Canadian Natural Resources Ltd. Q2 2010 Earnings Call Transcript

| About: Canadian Natural (CNQ)

Canadian Natural Resources Ltd. (NYSE:CNQ)

Q2 2010 Earnings Call

August 05, 2010 11:00 am ET


John Langille - Vice Chairman

Allan Markin - Chairman

Steve Laut - VP

Doug Proll - SVP, Finance


Andrew Fairbanks - Bank of America

Arjun Murti - Goldman Sachs

Greg Pardy - RBC Capital Markets

Amir Arif - Stifel

Monroe Helm - Barrow, Hanley

John Herrlin - Société Générale


Good morning, ladies and gentlemen. Welcome to the Canadian Natural Resources 2010 second quarter results 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, operator, and good morning, everyone. Thank you for attending our conference call. We will discuss our 2010 second quarter results and also update our plans for the balance of 2010. Participating with me today are Allan Markin, our Chairman; Steve Laut, our Vice President; Peter Janson, our Vice President of Horizon Operations, and Doug Proll, our Senior Vice President of Finance.

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 reserves are both expressed as before royalties unless otherwise stated.

Our second quarter cash flow reflects the strong quarter we had as we achieved over 1.6 billion dollars of cash flow with higher production and very efficient control of our costs. Again our cash flow exceeded our capital expenditures in this quarter and our CapEx was inflated with the number of acquisitions amounting to approximately 900 million dollars, all closing in this quarter. We are allocating the majority of our capital to oil projects as go forward.

Commodity prices for our oil production continue to be volatile but the average West Texas price remains relatively flat in the second quarter without realizing the first quarter. However, as expected, the heavy oil differential widened slightly in the quarter doing average of 18% off WTI.

Natural gas pricing continues to be challenged and averaged less than 4 dollar during the quarter. We expect this relative pricing situation to continue during the remainder of the year.

This quarter really shows the tremendous balance in our portfolio of oil assets with all four types producing at or near 100,000 barrels per day and contributing almost 70% of our total production volumes. Light oil from Canada and our international areas averaged 116,000 barrels per day. Coal heavy oil from our primary production area in Pelican Lake averaged 131,000 barrels per day. Our thermal heavy oil averaged 96,000 per day and our heavy oil mined at Horizon which is sold as high value SCO averaged 100,000 per day.

Our natural gas properties had over 200,000 BOEs contributed the remaining 30% of our production. So a very, very balanced portfolio. However, our oil sales contributed 86% of our total revenue and oil projects continue to be the preferential reinvestment area.

Before we turn the call over to Steve for the operating details, I'd ask Allan to make some comments. Allan?

Allan Markin

Thanks, John. Good morning, everyone. I am not sure if I can add anything from John's great start but as I said many times, Canadian Natural's balanced asset base allows us to add value in any business cycle. The efficiency of our operations has allowed us to drop our costs in most sectors of the company and thus, as John mentioned, enhanced cash flows.

Daily production increased 6% quarter-over-quarter. Spending money wisely and excellent and good operating practices has allowed higher than expected volumes, especially on the primary heavy oil side, record drilling has reaped great returns. Primary oils, thermal volumes achieved record highs. Soon the Kirby thermal project will achieve regulatory approval. Horizon volumes were and are increasing but some hiccups that more proactive maintenance will solve. Light oil, internationally, continues to achieve strong cash flows, especially at current oil pressures. We remain committed to growing value through the drill bit and acquisitions with efficient, solid operating and financial performance.

Over to you, Steve.

Steve Laut

Canadian Natural is in a very enviable position. Our strong well balanced assets combined with our capital discipline, focus on execution and effective operations has again delivered a very strong quarter and that performance is reflected in stoning results or outstanding results in four key indicators, production, operating costs, capital costs and feel cash flow.

Production was up 10% over Q2 2009 and 6% over the first quarter of 2010. With oil production up 21% over Q2 2009, and more importantly, 9% over Q1 2010 driving that overall volume growth. Canadian Natural continues to benefit from the decision to allocate capital towards the oil portion of our portfolio versus our GAAP portfolio.

