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Canadian Natural Resources Limited (NYSE:CNQ)

Q4 2008 Earnings Call Transcript

March 5, 2009 11:00 am ET

Executives

John Langille – Vice Chairman

Allan Markin – Chairman

Steve Laut – President and COO

Lyle Stevens – SVP, Exploitation

Real Doucet – SVP, Oil Sands

Doug Proll – SVP, Finance and CFO

Analysts

Brian Singer – Goldman Sachs

Gil Yang – Citigroup

Brian Dutton – Credit Suisse

Benjamin Dell – Bernstein

Martin Molyneaux – FirstEnergy Capital

Andrew Fairbanks – Merrill Lynch

Jenny Mikhareva – Macquarie Capital

Terry Peters – Canaccord Adams

Mark Polak [ph] – Swiss Capital [ph]

Kam Sandhar – Peters & Company

Farah Patinsky [ph] – EBS Global Asset Management [ph]

Operator

Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources fourth quarter 2008 conference call. I would now like to turn the meeting over to Mr. John Langille, Vice Chairman of Canadian Natural Resources. Please go ahead, Mr. Langille

John Langille

Thank you very much, operator, and good morning, everyone. Thank you for attending our conference call. We will discuss our 2008 fourth quarter and yearly results and our updated outlook for 2009. Participating with me today are Allan Markin, our Chairman; Steve Laut, our President and Chief Operating Officer; Real Doucet, our Senior Vice President of Oil Sands; Doug Proll, our Senior Vice President of Finance; and, Lyle Stevens, our Senior Vice President of Exploitation.

Before we start, I would refer you to the comments regarding forward-looking information contained in our press release. And also note that all dollar amounts are in Canadian dollars, and production of reserves are both expressed as before royalties, unless otherwise stated. I would like to make some initial comments before I turn the call over to the other participants.

During 2008, our conventional operations performed at our anticipated production levels relative to the amount of CapEx allocated to both natural gas and our oil projects. This level of achievement resulted in us realizing cash flows of almost 7 billion Canadian dollars for the year. These ongoing conventional operations will continue to produce cash flows throughout 2009, which together with our strong hedging program already in place and our disciplined approach with respect to CapEx will ensure free cash flow to be directed toward debt repayment in 2009. And of course, we have now achieved production of synthetic oil from Horizon. And as that production ramps up this segment of our business, will also start contributing to the generation of free cash flow.

Our expectations dating back to the fall of 2008 were that we would have volatile commodity pricing trending down, we would have tighter more costly credit markets, and we needed to have a very flexible capital budget. And accordingly, we set our plan to pay down debt; ramp up phase one production of Horizon; emphasize cost reductions and finding new ways to develop resources; and focus on value creation and growth, not just production growth. And as Steve and Doug comment on our operations and finances, you will see all of these expectations and plans unfolding. But before Steve starts reviewing our operations, I would now like to ask Allan to make some comments. Allan?

Allan Markin

Thanks, John. Good morning, an excellent morning. Canadian Natural’s defined growth plan has allowed us to continually create value for our shareholders. Our business strategies, which has helped us deliver consistent performance for the past 20 years has not changed. They are effective, they are proven, and they serve as a testament to the strength and breadth of the company.

We are very proud to announce that we achieved first synthetic crude oil production out of our Horizons Oil Sands Projects just last week. And we are now up and running at a steady rate. This is a major milestone for Canadian Natural. Horizon is a world class asset. And we would like to thank everyone involved for their tireless efforts and ongoing tireless efforts. Congratulations on a job well done.

In the midst of a challenging business environment, our conventional business has delivered strong quarterly and annual results for 2008. Finding and development cost for proved reserves came in at 20.68 Canadian dollars per barrel of oil equivalent. And for proved and probable reserves, 14.66 Canadian dollars. For a year of decreased drilling activity, we still manage to replace 95% of our proved reserves and 134% of proved and probable reserves.

When faced with instability and cost pressures, more so now than ever, we are continually seeking new, more cost effective ways to develop our portfolio of projects. Innovation and initiative are key in developing our assets given the current cost environment. As such, we are devising new techniques in the field that have lead to reduce drilling times and cost improvements.

Even now at Horizon, innovation and initiative continue as we look for cost effective alternatives for development of future phases. We have a tradition of value creation, driven by discipline and cost control. Regardless of business cycles, we will continue to deliver. Thank you. Steve?

Steve Laut

Thanks, Al. And good morning, everyone. As both John and Al has stated, Q4 and 2008 were very strong for Canadian Naturals. We have very strong assets, strong cash flow, and a strong plan for all cloudy [ph] price environments. The quarter started as Canadian Naturals very successful strategy is ensuring we are at a low cost crude. In light of the dramatic direction we’ve seen in the commodity prices in 2008, being a low cost producer is now more important than ever. And Canadian Natural is a low cost producer.

One of our defining characteristics is our belt and diverse asset portfolio. This allows Canadian Natural the ability to optimize capital allocation to maximize value. And just as importantly is the ability of our assets to free cash flow. In 2008 and in 2009, each of component of our assets, oil, gas, light oil, heavy, thermal, and Horizon will generate free cash flow. Our assets are strong and are low cost. The strength of our assets and their ability to free cash flow has largely financed the construction of our world class Horizon Oil Sands project.

