Canadian Natural Resources Ltd

NYSE:CNQ

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Canada Natural Resources (sic) [ Canadian Natural Resources ] Q4 and Year-End 2017 Earnings Results Conference Call. [Operator Instructions] Please note this call is being recorded today, March 1, at 9:00 a.m. Mountain Time.I would now like to turn the meeting over to your host for today's call, Mark Stainthorpe, Director, Treasurer and -- Treasury and Investor Relations of Canada -- Canadian Natural Resource. Please go ahead, Mr. Stainthorpe.

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

Thanks, Christine. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2017 conference call.With me this morning are Steve Laut, our Executive Vice Chairman, who will discuss our strategy and strategic focus on creating shareholder value; Tim McKay, our President, who'll provide a more detailed update on the year and quarter as well as discuss our ongoing projects and operations; Darren Fichter, our Chief Operating Officer for E&P, who will provide an update on our year-end 2017 reserves; and Corey Bieber, our Chief Financial Officer, who'll provide an update on our financial position.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?

[Steve W. Laut]

Thanks, Mark, and good morning, everyone. And thank you for joining the call this morning. As a result of significant capital investment, Canadian Natural has successfully completed the transition to a largely long-life, long-decline asset base with Horizon Phase 3 up and running. Canadian Natural is in a very strong and enviable position. We are generating significant and sustainable free cash flow. Cash flow that is growing, driven by our world-class, long-life, low-decline assets and complemented by our high quality, low capital exposure assets.In today's commodity price world, long-life, low-decline assets are very valuable and give Canadian Natural a competitive advantage. Reservoir risk is low to nonexistent and the scale of these operations matters along Canadian Natural to leverage technology and use continuous improvement processes to minimize our environmental footprint, maximize utilization, reliability and drive 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 to drop to 9%. As a result, our maintenance capital production flat is significantly less compared to a typical E&P company, making Canadian Natural more robust and generating more free cash flow. In addition, we're able to use Canadian Natural's size to drive economies of scale across all our businesses. Including Canadian Natural's large, high-quality inventory of low-capital exposure projects in primary heavy oil, natural gas and light oil in Canada and Côte d’Ivoire, which provides significant capital flexibility, quick payouts and a high return on capital, particularly where we leverage our infrastructure advantage to keep costs low. Canadian Natural is one of the few companies in our peer group that has quality in both asset types, the technical and operational expertise to execute in both asset types, to deliver effective and efficient operations. And importantly, the discipline to effectively allocate capital to grow production and maximize cash flow. Canadian Natural's unique combination of asset base strength, diversity and balance, combined with our strategy and competitive advantages, effective capital location and a management team that is more aligned with shareholders than any of our peers, drive sustainability, significant free cash flow and returns to shareholders. At this time, as I transition from the President's role to Vice Chairman, I'd like to provide some more strategic thoughts, namely minimizing our environmental footprint and the important impact this has on Canadian Natural's sustainability. As many of you know, Canadian Natural is committed to reducing our environmental footprint, particularly our greenhouse gas emissions. 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 in significant capital to capture and sequester CO2. We have CO2 capture and sequestration facilities at Horizon. Our 70% percent interest in the Quest Carbon Capture and Storage facilities at Scotford, and the capture and sequestration facilities at Northwest refinery when it's up and running in 2018. 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, based on data from the Global Carbon and Capture Institute (sic) [ Global Carbon Capture and Storage Institute ]. 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 using our 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 the greenhouse gas emissions intensity from oil sands production to levels that are below that of the average oil produced globally. For reference, today at Horizon, where we recognize our carbon capture initiatives, our emissions intensity is only slightly higher, 5%, than the average for all global oils. The impact technology and effective operation has on low-end Canada's oil sands, greenhouse gas emissions intensity, and our ability to leverage technology to continue to reduce our intensity is generally not well understood. Many external opinions of oil sands operations are based on outdated data from many, many years ago. 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 oil sands is unique and our collaboration on environmental issues is world leading.But COSIA, Canada's Oil Sands Innovation Alliance, sees the industry work together to tackle important environmental issues in greenhouse gas emissions, air, land and water, allowing the industry as a whole to progress up the technology curve at exponential rates, a significant Canadian success story. The value of Canada's oil sands is very important to Canada. Not only is the industry making significant strides in reducing our environmental footprint but creating hundreds of thousands of job for Canadians and adding significantly to all government revenues. Revenues that are important in supporting the government in such areas as healthcare and education, critical to the long-term prosperity of Canada. If the oil and gas sector is to provide security for hundreds of thousands of Canadian jobs and support for healthcare and education, Canada needs market access for our products. To that end, Canadian Natural supports the Alberta climate change initiative as it relates to the oil and gas sector. We also commend Premier Notley and Prime Minister Trudeau for the support of the Trans Mountain pipeline, a critical and important infrastructure investment to ensure Canada's prosperity.