Canadian Natural Resources Limited Announces 2023 Second Quarter Results

2023-08-03

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

Calgary, Alberta--(Newsfile Corp. - August 3, 2023) - Commenting on the Company's (TSX: CNQ) (NYSE: CNQ) second quarter 2023 results, Tim McKay, President, stated, "Canadian Natural's Q2/23 results demonstrated the advantages of our diverse and balanced asset base by delivering adjusted funds flow of approximately $2.7 billion. As well, we delivered average daily production volumes of approximately 1,194 MBOE/d in the quarter, which was impacted by wildfires in Western Canada, the continued unplanned third-party pipeline outage and planned Company turnarounds during the quarter. Wildfires in Western Canada did not cause any significant property damage to our assets and we would like to acknowledge our field personnel and their families as well as the first responders and emergency response agencies for their efforts in the affected communities over the last few months.

As a result of strong execution on our thermal growth plan, Q3/23 average thermal production is now targeted to be approximately 280,000 bbl/d, which represents growth of approximately 30,000 bbl/d from Q4/22 levels. Thermal production targets to capture strong realizations, as Western Canadian Select ("WCS") pricing has improved significantly year-to-date which, as of today, is forecasted to continue for the remainder of 2023.

Additionally, following the completion of planned turnarounds at our world class Oil Sands Mining and Upgrading assets, synthetic crude oil ("SCO") production was strong, with July 2023 volumes averaging approximately 513,000 bbl/d, capturing SCO pricing which continues to be priced at a premium to WTI.

Environmental, Social and Governance ("ESG") remains a priority for us as evidenced in our 2022 Stewardship Report to Stakeholders which was released today. This report highlights several of our ESG achievements, including top tier safety performance and the shared value achieved by working together across our operations with 167 Indigenous businesses through which approximately $684 million in contracts were awarded in 2022. Additionally, Canadian Natural is an investment leader in research and development ("R&D"). In 2022, we increased our investment in R&D by 30% over 2021 levels with over $587 million invested in technology development and deployment focusing on reductions in our environmental footprint, including reductions in greenhouse gas ("GHG") emissions and productivity improvements. The Company's strong track record of R&D investment will continue in 2023 and beyond and will be targeted to grow with our participation in the Pathways Alliance. Working together with the federal government of Canada and the Alberta government, the Pathways Alliance is a transformative industry collaboration with an actionable plan that includes the foundational Carbon Capture and Storage ("CCS") project, a significant opportunity to achieve meaningful GHG emissions reductions in support of industry, Alberta and Canada's climate goals. Canadian Natural continues to work together with governments on the importance of balancing environmental and economic objectives along with being able to support Canada's allies by providing affordable, reliable, responsibly produced energy."

Canadian Natural's Chief Financial Officer, Mark Stainthorpe, added, "Canadian Natural delivered solid results in a heavy planned turnaround quarter, as profitability and value from our diverse asset base generated adjusted net earnings of approximately $1.3 billion and adjusted funds flow of approximately $2.7 billion. Our effective and flexible capital allocation to our four pillars: returns to shareholders, balance sheet strength, resource value growth, and opportunistic acquisitions continues to deliver robust financial results.

Year-to-date up to and including August 2, 2023, we have returned approximately $4.3 billion to shareholders through dividends and share repurchases. Our commitment to increasing shareholder returns is evident in our sustainable and growing quarterly dividend which was increased for the 23rdconsecutive year in March 2023. As planned maintenance activities were completed in Q2/23, we are targeting strong production volumes and free cash flow for the second half of 2023 as we move towards our $10 billion net debt level and our commitment to return 100% of free cash flow to shareholders. When you combine our leading financial results with our top tier reserves and asset base, this provides us with unique competitive advantages in terms of capital efficiency, flexibility and sustainability, all of which drive material free cash flow generation and strong returns on capital.

This quarter marked the sixth anniversary of the acquisition of 70% of the Athabasca Oil Sands Project ("AOSP"). As part of the acquisition we issued approximately 97.6 million shares, resulting in shares outstanding at May 31, 2017 of approximately 1,215.0 million shares. Shareholder returns through share repurchases since the acquisition closed have been significant, resulting in a reduction of approximately 122.7 million shares over that period to approximately 1,092.3 million shares outstanding as of June 30, 2023, fewer shares outstanding than before acquiring AOSP. Additionally, since the closing, total corporate production has grown by roughly 50% or 442 MBOE/d from approximately 877 MBOE/d in Q1/17 to approximately 1,319 MBOE/d in Q1/23. This demonstrates our focus on safe, reliable production and our culture of continuous improvement."