With the Horizon project now on and in the production ramp up phase, the free cash flow from our strong conventional assets is now freed up for the alternative capital allocation choices. As we stated in our Q3 press release and conference call, the capital allocation priorities for 2009 were as follows, firstly, debt repayment; second, capital allocations to the highest return on capital projects, pre-asset development, acquisitions, and share buybacks; and thirdly, dividends.

We also outline the (inaudible) or Canadian Natural’s ability to proactively adjust our capital spending to market conditions. If you recall, we had an (inaudible) inventory developed for 2009 of 7 billion Canadian dollars. We chose, at that time, to allocate 4 billion Canadian dollars in 2009. Of the 4 billion Canadian dollars allocated, approximately 2 billion Canadian dollars is expense for capital that can be quickly deferred, if we so choose. The remaining 2 billion Canadian dollars is committed capital.

In light of the current commodity price environment and keeping with our priorities in 2009, we have chosen to spur 0.8 billion Canadian dollars of capital out of our 2009 programs, and pay down our debt by 420 million Canadian dollars. We’ve also increased our dividend to 10.5 Canadian dollars per share.

The 0.8 billion Canadian dollars deferral of capital program is a proactive action taken as a result of weak commodity prices and for the potential for further weakness in commodity prices, particularly in the gas side of the business. At these prices, the current cost environment, the economics for all, but the very best projects are marginal. Although we have not seen anything appreciable to date, as we move to this cycle, we fully expect that it’ll be much cheaper to or the develop reserves. In addition, we expect to see productivity and unit cost improvements on the development side of the business.

Therefore, we’re taking a prudent step to reduce our capital program now to ensure balance sheet strength and position ourselves for the remainder of 2009 and 2010. Of course, we’ll not make any property acquisitions if it adversely affects our balance sheet in 2009, and we cannot predict if and when any acquisitions would occur.

Therefore, our correction guidance has been revised 1,272 to 1,328 million cubic a day and 331,000 to 339,000 barrels a day of oil, a 4% increase on a BOE basis year-over-year and a 12% increase entry access in 2009, and that’s not including potential acquisitions. At the current strip, this will generate a cash flow of between 5.4 billion Canadian dollars and 6 billion Canadian dollars, allowing for significant debt repayment and putting Canadian Natural in a very strong position if the low commodity price scenario in 2010 were to unfold.

Initially, (inaudible) commodity price hedging that Doug will go over to provide additional cash flow protection. Canadian Natural is taking a very proactive and a prudent approach to managing the company by positioning ourselves through a significant opportunity capture in the future, no different than we had in the past. Let me now turn to assets and briefly update you on each.

Starting with gas in Canada, our gas production in 2008 behaved as expected in the upper end of our production guidance. Gas production in 2009 will again define as we drill significantly fewer gas shales than we would normally drill. Our risk capturing program is driven by low and even lower expected gas pricing in the short term.

For your reference, we have an inventory of over a thousand executable gas locations that could be drilled in 2009. And if we have chosen to drill these gas locations, our expectations would be for a 5% entry to exit gas production growth – volume growth.

However, with low gas prices and a significantly better economics for oil, we only drilled 142 gas wells in 2009. The majority of these gas wells are critical strategic, land expiry, and draining issue wells. One of the strength of Canadian Natural is our balanced diverse asset base. And as a result, we are not solely reliant of any one product to create optimum valued growth.

Our heavy and thermal oil – all assets in Canada outside of Horizon are very strong and will add tremendous value to Canadian Natural’s services. As many of you have heard, we’ve said before, our heavy oil assets are the underappreciated, undervalued hidden gem in our portfolio.

Our thermal assets are low and have 32 billion barrels of oil in place with 5.5 billion recoverables in our defining plants. Our plan is to add a 300,000 barrels a day of heavy oil production in a very stepwise, system cost control manner.

Primerose East is our most recent incremental step. We started steaming in September of last year, ahead of schedule and on budget. The news at Primerose is overall good. However, we have experienced some recent setbacks. During steaming, we experienced an event that released oil to the surface on one of our super pads. This experience, although the first retained in natural, has been experienced three to four times before by major thermal cyclic heavy oil producer just the south of our properties. This event can be managed, and operation can and will be returned to normal. However, to do so requires that we prudently manages the site with observation wells, passive seismic observation wells, and other mitigating measures as well as wait for approval before we can start off normal operations.

As a result of the time required to implement these measures, we have reduced our production expectations from Primerose East by roughly 12,000 barrels a day for the year. The good news from all these, and there is good news. Because of this event, we have switched to a steaming cycle early to a production cycle. Production for us for these pads have exceeded our expectations by roughly 10%. And we feel the overall performance of Primerose East is slightly better than budgeted in our plans, although delayed as we implemented necessary measures to continue normal operations.

