Canadian Natural Resources Ltd

NYSE:CNQ

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources Q4 2018 Earnings Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, March 7, 2019, 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, Vice]

Thank you, Carol. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2018 conference call.With me this morning are Steve Laut, our Executive Vice Chairman, who will briefly discuss our strategic focus on creating shareholder value and highlight some of the factors that set us apart from our peers. Steve will also provide an update on Canadian Natural and industry's efforts on the environmental front, where significant performance achievements are not well understood.Tim McKay, our President, will provide a more detailed update on the year-end and quarter as well as discuss our ongoing projects and operations. Darren Fichter, our Chief Operating Officer for E&P, will provide an update on our strong year-end 2018 reserves; and Corey Bieber, our Chief Financial Officer, will provide an update on our robust financial position.Before we begin, I would refer you to the special note regarding non-GAAP measures contained in our press release. These measures used to evaluate the company's performance should not be considered to be more meaningful than those determined in accordance with IFRS. I would also like to refer you to the comments regarding forward-looking statements 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 it 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 Canadian oil market was very rocky in the fourth quarter, with dysfunctional marketplace dynamics driving historically high differentials for both heavy and light oil in Canada.Canadian Natural delivered $1.22 billion of cash flow in a low price fourth quarter, reflecting the strength of our assets and our effective and efficient operations. The first quarter of 2019 is a completely different story, where market order has been established and with curtailments imposed by the Alberta government, our order has been established. The current outlook for the first quarter prices for SCO produced at Horizon and AOSP are up roughly 45%. Light oil is up roughly 66%, and heavy oil pricing is up roughly 400%. We applaud the Alberta government for taking this action.Short-term commodity price volatility has a minimal impact on Canadian Natural. We do not produce a significant portion of our reserve base out in a low-price period, as our asset base is long life, low decline and vary sustainable. Canadian Natural's long-life, low-decline asset base combined with our effective and efficient operations made Canadian Natural very robust. As a result, we generate significant free cash flow.Canadian Natural's ability to generate significant and sustainable free cash flow sets us apart from our peers. Canadian Natural is very disciplined in our cash flow allocation between our 4 pillars: the balance sheet, returns to shareholders via dividends and share buybacks, resource development and opportunistic acquisitions, all to maximize value for shareholders.We have a vast, high-quality, undeveloped assets with significant value adding and growth opportunities, and we remain disciplined on the execution of timing for these opportunities. Timing depends on improvements in market access, fiscal competitiveness and regulatory effectiveness and efficiency.In addition to balancing the 4 pillars, part of creating long-term value is reducing our environmental footprint. When it comes to environmental performance, Canadian Natural and indeed the entire Canadian oil and gas sector has delivered game-changing performance. Canadian Natural and Canada's oil and gas sector recognize the need to reduce greenhouse gas emissions, and we've been able to leverage technology and Canadian ingenuity delivering impressive results.Canadian Natural, ourselves, has invested $3.1 billion in R&D since 2009, the third largest for all industries in Canada. Essentially, Canada's oil and gas sector has taken what was branded as high-intensity oil in 2009 that made it what I would call the premium oil on the global stage, all in 10 years. And the Canadian oil and gas sector is committed to do even better in the future.For instance, at Canadian Natural's Horizon Oil Sands Mining and Upgrading operations, we reduced our greenhouse gas emissions intensity by 31%. At today's production levels, that's equivalent to taking 665,000 cars off the road. In our primary heavy oil operations, we reduced our methane vent volumes by 71% through technology and continuous improvement, equivalent to taking 760,000 cars off the road.Canadian Natural also captures and sequesters the large amount of CO2 in Canada, and we're the third-largest for the oil and gas industry in the world, equivalent to taking 576,000 cars off the road annually.With just these 3 projects, Canadian Natural is taking the equivalent of 2 million cars off the road, equivalent to 5% of the entire vehicles in Canada, and this is just what Canadian Natural has done. The entire industry has achieved similar, equally impressive results.Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high-intensity oil on a well-to-combustion basis in 2009 to well below the global average. This is an impressive Canadian success story. It is the basis or the root cause that has generated a tremendous opportunity for Canada.For instance, if the rest of world achieved what the Canadian oil and gas industry has in terms of flaring, then greenhouse gas emissions will be reduced by 23%. That's equivalent to taking a 110 million cars off the road. And for reference, that's more than 3x our vehicles on the road today in Canada. The one LNG plant Canada has approved went on stream is equivalent to taking 40 coal-fired power plants off-line, equivalent to reducing Canada's greenhouse gas emissions by 10% or greater than BC's total emissions. Canada has the capacity to build at least 5 of these LNG plants, which will be equivalent to reducing Canada's greenhouse gas emissions by 50%. Canadian Natural and the Canadian oil and gas sector has delivered game-changing environmental performance, and we have room to do even more. It's not 2009 anymore. Canadian oil and gas is now what I recall from a climate change as well as all other ESG metrics perspective the premium product, something all Canadians should be proud of. If you view climate change from a global perspective, as climate change is a global issue, not a national issue, then it makes sense that having more Canadian oil and gas on the global market will reduce greenhouse gas emissions. It's very clear that delivering Canada's oil and natural gas to global markets should be a climate change and economic priority for Canada.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. Canadian Natural and the Canadian oil and gas sector has made that happen, and we continue to press 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 have the lowest environmental footprint and lowest total cost.At Horizon, we've taken operating costs from over USD 40 a barrel to roughly USD 14.05 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 to be a leader in research and development. Canadian Natural is doing an excellent job when it comes to reducing our environmental footprint and balancing the 4 pillars of cash flow allocation to maximize value for shareholders.