Operating costs are down 13.55 on a BOE basis over Q2 2009 and 10% from Q1 2010. This is driven by significant decrease in conventional and thermal oil cost in Canada, down 17% year-to-date versus 2009, as well as the strong operating quarter in Horizon, with operating cost at 32.27 a barrel, near the low end of our guidance

Gas operating cost are also down slightly which in itself is a very impressive achievement as we choose to let gas production volumes decline in the slow priced environment. Capital spending is on track, and in fact we have lowered our capital spending guidance for 2010 by roughly 150 million dollars as we optimize capital spending and capture efficiencies on the Horizon capital program.

Free cash flow generation is strong, and we are on track to generate between 1.7 billion and 2.2 billion dollars of free cash flow in 2010. It is clear that Canadian Natural's assets are strong and well balanced.

We are increasing production, dropping off costs, reducing capital spending and setting Canadian Natural up for significant value growth, while at the same time, generating significant free cash flow. Few, if any of our peer group is, in a stronger position as Canadian Natural is going forward.

Turning in more detailed asset-by-asset, firstly gas in Canada. Canadian Natural has the largest land base in Western Canada. We dominate the land base, the infrastructure in our core areas and as a result, we are low cost producer and are able to stand up for a long period of lower gas prices.

Our gas land base is very well positioned with strong assets and teams in conventional, foothills, resource, and unconventional plays. Canadian Natural has over the last four years been quietly transforming the make up of our gas portfolio with 60% of our large gas store inventory made up of resource and unconventional play types with only 27% of the inventory from conventional play types, a fact not well understood by the street, but we have been historically viewed as a very efficient conventional gas player.

Our Septimus/Montney gas development is one example of our unconventional asset base. We have completed our 2010 drilling program with 13 wells drilled. Costs have been excellent coming in 20% less than expected.

Completion and flow back on these wells has just begun. The first well looks strong with early rates in excess of 10 million cubic feet a day at a thousand pounds wellhead pressure, as expected. Our plant at Septimus is to complete the first phase of development this year and bring on 50 million cubic feet of gas by year-end. We believe Septimus can deliver 200 million cubic feet a day and we elected bringing on future development in the future.

Turning to oil in Canada. Canadian Natural has a dominates heavy oil and thermal oil position in Canada. As you've heard me say before, we believe our heavy oil and thermal assets are the hidden gem in our portfolio. Heavy and thermal oil are delivering significant value today and our disciplined cost effective drilling program is adding tremendous value in the future, something we believe is not fully appreciated by the street.

Our thermal assets alone have 33 billion barrels of oil in place and 5.8 billion recoverable in our defined plan. To put that in perspective, 5.8 barrels of thermal oil is essentially the same as a 6 billion barrels recoverable at our world class Horizon operations. A vast amount of oil that will add tremendous value for all Canadian Natural shareholders.

Our plan to unlock this value targets adding approximately 285,000 barrels a day of heavy oil production in a very disciplined, step-wise, cost controlled manner and taking total production facility capacity to 405,000 barrels a day. Again, very similar to the 500,000 barrels a day we will achieve in Horizon after Phase 5.

In the second quarter, we achieved a very strong thermal production performance and development progress has been good and as expected as Primrose North East and Wolf Lake. Production will average between 80,000 to 90,000 barrels a day in 2010 and since this is a cyclic process, we will see peaks and troughs of 60,000 to over 100,000 barrels a day.

The second quarter saw production for the most part at the high end of the cycle with production averaging over 96,000 barrels a day. Again, its not different from the 99,000 we delivered at Horizon in Q2. The surveillance team at Primrose East is going very well and exceeding our expectations. We had expected the average between 16,000 and 20,000 however, performance to date we expect the average close to 23,000 barrels a day for 2010, as slowly return to normal steam operations.

At Kirby, our next thermal project, we expect to receive regulatory approval for this summer. We are making good progress on the details in the desired and developing a more detailed cost assessment with the target of sanctioning Kirby in Q4 2010.

As you know, we applied for regulatory approval to build the facility at Kirby to 45,000 barrels a day. As part of our ongoing process to maximizing value, we are currently looking to build the Kirby facility to roughly 40,000 barrels a day of initial capacity.

We continue to take a very disciplined approach to the engineering and construction of Kirby to ensure effective cost control with first steam is targeted for mid-2013. We expect to sanction the Kirby development in Q4 2010.

