Canadian Natural Resources Ltd

TSX:CNQ

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Canadian Natural's Q2 2019 Earnings Results Conference Call. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, August 1, 2019, at 9:00 a.m. Mountain Time.I would now like to turn the meeting over to your host for today's call Corey Bieber, Executive Advisor. Please go ahead, Mr. Bieber.

[Corey B. Bieber, Executive Advisor]

Thank you, operator, and good morning, everyone. Thank you for joining our Q2 2019 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 our industry's efforts on the environmental front, where significant performance and game-changing achievements are not well understood. Tim McKay, our President, will provide a more detailed update on the quarter as well as discuss our ongoing projects and operations. Then Mark Stainthorpe, 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 the call over to Steve.

[Steve W. Laut, Executive Vice Chairman]

Thank you, Corey, and good morning, everyone. As you've seen from the quarterly results and indeed the last dozen or so quarter results, Canadian Natural delivered strong, sustainable free cash flow. Very few companies can deliver this level of sustainable free cash flow that is safe, secure and provide substantial upside going forward. Canadian Natural maximizes the value of our free cash flow for shareholders by optimizing our cash flow allocation between our 4 pillars and leveraging our competitive advantages.Our competitive advantages include effective and efficient operations, a diverse and balanced asset base with significant development potential. We utilize the advantage of our owned and controlled infrastructure, the economies of scale we can leverage with our size, and our culture that is entrepreneurial, accountable and leverages our operational, technical and financial expertise to execute at high levels. Combined we drive top tier value creation from both an economic and environmental perspective, strengthening our 4 pillars. Our balance sheet, with our target of trailing debt to EBITDA down from 1.8 from 2 at the 2018 year-end. Returns to shareholders, a 23% dividend growth and $711 million in share buybacks year-to-date.Opportunistic acquisitions, with the Devon assets being the latest example of our ability to leverage our competitive advantages to grow value and production in a constrained market access environment. Resource development where we've taken this opportunity in a constrained market access environment to progress engineering and value engineering on our projects to create even greater value by leveraging technology, optimizing design, configuration, strategies and execution plans. And importantly, focus on driving enhanced margins growth on existing and future production.As we all know, market access has an effect been a cloud hanging over the Canadian oil and gas industry’s head for some time now and rightly so. Major pipeline projects have been going through very long delays as they work their way through what seems like endless regulatory and legal hurdles. This has been very frustrating for all involved. We are, in our view, now we're nearing the end of these hurdles. We're also starting to see a potential break in the clouds as the Trans Mountain pipeline is set to start construction, access to rail shipments is increasing with the capacity ramping up to 500,000 barrel a day range and a potential 50,000 barrel a day enhancement on Keystone. Although optimism is in short supply, there are some positives out there. What is a massive positive is the oil and gas industry's ability to leverage technology, innovation and Canadian ingenuity to create tremendous economic and environmental value. For the last number of conference calls, I spent some time talking about the environment. I won't go through all the details as I have in the past, but summarize the key points of what I consider to be a very impressive Canadian success story. Because 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. Essentially, Canada's oil and gas sector has taken what was branded as high intensity oil in 2009 and made it into 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 doing better in the future.Canadian Natural has already reduced our overall corporate emissions by 29% since 2012, and at Horizon, our intensity is down 37%. Our primary heavy oil intensity is down 78% when it comes to methane and we’re the fifth largest capturer of sequester -- and sequester of CO2 in the world. In just these 3 areas, Canadian Natural has taken the equivalent of over 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 high-intensity oil on a wells combustion basis in 2009 to well below the global average. It's not 2009 anymore. Canadian oil and gas now is a premium product, something all Canadians should be proud of.If you view climate change from a global perspective, and climate change is a global issue, not a natural issue, then it makes sense that having more Canadian oil and gas on the global market will reduce greenhouse gas emissions. If you believe action needs to be taken on climate change, then you should, you must advocate for greater market access for Canadian oil and natural gas. 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. Which brings me to the ESG criteria that most institutional investors have developed or are developing.When you look at the environment, the E in ESG, clearly Canada is doing very well if not better than any other jurisdiction, especially when you take in account Canada's environmental performance on greenhouse gas intensity. When it comes to the social and governance, SG of ESG, Canada clearly performs at the very top of the list. We believe with Canada's game-changing environmental performance and our well-established position at the top of list on S and G, that Canada clearly blows our competitors out of the water when it comes to ESG. As a result, when you look at Canada from a global perspective, then Canada should screen in when it comes to ESG criteria and Canada should actually be an ESG priority in terms of investment.I'll turn it over to Tim.

