Canadian Natural Resources Earnings Call Insights: Oil Prices, Canadian Oil Liquids OpEx

On Friday, Canadian Natural Resources Ltd (NYSE:CNQ) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Oil Prices

George Toriola – UBS: My question is around Steve you’ve talked about the organic growth which is quite impressive. Now, based on all of this is heavy oil. So, the question really is around at what price and my understanding is that the underlying reason, one of the underlying reasons for the growth is obviously high oil prices. So, at what crude oil price, would you start to take a second look at your heavy oil portfolio? If you could talk about WTI prices and also what discounts heavy oil differentials will be bothersome to that growth?

Steve W. Laut – President: George, I would say you’re right. The majority of our growth is heavy oil, but there is significant light oil growth in the synthetic from Horizon and obviously our light oil growth in Canada is growing at 15% from about 65,000 barrels a day. So, we do have light oil growth, so we could balance that, but a lot of it is kind of in heavy oil from thermal projects and from primary heavy oil and at Pelican. So, each one of those things would probably have a different cutoff point. I would say if you start with thermal heavy oil, depending where your gas price is, if you had gas prices in C$5 range and obviously we’re lot lower than that today, but you have gas price in the C$5 range, you would probably look at about C$55 to C$65 range to cut off. Our primary heavy oil would probably be even lower than that in that C$50 range, and then Pelican Lake I would say we closed the same as primary and that’s C$50 range. Now, obviously with lower gas prices, our thermal heavy oil have a lot of cut points. Now, differentials are obviously played big part of us, so we’re assuming we have in those prices of that normal range of 22% to 24% of WTI and that’s where we think long-term we’ll end up and you can tell obviously our primary heavy oil wells are very effective. Woodenhouse, for example, those wells are paying out in less than six months, so hope that gives you color, George.

George Toriola – UBS: I guess just one quick follow-up, and we’ve seen the gyrations in differentials and you talked about your expectations for the differentials tightening here. As you look into the future would you look at any downstream opportunities, just to be able to capture – some of those gyrations generate outside profits on the downstream side, would that be something you considered?

Steve W. Laut – President: We have looked at it in the past and we do consider. I guess pointing out that we are progressing the engineering at Redwater, our partnership with Northwest. The upgrader there is going to be built in (Hamilton) that’s 50,000 barrels per day and the engineering is progressing on track, and we expect to sanction that project this year. So, we are working on that part of it. We’ve been unable to do as many other producers have been doing is trading reserves for downstream assets and mainly because our view is we can build upgrading and refining assets, but we can’t build reserves in the ground. So for us it’s been tough to make that deal work, but obviously we are open to it, but I think our path right now is do the Redwater upgrader and getting increased access to heavy oil refining markets. To that end, we do believe Keystone will be approved. It won’t be approved until after the election obviously, and when that happens plus all the other pipeline activity you see, we should be able to access significant heavy oil markets in the Gulf Coast.

Canadian Oil Liquids OpEx

Greg Pardy – RBC Capital Markets: Steve, just a couple of questions and one is just on the Canadian oil liquids OpEx. How much of the delta do you think was related to one-time items and how much of a reversal would you expect as we get into the second and third quarter? The second question is just more strategic. You acquired about C$1 billion of nat gas properties last year is this the kind of market where you are going to continue to consolidate just given pricing and so on?

Steve W. Laut – President: Yeah, I think let’s talk about the gas price first and then get back to the operating cost, so I don’t forget the gas. It’s a hard time to keep a focus on gas. We think there are opportunities out there for gas price, but right now we’ve not seeing a lot of it and obviously it has to fit with us and it has to make sense. So we haven’t really done too much yet, but we obviously monitor the market and we evaluate everything that’s in our core area. As to our operating costs almost the largest part of that is one-time events. Obviously, the Beartrap and Lindbergh batteries caused us the truck volumes all over the place. We have additional sand that we had to truck, now we have sand handling facilities coming on stream. We have additional sand disposal wells and both Lindbergh and Beartrap are back on stream in full capacity after the offset. So most of that it’s going to go away and that’s why we believe we’re going to be right within the guidance that we set out at the start of the year and that’s C$11 to C$13 a barrel versus the C$15.40 we had here in the first quarter.

Greg Pardy – RBC Capital Markets: Then the last thing that throw us a little bit was just that it was like C$94 million charge I hate (money) questions, but it was like a C$94 million charge I think on FX and so forth. Could you speak to that as well?

Steve W. Laut – President: Basically, what we have is we have outstanding foreign exchange positions related to our currency management in our business and those positions settle monthly. So, the ones that you saw in the first quarter, the C$84 million worth of losses, we would expect some reversal of those in the second quarter.

Greg Pardy – RBC Capital Markets: Partial or…?

Steve W. Laut – President: Tough to predict the movement of the Canadian dollar vis-a-vis the U.S. dollar on monthly basis, but yeah we would see some reversal in April.