Canadian Natural Resources Ltd

NYSE:CNQ

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Canadian Natural's Q2 2018 Earnings Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, August 2, 2018, at 9 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Mark Stainthorpe, Vice President, Finance, Capital Markets of Canadian Natural Resources. Please go ahead, Mr. Stainthorpe.

[Mark A. Stainthorpe, Director of Treasury & Investor Relations]

Thank you, Stephanie. Good morning, everyone, and thank you for joining our second quarter 2018 conference call. In addition to discussing the second quarter results, we will provide an update on our operations, ongoing projects and strong financial position. With me this morning are Steve Laut, our Executive Vice Chairman; Tim McKay, our President; and Corey Bieber, our Chief Financial Officer. Before we begin, I would like to refer you to the comments regarding forward-looking information contained in our press release and also note that all amounts are in Canadian dollars. And production and reserves are expressed as before royalties, unless otherwise stated. With that, I'll now pass the call over to Steve.

[Steve W. Laut, Executive Vice Chairman]

Thanks, Mark, and good morning, everyone. And thank you for joining the call this morning. The second quarter was a very good quarter with strong cash flow per share, up 16% from Q1 at $2.19 a share and the quarterly earnings per share up 70% from Q1 at $0.80 a share, driving increasing returns on capital employed. Canadian Natural is in a very strong and enviable position with significant competitive advantages, competitive advantages, we are leveraging to generate significant, sustainable and growing free cash flow. Our competitive advantages are strategic with our top-tier expertise in all our areas of operations and our ability to leverage technology. We are very nimble, effectively allocating capital and capturing opportunities. We have access to capital markets. And maybe most importantly, our culture gives us a significant competitive advantage. On the asset side, our assets are vast with deep, well-balanced and diverse inventory of low capital exposure and long-life, low-decline projects. We own and control our infrastructure and leverage our size to drive economies of scale to increase effectiveness and efficiency. Importantly, 72% of our oil assets are long-life, low-decline assets. Long-life, low-decline assets are very valuable as reservoir risk is low and nonexistent. And the scale of these operations matters, allowing Canadian Natural to leverage technology and use continuous improvement processes to minimize our environmental footprint; maximize utilization, reliability; and deliver ever-increasing effective and efficient operations. The impact of long-life, low-decline assets on our sustainability is significant. Our average corporate decline rate is targeted at 9%. As a result, our maintenance capital to hold production is flat and significantly less compared to a typical E&P company, making Canadian Natural more robust and generating more free cash flow. Canadian Natural has always been focused on value growth, not growth for growth's sake. And our large strategic asset base and our nimble and effective capital allocation allows us to quickly and proactively react to market conditions and opportunities. Tim will highlight how we effectively reallocated capital to capture better value lighter oil opportunities in the quarter. We also have excited value-adding and growth opportunities at both Horizon and Athabasca Oil Sands Projects. As you know, we're taking most of 2018 to define and high-grade these opportunities. Progress is on track, and we have a slate of very exciting opportunities to enhance reliability, lower costs and add production. These opportunities will have between 75,000 and 95,000 barrels a day of production in smaller stepwise projects that will also increase reliability and lower both operating and sustaining capital cost at very good capital efficiencies. Smaller stepwise projects preserve our capital flexibility as they are shorter duration from initial capital spend to onstream date. As we become larger, more robust and sustainable, the opportunities for Canadian Natural to execute on value-adding and growth opportunities have significantly exceeded our expectations. We expect to provide additional clarity in all these opportunities as we progress through 2018. Part of creating long-term value is reducing our environmental footprint, where we have taken significant steps to reduce our environmental footprint and delivered meaningful results. Since 2012, we reduced our methane emissions in our conventional heavy oil operations by 71%. In addition, we have invested significant capital to capture and sequester CO2. We have CO2 capture and sequestration facilities at Horizon; our 70% interest in the Quest Carbon Capture and Storage facilities at Scotford; and the carbon sequestration facilities at the North West Refining when it's up and running.As a result, Canadian Natural will be conserving roughly 2.7 million tonnes of CO2 a year, equivalent to taking 570,000 vehicles off the road, making Canadian Natural the third-largest owner in the global oil and gas sector of CO2 capture and sequestration capacity and the fourth-largest of all industries in the world. This makes a significant impact on reducing our greenhouse gas emissions intensity with more reductions to come. In addition, Canadian Natural minimizes our land usage and recycles 90% of our water used in Oil Sands Mining and Upgrading, significantly reducing freshwater usage. Canadian Natural is also the largest investor in research and development in the oil and gas sector and the fourth-largest in all sectors in Canada. With investment in technology, we have made significant progress in reducing our greenhouse gas emissions. And there is a pathway to reducing our greenhouse gas emissions intensity from our oil sands production to levels that are below that of the average oil produced globally. For reference, today at Horizon, where we significantly recognize our carbon capture initiatives, our emissions intensity is only slightly higher, 5% than the average for global oil. The impact of technology and effective operations has on Northern Canada's oil sands greenhouse emissions intensity and our ability to leverage technology to continue to reduce our intensity is generally not well understood. Many external opinions on oil sands operations are based on outdated data from many years ago but unfortunately continues to be used today as reference materials in many reports. The long-life, low-decline nature of oil sands assets allows producers to continue to leverage technology, further reducing our environmental footprint and driving ever-increasing effective and efficient operations. This is exactly what has happened and continues to happen as we achieve further improvements. The value of Canada's oil sands is very important to Canada and Canadian Natural. We believe the oil sands will ultimately stand the test of volatile oil prices and any potential demand forecast scenario as we believe the oil sands will have the lowest environmental footprint and the lowest total cost. At Horizon, we've taken operating cost from over USD 40 a barrel to roughly USD 17 a barrel. And importantly, there are no reserve replacement costs, a fundamental factor in Canadian Natural's strategy to invest in the oil sands and be a leader in research and development. A critical plank in Canadian Natural's strategy is to balance and optimize the allocation of cash flow to maximize value for shareholders. We strive to balance and optimize what we call the four pillars of cash flow allocation: balance sheet strength, return to shareholders, resource development and opportunistic acquisitions. How we balance the pillars depends where we are on the commodity price cycle, the risk of creating cost inflation and other potential opportunities. At all times, the primary goal of balancing the four pillars is to maximize shareholder value. Canadian Natural is delivering substantial, sustainable and growing free cash flow. And we are effectively maintaining balance between the pillars. By strengthening the balance sheet and with oil prices strengthening and the outlook more stable, with greater visibility, our debt-to-EBITDA is targeted at 1.5x by year-end. Our balance sheet is strengthening quickly. As a result, we bought back 10.9 million shares. As well, we increased the dividend 22% this year, strong returns to shareholders. We continue our disciplined approach to resource development. The capital budget has been increased slightly to capture reliability opportunities and progress engineering and additional reliability, cost and production growth opportunities at Horizon. There are very few E&P companies that can deliver substantial, sustainable and growing free cash flow, and at the same time, deliver production growth per share, top-tier effectiveness and efficiency, a flexible capital allocation program to maximize value for shareholders and drive increasing returns on equity and returns on capital employed as well as increasing returns to shareholders, and at the same time, strengthen the balance sheet. Canadian Natural is robust, we're sustainable and clearly a unique E&P company. With that, I'll turn it over to Tim.

