Canadian Natural Resources Limited Announces 2021 Second Quarter Results

2021-08-05

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

Calgary, Alberta--(Newsfile Corp. - August 5, 2021) - Commenting on the Company's second quarter 2021 results, Tim McKay, President of Canadian Natural (TSX: CNQ) (NYSE: CNQ) stated, "Canadian Natural is in a strong position as our vast and diverse asset base delivered strong operational and financial results in Q2/21, as we achieved production volumes of approximately 1,142 MBOE/d in the quarter, notwithstanding the planned turnaround at our Oil Sands Mining and Upgrading operations.

Canadian Natural's long life low decline asset base generated significant free cash flow in the quarter maximizing value for our shareholders, as we balanced free cash flow to our four pillars of capital allocation; balance sheet strength, returns to shareholders, economic resource development and opportunistic acquisitions. In the first two quarters of 2021 we have reduced net debt by approximately $3.1 billion, returned approximately $1.3 billion to our shareholders through dividends and share repurchases, maintained capital discipline and executed on various opportunistic and strategic transactions which add long term value.

With the increased positive outlook for commodity prices for the remainder of 2021, we have increased our 2021 capital budget by $275 million to $3.48 billion as we undertake lead activities for future growth opportunities. The increase includes $120 million for conventional and unconventional assets, $110 million for long life low decline assets and $45 million in additional well abandonment activities. These increased investments are being financed out of the repayment of the North West Redwater Partnership ("NWRP") subordinated debt. This additional capital, along with strong operating performance from our existing 2021 drilling program, now has us targeting natural gas production above our previous guided production range and corporate production on a BOE basis above the mid-point of our previous guided production range for the 2021 year.

As previously announced, the Oil Sands Pathways initiative to achieve net zero greenhouse gas emissions by 2050 is an unprecedented initiative by the Canadian energy industry, by which Canadian Natural and our industry partners will strengthen our leading environmental, social and governance ("ESG") performance, while delivering meaningful emissions reductions and balancing sustainable economic development. Collaboration with the federal and Alberta governments on this initiative will be critical for Canada to achieve its climate goals."

Canadian Natural's Chief Financial Officer, Mark Stainthorpe, added, "Canadian Natural's robust business model and world class assets delivered strong adjusted funds flow in Q2/21 of approximately $3.05 billion, resulting in approximately $1.5 billion in free cash flow after dividends and capital expenditures, excluding acquisitions.

In Q2/21, net debt was reduced by approximately $1.7 billion as we repaid and retired the remaining $2.125 billion on our non-revolving term loan originally maturing in June 2022. In addition, subsequent to quarter end, we exercised the par call option on our US$0.5 billion November 2021 public bond, allowing us to repay the bond early in August 2021, capturing interest cost savings and further retiring absolute debt.

Annual 2021 WTI strip pricing has continued to strengthen from Q2/21 quarter end and using an annual average of US$66/bbl WTI, our 2021 targeted free cash flow increases significantly to a range of $7.2 billion to $7.7 billion, after dividends and net capital expenditures, excluding acquisitions. As a result of this strong free cash flow and increasing balance sheet strength achieved through 2021, the Board of Directors has revised its share repurchase policy effective July 1, 2021 and has authorized management to increase returns to shareholders through incremental share repurchases of approximately 1% of shares outstanding, or approximately 11 million shares, per quarter. Additionally, the new policy provides that once the Company reaches an absolute debt level of $15 billion, currently targeted to occur in Q4/21, 50% of free cash flow is targeted to be allocated to share repurchases under the Company's Normal Course Issuer Bid ("NCIB"), with the remaining 50% allocated to further strengthening of the Company's balance sheet."

