Imperial has slowed the pace of development of its Aspen in situ oil sands project given market uncertainty stemming from Alberta government intervention and other industry competitiveness challenges.
Canadian Natural Resources Limited announces 2018 fourth quarter and year end results
Canadian Natural has reported its 2018 fourth quarter and full year results, indicating that the company is continuing to show growth, even within a challenging oil and gas industy.
Commenting on the Company's 2018 results, Steve Laut, Executive Vice-Chairman of Canadian Natural stated, "In 2018 we demonstrated the strength of our diverse and balanced asset base, and our ability to create value for Canadian Natural's shareholders throughout the commodity price cycle. Canadian Natural's continued focus on effective and efficient operations, ability to exercise capital flexibility and our mix of long life low decline assets resulted in cash flows from operating activities of over $10.0 billion and adjusted funds flow of over $9.0 billion in 2018, a significant achievement given industry challenges faced throughout the year."
Canadian Natural's President, Tim McKay, added, "We had a strong operational year in 2018 despite the volatility in commodity prices, as the Company was able to react quickly and strategically to changing market conditions. The Company achieved record annual production of approximately 1,079,000 BOE/d, delivering 12% production growth and 14% production per share growth over 2017 levels. Our industry leading Oil Sands Mining and Upgrading operations delivered record annual production of 426,190 bbl/d of Synthetic Crude Oil ("SCO") as a result of strong production at Horizon and a full year of production from the Athabasca Oil Sands Project. Additionally, record low annual adjusted operating costs of $21.05/bbl (US$16.24/bbl) of SCO and unadjusted operating costs of $21.75/bbl (US$16.78/bbl) of SCO were achieved as a result of safe, steady and reliable operations, high utilization, and leveraging expertise to capture synergies.
In 2018, crude oil price differentials widened due to market access restrictions and as a result, the Company made the proactive and strategic decisions throughout the year to voluntarily curtail crude oil production and reduce activity. Canadian Natural strongly supports the Government of Alberta's mandatory production curtailment program announced in late 2018 and as expected after this announcement, crude oil price differentials have since significantly narrowed. The Western Canadian Select ("WCS") differential index has narrowed to US$12.38/bbl for Q1/19 from the US$39.36/bbl experienced in Q4/18 and the differential between SCO and West Texas Intermediate ("WTI") benchmark pricing has narrowed to US$2.70/bbl for Q1/19 from the US$21.35/bbl experienced in Q4/18. As previously announced, the Company will continue to evaluate progress on export pipelines before enacting increases, if any, to its base 2019 capital budget.
Canadian Natural's mix of long life low decline assets and effective and efficient operations resulted in total Company Gross proved reserves increasing at the end of 2018 by 12% to 9.893 billion BOE, replacing 359% of 2018 production, with a reserves life index of 27.7 years. The Company's continued focus on continuous improvement, innovation and leveraging technology has lowered our overall cost structure, and as a result, proved finding, development and acquisition costs, including changes in future development capital, were excellent in 2018 and decreased from 2017 levels by 24% to $9.39/BOE."
Canadian Natural's Chief Financial Officer, Corey Bieber, continued, "Throughout 2018, Canadian Natural demonstrated its financial strength and resilience to market challenges through reduced long-term debt and upgraded credit ratings. Net earnings of approximately $2.6 billion and adjusted net earnings of approximately $3.3 billion were achieved in 2018, contributing to the reduction in absolute long-term debt by approximately $1.8 billion. Free cash flow was significant in the year at approximately $2.8 billion after net capital expenditures and dividend commitments. Canadian Natural's free cash flow allocation policy that came into effect November 1, 2018 was demonstrated in 2018 as approximately 46% of annual 2018 free cash flow was allocated to share purchases and approximately 54% was allocated to the Balance Sheet, including the impact of foreign exchange, working capital and other adjustments. Returns to shareholders were significant in 2018, totaling over $2.8 billion with over $1.2 billion returned through share purchases and approximately $1.6 billion returned through dividends.
Subsequent to year end, our Board of Directors approved a quarterly dividend increase of 12% to $0.375 per share, payable on April 1, 2019. The increase marks the 19th consecutive year of dividend increases, confirming our commitment to sustainable and increasing returns to shareholders."
- Net earnings of $2,591 million were realized in 2018, an increase of $194 million over 2017 levels. Adjusted net earnings of $3,263 million were achieved in 2018, a $1,860 million increase over 2017 levels.