[Timothy Shawn McKay, President & Director]

Thank you, Steve. Good morning, everyone. I will now do a brief overview of our assets, talk to our 2018 second quarter results and our capital allocation to maximize value for shareholders. Starting with natural gas, our second quarter production of 1.539 Bcf a day was as expected at the midpoint of our Q2 guidance. In the quarter, we completed major plant turnarounds as planned. With low natural gas prices, we proactively shut-in production, which impacted the quarter by approximately 27 million a day as well as 12 million a day reduction due to heavy oil curtailments. We also proactively deferred recompletions and workover activities related to our natural gas assets for approximately 20 million a day, which could be executed this fall with improved natural gas prices. In the second quarter, Pine River plant ran at reduced rates, where we averaged approximately 78 million a day. Canadian Natural has come to an agreement to acquire the Pine River gas plant and are currently waiting on regulatory approvals. Once received, we will look to close later this year. As a result, the third party will require a 4-week outage to complete sales meter upgrade. At which time, we plan to complete maintenance work at the facility and complete an assessment to increasing the plant from its current restricted capacity to match our field capacity of approximately 145 million a day, which would significantly reduce our future operating cost in this area. Overall, second quarter natural gas production for North America was 1.48 Bcf per day with an operating cost average of $1.28, which was down from Q1 of $1.31. Our natural gas portfolio is diverse, which 35% is used internally, 32% is exported and only 33% exposed to AECO pricing. Q3 2018 natural gas guidance is targeted to be 1.535 to 1.565 Bcf per day. Yearly guidance is now adjusted to 1.55 to 1.6, primarily due to Pine River restrictions, including the 4-week outage this fall as well as shut-ins and deferral of natural gas activities. Our North American light oil and NGL production for Q2 was 89,906 barrels a day, which is essentially flat with Q2 2017 and as expected, down from Q1 of 93,158. In all areas, we continue to drill strategic wells that will set us up for future growth activities. As well, we continue to optimize our existing waterfloods. Our second quarter operating cost of $15.81 per barrel is comparable to our Q1 of $15.68 per barrel. For highlights, starting in the Tower area. We have an exciting Montney oil development. 4 wells are on production at approximately 400 barrels per day that are ramping up and 3 more wells are left to come on shortly as we target to fill our new 3,000 barrel a day facility. On our lands, we can drill an additional 41 wells, which leverage off our infrastructure and if we choose to expand this facility in this area. At Wembley, we have a significant Montney oil development opportunity on our 77 net sections of land, which could support approximately 175 wells over time. We drilled 2 net Montney wells in the first quarter. They have now come on and are currently producing approximately 800 barrels per day per well. With the success in light oil and the running room we have ahead of us, this is why we were allocating additional capital for light oil versus heavy oil. For Q2, we successfully drilled 8 net light oil crude wells across our lands. In Offshore Africa, one of our highest return areas in the company, production was 18,200 barrels a day as expected as we completed maintenance activities at Espoir. The drilling rig is now on site at Baobab and has commenced drilling 1.7 net producers and 1.2 net injectors with targeted production capacity addition of 5,700 barrels a day net by Q4. In the North Sea, we had strong drilling results, where we averaged 24,456 barrels a day in Q2, up 2,900 barrels a day from Q1 of 21,584. We had excellent operational results in the second quarter. Operating costs in the North Sea was $35.12, down 19% from the first quarter. Through the end of the second quarter, 2.9 net wells have been drilled, and we are currently producing approximately 1,700 barrels a day per well. The full drilling program consists of 3.9 net producers and 1 net injector. Q3 international operating production guidance is set at 43,000 to 47,000 barrels a day. Canadian Natural is focused on creating value. With the success in light oil and the short-term volatility in the heavy oil market, it makes sense to move capital from heavy oil to light oil. We've also made a strategic decision not to sell into anonymous heavy oil market and take actions to maximize value for our shareholders. Specifically in Q2, with the volatility we are seeing, we have proactively reduced our drilling program. We drilled 39 net wells, down from our original plan of 63 net wells and targeting to reduce of our overall yearly heavy oil count by approximately 55 wells. And the shift to light oil projects will be executed in the latter part of 2018. As a result, our Q2 of heavy oil production was down, averaging 84,811 barrels as we curtailed production of 7,450 barrels a day due to widening differentials and shut-in 2,900 barrels a day in the quarter. Our second quarter operating costs were very stable at $17.02 per barrel versus our Q1 cost of $17.03 per barrel. Highlights in the second quarter was our 6 multilateral heavy oil setup wells in the Smith area, which are on production at 340 barrels per day per well. This is a great result from a small program and has the potential development program that could target up to 125 wells across our 19 net sections of land.In our thermal properties, with the volatility of differentials early in the quarter, we took the opportunity to advance turnarounds for Primrose, Peace River and Kirby South, producing overall approximately 104,907 barrels as we expected versus the Q1 