well-executed development programs. This map shows our extensive land base, centered on the Alberta/Saskatchewan border near the City of Lloydminster. In addition to our assets in this region, we also produce primary heavy oil at [Wooden House], which is located in northern Alberta, close to our Pelican Lake operations. In the first quarter, we produced approximately 138,000 barrels per day, making us the large Canadian producer of primary heavy oil. Slide 56 outlines several key operational strengths that drives our value growth in heavy oil. Canadian Natural owns and operates five oil processing facilities, as well as facilities for sand disposal. These facilities are the backbone of our operation and ensure that our operating costs are minimized, which in turn maximizes our cash flow, and gives us a competitive advantage in the region. Canadian Natural has what I believe is the best undeveloped land base in the region, and this results in our drilling inventory of over 8,000 wells. The drilling opportunities here are low risk and repeatable. The formations are shallow and the typical slant well is drilled in just three days. We've executed some very large drilling programs in the region, but they are flexible and we can stop and start them very quickly depending upon economics and capital allocation within the Company. With our operated infrastructure, our history of large drilling programs, and our disciplined execution, we have developed into one of the most effective and efficient operators in the entire region. Our primary heavy oil strategy, slide 57, shows that our second-half drilling program will consist of 150 wells. This program will pilot cost savings initiatives that we've identified with the goal of reducing our capital costs by more than 25%. We've taken a very hard look at every aspect of the new wells, from surveying, construction, drilling, and equipping, and we believe that we can realize these savings. As I mentioned, our heavy oil drilling program is flexible and that's reflected in our revised 2015 program. 2014, we drilled 894 wells, and this year, we're targeting to drill a total of 187 wells. In 2015, the focus will be on low-cost recompletions, production optimizations, and initiatives to further reduce our cost structure in the region. By year-end, the teams will have reviewed every well in the region, evaluating recompletion potential, ensuring that equipment is right-sized, evaluating well servicing practices, and ensuring that our current production is maximized. Even though we've been operating in the region for more than 20 years, we're still focusing on improving our operating cost structure. We've created a small team focused on two initiatives. The first is improving our ability to handle some of the produced oil water emulsion that is difficult to treat, and the second is reducing the costs associated with the disposal to produce sand. We now have several centrifuges that are used to separate the difficult emulsion and we have eight underground salt caverns that are used for sand disposal. These initiatives have not only reduced our costs, but have also resulted in incremental 2000-barrels per day of oil production. Maximizing oil recovery from our heavy oil assets is still a priority. We'll continue with our ongoing initiatives with our water flood and polymer flood pilots, both of which are showing encouraging results. Pelican Lake, slide 58, is the first of three assets that is fundamental to Canadian Natural's strategy to transition to a longer-life, low-decline asset base. Canadian Natural's Pelican Lake pool is truly massive, contains more than 4 billion barrels of heavy crude oil, making it one of the largest pools in western Canada. It's also where we operate one of the largest polymer floods in the world. It's been a huge technical and economic success, where we've developed a commercial enhanced oil recovery process that is at the leading edge of industry. Today we estimate that we'll recovery approximately 19% of the total oil in place, and as we continue to enhance the process, we're confident in our ability to push recovery even higher. In the best portions of the pool, our reserves evaluator currently estimates ultimate recoveries of 35% to 40%. Even as we expand the project and grow production, we've maintained our discipline on cost control and are proud to have the lowest operating costs in the region. Our ongoing success at Pelican Lake has created many operational strengths, slide 59. In 2005, when we started piloting the polymer flood, it was an untested process in this type of reservoir and there were no commercial applications with this quality of oil. As a result, Canadian Natural has set to build the expertise and develop the technology. In the last 10 years, we've advanced polymer flooding from a five-well pilot to a commercial project with more than 1,000 horizontal wells. Canadian Natural has been diligent in controlling both our capital and operating costs by maximizing the utilization of our facilities, which includes four oil batteries and the Pelican sales oil pipeline. We've overcome many complex operational challenges in dealing with the treating of various water sources, the polymer mixing, and the treating of the produced fluids. Our operating costs, where we're already the industry leader, continue to drop as we solve these challenges. Significant expansion opportunities still exist with only 55% of the developed region under polymer floods. Slide 60 outlines our near-term strategy at Pelican Lake. The polymer flooding process is still in its infancy as a commercial recovery process, which provides significant opportunities for improving our operations and advancing the technology. The horizontal wells that were originally