[Timothy Shawn McKay, President & Director]

Thank you, Steve. Good morning, everyone. Canadian Natural assets are vast, well balanced and diverse. The strength of this model, plus the high levels of operational flexibility is reflected in our Q2 results, where we've been able to effectively execute our curtailment optimization strategy to maximize production and netbacks during unplanned and proactive downtime in our oil sands area. As a result, we exceeded production guidance in both conventional and thermal assets. We now forecast there will be some level of production curtailment for all of 2019. This level of curtailment was not included in our original 2019 guidance. However, despite the impact on volumes, Canadian Natural will still be within our original guidance, another reflection of the strength of our assets, our operational flexibility and our ability to effectively execute our curtailment optimization strategy. This, combined with our effective capital allocation, maximize free cash flow and value for our shareholders.I will now do a brief overview of our assets. Starting with natural gas. Our second quarter production of 1.532 Bcf was up from Q1 2019 of 1.51 Bcf primarily as a result of good operational performance in all areas. North American operations was 1.482 Bcf with operating costs of $1.15 per Mcf, which is down compared to Q1 2019 of about $1.30 and Q2 2018 of about $1.28 primarily a result of our continued focus on operational excellence in our operating costs. At Septimus, the company's high-value, liquid-rich Montney area, 5 net wells, with a target production capacity of 2,100 barrels a day of NGL and 30 million a day of natural gas were completed in late Q2. Septimus operating costs in Q2 of $0.33 per Mcfe are top tier. And with these new wells, the plant is targeted to be at full capacity for the remainder of 2019 further enhancing our operating costs with a target of $0.29 per Mcfe. Our operational excellence at Septimus supports this high-value, liquid-rich development.In the second quarter, Canadian Natural operations realized strong natural gas price of the $1.84 per Mcfe. Canadian Natural has a diverse natural gas sales portfolio of which 45% is used internally, 34% is exported and only 21% is exposed to AECO pricing at the midpoint of our guidance. Q3 2019 natural gas guidance is targeted to be 1.44 Bcf to 1.46 Bcf per day. For Q2 2019, our North American light oil and NGL production increased as per our optimization strategy to a 102 -- approximately 102,400 barrels per day, up 7% from Q1 and is up 14% compared to Q2 2018 with second quarter operating costs of $14.67 per barrel, a decrease of 8% compared to Q1 2019 level.In the Greater Wembley area, we continue to strategically drill, derisk our significant Montney oil development opportunities on our 155 net sections of land, which has the potential to support approximately 363 wells over time, creating significant value for our shareholders.Results continue to exceed expectations. In the first half of the year, the company brought on 12 net wells on production with initial 30-day liquid production rates averaging approximately 680 barrels per day per well, exceeding expectations of approximately 560 barrels per day per well, with an additional 2 net wells are targeted to come on in Q3.Also in the first half of the year, 12 net wells at Karr are currently producing approximately 2,750 barrels a day. With this success, the company is advancing a concept waterflood to pool and potentially add an additional 45 locations, which demonstrates the strength of our asset base and the company's ability to execute to maximize long-term value for our shareholders.Overall, our international assets had another strong quarter, generating significant free cash flow and value for the company. Q2 offshore Africa production was 23,650 barrels, up when compared to Q1 2019 has the last producer well at Baobab came on late Q1, and is currently producing at approximately 1,500 barrels a day meeting expectations. CDI operating costs in Q2 were very strong at $8.40 per barrel versus $9.79 per barrel in Q1. In the second quarter, we drilled one gross well -- exploration well at Kossipo, which flowed at a constrained rate of over 7,000 barrels a day, exceeding expectations and the company is now evaluating, which could set us up for another development opportunity in CDI with a potential growth capacity of 20,000 barrels per day tied into the Baobab FPSO.As previously announced, the company had targeted to commence a high value drill program in Q4 2019 at Espoir. Due to ongoing discussions with Cote d'Ivoire government, the Espoir drilling program has been canceled until such time that foreign exchange practices can be clarified. In South Africa, the operator is now targeting to proceed with a second exploration well in 2020 and contingent on results, an additional 2 more exploration could be drilled on the block.In the North Sea, production averaged 27,594 barrels per day in Q2, up from Q1 as a result of a successful drilling program offset by 21-day turnaround at Ninian Central.The 2019 drilling continues to go as planned. 1.9 net wells are on production in Q2, exceeding the budgeted rate of 4,200 barrels per day net by a 1,000 barrels a day. With 3 more gross producers to be drilled in Q3 followed by 2 more gross injectors in Q4.Q2 operating costs were $37.31 per barrel, down 6% from Q1 2019. Q2 international guidance is -- Q3 international guidance is 44,000 to 48,000 per barrel -- barrels per day, reflecting our planned turnarounds in the North Sea and Offshore Africa. Based on the strong operational results, international yearly guidance has been increased 46,000 to 50,000 barrels per day. Heavy oil production was up 77,000 -- approximately 77,700 barrels a day, up from Q1 2019 of approximately 68,500 barrels a day as we increased production as per our optimization strategy in the second quarter.Operating costs were strong. The second quarter operating costs of $17.52 per barrel, as compared to Q1 2019 operating cost of $17.30. We are on track to capture synergies after closing the Devon acquisition. Our team immediately began utilizing acquired steps, sand storage, deferring the need for new construction, redirecting approximately 3,700 barrels a day that were being processed at a third-party facility, and reducing our trucking costs and water disposal costs through optimization of the facilities. We are now proceeding with the plan to consolidate acquired facilities and moved heavy oil production to 100% owned ECHO pipeline by the end of Q3 2019, more than 1 year ahead of our initial plan, targeting approximately $25 million of margin improvement per year.A key component of our long life, low decline transition is a world-class Pelican Lake pool, where our leading edge polymer flood is driving significant reserves and value growth. In Q2, the production was approximately 55,000 barrels a day, down from Q1 of 61,200 as a result of the temporary shut in due to the wildfire. The restart and ramp up of the both Pelican field went very well, with July averaging approximately 62,000 barrels a day back to pre-shutdown