production of 111,851. At Kirby South, the second quarter production was 35,322 barrels as we slowed down the ramp-up of new wells and completed plant maintenance activities. Our Q2 operating costs were excellent at $9.12 per barrel, including fuel, which is very consistent to the first quarter. At Primrose, Q2 production of 67,569 barrels, we were able to start a turnaround in April and was completed by the end of the first week in May. Our thermal operations at Primrose continued to be effective and efficient at $14.66 per barrel, down from Q1 $16.61 per barrel. We are executing on our growth projects at Primrose and Kirby North. And they both are proceeding very well with a combined target to have over 70,000 barrels a day in 2020. At Kirby North, the company's 40,000 barrels a day SAGD project, which was originally targeting first oil in Q1 2020, we've had top-tier execution, very strong productivity this last year. And as a result, the project is now 3 months ahead of schedule. And we're now targeting first oil in Q4 2019. And cost performance remains on budget. The Central Processing Facility has 95% equipment on site and the SAGD drilling is nearing 45% and is targeting Q3 2019 to be complete. At Primrose, we have started drilling our highly profitable pad adds, which is on cost and time, with the plans being in schedule for Q4 2019, which is targeted at 32,000 barrels a day in 2020. A key component of our long-life, low-decline transition is our world-class Pelican Lake pool, where our leading-edge polymer flood is driving significant reserves and value growth. Q2 production is up 62,914 barrels a day from our Q1 average of 63,274 barrels a day as we continue converting existing waterflood areas in acquired lands for polymer flooding. We are on track as we target to have 63% under polymer flood by the end of 2018. This process maximizes long-term value as we convert more injection wells to more viscous polymer. It temporarily impacts production rates in the short term. However, over the long term, it creates better sweep and performance, maximizing oil recovery. At Pelican Lake, Q2 operating costs continue to be top-tier, and on a combined basis, were $6.96 per barrel, down from the Q1 of $7.07 per barrel as we optimize for polymer flood. With our low decline and very low operating cost, Pelican Lake has excellent netback and recycle ratio. Q2, we drilled 11 net producers. All wells are on production now and performing as expected at 90 barrels per day per well. At our oil sands operation in the second quarter of 2018, we produced 407,704 barrels at the midpoint of our guidance. Our industry-leading second quarter operating cost on a combined basis was very impressive at $22.94 per barrel, on track to our lower annual operating cost guidance of $20.50 to $24.50. We continue to capture synergies between the 2 new sites, leveraging technical expertise, services and buying power as well as operating efficiencies. We're also advancing our autonomous truck pilot, which is targeting for Q3 2019. Based on our current view and with our top-tier mining utilization, it could reduce our cost by an additional $0.30 to $0.50 on when in play. We continue to advance near-term opportunities at Horizon, where we see an opportunity to grow our production by 75,000 to 95,000 barrels a day. Early cost estimates are approximately $45,000 per BOE. And these volumes could have the added benefit -- will have the added benefit from leveraging our industry-leading operating costs and will give us increased reliability and lower sustaining costs. The potential Paraffinic Froth Treatment expansion work at Horizon has been very positive as the engineering and design specification work completed to date has shown the optimal production range of the proposed expansion to be 40,000 to 50,000 barrels a day, 10,000 barrels a day higher than the original concept. The expansion is targeted to produce high-quality diluted bitumen at low operating costs as we leverage off our existing infrastructure. Preliminary estimates of the capital required for the proposed expansion is approximately $1.4 billion. We are on track with our 2018 plan at Horizon as we continue defining and high-grading of the additional near-term opportunities with target completion of this process by year-end. These near-term opportunities are targeting to add long-life, zero-decline production in the range of 35,000 to 45,000 barrels a day of light, sweet, synthetic crude oil and will be executed in a disciplined, stepwise manner, which preserves Canadian Natural's capital flexibility. The previously discussed VGO expansion will be included in this high-grading process. And these opportunities are over and above our 4% growth profile. We have allocated an additional $170 million to advance these opportunities through the EDS feed to quarter-long leads and are targeting to have our execution plan and EDS cost estimate by the end of this year. Oil sands mining Q3 SCO production guidance is set at 374 to 404 barrels a day as we will complete a 21-day outage at Horizon, followed by the plant will run at restricted rates of approximately 130,000 barrels a day for 12 days to finish the 2 replacement maintenance on the Vacuum Distillate Unit. In summary, Canadian Natural continues to be an effective allocator of capital. We continue to execute with excellence. And we are an effective and efficient operator. We are in a very strong position and being nimble enhances our capacity to create value for our shareholders as we will continue to high-grade opportunities in the company. We will continue to focus on safe, reliable operations, enhancing our top-tier operations. We will continue to balance and optimize our capital allocation, deliver free cash flow, strengthen our balance sheet that Corey will highlight further in our financial review. With that, I will now turn it over to Cory.

