Canadian Natural Resources (CNQ)

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Canadian Natural Resources Limited (TSE:CNQ, NYSE:CNQ), Canada's second largest energy company behind suncor, is a major producer of crude oil and natural gas. It also engages in exploration and development in Western Canada, the North Sea (near the UK) and in the region of West Africa (Cote d'Ivoire, Gabon). Most of the company's production comes from North America (about 83% of crude oil and 97% of natural gas in early 2010). As a natural gas producer it transports to major pipelines throughout North America via its own carrier systems. It is one of the largest landowners (2nd largest in BC in terms of undeveloped land) in the western canadian sedimentary basin (much of it undeveloped), an oil and gas rich region encompassing Alberta and parts of Manitoba, Saskatchewan, BC, and the NWT.^[1]

Horizon oil sands which has a production life of at least 50 years, began producing synthetic crude oil in 2008. It is the company's largest (and most expensive to develop with start up costs totalling over 10 billion dollars) asset with resources totaling close to eight billion barrels of bitumen (which the company turns into sweet synthetic crude oil by upgrading processes).^[2] Production began in 2009 but it wasn't until early 2010 that it reached significant levels (70,194 bbl/d, 83,809 bbl/d in the third quarter of 2010).^[3][4] Horizon has been shut down since the second half of 2010; that resulted in large declines in production reported by CNRL in the first half half of 2011; In the second quarter of 2011 production was 556,539 boe/d (down 14.3% qoq, Horizon had accounted for 14% of the company's production). Crude oil production guidance for 2011 is down to 371-406,000 bbls/d from 421,000 bbls/d guidance in May.^[5]

Differing from many of its counterparts operations at Canadian Natural Resources, generally haven't been hampered by many fires (like Suncor) or explosions (on January 2, 2010 one of Pengrowth's pipelines exploded). There were a couple exceptions, in 2007 2 Chinese temporary foreign workers were killed when an oil tank collapsed (Canadian Natural and Sinopec were the 2 companies prosecuted but that didn't begin to take place until September 2010, between 2006 and 2009 142 people died of work related injuries but only 4 led to convictions).^[6]. In January 2011 a fire destroyed part of the Horzon project oil upgrading facility (contained to the coker area), the coker part was already undergoing repairs during the last quarter of 2010 that lowered output from Horizon by 22.35% in December 2010 (down to 83,700 from a high of 107,800 in November 2010, production there averaged 92,900 for the entire quarter). The upgrading facility is very important to production there because it converts bitumen from the oil sands into synthetic crude that's ready for refineries. Damage from the recent fire could result in a six months hault in production at certain parts decreasing total output by close to 10% (Horizon accounts for 6% of all output from the oil sands according to a Jan. 7 analyst inverviewed on Canada's BNN).^[7] In November 2010 CNRL was Canada's 7th most valuable company.^[8] Over 86% of revenue comes from oil with the other 14% coming from natural gas (as recently as September 2009 the percentage was 77% for oil and 23% for natural gas).^[9] The Horizon production hault has the effect of raising the price of upgraded synthetic crude above the price of West Texas Intermediate oil.^[10]

Company Overview

Canadian Natural operates in at least 4 major gas producing regions in the northern and southern plains areas of Alberta and 2 other gas containing regions in BC. Many of those properties were acquired in 2002 and 2006 when Rio Alto Exploration and Anadarko Canada (bought from Anadarko Petroleum for $4.08 billion) were taken over. In terms of crude oil there's Conventional Heavy production (many requiring SAGD and CSS to produce and so are named thermal in situ) happening at Pelican Lake, Cold Lake (Primrose, Primrose East) albeit at an early stage (5-15 % as much as it could if more wells were used). Not producing but with significant reserves are assets in Kirby, Grouse, Birch Mountain, Ipiatik, Gregoire and Leismer. Light crude oil is produced in almost all areas.^[11] An advantage CNRL has over other large oil companies is that most of its production happens in areas that are subject to low risk (94% in G8 countries as of September 2010).

