Canadian Natural Resources Limited Announces 2022 Second Quarter Results

2022-08-04

CSE - Canadian National Stock Exchange · Copper · Gold · Silver · Zinc · Lead · United States

Calgary, Alberta--(Newsfile Corp. - August 4, 2022) - Canadian Natural's (TSX: CNQ) (NYSE: CNQ) President, Tim McKay, commented on the Company's second quarter 2022 results, "Our world class asset base is strategically balanced across commodity types so we can be flexible and capture opportunities throughout the commodity price cycle to maximize value for our shareholders. A substantial portion of our unique and diverse asset base consists of long life low decline assets which have significant, low risk, high value reserves that require lower maintenance capital than most other reserves, making Canadian Natural a truly robust and resilient energy company.

"Our culture of continuous improvement with a focus on cost control and safe, effective and efficient operations, and our disciplined approach to capital allocation continues to drive strong operating results. Total corporate production averaged approximately 1,211 MBOE‍/‍d in Q2/22, including record quarterly natural gas production of approximately 2.1 Bcf/d which has grown over 30% from Q2/21 levels. We completed turnarounds at our Oil Sands Mining and Upgrading assets in Q2/22, with both mines having returned to full production rates, capturing a strong Synthetic Crude Oil ("SCO") price premium to WTI.

"So far in 2022, we have had strong execution and have realized efficiencies in both of our Conventional E&P and thermal in situ drilling programs, resulting in the drilling program being ahead of forecast in terms of actual versus planned wells drilled year-to-date, with comparable costs on a per well basis. In order to maximize value, we plan to continue with our operational momentum in the second half of 2022 maintaining the same base level of operating drilling rigs (approximately 13) to drill additional Conventional E&P wells beyond our original 2022 forecasted levels, which essentially backfills the latter half of our drilling program. Additionally, as part of our strategic growth plan released in January 2022, we are now targeting to drill 15 additional net thermal in situ wells in 2022. Our updated 2022 base and strategic growth capital program is now targeted to be approximately $4.9 billion and corporate production guidance range is increasing to 1,295 MBOE/d to 1,335 MBOE/d.

"Environmental, Social and Governance ("ESG") remains a priority for us as evidenced in our 2021 Stewardship Report to Stakeholders published today. This report highlights several of our ESG achievements, including top tier safety performance and the shared value achieved by working together across Canada with 144 Indigenous-owned businesses by which approximately $572 million in contracts were awarded in 2021, a 17% increase from 2020 levels. Additionally, Canadian Natural is a research and development ("R&D") investment leader. We have increased our R&D investment by 33% over 2020 levels with over $450 million invested in 2021 in technology development and deployment, with a focus of this investment on environmental footprint reduction, including reductions in greenhouse gas ("GHG") emissions, and productivity improvements. The Company's strong track record of R&D investment will continue in 2022 and beyond and is targeted to grow with our participation in the Pathways Alliance. Working together with the federal and Alberta governments, the Pathways Alliance is a transformative industry collaboration with an actionable plan that will help us collectively be more effective and efficient from a time and cost perspective for Carbon Capture, Utilization and Storage ("CCUS") projects and other GHG reduction projects. The federal government's support through an investment tax credit as well as the Alberta government's support in principle are important to achieving ambitious GHG emissions reductions by 2030. The tax credit is a positive approach where industry and government can co-invest in CCUS infrastructure at an achievable pace of development. Canadian Natural will continue to provide input to government on the importance of balancing environmental and economic objectives along with being able to support Canada's allies with energy security."

Canadian Natural's Chief Financial Officer, Mark Stainthorpe, added, "We are committed to maximizing shareholder value through effective and nimble capital allocation. In Q2/22, Canadian Natural generated approximately $5.4 billion in adjusted funds flow, resulting in significant free cash flow of approximately $3.3 billion, after dividends of approximately $0.9 billion and net base capital expenditures of approximately $1.3 billion, excluding acquisitions and strategic growth capital. We continue to strengthen our balance sheet, having reduced net debt by approximately $1.4 billion in Q2/22, ending the quarter with approximately $12.4 billion in net debt.

"Returns to shareholders year-to-date in 2022 have been significant as we have returned approximately $2.4 billion through dividends and approximately $4.0 billion through share repurchases, for a total of $6.4 billion, up to and including August 3, 2022. This includes the 28% increase to our sustainable and growing quarterly dividend in March 2022 to $0.75 per share, marking 2022 as the 22nd consecutive year of dividend increases. The increasing base dividend demonstrates the confidence that the Board of Directors has in the Company's world class assets and its ability to generate significant and sustainable free cash flow through the commodity price cycle.

