Canadian Natural Resources Ltd

TSX:CNQ

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Canadian Natural Resources Fourth Quarter and 2020 Earnings Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to turn the conference call over to Mr. Corey Bieber, Executive Advisor. Please go ahead.

[Corey B. Bieber, Executive Advisor]

Thank you, operator. Good morning, everyone, and thank you for joining our fourth quarter and year-end 2020 conference call. With me this morning are Tim McKay, our President; Darren Fichter, Chief Operating Officer, Exploration and Production; and Mark Stainthorpe, our Chief Financial Officer. 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 would 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 Tim McKay.

[Timothy Shawn McKay, President & Director]

Thank you, Corey. Good morning, everyone. The COVID-19 pandemic has impacted our lives and the way we operated our businesses in 2020, including the many precautions that we had to put in place to protect our stakeholders. Canadian Natural would like to thank our employees, contractors, suppliers and shareholders for their support through this challenging year. Despite the challenges in 2020, Canadian Natural delivered top-tier operational and financial results, which is a result of the strength of our long-life low-decline assets and operational excellence of our people, which maximized free cash flow in a challenging year. In 2020, we were nimble, quickly lowering our capital. With our long-life low-decline and high-quality asset base, we still achieved record annual corporate BOE production of 1.16 million BOEs per day, or approximately 65,000 BOE/d increase over 2019 levels. With our culture of continuous improvement, we continue to drive effective and efficient operations. And as a result, we had record low annual operating cost of $20.46 per barrel of SCO in our Oil Sands Mining Upgrading group, a decrease of $2.10 per barrel. As well, in our North American E&P liquids, we achieved significant operating cost reduction of $1.20 per barrel, or 10% lower than 2019 levels. We continue to apply the same drive to ESG, environmental, social and governance, to deliver industry-leading performance across the board, a significant factor in our long-term sustainability. Canadian Natural and the entire Canadian oil and gas sector leads the world and has delivered game-changing environmental performance. In 2020, we reduced our corporate GHG intensity by 18%, methane emissions by 28% from 2016 levels. Our safety record is top-tier as our corporate total recordable injury frequency improved 0.21 in 2020, a reduction of 58% from 2016 levels. We reached significant environmental milestones, including the 5 million tonne of CO2 captured at Quest and now have planted 2.5 million trees at our oil sands mining operations. In our oil sands operations, we can develop technologies using Canadian ingenuity to continue to move us closer to Canadian Natural's aspirational goal of reaching net zero emissions. Canadian Natural has multiple pathways to achieve net zero, with actions identified in the near, mid and long term and the strength of the Canadian oil sands mining asset is that it's with its long-life no-decline and with its manufacturing-like operation, it can have one of the clearest routes, if not the clearest route to net zero of any global assets. I will now do a brief overview of our assets, starting with natural gas. Overall, 2020 annual North American annual natural gas production was 1.48 Bcf per day, which is comparable to our 2019 production of 1.49, with North American annual natural gas production of 1.45 versus 1.44 for 2019, which is up slightly as a result of the company's strategic decision to invest in low-cost natural gas opportunities and the acquisition of Painted Pony in Q4. Our annual North American natural gas operating costs was $1.14, which is down 2% when compared to 2019 of $1.16. For the fourth quarter, North American natural gas production was approximately 1.6 Bcf per day versus 1.45 for Q4 2019, with strong operating costs of $1.07 per Mcf versus Q4 2019 of $1.11, impressive year-over-year operating cost performance as we continue to focus on operational excellence. At Septimus, the company's high-value liquids-rich Montney area in the second half of 2020, 8 wells were drilled, all came on production in Q4 '20. This project was completed with strong capital efficiencies of approximately $4,800 per BoE/d, with total current production rates from the new wells at approximately 46 million cubic feet per day and 2,200 barrels a day of NGLs, delivering as expected. Looking forward, on an annual strip basis, AECO prices for '21 look very strong at $2.78 per gj, an increase of approximately 31% toward 2020 levels, improving the economics of natural gas projects. In 2021, within our high-quality Montney lands at Townsend, 6 to 7 wells were brought on production, at strong rates, totaling approximately 74 million cubic feet per day compared to our target of 50 million, resulting in a strong capital efficiency of approximately $2,200 per flowing BOE. For North American light oil and NGLs, annual production was 84,658 barrels per day, down 13% from 2019, primarily a result of natural field declines. Annual operating costs were strong at $14.61 per barrel, which is 4% lower than the 2019 annual operating cost of $15.21 per barrel. Q4 production was 88,161 barrels per day, down 6% when comparing to Q4 2019, with fourth quarter operating costs that were down 10% to $13.88 per barrel as compared to Q4 2019 operating costs of $15.41 per barrel. In '21 -- in 2021, the company continues to