Most of the company's undeveloped land is in the northern plains region of North America (5.436 million net acres as of September 2010 which represents 36.1% of the company's total undeveloped land base) and offshore West Africa (4.193 million net acres which represents 27.8%).

Production

A facility shutdown at Espoir, West Africa because of facility upgrading, the cyclic nature of thermal production in North America, and phase changes at Horizon caused fluctuations in total production. Thermal production, used to extract bitumen makes use of cyclicsteam stimulation, a process that requires several weeks to restart when production rates fall off. Natural gas production has fallen steadily over the last couple years due to fewer natural gas wells drilled and more oil wells drilled as a result of the company's increased focus on utilizing oil resources. Even though lower production in the US and Mexico has caused demand for Canadian heavy crude oil by US refiners to increase CNRL plans to build its own upgrading facilities in Canada in an effort to reduce costs.^[12] The company's Heavy Oil budget for 2010 calls for 616 wells to be drilled as compared to 396 and 500 in 2008 and 2009 respectively.^[13] The company also plans to inject captured carbon dioxide from its hydrogen plant into tailings lakes (man made lakes used to diispose of byproducts from bitumen production) to separate the water from solids more quickly and efficiently. Positive effects are two fold, carbon dioxide gets sequestered and more water gets recycled into the plant.^[14]

• barrel of oil equivalent based on natural gas conversion factor of 5658.53 cf : 1 boe, calculated independently.

3rd Quarter 2011 - Crude oil and NGL's production up 15.4% from the second quarter (349,915-->403,,900 bpd) however down 1.9% from the 3rd quarter of 2010 when it produced 411,585 bpd.^[16] The quarter on quarter decrease is due to lower production from North America oil sands upgrading (Horizon) which averaged before royalties 50,354 bpd (down from 83,809 bpd in 3q10) and a decrease in offshore production by 32.9% (down to 22,525 bpd from 33,554 bpd in 3q10). Horizon is slowly recovering though, the 3rd quarter production at 50,354 bpd up from nothing in 2q11. The nine month average for Horizon was pushed up to 19,365. The North Sea showed slight declines in both oil (32,866 bdp in 2q11 ---> 26,350 bpd in 3q11) and natural gas (8 mmcf in 3q10, 7 mmcf in 2q11, 5 mmcf in 3q11).

2nd Quarter 2011 - Horizon has been shut down since the second half of 2010; that resulted in large declines in production reported by CNRL in the first half half of 2011; In the second quarter of 2011 production was 556,539 boe/d (down 14.3% qoq, Horizon had accounted for 14% of the company's production). Crude oil production guidance for 2011 is down 371-406,000 bbls/d from 421,000 bbls/d guidance in May. Horizon could resume operations very soon since all regulatory approvals have been met, the commissioning process began August 2, 2011 and repairs are nearly complete. Costs for repairs are between C$ 400 AND c$ 450 million.^[17]

3QFY10 the company received regulatory approval for the Kirby in situ oil sands project; in October 2010 it purchased more leases for land in an area near Kirby which is estimated to contain 520 million barrels of petroleum (development of phase 1 of 3 (cost $1.24 billion) is scheduled to begin in the last quarter of 2010; production is expected to reach 70,000 to 100,000 bbl per day by 2013). Heavy crude oil production was 7% higher than 12 months earlier while Pelican Lake (produces lighter crude, 39 wells were drilled) was 2.7% higher reaching 38,000 bbl per day. 209 of the 289 wells (351 scheduled for 4QFY10) drilled were for heavy, 6 for thermal and 35 for light crude oil. Natural gas production in North America continued to be lower, down 2% versus 3QFY09 (though up 1% compared to the previous quarter) due market conditions (low natural gas prices) and other factors which in the short term have caused the company to shift its forcus to crude oil drilling. In Olowi, West Africa compressor failures on a vessel depressed production though a new platform in Olowi started producing at a rate of 2,500 bbl/d; total West Africa oil production grew 12% since the previous quarter. In the North Sea production was 28% lower versus the previous quarter due to planned (and one unplanned) (Ninian Field) maintenance shutting down facilities (higher maintenance costs led to higher operating costs per barrel (to $30 to $31/bbl).^[15]