"Our free cash flow allocation policy is unique in that shareholder returns are not impacted by strategic growth capital or acquisitions given our current net debt position is below $15 billion, and that our free cash flow is net of dividends. Through Q3/22, we will continue to target to allocate 50% of our free cash flow to share repurchases and 50% to the balance sheet.

"Strong execution across the Company's operations year-to-date has resulted in substantial free cash flow generation driven by our top tier long life low decline assets with low maintenance capital requirements and our low cost structure. As a result, our financial position continues to strengthen, allowing for incremental returns to shareholders. Reflecting this, in August 2022, the Board of Directors approved an increase in returns to shareholders by declaring a special dividend of $1.50 per share, payable on August 31, 2022 to shareholders of record on August 23, 2022. This is a step towards the previously announced target to increase shareholder returns when net debt reaches $8 billion, which the Board of Directors see as a sustainable base level of corporate debt.

"When you combine our leading financial results with our top tier asset base, this provides unique competitive advantages which drive material free cash flow generation allowing for significant returns to shareholders."

QUARTERLY HIGHLIGHTS

| | | Three Months Ended | | | Six Months Ended | | | | | | | | | | | | | ($ millions, except per common share amounts) | | Jun 30 2022 | | | Mar 31 2022 | | | Jun 30 2021 | | | Jun 30 2022 | | | Jun 30 2021 | | | | Net earnings | $ | 3,502 | | $ | 3,101 | | $ | 1,551 | | $ | 6,603 | | $ | 2,928 | | | | Per common share | - basic | $ | 3.04 | | $ | 2.66 | | $ | 1.31 | | $ | 5.70 | | $ | 2.47 | | | | - diluted | $ | 3.00 | | $ | 2.63 | | $ | 1.30 | | $ | 5.63 | | $ | 2.46 | | | Adjusted net earnings from operations(1) | $ | 3,800 | | $ | 3,376 | | $ | 1,480 | | $ | 7,176 | | $ | 2,699 | | | | Per common share | - basic(2) | $ | 3.30 | | $ | 2.90 | | $ | 1.25 | | $ | 6.20 | | $ | 2.28 | | | | - diluted(2) | $ | 3.26 | | $ | 2.86 | | $ | 1.24 | | $ | 6.12 | | $ | 2.27 | | | Cash flows from operating activities | $ | 5,896 | | $ | 2,853 | | $ | 2,940 | | $ | 8,749 | | $ | 5,476 | | | | Adjusted funds flow(1) | $ | 5,432 | | $ | 4,975 | | $ | 3,049 | | $ | 10,407 | | $ | 5,761 | | | | Per common share | - basic(2) | $ | 4.72 | | $ | 4.27 | | $ | 2.57 | | $ | 8.99 | | $ | 4.86 | | | | - diluted(2) | $ | 4.66 | | $ | 4.21 | | $ | 2.56 | | $ | 8.87 | | $ | 4.85 | | | Cash flows used in investing activities | $ | 1,345 | | $ | 1,251 | | $ | 719 | | $ | 2,596 | | $ | 1,367 | | | | Net capital expenditures(1), excluding net acquisition costs and strategic growth capital(3) | $ | 1,266 | | $ | 844 | | $ | 957 | | $ | 2,110 | | $ | 1,765 | | | | Net capital expenditures(1) | $ | 1,450 | | $ | 1,455 | | $ | 1,285 | | $ | 2,905 | | $ | 2,093 | | | | Daily production, before royalties | | | | | | | | | | | | | | | | | | Natural gas (MMcf/d) | | 2,105 | | | 2,006 | | | 1,614 | | | 2,056 | | | 1,606 | | | | Crude oil and NGLs (bbl/d) | | 860,338 | | | 945,809 | | | 872,718 | | | 902,837 | | | 925,741 | | | | Equivalent production (BOE/d)(4) | | 1,211,147 | | | 1,280,180 | | | 1,141,739 | | | 1,245,473 | | | 1,193,434 | | |

(1)Non-GAAP Financial Measure. Refer to the "Non-GAAP and Other Financial Measures" section of this press release and the "Non-GAAP and Other Financial Measures" section of the Company's MD&A for the three months ended June 30, 2022 dated August 3, 2022. (2)Non-GAAP Ratio. Refer to the "Non-GAAP and Other Financial Measures" section of this press release and the "Non-GAAP and Other Financial Measures" section of the Company's MD&A for the three months ended June 30, 2022 dated August 3, 2022. (3)Net capital expenditures, excluding net acquisition costs and strategic growth capital, is defined as base capital expenditures. (4)A barrel of oil equivalent ("BOE") is derived by converting six thousand cubic feet ("Mcf") of natural gas to one barrel ("bbl") of crude oil (6 Mcf:1 bbl). This conversion may be misleading, particularly if used in isolation, or to compare the value ratio using current crude oil and natural gas prices since the 6 Mcf:1 bbl ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

The strength of Canadian Natural's long life low decline asset base, supported by safe, effective and efficient operations makes our business unique, robust and sustainable. In Q2/22, the Company generated strong financial results, including:

Net earnings of approximately $3.5 billion and adjusted net earnings from operations of approximately $3.8 billion.

