Mr. Steve Laut reports
CANADIAN NATURAL RESOURCES LIMITED ANNOUNCES 2012 FIRST QUARTER RESULTS
Canadian Natural Resources Ltd. has released its financial results for the first quarter of 2012.
Commenting on first quarter results, Canadian Natural's vice-chairman John Langille stated: "Our balanced asset base and production mix are key components to our strategy of creating long-term shareholder value throughout the commodity price cycles. We exited the first quarter of 2012 in a strong financial position and continue to have a high degree of flexibility in our capital allocation. This drives our ability to transition to more sustainable, longer-life production delivered from our existing asset base. The strength of our portfolio is evident as we target to grow production from the fourth quarter of 2011 to the fourth quarter of 2012 by 10 per cent while spending within cash flow and allocating more than half our 2012 capital budget to projects for future production."
Steve Laut, president of Canadian Natural, said: "Production was successfully restarted at Horizon on March 13, 2012. The third ore preparation plant and associated hydro-transport unit were fully integrated into operations in the quarter and contributed to solid production of approximately 111,500 barrels per day in April. Our thermal in situ operations are heading into a production cycle following completion of the steaming cycle and we are targeting a strong ramp-up in production through to the end of the year. In addition, our primary heavy crude oil achieved record quarterly production and Canadian light crude oil and natural gas liquids will continue to be strong drivers of value growth in 2012."
QUARTERLY HIGHLIGHTS
(in millions of dollars except per-share amounts)
Three months ended
Mar 31, Dec. 31, Mar 31,
2012 2011 2011
Net earnings $ 427 $ 832 $ 46
Per common share
Basic $ 0.39 $ 0.76 $ 0.04
Diluted $ 0.39 $ 0.76 $ 0.04
Adjusted net earnings from
operations (1) $ 300 $ 972 $ 228
Per common share
Basic $ 0.27 $ 0.89 $ 0.21
Diluted $ 0.27 $ 0.88 $ 0.21
Cash flow from operations (2) $ 1,280 $ 2,158 $ 1,074
Per common share
Basic $ 1.16 $ 1.97 $ 0.98
Diluted $ 1.16 $ 1.96 $ 0.97
Capital expenditures, net of
dispositions $ 1,596 $ 1,909 $ 1,694
Daily production, before
royalties
Natural gas (mmcf/d) 1,302 1,280 1,256
Crude oil and NGLs (bbl/d) 395,461 444,286 356,988
Equivalent production (boe/d)(3) 612,279 657,599 566,231
(1) Adjusted net earnings from operations are a non-generally accepted
accounting principles measure that the company utilizes to evaluate
its performance. The derivation of this measure is discussed in the
management's discussion and analysis.
(2) Cash flow from operations is a non-GAAP measure that the company
considers key as it demonstrates the company's ability to finance
capital reinvestment and debt repayment. The derivation of this
measure is discussed in the management's discussion and analysis.
(3) A barrel of oil equivalent is derived by converting 6,000 cubic feet
of natural gas to one barrel of crude oil. This conversion may be
misleading, particularly if used in isolation, since the 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. In comparing the value ratio using current crude oil
prices relative to natural gas prices, the conversion ratio may
be misleading as an indication of value.
Total crude oil and natural gas liquids (NGLs) production averaged 395,461 barrels per day in the first quarter of 2012, representing an increase of 11 per cent over the first quarter of 2011 and a decrease of 11 per cent from the fourth quarter of 2011. The increase in production over the first quarter of 2011 reflects the successful results of primary heavy crude oil and light crude oil drilling programs and increased production from Horizon partially offset by the timing of steaming cycles in bitumen (thermal in situ). The decrease in production from the fourth quarter of 2011 was a result of the temporary suspension of production at Horizon. On Feb. 5, 2012, production at Horizon was suspended for unplanned maintenance on the fractionating unit. Production for the quarter exceeded previously issued guidance as a result of resuming production on March 13, 2012, earlier than originally anticipated.