drilled here weren't completed with the flooding process in mind and we found that [silent] influx can occur, which impacts injectivity and productivity. Over the last two years, we've tested many techniques to clean out the long horizontal wells. These techniques continue to improve and costs continue to drop. We'll also continue to test new polymers to ensure that we're maximizing value through the optimum combination of polymer cost and recovery efficiency. We're continuously working to improve the reservoir process and have been testing a water alternating polymer scheme that has the potential to reduce costs and improve sweep efficiency. All of our work is focused on a single objective, which is to reduce the cost of producing a barrel of oil with the polymer flood. This means a continued drive to reduce capital cost, improve recovery efficiency, and reduce operating costs. I'll now move on to our North American light crude oil assets, starting on slide 61. Canadian Natural has a significant and diversified exposure to established and new light crude oil plays that provide a stable production base and opportunities for meaningful increases in our light oil production. Our portfolio of light oil assets is very diverse, reaching from Manitoba to northeast British Columbia, providing exposure to new plays across the entire western Canadian sedimentary basin. We're continuing to optimize recovery in existing pools through secondary and tertiary recovery, while at the same time, we're also pursuing development of newer pools utilizing horizontal wells in multi-frac technology. Slide 62 shows a few of our strengths in our light oil portfolio. Canadian Natural is proud of its record of increasing oil recovery, minimizing costs, and increasing value in mature light oil [fuels]. It's not always as glamorous as drilling new wells, but with a concentrated focus, it does add significant value. We operate 133 individual water floods and have four active EOR projects, all focused on maximizing value through increased recovery. In the last several years, Canadian Natural has been active in developing and expanding new plays utilizing horizontal wells with multi-frac technology. We've shown that our land base has great potential to deliver incremental production growth with this technology, and development costs are significantly improved when combined our owned and operated infrastructure. Our strategy, outlined on slide 63, includes the development and drilling of new light oil plays across western Canada. With a modest capital program in 2015, the focus will be on high-grading these plays and reducing costs and risk to make them more economically viable in today's environment. Improving recovery from existing pools, primarily through water floods, remains a large focus for our teams, and this effort will continue to add value for our shareholders. Several new floods have recently been implemented, and we continue to evaluate new opportunities. Our 2015 drilling program is small, but there's a renewed focus on optimizing and maximizing production from our existing assets. Similar to heavy oil, we're conducting well reviews of every well to ensure current production is maximized and to ensure that secondary zones are properly evaluated. It's also a great opportunity for us to optimize our operating practices to ensure that we're as efficient as possible. Strategically, our international assets, slide 64, provide an excellent platform for us to review and participate in light oil opportunities in both the North Sea and offshore Africa. Our exposure in the international arena creates geographic balance for the Company. We have a balanced exposure with low-risk, high-return development drilling in Cote d'Ivoire, coupled with a modest program to pursue high-impact exploration in both South Africa and the Cote d'Ivoire. The strengths of our international portfolio are outlined on slide 65. One of the benefits of the geographic balance that our international assets provide is exposure to Brent based crude oil prices. Similar to our western Canadian light oil assets, the North Sea provides value through our focus on maximizing oil recovery and minimizing operating costs. Our offshore development opportunities in the Espoir and Baobab fields in Cote d'Ivoire are low risk and provide strong returns for Canadian Natural. These low-risk opportunities are balanced by several high-risk, offshore exploration opportunities in the Cote d'Ivoire and South Africa. Our international strategy, slide 66, includes the completion of the 10-well drilling program at Espoir and the six-well drilling program at Baobab. To date, three wells have been drilled at Espoir, and the first well at Baobab has been just completed. Initial production rates look very strong. The first two Espoir wells have averaged approximately 2,500 barrels per day net to Canadian Natural, versus our expectations of 1,000 barrels per day per well. In the North Sea, our first priority is on improving our facility reliability and run times, and we will also continue to high-grade development opportunities. In the Cote d'Ivoire, we'll continue to evaluate additional development drilling opportunities, while we progress work on the exploration blocks. In South Africa, we're not expecting to recommence drilling until 2016. Back to North America, and our natural gas assets, on slide 67, we have a dominant position in the natural gas business in western Canada. Today, Canadian Natural is the largest producer of natural gas in Canada, with Q1 production of more than 1.7 Bcf per day. We have significant growth opportunities in the best liquids rich natural gas plays in western Canada. We're one of the largest Montney landholders in Canada and also have very significant