At Pelican Lake, we are on track with our program to convert the field to a highly successful polymer plant. By the end of 2010, we will push the Pelican area under polymer flood to 44% for the total pool.

As we continue to convert Pelican to polymer flooding, we expect production to reach a plateau rate of roughly 80,000 barrels a day of low cost production by 2015, roughly double the 39,000 barrels a day produced in Q2.

It is clear that Pelican Lake is a world-class pool with 4 billion barrels in place and roughly 561 million barrels of resource recoverable under polymer flood. A very pool with very robust development economics. Pelican Lake continues to generate significant value for shareholders enjoying some of the highest returns in our portfolio.

Our primary heavy oil program continues to roll along effectively and efficiently. In this commodity and cost environment, primary heavy oil generates top-docile returns on capital and our asset portfolio. Importantly, it also generates the quickest payout and largest cash-on-cash return.

In the first half, we drilled roughly 188 wells and we will have a busy second half as we'll drill 600 primary heavy oil wells for the year, a record number of primary wells for Canadian Natural, roughly 25% more than we drilled in 2009. Our dominant high quality land base, infrastructure, and effective operations allows us to drill this size of program on a very cost effective basis, making primary heavy oil one of the best value generators in our portfolio.

Turning to the North Sea, production has been strong and exceeded the top end of our guidance for Q2. As planned, we have started up the drill string in Ninian field, with a plan to drill one production well, one injection well and complete three well interventions as well undertake some subsea work on the T-Block and upgrade facilities in all five platforms in 2010.

In the third quarter, we will be undertaking the majority of the planned turnaround working on our platforms. We are well under way of tracking the plan. As expected, these turnarounds will impact production and is reflected in our third quarter guidance and full-year guidance that remains unchanged.

In offshore West Africa, at Olowi, and Gabon, we've completed the drilling program on the B Platform with all wells now on stream. Drilling the production wells, results from Platform B looks much better than Platform C and are in line with our expectations. The jack upgrade moved in late July on to Platform A and drilling is now underway. Platform A, first production is targeted for Q4 2010 and production at Olowi is expected to peak out in a 12,000 barrel a day range.

In Côte d'Ivoire, production at Baobab and Espoir is stable. The Espoir shutdown in Q2 to install additional compression has been completed with the duration of the production shutdown less than anticipated and as a result, Offshore West Africa production was at top end of our guidance for Q2. Production at Espoir will not be totally ramped up until the new facilities are fully commissioned in September.

It's important to note that Offshore West Africa had some of the highest return on capital projects in our portfolio and along with the North Sea generates significant free cash flow for Canadian Natural.

Turning to Horizon. We continued to make good progress driving towards sustained reliability. Overall, we are doing well, and I'm very happy with our progress as we gain confidence in our ability to operate the plant reliability as well as our ability to project the likelihood of upcoming issues, notwithstanding our recent Amine regen unit. Our decision to proactively take selective plant outages in May was effective and was reflecting the strong June production volumes.

There is no question the operation can and have to leave it at or above the 110 barrels a day of SCO design capacity. The production by month is as follows. April, 101,000 barrels a day, May, 81,400 barrels a day. June, 117,600 barrels a day and July with the Amine issue 93,380 barrels a day.

Production has been strong, and we are confident in the capacity, the plant and our ability to effectively run the operations. It is however very complex and a heat integrated plant and appears that it may take some time until we are fully optimized and reliable.

As an example, we have been running very strong for the month of July. However, a small leak in Amine regen unit, a critical component of the sulfur plant resulted in the unexpected discovery of severe pipe wall thinning due to corrosion.

Therefore we took immediate steps to shutdown the unit, which necessitates a full plant shutdown on July 30th. As a result, production for July ended up being below the guidance issued earlier in the week.

I'll turn it over now to Peter Janson to give you little more detail on this event and also highlight some of the other successes we've had at Horizon operations. Peter?

Peter Janson

Thanks, Steve and good morning everyone. Last week Horizon experienced a leak in the Amine plant plant in one of the overhead piping circuits. We were unsuccessful in attempting to install an engineered clamp and the decision was made to begin a controlled shut down on July 30th. Extensive inspection of the equipment upstream and downstream of the leak point identified accelerated corrosion as Steve had mentioned. Investigation into the cause is underway but we currently suspect high concentrations of ammonia compounds as the cause.