advance high-value Montney light crude oil development plan at Wembley, targeting 18 net wells and a construction of a new crude oil battery, with a targeted onstream date of October 2021. With the crude oil battery in place, new wells are targeted to be brought on stream at strong capital efficiencies of approximately $9,400 per flowing barrel. This project is targeting to exit 2021 and at total production rates of approximately 8,500 barrels a day of liquids and 28 million cubic feet of natural gas. Our international assets in 2020 had annual oil production of approximately 40,200 barrels per day, a decrease of 19% versus 2019 levels, primarily due to natural declines. Our international assets continue to generate strong free cash flow and value for the company. Offshore Africa annual production was approximately 17,000 versus 2019 of 21,400 barrels a day, which is down due to natural field declines. CDI operating costs were for 2020 were $13.29 per barrel versus 2019 of $11.21 per barrel. In the North Sea, annual production averaged 23,142 barrels a day in 2020 versus 2019 of approximately 28,000 barrels a day, primarily -- down primarily due to natural field declines in the succession of production in the Banff field in 2020. Annual operating costs were strong at $36.51 per barrel and were comparable to 2019 levels as the team did a great job managing costs. Moving to heavy oil. Annual production was 70,279 barrels a day in 2020 versus 82,189 barrels in 2019, reflecting natural decline, limited investment due to commodity prices and the Alberta mandatory curtailment program. Annual operating costs were $17.59 per barrel versus 2019 operating costs of $16.66 per barrel. Fourth quarter 2020 production was 65,513 barrels versus Q4 2019 production of 94,262 barrels per day, while operating costs were $17.61 per barrel versus Q4 2019 of $15.03. We continue to focus on effective and efficient operations. A key component of our long-life low-decline assets is our world-class Pelican Lake pool, where our leading-edge polymer flood continues to deliver significant value. 2020 annual production was 56,535 barrels per day versus 2019 average of 58,855 barrels a day, only a 4% decline, reflecting the very low decline of the property. The team continues to do a great job, and we had very strong annual operating costs of $6.03 per barrel, a 3% reduction versus 2019 operating cost of $6.22 per barrel. Fourth quarter 2020 production was approximately 56,000, down from the fourth quarter of 2019 of 59,000. Operating costs in Q4 2020 were very strong at $5.85 per barrel. At Pelican, our team continues to drive for operational excellence, and has been able to mitigate the impact of decline in production over the last 5 years, reducing the annual operating costs on a BOE basis, an excellent accomplishment by them. With our low decline and very low operating costs, Pelican Lake continues to have excellent netbacks. We had a strong year in thermal operations in 2020 as we continue to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations. In 2020, our thermal production reached a record of approximately 249,000 barrels a day, as we optimize production throughout the year under our curtailment optimization strategy. The strong annual performance in thermal reflects increase in volumes from pad adds at Primrose, production ramp-up of Kirby North and additional pad tie-in at Jackfish. Thermal annual operating costs were very strong at $9.44 per barrel, a decrease of 13% from 2019 levels of $10.83 as a result of cost synergies achieved as we integrated in Jackfish and Kirby North field operations as well as continue to focus on effective and efficient operations. Q4 production was approximately 266,200 barrels a day, down from Q3 as part of our curtailment optimization strategy with operating costs of $9.17 per barrel. In October, our thermal team optimized the ramp-up of additional pad out of Jackfish as we recorded a record monthly production of approximately 128,600 barrels a day, a great result by our team. In the company's world-class Oil Sands Mining and Upgrading assets, annual production averaged 417,351 barrels a day of SCO, an increase of 6% from 2019 levels, primarily as a result of high utilization rates and operational enhancements. Record-low annual operating costs were achieved in 2020 and remain industry-leading, averaging $20.46 per barrel of SCO, a decrease of $2.10 from 2019 levels, driven by the company's continued focus on high reliability, cost control as well as operational enhancements. In summary, the company increased annual SCO production by approximately 22,000 barrels a day over 2019 levels. As well, we reduced the total annual operating cost by $183 million, excluding energy cost. Our teams continue to do an excellent job here, and they are focused on continuous improvement and effective and efficient operations. At oil sands mining operation, production in Q4 was approximately 417,100 barrels a day as planned maintenance was concluded at Horizon and ASOP ran well at expanded capacity. In the quarter, operating costs were strong at $20.20 per barrel of SCO as their teams drive for operational excellence. As well in December, in our oil sands mining assets, we recorded a record monthly of approximate 490,800 barrels a day as we had high utilization rates combined with enhanced capacity and operational excellence. As part of our 2021 budget, a planned 30-day turnaround is scheduled for the month of April. During the shutdown, new incremental operational tankage at the upgrader is coordinated to be tied in. I will now turn it over to Darren for 2020 reserves review.

