OilVoice - CNR Announces 2009 Third Quarter Results and 2010 Budget

CNR Announces 2009 Third Quarter Results and 2010 Budget

Thursday, November 05, 2009

Canadian Natural Resources Limited has announced 2009 third quarter results and 2010 budget.

Canadian Natural's Chairman, Allan Markin, stated, "The third quarter was strong for Canadian Natural as we met all of our production targets, with the exception of Horizon, which encountered certain unexpected challenges during the ramp-up of its production levels. The challenges at Horizon are manageable and our teams are doing a great job in identifying and mitigating these issues. We continue to execute our defined growth plan in 2010, with all areas providing positive free cash flow in the range of $2.6 to $3.0 billion while still delivering 7% production growth."

Canadian Natural's Vice-Chairman, John Langille, continued, "Our balance sheet continued to strengthen during the quarter as we completed the retirement of the $2.3 billion non-revolving syndicated acquisition credit facility, with all payments made from internally generated cash flow. This brings our debt to book capitalization to 36%, essentially at the low end of our targeted range. Our debt to EBITDA is 1.6x, which is below our targeted range. Crude oil prices and the heavy oil differential remained favorable, and along with our hedging program, helped to mitigate the impact of weak natural gas prices. Looking to 2010, overall budget capital spending will be increased over 2009 levels but remains well within targeted cash flow, resulting in even further balance sheet strength."

Steve Laut, President and Chief Operating Officer of Canadian Natural concluded, "Our 2010 budget represents a prudent yet flexible approach to developing our world class assets. For 2010, budgeted capital spending is targeted to increase 26% over 2009 with over 80% of our capital allocated to the development of our crude oil assets. We will continue our disciplined, step-wise development of our vast heavy crude oil properties and start to unlock the significant EOR potential of our light crude oil properties in Canada. We will complete the Olowi development in West Africa and resume platform drilling in the North Sea. Spending at Horizon for the coming year is focused on Tranche 2 of Phases 2/3 and features a significant expenditure on developing a detailed cost estimate for future expansions. This capital budget provides us with the flexibility to react to fluctuations within the business environment. If economic conditions improve significantly during the coming year or other opportunities arise, we have the assets and the ability to focus capital on the projects that provide the greatest value and highest returns."

Highlights

• Total crude oil and NGLs production for Q3/09 was 359,269 bbl/d, an increase of 17% from Q3/08 volumes. Higher volumes in Q3/09 reflect production increases from Horizon Oil Sands Mining and Upgrading ("Horizon"), Baobab and Olowi offset by the temporary curtailment of steaming/production at Primrose East and planned maintenance in the North Sea.
• Natural gas production for Q3/09 averaged 1,293 mmcf/d, down 13% from Q3/08, as expected. The decrease in volumes for Q3/09 from previous quarters reflects the continuing reallocation of capital towards higher return crude oil projects.
• Quarterly cash flow from operations was $1,506 million, an increase of 10% from the previous quarter and a decrease of 17% from Q3/08. The increase from Q2/09 reflects higher crude oil price realizations partially offset by lower natural gas price realizations and lower natural gas sales volumes. The decrease from Q3/08 reflects lower crude oil and natural gas price realizations, partially offset by higher crude oil production.
• Quarterly net earnings and adjusted net earnings for Q3/09 was $658 million.
• Horizon production averaged 66,907 bbl/d of Synthetic Crude Oil ("SCO") for Q3/09 up from 59,599 bbl/d of SCO average production in Q2/09. The volumes were less than targeted due to a number of unforeseen production challenges that arose mid-way through the third quarter.
• Declared a quarterly cash dividend on common shares of $0.105 per common share payable January 1, 2010.