level.The team did a great job and in Q2, we had very strong operating cost of $6.72 per barrel compared to our Q1 2019 operating cost of $6.69 per barrel. Also in Q2, we consolidated operations reducing one oil battery as we target to reduce operating cost by additional $6 million per year enhancing our already low cost operations. With our low decline and very low operating costs, Pelican Lake continues to have excellent netbacks and recycle ratio.In thermal, Q2 production was approximately 109,600 barrels per day versus Q1 production of 94,200 barrels a day, as we optimize production in the quarter and our teams immediately were in the field, capturing synergy after closing the Devon acquisition.At Kirby South, second quarter production was steady at approximately 28,600 barrels a day with excellent operating costs at $10.55 per barrel, including fuel reflecting lower energy costs.At Primrose, second quarter production was optimized to approximately 71,900 barrels a day versus 62,000 in Q1 as operations at Primrose continue to be effective and efficient with second quarter operating costs of $12.39 per barrel, down from Q1 of $23 primarily a result of increased production and lower fuel costs.At Kirby North, the company's 40,000 barrel a day SAGD project is now streaming and running very well. While in the curtailed environment, we are controlling the pace of the ramp up and now targeting to ramp up to 40,000 barrels a day in early '21 -- 2021.At Jackfish, turnaround was completed in June and the field is at its curtailment target. The company is executing on its plan to achieve $135 million of cost savings between thermal and heavy oil assets. For Jackfish, we're proceeding with capturing cost savings and efficiencies and procurement, caps, logistics, service rigs, leveraging expertise across our SAGD operations.At Primrose, facility construction at our highly profitable pad adds continues on costs and ahead of schedule with a planned steam in Q3 2019, as we look to mitigate production losses from a plant turnaround at Horizon starting mid-September. Q3 production guidance is 198,000 -- 206,000 barrels a day. The yearly thermal guidance is now 157,000 to 172,000 barrels a day, which reflects production from Jackfish for the second half of 2019.At our oil sands mining operations in the second quarter, we produced 374,500 barrels a day, with industry-leading operating costs of $24.17. We continue to capture synergies between the 2 sites, leveraging technical expertise, services, buying power as well as operating efficiencies. Year-over-year hard dollar cost excluding fuel are down by approximately $100 million in the first 6 months as compared to 2018, as our teams are very focused on driving operational excellence.As previously talked about, a fire that occurred at the non-op Scotford North Upgrader on April 15, the repairs were successfully completed for approximately $21 million gross and resumed full production on June 24, 28 days longer than the original planned turnaround of 38 days.At Horizon, as a result of the company's proactive integrity program, portion of the piping to the amine unit was identified to have reduced thickness. Therefore, the company made the proactive decision to advance maintenance on the piping in Q2, ahead of the planned fall turnaround. During this period, company was able to increase both conventional and thermal production areas to mitigate some of the production impact. For July, our oil sands operation is very strong with monthly July average of approximately 463,000 barrels a day. At Horizon, we continue to advance engineering in a disciplined manner as we look to optimize costs and preserve our growth opportunities of 75,000 to 95,000 barrels a day as we wait for clarity on market access. Work on the IPEP pilot continues to look very positive and we are making enhancements to improve its performance and prove out this technology.Oil sands mining Q3 SCO production guidance is 413,000 to 433,000 barrels per day, reflecting the turnaround at Horizon of 25 days down from the 28 days, which is targeted to begin mid-September in order to manage the monthly curtailment volumes. 2019 oil sands mining yearly guidance is now in 405,000 to 450,000 barrels a day.As we have talked about the last few quarters, Canadian Natural continues to strongly support the government decision to curtail production as differentials for both WCS and Synthetic Oils in 2019 has stabilized to more normal levels. The outcome of this decision, has been very positive for all of Alberta producers and the benefits are widely distributed across Canada and Alberta through jobs, taxes, royalties and equalization payments. And without curtailment there would have been significant job losses.So far in the first half of 2019, WCS differentials have averaged approximately 20% of WTI, similar to historic normals in Q4 2017, when WTI was around $55 per barrel and a WCS differential was $12 a barrel, in spite a good proportion staying approximately 40%.Canadian Natural continues shipping oil by rail of 14,000 barrels a day with strong heavy oil pricing in the U.S. Gulf Coast. However, the safest and lowest impact to the environment has improved market access by building additional pipeline. Currently conventional production declines, turnaround activities, are reducing production capacity, combined with the strong crude by rail volumes and storage levels have decreased by almost 10 million barrels since April, which continues to be positive for Alberta oil production in Alberta.While curtailment volumes have continued to be reduced throughout the year, we are forecasting a mandatory curtailment to last to the end of 2019 at September level. While mandatory curtailment continues, we will optimize our turnaround schedules, pit stops to minimize the impact to the company.As we move to the fourth quarter, NWR is targeting to start taking incremental oil at 50,000 barrels a day in December. As well, many smaller pipeline optimization projects have been announced, which will improve Egress. Trans Mountain looks to be progressing forward as well, crude by well is -- crude by rail is targeted to increase by more than 150,000 barrels a day to a total of 500,000 barrels a day, including the Government of Alberta commitment, which as we move to 2020, is all positive momentum for Canadian producers.Canadian Natural is about advantage, is our ability to effectively allocate cash flow to our 4 pillars in light of market conditions in 2019. We will continue to execute with excellence and to be safe, effective and efficient operator. We are very -- in a very strong position, being nimble, which has capacity to create value for our shareholders as we continue to high-grade opportunities in the company. Our curtailment optimization strategy is a reflection of our ability to be nimble and operate with excellence. We continue to be focused on safe, reliable operation, enhancing our top tier operations. We continue to balance and optimize our capital allocation, deliver free cash flow and strengthen the balance sheet that Mark will highlight further in the financial review.With that, I'll turn it to Mark.

