Canadian Natural Resources Limited ($CNQ)

Good morning. We would like to welcome everyone to Canadian Natural's 2026 First Quarter Earnings Conference Call and Webcast. [Operator Instructions] Please note that this call is being recorded today, May 7, 2026, at 7:00 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance Casson, Manager of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining Canadian Natural's 2026 First Quarter Results Conference Call. Before we begin, 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. Also, I suggest you review the advisory section in our financial statements that include comments on non-GAAP disclosures. Speaking on today's call will be Scott Stauth, our President; and Victor Darel, our Chief Financial Officer. Additionally in the room with us this morning is Robin Zabek, COO of E&P; and Jay Froc, COO of Oil Sands. Scott will first run through our operational highlights that once again includes production records in the quarter. Victor will then summarize our strong financial results and our significant returns to shareholders year-to-date that includes an increased pace to our share buybacks. To close, Scott will summarize prior to open up the line for questions. With that, over to you, Scott.

Thank you, Lance. Good morning, everyone. We have a long track record of being an effective and efficient operator while consistently delivering top-tier operational and financial performance through a relentless focus on continuous improvement. Quarterly production averaged approximately 1,643,000 BOEs in Q1 2026, which included total quarterly liquids production of approximately 1,198,000 barrels per day, 66% of which was SCO, light crude oil and NGLs. Production in Q1 delivered year-over-year growth of approximately 4% or 61,000 BOEs per day from Q1 of 2025 levels, whereas quarterly liquids production of approximately 1,198,000 barrels per day was an increase of 24,000 barrels per day or 2% from Q1 2025 levels. Quarterly production levels in Q1 '26 included the following production records: record quarterly North American E&P liquids production of approximately 773,000 BOEs per day, which includes record liquids production of 329,000 barrels per day and record natural gas production of 2.668 Bcf per day. Record quarterly production at Jackfish of approximately 134,000 barrels per day. As a result of strong production volumes, combined with robust netbacks, we have reduced our net debt below $16 billion as of the end of April 2026, which resulted in targeted shareholder returns increasing to 75% of free cash flow on a forward-looking basis as evidenced by our robust share repurchases of approximately $360 million since March 31. Also, in April, at our world-class Oil Sands Mining and Upgrading assets, we achieved strong monthly production of approximately 630,000 barrels per day or approximately 52% of Q1 2026 liquids production, resulting in upgrader utilization of 106%. These strong production volumes are high value with strong SCO prices at a premium to WTI averaging approximately USD 5.70 per barrel on the forward strip for the remainder of 2026, generating significant free cash flow. As a result of industry-leading operating costs, increased commodity prices combined with the SCO premium, our netbacks are very strong. Put simply, the cash flow generation from Oil Sands Mining and Upgrading assets is significant and best-in-class. As mentioned, Jackfish production has been strong as a result of new pad at Pike 1, which came on in late Q4 2025. The second new pad at Pike 1 came on production in late March 2026 and continues to ramp up. Current combined production from the 2 new pads at Pike 1 is approximately 41,000 barrels per day and continues to exceed expectations with an SOR of approximately 1.8. As a result of strong performance from these Pike 1 pads and through facility optimizations, including pipeline interconnectivity and debottlenecking, Jackfish exceeded its facility nameplate capacity of 120,000 barrels per day by approximately 14,000 barrels per day on average in Q1. Another example of Canadian Natural's continued and consistent focus on delivering results through strong execution. Additionally, as part of our defined medium (sic) [ medium-term ] growth strategy in thermal in situ, we are progressing front-end engineering in 2026, including advancing long lead equipment items on the 30,000 barrel per day Jackfish expansion project and the 70,000 barrel per day Pike 2 growth project. We remain focused on executing our prudent and efficient 2026 capital program as outlined in our updated 2026 guidance previously released in March, and we continue our short- and medium-term growth plans across our top-tier asset base. Our ability to effectively allocate capital across our strong asset base provides us with a unique competitive advantage and when combined with accretive acquisitions, creates significant long-term value for our shareholders. Now I will turn it over to Victor for our first quarter financial review.