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. At Horizon, we already have taken emissions intensity within 5% for the global average and lowest total cost. At Horizon, we've taken operating costs from roughly USD 40 a barrel to roughly USD 16 a barrel. And importantly, there are no reserve replacement costs, a fundamental factor in Canadian Natural strategy to invest in the oil sands and be a leader in research and development. A critical point in Canadian Natural 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 4 pillars of cash flow allocation: balance sheet strength, returns to shareholders, resource development and opportunistic acquisitions. How we balance the pillars depends on where we are in the commodity price cycle, the risk of creating cost inflation and other potential opportunities. At all times, the primary goal of balancing the 4 pillars is to maximize shareholder value. Canadian Natural is delivering substantial, sustainable and growing free cash flow, as you will hear this morning, we're effectively balancing the pillars by strengthening the balance sheet, debt-to-EBITDA to 1.9x by year-end; increasing returns to shareholders, increased 22% to date; and taking a disciplined approach to resource development. We're maintaining our capital budget and production guidance.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 driving increasing returns in 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, sustainable and clearly a unique E&P company. Not surprisingly, Canadian Natural's management and staff compensation is directly tied to the key metrics to make it sustainable and maximize value. These key metrics include environment and safety performance; returns on capital; total shareholder return; effectiveness and efficiency; balance sheet strength; and production and reserve growth. 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 and talk to our 2017 fourth quarter and year-end results. Starting with natural gas, the fourth quarter production of 1.656 Bcf per day was essentially flat to our Q3 2017 production. In the fourth quarter, there was once again a third party reliability issues that impacted the quarter by an average of approximately $39 million a day as well due to lower natural gas prices in the fourth quarter, we proactively shut-in production, which impacted the quarter by approximately $24 million a day. Currently at the third-party plant, we are producing at a constrained rate of approximately $80 million a day as the plant has only one process stream functioning due to integrity issues. Overall, the 2017 annual gas production was 1.662 Bcf per day, and the North American annual operating cost of $1.19 per Mcf, we were within guidance. For Q1 activity, we are targeting 4 net gas wells of which 2 are preserving lands. All 4 wells have low-cost tie-in, and we've been able to ensure our drilling and completion costs are low by being organized and proactive in our execution strategy. Recognizing natural gas prices could be challenging for 2018, we are targeting to only drill 17 net wells. We have diversified our natural gas sales portfolio in which 32% is used internally, 29% is exported, and only 39% is exposed to AECO pricing. Our Q1 natural gas guidance is targeted to be 1.6 to 1.65 Bcf per day. Our North American light oil and NGL production in Q4 2017 was 94,437 barrels a day, up 2% from Q3 2017 and is up 8% when comparing to Q4 2016. On an annual basis, it was 92,036 barrels a day, up 5% from 2016. In all areas, we continue to optimize our water floods, drill strategic wells and complete minor accretive property acquisitions. Our annual operating cost were $14.30 per barrel versus the 2016 cost of $13.48 per barrel. For Q1, we're targeting 30 net light oil wells, up from the 23 we did in 2017. 13 wells are targeting Montney light oil areas at Tower, Goldendale and Wimbley. 9 wells are in Southeast Saskatchewan and 7 in Southern Alberta and 1 in the Kaybob area. Our Offshore Africa production was 19,519 barrels a day, an increase from Q3 2017 of 18,776 barrels per day. During the third -- which -- during the third quarter, we completed planned turnaround on the FPSO at Baobab. Côte d’Ivoire annual operating costs were within guidance at $12.41 per barrel. Total Offshore Africa annual operating costs were $2,407 per barrel as expected, up from the 2016 average of $1,848 due to the relatively fixed FPSO cost and lower production volumes. In the North Sea, we averaged 19,584 barrels a day in Q4 2017, down from Q3 2017 of 24,832 barrels a day, primarily as a result of the unplanned shutdown of the Forties Pipeline and the Ninian South platform in December, which together impacted the quarter by approximately 3,700 barrels a day. Operational improvements are continuing to reduce our annual operating costs in the North Sea, which are down 14% to $3,660 versus 2016. With the positive tax changes in the U.K., that if were enacted a couple of years ago, we continue to drill wells in the North Sea. We have started a 5.5 net well drilling program, consisting of 4.6 net producers, 0.9 net injectors, targeted to add approximately 3,000 barrels a day by the fourth quarter of this year. Q1 international production guidance is 38,000 to 42,000 barrels a day. For Q4, heavy oil production was strong as expected, averaging 99,326 barrels a day, which is approximately 1% higher than Q3 2017.In the fourth quarter, we drilled 116 net wells from our very large inventory. Results have been good with an average around 50 barrels per day per well. Drilling, completion, facility cost continue to be stable. In Q1, we target only 59 net wells and have slowed down the completions and ramp up of volumes due to the widening heavy oil differentials. We continue to review our capital program in the context of the current market and are evaluating, reducing our heavy oil drilling program for the second half of 2018 and substituting a light oil drilling program instead, if it makes sense. Our 2017 annual heavy oil volumes were 95,530 barrels a day, down as expected from 2016 levels. With operating costs of $15.71 per barrel up from our 2016 cost of $13.55 per barrel, primarily a result of higher lease maintenance, fuel and trucking cost. We continue to look for opportunities to drive effective and efficiencies in this core area, leveraging on infrastructure. A key component to a long-life, low-decline transition is our world-class Pelican Lake pool, where our leading-edge polymer flood is driving significant preserves and value growth. Q4 2017 production was 65,654 barrels a day, up from the Q3 average of 47,604 barrels a day as a result of the previous announced acquisition. On that property, we have