Operations

North America
• Q3/09 North America natural gas production, as expected, decreased 14% from Q3/08 and 4% from Q2/09, reflecting natural declines in base production and the Company's strategic decision to reduce spending on natural gas drilling due to stronger economics in crude oil projects.
• Canadian Natural targeted 17 net natural gas wells in Q3/09, including 2 wells in Northeast British Columbia, 8 wells in the Northern Plains region, 6 wells in Northwest Alberta, and 1 well in the Southern Plains region.
• Planned drilling activity for Q4/09 includes 25 net natural gas wells. In light of current natural gas economics, including pricing and the impact of Alberta's royalty regime, the Company continues to focus on land expiries, competitive drainage issues and advancing development of key resource projects, such as those identified in the Montney formation of British Columbia.
• Q3/09 North America crude oil and NGLs production decreased 7% from Q3/08 and 4% from Q2/09 levels. The majority of the decline in production volumes was in thermal crude oil reflecting Primrose North and South normal steam/production cycles, and the temporary curtailment of the thermal steam/production cycle at Primrose East.
• As previously disclosed, in Q1/09 after initial steaming at Primrose East, Canadian Natural discovered oil seepage at surface on one of the new multi well pads. A significant amount of investigative work was completed and the Company formalized and received approval for a plan to begin diagnostic steaming which commenced in August of this year. The Company continues to proactively work with the regulators to identify and resolve the issue and facilitate the prudent return of Primrose East to normal operations.
• Canadian Natural is continuing its proposed third phase of its defined thermal growth plan with development of the Kirby In-Situ Oil Sands Project. Kirby is located approximately 85 km northeast of Lac La Biche in the Regional Municipality of Wood Buffalo and has a targeted capacity of 45,000 bbl/d. The Company has filed its formal regulatory application documents for this project and is awaiting regulatory approval. Preliminary engineering is expected to commence in Q4/09. Upon completion of the engineering, Canadian Natural targets sanctioning of the project in late 2010.
• The development of new pads and conversion to tertiary recovery at Pelican Lake continued as expected throughout Q3/09. In Q3/09, the Company drilled 19 horizontal wells and plans an additional 19 horizontal wells throughout the remainder of 2009. Pelican Lake production averaged approximately 37,000 bbl/d for Q3/09.
• During Q3/09, drilling activity targeted 270 net crude oil wells including 217 wells targeting heavy crude oil, 19 wells targeting Pelican Lake crude oil, 24 wells targeting thermal crude oil and 10 wells targeting light crude oil.
• Planned drilling activity for Q4/09 includes 223 net crude oil wells, excluding stratigraphic test and service wells.

North Sea
• As expected, production was lower in Q3/09 compared to Q2/09 and Q3/08 due to planned maintenance shutdowns at all three of the Ninian platforms and at Tiffany. During the quarter, the Company continued to focus on lowering costs, high grading inventory and identifying infill drilling opportunities.

Offshore West Africa
• Offshore West Africa's crude oil production for Q3/09 was 35,021 bbl/d, an increase of 4% from Q2/09 and an increase of 44% over Q3/08, reflecting strong performance at Baobab and Espoir, and the commencement of operations at Olowi.
• During Q3/09, two new wells were tied in at the Olowi Field. Production to date from the first platform is below expectations. The Company is currently reviewing drilling results and production data to determine the root cause of well performance issues in order to develop appropriate remediation strategies and determine the impact on future production from the field and the impact on recoverable reserves. While the Company continues drilling the next scheduled platform, it is also reviewing ongoing/future development activities, which may result in changes to the scope of the overall plan.
• Progress on the Facility Upgrade Project at Espoir to increase processing capacity of the Floating Production Storage and Offtake Vessel ("FPSO") has reverted to the original schedule to accommodate effective utilization of the installation vessel at Olowi.

Oil Sands Mining and Upgrading
• Horizon production in Q3/09 averaged 66,907 bbl/d of SCO. Production was lower than guidance due to a number of challenges arising mid-way through the third quarter after the successful commencement of operations in the second quarter. The challenges related primarily to:

1. Premature equipment failures in the Ore Preparation Plant, Primary Upgrading, the Naphtha Recovery Unit and the Sulphur Plant.

2. Ore processing challenges arising in September resulting from a higher percentage of clays in the second mine bench and the lack of available blending materials from other mine benches associated with early mine operations.

• Canadian Natural believes it has largely resolved the matters associated with equipment and plant reliability. However, the Company remains cautious as it enters the first full winter of operations due to the challenges of operating in the northern Alberta environment. The processing issue from the higher percentage of clays will continue until additional mine benches are completed facilitating better blending of consistent ore qualities. This activity is currently underway with a focus on the third mine bench. The Company anticipates that it may take until the end of the second quarter of 2010 to fully resolve the ore blending issue.
• Engineering and procurement is underway for Tranche 2 of the Phase 2/3 expansion with a focus on increasing reliability and uptime. Tranches 3 and 4 of Phase 2/3 continue to be re-profiled. The Company continues to work on completing its lessons learned from the construction of Phase 1 and implementing these into the development of future expansions.

Marketing
• In Q3/09, the Western Canadian Select ("WCS") heavy crude oil differential as a percent of WTI was 15% compared to 13% in Q2/09. Heavy crude oil differentials remained narrow in Q3/09 due to stronger demand from the US refineries for heavy crude oil. The US refineries are experiencing weak refinery margins and this tends to increase the demand for the lowest cost crude oil, which is generally heavier crude oil.
• During Q3/09, the Company allocated approximately 124,000 bbl/d of its heavy crude oil streams to the WCS blend, optimizing the pricing for heavy crude oil. WCS is in the early stages of being recognized as a heavy crude oil benchmark for North America.
• The marketing strategy for Horizon SCO remains flexible. There is an active market for Horizon SCO and it has been favorably accepted by refiners.
• Natural gas pricing for Q3/09 continued to weaken compared to prior periods primarily due to supply/demand imbalances. North America natural gas inventory levels remained high during the third quarter due to an oversupply from US producers and lower industrial consumption.