Thanks, Scott, and good morning, everyone. The first quarter of 2026 delivered strong financial results, reflecting consistent execution in our operations, our high-quality diverse asset base and disciplined capital allocation framework. These were further supported by strengthening prices for our products during the quarter. In Q1, we generated adjusted net earnings of $2.4 billion or $1.17 per share and adjusted funds flow of $4.4 billion or $2.10 per share. These results demonstrate the significant cash-generating capability of our diverse long-life, low-decline asset base and supported by industry-leading cost performance across our operations. Net earnings for the quarter were approximately $1.3 billion, reflecting strong operational earnings and certain noncash items, including impacts related to the long-term LNG agreement, translation of U.S. dollar debt and higher share-based compensation expense driven by appreciation of the company's share price in the quarter. Our free cash flow generation in the quarter allowed us to continue delivering meaningful shareholder returns, during which we returned approximately $1.5 billion directly to shareholders in the quarter, including $1.2 billion in dividends and $300 million through share repurchases, which we manage prudently on a forward-looking annual basis. As announced previously in March, the Board increased our quarterly dividend, bringing the annualized dividend to $2.50 per common share and marking 26th consecutive years of dividend increases with a compound annual growth rate of 20%. This dividend track record reflects the sustainability of our business model, the strength of our balance sheet and the durability of our assets. With these results, the Board has approved a quarterly dividend of $0.625 per common share payable on July 7, 2026, to shareholders of record at the close of business on June 19, 2026. Subsequent to quarter end, strong operating performance, combined with robust netbacks allowed us to continue to accelerate debt reduction and share buybacks. As a result, buybacks from April 1 to May 5 increased, as Scott mentioned, to approximately $360 million, with direct returns to shareholders in the form of dividends and share buybacks for the year-to-date of approximately $3.2 billion. Looking forward, we remain focused on disciplined execution of our capital program while continuing to prioritize balance sheet strength and shareholder returns. With our high-quality production mix, strong cost structure and substantial free cash flow at current strip pricing, our next targeted debt level of $13 billion is approaching, at which time we increase shareholder returns to 100% of free cash flow. Our balance sheet is strong, liquidity equally so, supported by internally generated cash flow and undrawn credit facilities, providing us with ongoing financial flexibility to deliver shareholder returns, drive resource value growth and deliver on strategic growth opportunities as demonstrated by the accretive acquisition we did here early in Q1 of this year. Overall, our first quarter results reinforce the competitive advantages of Canadian Natural, scale, asset base, cost leadership and a clear framework for capital allocation that supports long-term value creation for shareholders, all of which look to be strengthening into the second quarter of 2026. Thank you. And with that, I'll turn it back to you, Scott.

Thanks, Victor. In summary, our relentless focus on continuous improvement, combined with effective and efficient operations has driven strong performance so far in 2026. Our ability to effectively allocate capital across our strong asset base provides us with a competitive advantage. This ability, combined with accretive acquisitions creates significant long-term value for our shareholders. Our culture of accountability through strong shareholder alignment as everyone at Canadian Natural is an owner, combined with our portfolio of world-class assets creates unique advantages that result in lower operating costs, which maximizes our netbacks and free cash flow generation. Before I turn it over for questions, I wanted to note the recent press release provided by the Oil Sands Alliance regarding competitiveness. We are committed to work together with the provincial and federal governments with the goal of achieving a fiscal competitive MOU framework that will attract capital investment to grow the oil sands. At Canadian Natural, we are prepared to do our part and grow production, create more high-paying jobs and help this country achieve its potential for economic prosperity. We have a good chance of achieving this if we are competitive, which means investment dollars must return value that is better than investment alternatives in other countries. As noted in the Oil Sands Alliance press release, we stand ready to roll up our sleeves and work with Canada and Alberta to make this happen. And with that, I'll turn it over to questions.

[Operator Instructions] And your first question comes from the line of Doug Leggate from Wolfe Research.