Total natural gas production for the first quarter of 2012 was 1,302 million cubic feet per day, representing an increase of 4 per cent over the first quarter of 2011 and 2 per cent over the fourth quarter of 2011. The increase in production reflects the impact of natural-gas-producing properties acquired during 2011 and strong results from the company's modest, liquids-rich drilling program offset by natural declines.
Canadian Natural generated quarterly cash flow from operations of $1.28-billion compared with $1.07-billion in the first quarter of 2011 and $2.16-billion in the fourth quarter of 2011. The increase in cash flow from the first quarter of 2011 was primarily related to higher sales volumes from the company's North America crude oil, NGLs and oil sands mining operations. The decrease in cash flow from the fourth quarter of 2011 was primarily related to lower synthetic crude oil (SCO) sales volumes, lower crude oil and NGLs netbacks and lower natural gas prices.
AECO benchmark natural gas prices were down 27 per cent in the first quarter of 2012 from the fourth quarter of 2011. This reduction in pricing was responsible for approximately $75-million less after-tax cash flow in the first quarter of 2012. The lower current strip AECO natural gas prices for full year 2012 when compared with original budget targets an after-tax cash flow reduction of approximately $550-million. As a result, the company has reduced natural gas capital expenditures by $190-million from original budget and has reduced full-year targeted drilling to 36 net wells.
Adjusted net earnings from operations for the quarter was $300-million, compared with adjusted net earnings of $228-million in the first quarter of 2011 and $972-million in the fourth quarter of 2011. Changes in adjusted net earnings reflect the changes in cash flow from operations.
North America light crude oil and NGLs quarterly production increased 19 per cent compared with the first quarter of 2011 and increased 7 per cent compared with the fourth quarter of 2011 as a result of a successful light oil drilling program and increased liquid recoveries from Septimus following the completion of a tie-in to a deep-cut facility.
Primary heavy crude oil production increased 24 per cent compared with the first quarter of 2011 and 8 per cent compared with the fourth quarter of 2011, achieving record quarterly production exceeding 120,000 barrels per day. Canadian Natural targets to drill approximately 815 net primary heavy crude oil wells in 2012 and increase production by 19 per cent over 2011, 3 per cent above original expectations primarily due to better than expected results from Woodenhouse. Woodenhouse is a new, non-traditional primary heavy crude oil area located 75 kilometres north of Pelican Lake.
At Horizon, the third ore preparation plant (OPP) and associated hydro-transport unit were successfully integrated into operations in the quarter. The third OPP is expected to increase production reliability going forward by allowing the company to maintain steady feedstock to the upgrader with two of the three OPPs continually on stream. SCO production in April, 2012, averaged approximately 111,500 barrels per day.
The WCS heavy crude oil differential as a percentage of WTI averaged 21 per cent in the first quarter of 2012. The WCS heavy differential widened in the first quarter of 2012 from the fourth quarter of 2011 as a result of planned and unplanned maintenance at key refineries in the United States and Canada. The WCS heavy crude oil differential as a percent of WTI widened to 29 per cent in March and 32 per cent in April. As expected, the differential for May narrowed to 19 per cent and indications in June are for further tightening to approximately 14 per cent as refineries come back on stream.
Subsequent to the first quarter of 2012, Toronto Stock Exchange accepted notice of Canadian Natural's renewal of its normal course issuer bid through the facilities of TSX and the New York Stock Exchange. The notice provides that Canadian Natural may, during the 12-month period commencing April 9, 2012, and ending April 8, 2013, purchase for cancellation on the TSX and the NYSE up to 55,027,447 shares.
Canadian Natural purchased 692,200 common shares in the quarter for cancellation at a weighted average price of $33.11 per common share. Subsequent to the quarter, the company purchased a further 521,100 common shares at a weighted average price of $32.21 per common share.
Declared a quarterly cash dividend on common shares of 10.5 cents per common share payable July 1, 2012.