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 defined cash flow 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 both strengthen the balance sheet and reduce our environmental footprint. Canadian Natural is robust, 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. The strength of our assets and our ability to execute shows in our 2018 year-end results, as we continue to be effectively allocate capital to maximize value for our shareholders. I will now do a brief overview of our assets.Starting with natural gas. Our overall annual production of 1.548 Bcf was down from 2017's production of 1.662 Bcf, primarily a result of our proactive decision to reduce natural gas activities, curtail and shut-in production due to low natural gas prices in our North American operations.Our annual natural gas production for North American operations was 1.49 Bcf with operating cost of a $1.25 per MCF, both within guidance. Our fourth quarter North American natural gas production was 1.44 Bcf per day, which was impacted approximately 85 million a day by the third-party Pine River plant, which was down most of the quarter. As well during the quarter, we proactively curtailed production due to low natural gas prices, an impact of approximately 30 million a day.The Pine River plant is up and running at a restricted rate of 90 million a day, and we will continue -- and we continue to wait on regulatory approval to take over operatorship. Based on our recent engineering cost assessment, we now target to reinstate the plant to a 120 million a day in the third quarter of 2019 versus our original plan of a 145 million a day.At Septimus in Q1, we have commenced a small drill-to-fill program of 5 gas wells and targeting them to be on production in late Q2. Septimus Montney is liquids rich and very robust due to the low-cost tie-ins and very low operating cost resulting in high netbacks.In the fourth quarter, the Canadian Natural operations realized strong natural gas pricing at $3.23 per Mcf as a result of our diversified natural gas sales portfolio, which 35% is used internally, 32% is exported and only 33% is exposed to AECO pricing.Q1 2019's natural gas guidance is targeted to be 1.49 to 1.52 Bcf per day. With the widening differentials in the second half of 2018, the company made the strategic decision to reallocate capital from heavy oil drilling to our North American light oil and NGL activities, drilling 32 net wells above our original targeted of 67 for the year.On an annual basis, our North American light oil and NGL production was strong at 93,728 barrels a day, up 2% from 2017 on an annual operating cost basis of $15.29 per barrel versus our 2017 cost of $14.30. In Q4, our production was very strong at 98,836 barrels per day, up 6% from Q3 and up 5% when comparing Q4 of 2017, which shows the strength of our asset base and our ability to execute. Fourth quarter operating comps were also strong at $14.25 per barrel.In the greater Wembley area, we continue to strategically drill and derisk our significant Montney oil development opportunities on our 155 net sections of land that could support over approximately 365 wells over time. In Q4, 2018, we drilled 27 net wells, 14 of them are on production and had strong initial 30-day rates of approximately 600 barrels a day of liquids. 12 more are targeted to be completed and on production at the end of the first quarter. A subset of this area is our core Wembley area, where 7 net wells results have been very strong with 30-day liquid rates of 785 barrels per day with 5 net wells left to be completed.Finally, in Southeast Saskatchewan and Manitoba, for 2018, away from the apportionment issues in Alberta, we drilled 33 net wells, 18 more than we had originally target, with total production ahead of approximately 2,750 barrels a day, showing our capital flexibility and the strength of our asset base and the company's ability to execute to maximize value. For Q1, we are targeting a total of 21 net crude -- light crude oil wells, 5 in the Grande Prairie area, 9 in Southeast Saskatchewan and Manitoba, and 7 in Southern Alberta. Our international light crude area had a very strong year at the top end of our annual guidance at 43,627 barrels a day, generating significant free cash flow as we receive breadth-based pricing for our oil. Offshore asset annual production was 19,662 barrels, slightly down from our 2017 average of 20,335 with annual operating costs of $26.34 per barrel. As well in early December, Olowi was permanently shut-in.Côte d’Ivoire annual operating costs were in guidance at $13.30 per barrel. Q4 Offshore Africa cost was 22,185 barrels per day, an increase of 3,400 barrels a day from Q3 2018 of 18,802 barrels a day as the new wells of Baobab were completed and came on production in the second half of 2018. Côte d’Ivoire operating cost in Q4 were very strong at $11.68 per barrel.In the North Sea, on an annual basis, we averaged 23,965 barrels a day, up slightly from 2017 of 23,426 barrels a day, as a result of our small but highly successful drilling program with annual operating cost of $39.89 per barrel. The North Sea Q4, we averaged 21,071 barrels. In -- down from Q3 of 28,702 barrels, primarily the result of all 3 plant maintenance in the quarter. In the first quarter of 2019, we target drilling 1 gross producer at Baobab and 1 well in the North Sea and the target to come on early Q2. Q1 international guidance is set at 46,000 to 50,000 barrels per day for Q1.As we talked about last quarter, the company made the strategic decision in Q4 not to sell in the anonymous market and voluntarily curtail production ahead of the Alberta government announcement in December.With the Alberta mandated production curtailment, differentials for both WCS and synthetic have quickly stabilized to more normal levels. We continue to support the government decision to curtail production as differentials for both WCS and synthetic oil in Q4 were anonymously high as a result of lack of market access and a dysfunctional nomination process.For the first quarter, WCS differentials has significantly tightened to USD 12.38 per barrel, approximately 23% of the WTI similar to historic numbers like in Q4 2017 when WTI was approximately $55 and the WCS differential was approximately $12 a barrel. This is in spite of the apportionment staying at 42%, confirming our view that the nomination process is dysfunctional.Looking ahead, there continues to be positive. Storage levels in Alberta have come down from the peak in December. Heavy oil in the U.S. Gulf is trading at a $2 premium to WTI. So even at today's pricing, it makes sense to move oil by rail. We're considering the fixed and variable cost. Canadian Natural today has shipping oil at approximately 14,000 barrels a day.The North West refinery will soon be taking incremental heavy oil at 50,000 barrels a day. Conventional declines should be in the range of 40,000, 45,000 barrels a day and may be higher with reduced activity. And rail will increase, as the Alberta government has now committed to 4,400 cars, equivalent to approximately 120,000 barrels a day. Combined with the industry of 150,000, it is constructive for future pricing.This totals to approximately 365 barrels a day of incremental capacity. As most of you are aware, with the government change in the curtailment process to