Scott, thanks for your comments, especially that last comment. I wonder if I could just pick up on that and go back to your strategy presentation from last year. You laid out that you've got a couple of large growth opportunities that are still currently on hold. The macro environment has changed materially since then, obviously. But you also have this, to your point, over carbon pricing, I guess, with as I was going to say, really more about the Oil Sands Alliance position as opposed to your position. But I guess my question is, what would it take given the combination of changes, especially around the macro to get you to basically give the green light to some of those growth developments?

Yes. Doug, I think it's continued with the messaging that we have been talking about for some time now. In order to expand the growth and have growth in oil sands operations, we need to be able to have the egress capacity long term to do so. As you know, Doug, there's significant upside for volume development in oil sands. And we need a regulatory framework and a fiscal framework that will allow us to enact on that capacity to grow those volumes. And over a very long period of time of a decade or so in Canada, we have not had the environment regulatory-wise to be able to do so. So we're hopeful that through the MOU and working together with the rest of the oil sands members and both levels of government that we can come to terms on an agreement that will work and bring those investment dollars towards those long-term projects. And we're hopeful that we'll be able to do that in short order here, Doug.

Very clear, and I hope folks are listening. My follow-up very quickly is on the dividend. I guess the cash return strategy generally. There's always a risk or perception in this business of procyclical buybacks, especially when you're about to breach your debt thresholds to give 100% back to shareholders. But you also have the lowest dividend breakeven, not just in Canada, but in the industry. What would it take for you to pivot more towards more meaningful and more frequent dividend bumps as opposed to focusing on what might be perceived as procyclical buybacks. I'll leave it there.

Thanks, Doug. I think it's important to ensure that we have the capacity to be able to do both buybacks and also continue on with our 26th year of growth of our annual dividends. Both of those are meaningful to our investors. And so we're trying to find a balance that works for all of our shareholders and one that aligns with our capacity to be able to grow our company, grow our production and increase our cash flow, which in turn increases more returns to shareholders. So it's a little bit about doing all of it, Doug, as to proceed to try to choosing one or the other.

And your next question comes from the line of Manav Gupta from UBS.

I want to congratulate you on the very strong performance on Pike 1. And I'm just trying to understand -- can you help us understand a little bit better how can you take the learnings of Pike 1 as you move ahead with your front-end design engineering on Pike 2 project?

Yes. I think it's more about -- from a reservoir perspective, Pike 1 would be very similar to the Pike 2 reservoir. And so in terms of learnings, for building a facility at Pike 2, I think we'd look at the assets that we've collected at Jackfish and then at our Kirby assets as well and take the best of both those worlds and apply our learnings into the development of the facilities for Pike 2. And then as I mentioned, from a reservoir perspective, both reservoirs are very similar. We would take our learnings from how we drill the wells at Pike 1 and apply that with some continuous improvement methodologies to drilling the wells in Pike 2.

And I wanted to ask you about the differentials. I think Syncrude is trading almost $5 over WTI. So if you could help us understand what's driving this premium? And if this premium sustains itself for the next 9 or 12 months, how does CNQ benefit from it?

Yes. Obviously, the continuance of premium over WTI for SCO is very beneficial to Canadian Natural with our significant SCO volumes. And so what we're seeing right now in the market is that the SCO barrels come at a high demand. From a cracking perspective, significant distillate cuts. And so with everything that's going on worldwide, there's just simply just a greater demand out there for that light crude to create that diesel production. So that would be where the demand is coming from on that perspective.

And your next question comes from the line of Dennis Fong from CIBC World Markets.

My first one focuses on oil sands mining. And I was actually hoping to understand like you showcased incredibly strong recent production there at the oil sands mining and operations situation. When you think about now owning 100% of the mine, can you talk towards any of the incremental learnings that you found any of the optimization techniques that you're kind of applying across both of the assets, also understanding that you've been operating it for a period of time as well prior to as well as how does that maybe change the interrelationship between Albian and Horizon and your go-forward plans with both assets?