Governance update
As part of the company's commitment to good governance practices, the board of directors has appointed ambassador Gordon D. Giffin as independent lead director concurrently with the company's annual and special meeting of shareholders on May 3, 2012.
Operations review and capital allocation
In order to facilitate efficient operations, Canadian Natural focuses its activities in core regions where it can own a substantial land base and associated infrastructure. Land inventories are maintained to enable continuous exploitation of play types and geological trends, greatly reducing overall exploration risk. By owning associated infrastructure, the company is able to maximize utilization of its production facilities, thereby increasing control over production costs. Further, the company maintains large project inventories and production diversification among each of the commodities it produces: light and medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal in situ), SCO (herein collectively referred to as crude oil), natural gas and NGLs. A large diversified project portfolio enables the effective allocation of capital to higher return opportunities.
OPERATIONS REVIEW
Three months ended March 31,
2012 2011
Drilling activity (number of wells) Gross Net Gross Net
Crude oil 300 278 290 279
Natural gas 21 19 28 25
Dry 6 6 17 16
Subtotal 327 303 335 320
Stratigraphic test/service wells 584 584 502 501
Total 911 887 837 821
Success rate (excluding
stratigraphic test/service wells) 98% 95%
NORTH AMERICA EXPLORATION AND PRODUCTION
Three months ended
North America crude oil and NGLs March 31, Dec. 31, March 31,
2012 2011 2011
Crude oil and NGLs production (bbl/d) 305,613 291,839 290,130
Net wells targeting crude oil 284 345 293
Net successful wells drilled 278 330 279
Success rate 98% 96% 95%
North America crude oil and NGLs production were within previously issued guidance for the quarter as a result of efficient and effective operations. Production averaged 305,613 barrels per day in the first quarter of 2012, representing an increase of 5 per cent from the first quarter of 2011 and the fourth quarter of 2011. The increase in production was a result of successful primary heavy and light crude oil drilling programs.
Primary heavy crude oil production increased 24 per cent compared with the first quarter of 2011 and 8 per cent compared with the fourth quarter of 2011, achieving record quarterly production exceeding 120,000 barrels per day. Canadian Natural targets to drill approximately 815 net primary heavy crude oil wells in 2012 and increase production by 19 per cent over 2011, 3 per cent above original expectations primarily due to better-than-expected results from Woodenhouse. Woodenhouse is a new, non-traditional primary heavy crude oil area located 75 kilometres north of Pelican Lake.
North America light crude oil and NGLs quarterly production increased 19 per cent compared with the first quarter of 2011 and increased 7 per cent compared with the fourth quarter of 2011 as a result of a successful light oil drilling program and increased liquid recoveries from Septimus following the completion of a tie-in to a deep-cut facility. North America light crude oil and NGLs is a significant part of Canadian Natural's balanced portfolio, averaging approximately 66,000 barrels per day in the quarter.
At Pelican Lake, reservoir performance continues to be positive. The company is constructing a 25,000-barrel-per-day battery and targets to drill eight injectors and 78 producers in 2012. The company targets to ultimately recover 561 million barrels (363 million barrels of proved plus probable reserves and 198 million barrels of contingent resources) of additional crude oil from this world-class crude oil pool.
As expected, thermal in situ production averaged approximately 80,000 barrels per day in the first quarter of 2012 as a result of the timing of steaming cycles. Production is targeted to ramp up in the second quarter as pads re-enter the production cycle. The company targets to increase production by 8 per cent in 2012 over 2011.
Canadian Natural has a robust portfolio of steam-assisted gravity drainage (SAGD) projects with the potential to grow thermal in situ production to approximately 480,000 barrels per day of capacity. Each project will be used as a template for the projects that follow, allowing the company to continually refine development and optimize performance. The company targets to add 40,000 to 60,000 barrels per day of production every two to three years through the development of these projects.