deep basin development potential. Our owned and operated infrastructure provides Canadian Natural the benefit of cost-effective development of these resources. The strength of Canadian Natural's operating philosophy continues with our natural gas assets, as shown on slide 68. Owning and operating infrastructure enables us to control operating costs, control development pace, and reduce the capital costs associated with new development programs. Today, we operate 20 major natural gas plants, each having capacities greater than 50 million cubic feet per day. In total, our facilities have more than 500 million cubic feet per day of unutilized capacity, which provides good opportunity for lower-cost developments. We have a very large premium-quality undeveloped land base in the most prospective regions of the basin. As you know, horizontal multi-frac drilling has changed the nature of natural gas drilling across North America. The best plays in Canada can compete with the US plays and Canadian Natural's undeveloped lands and infrastructure are optimally positioned. We have more than 1.4 million net acres in the Montney formation across northeast British Columbia and northwest Alberta. In the deep basin of Alberta, we have a very strong acreage position for future development in the Notikewin, Wilrich, and Falher channel plays. Unlike many large natural gas producers, our decline rate is very shallow at 15%, which significantly reduces the capital we've required to offset production decline. Slide 69 outlines our near-term natural gas strategy. Our 2015 drilling program is focused on retention of our premium-quality undeveloped land base, complemented by a small program at our Septimus/Montney project in northeast BC. We're also high-grading our development opportunities and meshing that with our unutilized capacity at our owned and operated facilities. This will minimize our development costs and will allow these projects to compete for capital. Today, the primary focus for our teams is on maximizing the production from our existing assets. We're conducting individual well reviews with all our staff participating, including geologists, geophysicists, engineers, and our field operations staff. Similarly, we are reviewing all aspects of our drilling program to reduce costs and improve efficiencies. The value of our facility ownership is being realized in several ways. First and foremost, the facilities minimize the operating costs of our current production. The facilities also reduce our development costs and provide processing income from third-party producers. Moving on to Slide 70, Canadian Natural's thermal in situ portfolio is the second of the three assets that's fundamental to Canadian Natural's strategy to transition to a longer-life, low-decline asset base. Canadian Natural's thermal portfolio has vast resources for development, with a staged growth plan that will take production capacity to over 500,000 barrels per day, once commodity prices stabilize at levels that justify these investments. Today, our two main producing assets are Primrose, where we produce from the Clearwater reservoir using cyclic steam stimulation, and Kirby South, where we produce from the McMurray, using steam-assisted gravity drainage. Within our land base, Canadian Natural has 97 billion barrels of bitumen in place, resulting in proved plus probable reserves of 2.3 billion barrels. The strength of our thermal assets, slide 71, starts with the size and depth of our developed and undeveloped portfolio. We have near-term opportunities with our existing producing assets at Primrose and Kirby South, mid-term assets with the Kirby North Phase 1 development, and excellent long-term potential with our other undeveloped assets. We've proven our ability to develop and grow our thermal assets and our production has grown at a 10% CAGR over the last 10 years. At the same time, new project construction and expansions have been delivered on budget, on schedule. Similarly, our operational expertise is also evidenced by our top-tier operating costs. Slide 72 provides an update of our current operations at Kirby South and Primrose. In late May, there was a large forest fire in close proximity to our operations at Primrose. We safely shut down operations at Primrose and evacuated all personnel. Production at Kirby South was also impacted since the Cold Lake oil pipeline that transports our Kirby production was also shut down. We're able to keep some Kirby operations functioning and truck small volumes of production. Thankfully, the fire is now under control, and in early June, we were able to regain access to the site. We had essentially no damage to our operations, other than power and communication disruptions. We now resume operations and production is quickly ramping up at both Primrose and Kirby South. As a result of the fire, we estimate that Q2 production will be reduced by approximately 7,500 barrels per day, which will put us near the low end of Q2 guidance. Full-year production guidance remains unchanged. Moving on to slide 73, our near-term strategy at Kirby South will be to continue to optimize production, ramping up to the 40,000-barrel per day facility capacity. At Primrose North and South, cyclic steaming of the existing wells will continue. No new drilling is planned for 2015, but we're evaluating the costs and economics for new pad developments in 2016. At Primrose East, the low pressure steam flat in Area 1 continues to perform as planned, producing as high as 13,000 barrels per day. We're also conducting low-pressure cyclic steam operations in Area 2, which is less mature than Area 1. Future thermal developments will require a significantly lower capital structure for the projects to be economic at today's commodity