Revised operating procedures and corrosion monitoring programs will be in effect upon start up and that will prevent recurrence once we come up again. Our immediate plan is to install piping replacements this coming weekend, along us some pipe sleeves for the heat exchangers just upstream of the leak. This event will continue to be investigated to ensure we haven't overlooked similar or related applications at Horizon. We expect to be back in production by the middle of next week.

During this outage we have bought forward some plant maintenance activities that were planned at the end of August and September, such as pigging, screen change in the ore processing plant and shovel maintenance. This will allow us to minimize production limitations for the balance of August and September.

Horizon management team has demonstrated our commitment to sustainable production with examples such as the improvements in hydro transport, tailing pipeline, reliability where we experienced zero leaks in Q2 and we've reduced the sulfur plant restrictions thereby achieving a new stream based record of 131, 000 barrels in this past quarter.

Back to you, Steve.

Steve Laut,

Thanks, Peter. As you can see we are on top of the issues and we are taking all the necessary steps to set us up for increased reliability and performance going forward. I don't know if you heard that Peter did mention that we did hit a record of 131,000 barrels a day stream day rate. It tells you the capacity of the plant when every thing is lines up.

Operating cost for Q2 are very good at 33.27 dollars a barrel near the bottom of our guidance. On the sustaining capital side, we are doing very well. We have reduced the sustaining capital for 2010 by 40 million dollars as we gain a better understanding of the work capacity of our equipment. This is a complex plant and will take some time to fully optimize.

Going forward our Ops team believe that they can lower operating cost not just from higher production levels but more effective operations. Although we are not there yet, we see many opportunities to further improve performance.

Horizon is a world class asset with over 6 billion barrels of recovered oil. We have target to increase production to phases 2 and 3, to 232,000 barrels a day and future expansions in phase 4 and 5 to just under 500,000 barrel a day or half a million barrels a day of light sweet crude with no declines for 40 years and virtually no reserve replacement costs.

In 2010, we continued to complete work on Tranches 2 of our Phase 2/3 expansion. As you see from our guidance, we have reduced the capital spending on Horizon by roughly 150 million in part due to reduced capital required in 2010 for Tranche 2.

Changes in design allowed us to achieve some scope reduction as well as some lower material cost and construction costs have also been realized in 2010. In addition, we moved some work into 2011 with the expectation that we will be able to optimize construction execution.

Our detailed lessons learned from Phase 1 is on track and weill incorporate any cost reduction affecting those measures into future expansions. Along with this work we will complete significant engineering work on future expansions and prepare a more detailed cost estimate. It is our expectation that we'll have a more detailed cost estimate around year-end 2010 and a better understanding of any modifications we make towards execution strategy. This work will be completed to get a better certainty on costing in various environments.

Canadian Natural is committed to the expansion of Horizon to 232,000 barrels a day and ultimately just under 500,000 barrels a day of light sweet 34 degree API oil. As always, Canadian Natural is very focused on cost control and creating value for shareholders and we will be fixing the expansion of Horizon but only when we can be assured that reasonable cost certainty can be achieved.

It is clear that Canadian Natural is in a very strong and enviable position. Horizon is a world class asset that is and will continue to add tremendous value to our shareholders. Our thermal heavy oil assets can add value similar in magnitude to Horizon yet in more manageable sizes and in my opinion are the hidden gem in our portfolio and in this low gas price environment generate even greater value for shareholders.

Our light oil assets, both internationally and in Canada, as well as our primary heavy oil assets in Canada continue to generate strong returns and in this low gas price environment, our strategy of maintaining a well balanced portfolio and the fact that we are the low cost producer will ensure that we will be able to withstand a sustained period of low gas prices.

Our teams are strong throughout the company. As Doug will point out, our balance sheet is strong and getting stronger. We have a very flexible capital program, giving Canadian National's ability not only to maximize the value of our well balanced portfolio but also cash any opportunities that present themselves in this environment.

Canadian Natural is in a great position and in today's environment, with our team, our strategy and our assets, I believe Canadian Natural is better positioned than ever before to generate significant value for shareholders.

With that I'll turn it over to Doug. Doug will update you on our financial position and prudent financial management.