[Corey B. Bieber, CFO & Senior VP of Finance]

Thank you, Tim, for that comprehensive update on the company's operational performance for 2018. We had a strong financial performance during the quarter. Net earnings of approximately $1 billion were achieved in the second quarter of 2018, accumulating to a very robust $1.56 billion over the first 6 months of the year. Adjusted net earnings from operations were about $1.3 billion for the second quarter, up about $400 million when compared with the first quarter and up about $950 million from the second quarter of last year. This second quarter improvement reflects solid crude oil production volumes and the effective and efficient operations that Tim spoke about as well as stronger crude oil pricing. Quarterly funds flow for the corporation was a record $2.7 billion, 57% higher than that recorded during Q2 of last year. For the first half, our funds flow was a record $5 billion, a 49% increase over 2017 levels. During the first half, we invested $2.1 billion in economic development, repaid debt at $1.6 billion, repaid deferred acquisition liabilities of $470 million and returned just under $1.2 billion of cash to shareholders in the form of dividends and share buybacks, essentially balancing the four pillars of capital allocation. Over the last 12 months since the AOSP acquisition, we have been able to reduce long-term debt, long-term net debt and acquisition liabilities by approximately $2.5 billion, improving our debt-to-book capitalization to under 40% from about 43% and debt-to-adjusted EBITDA to 2.1x from 3.4x. This clearly demonstrates our commitment to strengthening the balance sheet. At quarter-end, available liquidity was exceptional at $4.8 billion. Based upon current strip pricing, we would expect to exit the year in the range of 1.5x debt-to-EBITDA with debt-to-book cap in the range of 35%. Clearly, the company has transitioned into a very robust free cash flow enterprise with continually improving debt metrics. Further evidencing this, S&P removed the negative outlook on our strong BBB+ credit rating during the quarter. In closing, I believe that Canadian Natural continues to represent a sustainable, flexible and balanced E&P company with a high degree of resilience to commodity price volatility. With that, I'll hand it back to you, Tim, for your closing comments.

[Timothy Shawn McKay, President & Director]

Thanks, Corey. In summary, Canadian Natural has many advantages. Our balance sheet is strong and we will continue to strengthen in 2018. We have a well-balanced, diverse, large asset base. A significant portion of our asset base is long-life, low-decline assets, which requires less capital to maintain volumes. We have balance in our commodities with approximately 50% of our BOEs light crude oil, 25% heavy and 25% gas, which lessens our exposure to the volatility in any one commodity. We are delivering sustainable, substantial free cash flow, which we are effectively allocating to our four pillars. Canadian Natural continues to allocate cash flow to our four pillars to maximize value. Our balance sheet continues to strengthen. We continue with disciplined resource development. Return to shareholders has been strong with a 22% dividend increase earlier this year. And year-to-date, we have bought back 10.9 million shares. And finally, if we choose so, potential acquisitions. This was all driven by effective capital allocation, effective and efficient operations and by our teams who deliver top-tier results. With that, I will open up for questions.

[Operator]

[Operator Instructions] Your first question comes from Bill Gresh with JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Maybe to start with, I guess, the promotion, outlook for the second half of the year. I just kind of -- I was running through the numbers, and it looked like if you were try to use the midpoint of the guidance on the oil side, it would imply a pretty big step-up in the fourth quarter. Just any color on that. I mean, it feels like maybe we should be thinking towards the lower end of that range, but anything specific going on that would lead to a bigger step-up?