QUARTERLY HIGHLIGHTS

| | | Three Months Ended | | | Six Months Ended | | | | | | | | | | | | | ($ millions, except per common share amounts) | | Jun 30 2023 | | | Mar 31 2023 | | | Jun 30 2022 | | | Jun 30 2023 | | | Jun 30 2022 | | | | Net earnings | $ | 1,463 | | $ | 1,799 | | $ | 3,502 | | $ | 3,262 | | $ | 6,603 | | | | Per common share | - basic | $ | 1.34 | | $ | 1.63 | | $ | 3.04 | | $ | 2.97 | | $ | 5.70 | | | | - diluted | $ | 1.32 | | $ | 1.62 | | $ | 3.00 | | $ | 2.94 | | $ | 5.63 | | | Adjusted net earnings from operations(1) | $ | 1,256 | | $ | 1,881 | | $ | 3,800 | | $ | 3,137 | | $ | 7,176 | | | | Per common share | - basic(2) | $ | 1.15 | | $ | 1.71 | | $ | 3.30 | | $ | 2.86 | | $ | 6.20 | | | | - diluted(2) | $ | 1.14 | | $ | 1.69 | | $ | 3.26 | | $ | 2.83 | | $ | 6.12 | | | Cash flows from operating activities | $ | 2,745 | | $ | 1,295 | | $ | 5,896 | | $ | 4,040 | | $ | 8,749 | | | | Adjusted funds flow(1) | $ | 2,742 | | $ | 3,429 | | $ | 5,432 | | $ | 6,171 | | $ | 10,407 | | | | Per common share | - basic(2) | $ | 2.50 | | $ | 3.12 | | $ | 4.72 | | $ | 5.62 | | $ | 8.99 | | | | - diluted(2) | $ | 2.48 | | $ | 3.08 | | $ | 4.66 | | $ | 5.57 | | $ | 8.87 | | | Cash flows used in investing activities | $ | 1,560 | | $ | 1,153 | | $ | 1,345 | | $ | 2,713 | | $ | 2,596 | | | | Net capital expenditures, excluding net acquisition costs and strategic growth capital(3) | $ | 1,385 | | $ | 1,117 | | $ | 1,266 | | $ | 2,502 | | $ | 2,110 | | | | Net capital expenditures(1) | $ | 1,669 | | $ | 1,394 | | $ | 1,450 | | $ | 3,063 | | $ | 2,905 | | | | Daily production, before royalties | | | | | | | | | | | | | | | | | | Natural gas (MMcf/d) | | 2,085 | | | 2,139 | | | 2,105 | | | 2,112 | | | 2,056 | | | | Crude oil and NGLs (bbl/d) | | 846,909 | | | 962,908 | | | 860,338 | | | 904,588 | | | 902,837 | | | | Equivalent production (BOE/d)(4) | | 1,194,326 | | | 1,319,391 | | | 1,211,147 | | | 1,256,513 | | | 1,245,473 | | |

(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 and six months ended June 30, 2023 dated August 2, 2023. (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 and six months ended June 30, 2023 dated August 2, 2023. (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 Q2/23, the Company generated strong financial results, including:

Net earnings of approximately $1.5 billion and adjusted net earnings from operations of approximately $1.3 billion.

Cash flows from operating activities of approximately $2.7 billion.

Adjusted funds flow of approximately $2.7 billion.

Free cash flow(1)of approximately $0.4 billion(2)after total dividend payments of approximately $1.0 billion and base capital expenditures(3)of approximately $1.4 billion.

This quarter marked the sixth anniversary of the acquisition of 70% of the Athabasca Oil Sands Project ("AOSP"). As part of the acquisition the Company issued approximately 97.6 million shares, resulting in shares outstanding at May 31, 2017 of approximately 1,215.0 million shares. Shareholder returns through share repurchases since the acquisition closed have been significant, resulting in a reduction of approximately 122.7 million shares over that period to approximately 1,092.3 million shares outstanding as of June 30, 2023, fewer shares outstanding than before acquiring AOSP.