Doug Proll

Thank you, Steve and good morning. The second quarter and first half of 2010 produced a number of financial highlights for Canadian Natural. In the first half, Canadian Natural is very profitable generating net earnings of 1.5 billion dollars, or about 1.41 dollar per share. We generated cash flow from operations of 3.1 billion dollars, or 2.88 dollars per share.

In the same period, we incurred capital expenditures of 2.6 billion dollars resulting in free cash flow of 500 million dollars. As the company continues to generate free cash flow, this excess was applied to debt reduction.

At June 30th, our long-term debt was 9.3 billion, resulting in a debt-to-book capitalization ratio of 31%, and a debt-to-EBITDA of 1.3 times. Our second quarter oil production, as you heard previously, increased to 443,000 barrels per day and our barrels equivalent production increased to over 649,000 barrels per day.

These increases are spread across the product mix, representing five categories of oil production from heavy to light and synthetic crude oil, plus natural gas. This bodes very well as we enter the second half of the year with oil prices exceeding US$80 WTI per barrel and WCS differentials remaining nil.

This is also reflective of our asset diversification across several product lines and geographically. In addition, our product net backs are very good as we continue to focus on cost control.

Our commodity hedging program is used to underpin our cash flow for the purposes of securing our capital expenditure program. The outstanding positions are detailed in the financial statements and are posted on our website.

For the remainder of 2010, we have 200,000 barrels per day of oil hedged with WTI price callers with floors ranging from US$60 to US$70 per barrel. We also have 620,000 GJs per day of natural gas production for the third quarter and 220,000 GJs per day hedged in the fourth quarter with AECO floors of Canadian dollar 6 dollars on 220,000 GJs for the second half of 2010 and 450 on 400,000 GJs per day for the third quarter.

As a final note on August, the 3rd, Standard & Poor's affirmed their rating of Canadian Natural's long term corporate debt and senior unsecured debt as BBB, however, raised its outlook to positive from stable with a view to upgrading the company in the near future. We see this as a positive development confirming our own assessment that our company has repositioned itself for the future in terms of assets and production diversification, its people and the strength they bring to the table and our balance sheet strength. We are positioned to grow profitably through the exploitation of our strong assets and deep inventory of opportunities and the ability to allocate capital in a very disciplined manner.

Thank you and I will return you to John for some closing comments.

John Langille

Thank you, Doug, Peter and Steve for an excellent review of our operations. I think you can see that the diversity of our production sources all developed with very high working interest and efficient systems to control cost will continue to deliver tremendous value to our shareholders through the rest of this year and for many, many years to come.

With that, operator, I would open up the conference call to questions that people may have.

Question-and-Answer Session


(Operator Instructions) Our first question is from Andrew Fairbanks from Bank of America. Please go ahead.

Andrew Fairbanks - Bank of America

Thank you, good morning, guys. Just had a couple of costs questions for you. First your ran really well at Horizon in June, I don't know if you have a rough estimate for what the operating costs were just for the month of June? Then the second question would be outside of Horizon, are there particular areas you think that you can generate the biggest wins in terms of being able to reduce or restrain cost inflation as that looks like it's picking up a bit going forward, i.e., would there be drilling efficiencies, service company JVs, maintenance programs? Are there are particular areas that you think are worthwhile to spend a lot of effort on to try and keep costs inline going forward? Thanks.

Steve Laut

Andrew, its Steve, thanks for good questions. Operating costs were not fully detailed on June yet. We're in at 29 to 29.50 range a barrel, so looking pretty strong. As I said earlier, and I think probably Peter mentioned as well, we do believe we can do better and we're going to work on that but we can't promise that. We believe we got opportunities to do better.

As far as costing goes, we do see a little bit of inflation out there but as activity picks up for us when we see, the best for us to drop costs and what's worked very well for us in the past and continues to work for us is to be better planned. The more engineering on the capital projects, the more engineering we can do upfront, the more flexibility we can have and how we contract construction.

As far as drilling and completion work over operations are better planned and more I would say larger programs, we have basically a series of wells strung together that are very similar. We drive cost down that way. So it's all about planning, it's all about engineering and being prepared and using the best technology.


Our next question is from Arjun Murti from Goldman Sachs.

