Canadian Natural Resource Management Discusses Q2 2012 Results - Earnings Call Transcript

Canadian Natural Resource Ltd. (CNQ)

Q2 2012 Earnings Call

August 9, 2012 11:00 AM ET

Executives

John Langille – Vice Chairman

Steve Laut – President

Doug Proll – CFO and SVP-Finance

Analysts

George Toriola – UBS

David McColl – Morningstar

Greg Pardy – RBC Capital Markets

John Herrlin – Societe Generale

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources 2012 Second Quarter Conference Call. I would now like to turn the meeting over to Mr. John Langille, Vice-Chairman of Canadian Natural Resources. Please go ahead, Mr. Langille.

John Langille

Thank you, operator and good morning everyone. Thank you for attending this conference call where we will discuss our second quarter results and review our planned activities for the balance of 2012 and in some cases beyond that. Participating with me today are Steve Laut, our President, and Doug Proll, our Chief Financial Officer.

Before we start, I would refer you to the comments regarding forward-looking information contained in our press release, and also note that all dollar amounts are in Canadian dollars and production and reserves are both expressed as before royalties unless otherwise stated. I’d like to make some initial comments before I turn the call over to Steve and Doug for their in-depth discussion.

The second quarter saw us meet our production guidance and achieve record production. Crude oil production grew to over 470,000 barrels per day from the 395,000 barrels per day in the first quarter, and natural gas production remained at over 1.2 bcf per day. This growth was driven by firstly, the best quarterly production of SCO ever from Horizon, our oil mining project. Quarterly production averaged over 115,000 barrels per day as the completion of a third ore preparation plant greatly enhanced reliability.

Secondly, we have continued strong production from our primary heavy oil areas, which averaged over 122,000 barrels per day. And thirdly, production response of our thermal in situ project at Primrose returned to a production cycle from a steaming cycle. Daily average production from this project grew to 94,000 barrels from the first quarter average of 80,000 barrels.

This strong production together with emphasis on cost control and reduction of cost contributed to the growth in our quarterly earnings and cash flow. Cash flow amounted to $1.75 billion, up from $1.28 billion in the first quarter of this year. The cash flow gave us significant room to complete our second quarter capital program of $1.3 billion, payout dividends that have increased by 17% over last year and to buy back 6.2 million common shares under our Normal Course Issuer Bid.

Commodity prices continue to be volatile with a mixed outlook. Natural gas supply demand is out of balance. However, the recent record high temperatures in eastern North America have provided some additional market for natural gas usage, and it does appear that recently there has been a pull-back on development of new production, which may help to stabilize the supply of natural gas. However, having said that, our average price received for natural gas in the second quarter of this year decreased by 54% from the price received in the second quarter of 2011. Clearly the economics of natural gas development has been further compromised and we have curtailed our capital exposure accordingly.

Planned and unplanned maintenance activities at refineries and unplanned pipeline restrictions continue to affect the differential charge against heavy oil. The WCS differential averaged 24% of West Texas price in the second quarter of the year, somewhat higher than the 17% differential in the second quarter of 2011. We are able to positively manage our business over these cycles, and as additional refining capacity and new pipelines are put into service, we will be in a very good position to benefit from these additional markets for heavy oil.

We continue to ensure our business remains balanced and our financial position remains strong by reallocating capital expenditures. We have adjusted our targeted capital expenditures for the year downward by almost $700 million. This reduction in CapEx, however, does not adversely affect our oil production guidance for the 2012 year. As Steve will show you, our balance asset base is very strong. We have tremendous opportunities to increase our reserves and production and most importantly we have a very defined plan to accomplish that. With that, I will hand the meeting over to Steve and then to Doug to discuss our financial position. Steve?

Steve Laut

Thanks, John and good morning, everyone. As you can see in the second quarter our balanced and diverse assets, proven and effective strategy, executed by our strong teams delivered a very strong quarter. Production was up and operating costs were down across the board in North America. In addition, we’ve been nimble, effectively optimizing our capital allocation in the quarter in response to market conditions. We’ve reduced our capital spending in 2012 by roughly $700 million, a 10% reduction, and at the same time slightly increased our overall production guidance for 2012.

Canadian Natural’s ability to quickly and effectively reallocate capital and at the same time increase production, confirms the strength of Canadian Natural’s assets, our capital flexibility, the effectiveness of our strategies and the ability of our teams to effectively execute. Few, if any, companies in our peer group can effectively reduce capital spending and deliver a production increase.

I’ll briefly comment on each of our areas, starting with gas. As you know, we’ve been bearish on gas prices and that’s not changed. In Q2, we proactively reduced our gas drilling program for the year by half, from 71 wells to 35 wells. As well, we deferred the well completions on our Septimus program and as a result we’ve deferred $110 million of gas capital out of the 2012 plan. This deferral of capital impacts gas and NGL production exit rates, since all these wells, especially at Septimus, were liquids-rich wells. We’ve also proactively shut in 20 million cubic feet of gas in 2012.

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