[Darren M. Fichter]

Thank you, Tim, and good morning. To start, as in previous years, 100% of Canadian Natural's reserves are externally evaluated and reviewed by independent, qualified reserve valuators. Our 2020 reserves disclosure is presented in accordance with Canadian reporting requirements using forecast prices and escalated costs. The Canadian standards also require the disclosure of reserves on a company gross working interest share before royalties. In 2020, Canadian Natural had an excellent year, replacing 361% of the company's 2020 production on a total proved basis, 282% for crude oil, NGLs, bitumen and synthetic crude oil and 656% for natural gas. On a total proved plus probable basis, the company replaced 493% of the 2020 production. Total proved reserves increased 10% to 12.1 billion BOE and total proved plus probable reserves increased 12% to 15.9 billion BOE. Of the 12.9 billion BOE of total proved reserves, approximately 7 billion barrels are high-value, no-decline SCO reserves. It is also important to note that 71% of Canadian Natural's total proved reserves are proved developed producing reserves at 8.6 billion BOE. Finding and development costs are key indicators of the strength of our assets and the company's ability to execute. Canadian Natural delivered top-tier results in 2020, and our strong performance is reflected in our finding and development costs. The corporate finding, development and acquisition costs, excluding changes to future development costs are $1.91 per BOE for total proved and $1.40 per BOE for total proved plus probable reserves. Canadian Natural's finding, development and acquisition costs, including changes to future development costs are $4.46 per BOE for total proved and $3.46 per BOE for total proved plus probable reserves. The strength and depth of the company's asset base is evident, as approximately 80% of the total proved reserves are long-life low-decline, resulting in our top-tier proved reserve life index of 29.8 years and total proved plus probable reserve life index of 39.2 years. The net present value of future net revenue before income taxes using a 10% discount rate and including the full company ARO is $80.7 billion for total proved reserves and $98 billion for total proved plus probable reserves. In summary, these excellent results reflect the strength and depth of Canadian Natural's asset base, the value of the company's long-life low-decline reserves and our ability to execute. Now I will hand over to Mark for the financial highlights.