Kirby is our next incremental 45,000 barrels a day production position. And we expect regulatory approval this year. Our original time was to complete the details in issuing design for Kirby in 2009, and begin construction in 2010. However, in light of the current commodity prices, we have taken a prudent step to put our detailed design work on hold until we can see greater certainty on long term of overall pricing; and more importantly, until we can see significant capital cost reductions that should and will be achievable in this portion of the commodity price cycle.

Our Pelican Lake, our (inaudible) continues to perform well as we continue to convert initial portions of the pool to the polymer flood. As you know, Pelican is a world class pool with 4 billion barrels in place and between 350 of 475 million incremental oil recovery with a low cost polymer flood. However, we have reduced the capital spending of Pelican by dropping one rig and going down to the one remaining, more sufficient rig. As a result, we’ll drill only 50 wells from 2009 versus a 107 planned.

Our primary heavy oil program continues to effectively roll along and add strong value here. Tier 2, we have reduced our drilling program from a planned 485 wells to 315 wells in 2009.

In the North Sea, our production has been holding steady as we prepare for significant platform maintenance work in 2009. We’ll drill only one well from our platforms in North Sea in 2009. And we are currently completing this medium well, which our loss could be at our expectations and effectively on stream by the end of the quarter.

We’re also in the process of drilling the Deep Banff, high pressure, high capture gas exploration well. We expect to have results in Q2 ’09. Canadian Natural operates, and if successful will have a 36% work interest in the development our – interest in exploration well is 17% .

Most of our activity internationally is on offshore West Africa in 2009. And at Baobab, we are now completing the fourth well in the program, which we actually expected sometime in April. Overall, this well looks very good. Our initial expectation for the Baobab drilling program was to achieve somewhere between 10,000 and 15,000 barrels a day per unit production.

Although the fourth well got on at this time, we expect to add 10,000 to 11,000 barrels a day of production towards the lower end of our range, as we end up drilling some wells shorter than expected due to associated drilling problems. Overall, the Baobab program looks to be successful. Our rig contract will end after this well, and the rig is scheduled to return to the original operator.

Production at Espoir is slightly off expectations as we experienced some compressor issues in the first quarter. These issues are now being repaired, and we expect to return to full production by the end March, with no real impact on production guidance.

At Olowi, our shallow well developments in Gabon, we are drilling at pace on our first platform. The FPSO has now arrived in location and has moored up with the umbilical connections completed. We are currently completing the last stages of commissioning before we bring in the first Olowi well in April.

We expect to drill in a 2,000 barrel a day per well range, and we will begin to have similar well types as we drill the remaining wells on this platform, and then move to the next platform. In addition, we will surely move up the platform to drill one gas injection well, and then move back to the platform. The gas injection well is required to maintain reservoir pressure.

Now before I turn it over to Lyle to update you on the reserves and funding costs, I would like to briefly update you on the cost side of the equation. Canadian Natural is a low cost reserve. And in this environment, this is particularly important. It’s also important that we find ways to reduce our costs significantly, and return to cost levels more appropriate to the cost we incurred in the lower commodity price environment.

We are making some good steps in this direction to the better use of technology, innovative execution techniques, better productivity, and some cost reductions from the service and supply side of the business. We do, however, have some distance to go at any cost savings, particularly here in Canada, that we have seen a (inaudible) fund increases in steel prices. Significant cost reductions will have to be achieved before they’ll be any increase in activity at these commodity price levels.

As you know, we’re about to enter the spring break period in Canada where activities all, but shutdown. We will monitor the commodity prices and costs very, very closely. And do not preclude a further capital (inaudible) at that time. We have the ability to (inaudible) up to a 1 billion Canadian dollars of additional capital.

Our operating cost as well will need to be reduced even though we are one of, if not the lowest cost operator, for the various asset sites in each of our areas. Hereto, we are making progress, but have for example, costs such as municipal taxes increased 2.5 times since 2003 and now make up the third largest component of our operating cost on the gas side of the business.

All these challenges can and will be overcome as our (inaudible) more effective and innovative methods to (inaudible) and preserve projects change in reserves. Lyle will give you a quick update on our strong performance, particularly in Canada.

Lyle Stevens

Thanks, Steve. Good morning, ladies and gentlemen. Before I review the results, I’d like to mention that a 100% of our reserves are externally evaluated, not just audited or reviewed. I’ll be dividing my discussion into segments, starting with conventional oil and natural gas reserves, followed by Horizon Oil Sands mining reserves. I’d like to point out that our Horizon Oil Sands reserves and capital are not included when we calculate our finding and development costs.

Starting with our conventional crude oil and natural gas reserves, our 2008 net proved finding and on stream costs were 20.68 Canadian dollars per BOE, replacing 95% of our net production. The increase in our finding and on stream costs from 2007 is primarily related to economic revisions in the North Sea due to low year-end crude oil prices.

In North America, we replaced a 118% of our net production at a very good finding and on stream cost of 13.08 Canadian dollars per BOE. These results were driven by our continued success at Pelican Lake, our Primerose thermal projects as well as good results from our high graded natural gas drilling and development program. Cost control remains a focus for the company and that’s reflected in our excellent North American finding and on stream costs.