peak production, some companies like Canadian Natural who voluntarily curtail production in 2018 are taking a greater portion of the curtailment. I can say that through the great work done by our teams, post the change, we are able to mitigate some of that impact to Canadian Natural in the first quarter, which I will talk later in the call. For heavy oil, on an annual basis, our production was 86,312 barrels a day, down from 2017 levels of 95,530 barrels per day, approximately 10% lower as we proactively curtailed production, reduced drilling and completions workover, recompletion activities in heavy oil. Annual operating costs were $16.60 a barrel, up 6% versus the 2017 cost of $15.71 per barrel.Q4 production was 79,678 as we curtailed production further with operating cost of $16.85 as compared to Q4 2017 of $16.28 per barrel and Q3 operating cost of $15.58 per barrel. In Q4, we drilled 24 net heavy oil wells across our vast premium land base. And as we talked about last quarter, we're only drilling strategic wells that set us up for the future. Canadian Natural is focused on creating value. And with the curtailment in Alberta, it continues to make sense to only to drill wells that set us up for future growth. As such, we are targeting 6 heavy oil wells in the first quarter.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. Our annual production volumes were 63,082 barrels a day, which with very low operating cost of $6.72 per barrel, both which are very compressive considering we reinstated the polymer flood to 62% of the acquired property during 2018.In Q4 2018, production was 62,428 barrels a day versus the Q3 average of 62,727 barrels a day, as we see the polymer flood on the acquired property starting to stabilize the decline. Pelican continues to have very strong operating cost in Q4 at $6.47 per barrel, essentially flat from our Q3 operating cost of $6.43 per barrel.In Q4, we drilled 4 net producers on the acquired lands, which were very successful at approximately a 100 barrels per day per well. And the company has identified additional 31 opportunities on those lands. In 2019, we target to further consolidate operations as we capture synergy between the properties and target to reduce operating cost by approximately $6 million per year, enhancing our already low cost operations.With our low-decline and very low operating cost, Pelican Lake continues to have excellent netback and recycle ratios. Our thermal annual production was 107,839 barrels a day, primarily a result of a curtailing volumes during the year versus our 2017 average of approximately 120,000 barrels a year -- barrels per day per year, with overall 2018 operating cost of $13.20 per barrel versus $11.81 per barrel in 2017.Fourth quarter production was approximately a 102,000 barrels a day versus the Q3 production of approximately 112,500 barrels a day as we voluntarily curtailed production in the quarter. At Kirby South, annual production was steady at approximately 35,000 barrels a day with excellent operating cost of $9.54 per barrel, including fuel, which is very consistent with last year's productions of 36,000 barrels a day and $9.50 per barrel, which is a great job done by our team. At Primrose, annual production was approximately 70,000 barrels a day, down from the 2017 production of approximately 81,500 barrels a day, as we curtailed production and have smaller CSS cycle in late life wells.Our thermal operations at Primrose continue to be effective and efficient with annual operating cost of $14.03 per barrel, up from 2017 of $12.33 per barrel, primarily related to lower production volumes.We continue to execute on our growth projects at both Primrose and Kirby North, both are on cost and ahead of schedule. At Kirby North, the company's 40,000 barrel a day SAGD project, which is originally targeted first oil in Q1 2020, we have continued to have top-tier execution and very strong productivity.The project is now 2 quarters ahead of schedule and targeting first oil in Q3 2019, wrapping up to 40,000 barrels a day in late 2020. Cost performance remains on budget and the Central Processing Facility is now at 94% complete as of the end of February.At Primrose, drilling is complete and the completions in facility construction on our highly profitable pad adds continues on cost and ahead of schedule, with planned steam in Q3 2019, which is targeted to add a rate of approximately 10,000 barrels a day in the fourth quarter of 2019, and is targeted to add approximately 26,000 barrels a day in the first 12 months on production.Thermal Q1 production guidance is 92,000 barrels to 98,000 barrels per day for the quarter. We are very proud of our oil sands mining operation, which had an excellent year. We had record annual production of 426,190 barrels a day with an industry-leading operating cost of $21.75 per barrel on unadjusted basis, a great job done by our teams both sites as we leverage synergies, safely increasing reliability and reducing costs. At our oil sands mining operations, in the fourth quarter, we produced 447,048 barrels a day at the midpoint of guidance, while our industry-leading operating costs were very impressive at $19.97 per barrel on an unadjusted basis.Our teams had an excellent quarter. We continue to capture synergies between the 2 sites, leveraging technical expertise, services, buying power as well as operating efficiencies.Canadian Natural teams are very focused on operational excellence. With the mandated Alberta curtailment, our team at Horizon is now advancing plant pegging maintenance from April to starting in late May -- March. During this period, the Horizon will run at restricted rates of approximately a 140,000 barrels a day for 12 days. This volume will be allocated across the company, reducing the overall production impact caused by the mandated curtailment.With the curtailment continuing into April, Horizon plant maintenance now does not overlap with the plant maintenance at Scotford, production volumes reduced at AOSP will in turn be allocated across the company. A great work done by our team to lessen the impact of the monthly curtailment on the company.As announced in the third quarter, we acquired the Joslyn lease to the south of Horizon. Work has now begun on the lease as we are about to capture the synergies. By adjusting our mining plan, we target to save over $500 million in our new mine plan versus the original north pit plan. We continue to advance engineering in a disciplined manner at Horizon to preserve our growth opportunities of 75,000 to 95,000 barrels a day as we wait for clarity on market access. Oil sands mining in Q1 SCO production guidance is 400,000 to 440,000 barrels a day. Canadian Natural's advantage is our ability to effectively allocate cash flow to our 4 pillars in light of market conditions.In 2018, you've seen us deliver on maximizing value by optimizing our allocation to the 4 pillars. We will continue to execute with excellence and be a safe, effective and efficient operator. We are in a very strong position, being nimble, enhances our capacity to create value for our shareholders as we 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, delivering free cash flow, strengthening the balance sheet that Corey will highlight further in the financial review.With that, I will now turn it over to Darren for our 2018 reserves review.