started converting existing water flood areas to polymer flooding and complete wellbore clean-outs as needed. It's on track as we target to have 63% under polymer flood by the end of 2018. At Pelican Lake, Q4 operating costs were up on a combined basis to $681 per barrel as we integrated the acquired asset in this quarter. Pelican Lake 2017 annual production was 51,743 barrels a day, with a record low annual operating cost of $642 per barrel compared to our 2016 operating cost of $660 per barrel. The transition continues to go well as we capture synergies between the properties to reduce costs and enhance operations. With our low decline and very low operating cost, Pelican has excellent netbacks and recycle ratios. Q1, we're targeting to drill 8 net producers and 1 injector by the end of the quarter. In Q4 2017, our thermal operations combined to produce 124,121 barrels per day. Our Kirby South project had a strong quarter, producing 35,320 barrels with a very good thermal efficiency SOR of 2.94. The SOR is higher as 16 wells drilled in Q3 and Q4 were put on circulation. By the end of the quarter, 9 wells have been put onto production and are targeted to ramp up to approximately 600 barrels per day per well within 6 months. In the first quarter of 2018, the other 7 wells will also come off circulation and go onto production and start to ramp up. This program essentially keeps Kirby South at its capacity of 40,000 barrels a day. Our 2017 annual operating costs were excellent at $9.50 per barrel, including fuel, which is comparable to our 2016 cost of $9.33. At Primrose, production was strong in the steam flood area with 2017 average production averaging 39,300 barrels a day, significantly up from our 2016 average of 10,900 barrels a day. Our thermal operations continue to be effective and efficient with $11.16 per barrel operating cost, including fuel in Q4 2017. And on an annual basis, $12.33 per barrel flat to our 2016 cost of $12.36 per barrel.At Kirby North, the project is tending -- is trending ahead of schedule and cost performance is trending on budget. Civil work at the plant site has been completed, building and equipment modules have been set at the plant site. Major electrical work is starting to ramp up as the mechanical work is completed. Construction and drilling manpower is currently at about 740 people, including satellite module yards. The project is targeted to add 40,000 barrels a day, with steam in targeted for late 2019 and first production targeted in early 2020. The Q1 thermal production guidance is 108,000 to 114,000 barrels a day. Since the incident with the Keystone pipeline in November, the differentials have widened. Although oil is moving, but the differentials are behaving as if the oil can't move. This anomaly is -- has created -- is created by the current proportionate rules, which we believe is temporary. In the short term, as a result, we will be slowing down the ramp-up of wells and temporarily delaying the completions on some of our heavier wells as well moving our Peace River turnaround into March and Primrose as originally planned into early April. At Horizon, in the fourth quarter of 2017, we've produced 141,275 barrels a day as we completed the Phase 3 tie-ins, turnaround and the successful ramp-up of Phase 3 facilities. Q4 operating costs were normalized for downtime for the quarter were very strong at $21.13 per barrel. On an annual basis, Horizon production volumes were 170,089 barrels a day, while our operating costs were very good at $24.98 per barrel, below our midpoint of guidance for 2017.In the month of December, we achieved approximately 247,200 barrels a day of SCO, exceeding our 240,000 barrels a day we have targeted. As well, in the month of December, operating costs were under $20 per barrel, a great achievement by Horizon team. As we talk to in our last open house, our opening -- open -- our in-pit extraction process pilot is on track to start up in Q2, which will test if we could produce stackable dry tailings. Our review of the enhancement capacity opportunity at Horizon is underway. The engineering study is aimed to capturing any process enhancements at Horizon that will allow us to take advantage of any potential creep capacity.We anticipate completing this study in early Q2 and from there, start procuring equipment mid-2018 with installation of tie-ins during the 2019 turnaround and potentially long-lead equipment installation in 2020. Finally, the engineering and design work is proceeding as planned for the potential Paraffinic and VGO expansions at Horizon. For the fourth quarter, at AOSP mine, we continued to deliver safe and reliable operations.Our fourth quarter production was 180,221 barrels a day net, which included planned turnaround pit stops at both mines. As well, we achieved a very good operating cost of $27.95 per barrel.We continue to be focused on improving our reliability and delivering safe, cost-effective operations. Yearly volumes of 111,937 barrels a day exceeded our midpoint of guidance, while our annual operating costs were $26.34 per barrel below our guidance as we captured operating cost savings. At both sites, we're taking a systematic 3-pronged approach: first, understand the reliability enhancements opportunities, we can complete and execute them; secondly, with enhanced reliability, we can focus on reducing our operating costs; finally, we're going to complete engineering work at both sites to increase production by enhancing or modify equipment to gain creep capacity cost-effectively. As well, we continue to look for operating cost reduction synergies, opportunities that will positively both impact cycle. Oil sands mining, Q1, our fuel production guidance is 435,000 barrels to 465,000 barrels a day, with a yearly operating cost between $22.50 to $26.50. In summary, Canadian Natural is an effective and efficient operator, a position that has been enhanced by our ability to realize significant gains in optimizing our production, reducing our cost across the company. We continue to look for ways to become more effective and efficient in 2018. We are balanced for commodities with approximately 50% of our BOEs, light crude oil. 25% heavy and 25% natural gas, which lessens our exposure to the volatility of any one commodity. We will continue to focus on safe, reliable operation, enhancing our top-tier operations. We'll continue to optimize our capital allocation, deliver free cash flow, strengthen the balance sheet that Corey will highlight further in the financial review. I will now turn it over to Darren to talk to our 2017 reserves review.