prices. A cross-functional team has been created to review all aspects of our thermal projects with the objective of improving efficiencies and costs. Horizon, on slide 74, is our world-class oil sands mining and upgrading project, with over 14 billion barrels of bitumen in place and 3.6 billion barrels of proved plus probable synthetic crude oil reserves. Horizon is the third and most significant component of Canadian Natural's strategy to transition to a longer-life, low-decline asset base. Horizon Phase 1 operations have been steady and very reliable for several quarters. In the first quarter, we produced more than 134,000 barrels per day, reflecting the successful completion of the Phase 2A coker project and excellent upgrader utilization. We're continuing with the construction of the Phase 2/3 expansion that will see us take production to 250,000 barrels per day in late 2017. Once on stream, an oil sands mining and upgrading operation like Horizon provides decades of no decline production with low reserve replacement costs. Our Horizon operational strengths are shown on Slide 75. We've had strong reliability at Horizon, particularly since our first major turnaround in May of 2013. Our operating expertise continues to improve as evidenced by our improved reliability, excellent upgrader utilization, improving yields, and operating costs that continued to be reduced. We've shown that our project execution strategy is effective with the completion of Phase 2A on budget and ahead of schedule. Construction of Phase 2/3 remains on track and on schedule. The graph on slide 76 shows the timing of our planned Horizon expansions. Phase 2B will add 45,000 barrels per day of capacity in late 2016 and Phase 3 will add 80,000 barrels per day in late 2017. These expansions will result in additional reliability, redundancy, and significant operating cost savings for the Horizon operation. One of the significant economic advantages of expansion at Horizon is the reduction in total unit operating costs. In simple terms, the plant is a highly fixed-cost operation, therefore adding more production drives down the per barrel costs. Canadian Natural targets all-in operating costs at Horizon to fall between CAD25 per barrel and CAD27 per barrel upon completion of the Phase 2/3 expansion. The overall Horizon Phase 2/3 expansion is going very well, allowing us to take advantage of some portions of Phase 2B being completed ahead of schedule. That tie-in work can now be completed early and time to coincide with the remaining turnaround scope in May of 2016. This will enable us to capture execution synergies, lower costs, and improve production. Phase 3, the final 80,000 barrel per day portion of the expansion, is on track with mechanical completion targeted for late 2017. At this point, we do not see Phase 3 moving ahead of the targeted schedule as we've seen at both Phase 2A and Phase 2B. Completion of Phase 2/3 expansion will double production at Horizon from 125,000 barrels per day to 250,000 barrels per day. At this point, we don't anticipate a similar increase in name plate design capacity for Phase 2B and for Phase 3 as we've already seen at Phase 2A. I'll provide a brief update of the recent Horizon turnaround on Slide 77. The maintenance turnaround has been successfully completed and synthetic crude oil production commenced on Monday. We're expecting to ramp up to full production volumes later this week. The turnaround was extended by five days, after discovering an unexpected build-up of solids in the fractionator. The turnaround complete, strong reliability is expected going forward. Q2 production will be near the bottom end of guidance and annual production guidance remains unchanged. At Horizon, our 2015 strategy, on slide 78, includes maintaining our discipline on improving our ongoing operations. This means a continued focus on safety, reliability, operating costs, and SCO yields. In 2016, a major turnaround is scheduled and planning is well underway. On the project side, we'll continue with the construction of Phase 2/3 expansion, which as I mentioned, is going very well at this time. In summary, our asset base is very deep and balanced, with significant development opportunities in all of our products. As you've seen, the Company has a balanced portfolio of opportunities and we have short-, mid- and long-term projects all proceeding. As we've shown this year, our program is flexible and we will make significant changes to our programs to ensure that we maximize value. For all of our assets, we maintain a large premium quality undeveloped land base that provides us capital allocation choices and growth opportunities. Supporting our asset base is infrastructure that is largely owned and operated which provides us with the best opportunity to have effective and efficient operations. I'd now like to pass the call on to Corey to review our financial strengths. -------------------------------------------------------------------------------- Corey Bieber, Canadian Natural Resources Limited - CFO [6] -------------------------------------------------------------------------------- Thank you, Lyle, and good morning, everyone. This morning you've heard about our strategy, operational excellence, and strong asset base. Another critical part of execution is having the balance sheet flexibility to support the business activities. On slide 81, the key messages I want to leave you with are, number one, Canadian Natural maintains a strong investment-grade financial profile. This facilitates strong access to the US and Canadian debt capital markets, as well as exceptional support from financial institutions. Number two, we maintain a balanced maturity and currency profile, which minimizes refinancing risks and provides a