[Darren M. Fichter]

Thank you, Tim. Good morning. To start, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent, qualified reserve evaluators. Our 2018 reserves disclosure is presented in accordance with the Canadian reporting requirements using forecast prices and escalated cost. Canadian standards also require the disclosure reserves on a company gross working interest share before royalties. Finding and development costs and reserve replacements are key indications of a company's asset strength and ability to execute.In 2018, Canadian Natural continued our track record of delivering impressive results, and our strong performance is reflected in our finding and development costs. Our corporate finding, development and acquisition cost excluding changes in future development capital are $3.11 per BOE for proved reserves and $2.31 per BOE for proved plus probable reserves.Canadian Natural's finding, development and acquisition costs including changes in future development capital are $9.39 per BOE for proved reserves and $10.79 per BOE for proved plus probable reserves. We replaced 2018 production by 281% for proved developed producing reserves, by 359% for proved reserves and by 485% for proved plus probable reserves.As evidence of Canadian Natural's transition to a long-life, low-decline asset base, our top tier reserve life indexes have increased to an impressive 21.3 years for proved developed producing, 27.7 years for proved, and 37.4 years for proved plus probable reserves.In 2018, we increased our proved developed producing reserves by 10% to 7.6 billion BOE. Proved reserves increased 12% to 9.9 billion BOE, and proved plus probable reserves increased 13% to 13.4 billion BOE.The net present value of future net revenue before income taxes using a 10% discounted rate increased 19% to $106.6 billion for proved reserves, and 14% to $131 billion for proved plus probable reserves.In summary, these excellent results reflect our ability to execute as well as the strength, balance, and exceptional opportunities we have on our asset base.Now I will hand over to Corey for the financial highlights.

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

Thanks, Darren, for that comprehensive update on the company's reserves performance for 2018. We demonstrated our resilience during the fourth quarter and had strong financial performance during 2018.During the fourth quarter, pricing on benchmark West Texas Intermediate dropped 15%, which was exacerbated by exceptionally high differentials on both heavy oil as well as light oil and SCO, significantly impacting all of industry. As noted earlier, CNQ proactively curtailed volumes in 2018, and the impact in Q4 of '18 was about 24,500 barrels a day of production.We also strongly supported the government of Alberta in their mandating and production curtailments in 2019. Against the backdrop of negative pricing volatility in Q4 '18, Canadian Natural's strong asset base still drove cash flow from operating activities of $1.4 billion in Q4 '18, about $350 million greater than quarterly cash flows used in investing activities.For the year 2018, we drove exceptionally strong financial results again in the context of a very volatile marketplace, again, a resilience and strong cash flow -- strong free cash flow, generating capacity was exhibited.Cash generated from operating activities was a record $10.1 billion with adjusted funds flow coming in at $9.1 billion. This resulted in net earnings of $2.6 billion and adjusted earnings of $3.3 billion. These 2018 adjusted net earnings from operations of $3.3 billion represented an increase of about $1.9 billion when compared with 2017, even with the volatility and realized pricing in the year, particularly in Q4 '18. This strong result was largely driven by higher oil sands mining production where we benefited from a full year of Horizon Phase 3 and AOSP production, coupled with a 13% reduction in per barrel unadjusted operating cost on these assets.Our 2018 adjusted funds flow of $9.1 billion was $4.4 billion in excess of our net capital expenditures. $2.8 billion of this free cash flow was returned to shareholders: $1.56 billion of it through dividends, up 22% from the prior year; and $1.28 billion through share repurchases, helping to reduce our float by about 1.7%.Long-term debt was also reduced by $1.8 billion. This was through $2.8 billion in the hard debt repayments, offset by $1 billion in mark-to-market currency adjustments on future U.S. dollar debt repayments. Gross debt to total capitalization decreased to 39.1% from 41.4% at the end of 2017, and adjusted debt-to-EBITDA dropped to 2x from 2.7x at the end of 2017. This was all achieved, while at the same time increasing liquidity by $575 million to $4.8 billion over -- to $4.8 billion.As you can see, we'll continue to derive our 4-pillar free cash flow allocation strategy to great effect, and this capital and operating discipline continues into 2019. Adjusted funds flow is targeted to increase as heavy oil differentials is rebounded into the low teens from the $40 average in Q4 of '18. Similarly, SCO differentials have reverted to more normal ranges versus the $21 range in Q4 of '18. This coupled with strong 2018 operating performance and the resilience demonstrated in Q4 '18 has given our Board of Directors the confidence to increase our current dividend by 12% to $0.375 per quarter payable effective April 1. Additionally, through the March 6, a further 4.3 million shares were purchased at a cost of $35.86 per share.Clearly, the company has transitioned into a very sustainable and robust free cash flow enterprise. This is demonstrated by both significant debt reduction and significant cash returns to shareholders. I believe Canadian Natural continues to represent a sustainable, flexible and balanced E&P company with a high degree of resilience to commodity price and price volatility.With that, I'll hand it back to you, Tim, for closing comments.

