Canadian Natural Resources Limited (CNQ) Earnings Call Transcript & Summary

Good morning. We would like to welcome everyone to Canadian Natural's conference call and webcast presentation regarding the acquisition of Chevron's Alberta assets and the 7% dividend increase. 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, October 7, 2024, at 7:00 a.m. Mountain Time. And I would like to turn the meeting over to today's host, Lance Casson, Manager of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining Canadian Natural's conference call as we announced the acquisition of Chevron Alberta assets and a dividend increase. As always, I'd like to remind you of our forward-looking statements. And it should be noted that in our reporting disclosures everything is in Canadian dollars, unless otherwise stated, and we report our reserves and production before royalties. Additionally, I would suggest to review our advisory sections in the slides and press release that includes comments on non-GAAP disclosures. Speaking on today's call will be Scott Stauth, our President; and Mark Stainthorpe, our Chief Financial Officer. Also in the room is Robin Zabek, COO of E&P; and Jay Froc, COO of Oil Sands. Scott and Mark will provide the details of this accretive transaction that drives long-term shareholder value. Please ensure you follow on the webcast as the slides are user defined. At the conclusion of our prepared slides, we will open up the line for questions. With that, over to you, Scott.

Thanks, Lance. Good morning, everyone. Thank you for taking part in our conference call this morning. Canadian Natural has entered into an agreement to acquire subject to regulatory approvals from Chevron Canada is 20% interest in the Athabasca Oil Sands Project, which includes the Muskeg River and Jackpine mines, Scotford upgrader as well as the Quest Carbon Capture and storage facility, bringing Canadian Natural's current working interest to 90% in AOSP. In addition, Canadian Natural has agreed to acquire Chevron Canada's 70% operated working interest in the Duvernay. Skipping ahead to Slide 4. For our agenda this morning, I will be discussing the key details about these transactions, including overviews on each of the assets, and Mark will provide the financial overview, our dividend increase and our free cash flow allocation. Slide 5. These acquisitions are an opportunity that is unique to Canadian Natural and provides more high-value SCO in our Oil Sands Mining and upgrading operations, building up the strength and efficiencies gained over the past 7 years at AOSP. The Duvernay is a premium high-value derisked liquid-rich resource production providing Canadian Natural with Montney-like capital efficiencies and the ability to leverage our extensive Montney and Deep Basin areas with operational and cost synergies. Both these assets provide significant free cash for decades, as Mark will illustrate for you this morning, our free cash flow plan is targeted to maintain equivalent to current returns to shareholders with more upside in the future. Slide 6. Through acquiring these AOSP assets -- these AOSP and Duvernay assets from Chevron, Canadian Natural is uniquely positioned to achieve synergies of a combined transaction, which benefits both parties. Purchase price is USD 6.5 billion with an effective date of September 1, 2024, and a targeted close date of December 6, 2024. The acquisition cost of $71,600 per BOE per day at targeted 2025 production is immediately accretive to Canadian Natural's flowing metrics. Slide 7. These assets build on the robustness of Canadian Natural's assets, the 2025 forecast of approximately 122,500 BOEs per day is approximately a 9% increase to our base, compared to the 2024 budgeted midpoint with 92,500 barrels per day of liquids increase and 179 million cubic feet per day increase in natural gas. We will see additional efficiencies that we went through synergies between Horizon and AOSP mines, and cost synergies in the Duvernay with adjacent Canadian Natural assets. As we welcome Chevron in Alberta, we look forward to leveraging technology learnings through combined team expertise. Our world-class Oil Sands Mining assets will provide increased cash flow. And in the Duvernay, we have an extend to drill-to-fill liquid-rich inventory with short cycle times. Slide 8. turning to the AOSP transaction, Slide 9. As part of the AOSP acquisition, Canadian Natural also purchases Chevron's interest in the oil sands leases, including Pierre River, Ells River, Namur and Saleski. Since 2017 AOSP acquisition, we have been able to create significant value by increasing production at AOSP by approximately 30% and decreasing costs by approximately 20%. In this seamless integration, we have announced today strengthens the robustness and sustainability of our Oil Sands Mining and Upgrading assets. Slide 10. This map shows the connectivity through the corridor pipeline between the mines and the Scotford Upgrader located near Edmonton. Slide 11. As we plan to continue to build upon and deliver the synergies between Horizon in AOSP, our Zero decline production increases by approximately 13%, and our 1P and 2P reserves increased on our estimates by 12%. The map shows the close proximity of the AOSP and Horizon assets as well as consolidated oil sands leases with future development potential. Slide 12 trains for Duvernay summary. Slide 13. The acquired 70% operated interest in the Duvernay has a targeted 2025 production of approximately 30,000 barrels per day and 179 million cubic feet per day of natural gas with growth potential opportunity through a defined plan to produce a combined approximately 70,000 BOEs per day by 2027. The teams have identified over 340 net oil and liquid-rich locations in an area that has proven and derisked with strong capital efficiencies, very similar to the Montney. This map shows the close proximity -- Slide 14. This map shows the close proximity to our core Deep Basin assets, and we expect cost efficiencies in the range of approximately 15% or $40 million per year with extensive infrastructure that will enable high-value liquids growth through a defined development plan. Slide 15. As I mentioned, our teams have identified over 340 net locations with the majority upside coming from liquid rich and light oil windows with average liquid production at approximately 46%. We see strong liquids-rich production across the entire Central Kaybob, Waskahigan and Chickadee areas, and the combined teams will focus on technology and efficiency synergies to drive more value going forward. With that, I turn it over to Mark for the financial update.