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

Thanks, Darren. The fourth quarter was strong operationally and financially as the base business delivered significant adjusted funds flow of $1.85 billion and free cash flow of approximately $700 million after capital and dividends in the quarter, excluding both the Painted Pony acquisition and the transportation provision taken in the quarter related to the Keystone XL pipeline project. This was a very strong result and contributed to us exiting 2020 in a robust financial position. Our net debt balance at the end of 2020 would have been down approximately $80 million from ending 2019 levels, excluding costs related to the acquisition completed in Q4. This includes over $2.2 billion returned to shareholders in 2020 through an increased dividend and share repurchases in the year. Focusing on the second half of 2020, we reduced absolute net debt by over $1.5 billion as free cash flow was allocated to debt reduction. To date in 2021, we continue to generate significant and growing free cash flow, which has already been allocated to debt repayment, including retiring $362.5 million of nonrevolving term loans. The robust free cash flow generation from our assets will continue to facilitate further balance allocation to our 4 pillars over the long term. This clearly demonstrates the sustainability of our business model, the ability of our unique long-life low-decline asset base with low maintenance capital requirements and effective and efficient operations to generate significant free cash flow. We continue to maintain significant liquidity, including revolving bank facilities, cash and short-term investments. Liquidity at year-end 2020 was approximately $5.4 billion, and we had approximately $0.5 billion in commercial paper for which we reserve capacity under these revolving facilities. Given the confidence in our long-life low-decline assets and sustainability of our free cash flow, the Board of Directors have increased the dividend by 11% to $1.88 per share annually, with the first quarterly payment of $0.47 per share payable on April 5, 2021. This represents the 21st consecutive year of dividend increases, represents a 20% CAGR since inception and further demonstrates the commitment to returning value to shareholders. In addition, subsequent to year-end, the Board of Directors authorized management, subject to acceptance by the TSX, to repurchase shares under a normal course issuer bid targeted to equal options exercised throughout the coming year in order to eliminate dilution to shareholders. Given the increase in commodity prices since our budget release in December, the forecast for free cash flow generation in 2021 is significantly higher. At an average price of approximately USD 57 WTI, we now target to generate between $10.3 billion and $10.8 billion of adjusted funds flow, which equates to $4.9 billion to $5.4 billion of free cash flow after capital and the increased dividend. This provides significant opportunity to optimize allocation to our 4 pillars, including further debt reductions and continued returns to shareholders. With that, I'll turn it back to you, Tim.

[Timothy Shawn McKay, President & Director]

Thanks, Mark. Canadian Natural's advantage is our ability to effectively allocate cash flow to our 4 pillars. We have a well-balanced, diverse and large asset base, which a significant portion is long-life low-decline assets, which requires less capital to maintain volumes. We balanced our commodities in 2020 with approximately 47% of our BOEs, light crude oil and SCO; 32% heavy; and 21% natural gas, which lessens our exposure to the volatility in any one commodity as we move through 2021. We 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 delivered top-tier results. We have robust sustainable free cash flow, and even in a challenging year as 2020, returns to shareholders were significant at approximately $2 billion in dividends, $0.3 billion in share repurchases for a total of $2.3 billion. And today, our dividend has increased by 11% for the 21st consecutive year. In summary, we continue to focus on safe, reliable operations and enhancing our top-tier operations, and we will continue to drive our environmental performance. We are in a very strong position and being nimble enhances our capacity to create value for our shareholders. Canadian Natural is delivering top-tier free cash flow generation, which is unique, sustainable and robust and clearly demonstrates our ability to both grow economically the business and deliver returns to shareholders by balancing our 4 pillars. With that, we will now open the call to questions. Thank you.

[Operator]

[Operator Instructions] First question comes from Menno Hulshof with TD Securities.

[Menno Hulshof, Research Analyst]

I'll just start with one on your ongoing 2-year solvent EOR pilot at Kirby South. And I believe you have a second pilot planned for Primrose. So maybe you could just give us an update on how that's going. And what is your best guess on when you'll have the confidence to roll out that process commercially?

[Timothy Shawn McKay, President & Director]

Sure. Tim here. At Kirby South, we got one more year in which we need to see how much of our solvent we recover to get that piece comfortable with where our recoveries would be. And then at Primrose, we're just initiating that pilot. And again, it's kind of a 2- to 3-year period. And based on Kirby South, we feel very confident, obviously, to try it down at Primrose. So in general, it's about a 2- to 3-year period for -- to get kind of a full cycle of results.