- Cash flows from operating activities were $10,121 million in 2018, an increase of $2,859 million compared to 2017 levels.
- Canadian Natural generated significant annual adjusted funds flow of $9,088 million in 2018, an increase of 24% or $1,741 million over 2017 levels. The increase year over year was primarily due to increased Synthetic Crude Oil ("SCO") production volumes, higher netbacks in the Oil Sands Mining and Upgrading segment and higher netbacks in the International segment, partially offset by lower crude oil, NGLs and natural gas netbacks in the North America Exploration and Production ("E&P") segment, and significantly lower crude oil pricing in Q4/18.
- On December 2, 2018, the Government of Alberta announced the mandatory production curtailment program that resulted in crude oil differentials narrowing to more normalized levels. Subsequent to year end, the Western Canadian Select ("WCS") differential index narrowed to US$12.38/bbl for Q1/19 from US$39.36/bbl for Q4/18 and the differential between SCO and West Texas Intermediate ("WTI") benchmark pricing narrowed to US$2.70/bbl for Q1/19 from US$21.35/bbl for Q4/18.
- Cash flows used in investing activities were $4,814 million in 2018, a decrease of $8,288 million compared to 2017 levels as a result of acquisitions completed in 2017.
- Consistent with the Company's four pillar strategy, the Company maintained balance in the allocation of its annual adjusted funds flow throughout 2018:
- The Company remained disciplined in its economic resource development investments with annual net capital expenditures of $4,731 million, or approximately $4,490 million, excluding net acquisitions.
- The Company reduced long-term debt by approximately $1,835 million, including the impact of foreign exchange, working capital and other adjustments. As a result, debt to adjusted EBITDA strengthened to 2.0x and debt to book capitalization improved to 39.1%.
- Returns to shareholders are a key focus for Canadian Natural as the Company returned a total of $2,844 million in the year, $1,562 million by way of dividends and $1,282 million by way of share purchases.
- Share purchases for cancellation totaled 30,857,727 common shares at a weighted average share price of $41.56.
- Subsequent to year end and up to and including March 6, 2019, the Company executed on additional share purchases of 4,340,000 common shares for cancellation at a weighted average share price of $35.86.
- Dividends increased 22% from 2017 levels to $1.34 per share. Subsequent to year end, the Company declared a quarterly dividend increase of 12% to $0.375 per share, payable on April 1, 2019. The increase marks the 19th consecutive year that the Company has increased its dividend, reflecting the Board of Directors' confidence in Canadian Natural's sustainability and robustness of the asset base driving the ability to generate significant adjusted funds flow.
- The Company executed on opportunistic net acquisitions of $241 million, including net exploration and evaluation proceeds of $74 million. These core area acquisitions add significant future value to the Company's long life low decline asset portfolio.
- Canadian Natural delivered annual adjusted funds flow in excess of net capital expenditures of approximately $4,360 million, including the deferred discounted purchase consideration related to the Joslyn acquisition. After dividend requirements, annual free cash flow totaled approximately $2,795 million.
- Demonstrating Canadian Natural's commitment to balanced capital allocation, the Company allocated approximately 46% of annual 2018 free cash flow, after dividends, to share purchases and approximately 54% to the Company's Balance Sheet, including the impact of foreign exchange, working capital and other adjustments.
- The Company achieved record annual production volumes of 1,078,813 BOE/d in 2018, an increase of 12% over 2017 levels. The increase from 2017 was mainly due to a full year of Horizon Phase 3 production and a full year of production from acquisitions completed in 2017, partially offset by declines in natural gas production along with voluntary natural gas and crude oil curtailments, shut ins and reduced drilling activity.
- Annual BOE production per share growth was strong, increasing 14% when compared to 2017 levels.
- Canadian Natural's annual corporate crude oil and NGLs production reached a record 820,778 bbl/d, an increase of 20% over 2017 levels. The increase from 2017 was mainly due to Horizon Phase 3 operating at high utilization rates and a full year of production from acquisitions completed in 2017, partially offset by voluntary crude oil production curtailments, shut ins and reduced drilling activity.
- North America crude oil and NGLs, excluding thermal in situ oil sands, averaged 243,122 bbl/d in 2018, representing a 2% increase from 2017 levels mainly due to the successful integration of acquired assets at Pelican Lake, partially offset by the impact of proactive measures taken to reduce annual drilling in the second half of the year by approximately 100 net wells, delay completion and ramp up of new wells, and voluntarily curtail crude oil production.