• Production Balance^[18]

Financial Information

2QFY 2011 - Net income (earnings) were 42.7% higher than the same period in 2010 (up to C$929 million (US$953 million) from C$651 million) due mostly to higher oil prices (crude futures increased 31.1% to US$102.34 per barrel from US$78.05 per barrell). 2012 capital spending is forecast to be between C$7 and C$8 billion.^[17]

Royalties - In 2010 the company paid $1.421 billion in royalty payments which equates to 9.9% of total revenue that year; 30% of it ($431 million) came in the last three months of the year. Total 2010 royalties were 138% higher than in 2009 (when they totaled $597 million which equates to 5.9% of total revenue that year).

Helping the company's balance sheet is the price difference between bitumen and the light variety of crude oil, currently 10 to 15% compared to usual historical levels of 30 to 40%.^[12] In March 2010 the Alberta government reduced maximum royalty rates on new wells (less than 1-1.5 years producing depending on type of wells) to 5%, that helped boost the company's after royalty production. In 2010 losses due to foreign exchange rates were lower especially in the 2nd quater when it contributed a gain of $156 million to earning before taxes. The 2006 acquisition of Andarko Canada cost the company $4.641 billion in cash considerations.^[21]

Reserves

CNRL is ranked near the top in terms of reserves among Canada based petroleum companies. In early 2011 total reserves were at 6.9 billion barrels of oil equivalent (2010 reserve replacement was 341% of total production). During 2010 2P reserves increased by 8% or 787 billion boe of which 624 million boe was crude oil; proved reserves increased 569 million boe of which 433 boe was crude oil and NGL. Gross crude oil reserves rose 8% in 2010, natural gas 9%.^[20]

Trends

Canadian Oil Companies on pace for comeback year in 2010

Profits which were down 90% industrywide in 2009 are on pace to reach $8.4 billion in 2010.^[23]

Pipeline spill in Michigan could affect the reputation of Canadian oil in the US

In 2010 a pipeline spill in Michigan caused by Enbridge's infrastructure was thought to have impacted American demand for Canadian oil by raising concerns regarding Canadian oil company practicies. The US ambassador to Canada explained those concerns away as an overreaction.^[24]

Recent scientific developments and new technologies make bitumen more attractive

CNRL is highly exposed to Alberta's oil sands (8 billion barrels of bitumen) and so it directly benefits when advancements are made regarding the methods (many rely on new technologies like THAI) of bitumen extraction and/or refining. Research and development by domestic competitor Petrobank Energy and Resources (over 80% of its total resource base comes from its HBU heavy oil division which has yet to be significantly utilized) which has 10 patents related to Toe to Heel Air Injection extraction technology, and foreign Japanese group at Hokkaido University have significantly improved on both the efficiency and costs related to bitumen production and refining. The Japanese research team developed a cheap catalyst (formed by burning iron with oxides of metals like aluminum) that transforms bitumen into a lighter oil at an accelerated rate (by aiding in decomposition); though the catalyst is cheap and the 90% reduction of coke by-product greatly reduces processing costs the cost associated with the vat required to carry the bitumen during processing (at extreme temperature and pressure) remains a stumbling block.^[25] Petrobank's THAI technology already has the capability of extracting 17% more bitumen than steam assisted gravity drainage.^[26]

Horizon production could be haulted for 6 months after fire at coker (Jan 2011)