Low commodity prices at year-end resulted in total proved economic revisions of negative 56 million BOEs. There was a 90 million negative from the North Sea, which is partially offset by positive revisions of 25 million BOEs in North America and 90 million BOEs in offshore West Africa.

The gains in North America are primarily related to deferring oil sands project payouts for our thermal projects. In the Coldevoir [ph], low year-end prices also deferred project payout. And under the terms of the PSA, the government share is reduced.

On a net proved and probable basis, our corporate finding and on stream costs were 14.66 Canadian dollars per BOE. Since anchored by our North American results, our net proved and probable finding and on stream costs were only 11.30 Canadian dollars per BOE. Our total net proved reserves remained essentially the same as year-end 2007 at 1.96 billion barrels of oil equivalent, made up to 1.35 billion barrels of crude oil and NGLs and 3.68 tcf of natural gas.

Now moving on to the Horizon oils and mining project, the net proved synthetic crude oil reserves were 1.95 billion barrels, which is an 11% increase over year-end 2007. This increase is due to low year-end crude oil prices, which defers project payout, thereby reducing royalties. Similarly, proved and probable reserves increased to 2.94 billion barrels. And with that, I’ll pass it back to Steve.

Steve Laut

Thanks, Bob. Now before I turn it over to Real to give you a more detailed update on Horizon, let me make a few general comments. As you’ve heard in our press release, Horizon began production on February 28th. This is a major milestone for Canadian Natural as Horizon will add steady reliable production with no production declines for 40 years with virtually no reserve in place and costs.

Horizon is a world class asset and now that we’re now on stream will add a tremendous value to share holders for the next 40 years. We have spent considerable time, nine years and we’re just close to 9.5 billion Canadian dollars bringing the first phase of Horizon on stream. During (inaudible) phase has been one of the most highly inflationary periods in memory. We have not taken any shortcuts, especially in the winter to characterize the safety of our people or the integrity of the plant rushing to get to first oil.

Today, we are in the process to ramp up phase in the project. It has been extremely difficult to do the final commissioning and start up in a winter, even more difficult than we had anticipated. Horizon team put in a tremendous effort in getting us in this stage in a safe and effective manner. It will take patience and perseverance as we ramp up the production to full rates and increase plant reliability and lower operating cost on phase one of Horizon.

We are underway in charge of our phases 225 and charge two as re-profile capital staying in 2009 of 120 million Canadian dollars in 2009. And with that, I’ll turnover to Real to give you more detailed updates on the Horizon. Real?

Real Doucet

Thank you, Steve. Good morning, ladies and gentlemen. Since February 28, last Saturday and even a little before that, we have run steady at 55,000 barrel a day. We have produced, so far, over 350,000 barrels of NASDAQ, car oil, diesel, and gas oil, and mix of sour and sweet blend. We’re filling up the site inventory of our intermediate and final tankage right now. And we are working on blending the synthetic crude oil for the spec product for the pipeline.

The diesel hydroxide titer, which is the last plan to be completed is mechanically completed and the commissioning is coming up to an end. We have a start plan on February 25th and we are still right now on the startup mode. We have turned the turbines and the compressor. There have been around at the same capacity. The next step for us is to heat up the furnace and sulfide in the reactor catalyst. And we expect to have this diesel plant in full reliable production by the end of April. So on this, I would like to give it to you, Steve.

Steve Laut

Thanks, Real. And in summary, Canadian Natural’s in a very strong position. Our assets are performing well. Our balance sheet is strong and getting stronger. Our balance of rich portfolio allows Canadian Natural to effectively allocate our capital to a highest turn and capital project.

In addition, Canadian Natural has tremendous capital flexibility and can pull back further on capital spending if we believe this is a prudent course of action to enhance the long term value of Canadian Natural.

Canadian Natural is a low cost producer and it is a significant competitive managing seasoned environment. We will continue to focus on lowering costs across the board, but particularly at Horizon. A new operation, which will in our view present numerous (inaudible) efficiency and effectiveness opportunities to lower operating cost going forward.

Our assets, our balance sheet, our lower risk development opportunities are all strong. Our management team is strong and together we have been through these times before. We are proactive and making a tough decision to not only survive, but prepared to capture the opportunities that will present themselves in this environment. And with that, I will turn it over to Doug to update you on our financial position and our prudent financial management. Doug?

Doug Proll

Thank you, Steve. And good morning. 2008 was a solid year financially and operationally for Canadian Natural where we were able to roughly balance cash flow and capital expenditures and exit the year with a very strong balance sheet.

2008 will be remembered for its economic highs, WTI at a 147 Canadian dollars, NYMEX of 12 Canadian dollars per MMbtu, the Canadian dollar at par with the US dollar and robust economics around the world.

That was the first half. Today, WTI is at 43 Canadian dollars, NYMEX is at just over 4 Canadian dollars, the Canadian dollars at 0.77. And the world economists are still trying to find the bottom as the liquidity balloon deflates like never before.

Canadian Natural is very well placed in this new world due to its balance sheet strength, its diverse asset and production base, its strong cash flows, and its liquidity position. The increased in the long term debt year-over-year largely resulted from the translation of our US dollar long term debt at period and exchange rates. This amounted to almost 1.5 billion Canadian dollars of the increase.