[Timothy Shawn McKay, President & Director]

Thanks, Corey. As you're aware, Corey Bieber, our CFO for the last 6 years, will move to the new role with the company as an Executive Adviser effective March 31, 2019. Canadian Natural has a robust succession plan that ensures a smooth transition. And over the years, it continues to show the strength of our people we develop. We congratulate Mark Stainthorpe on his new role as CFO.In summary, Canadian Natural has many advantages. Our balance sheet is strong, and it will continue to strengthen. We have a well-balanced, diverse and 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 a balance in our commodities with approximately 50% of our BOEs, light oil and SCO 25% -- 24% heavy and 24% natural 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 4 pillars. Canadian Natural will continue to allocate cash flow to our 4 pillars in a disciplined manner to maximize value for our shareholders. Our disciplined resource development has replaced 2018 production by 359% for proven reserves corporately. With FD&A cost of $3.11 per BOE and increase reserve life index to 27.7 years, all in [ present ] metrics.Returns to shareholders have been strong, with 22% dividend increase in 2018 and our balance sheet debt reduction of $1.8 billion and will continue to strengthen. We have bought back approximately 30.9 million shares. And finally, we completed 2 strategic core land area acquisitions that added significant long-term value to Canadian Natural. We target 2019 to be another strong year of allocating to our 4 pillars, all driven by effective capital allocation, effective and efficient operations and by our teams who deliver top-tier results. In 2019, we will continue to be very disciplined with our capital spending. With the announced dividend increase of 12%, it's our 19th consecutive year of dividend increases. And year-to-date, we have purchased approximately 3.9 million shares, and we will continue to reduce our debt as per our allocation policy.With that, I will open it up to call -- the call to questions.

[Operator]

[Operator Instructions] Our first question today comes from Benny Wong from Morgan Stanley.

[Benny Wong, Vice President]

Appreciate your thorough comments on the crude takeaway look in your prepared remarks. Just wondering now with Line 3 delayed and the strong heavy oil pricing that we're seeing along the coast, should we expect seeing you to be more inclined to look for more crude by rail than what you're moving now?

[Timothy Shawn McKay, President & Director]

Thanks, Benny. Tim McKay here. We will continue to value the rail options, and we're not adverse to doing more rail, if it's the right deal for our shareholders on the terms of cost and term. So if you're calling 2012, we took a flexible approach to crude by rail and at times we moved up to 35,000 barrels a day. So today, we continue to look at options and the right -- we have the right term and price, we would look to potentially do more.

[Benny Wong, Vice President]

I guess my follow-up is related to that and regarding Kirby North and the new Primrose pads. I think as of right now, the target is for start-up later this year. Does that still makes sense with the Line 3 being delayed? Or potentially rail kind of bridge that?

[Timothy Shawn McKay, President & Director]

Okay. So with that, it's really too early to say if we would defer the start-up of either project. As -- we'll -- the way we see it today, Northwest upgrader will take an incremental 50,000 barrels a day of incremental heavy oil. We still see declines conservatively at 45,000 barrels a day. And in fact, we were opposed by one operator operating to sell their portion of curtailment volume allocation. So we see declines conservatively of 45,000. It could be much higher with the additional rail by both industry and government. From our perspective, it's just too early to say whether we'd start those projects up or delay them. The nice part of both is they're ahead of schedule. They're on cost. And we have that optionality to look to defer if we see that it is going to be a problem and the differentials are going to blow out, we'll just defer Kirby North start-up, which is not a big issue for the summer months. And then at Primrose, with the CSS cycles, they're very flexible. From that aspect, we decide when we put steam in. So Primrose is probably the most flexible option we have.

[Benny Wong, Vice President]

Great. That's very helpful. And just my final question is Devon Energy is marketing its Canadian assets. And just wanted to get your view on those assets, and if they'd be a good fit within your strategy at the right price? It seems like Jackfish and Pike is pretty close to Kirby. Just wondering if there will be synergy opportunities there?