In January 2011 a fire destroyed part of the Horzon project oil upgrading facility (contained to the coker area), the coker part was already undergoing repairs during the last quarter of 2010 that lowered output from Horizon by 22.35% in December 2010 (down to 83,700 from a high of 107,800 in November 2010, production there averaged 92,900 for the entire quarter). The upgrading facility is very important to production there because it converts bitumen from the oil sands into synthetic crude that's ready for refineries. Damage from the recent fire could result in a six months hault in production at certain parts decreasing total output by close to 10% (Horizon accounts for 6% of all output from the oil sands according to a Jan. 7 analyst inverviewed on Canada's BNN).^[27] The Horizon production hault has the effect of raising the price of upgraded synthetic crude above the price of West Texas Intermediate oil.^[10]

Unusually high gas prices prompt Tony Clement to call parliamentary hearings

On May 12, 2011 Tony Clement, Canada's industry leader stated his intention of bringing together key executives in the oil refining and retail sectors in Ottawa where they will be subjected to questions regarding gas prices and the method used to determine it. One of the concerns raised by Tony Clement and other ministers of parliament (MP's) is that although the price of oil is 31% lower (May 2011) than it was the previous year gas prices haven't fallen (remain near or above the Cdn$1.3, $1.4/L level). Even though federal gas taxes are a key component of the price of gas the federal government wouldn't commit to a review of the tax.^[28] Canadian Natural is not expected be directly involved/affected by the hearings because it is not a major refiner or operator of gas filling stations, however it does do some business in the retail sector.

Growing interest in reaching Asian Markets

Due to filled up pipelines and storage tanks in Canada and the USA Canadian produced crude oil has been selling at discount prices relative to crude sold abroad. Nearly all of Canada's two million barrels per day production goes to the United States and so when the supply chain there is overwhelmed Canadian companies lose out. To gain greater international exposure, Canadian petroleum companies must first gain access to infrastructure necessary to carry the oil to end terminals in British Columbia. In order to do that new pipeline systems have to be built something that has been put on hold due to opposition from environmentalists and Native Indian groups. Enbridge's recent proposal, the 728 mile Northern Gateway pipeline from Edmonton to Kitimat, British Columbia was filed with the National Energy Board in May 2011; That pipeline would start transporting oil in 2016.^[10]

Alberta Energy Boards estimate of oil sands reserves only assume 20% recovery rate but companies have been producing at more than 60%

Companies using Steam Assisted Gravity Drainage to recover in-situ crude have a recovery rate in excess of 60% meaning that oil sands reserves could be considered much higher than the 173 billion barrel 2007 estimate made by the province's energy board. Since then, other technologies such as Petrobank's Toe To Heel Air Injection method are more even more efficient (THAI 17% more than SAGD)

Oil Sands accounted for 40% of Alberta's carbon release in 2007 but that will grow by magnitudes in the near future

When production was 726,000 bpd in 2007 (60% as much as it was in 2008, 22% as much as it is expected to be by 2020) the oil sands released 1 billion ft3 daily of carbon through the burning of natural gas which is used in various stages of production/upgrading. That accounted for about 40% of Alberta's and 5-8% of Canada's greenhouse emissions. If production triples in the next decade those emissions consequently be higher and given Canada's commitment to the Kyoto Protocol, future oil sands projects could be at risk if a less tolerant government is elected (Canada's current opposition party (2011, NDP) is led by someone who has opposed the oil sands on environmental grounds).^[29] Canada ranked 7th in emissions in 2008 up from 8th for most of the previous decade but it only ranks 15th in per capita emissions (2008).