Additionally, since the closing, total corporate production has grown by approximately 50% or 442,484 BOE/d from 876,907 BOE/d in Q1/17 to 1,319,391 BOE/d in Q1/23.

Returns to shareholders in Q2/23 were strong, totaling approximately $1.5 billion, comprised of approximately $1.0 billion of dividends and approximately $0.5 billion of share repurchases.

In Q2/23, the Company repurchased approximately 6.4 million common shares for cancellation at a weighted average price of $76.57 per share for a total of approximately $0.5 billion.

Canadian Natural increased its sustainable and growing quarterly dividend in March 2023 to $0.90 per common share, marking 2023 as the 23rdconsecutive year of dividend increases and demonstrating the confidence that the Board of Directors has in the sustainability of our business model, our strong balance sheet and the strength of our diverse, long life low decline asset base.

Year-to-date, up to and including August 2, 2023, the Company has returned approximately $4.3 billion to shareholders through approximately $2.9 billion in dividends and $1.4 billion through the repurchase and cancellation of approximately 17.6 million common shares.

Subsequent to quarter end, the Company declared a quarterly dividend of $0.90 per share, payable on October 5, 2023 to shareholders of record on September 15, 2023.

Canadian Natural continues to maintain a strong balance sheet and financial flexibility, with net debt(1)of approximately $12.0 billion and significant liquidity(1)of approximately $5.6 billion at the end of Q2/23.

In June 2023, the Company extended its $2.425 billion revolving credit facility by three years, now maturing June 2027 and subsequent to quarter end the Company filed Canadian and US base shelf prospectuses, providing the Company with additional liquidity options.

The Company's free cash flow allocation policy provides that when net debt is between $10 billion and $15 billion, 50% of free cash flow will be allocated to share repurchases and 50% of free cash flow will be allocated to the balance sheet, less strategic growth / acquisition opportunities. Free cash flow for the purpose of the policy is defined as adjusted funds flow less dividends, less base capital. When net debt reaches $10 billion, returns to shareholders increases to 100% of free cash flow with the free cash flow definition modified to adjusted funds flow less dividends and less total capital expenditures for the year. This is a reflection of the Board of Director's confidence in the sustainability and resilience of the Company to support accelerating incremental shareholder returns to 100% of free cash flow.

In Q2/23, the Company continued to focus on safe, effective and efficient operations, with quarterly average production volumes of 1,194,326 BOE/d, comparable to Q2/22 levels.

Natural gas production averaged 2,085 MMcf/d in Q2/23, compared to Q2/22 levels of 2,105 MMcf/d.

Liquids production averaged 846,909 bbl/d in Q2/23, compared to Q2/22 levels of 860,338 bbl/d.

Quarterly production in Q2/23 was negatively impacted by wildfires and the previously mentioned third-party pipeline outage which began in Q1/23 and has now been resolved, resulting in a Q2/23 average production impact of approximately 24,400 BOE/d (99 MMcf/d and 7,900 bbl/d).

At present, wildfires in Western Canada continue to have a minor impact on production volumes as the Company continues to actively monitor the situation.

Following the completion of planned turnarounds at Horizon and the non-operated Scotford Upgrader, the Company achieved strong monthly average production in July 2023 of approximately 513,000 bbl/d of SCO.

The Company's strategic growth plan targets to increase production from our long life no decline oil sands mining and our low decline thermal in situ assets with the following projects:

At Horizon, the reliability enhancement project is targeting to add approximately 14,000 bbl/d of additional SCO production capacity in 2025 as a result of shifting the maintenance schedule from once per year to once every two years, reducing downtime for maintenance activities and increasing overall reliability at Horizon.

During the planned turnaround at Horizon and as part of the reliability enhancement project, the Company completed tie-ins of two furnaces. In August 2023, both furnaces are targeted to be operational, increasing SCO production capacity by approximately 5,000 bbl/d, which is included in the Company's 2023 production guidance.

Based on the forward strip as of July 24, 2023, these high margin SCO barrels will capture strong pricing with an average premium to WTI pricing of approximately US$3.00/bbl in Q3/23 and Q4/23, generating significant free cash flow for the Company.