[Timothy Shawn McKay, President & Director]

Yes, it's Tim here. Yes, our production profile was loaded to the latter half year with a lot of these activities coming on in Q3 and Q4. But to your point, we see it into a lower half of the annual guidance.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Yes. Okay, that makes sense. And the second one would just be with respect to the projects and the implications for capital spending, obviously you gave us some color here about 2018. What I'm wondering is, with $1.4 billion spending for the Horizon project and the other opportunities you've mentioned there, how are you thinking about capital spending as we move to 2019 and 2020 and the timing of all this? And should we be thinking that your underlying base capital spending numbers that you talked about at the Analyst Day last year is pretty much on track and this was just a layer on top of it? Or would it substitute for something else? Just any general thoughts.

[Timothy Shawn McKay, President & Director]

All right. So it's pretty early to say exactly what the exact number would be, but our $4.3 billion to $4.5 billion range, we'll be very close to that range I would suspect, with no major change that way. If you look back in 2017, we had $4.9 billion spending, and we actually lowered it in 2018 to actually now -- to the revised now of $4.6 billion. So what I would see as we move to our budget process is we will allocate capital to the most appropriate areas in keeping that spending very much in line with our previous numbers.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

So you're saying that even if you do the PFT project, you wouldn't be -- that wouldn't be additional capital relative to the budget you laid out in November?

[Timothy Shawn McKay, President & Director]

It -- what we will do is reallocate capital. So if you look back on 2017 and 2018, we actually decreased Horizon -- well, Horizon spending decreased, and that was allocated to Thermal. So what we see going into the fall here is that we will high grade our opportunity and see where we will flex a little bit of capital and layer on top what would be needed, but I don't see it being significant.

[Corey B. Bieber, CFO & Senior VP of Finance]

So Bill, when you look at it, we have a range here going forward, it'll probably be that range of this same kind of capital as we have this year. But if you look at the capital spending this year at Horizon, we have $500 million spent to the tailings pond and environmental work. Obviously, that work will be complete this year. So that means we have $500 million less to spend in 2019. So as Tim said, it will all be balanced off here, and we'll be within the range.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Right. Okay, okay, I remember that now. Okay, that's helpful. And then is the timing for all this essentially 2020 then?

[Timothy Shawn McKay, President & Director]

Sorry?

[Philip Mulkey Gresh, Senior Equity Research Analyst]

For the Horizon project, sorry.

[Timothy Shawn McKay, President & Director]

We would start executing the project in a stepwise manner starting, really, next year 2020 and into '21. So it's very preliminary. We will give a lot more detail here later this year. But the preliminary, we see it very stepwise over the next few years.

[Operator]

Your next question comes from Neil Mehta with Goldman Sachs.

[Neil Singhvi Mehta, VP and Integrated Oil & Refining Analyst]

It was nice to see some share repurchases in the quarter with the stock trading at a wide free cash flow yield. What do you think about the potential for incremental share buybacks here in the third and fourth quarter and then into 2019? And what's the framework around share repurchases?

[Corey B. Bieber, CFO & Senior VP of Finance]

Yes. Thanks, Neil. It's Corey. So as -- I think we said a few times today, it is a priority to return capital to shareholders, and we've done that very well through 18 years of consecutive dividend increases. More recently, the dividend is averaged about 22% compound annual growth rate. That means really over $2 billion through buybacks and distributions in recent years. Recently with the stronger commodity prices and greater visibility on our free cash flow, we have bought back additional shares, and that puts us in a better position to increase return to shareholders without compromising capital to other pillars. So as we go forward here, it really depends on -- based on current environment, the outlook and the opportunities that each of the 4 pillars, we'll make the decision on how best to return capital to shareholders through buybacks. So it is important part of it, important part of the 4 pillars, but we make that decision as we go forward. We don't have set figures.

[Neil Singhvi Mehta, VP and Integrated Oil & Refining Analyst]

That make sense. Is the framework more opportunistic or flywheel in nature? In the sense that -- do you say you have a view of intrinsic value and when the stock gets dislocated from that, you take advantage of it? Or do you look at all the other priorities, and when there's excess cash, you utilize that for the buyback?

[Corey B. Bieber, CFO & Senior VP of Finance]

You know what, it comes down to allocation of capital, which we believe we're pretty good at through the 4 pillars, and it is maximizing shareholder value. So some of it is covering off dilution, some of it could be an economic decision and some of it is just based on the current environment outlook and opportunities at which the company sees internally based on the forward view. So we consider it all. We're not dogmatic in how we approach it. We are very flexible, and I would say, we're actually very nimble as well. So when we see opportunities, we are very good at capturing those opportunities.

[Neil Singhvi Mehta, VP and Integrated Oil & Refining Analyst]

Yes. And there was a comment that you made in the release today, talking about M&A and how -- this year you've done smaller level of transactions. Can you just talk about the M&A market? And given where you are, especially as you're digesting the Athabasca deal, are you at a point right now where you're focused more on organic opportunity and capital returns versus trying to secure large transactions?