[Menno Hulshof, Research Analyst]

So do you think you would have to complete the Primrose pilot first before you would consider the commercial rollout?

[Timothy Shawn McKay, President & Director]

For the Primrose area, absolutely. For Kirby South, we're -- to do that piece, we just need one more year.

[Menno Hulshof, Research Analyst]

Okay. And then my -- sorry, go ahead.

[Timothy Shawn McKay, President & Director]

Yes, they're a different process. So obviously, Kirby South is SAGD. And then Primrose, where we're leveraging that technology is on the steamflood area.

[Menno Hulshof, Research Analyst]

Okay. Helpful. And then I'll follow-up with a question on CSS given all of the news flow that we've had on that front, including Exxon yesterday. Obviously, you're a dominant CCS player already. But is there any low-hanging fruit in terms of brownfield expansions on either the capture or storage side of things that could boost existing capacity over the midterm?

[Timothy Shawn McKay, President & Director]

The -- so I'm not quite sure on your question. But at Primrose, obviously, we have extra steam capacity. So really, all we would have to do is just get the okay to do more pad adds, and we can add approximately 80,000 barrels a day right at Primrose itself. So obviously that's not in our plan today. We're taking a conservative approach here this year, waiting on some Enbridge to get Line 3 approved and onstream. So we have that in our back pocket for future development.

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

Hey, Menno, this is Mark. Was your question on CSS or CCS?

[Menno Hulshof, Research Analyst]

Oh, sorry, CCS. Yes. I might have misspoken. Yes, I was referring to CCS.

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

Somewhere on the carbon capture front.

[Menno Hulshof, Research Analyst]

Yes. Yes. That's right. Any -- my specific question was, is there any low-hanging fruit in terms of expansions on the capture or storage side of things that could take your existing capacity up within the next, call it, 3 to 5 years?

[Timothy Shawn McKay, President & Director]

Well, we're just working through those details right now. Obviously, our advantage is having the infrastructure in place. So obviously, to do that, it's quite easily done. The biggest issue is just trying to walk through the technical changes. So if you look at something like in the thermal side, if we go towards solvents, we're going to cut our GHG emissions in half. So -- and then in certain areas, there is areas where you can do CO2 disposal quite cheaply without tying into the infrastructure. So there's lots of options. Our teams are very focused on going through those details and coming up with the best solution to reduce our greenhouse gases.

[Operator]

Next question comes from Phil Gresh with JPMorgan.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

First question, very helpful color on the free cash flow generation potential here. Mark, I guess, is the goal here for 2021 just to ratchet the debt down towards that $15 billion net debt target that you've talked about in the past, is get there as quickly as you can? Or I guess what other considerations do you have in terms of areas of potential uses of cash, whether it's capital or buybacks? What are scenarios where you might consider other options?

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

Yes. Thanks, Phil. And as you mentioned, we put some clarity around the free cash flow profile for 2021. As we mentioned, the dividend has been increased by the Board. So that's been set here, the $1.88 a share. And then we've instituted or we've been given the direction by the Board that we can buy back shares equal to the amount that is exercised from our option program. So basically, just to eliminate the dilution to shareholders. So those are kind of the 2 free cash flow profiles right now for shareholder return, and then it goes to debt repayment. So you'll see, in my view, significant reductions in debt as we go forward given that significant free cash flow profile.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Right. Okay. And as you -- having gone through the COVID environment, is $15 billion still roughly the right target you're thinking about? Or has anything changed in that regard in your view?

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

Yes. Right now, we're just -- we generate significant free cash flow. That $15 billion was part of a free cash flow allocation profile. I think if you look at where we exited 2020, able to keep debt flat from -- basically flat from 2019 levels shows that we're going to decrease that debt level likely quite quickly here given the strip pricing. So I think you will see that level get achieved very quickly.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Okay. And that would still be generally where your target, your long-term target would be that, that's where you're comfortable in, say, a mid-cycle or however you want to look at it in a volatile oil price environment?