Thanks, Scott, and good morning, everyone. I'll start on Slide 17, titled Financing Plan. Our financial position is very strong today and includes significant available liquidity. At the end of the third quarter of 2024, our available liquidity was approximately $6.2 billion, including cash. We have also obtained a $4 billion fleet committed term loan facility, so after funding the acquisition, we will have in excess availability of approximately $1.5 billion. Moving to Slide 18. Canadian Natural generates significant and sustainable free cash flow that is started to be further enhanced with the acquired assets. As a result, our Board of Directors agreed to increase the quarterly dividend by 7% to $0.5625 per share payable at the next regular quarterly dividend payment in January 2025. This will mark 2025 as the 25th consecutive year of dividend increases with a 21% compound annual growth rate over that period. Post-acquisition, our debt metrics remain very strong, where we target in a $70 WTI environment, debt-to-book capital to exit 2024 at approximately 30% and our ending 2024 debt to forward 12-month EBITDA at approximately 1.1x. Moving to Slide 20. We have also updated our free cash flow allocation policy. And to remind everyone, we define free cash flow as adjusted funds flow, less all capital and dividends. We manage the allocation of free cash flow on a forward-looking annual basis, while managing our working capital and cash management as required. Post closing of the acquisition, the free capital allocation policy will be 60% of free cash flow to shareholder returns and 40% to the balance sheet until net debt reaches $15 billion. When net debt is between $12 billion and $15 billion, 75% of free cash flow allocated to shareholders and 25% to the balance sheet. And when net debt is at or below $12 billion, 100% of free cash flow will be allocated to shareholders. The updated policy recognizes our current strong financial position while targeting further improvements going forward. It also delivers significant total shareholder returns that post closing in a USD 70 WTI environment, targets to be essentially the same absolute amount as under our 100% free cash flow distribution to shareholders prior to the acquisition. And over time, provides further upside and additional free cash flow to shareholders, exceeding those under the current 100% distribution of free cash flow to shareholders. Thank you. And with that, I'll turn it back to Scott for a summary, and then open up the line for questions.

Thank you, Mark. In summary, Canadian Natural has executed a unique opportunity to combine 2 high-value assets that provide immediate and significant sustainable free cash flow. This transaction provides a material production and reserve increase further leverages our expertise. The AOSP assets supports our Oil Sands Mining and Upgrading top-tier cost structure efficiencies that our team has worked hard at developing over the past 7 years and through continuous improvement activities, we will continue to drive even more value. The high-value derisked liquidate Duvernay assets complement our Deep Basin inventory with more operational and cost synergies. Thank you, and I will now open it up for questions.