Our debt to book capitalization was 41% at the year-end, compared to 45% at the end of 2007 and near the mid-point of our targeted range of 34 %to 45%. Debt to EBITDA is at 1.9 times, again within our targeted range of 1.8 to 2.2 times. We have initiated the retirement of the non-revolving credit facility, which matures in October of 2009 with an initial payment of 420 million Canadian dollars in February.

It is our intention to retire this facility from an allocation of cash flow from operations, which includes the proceeds from our commodity hedge program. This will be completed systematically over the period through October of this year. As we look beyond 2009, our revolving syndicated credit facilities are in place through June 2012, our experts to the debt capital markets is good with strong and stable credit ratings. And our debt maturities are very manageable at less than 500 million Canadian dollars per year to 2012.

Our asset based is very diverse and our production continues to diversify from conventional oil and natural gas to include new production of conventional streams in Canada and Offshore West Africa, as well and synthetic crude oil with the reserve light of 40 years.

As Steve has discussed, our focus for 2009 is control of costs, control of costs, and control of costs. This will further strengthen our cash flow. We have a strong liquidity position. At the end of 2008, we had 2.5 billion Canadian dollars of available credit under our bank credit facilities. We are also actively managing our various counterparty exposures and believe this exposure to be relatively low.

Finally, we remain active in the commodity hedge type. As you know, we have in placed 92,000 barrels per day of crude oil foots with the floor of $100 per barrel. In addition, we have crude oil collard on 25,000 barrels per day with the floor of $70 per barrel and of ceiling of $111. These positions are in placed for the remainder of 2009. We have 400,000 GJs per day of acorn natural gas physical sales contract with an average price of 5.59 Canadian dollars per GJ for the period April to December.

And in addition, we have started looking at 2010 where we have in placed 220,000 GJs per day of (inaudible) natural gas collars with the floor of 8 Canadian dollars and a ceiling of 8 Canadian dollars for all of 2010.

We have also increased our ability to hedge up to 60% of the near 12 months of budgeted production and up to 40% of the following 13 to 24 months of estimated production. This program was undertaken is for cash flow and is actively managed by the company’s management committee weekly.

In conclusion, we believe Canadian Natural will not only fully weather this period, but continue to grow and diversify. As such, we are very pleased to advise that the Board of Directors have authorized a 5% increased in our dividend to 0.40 Canadian dollars per annum from 0.40 Canadian dollars per share per annum.

This is our ninth consecutive year of dividend increases since the exemption of the dividend distribution in 2001. Thank you. And I will return to you to John for some closing comments.

John Langille

Thank you very much, Doug. Thanks, ladies and gentlemen. You can see that after this review of our assets and what we’re doing and as we go forward that we’re in very good shape to get through the, what some people are calling, the worst part of the recession. And with that, Operator, I would open up the conference call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) There will be a brief pause while participants register. And we thank you for your patience. The first question will be from Brian Singer from Goldman Sachs. Please go ahead.

Brian Singer – Goldman Sachs

Thank you. Good morning. You have had in you comments and in your release strong interest in consolidation acquiring over drilling. And you’ve mentioned interest in doing that for sometime now, but it seems like the language maybe it’s stronger than it has been on the past. And I wanted to see if you could comment a little further on thoughts regionally and status wise?

John Langille

Well, thanks, Brian. I think it’s just purely coincidentally my language sounds stronger. I try to be weak in the answer. So, no, we think ultimately that there will be more opportunities. With this commodity price environment, yes. I’ll think you’ll see some assets to put up for sale in maybe distressed situations. And we’ll put through 2009, we’ll see probably more opportunities. I did say that we haven’t seen that yet, but we expect to set it as we go forward. So we will leave ourselves that opportunity to adjust our capital program further as we see (inaudible) rather than the drill.

Brian Singer – Goldman Sachs

Given the various under capital needs, do you see any acquisitions and consolidations solely funded out of free cash flow or the potential for other debt or equity should opportunities make themselves go?

John Langille

I think, Brian, we’re sort of looking at this point for free cash flow.

Brian Singer – Goldman Sachs

Great. Thank you.

Operator

Thank you. The next question will be from Gil Yang from Citigroup. Please go ahead.

Gil Yang – Citigroup

Good morning. Could you give a little bit of detail as to – maybe you mentioned this in the – I apologize. I missed it but what are the main drivers for the costs at Horizon dropping and should we still think of production? Gas consumption on a per barrel basis is an MCF or so.

Steve Laut

Yes. I think the main drivers at Horizon are I think we’ll be able to get correction efficiencies. We see ways – commodity prices coming down. Chemical prices are down. We are seeing ways to do things more effectively with our labor. And obviously gas prices down. So that’s a big input cost. And overall I think we’re just seeing better ways to run the plant.

Gil Yang – Citigroup

And you’re still consuming about – are you on target with the – is that 1 Mcf per barrel?

Steve Laut

Yes. That’s pretty all where we are.

Gil Yang – Citigroup

Do you think that’s the right number or can you see improvements there?

Steve Laut

I think it’s the right number for now. But obviously as we get our heat integration processes further fine tuned, we might be able to do better than that.