[Steve W. Laut, Executive Vice Chairman]

Neil, I think, as you know, Canadian Natural is always focused on maximizing value. And we do that through the 4 pillars. I think we heard you say many times before, strengthening the balance sheet has been a priority, it's strengthening very quickly. Returns to shareholders are important to us, and you've seen that increase significantly this year. There is no gaps in our portfolio, so it's not like we need to do any acquisitions. So we're not actually chasing anything. But that being said, we're not averse to doing acquisitions and we're good at it. If it make sense and add value, we'll take a look. But I think right now, it doesn't look like much is out there and nothing is really coming to us, and we're focused on organic growth. And I think as you'll see as we progress through the year, here probably towards the year-end, we have a lot of exciting organic growth opportunities, value-adding opportunities not only to grow production, but increase reliability and lower costs both through the operating cost and sustaining capital cost at Horizon. So we've got a lot of good opportunities in front from us, and we're in a really good position, so it's not like we need to do acquisitions.

[Neil Singhvi Mehta, VP and Integrated Oil & Refining Analyst]

No. That make sense. But last one for me is just on egress. And there's been a lot that's been written around WCS differentials. Obviously, the spreads are elevated right now. Can you remind us the cash flow sensitivity for you guys around WCS? And then how you see it playing out from here? Rail has taken a bit longer than we would have anticipated to have started up, but maybe we'll see it in the back half and into 2019. So any thoughts around differentials, how the market ultimately clears here in 2018 and 2019 and your sensitivity to that?

[Timothy Shawn McKay, President & Director]

Sure. So just on the differentials, it's about $90 million for every $1 different change in WCS. And yes, we are seeing a lot of volatility in the market. We keep hearing that more rail is coming and it has obviously been slower. And as well, North West upgrader should be on stream here in Q3, which will help alleviate things by taking about 80,000 barrels a day of diluted bitumen off the market. So it is very volatile, and as a company we're continuing to be nimble. Part of the reason we are reducing our heavy oil is because of that, and at the same time, our light oil activities continue to show very, very strong results. So we'll continue to just look ahead in the market and say, make those decisions as we go through the year.

[Corey B. Bieber, CFO & Senior VP of Finance]

Just one addition. Neil, from Corey. So our WTI sensitivity is about $250 million on cash -- on funds flow from operations per dollar change. So as you can see the WCS has $90 million. It's kind of reflective over the fact that heavy oil has become a much smaller portion of the portfolio of around 25% of the BOE mix.

[Steve W. Laut, Executive Vice Chairman]

So long term, we think the differential is going to be in that 22%, 23% range. We know we're going to have a volatile period here of time probably through the next year, or so, as we wait for Line 3 to come on. And as Tim mentioned, we've got 80,000 barrels a day at North West coming on, take up fuel and bitumen. We know we've got real capacity coming in excess of 100,000 barrels a day. So it just really matters how will that balance between production and takeaway capacity; how it works here for the next year until Line 3 comes on stream.

[Operator]

Your next question comes from Matt Murphy with Tudor, Pickering, Holt.

[Matthew Murphy]

You guys mentioned industry working towards the more effective nomination process. Just wondering if you could elaborate on how a more effective process may result in an improvement for yourselves and your peers, either via better pricing or greater certainty of moving your barrels?

[Timothy Shawn McKay, President & Director]

Okay. Well, Canadian Natural is an active participant in the industry crude oil logistics committee. And what the committee is trying to do is take what we would call the air barrels out of the nomination system. So currently, what we see happens is that your -- there's excess nominations, which then are apportioned back to all the industry members. So by reducing the air barrels, we should have less [ apportionate ] and then less potential spot barrels going into the market at the last minute causing not only logistical constraints for Enbridge, but also causing producers and refiners to acquire those barrels. And typically, those barrels are always at a bigger spread.

[Operator]

Your next question comes from Paul Cheng with Barclays.

[Paul Cheng, MD & Senior Analyst]

I have to apologize, first, maybe I'm beating the dead horse here. I'm just curious that if we look at the market reaction in some of your peers, whether it is Conoco when they coming out with a 20% to 30% cash flow for this cycle for cash return or the share fund talking about a sustainable $3 billion on a consistent basis buyback at the minimum. Or there's Suncor talking about any of the excess cash flow that coming back primarily into the cash return to shareholder. That seems to be well received by the market. Just curious that, internally, I'm sure you gentlemen look at that, and is there any particular reason why you decided that's really not for you to adopt such a strategy similar to your peers?

[Steve W. Laut, Executive Vice Chairman]

I think, Paul, really when you look at our new book -- we try to be as clear as we can on our strategy. We have, as you know, substantial free cash flow that's growing. It's robust. It's sustainable. And what we try to do is balance those 4 pillars, and we do a pretty good job balancing those 4 pillars; react to the market conditions, and that's how we ensure that we do that, and that's what we communicate to The Street. We are not communicating to the Street that we have a buyback program other than the Normal Course Issuer Bids, so you know what we can go up to. Dividends have increased significantly, and that's pretty stepwise. So really the message for the Street for us is that you'll see us balance those 4 pillars: balance sheet; return to shareholders, which includes buybacks and dividends; resource development, which is very steady; and opportunistic acquisitions, which we don't see much of. So that's how we look at it, and that's how we deliver the message to the Street.