[Mark A. Stainthorpe, CFO & Senior VP of Finance]

Thanks, Tim. Canadian Natural's financial performance in the quarter demonstrated our continued focus on financial strength and our ability to be flexible to capture opportunities. Net earnings of approximately $2.8 billion, adjusted net earnings of over $1 billion, cash flow from operations of over $2.8 billion and adjusted funds flow in excess of $2.6 billion, were achieved in the quarter. All results were up substantially from Q1 '19. A stronger realized pricing, lower production costs in our E&P segment and our ability to execute on our curtailment optimization strategy were evident in the results.Net earnings includes a onetime reduction in deferred income tax expense of approximately $1.6 billion relating to the reduction in Alberta tax rates. Our prudent capital program resulted in approximately $910 million invested in the first -- in the quarter, before considering the Devon asset acquisition. This resulted in free cash flow generated of $1.3 billion after dividends of $450 million in the quarter, again before the Devon asset acquisition.Capital in the first 6 months was approximately $190 million less than original budget showing strong discipline on capital spending with flexibility for potential execution of these projects later in 2019 or into 2020. Additionally, share buybacks totaled over $390 million in the quarter or 10.45 million shares purchased for cancellation. Together with the dividend, returns to shareholders were over $840 million in the second quarter. In the first half of 2019, returns to shareholders have amounted to approximately $1.5 billion by way of approximately $850 million in dividends and $630 million in share buybacks, as we continue to execute our free cash flow allocation policy.The free cash flow allocation policy is also evident in our debt balance with a reduction of $1.2 billion from Q1 '19 levels when excluding the Devon asset acquisition and an increase of $2.2 billion when including the asset -- acquisition in the quarter. Acquisition financing included a 3-year $3.25 billion syndicated term loan facility that was successfully closed in the quarter.Our debt metrics remain strong, and are targeted to get even stronger throughout 2019. At current strip pricing and based on our corporate guidance, we target to exit 2019 with a debt-to-adjusted EBITDA, debt-to-cash flow and debt-to-book capital at levels below those existing at December 31, 2018, despite the completion of the Devon acquisition financed on our balance sheet, along with returns to shareholders by ways of dividends and share purchases throughout the year.Finally, available liquidity represented by bank facilities and cash at quarter end was approximately $4.6 billion, an increase of $330 million over Q1 2019 levels and includes the repayment of medium term notes of $500 million in the second quarter providing flexibility to manage throughout the business cycle and drive increasing shareholder value.With that, I'll turn it back to you, Tim.