Gil Yang – Citigroup

Okay. Thank you very much.

Operator

Thank you. The next question will be from Brian Dutton of Credit Suisse. Please go ahead.

Brian Dutton – Credit Suisse

Yes. Good morning. Steve, could you give us a little bit of color first on the steam issue at Primrose. And second question is on the North Sea reserve breakdown. The economic test there. What was the Brent price at year end and what would be the Brent price required to get all those reserves back?

Steve Laut

Okay. I’ll talk about the steam issue and I’ll let Lyle talk to you about the prices. As you know in North Sea last year we had pretty high prices that added a bunch of reserves at the tail end of these platforms (inaudible) and take that away. But I’ll give you the numbers in a sec.

On the steam issue at Primrose, the color is we have four super pads and they’re fairly close together. The wells are drilled going underneath some of the pads. What we’ve seen is oil has seeped to the surface – was seeping to the surface of the pad. We immediately shut down our steaming operations and started cruising to relieve the pressure in the formation. That’s when we see better results.

It looks like we had seen this before in the operator to the south. In the same general area to the south of us. We may have a number of issues that could have created that. It looks like oil has come up maybe along the outside of the well and worked it’s way to the surface. This is controllable and manageable. It has been shown – proven by the operator to the south. And we are undertaking, basically, the same mitigating measures and expect to be up and running, steaming again sometime by the middle of this year.

Operator

Thank you. The next question will be–

Steve Laut

Sorry. We got to – Lyle’s going to tell you the prices here at the year-end.

Lyle Stevens

Yes. For rent pricing at year-end December 31st 2008, rent price was $41.76 per barrel. That compares to $96.02 at year-end 2007. So to get all of those reserves back, we would have to go back to the $96. But obviously, it’s going to be a gradual thing. As the price moves up, we will get incrementally more reserves back.

Brian Dutton – Credit Suisse

Just so that I understand, is that there was no cushion at the end of last year in that $96 price? Or was there some cushion there in the reserves? But you need the full $96 to get it all back?

Steve Laut

I think Brian, what we do is the reserves are, as you know, independently evaluated. And we have really not much to say. So at that price, it’s really an operating cost issue, how long you can run the platforms out. And at $96 price – cost in price, obviously, you’re going to let the operating cost float a lot higher before you shut down the platforms and start (inaudible). And at $41, that comes a lot sooner. So all things staying the same on the operating cost side, you would have to really practice to get those reserves back.

Brian Dutton – Credit Suisse

Okay. Thank you.

Operator

Thank you. The next question will from Benjamin Dell from Bernstein. Please go ahead. Your line is now open.

Benjamin Dell – Bernstein

All right. Thank you. I have two quick questions. One was on the 2.35 billion Canadian dollar credit revolver. Have you had any contact with the lenders that suggests that will be extended? And what the terms of that will be at or whether it will still be as big?

Steve Laut

I think that’s the loan that we’re intent on retiring by the end of October this year, in which we made an initial payment in February of 420 million Canadian dollars. And our plan is to retire that loan on a systematic basis between now and the end of October when it becomes due. So as a consequence there have been no discussions with the lenders to extend that loan.

Benjamin Dell – Bernstein

Okay. And obviously, you’ve made some comments around acquisitions. I have two questions on the Anadarko assets. Can you give us indication of how close they were to an impairment on the ceiling test? And whether you’ve done a loop back to look at the equational dilution from that transaction?

Steve Laut

I’ll maybe answer from more general terms on Anadarko. Obviously, when we bought Anadarko, we thought that it was a low price scenario. And we expected prices to increase over time. It didn’t increase as quickly as we thought. We did get good increases in 2008.

Overall, the assets are as what we expected. And in a lot of ways, I felt increased our position in the shale gas here in Canada, and opened up that course in a bigger way. So although gas prices are not where we anticipated when we bought Anadarko, overall the assets are very strong. And we are very happy with those assets. As far as the ceiling test right now, Lyle will speak for the comments (inaudible) get back to it then.

Lyle Stevens

No I don’t have any comments on it.

Steve Laut

We don’t have it broke down in that detail yet.

Benjamin Dell – Bernstein

Okay. No problem. Thank you.

Operator

Thank you. The next question will be from Martin Molyneaux from FirstEnergy Capital. Please go ahead.

Martin Molyneaux – FirstEnergy Capital

I’ll just key it back to the Primrose East question. You said you’ll be steaming again in September – or sorry, in the middle of the year. Does this change how you go about putting these super pipes together in the future? For let’s say Kirby or other projects of similar nature?

Steve Laut

Actually it doesn’t change. These things I guess happen occasionally it looks like. And they’re random. At this point in time, we do not see anything that we have done that would have initiated this (inaudible) the way we drill the wells or place the (inaudible). I think we may – mean put more seismic – passive seismic wells around the pad so we can see if it’s at the center.

Martin Molyneaux – FirstEnergy Capital

Okay.

Steve Laut

As far as the new construction at Kirby, that’s a site B, which is a low pressure operation. And we don’t expect to see any issues at all.