natural hedge to commodity prices, which are largely derived from US dollar indices. Number three, we maintain ample liquidity to manage our activities and create additional buffers for downdrafts and cash flow or to take advantage of opportunities as they may arise. Number four, we have a consistent and sustainable track record of both generating business returns and returning cash to our shareholders. Number five, we are in a strong financial position and have a number of levers at our disposal to quickly react to the change in market conditions, both in terms of upside and downside. Turning to slide 82, our financial objectives are straightforward. We strive to maintain an open and transparent dialogue with our three rating agencies to ensure they understand our business plans, and just as importantly, the flexibility to execute, alter, or cut back the plan as business conditions warrant. Following a very significant reduction in commodity pricing, Canadian Natural was very quick and agile in its reactions. In total, since the original 2015 capital budget was issued last November, Canadian Natural has found cost savings or capital deferrals amounting to almost CAD2.9 billion, or 33%. Conversely, based upon mid-point levels in guidance, we anticipate annual production growth of 11% over 2014 levels, a very significant achievement in light of how capital reinvestment has altered. In my opinion, few companies would be able to effectively execute this type of capital flexibility in such a short period of time. We proactively consider our financial position today and in the future, with a view to maintaining leverage within our targeted ranges. As of March 31, our debt-to-book capitalization and our debt-to-EBITDA were strong and we believe these metrics will remain strong in the current environment. We currently anticipate exiting 2015 with a debt-to-book cap of around 34% to 36% and debt-to-EBITDA of about 2.2 to 2.3 times. I consider these to be very strong metrics, given the velocity and quantum of commodity price decline over the last year, as well as CAD2.15 billion spend on the Horizon expansions. We target strong liquidity to both support the business initiatives and provide that buffer in the event of a material change in business plans or the environment. Our liquidity is ample, at CAD3.3 billion available at March 31, having been bolstered by an additional CAD1.5 billion non-revolving bank facility that was executed during Q1. Additionally, and as you've heard throughout this call, we focused on allocating capital to drive the strongest returns for our shareholders. With 15 consecutive years of dividend increases, we have established a strong and sustainable business model that accommodates both reinvestment to create further shareholder wealth and returning cash to shareholders on an increasing basis. As shown on slide 83, one of the key metrics considered by ourselves, rating agencies, banks, and fixed-income investors is debt per proved reserves. Canadian Natural is very well-positioned with one of the lowest ratios in the industry. Our balanced approach to financing, as shown on slide 84, indicates that we've balanced our sources of funding with consideration to financial institutions, short-term commercial paper, as well as US and Canadian debt capital markets. We've managed our maturity profile to allow for financial flexibility to afford the opportunity to retire or extend maturities on a regular basis. This flexibility is consistent with our capital allocation methodology. We proactively considered currency in our finances in terms of rates, as well as capital and cash flow exposures. Certainly the rate environment in the US and Canadian debt capital markets have afforded us the opportunity to reduce our overall cost of debt. In fact, since 2008, our average Corporate interest rates have reduced from over 5.5% to under 4% today. Knowing your financial partners and keeping a strong open dialogue is important, particularly in the current business environment. As seen on Slide 85, we currently have over CAD7.1 billion in bank lines, of which CAD3.3 billion was available on March 31. Our bank group is broad-based and the relationships are long-term. We know and understand each other. During Q1 of 2015, our understanding of what business works for certain of our banks led to a new $1.5 billion three-year drawn non-revolving bank facility. This facility makes financial returns for the participating banks and certainly bolsters Canadian Natural's liquidity. This is a great example of how we've tried to achieve win-win scenarios with our financial partners. Between the CAD3.3 billion of undrawn capacity, as well as the recent CAD500 million reopening of our [MTN], which matures in 2020 we have more than ample capacity to fund our business requirements and upcoming maturities, as shown on slide 86. You'll note the refinancing requirements in any given year are very manageable in the context of our ability to access the debt capital markets. But more than this, there is optionality to reduce debt levels, particularly after the completion of Horizon Phase 3, when we would expect cash flow to increase and capital spend to significantly decrease. Turning to the sustainability of the dividend on slide 87, we are cognizant that shareholders want direct cash participation in the growth of the business. Only 15% of the companies including in the TSX60 have 15 years or more of consistent annual dividend increases. Canadian Natural is certainly a leader within that select group. Canadian Natural is the only independent E&P on the list, and with a compound annual dividend growth rate of 22.4%, we have shown the largest increase since 2000 of any company on the [deck]. Similarly, when we compare it