[Timothy Shawn McKay, President & Director]

Thanks, Mark. In summary, we are delivering sustainable top tier free cash flow, Canadian Natural has many advantages, our balance sheet is strong and we will continue to strengthen, and 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 balance in our commodities with approximately 51% of our BOEs light oil SCO, 24% heavy, 25% natural gas in Q2, which lessens our exposure to the volatility in any one commodity.Canadian Natural will continue to allocate cash flow to our 4 pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective and efficient operations, and by our teams who deliver top tier results.We have a robust, sustainable free cash flow. Our dividend was increased earlier in the year and it was our 19th consecutive year of dividend increases, which has a CAGR of 21%. Share purchases of year-to-date to July 31 were 19 -- approximately 19.4 million shares or approximately $711 million. And when combined with our 2018 shares of approximately 30.9 million shares equals to a cumulative total of approximately 50.3 million shares or approximately $2 billion returned to shareholders through our share purchase alone.With that, we will now open the call up for questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Neil Mehta from Goldman Sachs.

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

Congrats on a good quarter here. And I guess, the first question is around the egress coming out of Western Canada, and just curious on your views on how this plays out from here in terms of getting crude to market? And I'm thinking on a couple of different fronts. One is, how do you see the government's rail contracts playing out from here? Two is, ultimately some of the big pipelines that are being talked about whether TMX or Line 3, how do you see the risk from there, and then three, about crude by rail? So if you can kind of step back and give us the kind of the ecosystem getting Canadian crude out of the basin, it would be helpful here.

[Timothy Shawn McKay, President & Director]

Sure. Thanks, Neil. So currently, the Alberta government is going through a process here that's to conclude here later in August on the rail contracts. So currently, we are in the process and we're walking through that piece today. And to go forward with it, obviously it has to make economic sense, and -- but we're in the process and we're looking at it. In terms of pipelines, what we see ahead of us, is that there are many projects that have been announced, many optimization projects that are looking to go ahead, so we see pipeline egress happening. It's happening differently than obviously we originally envisioned a year ago. But we're very confident the pipelines will go forward, and how that unravels is, getting I would say less and less flurry as each hurdle is being overcome either through regulatory or through the legal system.

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

All right. And then the follow-up is just around M&A. You successfully completed the Jackfish transaction. So can you talk about early learnings from that integration and how that's going? And is this a moment for the company to digest recent acquisitions, whether that's AOSP or Jackfish, and take a pause as it relates to M&A at this point and really focus on deleveraging?

[Timothy Shawn McKay, President & Director]

Sure. Well, if you talked on the Devon acquisition, our teams were out in the field. Essentially that next day after they closed, we're executing on that plan. The plan is, in my mind going very, very well and ahead of our initial plan, view of capturing those opportunities. From our perspective, we see capturing that $135 million. I would say, it's very conservative at this time. And as we tick into the assets, we always find more opportunities and whether it's ASOP or the Devon acquisition -- as on the oil sand side, we're seeing another $100 million, captured as savings. I would see on the Devon acquisition that process happening to catch those savings -- more than those savings that we have announced. On the M&A acquisitions, we don't have any gaps and we always look at opportunities and -- but we have no gaps. So that's really all I can say about that.

[Operator]

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

[Philip Mulkey Gresh, Senior Equity Research Analyst]

My first question is just on capital spending. And obviously you've kept it at really low levels this year just tweaking it up for the Devon transaction. But any thoughts you could share around 2020? Some of your peers have been kind of highlighting that they're not planning to increase CapEx at all at this point. And so given the egress situation and given the opportunities in the portfolio, where would you stand relative to this year's $3.8 billion?

[Timothy Shawn McKay, President & Director]

Thanks, Phil. Certainly to say, but I don't -- with our low maintenance capital, I could see us very much being in the same range as that we were in 2019. The beautiful part of having low-decline, long-life assets is that, that maintenance capital is very low for our company. And I really don't see in this environment that you need to push that much further than a little bit about, to keep future opportunities open for the company.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Second question I was just kind of digging through your full-year guidance, and your third quarter guidance and what it will imply for the fourth quarter. And it did seem like, if I did my math right, there's a bit of an expectation of a step up in thermal 3Q to 4Q. Maybe if you could just confirm that and what's driving that?

[Timothy Shawn McKay, President & Director]

Sure that is correct. So look there's 2 items. One is, Kirby North, we are doing that ramp up, trying to manage it within the curtailments that we have today. The other item that's probably not well understood is the thermal pad adds, the Primrose. So right now because we are ahead of schedule, we've adjusted the Horizon turnaround, so that we could do a cycle during that Horizon turnaround. So these cycles are roughly 30,000 barrels a day. So with that, we're able to feather in that Primrose production. And then, obviously, depending on how the November and December, October curtailment volumes are allocated, we have that opportunity to even do further on the thermal side, so.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay. Got it. And did I -- Tim, I thought you had said before, Kirby, you weren't expecting to do until 2021?