Martin Molyneaux – FirstEnergy Capital

Okay. Second question was Baobab, have you redesigned the wells so that you don’t have the sand issues this time around? Have you seen any sand coming in the initial production from the new wells?

Steve Laut

Actually, the last two wells that we’ve done have been a veritable bust. We had one well where we had a lot of circulation issues. We’re concerned about the effectiveness on the gravel pack. We actually (inaudible) that well, but production is strong. We have seen a little bit of sand from that well, but not being significant. It’s all stuck with design to pull through the gravel pack anyway. So we believe that we have that sand issue dealt with. We’ll see with (inaudible).

Martin Molyneaux – FirstEnergy Capital

Great. Thank you.

Operator

Thank you. The next question will be from Andrew Fairbanks from Merrill Lynch. Please go ahead.

Andrew Fairbanks – Merrill Lynch

Okay. Good morning, guys. I was wondering if you could talk a little bit about the Horizon Phase Two development strategy and maybe the spending tempo there? Obviously, in the kind of emerging environment, it’s a good time to build out projects. But how do you think about that expansion currently?

Steve Laut

Well right now on Horizon Phase Two we are on – we are going ahead with it. But as we said in November where we profiled the capital cost, so we’re moving ahead within the third OPT and design that crusher right now. Actually the equipment is ordered and will be delivered. And there will be more spending in 2010 to install that. That will give us a lot more production ability and increased somewhat production capability. We’re also looking at some CO2 techniques since they charged too.

As far as charge three goes, we are still doing some work internally on that. But we have not released any of the details in engineering design, which we wouldn’t do anyway probably until 2010. So we’ll wait and see here. I think there’s an opportunity. It seems that the Fort McMurray area is the last area in Western Canada to recognize that cost reductions will be necessary. And we hope to be able to get more effect on this, particularly on the (inaudible) side.

Going forward, I think there’s an opportunity to capture maybe 20% to 30% cost reductions in Horizon and the Oil Sands just by their labor productivity. And in a lower price environment, we should be able to capture that. But at this point in time we’re sticking to our plan.

Andrew Fairbanks – Merrill Lynch

That was excellent. And do you have any individual pieces of work that you’ve seen cost reductions come in. Obviously there’s a neighbor of yours with a yet-to-be-developed project that is making perhaps a 25% reduction as an order versus their bid of last year. Do you have any incremental data that would indicate that the bidding process is loosening up a little bit?

Steve Laut

We have anecdotal data on small contracts that we’ve seen that reductions have been way more than 25% to 30%. I think as I told (inaudible) river diversion where we’ve seen the first bids came in at 45 million Canadian dollars to 75 million Canadian dollars. And we decided to do it ourselves. And then we had another bid coming up at 14 million Canadian dollars.

So it tells you that there is tremendous productivity gained – to be acquired if we can have normal activity. The problem with the oil sands is what’s – things, cost reducing things get better it seems that all the operators piling at the same time and then they get themselves right back into the same spot. So it’s a difficult decision. Decide on how to go forward. And that’s why we decided to break the next phase into very small projects we can control costs much better than trying to do a mega project as we have done here in Phase 1.

Andrew Fairbanks – Merrill Lynch

Great. Thanks, Steve.

Operator

Thank you. The next question will be from Jenny Mikhareva from Macquarie Capital. Please go ahead.

Jenny Mikhareva – Macquarie Capital

Good morning, gentlemen. Most of my questions have been answered. But could you please tell me what the impact is if any of the latest royalty incentives on the company’s drilling program if at all? And considering all the incentives implemented by the government over the past few months trying to stimulate activity in the province, where do you see – where do you need gas prices to be in order to start drilling more wells in Alberta?

Steve Laut

Jenny I’ll answer the first part of that question and Lyle could give a lot more detail on the incentive program. Really, we need to probably in that 6.50 Canadian dollars to 7.50 Canadian dollar gas range to really start ramping up the drilling program. And of course that would be dependent on what oil prices are and the other capital allocation choices for us at that time. Because we all take the biggest – highest return.

Incentive program I think is a one year program and is good and the fact that it tells us. It is only a one year program and with the low prices you will not see us change our activity based on that. Lyle, you want to give us more update on what it is all about?

Lyle Stevens

Sure. I guess the program is very helpful to economics in Western – or in Alberta for natural gas. We likely still need to get to at least 6 Canadian dollars income before we would really start to have an increase in the number of economic prospects we have.

One of the negatives with the program is it really doesn’t address the long term issues with the new royalty framework. So it is a short term fix . It is helpful and will help the economics of some of the strategic and expiry wells we are going to drill. As Steve mentioned, we’re unlikely to change our program in 2009, and it doesn’t fix the problems with NRF.

Operator

Thank you. The next question will be from Terry Peters of Canaccord Adams. Please go ahead.

Terry Peters – Canaccord Adams

Thank you. I just have a question regarding your hedge book. And you’ve got now quite a nice win in some of your hedges. What – could you give a comment about counterparty risk considering what’s been going on in financial markets and just talk a little bit about that?