QUARTERLY HIGHLIGHTS

| | | Three Months Ended | | | Six Months Ended | | | | | | | | | | | | | ($ millions, except per common share amounts) | | Jun 30 2021 | | | Mar 31 2021 | | | June 30 2020 | | | June 30 2021 | | | June 30 2020 | | | | Net earnings (loss) | $ | 1,551 | | $ | 1,377 | | $ | (310 | ) | $ | 2,928 | | $ | (1,592 | ) | | | Per common share | - basic | $ | 1.31 | | $ | 1.16 | | $ | (0.26 | ) | $ | 2.47 | | $ | (1.35 | ) | | | - diluted | $ | 1.30 | | $ | 1.16 | | $ | (0.26 | ) | $ | 2.46 | | $ | (1.35 | ) | | Adjusted net earnings (loss) from operations (1) | $ | 1,480 | | $ | 1,219 | | $ | (772 | ) | $ | 2,699 | | $ | (1,067 | ) | | | Per common share | - basic | $ | 1.25 | | $ | 1.03 | | $ | (0.65 | ) | $ | 2.28 | | $ | (0.90 | ) | | | - diluted | $ | 1.24 | | $ | 1.03 | | $ | (0.65 | ) | $ | 2.27 | | $ | (0.90 | ) | | Cash flows from (used in) operating activities | $ | 2,940 | | $ | 2,536 | | $ | (351 | ) | $ | 5,476 | | $ | 1,374 | | | | Adjusted funds flow (2) | $ | 3,049 | | $ | 2,712 | | $ | 415 | | $ | 5,761 | | $ | 1,752 | | | | Per common share | - basic | $ | 2.57 | | $ | 2.29 | | $ | 0.35 | | $ | 4.86 | | $ | 1.48 | | | | - diluted | $ | 2.56 | | $ | 2.28 | | $ | 0.35 | | $ | 4.85 | | $ | 1.48 | | | Cash flows used in investing activities | $ | 719 | | $ | 648 | | $ | 693 | | $ | 1,367 | | $ | 1,552 | | | | Net capital expenditures, excluding net acquisition costs (3) | $ | 957 | | $ | 808 | | $ | 421 | | $ | 1,765 | | $ | 1,259 | | | | Net capital expenditures, including net acquisition costs (3) | $ | 1,285 | | $ | 808 | | $ | 421 | | $ | 2,093 | | $ | 1,259 | | | | | | | | | | | | | | | | | | | | | | Daily production, before royalties | | | | | | | | | | | | | | | | | | Natural gas (MMcf/d) | | 1,614 | | | 1,598 | | | 1,462 | | | 1,606 | | | 1,451 | | | | Crude oil and NGLs (bbl/d) | | 872,718 | | | 979,352 | | | 921,895 | | | 925,741 | | | 930,286 | | | | Equivalent production (BOE/d) (4) | | 1,141,739 | | | 1,245,703 | | | 1,165,487 | | | 1,193,434 | | | 1,172,120 | | |

Footnotes 1 through 3 describe non-GAAP financial measures that the Company considers key in evaluating its performance. Derivations of these measures are discussed in the "Advisory" section of this press release.

(1)Adjusted net earnings (loss) from operations demonstrates the Company's ability to generate after-tax operating earnings from its core business areas. (2)Adjusted funds flow demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. (3)Net capital expenditures provides an understanding of the Company's capital spending activities in comparison to the Company's annual capital budget. (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.

Net earnings of $1,551 million and adjusted net earnings from operations of $1,480 million were realized in Q2/21, a significant increase from Q2/20 levels, primarily as a result of higher realized pricing and effective and efficient operations.

Cash flows from operating activities were $2,940 million in Q2/21.

The strength of our assets, supported by safe, effective and efficient operations demonstrate our ability to generate significant and sustainable free cash flow over the long-term, making Canadian Natural's business unique, robust and sustainable.

As a result, Canadian Natural generated strong quarterly adjusted funds flow of $3,049 million in Q2/21, an increase of $2,634 million from Q2/20 levels, primarily as a result of higher realized pricing and effective and efficient operations.

Year to date in 2021 to the end of July, Canadian Natural has delivered effective and efficient operations and by remaining nimble has executed on a number of strategic initiatives that have resulted in increasing free cash flow generation and long term shareholder value. These strategic initiatives are outlined below:

On June 30, 2021,the Company and the equity partners together with the toll payers, agreed to optimize the structure of NWRP, to better align the commercial interests of the equity partners and the toll payers. Under this Optimization Transaction, NWRP repaid the Company's subordinated debt advance of $555 million and the Company received a $400 million distribution from NWRP.

The Company owns approximately 6.4 million shares of Inter Pipeline Ltd. ("IPL"), which is currently subject to a third-party offer to purchase, with the current value of these shares being approximately $130 million to the Company, provided that all conditions of the third-party offer for IPL shares are satisfied.