Cash flows from operating activities of approximately $5.9 billion.

Adjusted funds flow of approximately $5.4 billion.

Strong execution across the Company's operations year-to-date has resulted in substantial free cash flow(1)generation driven by our top tier long life low decline assets with low maintenance capital requirements and our low cost structure. As a result, our financial position continues to strengthen, allowing for incremental returns to shareholders. In August 2022, the Board of Directors approved an increase in returns to shareholders by declaring a special dividend. Subsequent to quarter end, the Company declared:

A special dividend of $1.50 per share, payable on August 31, 2022 to shareholders of record on August 23, 2022.

A quarterly base dividend of $0.75 per share, payable on October 5, 2022 to shareholders of record on September 16, 2022. In March 2022, Canadian Natural increased its sustainable and growing quarterly dividend by 28% to $0.75 per share, up from $0.5875 per share, marking 2022 as the 22nd consecutive year of dividend increases.

Canadian Natural's free cash flow policy is defined as adjusted funds flow less base capital expenditures and dividends, including special dividends. The Company targets to allocate 50% of this free cash flow to share repurchases and 50% to the balance sheet, less any strategic growth capital / acquisitions. In addition, when the Company's net debt reaches $8 billion, which the Board sees as a base level of corporate debt, the Company will allocate additional free cash flow as incremental returns to shareholders.

Our policy is unique in that acquisitions and strategic growth capital do not impact returns to shareholders.

| Free Cash Flow and Returns to Shareholders | | | | | ($ millions) | | Six Months Ended Jun 30 2022 | | | Adjusted funds flow(1) | $ | 10,407 | | | Less: Base capital expenditures(2) | | 2,110 | | | Dividends paid on common shares | | 1,560 | | | Free cash flow | $ | 6,737 | | | | | | | | Share repurchases | $ | 3,088 | | | Percent of free cash flow | | 46% | | | Balance sheet / Strategic Growth Capital / acquisitions | $ | 3,649 | | | Percent of free cash flow | | 54% | | | | | | | | Total direct returns to shareholders (dividends paid and share repurchases) | $ | 4,648 | |

(1)Refer to the descriptions and reconciliations to the most directly comparable GAAP measure, which are provided in the "Non-GAAP and Other Financial Measures" section of the Company's MD&A for the three months ended June 30, 2022 dated August 3, 2022. (2)Item is a component of net capital expenditures. Refer to the "Non-GAAP and Other Financial Measures" section of Company's MD&A for the three months ended June 30, 2022 dated August 3, 2022 for more details on net capital expenditures.

Canadian Natural delivered substantial free cash flowin Q2/22 of approximately $3.3 billion(2)after approximately $0.9 billion in dividend payments and base capital expenditures(3)of approximately $1.3 billion.

Returns to shareholders was significant in Q2/22 having returned approximately 53% of adjusted funds flow or approximately $2.9 billion, comprised of approximately $0.9 billion in dividends and approximately $2.0 billion in share repurchases.

In Q2/22, the Company repurchased approximately 26.4 million common shares for cancellation at a weighted average price of $75.92 per share for a total of approximately $2.0 billion.

Year-to-date up to and including August 3, 2022, the Company has returned a total approximately $6.4 billion to shareholders through approximately $2.4 billion in dividends and approximately $4.0 billion through share repurchases via the cancellation of approximately 55.9 million common shares at a weighted average price of $71.47 per share.

Since 2010, Canadian Natural has repurchased approximately 189.6 million shares for a total of approximately $9.3 billion at a weighted average price of $49.21 per share.

During Q2/22, the Company continued to strengthen its balance sheet and improve its financial flexibility.

Increased indirect returns to shareholders by reducing net debt(1)by approximately $1.4 billion, ending the quarter with approximately $12.4 billion in net debt.

Undrawn revolving bank credit facilities totaling approximately $5.5 billion were available at June 30, 2022. Including cash and cash equivalents and short-term investments, the Company had significant liquidity(1)of approximately $6.1 billion with no amounts drawn under its commercial paper program.