Kirby South phase 1 remains on cost and on schedule with first steam-in targeted for late 2013. Drilling is progressing on the fourth of seven pads with wells confirming geological expectations. The total project was 42 per cent complete at the end of the quarter.
Construction preparation work is under way on Kirby North phase 1, including construction of the main access road and clearing of the plant site; first steam-in is targeted for 2016.
The regulatory approval application for Grouse was submitted in the quarter with first steam-in targeted for 2017.
Canadian Natural has an active stratigraphic test well drilling program to delineate the reservoir characteristics for future projects. The company drilled 355 stratigraphic test and observation wells in the quarter.
In the second quarter of 2012, the company plans to drill 44 net thermal in situ wells and 182 net crude oil wells, excluding stratigraphic test and service wells.
North America crude oil and NGLs operating costs increased to $15.40 per barrel from $12.28 per barrel in the first quarter of 2011 and $14.32 per barrel in the fourth quarter of 2011. The increase was primarily due to higher primary heavy crude oil operating costs as a result of increased trucking costs, facility-treating constraints (Lindbergh expansion targeted for the third quarter of 2012), drilling more wells than budgeted in the first quarter of 2012, seasonality and the impact of greater than forecasted production from Woodenhouse. Notwithstanding these the first quarter of 2012 costs, 2012 full-year operating cost guidance for North America crude oil and NGLs remains at $11 per barrel to $13 per barrel.
NORTH AMERICA NATURAL GAS
Three months ended
March 31, Dec. 31, March 31,
2012 2011 2011
Natural gas production (mmcf/d) 1,281 1,255 1,225
Net wells targeting natural gas 19 29 26
Net successful wells drilled 19 27 25
Success rate 100% 93% 96%
North America natural gas production for the quarter averaged 1,281 million cubic feet per day, representing an increase of 5 per cent from the first quarter of 2011 and an increase of 2 per cent from the fourth quarter of 2011. The increase in production was a result of natural-gas-producing properties acquired in 2011 and strong results from the company's modest, liquids-rich drilling program offset by natural declines.
AECO benchmark natural gas prices were down 27 per cent in the first quarter of 2012 from the fourth quarter of 2011. This reduction in pricing was responsible for approximately $75-million less after-tax cash flow in the first quarter of 2012. The lower current strip AECO natural gas prices for full year 2012 when compared with original budget targets an after-tax cash flow reduction of approximately $550-million. As a result, the company has reduced natural gas capital expenditures by $190-million from original budget and has reduced full-year targeted drilling to 36 net wells.
In the first quarter of 2012, the company has shut in approximately 16 million cubic feet per day of natural gas in addition to the approximately 20 million cubic feet per day shut in in the fourth quarter of 2011. The company has a strategic plan to shut in certain additional natural gas volumes of approximately 22 million cubic feet per day if natural gas prices remain below economic thresholds in those areas.
At Septimus, the plant expansion remains on track and on budget. The expansion will increase sales capacity to 110 million cubic feet per day and approximately 11,000 barrels per day of liquids. The company targets to drill 10 net natural gas wells in 2012, reflecting a reduction of seven net natural gas wells from the previous forecast.
North America natural gas operating costs increased to $1.33 per thousand cubic foot from $1.16 per thousand cubic foot in the first quarter of 2011 and $1.12 per thousand cubic foot in the fourth quarter of 2011. The increase was a result of seasonal winter costs and high operating cost properties acquired in the fourth quarter of 2011. Canadian Natural expects operating costs to decline once acquired properties have been fully integrated with existing operations. Two thousand twelve full year operating cost guidance for North America natural gas remains at $1.10 per thousand cubic foot to $1.20 per thousand cubic foot.