As a result of these strategic initiatives Canadian Natural will realize cash proceeds of approximately $1,085 million, which will be allocated to our four pillars of capital allocation; balance sheet strength, returns to shareholders, economic resource development and opportunistic acquisitions. In this regard the Company has and will utilize a portion of these proceeds as follows:

Year to date, the Company has completed three opportunistic acquisitions. The first two acquisitions consisted of natural gas assets located in the Montney region of British Columbia, with aggregate production of approximately 11,100 BOE/d (consisting of 63 MMcf/d and 600 bbl/d of NGLs), approximately 107,000 acres of Montney lands, and related processing infrastructure with approximately 140 MMcf/d of capacity. These two acquisitions build on the Company's expansive natural gas operations in northeastern British Columbia increasing our total Montney lands to approximately 1.3 million acres. The third acquisition consisted of a 5% net carried interest on an existing Canadian Natural oil sands lease, from which all of our Horizon production is derived. Total cash consideration paid for these acquisitions was approximately $450 million and our 2021 capital expenditures will be increased by this amount.

To further invest in value adding opportunities on our vast asset base, the Company plans to increase its 2021 capital budget by $275 million, excluding acquisitions, to approximately $3.48 billion, including approximate additions of $120 million related to conventional and unconventional assets, $110 million related to long life low decline assets and additional $45 million related to abandonment and reclamation activities. The additional activities in the second half of 2021 are as follows:

Additional conventional and unconventional capital of approximately $120 million primarily relates to additional drilling of 78 crude oil wells and development activities, with a targeted capital efficiency from these expenditures of approximately $8,400 per flowing BOE and a 2021 exit rate of approximately 14,000 BOE/d.

Additional long life low decline asset capital of approximately $110 million, consisting of approximately $35 million for construction of three new pads at Primrose, two new pads at Kirby North and two new pads at Kirby South, which will support production additions in 2022 and beyond. At Horizon, the additional capital of approximately $75 million is primarily related to additional scopes completed and the extended turnaround in Q2/21.

Our area based abandonment programs have been highly cost effective and as a result incremental capital is being allocated to complete an additional 800 well abandonments over our initial 2021 target of 2,500, as we continue to prudently manage our liabilities and environmental footprint.

These additional expenditures will result in an estimated increase of 1,500 jobs across Alberta, British Columbia and Saskatchewan.

These additional expenditures, effective and efficient operations, strong operational and drilling performance, development activities, and acquisitions have resulted in increased annual corporate production.

Corporate annual natural gas production is targeted to be above the top end of the previously issued range in 2021, with annual production levels now targeted between 1,680 MMcf/d to 1,720 MMcf/d, with targeted year end exit volumes in excess of 1,800 MMcf/d.

Corporate annual liquids production is targeted to be above the mid-point of the previously issued range in 2021, with annual production levels now targeted between 940 Mbbl/d to 980 Mbbl/d.

Corporate annual production is targeted to be above the mid-point of the previously issued range in 2021, with annual production levels now targeted between 1,220 MBOE/d to 1,267 MBOE/d.

Annual 2021 free cash flow is targeted to be robust at a range of $7.2 billion to $7.7 billion using an annual average WTI of US$66/bbl, after dividends and budgeted capital expenditures, excluding net acquisitions.

Free cash flow generation has been significant in 2021 and the Company's balance sheet continues to strengthen, providing the Board of Directors the confidence to approve a more defined free cash flow allocation policy in accordance with the Company's four pillars of capital allocation. Effective July 1, 2021 under the new policy, the Company targets to allocate free cash flow as follows:

Increased returns to shareholders through incremental share repurchases of approximately 1% of common shares outstanding or approximately 11 million shares per quarter.

Once the Company reaches $15.0 billion in absolute debt, currently targeted to occur in Q4/21, 50% of free cash flow is targeted to be allocated to share repurchases under the Company's NCIB, with the remaining 50% allocated to further strengthening of the Company's balance sheet.

In Q2/21, reflecting the strength of our effective and efficient operations and our high quality, long life low decline asset base, Canadian Natural generated robust quarterly free cash flow of $1,535 million, after dividend payments of $557 million and net capital expenditures of $957 million, excluding acquisitions.

Canadian Natural executed on our commitment to further strengthen our balance sheet with strong financial results in Q2/21, reducing net debt by approximately $1.7 billion from Q1/21 levels. Net debt has decreased by approximately $3.1 billion in the first two quarters of 2021.

In Q2/21 the Company fully repaid and retired the remaining outstanding balance on its $2,125 million non-revolving term loan. The facility was originally due in June 2022.