[Darren M. Fichter, COO of Exploration & Production]

Thank you, Tim. Good morning, ladies and gentlemen. To start, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent qualified reserve valuators. Our 2017 reserve disclosure is presented in accordance with Canadian reporting requirements, using forecast prices and escalated costs. The Canadian sands also require the disclosure reserves on a company growth, working interest share before royalties.2017, we had a great year and our strong performance is reflected in our finding and development costs. Our proved corporate finding, development and acquisition costs, excluding the change in future development capital, is $5.15 per BOE. The proved plus probable FD&A is $5.52 per BOE. Note that these FD&A results include the AOSP acquisition. Excluding AOSP, the 2017 FD&A are $5.13 per BOE per proved and $8.83 per BOE for proved plus probable.In 2017, Canadian Natural finding, development and acquisition costs, including the change in future development capital, are $12.29 per BOE per proved and $12.17 per BOE for proved plus probable. Again, these results include AOSP. Excluding AOSP, the FD&A, including FDC, is $10.81 per BOE for both proved and proved plus probable. Canadian Natural equates proved developed producing proved and proved plus probable reserves by 887%, 927% and 866% of 2017 production. Excluding AOSP, we replaced production for proved developed producing, proved and proved plus probable up by an impressive 256%, 301% and 175%. As evidence of Canadian Natural's transition to a long-life, low-decline asset base, the proved developed producing reserve life index of the company is now 19.2 years. The reserve life index for proved is 24.6 years and proved plus probable is 33 years. In 2017, we increased our proved developed producing reserves by 67% to 6.91 billion BOEs. The total proved reserves increased 49% to 8.87 billion BOEs. And our total proved plus probable increased 29% to 11.87 billion BOEs. The proved net present value of future net revenue before income tax, using a 10% discount rate, increased 30% to $89.8 billion and increased 24% to $114.5 billion for proved plus probable. In summary, these excellent results reflect the strength, balance and great opportunities we have in our asset base. Now I will hand over to Corey for the financial highlights.

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

Thank you, Darren, for that comprehensive update on the company reserves performance for 2017. We also had strong financial performance during the year 2017. Net earnings of almost $2.4 billion were achieved in 2017 as compared to the loss of $204 million during the same period of 2016. This improvement reflects stronger commodity pricing as well as higher crude oil production volumes and the effective and efficient operations that Tim spoke about. Adjusted earnings for 2017 were $1.4 billion as compared with a loss of $669 million in 2016, again reflecting higher commodity pricing and crude oil production volumes. 2017 funds flow for the corporation were also very robust at $7.35 billion, 70% higher than that recorded during 2016. Funds flow was over $2.3 billion higher than CapEx, excluding AOSP acquisition costs, meaning the company is generating very significant free cash flow. As previously stated, the current -- one of the current focuses for the company of free cash flow is debt reduction. Following the net debt reduction of about $650 million during the third quarter of 2017, a further reduction of $260 million was realized during the fourth quarter. This represents a combined net debt reduction of both $905 million since the AOSP acquisition, even with downtime taken for the Horizon turnaround in times as well as $975 million Pelican Lake acquisition. Correspondingly, liquidity exited the year at $4.25 billion, about $600 million stronger than amount at June 30 and over $1.2 billion stronger than December 2016. Interestingly, if you compare our Q4 '17 ending net debt of $22.3 billion and compare that to Q3 of '16 net debt is $17.3 billion and adjust for the $8.24 billion of cash paid for the AOSP transaction, underlying net debt has reduced by over $3 billion over the 5 quarters since the completion of Horizon Phase 2B, largely as a result of repayments from fund flow. During those 5 quarters, WTI averaged just over $50 a barrel.Beyond this, and subsequent to year-end, we have successfully retired about $1.5 billion in Canadian equivalent debt. These are comprised of 2 notes accumulating to U.S. $1 billion and $275 million in canceled two drawn bank facilities. All in all, this is a very strong indicator of a robust free cash flow enterprise and continuing improving debt metrics.Based upon current strip pricing, we would expect to exit the year at about 2x debt -- sorry, under 2x debt-to-EBITDA with debt to book capitalization in the range of 35% to 40%. However, returns to shareholders are also a critical pillar of our strategy. Based upon the financial resilience and operational robustness of the company's assets and the board's confidence in the business plans of the company, we have increased the regular quarterly dividend by $0.06 or 22%, effective April 1. Following this increase and based upon our estimates of capital required to maintain production, we believe that our current dividend and production levels remained resilient to under $40 WTI, a rarity in our industry. This is reflective of our strong asset base in which almost [ 60% ] is considered long-life, low-decline in nature, and our low-cost profile underpinned by our no decline oil sands mines, which account for almost 40% of our BOEs. This substantial increase represents the 18th consecutive year of dividend increases, also a rare achievement for any company in any industry. Delivery of the defined plan continues, and our teams remained focused on growing value for our shareholders. In closing, I believe that Canadian Natural continues to represent a sustainable, flexible and balanced E&P with a high degree of resilience to commodity price volatility. With that, I hand it back to you, Steve, for your closing comments.