INTERNATIONAL EXPLORATION AND PRODUCTION
Three months ended
March 31, Dec. 31, March 31,
2012 2011 2011
Crude oil production (bbl/d)
North Sea 23,046 26,769 34,101
Offshore Africa 20,712 22,726 25,488
Natural gas production (mmcf/d)
North Sea 3 6 9
Offshore Africa 18 19 22
Net wells targeting crude oil 0.0 0.0 0.9
Net successful wells drilled 0.0 0.0 0.0
Success rate 0% 0% 0%
North Sea crude oil production averaged 23,046 barrels per day during the first quarter of 2012 representing a decrease of 32 per cent compared with the first quarter of 2011 and a decrease of 14 per cent compared with the fourth quarter of 2011. The decrease from the first quarter of 2011 was a result of suspended operations at Banff/Kyle due to damage suffered to the floating production storage offloading vessel (FPSO) from severe storm conditions.
In the fourth quarter of 2011, the Banff/Kyle FPSO was removed from the field after suffering damage from severe storm conditions. The company is assessing the extent of the damage including associated costs. The incident is an insurable event for both property damage and business interruption insurance.
Production in offshore Africa averaged 20,712 barrels per day during the first quarter of 2012, representing a decrease of 19 per cent compared with the first quarter of 2011 and a decrease of 9 per cent compared with the fourth quarter of 2011. The decrease from the first quarter of 2011 was a result of natural field declines. Infill drilling at the Espoir field is targeted to begin in late 2012, targeting additional production of 6,500 barrels of oil equivalent per day at the completion of this drilling program.
Subsequent to the quarter, Canadian Natural acquired a 36-per-cent interest in block 514 in Cote d'Ivoire. This block's areal extent is approximately 1,250 square kilometres and has an initial three-year term in which 3-D seismic data will be acquired and a well will be drilled. The company believes this block is prospective for deepwater channel/fan plays similar to recent discoveries in Ghana and elsewhere in offshore Africa.
North Sea and offshore Africa realized crude oil prices increased in the first quarter of 2012 by 7 per cent and 26 per cent, respectively, from the fourth quarter of 2011, partially as a result of the increase in the Brent benchmark pricing.
NORTH AMERICA OIL SANDS MINING AND UPGRADING -- HORIZON
Three months ended
March 31, Dec. 31, March 31,
2012 2011 2011
Synthetic crude oil production
(SCO) (bbd/d) 46,090 102,952 7,269
SCO production at Horizon averaged 46,090 barrels per day in the first quarter of 2012. The decrease from the fourth quarter of 2011 was due to the temporary suspension of production. On Feb. 5, 2012, production at Horizon was suspended for unplanned maintenance on the fractionating unit. Production for the quarter exceeded previously issued guidance as a result of resuming production on March 13, 2012, earlier than originally anticipated. Production in April, 2012, averaged approximately 111,500 barrels per day.
The third OPP and associated hydro-transport unit were successfully integrated into operations in the quarter. The third OPP is expected to increase production reliability going forward by allowing the company to maintain steady feedstock to the upgrader with two of the three OPPs continually on stream.
Canadian Natural's staged expansion to 250,000 barrels per day of SCO production capacity continues to progress on track. Thus far, the company's strategy to break the expansion down into smaller, more focused projects has proven to be effective. The project capital budget for Horizon for 2012 is $1.88-billion and projects currently under construction are trending at or below cost estimates.
MARKETING
Three months ended
March 31, Dec. 31, March 31,
2012 2011 2011
Crude oil and NGLs pricing
WTI benchmark price (US$/bbl)(1) $ 102.94 $ 94.02 $ 94.25
Western Canadian Select blend
differential from WTI (%) 21% 11% 24%
SCO price (US$/bbl) (2) $ 98.11 $ 102.95 $ 95.24
Average realized pricing
before risk management (C$/bbl)(3) $ 80.08 $ 85.28 $ 67.96
Natural gas pricing
AECO benchmark price (C$/GJ) $ 2.39 $ 3.29 $ 3.57
Average realized pricing
before risk management (C$ per mcf) $ 2.47 $ 3.50 $ 3.83
(1) WTI refers to West Texas Intermediate.
(2) SCO refers to synthetic crude oil.
(3) Excludes SCO.