[Timothy Shawn McKay, President & Director]

What we've always stated, we have no gaps in our portfolio. We do look at all items in our core areas. For example, the Joslyn lease, we exercised that option, which would add a significant value to Canadian Natural. So we're not opposed to doing or looking at things and doing the right deal for the right opportunity that creates long-term value for our shareholders.

[Operator]

Our next question comes from Manav Gupta from Crédit Suisse.

[Manav Gupta, Research Analyst]

You've indicated earlier in the comments that entire nomination process is dysfunctional kind of forced the government hand, which is what most people agree with. I'm just trying to understand what efforts are being made to fix this broken system, if any?

[Timothy Shawn McKay, President & Director]

Thank you for the question. We continue to work with the government and other industry players to change the rules as far as the nomination process. So as an industry, we're still at various opposing of how to fix it. But we have made a recommendation to the crude oil logistics committee parts of it and have sent that to the government for their feedback.

[Manav Gupta, Research Analyst]

And a follow-up is, look, we're looking at Venezuelan production declining pretty sharply. The sanctions are in. So there is obviously a very strong tight market for heavy sour barrels. And then obviously you're indicating that you would like to ramp up volumes at Horizon. You're talking about engineering designs, which could increase productions 75,000 to 95,000 and then you also indicate but those projects will only brought online with improved market access. So I'm just trying to understand that comment on improved market access was that more a comment on Line 3 or was that more a comment on KXL and TMX?

[Timothy Shawn McKay, President & Director]

It's actually the government is meant for all 3. Obviously, we're disciplined with Line 3 being delayed, but we're confident it will be built in the future. KXL, it's going through the process, and we look to hear that piece here by the end of Q1 as well as Trans Mountain as well is going through the process. The NAB hit the first phase, and we're just waiting on the second phase of the NAB consultation to have Trans Mountain looking ahead. And we hope with Trans Mountain that, that construction could start as soon as this summer.

[Operator]

Our next question comes from Greg Pardy from RBC Capital Markets.

[Greg M. Pardy, Managing Director and Co]

Tim, you mentioned that you had made an adjustment to the Horizon mine plan. I'm just wondering if you can talk about that a little bit and maybe how Joslyn fits into that plant.

[Timothy Shawn McKay, President & Director]

Sure. So in the third quarter, we acquired the Joslyn lease. And so in their original Horizon mine plan, we were actually looking to go to the North, and which was longer haul, it's more costly. With the Joslyn lease, it's very proximal to our current pit digging, I guess, you would call it. And so with that, by just moving south, it saves us over $500 million and as well we look to use the opportunity of that south pit expansion to test IPEP in their potentially. So it's just a real nice opportunity and fits well with Canadian Natural's operation at Horizon.

[Greg M. Pardy, Managing Director and Co]

Tim, then when do you -- like in what year -- how many years down the road do you think it will be before you're in -- effectively in the south pit or the Joslyn assets?

[Timothy Shawn McKay, President & Director]

We're actually -- well, we're in there today, stripping. And 2021, we will be moving oil.

[Operator]

Our next question comes from Phil Gresh from JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Sorry about that. Can you hear me?

[Timothy Shawn McKay, President & Director]

Yes, we can.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay, sorry. First question was just on the capital spending for the year. And understanding that you want an appreciation or whatever better market access to go forward certain projects, does that mean if we don't hear anything this year that this capital spending number -- you gave different scenarios at the Analyst Day. So does that mean at this point, you'd be thinking of this capital spending number is what you'd be sticking with? And to the extent there's extra cash flow but not necessarily better market access that we should be thinking debt pay down and more buybacks to shareholders would be the plan for the year?

[Timothy Shawn McKay, President & Director]

Yes, Phil, so the way we see it today, our budget at $3.7 billion is where we sit. Obviously, from a just a corporate execution basis, our teams are ready to execute on future value opportunities, should we see clarity in market access. But the way it sits today, the $3.7 billion budget is, stands as is.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay. And did -- I might have missed this, but you guys usually give an end-of-year view at the strip of what the balance sheet would look like. Did you make that comment? Or can you share it?

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

Of course, I can share it, Phil. It's Corey. So yes, debt-to-EBITDA, we would see right now, we're in that 2x range. We'd see that coming down 0.1 or 0.2, and our debt-to-book cap is in that 39% range. It might come down into that 37.5% range, all things being equal strip today.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay, great, Corey. And of course, congratulations to you. One final question understanding the -- this Line 3 situation, I know you guys view that the market does have a natural decline rate to it. And so how things play out over the course of this year in terms of supply-demand balances without Line 3 coming on and the decision you might make for certain projects, et cetera. But do you -- is it your base case assumption at this point that the curtailments would still need to continue into 2020 to keep markets balance without Line 3? Or I just want to clarify on that.

[Timothy Shawn McKay, President & Director]

Yes. It's always hard to say based -- because the activity levels could be different than they currently are. But the way we see it today between the basin declines, the Northwest upgrader, rail, we see curtailments actually diminishing. Like you said, conservatively, in our forecast, we have 45,000 barrels a day decline. If you look at the basin, if you have a 0 activity case, basin is probably closer to 300,000 barrels a day of decline. So the wild card and all this is always the activities levels, but it's clearly the activity level here in Alberta is less. And -- so conservatively that 45,000 barrels a day decline is probably too conservative.

[Operator]

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

[Asit Kumar Sen, Research Analyst]

I have 2 questions. One a quick one on operations and one strategic. So on the North West Redwater refinery or upgrader, what is the current volume and -- what's the feedstock fleet? I think I heard 50,000 barrels a day heavy oil. What time frame is that?