[Timothy Shawn McKay, President & Director]

We are ramping Kirby North up, but that the -- with the SAGD it's, what I would say, a controlled ramp up on the SAGD. And so all we were doing is, we were just slowing that down until we get a little more clarity of where the curtailments are heading. Obviously, every volume we add at Kirby has to come out of the system somewhere. So we're trying to just manage that within the curtailments, within the flexibility we have of the different levers within the company. So obviously, if -- example, if we have a issue in one area that we can't meet their curtailment volume, it is nice to have that optionality to be able to ramp up other areas to make those volumes.

[Operator]

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

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

Just to maybe come back around your comments earlier about the performance of the synergies and integration of the Devon assets, I was just curious, is that operational that we should expect to see you potentially raise the numbers on, or is it something unique to the market conditions today, where I mean things are just playing soft, or is it -- maybe at a third option being that you want to be conservative when you first put the numbers out, now you've seen the asset and we should think of it is as a fairly straightforward-process of outperforming on synergies. Just curious kind of which bucket that might fall into.

[Steve W. Laut, Executive Vice Chairman]

Yes, that would fall into your third bucket, Roger. Obviously when we look at an acquisition, operationally we have very good focus on what opportunities are ahead of us. But then, once we take over the operations, we generally get to a -- get a deeper dive into how things could deleverage further. And that's usually what happens on all our acquisitions, is I would say conservative on the cursory look. And then as we get into it, we will find more and more opportunities. And similarly, with the -- able to move the volumes over earlier, it's -- you do a cursory look and then you actually look at how you could actually do it operationally better, more efficient and faster.

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

All right, so there is an operational component to it. I would think is fair to say.

[Steve W. Laut, Executive Vice Chairman]

Yes.

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

Okay. And the second question, I have come back and beat kind of the same topic, it's already been hit here. But as you think about cash flows and the use thereof going forward, I mean you've done a great job with the dividend and the share repos. It doesn't sound like there's any hole in the portfolio. So as we think about the cash, well as you're going to generate over the next, let's say, foreseeable future, the next couple of years, the -- and let's assume no real change on egress for crude out of Canada, so kind of historical differentials within the pipeline expansions, it should occur, what do you do with the cash? I mean, should we think of it as incremental is coming to shareholders? It will go more aggressively to share repurchases? I mean, just generally speaking across the industry, dealing with the kind of valuation and discounts, and then a little bit more pronounced where you are. So just curious kind of how you evaluate the option of ramping up the share repos from here even?

[Mark A. Stainthorpe, CFO & Senior VP of Finance]

Yes, Roger, it's Mark. And what we've established is, this free cash flow allocation policy. So we continue to drive towards that. So when you look at cash flows less our capital, less our dividend, we're allocating 50% to share buybacks and 50% to the balance sheet. We've been trying to manage that on a go-forward basis, looking forward and managing on a week-to-week basis. Tim mentioned the low even capital profile. So we continue to generate and in this kind of environment, generate a lot of free cash flow. So I think it's fair to assume that we're going to continue along those lines of that free cash flow allocation policy. You'll see us manage that 50-50.

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

Yes, I guess I'm just curious, I mean, the 50-50 allocation of, what did you base that on? I mean, in other words, we're all seeing everybody trying to do the same thing, we're not necessarily hitting a result. I recognize some of that is out of your hands, a lot of it seems to be out of our hands on the sell-side despite trying to get people interested in energy. But I mean, is there any analysis you've done that says maybe you should be more aggressive on debt repayment relative to share repos or the other way around? I'm just -- I mean 50-50 sounds great, I'm just trying to understand like what the science is behind that.

[Mark A. Stainthorpe, CFO & Senior VP of Finance]

Well, there's a little bit of science in the sense that we are targeting some balance sheet metrics. So we're looking at $15 billion of absolute debt and 1.5x debt-to-EBITDA. So there's some science around that, that we are focused on. But overall Roger, I think, what we're looking for is balance and you've seen that across the company, whether it be operationally or in this sense, as far as returns to shareholders via dividends and share purchases and debt repayment.

[Operator]

Your next question comes from the line of Manav Gupta from Credit Suisse.

[Manav Gupta, Research Analyst]

I actually wanted to focus a little bit on Lower Montney results. We are actually seeing some good industry data coming in there. You guys are leading the charge. I'm just trying to understand, I know it's early days, but when you look at Lower Montney, do you think it could be as prolific as the Upper and the Middle Montney? Yesterday we saw some results in Lower Montney, which were like 70% condensate yield. Are you seeing that height of the condensate yield in Lower Montney? And finally, on the same lines, are you already in triple-stack mode, or you want to go to triple-stack where you can hit all the 3 zones together?

[Timothy Shawn McKay, President & Director]

Okay. So just on the first question on Lower Montney, we are seeing a very good opportunity in Lower Montney, and as you said, with very good liquid rates. Yes, it's early in its development. We see lots of opportunities on land. In terms of doing the 3 different levels, absolutely. If you look at the way it would develop in terms of cost effectiveness, it would be and it would make sense to do 2 or 3 levels of development on one pad. So that is a huge opportunity for the industry and the Montney, I would say for Alberta, is a real gem and a real opportunity.