Yes. Dennis, I think it's important to remember from an overall perspective for Canadian Natural with our Oil Sands Mining and Upgrading assets, we are best-in-class operating cost. And so anything that we've done, say, post the swap is just on the edges in terms of incremental continuous improvement opportunities. We've laid that out in terms of what they look like for savings, for warehousing cost, reductions in savings in that, we said in the range of about $30 million. Utilization of equipment is probably in the range of about $40 million a year. So those are significant in themselves. And if you look at the overall development of both of those Horizon and the Albian sites, they both present significant upside given the vast reserves that we have. So there's projects that we've also outlined in -- back in the fall with our investor open house of 150,000 barrels a day at growth opportunity at Jackfish expansion and 90,000 barrels a day at Horizon. And so really, that sort of lays out the upside. It shows you the robustness of the reserve capacity in both of those areas. And so I think owning and operating those assets with the same mindset, which we have worked on doing since 2017, we've created significant value since 2017. We reduced our operating cost from $42 a barrel at Albian down to $25 or less. We have increased the production by 50,000 barrels a day for extremely low capital cost in the range of about $30 million -- $300 million. So we have been able, over time, Dennis, to extract a lot of value out of the AOSP asset. We'll continue to work on the fringes to find continuous opportunities, but it's all on the backs of having the lowest operating cost in the industry.

Great, Scott. I really appreciate that context. Switching maybe to a follow-on to Manav's question on Pike. Obviously, really strong initial productivity from the first two pads there. Can you talk towards if the strength in well pad or the well productivity is making any, we'll call it, adjustments to the way that you guys think about the Jackfish expansion scope as well as that for Pike 2? Is that changing the way that you're thinking about the oil treatment or any of the scope of those two expansion projects?

Dennis, it really isn't changing our perspective of how we construct the facilities. The strong performance from the reservoir is very encouraging. Again, we expect Pike 2 to present similar results in itself. But again, if we look at the expansion that we're doing at Jackfish and the relative volumes that we have in the Pike area there, what I'm most excited about is, yes, we're going to add additional steam capacity to increase -- continue to increase the barrels of production that go through the facilities there. But I'm also impressed and looking forward to the -- what the teams are going to be able to execute in terms of exceeding the facility capacities. And so we're starting to see an example of that right now where those facilities at Jackfish were designed for 120,000. In the quarter, we saw 134,000. So it's very significant. I do believe there is more to come from that perspective, and we're going to realize that value and continue to bolster that strong acquisition that we did back in 2019. And the strategic position that it was and execute on filling up those assets.

[Operator Instructions] And your next question comes from the line of Greg Pardy from RBC Capital Markets.

Maybe just to start with a question for Victor. So you had a pretty big working capital deficiency or a meaningful one in the first quarter. Do you expect any of that to reverse into 2Q? And then with respect to the $13 billion net debt target, I mean, I know everything is kind of moving around. But just given the commodity price strength, juxtaposed against increased buybacks, is $13 billion conceivable like that you would hit that this year, do you think?

Yes. For sure, when I said it's in view, definitely when we look at forward strip pricing, we see a path to get there this year. I mean, as you point out, it depends on what the premiums look like for SCO, et cetera, over the course of the year. But definitely, we're optimistic that with good operating performance, it's possible. But I'm not going to commit to you yet. We'll see how the next couple of quarters here play out. On the working capital front, to your point, pretty regular course tax items in the quarter. Otherwise, I think for the rest of the year, fairly regular working capital impacts in Q2 and Q3. So nothing out of the ordinary.

Okay. Okay. Understood. And then, Scott, maybe it's kind of related to the regulatory framework and so on. But I'm more interested in how you're thinking about egress and market diversification, right? There's a lot of proposals now that are cost efficient to move barrels into the U.S. There's an open season with respect to Trans Mountain. And then there's this looming big million barrel a day pipeline kind of off in the future. But how do you see the egress landscape shaping up? Is it better than maybe what it was a year ago? And then what about market diversification for CNQ just given your size?