Arjun Murti - Goldman Sachs

Just somewhat follow-up on the cost question, related more to maintenance CapEx. You are still trying two things at Horizon. Just curious if you estimate of what maybe the ongoing maintenance CapEx will be for Phase 1 once things settle down a bit, maybe on a annual basis. Thank you.

Steve Laut

We look at maintenance capital, there's two parts to that. Part of it's in the operating cost going forward, and we believe we will be in that say, post 2010 in that $30 to $30 a barrel range on operating cost. The other part is in sustaining capital and we believe we are in that 4 dollar to 5 dollar barrel range, and we probably are a less than that this year, but as things wear out, that should increase and that would be lumpy. There will be times when we much of trucks and shovels as we go forward.

Arjun Murti - Goldman Sachs

That's great. On the 30 to 35, Steve, does that include the natural gas cost as part of that or is that just the cash cost axe that gas?

Steve Laut

That includes the gas cost as well.

Arjun Murti - Goldman Sachs

Fantastic. I think Doug gave an update on the hedging program for this year, just curious on the plans for 2011 and beyond. Obviously with Horizon, you have stronger free cash component, you've got a stronger balance sheet. Do you still plan to utilize I guess in particular oil hedging or plan to be less hedged going forward?

Doug Proll

As you know, our hedging policy is 60% for the near 12 months and 40% for the period going out, following that up-to 24 months, and I think what you will see is a continuing on with the near-term hedges.

We are reviewing our hedge policies or our hedge program for 2011 at the current time, and I suspect where WTI prices are today that you will see us engage in further callers into the fall as we move closer to 2011.

As for periods farther out in the initial 2012, I think we will be more conservative on that perspective from a point of putting our own hedges, and we will wait and see well how we do with the 2011 budget as well as the Kirby and Horizon sanctioning another projects that may come up during that time.

Steve Laut

Arjun to add to that is obviously, we have very strong position and a lot of free cash flow. Our need to hedge is not as strong as it was in the past, so our balance sheet is very strong and our cash flow is also very strong.


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

Greg Pardy - RBC Capital Markets

A couple of questions. Maybe just with Horizon and Tranche 2, so once that's completed, I think there was a 5,000 to 15,000 barrel a day increment, so are we sort of talking 125,000 or 130,000 barrels a day of capacity at Horizon next year?

Steve Laut

I think next year that won't happen. Obviously Tranche 2 is not fully done until 2012 and some of it is in 2013, and lot of that's reliability, Greg. So, the big part of Tranche 2 is third OPP, which will give us higher reliability and less downtime for screen change outs and issues like that with the OPP. And as we get farther into the mine, you have to truck farther, and so you need that third OPP to ensure you have efficiencies and lower operating cost.

Greg Pardy - RBC Capital Markets

Steve, you've talked quite a bit about Kirby. Could you characterize a little bit just in terms of SORs that you would expect when it settles down. I don't know whether or not you are or now you're preparing stackable capital intensity at this stage. And then beyond that I think plans had been with growth you've got and other 60,000 coming on potentially in 2014, any detail around that one would be great as well.

Steve Laut

I think the SORs, overall, we look to be in that 3 to 3.4 range at Kirby. And as far as our capital intensity goes, I think we're going to wait until we get the detailed cost estimate, but I don't see any surprises coming.

As far as gross, it looks like it will be the next in the hopper as you say for 2014 steaming. We'll continue to evaluate that and look for ways to do that effectively and cost effective, but is next in our sort conveyor belt or assembly line of projects on the thermal side.


Our next question is from Amir Arif from Stifel. Please go ahead.

Amir Arif - Stifel

One quick question on the Pelican Lake. I think, Steve you mentioned that you're going grow from 40,000 to, it was 80,000 barrel by 2015?

Steve Laut

That's correct. 80,000 barrel a day will be the peak or the Plateau.

Amir Arif - Stifel

Is that simply I just keep pushing the polymer flood to other parts of the field?

Steve Laut

That's right. At the end of the year it will be 44% of the field on the polymer flood. As you know it takes about 12 to 18 months before you get response and ramps up from there. So, it will takes us to about 2015 till we get most of fuel underwater polymer flood and then you going to the ramp up that comes after that.

Amir Arif - Stifel

Then how long of a plateau before you start getting the decline of figuring or anything coming out?