[Manav Gupta, Research Analyst]

And a quick follow-up, as last time you explained in detail to us how the nomination process is broken and what are the measures that need to be taken. I'm just trying to understand, has there been any progress since the new government is in office and you're trying to negotiate and leave the pass over there, but has there been any progress on fixing this broken nomination process?

[Steve W. Laut, Executive Vice Chairman]

Yes. So there has been no progress on fixing the nomination process. We had been involved, but the government's first priority is obviously to reduce the curtailment. Second priority, is Israel getting that off the table in there. And then the third appears to be the nomination process. So we're confident the government will get through it, but right now there has been no traction in terms of seeing the nomination process.

[Operator]

Your next question comes from the line of Greg Pardy from RBC Capital Markets.

[Greg M. Pardy, Managing Director and Co]

Maybe just to come back to something that Roger was asking, and Mark maybe if could you just qualify this, that when you think about the formulaic approach, is it done on a quarterly or an annual basis? And I think what we're driving at is, is when you look at your third and fourth quarter, at least as per our model, I mean, there's significant debt reduction embedded in there.

[Mark A. Stainthorpe, CFO & Senior VP of Finance]

Yes. So I mean, well, what you've seen Greg in 2019 of course, is we've increased our debt to do the acquisition, but you quickly see that debt come down. And that's sort of what I was talking about. Even if you look at entry to exit going into 2018, despite $3.2 billion, $3.4 billion acquisition, the debt actually comes down over the year. So we do have those targets that I mentioned that we're focused on. And again, the free cash flow generation of the company is significant. We do manage it, you're asking on a quarterly or yearly basis. It's actually more like on a weekly basis, Greg. We kind of look at it all the time as we look forward.

[Greg M. Pardy, Managing Director and Co]

Is there anything to add just on the ramp up at Northwest mainly as it relates to just taking incremental bitumen? Just feels like it's a bit of a blind spot. We've been waiting for this 50,000 for a while.

[Steve W. Laut, Executive Vice Chairman]

Yes, Greg. It's Steve here. Now they're working on it and probably best to get the information directly from Northwest, but they're making progress and hopefully they'll get there soon.

[Greg M. Pardy, Managing Director and Co]

Okay. Last one from me then is, just on, I mean, you guys have been one of the major architects who are thinking how curtailment policy has been shaped and so on, and it's obviously been very effective. It's also kind of standing in a way in some ways in terms of incentivizing crude by rail there because we really haven't got spreads that are sufficient to really incentivize those ramp ups. In your view, I mean, should the curtailments be tapered more quickly or -- and again, I know that's a government decision, but they're obviously consulting with the industry or is it about right?

[Timothy Shawn McKay, President & Director]

Greg, it's Tim McKay here. In our opinion it's all about being right. Obviously, it will be devastating for the industry if the differentials, again, blow out on both the Synthetic and WCS. So doing a measured approach is in our opinion, the right aspect. I mean, the storage levels are going down. So that is very, very positive. With the rail obviously, you're absolutely right, with reducing curtailment, there has to be something linked with the rail. Obviously, if we're in a curtailed environment and there's no benefit of doing rail, it's going make it very difficult for companies to economically justify it. So in our mind we see curtailment and the resolution of the rail have to be somewhat linked to reduce the curtailment.

[Greg M. Pardy, Managing Director and Co]

Okay. Last one from me, to oblige, is there simply going to be more rail in your future? I mean, irrespective of what happens with the Alberta government contracts, you've got 40,000 of bitumen and it's even bigger when you gross it up, for obviously, the deal you're going to need that sitting behind pipe plus a whole bunch of other stuffs you can do. Does it not make more sense just to kind of go bite the bullet on multiple fronts, if you need to?

[Timothy Shawn McKay, President & Director]

Greg, I really wouldn't want to comment on that because, obviously, we're a competitor, and to us, it's always good to keep our cards close to our chest.

[Operator]

[Operator Instructions] And your next question comes from the line of Phil Skolnick from Eight Capital.

[Philip Ross Skolnick, Managing Director of Energy Research]

Just circling back to the Devon acquisition, talking about the consolidation of the facilities there, now what would be the timing around that? And what kind of CapEx associated with that and how do we think about the cost savings upside to come from that as well?

[Timothy Shawn McKay, President & Director]

Sure. The facility we're talking about consolidating or actually shutting down is actually heavy oil battery. So the cost to shut it down are very, very low. Obviously, we just have to preserve it. So that part is, I would call, de minimis in terms of cost. The real opportunity is really reducing the trucking costs, and then as well with going to the ECHO pipeline, we gain that $25 million worth of margins. So it is actually very easily done and the teams are working on it, and we're very confident it will be done before the end of Q3.