[Timothy Shawn McKay, President & Director]

I think the other element, Steve, is we have exceptional project portfolio that can deliver very, very good returns as we develop it. And we don't want to prejudice that development plan and that growth plan, we see that as being an important element for shareholder value creation.

[Paul Cheng, MD & Senior Analyst]

All right. And all I would just say though, is that seems like shareholder does appreciate that you have some, maybe more transparence and clear in terms of what is the cash return expectation that they could have. The different topic that I'm wondering then, is CNQ involved with any well discussion to increase your shipment or your transportation through rail?

[Timothy Shawn McKay, President & Director]

So -- this is Tim here. On the rail thing, basically we're always talking with various parties and looking for opportunities that make economic sense. And if you look back in time, we had shipped as much as 35,000 barrels a day by rail, but it made economic sense and it was good long-term value for our shareholders. So we are obviously talking with various parties. We don't have anything on our plate today, but we're not opposed if the right economic opportunity is there to do rail.

[Paul Cheng, MD & Senior Analyst]

Tim, can you share with us then, from what you can see, what is the biggest hurdle or is the bottle -- yes, is sort of like the obstacle between the 2 sides, the producer and the well operator coming to the agreement? Is it that the fee that they're trying to charge? Or is the duration of the contract? Or is the minimum volumes level that they want?

[Timothy Shawn McKay, President & Director]

Sure. It's really a bit of everything. So the things that we've seen in the past here have been the term, most wanted a term about 3 years, which -- if you look ahead and say, Enbridge will be on stream Q4 and the differentials will tighten, you will be out of the money very shortly. The other aspect is that the cost, it is not as good as a good pipe, that's -- that we have access to. So we evaluate it. There could be a point here, a period of time where we would do rail. But again, it would have to be more short terms and a more appropriate for the difference between the cost of the pipe versus rail.

[Paul Cheng, MD & Senior Analyst]

Okay. So that's -- I suppose that based on what you just say, CNQ is not aggressively trying to make some commitment and increase your well commitment over the next, say, call it, 2, 3 years. That's not the path that you're going to take.

[Steve W. Laut, Executive Vice Chairman]

We will continue to look at all the options when we have discussions. As you can imagine, we are in discussions with people. So it's not our interest to sit here and tell you all the details of where we're at. So just continuing to talk about it. And we're trying to maximize value, and I think Tim outlined it fairly well.

[Paul Cheng, MD & Senior Analyst]

Okay. And final one, just to clarify. You're saying that the North West Redwater refinery started taking heavy oil in the third quarter? Any idea is it by the end of the quarter or that is going to be this month?

[Timothy Shawn McKay, President & Director]

It's on track here and they're very close. And I think it's more for North West to publicly comment on that rather than us, but they're making good progress and we're very confident they're going to make you Q3.

[Operator]

Your next question comes from Roger Read with Wells Fargo.

[Roger David Read, MD & Senior Equity Research Analyst]

Maybe as another way to think about the question that keep -- everybody keeps pushing on the shareholder returns here. You mentioned balance sheet strength 1x EBITDA, and I know you've got a lot of debt that isn't necessarily advantageous to try to repay at this point, modest debt due between now and say, the end of '19. But what is the right way maybe to think about the balance sheet structure other than in a debt-to-EBITDA standpoint because we all know, with oil prices moving around, EBITDA can change. So is there a debt-to-cap, a long term sort of maybe cash versus repayments? And then we can kind of work our way into what we think you might do, given that -- it sounds like CapEx should be fairly stable, acquisition seems somewhat unlikely at least on the large side in a way we can kind of frame up, maybe the cash available for dividend increases or share repos.

[Corey B. Bieber, CFO & Senior VP of Finance]

Yes. Thanks, Roger. So yes, we evaluate several metrics as do the rating agencies and we target to ensure that we maintain very strong investment-grade ratings through the -- through peak -- through the entire cycle. So we're pretty well positioned today to withstand very volatile commodity price cycles. If you look back in history, pre-2015, our debt to EBITDA was in the range of 1x to 1.3x. And at strip today, as we said earlier, we target to be in that 1.5x, so we're getting close back to those levels. Additionally to your point, we do target a debt-to-book-cap range. Our range right now is in that 25% to 45% range. We're in that -- just under 40% today, probably again being that mid-30s by the end of the year. Typically, we're at the higher end being post-accretive acquisitions like we are today, more and more commodity price environment. And then we target to be in the lower end in a higher price commodity environment. So we're deleveraging and try to be in that lower half very, very quickly.

[Roger David Read, MD & Senior Equity Research Analyst]

Okay. And then the other question I had, if we look at the OpEx, and it's a little tough right now because with the start-ups and everything to get a real good handle on the right OpEx trends on a certainly year-over-year basis. But is there anything as we look whether it's in the E&P business or in the oil sand side that we should think of, that won't be favorable in terms of OpEx going forward? And I'm not just looking at production, I'm looking sort of the total thing including transportation and everything.