Competition

9 of the 54 biggest oil companies in the world are based in Canada (per the global 2000 list put together by forbes) and only 1 of them (enbridge) doesn't engage in production. Between the others, Imperial Oil and Suncor are Canada's leading refiners (are first and second and the difference between them is marginal) and operate the largest number of filling stations in every province with the exception of the maritimes (36% during the mid 2000-2010's).^[30] In terms of barrels of oil equivalent Suncor is virtually tied with Canadian Natural (was 10% in 2010 but the difference is decreasing) however Suncor has about twice as many proved reserves (but both companies have a very large and increasing resource base). As recently as 2009 another major producer of oil and gas Encana, was comparable in size to both but that changed when the company decided to spin off much of its natural gas segment, that move resulted in the formation of Cenovus Energy. Cenovus Energy is a major refiner of oil and gas and has a sizeable and growing heavy oil production and upgrading business, ironically at the expense of its natural gas business (natural gas production which was the former Encana's main focus, was down 11.1% to 738 MMcf/d in September 2010 (between 123 and 127 thousand boe per day). Other major players are Husky Energy (46% of reserves are natural gas), Talisman Energy (total production is about 49% higher than Imperial Oil) and Nexen. There are a growing number of other companies reaching significant size that are based in Canada but operate mainly abroad, like Pacific Rubiales Energy, Niko Resources, Vermilion Energy (largest producer of oil in France) and others. Some other companies that compete domestically with Canadian Natural Resources (Penn West, Baytex Energy, Enerplus, Arc Energy (oil and shale gas)) converted to corporations from trusts in 2011 because of changes made to tax legislation by the government of Canada.

References

1. ↑ ^{1.0 1.1} Canadian Natural Resources Limited Announces 2010 First Quarter Results (2010-05-06).
2. ↑ Cahill Group of Companies-Horizon. Retrieved on 2010-08-01.
3. ↑ Canadian Natural Resources Limited Announces Horizon Oil Sands Production (2010-05-31).
4. ↑ Horizon Oil Sands. Retrieved on 2010-08-01.
5. ↑ Canadian Natural Quarterly Profit Rises on Higher Oil Prices (August 4, 2011).
6. ↑ Alta. Chinese workers death case delayed (2010-09-23).
7. ↑ Canadian Natural says Horizon work cuts output (2011-01-06).
8. ↑ Oil sands giants post big profits (201011-05).
9. ↑ CNRL 2010 Third Quarter Report page 16 (2010).
10. ↑ ^{10.0 10.1 10.2} Analysis: Foes fight Canada pipeline to rich Asia market (2011-02-17).
11. ↑ 2008 year end and fourth quarter results (2009-03-5).
12. ↑ ^{12.0 12.1} CNQ to process bitumen on home turf (2010-03-04).
13. ↑ corporate presentation.
14. ↑ Canadian Natural Resources-CNQ to process bitumen on home turf (2010-03-18).
15. ↑ ^{15.0 15.1 15.2 15.3} Canadian Natural Resources third quarter results 2010 (2010-11-04).
16. ↑ Canadian Natural Resources Limited 2011 Third Quarter Results (2011).
17. ↑ ^{17.0 17.1} Canadian Natural Quarterly Profit Rises on Higher Oil Prices (August 4, 2011).
18. ↑ strategy and 2010 budget (May 2010).
19. ↑ 2009 year end and fourth quarter results (2010-03-04).
20. ↑ ^{20.0 20.1 20.2} CNRL 2010 Annual Financial Report (2011-03-03).
21. ↑ OilVoice CNRL. Retrieved on 2010-08-08.
22. ↑ Proved Reserves CNRL.
23. ↑ Better times ahead for Canada's oil companies with expected $8.4B profit in 2010 (2010-09-02).
24. ↑ Canada not blamed for Enbridge pipeline spill in Michigan (2010-09-15).
25. ↑ New technology for bitumen extraction (2010-08-09).
26. ↑ Petrobank's THAI Technology Expands Exploitable Bitumen In Place (2010-03-12).
27. ↑ Canadian Natural says Horizon work cuts output (2011-01-06).
28. ↑ Ottawa to grill gas-industry executives over soaring pump prices (2011-05-12).
29. ↑ Layton would slash oilsands subsidies (March 31, 2011).
30. ↑ Petroleum Products Distribution Networks Natural Resources Canada. Retrieved on 2010-11-26.