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

Yes. So I think when the free cash flow allocation policy was out there, that was a target, but that was when we would revisit looking at different allocation profiles. So we'll just continue here to manage the 4 pillars as we have in the past.

[Philip Mulkey Gresh, Senior Equity Research Analyst]

Sure. Last one for me, just on the CapEx side of things. I mean it seems like pretty clear that you would prefer not to raise capital in this environment. I'm guessing inflation is probably pretty tame as well. So is there just essentially no real scenario here in 2021 where you think about allocating more to grow the capital? Is it more of a 2022 and beyond type of event? Or just any last thoughts there.

[Timothy Shawn McKay, President & Director]

I think -- Tim here again. I think if you look at, let's say, 2020, that year started off very robust and changed very quickly. If we look at into 2021, the volatility can still be quite extreme. Obviously, there's still spare capacity at [ OPEC ]. So I think we're very happy where we are today with our CapEx, and we'll just look to manage our balance sheet here till the end of the year.

[Operator]

Next question comes from Greg Pardy with RBC Capital Markets.

[Greg M. Pardy, MD & Co]

I'm going to come back to Phil's question, but maybe just ask it in a slightly different way. When you go back to the minor downgrade from S&P, right, which was sort of placing a greater industry risk or what have you around the oil sands business generally or energy generally, I guess. Mark, does that cause you to think differently about what the appropriate level of debt cash flow or debt cap is, maybe in the context of how the rating agencies are going to work with you guys versus in the past?

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

Thanks, Greg. We always monitor and look at these things over the long term. So 2020, obviously, an aberration in pricing given the global pandemic. We have our 4 pillars of capital allocation that we've always been focused on, on being relatively balanced. So you have to also look, Greg, at the source of the cash flow. It's certainly different compared to different E&P companies because of the sustainability of that cash flow, because of the assets and reserves, as Darren went over that underlying that free cash flow. So it's much more sustainable in different pricing environments. So I think we saw that through 2020.

[Operator]

Next question comes from Manav Gupta with Crédit Suisse.

[Manav Gupta, Research Analyst]

So first of all, I want to congratulate you. I think it was only 2 quarters ago that many were questioning the sustainability of your dividend. You have proven that you are always right and you knew your assets better than everybody else by raising the dividend. So I wanted to congratulate you on that. My quick question here is, I think I heard that in December, you hit 490,000 at oil sands. I wanted to confirm if that was the right number. It wasn't 419,000, it was 490,000? And I just want to understand have you ever hit that level before? I think you did very well in 2Q of '20, when you hit for the quarter, about 465,000, but I don't think you hit 490,000 back then. So if you could just help us understand how you got to 490,000 in the month of December?

[Timothy Shawn McKay, President & Director]

Sure. So that was me with my words getting lost here, but it was 490,800 barrels a day for the month of December. And obviously, December 1, that curtailment came off. We had the extra capacity at the ASOP, gross capacity of 320,000 barrels a day. And then as well at Horizon, they had an excellent month that it's around 260,000. So in both areas, you really have to look at how well our teams have done there in terms of enhancing our production. It's been small increments, but every year, they've been able to find a little more capacity and lower our costs. And they've really done an excellent job, they really look at what are sustainable changes that we can enhance our operating costs, increase our reliability and enhance our production volume. So yes, it was 490,800 barrels a day. It was a tremendous job by our team there.

[Manav Gupta, Research Analyst]

Congratulations. Great results. I have a quick follow-up. You always have a very informed view on apportionment pipeline. We have had a little bit of a setback here with Keystone, but do you think Enbridge Line 3 and TMX can still make sure that this don't blow out? And any comments you have on the apportionment at current times?