[Steve W. Laut]

Thanks, Corey. And before I turn over to Tim for some concluding remarks, I'll point out another Canadian Natural strength and, I believe, competitive advantage. Mainly, the strength, depth and breadth of our management team and the effectiveness of our succession plans. As we announced in December, today Tim will be taking over the role of President. Dan Fichter and Scott Stauth will be taking on the role of Chief Operating Officers for conventional and oil sands operations respectively. All these successions are internal. Everyone has a long history of Canadian Natural and has an intimate understanding of Canadian Natural's culture, business practices, operations and strategies. I'll be taking on the role of Executive Vice Chairman and will remain on the management committee and be involved in all management committee matters as well as other strategic activities. This will allow for a very smooth transition and leadership continuity. This is a highly effective Canadian Natural business practice and has been successfully utilized in the past. When I took on the President's role from John Langille in 2005, John stayed on for over 6 years as Vice Chairman. Additionally, Doug Proll, transitioned from the CFO position to Executive Vice President, allowing Corey to successfully take over the role of CFO. But Doug stayed on for roughly 3 years as Executive Vice Chairman. With that, over to you, Tim.

[Timothy Shawn McKay, President & Director]

Thank you, Steve. In summary, Canadian Natural has many advantages. Our balance sheet is strong and it will continue to strengthen in 2018. We have a well-balanced, diverse and large asset base with significant portion of our asset base long-life, low-decline assets, which requires less capital to maintain volumes. As a result, we delivered significant free cash flow. We continue to deliver year after year strong F&D costs and replacement numbers. With a balance in our commodities, we're approximately 50% of our BOEs, light crude oil, 25% heavy and 25% natural gas, which lessens our exposure to the volatility in any one commodity. For natural gas, we have further diversified our portfolio in which 32% is used internally, 29% is exported, and only 39% is exposed to AECO pricing. We can deliver sustainable and substantial free cash flow, which we are effectively allocating to our 4 pillars. These strengths allow Canadian Natural to allocate cash flow to our 4 pillars to maximize value. Our balance sheet strengthened, debt is down $460 million. We continued disciplined resource development. Returns to shareholders with a dividend increase of 22%, with potential share buybacks if we choose so and finally, optimistic acquisitions, all driven by effective capital allocation, effective and efficient operations by our team delivering top-tier results. With that, I will now open the floor for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Benny Wong from Morgan Stanley.

[Chui Kit Wong, Vice President]

Appreciate the short-term views in terms of prepared remarks. But wondering if we can get update on how you're thinking about the heavy oil differentials over next couple of years? And if you have any increased confidence on these major pipelines happening, given the recent headlines? And if you can remind us what your strategy is around the differentials until those pipelines fall into place? What depreciation that over half your volumes is light oil priced?

[Timothy Shawn McKay, President & Director]

Okay, Benny, a few questions there. We view the differentials here -- the slide in differentials is basically a result of the Keystone incident back in November there where, for 13 days, there was basically roughly 600,000 barrels a day backed up into Alberta. We view this that, over the long term, it'll sort itself with the pipeline being back serviced as well as additional rail over time will fill in those incremental barrels. So we see the differentials basically strengthening back into the pre-November differentials of around $15 per barrel.

[Chui Kit Wong, Vice President]

Great. And just wondering if you can give us an update on the Sturgeon Refinery. Is that still a target to be completed this year? And if there's an opportunity to increase your stake, would CNQ be interested in that?

[Steve W. Laut]

Yes, Benny, it's Steve here. The refinery in North West is on track. In fact, actually, it's running as a light oil refinery rate today, producing ultralow sulphur diesel and VGO and some naphtha. So we're running SCO, we're just waiting for the gasifier and LC Finer to be completed and commissioned. So that will start up in late Q2, taking heavy oil. And as you know, that will increase demand for heavy oil in Alberta by 80,000 barrels a day, and I'll just point out that 80,000 barrels a day will not require pipeline access out of Alberta and will help the differentials -- part of the reason Tim was talking about, expect differentials to come back to more normal levels. As far as going forward, I think what our plan here is let's just make sure the plant runs effectively and efficiently. And when we see that, then we'll make a decision whether to participate in any kind of expansion, if it makes sense.

[Chui Kit Wong, Vice President]

Great. And just one final one, if I may. It seems like one of the things weighing on the stock is this overhang of stock that Shell owns. I know you guys have historically not been active -- particularly active in buying back shares, but wondering if a, that's something you might make sense thinking about in this unique situation? And b, we're seeing a lot of other producers talk about it, seeing if it makes sense to be bigger part of the capital allocation decision going forward. And I'll leave it there.

[Steve W. Laut]

So what we do is we look at returns to shareholders through dividends and buybacks. We do both. Obviously, as you know, we're biased towards dividends. Share buybacks is something we'll look at. I think, for us, the important thing to do first is we'd like to strengthen balance sheet as a priority over buybacks. So we'll do that. We're not averse to buybacks. And we may do more of that as we go forward here shortly. But balance sheet is our first strength.

[Operator]

Your next question comes from the line of Neil Mehta from Goldman Sachs.

[Emily Chieng, Research Analyst]

This is Emily Chieng on behalf of Neil. First of all, congrats on that 22% dividend bump. I guess, can you provide some insight as to why $0.335 was the right number for the quarter? Was there anything in particular you guys are trying to solve for? And do you have, perhaps, a dividend growth target going forward?