[Darren M. Fichter]

Yes. So North West -- and it's probably better to get the information directly from North West. But we can tell you that they're taking between 40,000 and 50,000 barrels a day of SCO. They are still commissioning the gas-fire and the LC Finer. Once they are up and running, that would switch to about 80,000 barrels a day of blended bitumen. So basically take 80,000 barrels a day of heavy oil volumes off the pipeline and turn it into products here in Alberta. So when that's up and running, it will be a positive impact, as Tim pointed out, for production in Alberta.

[Asit Kumar Sen, Research Analyst]

Got you. And then a more big picture question. You all had laid out a fairly steady growth profile at the December Analyst Day. I think that target is 7.5% production per share CAGR at strip pricing at that time. Now outside of oil prices, what would it take for you to lower the long-term growth profile to return more cash to shareholders? In other words, in the current environment and investor debate, how are you thinking about optimally balancing cash returns and growth within your 4-pillar framework?

[Timothy Shawn McKay, President & Director]

So with that forecast, we actually had very conservative spending profile and growth profile. So it really -- in my mind, doesn't change kind of our forward-looking on a per share basis.

[Darren M. Fichter]

I think one thing you got to look out here is that we are generating a tremendous amount of free cash flow. We have a well-defined allocation policy here of all the free cash flow. 50% will go to share buybacks and the rest to the balance sheet after dividends. So we are, I think, doing a very prudent and responsible way of forecasting. As Tim pointed out in his call -- in the call here today, our assets are very strong. We're able to deliver that growth, and it's really a reflection of the long-life, low-decline assets -- our assets, so the declines are much slower. So it's easier for us to deliver growth and returns to shareholders, and that's what's makes us a very unique E&P company compared to our peers.

[Operator]

Our next question comes from Neil Mehta from Goldman Sachs.

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

The first is on just the dividend bump, 11%, nice to see. How do you guys go about sizing what the appropriate dividend increase would be? And just talk about your strategy around capital returns with all this uncertainty going on in Alberta?

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

Yes. I -- it's Corey. I'd say that dividends are very important to us and to the board, obviously, the shareholders as well. So what the board does, they evaluate our position on payout and yield on our quarterly basis against our cash flow and net earnings, both on a historic as well as on a forward-looking basis. And those metrics provide the board some guidance as to the appropriate yield and payout levels for the company. But fundamentally, the board's view is that the dividend has to be sustainable and provide room for growth on an annual basis throughout the commodity price cycle. And then we, in order to do that, we do a lot of stress testing at low commodity prices to ensure that the dividend is sustainable. So it's balancing that growth, that discipline, that trajectory on the dividend but also measuring it with the sustainability through the cycle. There's a several different factors that are looked at, and I don't want to get into all of them here. But it really is a stress test but providing that long-term growth in the dividend.

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

That's helpful. This question might be a little trickier to answer, but anything that you can provide would be helpful. It's just with the elections coming up over the next 2 to 3 months in Alberta, how do you see different outcomes around curtailment? So Enbridge Line 3 getting pushed to the right, do you think there's a reasonably high probability that the curtailments get extended through the balance of the year? And then some of peers have actually explicitly made comments about whether they think curtailing production is the right thing or the wrong thing to do for the long-term health of the Canadian oil industry. So your thoughts there would be interesting as well.

[Timothy Shawn McKay, President & Director]

I think elections are tough to predict what's going to happen. I will point out this that both parties in the Alberta that are vying for the election are very supportive of curtailment and came out strongly in favor of curtailment. I would think you'll see whoever wins the election would be very judicious in how they manage curtailment, and they'll really look and ensure that there's no marketplace dysfunction that we've had here in the past to make sure that doesn't happen again. So we think curtailment, as Tim pointed out, will probably lessen here as we go forward, and we're seeing that already I think. So it's just to manage process, Line 3 is delayed. That hurts us, but as Tim pointed out, those 365,000 barrels a day of like to takeaway capacity coming anyway without Line 3. And with declines, we think you'll see curtailment come down and maybe markedly.

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

Last question for me, Tim, would be if you control that into your comments around carbon intensity because that kind of flies in the face of conventional wisdom. Many participants view Canadian oil as higher in carbon levels and emissions than other types of oil. So could you just talk about the data behind that? And provide more color on your angle here?

[Timothy Shawn McKay, President & Director]

Yes. I think what you got to look at here is most of the people are using information from 2009 and before. Obviously, we were high intensity of oil at that period of time. As I pointed out in my comments earlier, we've made tremendous progress and reduced our emissions intensity by a huge amount. And Natural fact we're actually below the average and we can even do more here as we go forward, and we will do more. This is not just Canadian Natural. This is the whole Canadian oil industry. So when you look at that way, and you look at the intensity and when you look at flaring that we do here, don't do hearing Canada versus the rest of the world. If you look at it at a global perspective, you'll actually reduce greenhouse gas emissions in the world globally by producing Canadian oil and Canadian gas and producing that oil and delivering it to global markets than you do today. I think that is essentially a game-changing performance. It changes the perspective. I think it will take some time because people are slow to adapt the new data, new facts are reality. But in fact, if you really believe in reducing global emissions, then Canadian oil should be sent to global markets as should Canadian gas. And I think it's very clear that the data points that out. That wasn't always the case and I think it's a tremendous credit to the Canadian oil and gas sector for making those improvements in performance.