[Steve W. Laut, Executive Vice Chairman]

Really, other than volatility in the commodity prices like natural gas, obviously on our Thermal operations and our oil sands operations, it benefits from lower natural gas prices. But anything else, again, diesel, gasoline, that is actually higher for our employees and our field operations. But other than those 2 items, everything else was very stable. We've been working very well across the board with all our vendors and service providers.

[Operator]

Your next question comes from Phil Skolnick with Eight Capital.

[Philip Ross Skolnick, Managing Director of Energy Research]

With respect to AOSP during the period of turnaround, did you sell any bitumen blender in that time because your realized price of $80.17 did come in a little bit lower than what I was expecting. I was just wondering if that was -- if you did that, was that blended into $80.17 price?

[Timothy Shawn McKay, President & Director]

Yes, that's correct.

[Philip Ross Skolnick, Managing Director of Energy Research]

Okay. Cool. And just finally, just a follow-up on the Enbridge nomination discussion. Is there any idea in terms of timing, given Enbridge kind of had that hiccup when they attempted to do a fix and really didn't?

[Steve W. Laut, Executive Vice Chairman]

We're working together with Enbridge, all producers and other shippers and buyers on the crude oil logistics committee to fine-tune and to make sure that the oil that does move it's more effective and efficient on the system. There's no really no time on that, Phil, it's an ongoing process. And we'll update you as we go forward, but I think good progress has been made and we've seen a little less volatility in heavy oil differentials because of it.

[Operator]

Your next question comes from Asit Sen with Bank of America Merrill Lynch.

[Asit Kumar Sen, Research Analyst]

I had one question on the pillar of cash allocation, which is the bolt-on acquisition or M&A. You've made a small acquisition recently, Laricina. Just wondering what drove towards that? In other words, what I'm trying to figure out, what are your parameters that you look for making those bolt-ons, since you have almost everything in your portfolio?

[Timothy Shawn McKay, President & Director]

Well, if you look at that acquisition there and you look at our existing lands that we acquired also from ASOP (sic) [ AOSP ] and Cenovus, it is a very strategic opportunity that overlaps our lands. It has strategic infrastructure that we will leverage off of. And obviously, our operations are right at the top of it. So our Thermal group is very versed in all sorts of Thermal operations, whether it's SAGD, CSS, solvent. And as such, we're able to leverage our expertise team on this item. So it's a very, very strong fit and a very good opportunity for future value for the company.

[Asit Kumar Sen, Research Analyst]

Great. And I guess I would just follow up with the scenario question. So if -- how would your strategy change if any in 2019, if the WCS diff, they're currently at $30 stays flat or doesn't change? Would -- it just looks like you're factoring the $20 or $23, just talk to us about your thought process. And also, if you could update us given the growth that you're going to experience on your corporate decline rate and sustaining CapEx in 2019.

[Steve W. Laut, Executive Vice Chairman]

You know what, we're going to come out with that when we do the budget, but it's probably too early for us to comment. But I think directionally, you can see that we have a very large diverse inventory of projects we can go to. If you see differences in prices in near terms, we allocate capital based on that. So if you had a higher differential, which means heavy oil projects less competitive with our light oil projects, both here in Canada and the U.K. and Offshore Africa or some of our projects we have at Pelican and Horizon, we will allocate capital to maximize value for shareholders. So we'll see, we'll monitor as they go forward and then as we develop the budget here in the fall, we'll make sure we have lots of flexibility to adapt to any situation you can see out there.

[Operator]

Your final question comes from Neil Mehta with Goldman Sachs.

[Neil Singhvi Mehta, VP and Integrated Oil & Refining Analyst]

Yes, sorry for the follow-up here, guys. One last question, when we think about the debottlenecking, the project at Horizon and the incremental growth there, how should we think on a fully burdened basis kind of what the breakeven of the project is, either on a WTI or Brent basis when you really layer in all the costs for that?

[Timothy Shawn McKay, President & Director]

Neil, what you're doing here is obviously we're still fine-tuning the costs. As you know, we haven't given you details on the cost. We expect we'll fine-tune those costs as the year goes through, but I would think the breakeven to get a return on capital is somewhere between that $45 to $55 WTI range. I think it's probably likely to be below $50, but we're going to fine-tune the costs as we go forward.

[Operator]

This concludes the question-and-answer session today. Mr. Stainthorpe, I turn the call over to you.

[Mark A. Stainthorpe, Director of Treasury & Investor Relations]

Thank you, Stephanie, and thank you everyone for attending our conference call this morning. As you heard on the call today, Canadian Natural is in an enviable position. Our free cash flow generation is significant and sustainable, allowing for a balanced allocation to our 4 pillars. Our long-life, low-decline assets makes Canadian Natural more robust and provides several opportunities to drive increasing production, deliver effective and efficient operating costs and create shareholder value in an environmentally responsible manner. This is complemented by a diverse, low capital exposure asset base that provides optionality, which Canadian Natural can and will exercise at our discretion to maximize shareholder value. If you have any further questions, please give us a call. Thank you again, and we look forward to our third quarter conference call in early November.

[Operator]

Thanks, and enjoy the day.