[Timothy Shawn McKay, President & Director]

We'll have Corey answer the question.

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

Sure. Emily, we look at a -- our Board of Directors looks at a number of items, including forecasts; volatility; capital expenditure plans; funds flow; and most importantly, resilience through the business cycle. And as I said in my remarks, at this point in time, we would believe that that dividend is very resilient, right through $40 WTI and below. There is no formulas the board uses. The board makes common sense decisions based on the information they have. And I can tell you, they'll ask an awful lot of questions and a lot of different metrics and come to a decision on what makes sense in that situation. And as I say, importantly, what's resilient through the price cycle.

[Emily Chieng, Research Analyst]

Great. And I guess my second question is just on costs. In particular, costs at Horizon surprised us to the downside, despite there being a fairly significant turnaround in the fourth quarter. And you mentioned that costs there were running below $20 a barrel in December. Can you talk us perhaps through what you're seeing in West Canada as well as internationally? And I guess how much further downside can we expect to see?

[Timothy Shawn McKay, President & Director]

Okay. Well, with relation to Horizon, our cost performance has been very good, and they continue to drive efficiencies at both Horizon and ASOP (sic) [ AOSP ]. In terms of the macro picture, internationally, very little cost pressures, activity is still, I would call, somewhat muted. Domestically, there is certain areas that are feeling some cost pressures. Obviously, with the price of oil, our cost of diesel, our trucking costs, are feeling that pitch. Certain services, fracking in particular, feel that cost pressures, but drilling costs have been stable, and we are seeing some pressure on service rig cost.

[Operator]

Your next question comes from the line of Joe Gemino from Morningstar.

[Joseph J. Gemino, Equity Analyst]

You provided a little insight as to what -- as to natural gas production next year. In your opinion, what will it take to ramp up drilling with your natural gas in North America? And about how far off do you think that is from happening?

[Timothy Shawn McKay, President & Director]

Well, the key piece of -- that we need is market access, which Steve alluded to, both the crude oil and natural gas pipelines are at capacity. So until we get better pipelines to give us better markets, the access will be difficult to grow much beyond where we are today.

[Joseph J. Gemino, Equity Analyst]

Sure. And how do you think about that in terms with TransCanada's proposed NOVA Gas expansion projects? Was that something that you see as -- would expand your market access?

[Timothy Shawn McKay, President & Director]

I'll let -- pass this to Steve.

[Steve W. Laut]

Yes, I think, just adding to what Tim said, obviously, there are [ Peace fields ] expanding within Alberta, get rid of some of the bottlenecks, which will be helpful. We also need to get expert capacity out of Alberta and Western Canada. And I think if you look at all the various proposals out there, there's about 2.5 Bcf a day of export capacity you can see coming by 2020. That will help, and that will be able to allow production in Alberta to grow. And we will take our share of that. So if you look at all the pipelines, Alliance, Spectra, and TCPL, there's about 2.5 Bcf a day of egress capacity. We see demand growing in North America by about 13 Bcf a day. And we believe that Canada should be able to capture about 2.5 Bcf of that.

[Operator]

Your next question comes from the line of Paul Cheng from Barclays.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

Just curious, I understand the balance sheet strengthening is the near-term priority. And at what point that priority will give way that for more of the shareholder return on the buyback?

[Steve W. Laut]

Corey?

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

Yes, I think what we do is we look at all 4 of our pillars in concert with each other. So again, similar to the dividend question, there is no magic number in terms of where the debt level is. It's really opportunity-based and what's going to create the most value for our shareholders in our and our board's view. Certainly, the debt metrics are getting very strong and that increases -- that significantly increases capacity over the medium term to look at other opportunities like debt -- or like share buybacks or reinvestment in the basin, if it's economic. So I don't think, again, there's a formula that we'll be held to. I think it's what makes sense in the business circumstance and what is the opportunity set. And today, what we're effectively doing is building that capacity, so we have options under any of the other 3 pillars.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

And as the company strengthen the balance sheet, will the board and the management team be looking at your hedging program and whether that is still necessary going forward?

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

I'll take that one as well. In terms of the hedging program, as we look out where we are today, there's really no significant capital expenditure program -- major capital expenditure program, like we had with the Horizon build-out. And as I said before, we're very resilient, right into the high 30s, low 40s, in terms of maintaining our capital and our dividend. So the -- I think the dividend -- or the hedge policy remains there, but I think it's more unlikely that we would be utilizing hedging at this point in the marketplace. There's really no need for it today.

[Steve W. Laut]

Just to add to that, Corey, I think our hedging program we use only to ensure we have the cash flow to do our capital program. As Corey said, we don't have -- not a significant capital program, have significant free cash flow, so the need to hedge is just not there.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

I would say that for most of the analysts, that we appreciate you don't hedge. And just curious that on the next several years, you gave the CapEx for this year, and how should we look at this as the baseline, and you're going to be pretty close to this CapEx level, given that the bulk of your most significant heavy CapEx is now behind you? Or that that's still going to fluctuate substantially?

[Timothy Shawn McKay, President & Director]

No, we see it as relatively flat. There could be little bumps. Obviously, we have -- our Kirby North expansion program that we're doing. We have potentially small VGO and Paraffinic opportunities ahead of us. So on a relatively -- it's probably pretty flat, but there could be some years where it's a little bumped up with some of these expansion opportunities we have ahead of us.