with our broader E&P group in North America, as shown on slide 88, not only does Canadian Natural hold the longest streak of consecutive annual dividend increases, but the total shareholder return, which is defined as dividends and stock price appreciation, is by far the greatest, at over 700%, versus the nearest competitor at just over 600%. Clearly, shareholder value creation and dividend return has been a long-term focus of the Company, and we have excelled at it. As further shown on slide 89, even in recent years, Canadian Natural has outperformed its peers in terms of increasing cash returns to its shareholders. It is an area of focus and our track record is strong, both in recent years and over the long-term. In my opinion, it's rare to find a company with the growth prospects, disciplined capital allocation methodologies, financial robustness, and strong track record of shareholder returns as Canadian Natural has demonstrated. Turning to slide 90, I'll briefly speak to our royalty revenue stream. As previously reported, given the robust nature of our plays on our lands, we continue to see active drilling and resulting production growth, even during the current down cycle in commodity prices. Q4 of 2014 production volumes on the royalty lands increased 3% and 14% from the third quarter and second quarter of 2014 levels, respectively. More importantly, drilling activity has been strong on the Company's royalty lands with 144 wells drilled in Q4 of 2014, of which 127 wells were drilled by third parties. In Q1 of 2015, this pace continued, with drilling activity consisting of 75 wells drilled, 72 of which were drilled by third parties, and three wells were drilled by Canadian Natural. We understand the assets well, and are evaluating what course of action will maximize value for our shareholders. Based on the evaluation of comparative enterprises, there is significant value potential to unlock. We continue to evaluate all options, including outright sale, IPO spin-out, as well as retention of the lands, and still target 2015 for a decision. That being said, we're in a strong financial position, so don't feel compelled to get a deal done. Rather, we have the flexibility to look at all the variables and do what we believe will create the most value. In summary, on slide 91, we have strong financial metrics that's reflected by solid credit ratings and excellent access to debt capital markets and financial institutions. Our maturity and currency profile is balanced in that it considers financial flexibility, refinancing risks, and cash flow protection. Our liquidity is robust. Returning value to shareholders is a priority and our dividend program is designed to be sustainable throughout the business cycle. Our financial position is strong and expect (technical difficulty) it to remain strong over the coming years. Certainly, all things being equal, we expect to have even more financial flexibility upon the completion of Horizon Phase 3 and the incremental cash flow it will generate in 2018 and for decades to come. The royalty lands have the potential to further strengthen the balance sheet, depending on our final course of action. For 2015, I believe we have prudently and methodically managed capital to both reserve value created to date and allow for optionality to generate incremental value for shareholders in the future. Our plan is complete with the optionality to protect in the downside and to proactively take advantage of opportunities if and when they arise. Now back to you, Steve, for concluding comments. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [7] -------------------------------------------------------------------------------- Thanks, Corey. As you can see, Canadian Natural has delivered value creation and is very well-positioned to deliver even greater value creation going forward. Firstly, our strategy sets us apart. It's proven, effective, and value-driven, unlocking the tremendous value of our assets, and delivered increasingly more effective and efficient operations. It allows us to withstand commodity price volatility and fiscal changes. Most importantly, Canadian Natural haas delivered safe, effective, efficient, and environmentally responsible operations, top tier in our peer group. Our asset base is large, diverse, and well-balanced and provides us with significant capital allocation choice and the ability to effectively transition to longer-life, low-decline assets. Our balance sheet is strong and we're in a very strong financial position. Canadian Natural generates strong cash flow, which is increasing and will become even more sustainable, as we complete that transition to long-life, low-decline assets. In 2015, slide 94, Canadian Natural is committed to lowering the cost structure, in a methodical and structured manner. We're committed to completing Horizon Phase 2/3, maintain our balance asset base optionality, ensuring we can act quickly to change, and most importantly, we're commit to maintaining balance sheet strength, creating value, and returns to shareholders. Operationally, we are delivering, slide 95. Production for both oil and gas is on guidance for the quarter and the year. Operating costs are on guidance and trending down. Capital costs are also on guidance and cost savings are being realized. The completion of Horizon is on track, slide 97 (sic --"96"), and we're set to add 125,000 barrels a day, doubling current production in 2018, not that far away. With the increased production comes increased capital allocation, slide 97. Canadian Natural takes a balanced approach to capital allocation, and will continue to do so as production ramps up. We'll allocate capital to resource development, returns to shareholders through dividends and share buybacks, strengthening