Thermal in situ production is targeted to increase to an average of approximately 280,000 bbl/d in Q3/23, as a result of strong execution enabling the Company to optimize the production schedule on the new Primrose CSS pads, combined with the Kirby SAGD pads coming on stream earlier and ramping up ahead of plan. This represents production growth of approximately 30,000 bbl/d from Q4/22 levels, utilizing existing facility capacity.

Based on the forward strip as of July 24, 2023, the tighter average WCS differential of approximately US$15.00/bbl in Q3/23 and Q4/23 is an improvement compared to Q1/23 when WCS differentials averaged approximately US$25.00/bbl. Thermal in situ and heavy crude oil production is well positioned to capture strong pricing, generating significant free cash flow.

The 2023 capital budget in Oil Sands Mining and Upgrading and North America E&P has been increased by a combined $200 million compared to the original budget. In particular, Oil Sands Mining and Upgrading 2023 capital has increased by approximately $130 million largely reflecting increased scope and third-party service costs relating to sustaining activities to ensure safe and effective operations. The remaining approximately $70 million relates to North America E&P and thermal operations, as a result of increased non-operated and workover activity on our properties as well as inflationary pressures. The result is an increase to the Company's 2023 targeted total capital program of roughly 4% to approximately $5.4 billion.

Despite the wildfires in Western Canada, the third-party pipeline outage in the first half of the year, and the previously announced unplanned outages at Horizon in January 2023, Canadian Natural's 2023 production is still targeted to be within the Company's corporate guidance range of 1,330,000 BOE/d to 1,374,000 BOE/d, but closer to the lower end.

OPERATIONS REVIEW AND CAPITAL ALLOCATION

Canadian Natural has a balanced and diverse portfolio of assets, primarily Canadian-based, with international exposure in the UK section of the North Sea and Offshore Africa. Canadian Natural's production is well balanced between light crude oil, medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal oil) and SCO (herein collectively referred to as "crude oil") and natural gas and NGLs. This balance provides optionality for capital investments, maximizing value for the Company's shareholders.

Underpinning this asset base is the Company's long life low decline production, representing approximately 73% of budgeted total liquids production in 2023, the majority of which is zero decline high value SCO production from the Company's world class Oil Sands Mining and Upgrading assets. The remaining balance of the Company's long life low decline production comes from our top tier thermal in situ oil sands operations and our Pelican Lake heavy crude oil assets. The combination of these long life low decline assets, low reserves replacement costs, and effective and efficient operations results in substantial and sustainable adjusted funds flow throughout the commodity price cycle.

In addition, Canadian Natural maintains a substantial inventory of low capital exposure projects within the Company's conventional asset base. These projects can be executed quickly and, in the right economic conditions, provide excellent returns and maximize value for our shareholders. Supporting these projects is the Company's undeveloped land base which enables large, repeatable drilling programs that can be optimized over time. Additionally, by owning and operating most of the related infrastructure, Canadian Natural is able to control major components of the Company's operating costs and minimize production commitments. Low capital exposure projects can be quickly stopped or started depending upon success, market conditions or corporate needs.

Canadian Natural's balanced portfolio, built with both long life low decline assets and low capital exposure assets, enables effective capital allocation, production growth and value creation.

| Drilling Activity | | Six Months Ended June 30 | | | | | | | | | | | | | | 2023 | | | 2022 | | | | | | | | | (number of wells) | | Gross | | | Net | | | Gross | | | Net | | | Crude oil(1) | | 141 | | | 135 | | | 142 | | | 139 | | | Natural gas | | 50 | | | 42 | | | 65 | | | 43 | | | Dry | | 2 | | | 2 | | | 1 | | | 1 | | | Subtotal | | 193 | | | 179 | | | 208 | | | 183 | | | Stratigraphic test / service wells | | 470 | | | 409 | | | 463 | | | 395 | | | Total | | 663 | | | 588 | | | 671 | | | 578 | | | Success rate (excluding stratigraphic test / service wells) | | | | | 99% | | | | | | 99 % | |

(1)Includes bitumen wells.

The Company drilled a total of 179 net crude oil and natural gas producer wells in the first half of 2023, comparable to levels in the first half of 2022.

North America Exploration and Production

Earlier from King Global Ventures Inc.

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