Steve Laut

Yes. Thanks, Terry. We do have a counterparty risk as you point out. And it’s quite large with various institutions. But virtually all of the institutions that we deal with are also in our bank syndicate. We do have a couple of outside but they’re not affected by the – by the situation that’s out there right now. And we look at our banks. We see them as all been strong to very strong. And we believe that this is the group that we have our hedges with. And this is the group that we will continue to do our hedges with. And we’re very happy with the counterparty risk exposure that we have today.

Terry Peters – Canaccord Adams

Are they dominated by K institutions or is it mixed?

Steve Laut

Well it’s a mix.

Terry Peters – Canaccord Adams

Okay.

Steve Laut

As you know we have about 16 lenders in our syndicate, 13 of which have been with us for five years or greater. So there’s a fair amount of knowledge on both sides of the equation.

Terry Peters – Canaccord Adams

Okay. Thank you.

Operator

(Operator instructions) The next question will be from Mark Polak [ph] of Swiss Capital [ph]. Please go ahead.

Mark Polak – Swiss Capital

Hi. I was wondering if you can give us any update on plans for South African exploration? I think you guys are hoping to take off a rig in transit and targeting ten or 11. Just curious. Any success in securing a rig there or change in timeline. And with the issues at Primrose East, just curious if that impacts plans for the follow up site de-process after the CSS in terms of timing? Or how do you go about developing that.

Steve Laut

Okay. Firstly on the South African well. Our timeline is still 2010 to 2011. I guess with the way the situation is now, our outlook for being able to acquire a rig to drill that well is suddenly looking better. But again, that’s in 2010, ‘11 so that’s way out there. And we are actively in the market. Feeling out what the rig availability is. I will say that we’re in no hurry to commit to a rig. We see that there will be fairly softness in rig rates going forward. So it makes no sense for us to commit early.

As far as follow up processes at Primrose East, I’m glad you brought that up because there’s a big upside there for us to capture that’s not really booked on reserves. Site D and the follow up processes are a variation of that our low pressure processes, and will not affect – this event will not affect our process whatsoever.

Mark Polak – Swiss Capital

Okay. Thank you very much.

Operator

Thank you. The next question will be from Kam Sandhar from Peters & Company. Please go ahead.

Kam Sandhar – Peters & Company

Hi, Steve. A couple of questions. First of all can you give us an idea of what the capital spending associated with the fixes at Primrose East might be? And the second question, on the capital reduction on the oil side, how much of it is related to deferral of Kirby and anything that’s happening at Primrose. And where the rest of the reduction might be? Thanks.

Steve Laut

Kam, I didn’t quite catch the second part of your question there about Kirby and the (inaudible).

Kam Sandhar – Peters & Company

Just on the conventional oil spending reduction. How much of it is thermal, specifically related to Kirby? And where the rest of the reduction might have come from?

Steve Laut

Go ahead, Lyle. You can answer the questions, but really, Kirby, doesn’t give us any production and I think we’re just doing detailed engineering this year. That cost was probably in the 10 million Canadian dollar to 15 million Canadian dollar range. So it’s not a big part of the cost reduction. You can see by the number of wells that we’re drilling west and wells and heavy offside, and the Pelican preservation with the costs are coming down. As far as Primrose East.

Lyle Stevens

Yes. At Primrose East, we’re doing a bunch of investigative work there, logging some of the existing wells, doing temperature surveys. We’re also in the process of licensing three observation wells that we want to drill there. And today, we’re probably estimating incremental costs of 5 million Canadian dollars to 6 million Canadian dollars that we’ll spend there this year.

Kam Sandhar – Peters & Company

Okay.

Operator

Thank you. The next question will be from Farah Patinsky [ph] from EBS Global Asset Management [ph]. Please go ahead.

Farah Patinsky – EBS Global Asset Management

Thanks very much. The question on Horizon, now you’ve said you had first production and you’re proceeding to blending products. And I’m wondering, when do you expect to see your first sales? And I know it’s going to be a bumpy start but what are you budgeting in terms of daily sales volumes until you get the final hydrocheater [ph] started in April?

Steve Laut

Part of the best way for us to tell you that is we have between the technical side and the pipeline fill we have to fill about a million barrels of capacity to have a sale. So we’ve got 350 done now. About 55,000 barrels a day you can work out how many days it will be before we need to sell a product. So we’ve got to fill our tanks, start the planning and then start shipping the pipeline with (inaudible) wants us to start very slowly. Increasing the production rate as we push the date to the pipeline. But that’s one of the reasons why we have to fill our tanks. So with a million barrels divided by 55,000, that’s probably 20-some days. We will be able to ramp production up as we go forward. But as you know production will be up and it will be down. We’re not going to be steady at 55,000 here for the next ten months or so.

Farah Patinsky – EBS Global Asset Management

Great. Thanks very much.

Operator

Thank you. And there are no further questions at this time. So I’ll return the meeting over to Mr. Langille.

John Langille

Thank you very much, Operator. And thank you ladies and gentlemen for listening in to our conference call today. And as usual, if you have any further questions do not hesitate to call us. And have a good day. Thank you very much.

Operator

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.

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Source: Canadian Natural Resources Limited Q4 2008 Earnings Call Transcript
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