Canadian Natural Resources, Ltd. (CNQ) Q4 2018 Results - Earnings Call Transcript

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About: Canadian Natural Resources Limited (CNQ)
by: SA Transcripts
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Earning Call Audio

Canadian Natural Resources, Ltd. (NYSE:CNQ) Q4 2018 Results Conference Call March 7, 2019 11:00 AM ET

Company Participants

Mark Stainthorpe - Vice President, Finance, Capital Markets

Steve Laut - Executive Vice Chairman

Tim McKay - President

Darren Fichter - Chief Operating Officer for E&P

Corey Bieber - Chief Financial Officer

Conference Call Participants

Benny Wong - Morgan Stanley

Manav Gupta - Credit Suisse

Greg Pardy - RBC Capital Markets

Phil Gresh - JP Morgan

Asit Sen - Bank of America Merrill Lynch

Neil Mehta - Goldman Sachs

Dennis Fong - Canaccord Genuity

Paul Cheng - Barclays

Operator

Good morning, ladies and gentlemen. And welcome to the Canadian Natural Resources Q4 2018 Earnings Results Conference Call. After the presentation, we will conduct the question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, March 7, 2019, at 9:00 AM Mountain Time.

I would now like to turn the meeting over to your host for today's call, Mark Stainthorpe, Vice President, Finance, Capital Markets at Canadian Natural Resources. Please go ahead, Mr. Stainthorpe.

Mark Stainthorpe

Thank you, Carol. Good morning, everyone. And thank you for joining our fourth quarter and year-end 2018 conference call. With me this morning are Steve Laut, our Executive Vice Chairman who will briefly discuss our strategic focus on creating shareholder value and highlight some of the factors that set us apart from our pears. Steve will also provide an update on Canadian Natural and industries' efforts on the environment front where significant performance achievement are not well understood. Tim McKay, our President, will provide a more detailed update on the year-end and quarter, as well as discuss our ongoing projects and operations. Darren Fichter, our Chief Operating Officer for E&P, will provide an update on our strong year-end 2018 results and Corey Bieber, our Chief Financial Officer, will provide an update on our robust financial position.

Before we begin, I would refer you to the special note regarding non-GAAP measures contained in our press release. These measures use to evaluate the company's performance should not be consider to be more meaningful than those determined in accordance with IFRS. I would also like to refer you to the comments regarding forward-looking statements contained in our press release and also note that all amount are in Canadian dollars and production and reserves are expressed as before royalties unless otherwise stated.

With that, I'll now pass it over to Steve.

Steve Laut

Thanks, Mark, and good morning everyone. Thank you for joining the call this morning. The Canadian oil market was very rocky in the fourth quarter with disfunctional marketplace dynamics, driving historically high differentials for both heavy and light oil in Canada. Canadian Natural delivered $1.22 billion of cash flow in a low price fourth quarter, reflecting the strength of our assets and our effective and efficient operations.

The first quarter of 2019 is a completely different story where market order has been established and with curtailments opposed by the Alberta government by order has been established. The current outlook for the first quarter prices for SCO produced at horizon and AOSP are up roughly 45%. Light oil is up roughly 66% and heavy oil pricing is up roughly 400%. We applaud the Alberta government for taking this action. Short-term commodity price volatility has a minimal impact on Canadian Natural. We do not produce a significant portion of our reserve base out in a low price period, as our asset base is long life low decline and very sustainable.

Canadian Natural's long life low decline asset base combined with our effective and efficient operations make Canadian Natural very robust. As a result, we generate significant free cash flow. Canadian Natural's ability to generate significant and sustainable free cash flow sets us apart from our peers. Canadian Natural is very disciplined in our cash flow allocation between our four pillars; the balance sheet; returns to shareholders via dividends and share buybacks; resource development; and opportunistic acquisitions, all to maximize value for shareholders. We have a vast high quality undeveloped assets with significant value adding and growth opportunities, and we remain disciplined on the execution of timing before these opportunities. Timing depends on improvements and market access, fiscal competitiveness and regulatory effectiveness and efficiency.

In addition to balancing the four pillars, part of creating long term value is reducing our environmental footprint. When it comes to the environmental performance Canadian Natural and indeed the entire Canadian oil and gas sector has delivered game changing performance. Canadian Natural and Canada's oil and gas sector recognize the need to reduce greenhouse gas emissions and we've been able to leverage technology and Canadian ingenuity delivering impressive results. Canadian Natural ourselves invested $3.1 billion in R&D since 2009, the third largest for all industries in Canada. Essentially, Canada's oil and gas sector is taking what was branded as high intensity oil in 2009, and meet it with what I would call the premium oil on the global stage. All in 10 years and the Canadian oil and gas sector is committed to do even better in the future.