Financial
• The Company continues to believe that its internally generated cash flow from operations supported by the implementation of its commodity hedge policy, the flexibility of its capital expenditure programs supported by its multi-year financial plans, its existing credit facilities and its ability to raise new debt on commercially acceptable terms, will provide sufficient liquidity to sustain its operations in the short, medium and long-term and support its growth strategy. A brief summary of the Company's strengths are:
- A diverse asset base geographically and by product - produced approximately 575,000 boe/d in Q3/09, comprised of approximately 38% natural gas and 62% crude oil - with approximately 93% of production located in G8 countries.
- Financial stability and liquidity - cash flow from operations of $1,506 million for Q3/09, with available unused bank lines of $1,261 million at September 30, 2009.
- Reduced volatility of commodity prices - a proactive commodity hedging program to reduce the downside risk of volatility in commodity prices supporting cash flow for its capital expenditure program.
- A strengthening balance sheet with debt to book capitalization of 36% which is at the low end of the Company's targeted range, and debt to EBITDA of 1.6 times, below the targeted range.
• In Q3/09 the $2.3 billion non-revolving syndicated acquisition credit facility was retired prior to its maturity in October 2009.
• Declared a quarterly cash dividend on common shares of C$0.105 per common share, payable January 1, 2010.

Outlook
• The Company forecasts 2009 production levels before royalties to average between 1,305 and 1,314 mmcf/d of natural gas and between 352,000 and 363,000 bbl/d of crude oil and NGLs. Q4/09 production guidance before royalties is forecast to average between 1,213 and 1,243 mmcf/d of natural gas and between 359,000 and 390,000 bbl/d of crude oil and NGLs.

Highlights of the 2010 Budget
• Equivalent production target of 586,000 to 643,000 boe/d before royalties, representing a midpoint increase of 7% from the midpoint of 2009 forecasted annual average production guidance. Exit to exit production is targeted to increase 17% in 2010.
• Crude oil and NGLs production target of 400,000 to 445,000 bbl/d before royalties, representing a midpoint increase of 18% from the midpoint of 2009 forecasted annual guidance. The increase reflects the ramp up of operations at the Horizon Oil Sands, the drilling of additional pads in Primrose North and Pelican Lake, and target ramp-up at Primrose East, offset by reduced activity in the North Sea.
• Natural gas production target of 1,117 to 1,185 mmcf/d before royalties, representing a midpoint decrease of 12% from the midpoint of 2009 forecasted annual guidance. The decrease reflects an 18% reduction in drilling activity levels year over year, largely as a result of the economic impacts of low natural gas prices and increased royalties in Alberta.
• Based upon targeted production and forward strip pricing on October 27, 2009 (US$82.00/bbl, Western Canadian Select heavy oil differential of 22%, NYMEX natural gas price of US$6.00/mmbtu and exchange rate of C$1.00 = US$0.94), cash flow from operations is targeted to be between $6.5 billion and $6.9 billion ($12.00 - $12.70 per common share).
• Capital spending in 2010 is budgeted at $3.9 billion, a 26% increase over 2009.
• Free cash flow (cash flow after capital), is targeted between $2.6 billion and $3.0 billion based on October 27, 2009 forward strip pricing. Free cash flow will initially be used to reduce debt facilities.
• Canadian conventional crude oil and natural gas capital expenditures of $2.6 billion in 2010, representing a 50% increase in capital spending from 2009 levels. The increase is due to a record primary heavy crude oil drilling program, a 94% increase in capital allocation to expand polymer flooding at Pelican Lake, increased focus on the Enhanced Oil Recovery program, and the progression of our thermal crude oil development plan.
• Canadian Natural is progressing with initial development stages of the Septimus/Montney natural gas play in British Columbia with 13 wells planned for 2010.
• International conventional crude oil and natural gas capital expenditures are budgeted to be $463 million, a decrease of 36% from 2009. Planned activity includes completing the start up of one drill string in the North Sea and completion of the Olowi development in Offshore Gabon.
• Canadian Natural has significant capital flexibility in the 2010 capital program allowing the Company to quickly adapt our capital spending profile to commodity price environment.
• Included in the 2010 budget is approximately $479 million of capital for Horizon Phase 2/3 Tranche 2 expenditures targeted to increase reliability of the plant while also affording some de-bottlenecking opportunities. Additionally, Canadian Natural has budgeted approximately $95 million for completion of engineering work to provide a higher degree of cost certainty for future expansion.
• Continued strong balance sheet management which provides financial flexibility for operating plans.