[Operator Instructions] And your first question will be from Greg Pardy at RBC Capital Markets.

Scott, I mean, back in 2017, when you took 70%, you've implemented a lot of changes since that time. So now you've got effectively full control of AOSP Horizon. Are there further synergies now by picking up this extra 20%?

Yes. Good question, Greg. I think what it does do for us is it allows for a little bit more ease in terms of governance on the assets. I can see us utilizing the equipment more effectively between the 2 sites take better overall utilization of the equipment across both sites. So that combined with the fact that we will continue to work on our continuous improvement opportunities, working on optimizing the production and work in the future on increasing production capacity out of the AOSP asset.

Okay. That's helpful. And then the second question really relates to sustaining capital and then how you'll fold some of the assets into the portfolio for next year. So with AOSP, I'm assuming that's pretty much additive to perhaps whatever we were factoring in next year. But then with the Duvernay then, I'm assuming it's going to compete with in other opportunities within the portfolio. So I'm trying to better understand, is that kind of additive? Or should we think about that as being in the mix? And then sort of related to this, to complicate the question even more, how much would sustaining capital increased by maybe just with the deal for next year, overall deal for next year?

Well, I think the summary of your question is what is our sustaining capital look like? And if you looked at the assets on a combined basis, I think you could -- a good estimate would be approximately $400 million between the 2 assets.

Next question will be from Dennis Fong at CIBC.

It's a little bit of a follow-on to Greg's question here. As you've now seen the strategic capital spending on Horizon come to a close and you see, frankly, the extending period of production time between turnarounds, how do you think about the like growth opportunity set as we kind of go forward? Obviously, you've highlighted with the Duvernay and opportunity to grow this asset to 70,000. How does that maybe compete? And I understand that you've already addressed how it compares to Montney, but how does it compete against the rest of your portfolio in terms of the growth of the strategic capital component of things?

Yes. That's a good question, Dennis. I think if you look at the growth opportunities that we talked about in the past beyond the reliability project at Horizon, we will look towards both of these assets for competing capital across the entire portfolio. So there will be production increase opportunities in the future at AOSP. The assets are similar to Horizon in terms of the reserves. So you can look for that down the road. And really, I think we're going to maintain our capital discipline, Dennis, that we've carried over the past number of years, where the best projects rise to the top in terms of being able to be executed on a budgeted calendar year basis. So I don't think we're going to change too much from that perspective. Our portfolio was very deep, as you know. We have lots of opportunities. The Duvernay asset will be another top-tier strong capital efficiency area as well. So it competes very well with our high liquids Montney production in our light oil and also our multilateral heavy oil wells as well, so thermal. And so we've got a lot of opportunities within there, Dennis, to bring forward over time, and we'll be sure to maximize the value for our shareholders.

Great. I appreciate that color and context. I guess my quick follow-up here is, and I appreciate the commentary about the 15% cost improvements or $40 million annually for synergies. Is that mostly just focusing in on the development of the acquired assets? Or does that incorporate the opportunities to develop assets within that region? You mentioned Chickadee, Waskahigan and so forth. And how does that maybe intertwine with the 340 net locations identified?

Yes. So 2 separate things there. Dennis, their development plans will look towards that bringing forward those 340 net locations. But the cost saving synergies that I was referring to at around 15% are related to the current operational op cost savings. So we'll get those synergies through. If you look at how we are in the area there with the rest of our assets, we'll have combined contractor synergies, savings, purchasing power savings on goods and services and also liquids movements, transportation costs, those kinds of things are what we added up into the bucket to get to $40 million.

Next question will be from John Royall at JPMorgan.

So could you talk about how you arrived at the $2 billion hike to the net debt floor and what makes $12 billion the right number post acquisition?