[Philip Ross Skolnick, Managing Director of Energy Research]

So there is nothing, I guess, then on facilities side at Jackfish that could be consolidated?

[Timothy Shawn McKay, President & Director]

There is opportunities at Jackfish in terms of -- probably on more on the water side to handling where we can optimize our fuel usage and maybe the way we use the produced water. And our teams are working on it and that's just upside. That was never in our cost savings or the opportunity piece there. But we are working on additional opportunities there. They don't look overly expensive. So we look at them as a way of growing our margin.

[Operator]

Your next question comes from the line of Gary Chapman from Guardian Capital.

[Gary M. Chapman]

I've got 3, I think, quick questions. One is, you're doing a great job on greenhouse gas emissions. Are you having third-party verification, just so the general public perception might improve if they think it's been done by a third-party as opposed to coming out of the company? So that's one question.The second, when you're evaluating rail on economics, is it purely economics or are you including a bit of an insurance element to it? I mean, I have life insurance. It's negative cash flow, but I hope to never win. And secondly -- third part, when you look at debt-to-equity at 1.5x, just to an earlier question, why not 1.0x? I mean, there would be a transfer of enterprise value from debt holders to equity holders, going to 1.0x. And in an environment of extremely volatile energy prices, maybe the equity would be valued at a higher multiple with a lower debt level.

[Timothy Shawn McKay, President & Director]

Sure, Gary, okay. So Steve would you want to talk about greenhouse gas?

[Steve W. Laut, Executive Vice Chairman]

So the greenhouse gas emissions, Gary, we get asked for the verification. And I think you have to remember here there's a lot of reporting that goes on greenhouse gas emissions that has to go through the Alberta government. So they are in a sense verified through that process. We'll look at third-party verification, we've just to make sure it adds value. And I think what you have to really look at is greenhouse gas emissions are going down dramatically in terms of intensity. So it's really positive for the Canadian economy and Canadian contribution to climate change as a whole.

[Timothy Shawn McKay, President & Director]

And then on the rail side, yes to your point, it is more than just one element. You have to look at timing of a potential increase in egress, what that likelihood is to your point of insurance and the economics. So it is actually a very complex item and we look at all aspects to make sure that a key is that it adds long-term value for our shareholders. And debt-to-equity?

[Mark A. Stainthorpe, CFO & Senior VP of Finance]

Yes, and Gary on the question around debt-to-equity, debt-to-capital, the 1.5x in $15 billion is considered more of an initial target. So we developed this free cash flow policy in late 2018 with these targets. And the idea would be you'd revisit it at that point. So depending on where we are, and the environment and everything that's going on, there'll be decisions around what does a new target look like. So -- and then you know that's at the Board level and we will review that and look at it every quarter.

[Operator]

Your next question comes from the line of Benny Wong from Morgan Stanley.

[Benny Wong, Vice President]

One of your smaller peers that runs volumes through the ECHO pipeline that started talking about looking at using less condensate or even using butane instead to reduce blending costs on the volume de-centered to pipe. I know you guys, obviously you guys upgrade the Devon assets a little bit now and send barrels on that line. Is that something you think is feasible, is that's something you would consider exploring?

[Timothy Shawn McKay, President & Director]

Yes, we've been doing many different things on our ECHO pipeline and systems -- heavy oil systems for years to improve the margins.

[Benny Wong, Vice President]

And my follow-up is really I want to get your long-term perspective of how you think about your portfolio. I understand integrating and optimizing the Devon assets are the main focus. And appreciate you guys have no gaps in the portfolio. But as we think about value creation in a world that seems to no longer want growth, integration seems like a potential strategy and you guys are unique in most of your peers with all the downstream business. I guess my question is, how do you think about the refining business today? Would it make sense to increase your ability to capture more margin with refinery assets if the price is right? Or do you envision seeing Q2 stick to what it's great at and stay as a dominant E&P-focused company?

[Timothy Shawn McKay, President & Director]

Well, I think you've seen us somewhat diversify over time. We are 50% owner of the NorthWest Upgraders. So that is part of our D&A, I would say. So in all cases, the key is how does it integrate with our operations and can we see a value proposition? And I would say that whether it's upstream or downstream, we look at it, how would it integrate with our business and how could Canadian Natural capture more value for our shareholders.

[Operator]

And with that, there are no further questions in queue. I'd like to turn the call back over to Mr. Bieber.

[Corey B. Bieber, Executive Advisor]

Thank you, operator. As you can see Canadian Natural's large, well-diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver efficient and effective 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 don't hesitate to give us a shout.And thank you again, everyone for attending our conference call this morning. And we look forward to our 2019 third quarter conference call in early November.

[Operator]

Thanks. And enjoy the day.