For instance, at Canadian Natural's Horizon oil sands mining and upgrading operations, we've reduced our greenhouse gas emission intensity by 31%. At today's crushing levels that's equivalent to taking 665,000 cars off the road. In our primary heavy oil operations, we reduced our methane vent volumes by 71% through technology and continuous improvement equivalent to taking 760,000 cars off the road. Canadian Natural also captured and sequesters the largest amount of CO2 in Canada, and we're the third largest oil for the gas industry in the world, equivalent to taking 576,000 cars off the road annually. With just these three projects, Canadian Natural is taking equivalent of 2 million cars off the road, equivalent to 5% of the entire vehicles in Canada, and this is just what Canadian Natural has done. The entire industry has achieved similar equally impressive results.

Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high intensity oil on a well combustion basis in 2009 to well below the global average. This is an impressive Canadian success story. It is a basis or the root cause that has generated a tremendous opportunity for Canada. For instance, it’s a rest of world achieved what the Canadian oil and gas industry has in terms of flaring, the greenhouse gas emissions we've reduced by 22%, that's equivalent to taking 110 million cars off the road. And for reference, that's more than three times in our vehicles on the road today in Canada.

The LNG plant Canada's approved one onstream is equivalent to taking 40 coalfire power plants offline, equivalent to reducing Canada's greenhouse gas emissions by 10%, or greater than DC's total emissions. Canada has the capacity to build at least five of these LNG plants, which will be equivalent to reducing Canada's greenhouse gas emissions by 50%. Canadian Natural and the Canadian oil and gas sector has delivered game changing environmental performance, and we have room to do even more. It's not 2009 anymore. Canadian oil and gas is not what I would call from a climate change, as well as all other ESG metrics perspective, the premium product, something all Canadians should be proud of.

If you view climate change from a global perspective, because climate change is a global issue not an national issue, they didn't make sense that having more Canadian oil and gas on the global market will reduce greenhouse gas emissions. It's very clear that delivering Canada's oil and natural gas to global markets should be a climate change and economic priority for Canada. A long-life low-decline nature of oil sands assets allows producers to continue to leverage technology, further reducing our environmental footprint and driving ever increasing effective and efficient operations. Canadian Natural and the Canadian oil and gas sector has made that happen, and we continue to press further improvements.

The value of Canada's oil sands is very important to Canada and Canadian Natural. We believe the oil sands will ultimately stand the test of oil prices and any potential demand forecast scenario, as we believe the oil sands have the lowest environmental footprint and the lowest total costs. At Horizon, we've taken operating costs from over $40 a barrel to roughly $14.5 a barrel. And importantly, there are no reserve replacement costs, a fundamental factor in Canadian Natural's strategy to invest in the oil sands and to be a leader in research and development. Canadian Natural is doing an excellent job when it comes to reaching our environmental footprint and balancing the four pillars of cash flow allocation to maximize value for shareholders. There are very few E&P companies that can deliver substantial; sustainable and growing free cash flow and at the same time, deliver production growth per share, top-tier effectiveness and efficiency; a defined cash flow allocation program to maximize value for shareholders and drive increasing returns on equity and returns on capital employed; as well as increasing returns to shareholders and at the same time, will strengthen the balance sheet and reduce our environmental footprint. Canadian Natural is robust, sustainable and clearly a unique E&P company.

With that, I'll turn it over to Tim.

Tim McKay

Thank you, Steve. Good morning everyone. The strength of our assets and our ability to execute shows in our 2018 year-end results as we continue to be effectively allocate capital to maximize value for our shareholders. I will now do a brief overview of our assets.

Starting with natural gas, our overall annual production of 1.548 bcf was down from 2017 production of 1.662 bcf, primarily a result of our proactive decision to reduce natural gas activities, curtail and shut-in production due to low national gas prices in our North American operations. Our annual natural gas production for North American operations was 1.49 bcf with operating costs of $1.25 per mcf, both within guidance. Our fourth quarter North American natural gas production was 1.44 bcf per day, which was impacted approximately $85 million today by the third-party Pine River plant, which was down mostly the quarter. As well as during the quarter, we proactively curtailed production due to lower natural gas prices, an impact of approximately $30 million a day.

The Pine River plant is up and running at a restricted rate of $90 million a day and we continue to wait on regulatory approval to take over operatorship. Based on our recent engineering cost assessment, we now target to reinstate the plant to $120 million a day in the third quarter of 2019 versus our original plan of $145 million a day. At Septimus Montney in Q1, we have commenced a small drill program of five net gas wells and targeting them to be on production in late 2Q. Septimus Montney is liquids rich and very robust due to low cost tie-in and very low operating costs, resulting in high net back. In the fourth quarter, the Canadian Natural operations realized strong natural gas pricing at $3.23 per mcf as a result of our diversified natural gas sales portfolio, which 35% is used internally, 32% is exported and only 33% is exposed to ECHO pricing. Q1, 2019 natural gas guidance is targeted to be 1.49 to 1.52 bcf per day.