Yes. Greg, I think if you look at the short and medium term and you compare where we're at now compared to a couple of years ago, it looks very good. But the expansions through the mainline through the Prairie Connector opportunity and through TMX, all of them are positive for this medium-term growth that will help the industry here grow. So it's very positive. I think if you looked at the expansion to the West Coast for 1 million barrel a day pipeline, I think that's very important to ensure that when you look beyond the short and sort of midterm growth platforms, we need that pipeline to be able to grow oil sands in a significant way. And I would say it's all good, Greg. All of those point towards a very robust Western Canadian Sedimentary Basin development opportunity. In terms of our positioning at Canadian Natural, we'll continue to take and look at those diversification opportunities to ensure that we achieve the best netbacks possible for all of our oil production. And that it comes through a combination of going both South and to the West Coast.

And your next question comes from the line of Patrick O'Rourke from ATB Cormark.

I was just thinking about the Duvernay asset, and now that you've had it for a period of time here, we've seen very strong IPs. Maybe perhaps an update on how the wells are performing and where you sort of sit in terms of capital cost and improvements there and what's left?

Yes, Patrick, the Duvernay has turned out very well for us. We are meeting the expectations from a production growth perspective there. The capital cost we have brought down significantly over time here since the acquisition. We've also had a significant reduction in the operating cost in the range of plus a couple of bucks a barrel drop in operating costs. And so that's very significant from a netback perspective. We've applied our learnings from the Montney, brought them into the Duvernay with some adjustments and things have been looking very well. To the east side, there is a window of more significant liquids production as well as you move east. So we're just at the front-end stage of looking to understand the results from that part of it. So it's all very good, Patrick. And we like the play a lot. There's significant, obviously, netbacks in there and high liquids production. So it's a very good part of our portfolio.

Okay. Great. And maybe this ties back a little bit to Duvernay and some of the short-cycle targets that you have. But I think at the Investor Day, you did a very good job of sort of laying out short cycle, mid-cycle, long-cycle capital projects or targets that you have in the portfolio. And you're obviously a very regimented company, but we're in a very volatile commodity environment. So I'm wondering if you could maybe walk us through a little bit of the process and how you're thinking about capital allocation, particularly in the shorter cycle end of the portfolio to ensure that we're -- that you're maximizing value here, and I think maybe shifting to oilier and more liquids-rich targets. And with the ebbs and flows of the oil price, how you manage that on a daily basis looking forward here in 2026?

Yes, Patrick, I think patience is a really important factor. When we look at how we've laid out our plans for the capital program, which we've had some adjustments back in March, and we talked about that. The short-term development opportunities in our multi-lats liquid-rich plays, we are putting significant efforts towards capitalizing on that, and we're getting good results, good productivity from the wells, low operating cost, lower capital cost. Our drilling -- drill times continue to improve. So not only are we maximizing our ability to be able to develop these resources, we're doing it in such a manner on the short-term projects that -- we're doing it in such a manner that we're able to improve our netbacks, not just on -- because prices are higher today, but because the prices have remained flat, we would have had stronger netbacks for the cost reductions and stronger returns just with our activities through continuous improvement. So we'll continue on with that, and we're monitoring that. And we've got, as I mentioned, significant drilling rigs out there working in about -- 20, 21 rigs working. And so then if you look at our medium-term plans, I think we've laid that out, as you mentioned, fairly detailed for our thermal in situ projects. I've talked about it again today. We're continuing with the engineering for Pike and for Jackfish expansion. We're looking to proceed with long lead items there to advance those projects, lots of confidence there. And again, the longer-term projects in oil sands mining, we need to see -- we're looking for positive outcomes on the MOU for development of those areas.

And your next question comes from the line of Neil Mehta from Goldman Sachs.

First question is just on natural gas. You talked about your marketing strategy around oil, but there's obviously been a lot of volatility around natural gas. So maybe your perspective on how that changes your activity plans in gas in Western Canada, how you're thinking about marketing it? And then can you talk a little bit about the global gas picture? You've got this interesting agreement in 2030 with Cheniere. Is there an opportunity to layer more of that in?