- In 2018, Pelican Lake crude oil production averaged 63,082 bbl/d, a 22% increase when compared to 2017 levels primarily due to assets acquired in late 2017. In 2018, polymer flood restoration on the acquired lands was completed ahead of schedule, where approximately 62% of acquired lands are now under polymer flood.
- At the Company's world class Oil Sands Mining and Upgrading assets, industry leading operations provided record annual production of 426,190 bbl/d of SCO, an increase of 51% from 2017 levels. The increase in production was primarily due to a full year of Horizon Phase 3 operations and the acquisition of the Athabasca Oil Sands Project ("AOSP") in 2017.
- The Company realized record low annual unadjusted operating costs of $21.75/bbl (US$16.78/bbl) of SCO in 2018, a decrease of 13% from 2017 levels. Operating costs were top tier, below the midpoint of guidance and were achieved through safe, steady and reliable operations, high utilization, and leveraging expertise to capture synergies. After normalizing for planned turnaround downtime, operating costs decreased 10% to $21.05/bbl (US$16.24/bbl) of SCO compared to $23.40/bbl of SCO in 2017.
- In the Company's thermal in situ operations, pad additions at Primrose continue to be on budget and ahead of schedule with initial production targeted to add approximately 10,000 bbl/d in Q4/19. The program targets to add approximately 26,000 bbl/d in the first 12 months of production. These pad additions are high return activities as the Company utilizes available excess oil processing and steam capacity at Primrose.
- At Kirby North, top tier execution and strong productivity have resulted in the project progressing two quarters ahead of the sanctioned schedule. The project now targets first steam in late Q2/19 with the flexibility to ramp up production in late Q3/19. Cost performance remains on budget with the overall project 87% complete. Kirby North's overall capacity of 40,000 bbl/d of Steam Assisted Gravity Drainage ("SAGD") production is targeted for late 2020.
- International E&P annual production volumes were strong in 2018, averaging 43,627 bbl/d, comparable to 2017 levels. International production volumes receive Brent pricing, which is not subject to the price differentials experienced in Alberta. 2018 Brent pricing averaged US$71.12/bbl, a 31% increase from 2017 pricing of US$54.38/bbl, generating significant adjusted funds flow in the Company's International segment.
- The 2018 drilling program in the North Sea was successfully completed on time and on budget with 3.9 net producer wells drilled in the year. Current light crude oil production continues to be strong at approximately 1,250 bbl/d net per well.
- In 2018, the Company successfully drilled 1.7 net producer wells at Baobab. Current light crude oil production is exceeding sanctioned expectations at approximately 2,500 bbl/d net per well. As a result of the successful 2018 drilling program at Baobab, Canadian Natural targets to drill one additional producer well at Baobab in 2019.
- Subsequent to year end, the operator of the South Africa exploration well announced a discovery of significant gas condensate and targets to evaluate further exploration wells on Block 11B/12B located offshore South Africa. Canadian Natural expects the cost of the current exploration well to be fully carried. In 2019, the operator targets to acquire 3D seismic on the Block.
- Balance sheet strength and strong financial performance were demonstrated in 2018 through reduced long-term debt and upgraded credit ratings.
- In 2018, Moody's Investors Service, Inc. upgraded the Company's senior unsecured rating to Baa2 from Baa3 and its short term rating to P-2 from P-3 with a stable outlook. Additionally, Standard & Poor's revised the Company's rating outlook to BBB+/stable from BBB+/negative.
- Canadian Natural maintains strong financial stability and liquidity represented by cash balances, and committed and demand bank credit facilities. At December 31, 2018 the Company had approximately $4,824 million of available liquidity, including cash and cash equivalents, an increase of approximately $574 million from 2017 levels.
- Canadian Natural's crude oil, SCO, bitumen, natural gas and NGL reserves were evaluated and reviewed by Independent Qualified Reserves Evaluators. The following highlights are based on the Company's reserves using forecast prices and costs at December 31, 2018 (all reserves values are Company Gross unless stated otherwise).
- Total proved reserves increased 12% to 9.893 billion BOE. The increase is largely driven by the addition of the Horizon South Pit, and pad additions and improved recovery at Primrose.
- Proved developed producing reserves additions and revisions are 1.109 billion BOE, replacing 2018 production by 281%. The total proved developed producing BOE reserves life index is 21.3 years.