Subsequent to quarter end the Company exercised a 90-day par call option on its US$500 million 3.45% notes originally due November 15, 2021 with repayment to occur on August 16, 2021.

Returns to shareholders year to date in 2021 have been significant, as Canadian Natural has returned approximately $1.5 billion by way of dividends and share repurchases up to and including August 4, 2021.

In March 2021, the Company declared a quarterly dividend of $0.47 per share, an increase of 11% from the previous level of $0.425 per share, marking 2021 as the Company's 21st consecutive year of dividend increases, reflecting the Board of Directors' confidence in Canadian Natural's strength and the robustness of the Company's assets and its ability to generate significant and sustainable free cash flow.

Subsequent to quarter end the Company declared a quarterly dividend of $0.47 per share, payable on October 5, 2021.

In March 2021, the Board of Directors authorized management to repurchase shares under a NCIB to approximately offset options exercised throughout the coming year, in order to minimize or eliminate dilution to shareholders.

Share repurchases for cancellation in 2021 up to and including August 4, 2021 total 11,044,400 common shares at a weighted average price of $42.00.

In Q2/21 the Company continued its focus on safe, effective and efficient operations averaging quarterly production volumes of 1,141,739 BOE/d, decreases of 2% and 8% from Q2/20 and Q1/21 levels respectively. The decreases from prior periods are primarily as a result of the timing of the planned turnaround at our Oil Sands Mining and Upgrading operations, in particular at Horizon and de-coking at the Scotford Upgrader ("Scotford") completed in the quarter.

Corporate natural gas production averaged 1,614 MMcf/d in Q2/21, an increase of 10% from Q2/20 levels and comparable with Q1/21 levels. The increase from Q2/20 was primarily as a result of acquired production in Q4/20 and strong drilling results, partially offset by natural field declines and the temporary full quarter shutdown of the Pine River Gas Plant, which resumed operations on July 24, 2021, restoring production of approximately 100 MMcf/d.

Corporate natural gas operating costs in Q2/21 averaged $1.19/Mcf, an increase of 3% from Q2/20 levels and a decrease of 6% from Q1/21 levels. The increase from Q2/20 was primarily due the increase in electricity costs. The decrease from Q1/21 primarily reflects the impact of seasonality.

Quarterly liquids production volumes averaged 872,718 bbl/d in Q2/21, decreases of 5% and 11% from Q2/20 and Q1/21 levels respectively, primarily as a result of the timing of the planned turnaround at Horizon and de-coking at Scotford completed in the quarter.

Canadian Natural's North America E&P liquids production, including thermal in situ was strong in Q2/21 averaging 478,314 bbl/d, an increase of 16% from Q2/20 levels and comparable with Q1/21 levels.

North American E&P liquids, including thermal in situ, operating costs averaged $12.82/bbl (US$10.44/bbl) in Q2/21, an increase of 10% from Q2/20 levels and comparable with Q1/21 levels of $12.80/bbl. The increase in operating costs from Q2/20 was primarily due to increased energy costs.

Canadian Natural's thermal in situ production averaged 258,551 bbl/d in Q2/21, an increase of 21% over Q2/20 levels and a decrease of 3% from Q1/21 levels.

Thermal in situ assets operating costs averaged $11.78/bbl (US$9.59/bbl) in Q2/21, increases of 16% and 3% from Q2/20 and Q1/21 levels respectively. The increase in operating costs from Q2/20 was primarily due to increased energy costs and the increase from Q1/21 was primarily as a result of lower volumes in Q2/21 from Q1/21 levels.

The Company's world class Oil Sands Mining and Upgrading assets averaged quarterly production of 361,707 bbl/d of Synthetic Crude Oil ("SCO") in Q2/21, decreases of 22% and 23% from Q2/20 and Q1/21 levels respectively due to the timing of the planned turnaround at Horizon and de-coking at Scotford, which were both completed in the second quarter of 2021.

The Company's focus on continuous improvement initiatives delivered high utilization and reliability at the Company's Oil Sands Mining and Upgrading assets. As a result, record monthly SCO production of approximately 495,100 bbl/d was achieved in June 2021, an increase from the previous record of approximately 490,800 bbl/d of SCO achieved in December 2020.

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.

Canadian Natural Resources Limited Announces 2021 Second Quarter Results

QUARTERLY HIGHLIGHTS

OPERATIONS REVIEW AND CAPITAL ALLOCATION

Earlier from King Global Ventures Inc.