Yes. Neil, if you looked at the opportunity to expand on that to capture strong global pricing. We continue to talk to folks. We'll look at those opportunities as they present themselves. And more to come on that, but we are certainly thinking about diversification. It is part of our strategy. In terms of the development on the gas side, for some time now, we've been messaging that our focus has been on the liquids-rich production. We're really not drilling any dry gas in the basin. And we're looking at where the strongest returns are. That's how we manage our capital portfolio. We're focused on that. And yes, we do have significant Montney dry gas opportunity as well, but we'll keep those in the bank for the future, and we'll capitalize in those areas that have the significant liquids production for now. So it's really a focus on liquids production, high returns and not any significant focus on drilling any dry gas wells.

Yes. That makes sense in this macro. And in the release, I thought this was interesting the comments about piloting solvent-enhanced oil recovery in some of your in situ assets. And it's certainly something that we've been talking a lot about solvent recovery and the potential upside from production that could generate, but it's such an interesting engineering organization. I'd be curious how big do you think this could be as it relates to your E&P assets?

Yes. If you look at the SAGD assets, we've -- and our cyclic team at Primrose. In both cases, we have deployed a bit of butane to reduce the steam and reduce the overall emissions through a couple of pilot projects. We had the commercial pad at K108 in Kirby North. And again, what we saw out of -- in all of these aspects of what we tested so far is that we're able to see, particularly on the Kirby pad, strong recoveries of the butane. Butane is a significant cost driver or any solvent that you're injecting would be the significant cost driver and really where you need to focus on in terms of ensuring that you're going to get strong returns for that type of investment. That's where the key is on that cost side of it. And we're telling the teams, let's ensure that we can go out and find the lowest cost alternative to capture that upside of reduced steam requirements and still have strong SOR recoveries. So we're taking the path of ensuring that we really focus on getting the cost right before we deploy it in any kind of significant scale. If you look, Neil, at the future and what it does capture for, what it can capture is helping bring reserves forward for development in our thermal in situ assets with lower capital -- overall capital deployment. So the upside is certainly there. It's just really important to ensure that you got the lowest cost alternative from a solvent perspective and designing your recovery facilities, you want to ensure we get that right because we can get the best of both worlds with that, Neil. We can look at that long-term opportunity. And in the interim, we can continue to develop and add pad adds at low capital efficiency cost.

[Operator Instructions] And your next question comes from the line of Menno Hulshof from TD Cowen.

I'll start by circling back on return of capital and the 75% return of free cash that you're currently on. You talked about being very active on the buyback in April and even through the beginning of May. But would you consider leaning into the balance sheet more aggressively over the near term to take advantage of higher spot prices?

It's not something that -- like the way the free cash flow allocation policy is laid out, I think we intend to adhere to that as it's currently laid out. As you know, there's going to be lots of free cash flow generation here in the second quarter at current strip pricing. And I don't think leaning into the balance sheet will be required. I think we'll have lots of cash flow to have a very robust program. And I think the target as laid out by the Board here is to maintain that 75% level. So that's the plan for now.

Okay. And then the second question is on sulfur, which is this commodity that comes up once every 10 years or so. But clearly, prices are a lot higher. Can you just refresh us on your exposure to that market? How much you're currently selling into the market today and what that could amount to in terms of quarterly revenue, if you're prepared to share that?

Yes. Menno, thanks. We won't get into the exact details of the revenue from it. But I can tell you we're a significant producer of sulfur at our oil sands mining operations at the upgraders, both Horizon and Scotford also in our conventional operations in our -- in the Western part of the province in BC. And so certainly, as you mentioned and indicated sulfur has been cyclic in nature. And we're certainly seeing a turn towards the upside at this point in time. And it's a good position to be in where we're able to realize strong value from the sale of those sulfur values. So we're going to continue to monitor that and take advantage of it as the cycle rides higher.

There are no further questions at this time. I will now hand the call back to Lance Casson for any closing remarks.

Thank you, operator, and thanks to everyone for joining our call this morning. If you have any questions, please give us a call. Have a great day.

And this concludes today's call. Thank you for participating. You may all disconnect.