Yes. When you look -- John, it's Mark. When you look at what the acquisition brings as far as production reserves, those sorts of things and you compare where we were before the acquisition to where we are now, it just makes sense to have a higher debt floor. When you look at a $12 billion debt target, if you want to call it that, for a company our size, it's a very manageable debt level through any type of commodity price cycle. And in fact, you can go back to 2020 and look at where we were from a balance sheet perspective and able to manage through that quite seamlessly. So it kind of proves the fact that today, we're in a very strong financial position, but working to get it even stronger going forward here.

Makes sense. And then you mentioned the sustaining capital on this deal. Can you talk about how increasing your stake in AOSP will change the production cost profile just within the overall mining segment, given you report those 2 assets combined?

Yes. I think I would look at it on a holistic basis, John. As I mentioned, we've worked at bringing the cost down over time at about 20%. And over the past 7 years, that's a significant value-added continuous improvement plan there. And I think just looking forward, what we're going to be searching for with the team is driving the value of the culture of our mining operations to create additional continuous improvement opportunities, and they'll be probably in an individual basis, they'll be small in nature, John, but they add up when you have all the teams in the mining operations working together. Each one of those teams has their own initiatives for driving continuous improvement. So we just see the cost challenges out there for -- in terms of any inflationary increases to be offset by the work that the teams are going to do on finding additional continuous improvement opportunities.

Next question will be from Neil Mehta at Goldman Sachs.

Congratulations on the transaction. I just try to bridge to the cash flow number here. Can you just kind of give us a sense that, that $70 WTI what the -- how you guys would see the incremental cash flow? Just trying to bridge that against the CapEx of $400 million to get to a free cash flow.

Yes. Neil, it's Mark. Due to all the variables that go in the cash flow, you know that we don't guide to cash flow exactly. So I can't do that. But let me just try and help you out. When you think about this, think of it as a total shareholder return, so dividends and buybacks. So because these assets bring in that additional free cash flow and the dividend is higher, but that pool of free cash flow after the dividend is higher. So when you combine the increased dividend and 60% of a bigger free cash pool, we target the return to essentially be the same absolute amount as before the acquisitions. And the bonus is that over time that free cash flow grows and that allocation as a percentage to shareholders grows. So we'll be in excess of what that shareholder returns are today on 100% for the acquisition. So think of it as a total return distribution to shareholders.

Yes, we can bridge through those numbers. That's helpful. And then you talked about $400 million of sustaining CapEx. Do you envision any growth CapEx associated with this asset? Or are there any projects that seem interesting that we should be contemplating?

Well, I think, Neil, if you just look at the Duvernay assets, we talked about our development plan there, 340 net locations. So those locations are going to come with capital efficiencies that are pretty similar to what we currently experience in the Montney. So again, high value, high liquids opportunities there. And hopefully, that helps answer your question.

Next question is from Patrick O'Rourke at ATB Capital Markets.

Congratulations on the deal. I just want to ask maybe a little bit of color in terms of the nonproducing assets, in particular, Pierre River and how this could fit in strategically? Would you see this as sort of reserve life extension? Or is this a potential future growth asset for Canadian Natural?

Good question, Patrick. And yes, if you look specifically at Pierre River, you can see just adjacent to our North Mine pit at Horizon. So if you look long term, we have a couple of options. Those reserves from the Pierre River area could be added as a production to Horizon as the North Mine depletes, you could add that significant production reserves from those areas. You could also look at a stand-alone development facility at some point there. Obviously, that would come with significant capital outlay to do a repeat of what we currently have at Horizon. So certainly, those options are there, Patrick. And we're in an enviable position from that perspective.

Okay. Great. And then just shifting gears over to the Duvernay assets. Obviously, 30% partner in those assets and joint operator agreement, can you maybe sort of speak to your level of comfort with that? And of course, I would assume that you haven't communicated with the joint venture partner yet.

Yes. So still early stages there, Patrick, in terms of -- from that development. And we look forward to working with our partner as we go forward here and developing these assets with the both companies' interest at hand. And as we've outlined here this morning, you can see that significant growth opportunities, which will benefit both partners.

Next question will be from Roger Read at Wells Fargo.