Steve Laut

Plateau is for about three to four years and then you come off slowly. That's what we expect, but this polymer flood continues to surprise us to the upside, so it could fall off decline slower than we expect, but it's too early to say.

Amir Arif - Stifel

Then just a question on the maintenance cost at Horizon, I think you touched already, but the 3 dollars to 4 dollars or 4 dollars to 5 dollars a barrel that you are thinking on the maintenance is that just trucks and shovels or does that include ongoing maintenance for plant repairs and other stuff as well?

Steve Laut

So, I'll try to be clear here. So, we define Horizon cost in three ways. There is a capital cost for projects. There is day-to-day operating cost and then a sustaining capital. In our operating cost, there's maintenance, where we are replacing equipments, let's say the tanks pipes wear out on a normal basis and then is sustaining capital to improve like trucks and shovels and others things.

So, the sustaining capital is probably 4 dollars to 5 dollars a barrel, operating cost in that 3 dollars to 3.5 dollars a barrel and the capital cost would expand. So, maintenance capital itself is not defined or that's not how we define it. We put it in operating and sustaining capital.


Our next question is from Monroe Helm from Barrow, Hanley. Please go ahead.

Monroe Helm - Barrow, Hanley

Sure. You made some significant acquisition so far this year. Can you talk about how the acquisition market is looking now and should we expect some additional capital to go that area over the rest of this year and the first of 2011.

Steve Laut

As far as acquisitions go, there seems to be a steady amount of acquisition properties that sort of going floating by here in Western Canada, and other parts of the world. As you know, we are focused on acquisitions that would occur in our core areas, so we'll look at anything that's in our core area.

I personally think that their strength maybe drop off a bit, but I wouldn't be surprised if there is something that makes sense for us that we can see if there are synergies for our operations and that we can drop cost we will think of property acquisitions within our core areas if they makes sense. So it could happen. Hopefully that answers your question.


(Operator Instruction) Our next question is from John Herrlin from Société Générale. Please go ahead.

John Herrlin - Société Générale

Following up on what Monroe asked Steve. You said the properties in your release were complementary. Could you give us a sense of where the gas properties were concentrated that you purchased?

Steve Laut

Thanks John, it's good to hear from you again. Yes. All those properties were in the Northwest Alberta and Northeast BC towards the deeper part of the basin, more resources oriented part of the base although a lot of the properties were conventional gas and I think when we add them all up, probably about 25% of oil and 75% gas. It's in Northwest Alberta and Northeast BC.

John Herrlin - Société Générale

Going forward, should we expect this kind of strategy to be continued in terms of not spending current capital dollars on well drilling activity given the weakness in gas prices? You have done this in the past.

Steve Laut

Yes. I think you will see us maintain that. Our concern is gas prices are weak. Maybe we've hit the bottom on offshore but we believe shale gas is real (inaudible), because we have a lot of ourselves, so we got a good feel of the viability, and I guess our concern is that gas prices do strengthen.

You may see a flood of gas come on to market and then depress prices again, so we have sort of bit of a cycle. So, we are not in any hurry to drill gas properties. We don't need to, to add value and we are very balanced and we are taking the longer term approach.

John Herrlin - Société Générale

You have no real lease expiration issues on anything?

Steve Laut

We have ongoing expirees, but it's everything we can manage and a lot of our drilling is towards keeping our land, but it is not a big program, as you see only 100 wells.

John Herrlin - Société Générale

Okay, last one from me, it's for Doug. With IFRS coming up, are there any potential charges that we should be aware of or cost associated with the conversion or is it too early?

Doug Proll

That's a little bit early, I mean we are getting closer and I think we've detailed it in the financial statements, but the one area that we know is going to be a non-cash change in stock based compensation and that's basically, because we have to setup the stock options on a block shale basis and account for them from that perspective, so higher initial charge, but over the life of the option, they will be the same.

All of the stuff that we see right now, including move to cash generating units is all non-cash and I think we are getting closer and maybe have something more to say in that regard later in the year, but this year we see things unfolding pretty much as expected.


There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Langille.

John Langille

Thank you, everyone for tying into our call today, and of course as usual if you have any further questions, do not hesitate to call us and we look forward to a great balance of 2010 and many years to come. With that, thank you very much, again, for attending our call and have a good day. Thank you.


Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation

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