On June 3, 2022, DBRS upgraded our unsecured long-term investment grade credit rating to A (low) from BBB (high), with a stable rating outlook.

In Q2/22, the Company continued its focus on safe, effective and efficient operations, delivering quarterly average production volumes of 1,211,147 BOE/d.

Canadian Natural delivered record quarterly average natural gas production of 2,105 MMcf/d in Q2/22, increases of approximately 5% and 30% over Q1/22 and Q2/21 levels respectively. The increase over Q1/22 reflects strong drilling results, partially offset by natural field declines. The increase over Q2/21 levels reflects strong drilling results and acquisitions, partially offset by natural field declines.

As a result of the Company's diversified sales points, our natural gas production captured strong realized natural gas pricing of $7.93/Mcf in Q2/22, a 51% increase above Q1/22 levels and approximately 30% higher than the AECO benchmark price in Q2/22.

Corporate natural gas operating costs(4)averaged $1.17/Mcf in Q2/22, decreases of 11% and 2% from Q1/22 and Q2/21 levels respectively, primarily reflecting seasonality impact and higher production volumes in Q2/22.

Quarterly liquids production averaged 860,338 bbl/d in Q2/22, a 9% decrease from Q1/22 levels and comparable to Q2/21 levels. The decrease from Q1/22 primarily reflects the planned turnaround activities in Q2/22 on the Company's Oil Sands Mining and Upgrading assets, which reduced production by approximately 73,000 bbl/d in Q2/22.

The Company's world class Oil Sands Mining and Upgrading assets continue to deliver safe and reliable production, with Horizon reaching royalty payout in April 2022. Quarterly production averaged 356,953 bbl/‍d of SCO in Q2/22, reflecting planned turnarounds at Horizon and Scotford completed during the quarter.

The turnaround at Horizon was completed in 24 days, 8 days earlier than budgeted, primarily as a result of strong execution.

The turnaround at the non-operated Scotford Upgrader was completed in 82 days, 17 days longer than budgeted.

With the turnarounds now complete, both AOSP and Horizon have returned to full production rates, capturing a strong SCO price premium of over US$10/bbl to WTI.

UPDATE TO 2022 CAPITAL BUDGET AND PRODUCTION

Canadian Natural has had strong execution with its drilling program so far in 2022, resulting in the Company drilling 22 net operated wells ahead of forecast, consisting of 11 net thermal in situ and 11 net Conventional E&P wells, with drilling costs on a per well basis comparable to budget, despite inflationary cost pressures. As a result, the Company has the ability to capture additional value by accelerating strategic growth opportunities within our large, unique and diverse asset base to maximize value for our shareholders. As a result, 2022 capital expenditures will be adjusted as follows:

Base Capital will now be targeted at approximately $3,845 million, an increase of approximately $200 million over original 2022 levels, largely due to forecasted inflationary pressures in all operating areas for items such as steel, manufactured goods, services and labour.

Strategic Growth Capital will now be targeted at approximately $1,075 million, an increase of approximately $375 million over original 2022 levels, with details of the Company's additional high value opportunities summarized below.

Updated 2022 capital expenditures are summarized as follows:

| Net Capital Expenditures ($ million)(1) | | 2022 Budget | | | 2022 Forecast | | | Base Capital(2) | $ | 3,645 | | $ | 3,845 | | | Strategic Growth Capital | | 700 | | | 1,075 | | | Total Capital | $ | 4,345 | | $ | 4,920 | |

(1)Excludes net acquisition costs. (2)Net capital expenditures, excluding net acquisition costs and strategic growth capital, is defined as base capital expenditures.

As a result of efficiencies gained and this incremental Strategic Growth Capital in 2022, we are targeting to add approximately 40,000 BOE/d of additional production growth in 2023 from the original 2022 mid-point of guidance.

| Strategic Growth Plan - Incremental Targeted Production | | 2023 Forecast | | | 2025 Forecast | | | Natural gas (MMcf/d) | | ~140 | | | ~280 | | | Conventional E&P Crude Oil & NGLs (bbl/d) | | ~10,000 | | | ~35,500 | | | Thermal and Oil Sands Mining & Upgrading (bbl/d) | | ~7,000 | | | ~14,000 | | | Total Liquids (bbl/d) | | ~17,000 | | | ~49,500 | | | Total BOE/d | | ~40,000 | | | ~96,000 | |

The incremental Strategic Growth Capital is targeted to be invested, as follows:

Canadian Natural Resources Limited Announces 2022 Second Quarter Results

QUARTERLY HIGHLIGHTS

UPDATE TO 2022 CAPITAL BUDGET AND PRODUCTION

Earlier from King Global Ventures Inc.