[Yim Chuen Cheng, Managing Director and Senior Analyst]

Okay, 2 final question. One, some of your peers that is going to roll out with the autopilot trucks. Curious that whether that is in the game plan for you guys in Horizon and AOSP? And secondly, that with you are the operator in both operation, have you been able to go back and looking at deep dive and be able to identify any kind of operating synergies you may be able to drive through? Or this is just too early, since that you just took over AOSP?

[Timothy Shawn McKay, President & Director]

Okay. So first question is on the autonomous trucks. Yes, we are actually going to conduct a pilot here in 2019. Obviously, with our cost metrics, we have a different view on where and how they would be utilized as well as we have our pilot, the in-pit extraction process, where we're looking at trying to do stackable tailings, which could impact that decision in the future. So we're actually doing 2 different views of that to try and see how we can do things more efficiently. And that relates to both sites. As well as the operating cost, yes, we are capturing synergies between the 2 sites. Obviously, transportation, 2 sites, they're very proximinal. We are sharing -- obviously, the people are -- they're under one umbrella, and we're sharing technical expertise that will come through helping both sites.

[Operator]

Your next question comes from the line of Phil Gresh from JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

First question, just on maintenance for this year. Do you have any turnarounds expected at Horizon or AOSP?

[Timothy Shawn McKay, President & Director]

Yes, we have 2 pit stops at AOSP as well as Scotford upgrader has an outage in the summer. As well as Horizon, there is a turnaround scheduled for September.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay, got it. The second question is just on the 1Q guidance. You mentioned a couple of factors that you were considering, I think, on the heavy oil side that may have led that guide to be a little bit lighter in 1Q relative to the full year. Do you have a quantification of how much of that production was kind of purposely held back?

[Timothy Shawn McKay, President & Director]

Well, we're actually doing a combination of items here. Obviously, there is turnarounds that were planned later, Q2. So what we're doing is just moving them ahead, more into late Q1, early Q2, some of it. And essentially, just modifying our profile is the way I would say it. As the only real impact in the short term is just on our thermal and heavy oil operations and obviously, on the thermal side, these wells would be ramping up. We're just slowing it down so that we can have those ramp ups be more coincidental to better product pricing.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Right, okay. Yes, I just -- there may have been some disappointment with the 1Q guidance that seemed a bit unnecessary, I guess. My next question would just be if you have an updated view -- at the Analyst Day, you gave a view of free cash flow at the strip and obviously, the strip has changed quite a bit. So I was curious if you have an updated view?

[Timothy Shawn McKay, President & Director]

Corey?

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

Sure, Phil. Yes, so generally speaking, our sensitivities were about $250 million for a $1 change in WTI. And about $90 million for a change in WCS pricing. So based on those, you can largely do your own sensitivities. But from the 2.4, we're probably up about $1 billion, $1.5 billion, depending on what WTI price you want to assume for the year.

[Operator]

Your next question comes from the line of Amir Arif from Cormark Securities.

[Amir Arif, Analyst of Institutional Equity Research]

Just first question is on your oil sands operating costs. With Horizon coming in below $20, I know in your release, you mentioned that you're looking to capture additional cost-saving opportunities in '18. Can you highlight what those are? Or are those simply related to the expansions at the Paraffinic site and other growth opportunities you're looking at for debottlenecks?

[Timothy Shawn McKay, President & Director]

Generally, the oil sands operating costs at both sites -- we're capturing opportunities and synergies. There's a number of items, there's not one single thing. If you look back in time here, we've been very methodical and very deliberate in our operating cost reduction. So there is not one major piece to it. Obviously, you also have to take into account that December is just one month of the year. So it -- you have to use the average. We do have a turnaround and some outages coming at both sites. So it was a great result. It does tell us that we are on track to operate very efficiently at both sites.

[Amir Arif, Analyst of Institutional Equity Research]

Okay, and then just on that operating cost side, can you give me a sense of how much of that is natural gas-related, like how much Mcf per barrel on average in the operating cost number?

[Steve W. Laut]

I think we can get back to you on the fill, we don't have that right at the top of our head, but if you want, we can just give you the number offline.

[Timothy Shawn McKay, President & Director]

You're looking for a dollar...?

[Amir Arif, Analyst of Institutional Equity Research]

Just curious -- yes, well, just how much of that is -- how much of your operating cost is related to, like, fuel cost, for example, on natural gas consumption? That's fine, I can get that number offline. And then the second question is just more on the natural gas side. I know your corporate decline rate is about 9%, but could you give me a rough sense of what that might look like for your natural gas assets. I'm just looking at your [ 1,617 ] Bcf a day, holding it flat with 17 net wells and just trying to get a better sense of either what the corporate decline rate is or how prolific these 17 wells are in terms of what you're adding to replace production.

[Timothy Shawn McKay, President & Director]

I would say roughly 15%, Darren?

[Darren M. Fichter, COO of Exploration & Production]

Yes, it's around 15%. I can give you the exact number if you want to get the exact number.

[Amir Arif, Analyst of Institutional Equity Research]

Okay. And then is -- do you have a rough breakdown of how much of that gas is, let's say, Montney/Deep Basin versus legacy production?