In the first quarter of 2012, WTI pricing increased by 9 per cent from the first quarter of 2011 and the fourth quarter of 2011, partially due to supply and demand imbalances.
The WCS heavy crude oil differential as a percentage of WTI averaged 21 per cent in the first quarter of 2012. The WCS heavy differential widened in the first quarter of 2012 from the fourth quarter of 2011 as a result of planned and unplanned maintenance at key refineries in the United States and Canada. The WCS heavy crude oil differential as a percentage of WTI widened to 29 per cent in March and 32 per cent in April. As expected, the differential for May narrowed to 19 per cent and indications in June are for further tightening to approximately 14 per cent as refineries come back on stream.
During the first quarter of 2012, Canadian Natural contributed 152,000 barrels per day of its heavy crude oil stream to the WCS blend. The company is the largest contributor of the WCS blend, accounting for 51 per cent.
AECO benchmark natural gas prices decreased 33 per cent compared with the first quarter of 2011 and 27 per cent compared with the fourth quarter of 2011 due to supply and demand imbalances in North America.
Redwater upgrading and refining
Supporting and participating in projects that add incremental conversion capacity is a key part of the company's marketing strategy. Canadian Natural, in a partnership agreement with North West Upgrading Inc., continues to move forward with detailed engineering regarding the construction and operation of a bitumen refinery near Redwater, Alta. Project development is dependent upon completion of detailed engineering and final project sanction by the partnership and its partners, and approval of the final tolls. Board sanction is currently targeted in 2012.
Financial review
The financial position of Canadian Natural remains strong as the company continues to implement proven strategies and focus on disciplined capital allocation. Canadian Natural's cash flow generation, credit facilities, its diverse asset base and related capital expenditure programs, and commodity hedging policy all support a flexible financial position and provide the right financial resources for the short, middle and long term. Supporting this are:
- A large and diverse asset base spread over various commodity types; average production amounted to 612,279 barrels of oil equivalent per day in the first quarter of 2012 with over 96 per cent of production located in G8 countries;
- A strong balance sheet with debt-to-book capitalization of 26 per cent and debt to EBITDA (earnings before interest, taxes, depreciation and amortization) of 1.0. At March 31, 2012, long-term debt amounted to $8.2-billion compared with $8.5-billion at March 31, 2011;
- Canadian Natural maintains significant financial stability and liquidity represented by approximately $4.1-billion in available unused bank lines at the end of the quarter;
- Canadian Natural's commodity hedging program protects investment returns, ensures continuing balance sheet strength and supports the company's cash flow for its capital expenditures programs; the company has hedged approximately 50 per cent of the remaining three quarters of forecasted 2012 crude oil volumes through a combination of puts and collars.
- Subsequent to the first quarter of 2012, Toronto Stock Exchange accepted notice of Canadian Natural's renewal of its normal course issuer bid through the facilities of Toronto Stock Exchange and the New York Stock Exchange; the notice provides that Canadian Natural may, during the 12-month period commencing April 9, 2012, and ending April 8, 2013, purchase for cancellation on the TSX and the NYSE up to 55,027,447 shares;
- Canadian Natural purchased 692,200 common shares in the quarter for cancellation at a weighted average price of $33.11 per common share; subsequent to the quarter, the company purchased a further 521,100 common shares at a weighted average price of $32.21 per common share;
- Declared a quarterly cash dividend on common shares of 10.5 cents per common share payable on July 1, 2012.
Outlook
The company forecasts 2012 production levels before royalties to average between 1,220 million and 1,260 million cubic feet per day of natural gas, and between 440,000 and 480,000 barrels per day of crude oil and NGLs. Production guidance for the second quarter of 2012, before royalties, is forecast to average between 1,250 million and 1,270 million cubic feet per day of natural gas, and between 453,000 and 482,000 barrels per day of crude oil and NGLs. Detailed guidance on production levels, capital allocation and operating costs can be found on the company's website.
We seek Safe Harbor.
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