[Timothy Shawn McKay, President & Director]

Sure. Right now, apportionment, obviously, on the light side is 0. So that's very positive for the light oil side. And then on the heavy side, we're still seeing, I would say, elevated apportionment, 47% for March. And this will change. It will go down again as we start into our turnaround seasons, and ourselves and many others will be doing maintenance activities. I guess on the heavy side, interesting part, even though it's a 47% apportionment, the differentials are quite low at about $11. So it's kind of an interesting phenomenon now. Obviously, we feel very comfortable that Line 3 will progress onward and that we're going to sit here this year, work through that and you'll see that Enbridge will get better onstream here in Q3.

[Operator]

[Operator Instructions] You have a question from Neil Mehta with Goldman Sachs.

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

Congrats again on this free cash flow guidance. I guess the first question is just really around the cash flow number, the $10.3 billion to $10.8 billion is predicated on $57 WTI. Obviously, post-op back today, we are significantly above that. So the question is sort of the assumptions that go into that $10.3 billion to $10.8 billion. What are you assuming for crude differentials? And then can you remind us what you're using for FX as well as -- and then -- and what the sensitivity is to every dollar change in WTI?

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

Neil, it's Mark. Thanks for that. Just so everybody knows in the advisory at the back of the press release, you will find these numbers as far as the forecast that went into those numbers. So the WCS discount was USD 11.77 per barrel. AECO was at $2.88 a gj and FX, about $1.27. So those were all just strip prices at the time that we ran the forecast.

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

And the sensitivity of every dollar change?

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

So the sensitivity of every dollar change obviously changes as the cash flow goes up because you generate more U.S. dollar revenue. So at budget time, it was probably in the neighborhood of $82 million. It's probably above $100 million to $125 million now at $0.01 change. I'm sorry, and that's cash flow after tax [ for a year's average ].

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

I'm sorry, that's for FX, right? But for every dollar change in WTI?

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

Every dollar change at WTI is about $330 million cash flow after tax Canadian.

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

Okay. That's perfect. And then just a follow-up is your thoughts around M&A. Do you still -- you've been opportunistic or able to tuck-in Painted Pony last year. What do you think the market environment is for bolt-on acquisitions in Canada? Or do you view this as a time that you really want to just organically delever and return capital to shareholders with the strong recovery in valuations and the commodity price?

[Timothy Shawn McKay, President & Director]

Well, I think our real key focus is delever, work on our operations here. But you know, you never can say never. We've always been optimistic in our acquisitions and we look at a lot of opportunities that we have synergies that we feel we can add a lot of value for our shareholders. So to me, today, we're looking to delever very quickly, but we always look for in terms of optimistic opportunities.

[Operator]

Your last question comes from William Lacey with ATB Capital Markets.

[William J. Lacey, Research Analyst]

Gentlemen, just a real quick question, and I apologize if you've got this outlined somewhere. Just your thoughts on taxes other than the fact that you hate them. And on royalties, especially in terms of sort of post-payout timing for projects. Do you have any insights on that?

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

Sure, William, it's Mark. I'll leave some of the detail maybe to IR to go through with you after. But if you look at cash taxes, when we ran the budget for 2021 in December when we had our budget press release, we were running at $45 WTI. Just to give you some perspective at that time, cash taxes run at $250 million to $300 million range. I would suggest that strip here in $57 WTI range, we'd be north of $1 billion. But again, I'll let you take that off with IR and kind of go through the detailed modeling on it. Same goes for royalties. You're right, we have oil sands royalty projects that, of course, have a royalty regime that has a pre and post payout. So as we generate more cash flow from those properties, we can get into payout. So another thing that I'll let IR take off with you.

[Operator]

And at this time, I will turn the call over to Mr. Bieber.

[Corey B. Bieber, Executive Advisor]

Thank you, operator, and thank you, everyone, for attending this conference call this morning. Canadian Natural's large, well-diverse asset base continues to drive significant shareholder value even through a year as turbulent as 2020. The ability of our teams to deliver effective and efficient operations with top-tier performance is contributing to proven resilience as well as substantial and sustainable free cash flow. This, together with effective capital allocation, contributes to achieving our goal of maximizing shareholder value. If you do have any further questions, please don't hesitate to give us a shout. Thank you and goodbye.

[Operator]

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