[Darren M. Fichter, COO of Exploration & Production]

I don't have that exact number, either. I can get you that number, too.

[Amir Arif, Analyst of Institutional Equity Research]

And then the 17 wells that you are drilling, are those -- is it simply drill to fill on existing facilities? Or are these basically, you're adding Montney-type volumes to replace all legacy declines?

[Darren M. Fichter, COO of Exploration & Production]

Yes, no, they're exactly what you said, they're drill to fill -- yes, exactly.

[Timothy Shawn McKay, President & Director]

Except for the East Septimus facility, where we're doing a small facility to handle some volumes. The gas will be handled at Septimus so kind of a combination of the 2.

[Operator]

Your next question comes from the line of Roger Read from Wells Fargo.

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

Just diving into the questions on crude by rail. I know you don't have to be a big user of it but to the extent you would or that you are seeing some pushback from the rails or, let's say, a demand for longer-term contracts, any light you can shed on that? Any changes we've seen thus far in '18?

[Timothy Shawn McKay, President & Director]

Okay. On the rail, what we see is that there is increased rail activity. People are evaluating and some are signing up, as we've seen in the news, to move heavy oil barrels out of the basin.

[Steve W. Laut]

I think, Roger, one of the things that's happened here is I think the industry anticipated that we would need rail capacity in 2018 and that rail capacity was sort of planned to be brought on in a methodical basis across the year. But with the Keystone leak, all that demand all of a sudden happened, you might say, sort of instantaneously to try to handle the backlog. Clearly, it's very difficult for rails to rally the railcars and everything in a short notice. We expect over time that this will be resolved.

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

Okay. And then I know it's been hit a couple of times but when you try to think about share repurchases versus acquisitions and I mean, with the reserves that you highlighted here and the reserve life, you don't need an acquisition. But I was just kind of wondering, from a -- almost a return standpoint, how would you weigh an acquisition versus share repo? Does the -- does one have to clearly outweigh the other? Or if they're sort of tied, you'd prefer one versus the other?

[Steve W. Laut]

We evaluate everything, including share repurchases, acquisitions, resource development, on the same criteria, it's just to maximize value. We have a certain return criteria we have to make. Clearly, we'll take a balanced approach if they're equal. Obviously, when you do share buybacks, you can do that essentially at any time. When there's corporate acquisitions that come by or property acquisitions, they're a one-time event, they only come by once. So you have to weigh that into consideration. But generally speaking, we will focus on value creation. Whatever capital we allocate has to create the most returns. And that's what we're focused on and that's how we'll look at it.

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

Okay. And then if I could sneak just one more, on the acquisition front or if you think about bid-ask spreads and attractive value, the things that are coming across at this point, is there a particular region that you would cite as relatively aggressively bid versus one that's maybe being -- maybe where you see actual value opportunities? And I'm thinking more international versus domestic gas opportunities.

[Timothy Shawn McKay, President & Director]

No, we don't see anything ahead of us there. Our portfolio is very strong. We have a huge amount of assets that we can develop ourselves more cost-effectively.And just one note, there was a question regarding the fuel cost there on Horizon and AOSP, and it's roughly $1.50 per barrel.

[Operator]

[Operator Instructions] Your next question comes from the line of Dennis Fong from Canaccord Genuity.

[Dennis Fong, Exploration and Production Analyst]

Just quickly on Horizon, I was just wondering, have you guys seen, with respect to the ramp-up of Phase III, have you guys tested the limit of the facility yet? And how does that kind of contribute to your thought process on debottlenecking and so forth? I understand you have that three-prong approach. I'm just curious as to whether or not you've actually bumped up against the upper limits of the facility yet?

[Timothy Shawn McKay, President & Director]

At Horizon, I hate to use the word bumped up to -- what we've been doing is we've been doing some testing of the various equipments. And as we alluded to previously is, the DRU furnaces appear to be where the opportunity lies. Obviously, we have to do the work, the process guys are in the process of doing all the testing between the different pieces of equipment. But our opinion and where we sit today is that the DRU furnaces are the limiting factor that we see ahead of us.

[Dennis Fong, Exploration and Production Analyst]

Okay. And then just with respect to the engineering and your potential September turnaround, would the engineering and the procurement of any materials be complete by that point in time? Or are we expecting more of kind of a 2019 view for some of these kind of low-hanging fruit for Horizon?

[Timothy Shawn McKay, President & Director]

It is very hard to say at this point. Obviously, they're looking at various scenarios, both short term, medium term and long term. So it's too early to speculate. Obviously, anything we can do in the short term cost-effectively, we would do.

[Operator]

There are no further questions at this time. Mr. Mark Stainthorpe, I turn the call back over to you.

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

Thanks, Christine, and thank you, everyone, for attending our conference call this morning. Canadian Natural's large, well-diverse asset base continues to drive significant shareholder value. With the completion of our transition to a long-life, low-decline asset base and continued effective and efficient operations, going forward, we generate substantial and sustainable free cash flow. This, together with effective capital allocation, contributes to achieving our goal of maximizing shareholder value. If you have any further questions, please give us a call. Thank you again, and we look forward to our 2018 first quarter conference call in early May. Thank you, goodbye.

[Operator]

This concludes today's conference call. You may now disconnect.