[Operator]

Our next question comes from Dennis Fong from Canaccord Genuity.

[Dennis Fong, Exploration and Production Analyst]

Just back at your Investor Day, I believe you guys discussed an aggregate amount of stores that you guys were using in Q4. Just out of curiosity, it sounded like that was relatively full at around the end of the quarter, and are you using that storage in terms of some of your marketing efforts to potentially gain incremental sales in Q1 as they're excluded from the mandatory curtailment?

[Darren M. Fichter]

So the storage that we have is excluded from the mandatory curtailment. Obviously, we have storage to be that's used for operational issues for SCO and as well as heavy oil. So those are more what I would call marketing operational versus what you're alluding to being somehow used in the curtailment calculation. But storage levels were quite low down, right?

[Timothy Shawn McKay, President & Director]

Our store levels are quite low. So essentially we had full storage. We got big open house, and today, we have very little in storage.

[Dennis Fong, Exploration and Production Analyst]

Okay, all right, perfect. And then the second question that I have is just maybe a bit of expansion around some of the debottlenecking initiative at Horizon. So the primary, I guess, concern for you guys in terms of potentially sanctioning this is around Egress initiatives. Can you maybe comment a little bit about notwithstanding that kind of component, other things that may hinder you from the signing kind of move forward with some of these projects? Or is it just the Egress component that you guys have concerns about with respect to evaluating the economics of these debottlenecking projects at Horizon?

[Timothy Shawn McKay, President & Director]

In general, we're looking ahead for better market access and really for those projects, we continue to do the engineering work to be ready to execute on that optionality and it is optionality. So to us, when we see greater clarity on the market access or takeaway capacity, then we'd look to do that long-term projects. Remember, they are 2 to 5 years out in terms of when those volumes would come to the market.

[Operator]

Our next question comes from Paul Cheng from Barclays.

[Paul Cheng, MD & Senior Analyst]

First, I want to say congratulations to Mark and Corey for your corresponding new position. Tim, on the -- just want to clarify, the timing for the standup of Kirby North and Primrose on the new project. Are the contingents on the Alberta government lifting the curtailment totally? Or that you will be able to fill in because I thought the curtailment is asset by asset.

[Timothy Shawn McKay, President & Director]

Note, the curtailment is actually done on a corporate basis. So that the really positive part of Canadian Natural is we have a host of various assets, Horizon, AOSP, thermal, which we can optimize how the curtailment impacts the company. So for example, my example of that is, on Horizon, by moving it into March, our corporate allowable doesn't change but we gained a 140,000 barrels a day by not overlapping with other facets in terms of curtailment. So it's a very much corporate basis and as that we can use that as an opportunity to maximize our assets that way.

[Paul Cheng, MD & Senior Analyst]

I see. Yes, because we were being told by other companies that it's actually on an asset-by-asset basis. So but you're saying that exactly on the company LIFO.

[Timothy Shawn McKay, President & Director]

Yes. If you only have one asset, it would be just that one asset. But Canadian Natural has lot of different assets and a lot of levers to pull to minimize the impact of the curtailments.

[Paul Cheng, MD & Senior Analyst]

And can you tell us that production quota you receive from the government? Is it marginally go to February or March is actually different or just no one?

[Timothy Shawn McKay, President & Director]

February and March were the same based on the 250,000. They did increase the April by 25,000 barrels -- decreased, I guess, the 25,000 barrels a day. So the current allocation is -- or curtailment is 225,000 barrels a day.

[Paul Cheng, MD & Senior Analyst]

So they already announced in April?

[Timothy Shawn McKay, President & Director]

Yes, they did.

[Paul Cheng, MD & Senior Analyst]

Okay. And for the -- top of your sales price if I look at the value in Texas as of last 9 years about $60 and in head, [ this is ] about $45.70. So are we talking about the spread is $14.30? So you should cut the, I guess, for most of the well for oil variable cost. But is that the spread wide enough for anyone to sign new contracts. In other words does that cover the entire contract price?

[Timothy Shawn McKay, President & Director]

The -- well, it depends on your agreement. If you -- there's a couple of ways you can look at this. If you have a fixed cost and let's say $10 and a variable cost between $5 -- about $5, that would look to cover your cost. If you look at it from a terms of your fixed cost as a sunk cost, that you're actually on a variable basis you would be gaining value by doing that. So obviously, it depends on what type of agreements you have, terms, cost to save if you would be making money or...

[Paul Cheng, MD & Senior Analyst]

No, no, no. Tim, sorry, that's not what I mean. I think that I understand that this spread is sufficient to cover the variable cost. I guess my question is that is the spread sufficient to indulge anyone to sign new contract so that the text call is not a sunk cost because you're signing a new contract.

[Darren M. Fichter]

I think, Paul, the economic state would say that there's money to be made by moving oil by rail. And as Tim pointed out the contracts are fairly complex. So I think people are working through that but on the surface, yes, you make money by moving rail to the Gulf coast today.

[Operator]

There are no further questions. I now turn the call back to Mr. Stainthorpe.

[Mark A. Stainthorpe, Vice]

Thanks, Carol. 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. The ability of our teams to deliver effective and efficient operations with top-tier performance is contributing to 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 2019 first quarter conference call in early May. Thank you again, and goodbye.

[Operator]

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