the balance sheet, and opportunistic acquisitions if they make sense and add value. Effectively balancing capital allocation, slide 98, to maximize value for shareholders is not a surprise, as Canadian Natural Management and directors are more aligned with shareholders than any of our peers. Returns to shareholders are important to Canadian Natural, slide 99. That importance is reflected in returns to shareholders that have been increasing at a 44% CAGR since we brought on Horizon Phase 1 in 2009, the first major step to our transition of a long-life, low-decline asset mix. Canadian Natural is in great shape, slide 100. We have a proven, effective, value-driven strategy to not only grow cash flow significantly, but increase the sustainability of our cash flow. It all starts with safe, effective, efficient, and environmentally responsible operations of our diversified and balanced reserve base, the largest in our peer group, a reserve base that ranks with global industry players and delivers strong cash flow. Canadian Natural's strategy is proven, effective, and value-driven, a strategy that sees us continue to develop our vast, high-quality resource base in a very disciplined manner and effectively transitioning to a long-life, low-decline asset base, while unlocking significant value and sustainable cash flow for shareholders. Our balance sheet is strong, with capacity to capture opportunities and weather commodity price volatility. Most important of all, we have the people, the expertise, and the experience to execute our programs and operate effectively and efficiently. As a result, we expect not only to survive this low commodity price cycle, but come out of the cycle even stronger than we entered the cycle. With that, I'll turn it over to you, operator, and open it up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from line of Phil Gresh from JPMorgan. Your line is open. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [2] -------------------------------------------------------------------------------- Hey, good morning, everybody, and thank you for hosting this call today. First question is just on the cost savings. You talked about the CAD300 million in saves in the first quarter. I was wondering if you could give us some updated thoughts around what kind of multi-year cost reduction potential you might see across the business and how you're tracking in general with respective full year and an outlook for 2016? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [3] -------------------------------------------------------------------------------- Thanks, Phil. That's a really great question. As you know, and Tim outlined, we are really focused on delivering cost reductions more effective and more efficient, and we're doing that in a number of ways, and Tim outlined those basically six ways. Some of that will be driven by just the commodity price and lack of activity in the industry, and we think 50% to 75% of the ultimate cost savings we're going to get will be sustainable. I'd say, right now, probably only 50% are. We're continuing to work on getting the right scope and the right technology and the right productivity and methodology to execute our work to reduce those costs. So at this point in time, as Tim pointed out, we're probably well on our way, but we have got a long ways to go and we see lots of opportunities to increase. For us to speculate on what we see in 2016 is too early to say. You can look at where we are -- what we expect in 2015 versus 2014. We've seen, all-in all, about a cost savings of CAD940 million in cost savings versus 2014 if we had the costs we had in 2014 and 2015, so we make great strides and we'll continue to make great strides, but most importantly, we're focused on the sustainability of it, but no numbers to give you directly. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [4] -------------------------------------------------------------------------------- Okay. Just two quick follow-ups. One is on slide 17, you gave the sustaining capital requirements and it didn't include maintenance or turnaround, so I was just wondering if you could give us maybe an all-in sustaining capital number? You've said in the past, it might be around CAD3.4 billion, CAD3.5 billion, but just wanted to square those numbers and make sure we had the all-in number? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [5] -------------------------------------------------------------------------------- Thanks, Bill. That's a good clarifying question because really that slide was intended to show the power and strength of the long-life asset, particularly at Horizon and Pelican, that deliver very little production declines, so we don't use much capital to replace production. But in terms of total sustaining capital, it is in that CAD3.5 billion range currently. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [6] -------------------------------------------------------------------------------- Okay. Last question, on thermal, you talked about needing to reduce the cost structure. I'm just trying to get a sense of what range we're talking about. I assume it's maybe something in the 30% range to hit a 15% IRR, give or take, but maybe any additional color you could provide there would be helpful? -------------------------------------------------------------------------------- Doug Proll, Canadian Natural Resources Limited - EVP [7] -------------------------------------------------------------------------------- What we're doing -- we're doing this across all areas, Phil -- is we're looking at ways to improve our effectiveness and get our costs down and our productivity up. This also goes hand in hand with what the price will be, so it's -- our target is, we don't give a target. We're trying to go as high -- as much savings as we can and reduce the cost as much as we can. Most of that comes from the right scoping and the productivity. Basically it means, do we have the right tools, the right people, and the right system to effectively execute the work. So I would say we believe that we can get 25% easily at Kirby and there are thermal projects going forward and likely more than that, and depending where the price is, we think it's somewhere between $60 and $75, as we said earlier in call, we believe we will have a program in Kirby that we can develop here if we choose to, going forward. -------------------------------------------------------------------------------- Phil Gresh, JPMorgan - Analyst [8] -------------------------------------------------------------------------------- Okay, got it. Thanks, I'll turn it over. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Greg Pardy from RBC Capital. Your line is open. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [10] -------------------------------------------------------------------------------- Thanks, good morning, Steve. Maybe just to start with Horizon. Is there any change in the ramp up on Phase 3? And then secondly, you're showing a CAD26 OpEx price, in the slides, it's probably CAD20 to CAD25, but would you expect -- I would assume you'd realize that kind of operating cost a lot sooner than CAD20, CAD25? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [11] -------------------------------------------------------------------------------- Yes, there's no change in the ramp-up for Horizon Phase 3, and obviously, we're being somewhat conservative in our forecast. We'll get cost reductions in 2016 and 2017 as well. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [12] -------------------------------------------------------------------------------- Okay, and then just you mentioned -- Lyle mentioned 150 primary heavy oil wells during the second half of this year. Has that number changed and is it being supplemented to some extent with -- you mentioned before you had 161 wells that had been drilled but not tied in? I just want to get an idea of how much of a change there is actually occurring in your primary heavy program? -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [13] -------------------------------------------------------------------------------- We talked about that in the second quarter, or the first-quarter call, and we did increase the drilling on the heavy oil. Lyle can give you the numbers on that, but the production we had shut in or wells not completed, most of that will come on here as we go through the second quarter. But we did increase the drilling in the second quarter to [de novo], so I don't think it's significant, Greg. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [14] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Lyle Stevens, Canadian Natural Resources Limited - EVP of Conventional Operation [15] -------------------------------------------------------------------------------- Yes, in the revised budget that we announced in January, we were at around 170 wells, so we've actually increased it just by 17 wells. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [16] -------------------------------------------------------------------------------- Okay, got it. The last one for me, the R&D number you put out, it was CAD450 million, it's a bigger number than I would have expected, but what's in that? What are you accounting for with that number? -------------------------------------------------------------------------------- Tim McKay, Canadian Natural Resources Limited - COO [17] -------------------------------------------------------------------------------- That's all the research and development work we do at Pelican Lake and the polymer flood, our EOR work in different various pools, all the R&D work we do at Horizon, and so it's all accumulated together, so to break it out, I can't give you a long (multiple speakers) -- -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [18] -------------------------------------------------------------------------------- No that's okay. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [19] -------------------------------------------------------------------------------- Greg, just to add a little bit of color on it. It's -- our consideration is whatever qualifies for an SR and ED tax credit for federal tax purposes, so that's the level of tax that we're using for R&D. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Okay, great. Thanks, all. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- There are no further questions in queue at this time. I will turn the call back over to our presenters for any closing remarks. -------------------------------------------------------------------------------- Steve Laut, Canadian Natural Resources Limited - President [22] -------------------------------------------------------------------------------- Thank you, operator, and thank you, ladies and gentlemen for attending our open house conference call. As you have seen, 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 concentrate on safe, efficient, and reliable operations, and a strong financial position, supported by readily available liquid resources. And finally, Canadian Natural retains significant capital expenditure program flexibility to proactively adapt to changing economic conditions. If you have any further questions, please give us a call. Thank you again and we look forward to our second-quarter conference call in early August. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's conference call. Thank you for joining us. You may now disconnect.
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