- Proved reserves additions and revisions are 1.416 billion BOE, replacing 2018 production by 359%. The total proved BOE reserves life index is 27.7 years.
- Proved plus probable reserves increased 13% to 13.382 billion BOE. Proved plus probable reserves additions and revisions are 1.910 billion BOE, replacing 2018 production by 485%. The total proved plus probable BOE reserves life index is 37.4 years.
- Proved finding, development and acquisition ("FD&A") costs, excluding changes in future development capital ("FDC"), are $3.11/BOE and proved plus probable FD&A costs, excluding changes in FDC, are $2.31/BOE. Proved FD&A costs, including changes in FDC, are $9.39/BOE and proved plus probable FD&A costs, including changes in FDC, are $10.79/BOE.
- Proved net present value of future net revenues, before income tax, discounted at 10%, is $106.6 billion, a 19% increase from the year end 2017 evaluation. Proved plus probable net present value is $131.0 billion, a 14% increase from year end 2017.
FOURTH QUARTER HIGHLIGHTS
- Due to a significant decline in crude oil pricing, largely driven by an oversupplied domestic market environment, lack of takeaway capacity and increased global supply, the Company incurred a net loss of $776 million in Q4/18 and an adjusted net loss from operations of $255 million.
- Cash flows from operating activities were $1,397 million and adjusted funds flow were $1,229 million in Q4/18. Adjusted funds flow decreased by $1,601 million from Q3/18 levels and by $1,078 million from Q4/17 levels due to significantly wider crude oil price differentials, largely driven by market access restrictions.
- On December 2, 2018, the Government of Alberta announced the mandatory production curtailment program that resulted in crude oil differentials narrowing to more normalized levels. Subsequent to year end, the WCS differential index narrowed to US$12.38/bbl for Q1/19 from US$39.36/bbl for Q4/18 and the differential between SCO and WTI benchmark pricing narrowed to US$2.70/bbl for Q1/19 from US$21.35/bbl for Q4/18.
- The Company's production volumes in Q4/18 averaged 1,081,368 BOE/d, a 2% increase over Q3/18 levels and a 6% increase over Q4/17 levels. The increase from the comparable quarters was mainly due to strong production from the Oil Sands Mining and Upgrading segment partially offset by reduced drilling activity and the impact of strategic actions taken to voluntarily curtail primary heavy and thermal in situ crude oil production totalling approximately 24,500 bbl/d.
- At the Company's world class Oil Sands Mining and Upgrading assets, top tier operations provided quarterly production of 447,048 bbl/d of SCO, an increase of 39% over Q4/17 levels mainly due to production from the Horizon Phase 3 expansion and a 13% increase over Q3/18 levels as operations resumed following a major planned turnaround at Horizon.
- The Company realized industry leading operating costs of $19.97/bbl (US$15.12/bbl) of SCO in Q4/18, through safe, steady and reliable operations, high utilization, and leveraging expertise to capture synergies. These results were comparable to Q3/18 levels and a 20% decrease from Q4/17 levels.
- Offshore Africa quarterly production volumes averaged 22,185 bbl/d in Q4/18, an 18% increase over Q3/18 and a 14% increase over Q4/17 levels. The increase in production from the comparable periods was primarily due to production from new wells drilled at Baobab in 2018, partially offset by natural field declines. International production receives Brent pricing that averaged US$67.45/bbl in Q4/18, a 10% increase from Q4/17 pricing of US$61.46/bbl, generating significant adjusted funds flow in the Company's international segment.
- Share purchases for cancellation in the quarter totaled 10,845,600 common shares at a weighted average share price of $37.67.
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 and SCO (herein collectively referred to as "crude oil"), natural gas and NGLs. This balance provides optionality for capital investments, maximizing value for the Company's shareholders.
Underpinning this asset base is long life low decline production from the Company's Oil Sands Mining and Upgrading, thermal in situ oil sands and Pelican Lake heavy crude oil assets. The combination of long life low decline, low reserves replacement cost, and effective and efficient operations results in substantial and sustainable adjusted funds flow throughout the commodity price cycle.
Augmenting this, Canadian Natural maintains a substantial inventory of low capital exposure projects within its conventional asset base. These projects can be executed quickly and with the right economic conditions, can provide excellent returns and maximize value for shareholders. Supporting these projects is the Company's undeveloped land base which enables large, repeatable drilling programs which can be optimized over time. Additionally, by owning and operating most of the related infrastructure, Canadian Natural is able to control a major component of its operating cost 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.
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