With the widening differentials in the second half of 2018, the company made the strategic decision to reallocate capital from heavy oil driving to our North American light oil and NGL activities, drilling 32 net wells above our original targeted of 67 for the year. On an annual basis, our North American light oil and NGL production is strong at 93,728 barrels a day, up 2% from 2017 on an annual operating cost basis of $15.29 per barrel versus our 2017 cost of $14.30. In Q4, our production was very strong at 98,826 barrels per day, up 6% from Q3 and up 5% when comparing Q4 of 2017, which shows the strength of our asset base ability to execute. Fourth quarter operating costs were also strong at $14.25 per barrel.

In the Greater Wimble area, we continue to strategically drill and de-risk our significant Montney oil development opportunities on our 155 net sections of land that could support over approximately 365 wells overtime. In Q4, 2018, we drilled 27 net wells, 14 of them are on production and had strong initial 30 day rate of approximately 600 barrels a day of liquids. 12 more are targeted to be completed and on production at the end of the first quarter. A subset of this area is our core Wimble area where seven net wells results have been very strong with 30 day liquid rates of 785 barrels per day with five net wells left to be completed.

Finally, in Southeast Saskatchewan and Manitoba for 2018, away from the apportionment issues in Alberta, we do up to 32 net wells, 18 more than we had originally target with total production add of approximately 2,750 barrels a day, showing our capital flexibility and the strength of our asset base and the company's ability to execute to maximize value. For Q1, we are targeting a total of 21 net crude oil wells, five in the Grande Prairie area nine in the Southeast Saskatchewan, Manitoba and seven in Southern Alberta.

Our international light crude area had a very strong year. At the top end of our annual guidance at 43,627 barrels a day, generating significant free cash flow as we receive Brent based pricing for our oil. Offshore asset annual production was 19,662, slightly down from our 2017 average of 20,335 with annual operating cost of $26.34 per barrel, as well in early December, Olowi was permanently shut-in. Cote d'Ivoire annual operating costs were in guidance at $13.30 per barrel. Q4 offshore Africa cost was 22,185 barrels per day, an increase of 3,400 barrels a day from Q3, 2018 of 18,302 barrels a day as the new wells are there that have completed and came on production in the second half of 2018. Cote d'Ivoire operating costs in Q4 were very strong at 11.68 per barrel. In the North Sea on an annual basis, we averaged 23,965 barrels a day, up slightly from 2017 of 23,426 barrels a day as a result of our small but highly successful drilling program with annual operating cost of 39.89 per barrel.

The North Sea Q4, we averaged 21,071 barrels, down from Q3 of 28,702 barrels, primarily a result of all three planned maintenance in the quarter. In the first quarter of 2019, we target drilling one gross producer at Baobab and one well in the North Sea that are targeted to come on early Q2. Q1 international guidance is set at 46,000 to 50,000 barrels per day for Q1. As we talked about last quarter, the company made the strategic decision in Q4 not to sell in the anonymous market and voluntarily curtail production ahead of the Alberta government announcement in December. With the Alberta mandated production curtailment, differentials for both WCS and synthetic have quickly stabilized to more normal levels. We continue to support the government decision to curtail production as differentials for both WCS and synthetic oils in Q4 were enormously high as a result of lack of market access and a dysfunctional nomination process.

For the first quarter, WCS differentials have significantly tightened to 1,238 US per barrel, approximately 23% of WTI similar to historic numbers like in Q4 2017 when WTI was approximately $55 and the WCS differentials approximately $12 a barrel. This is in spite of the apportionment stating at 42%, confirming our view that the nomination process is dysfunctional. Looking ahead, it continues to be positive. Storage levels in Alberta have come down from the peak in December, heavy oil in the US Gulf is trading at a $2 premium to WTI. So even at today's pricing, it makes sense to move oil by rail considering your fixed and variable costs, Canadian Natural has shifting oil at approximately 14,000 barrels a day.

The northwest refinery will soon be taking incremental heavy oil at 50,000 barrels a day. Conventional declines should be in the range of 40,000 to 45,000 barrels a day and may be higher with reduced activity. And rail will increase as the Alberta government has now committed to 4, 400 cars equivalent to approximately 120,000 barrels a day, combined with the industry of 150,000 it is constructive for future pricing. This totals to approximately 365 barrels a day of incremental capacity. As most of you are aware with the government changing the curtailment process to peak production, some companies like Canadian Natural who voluntarily curtail production in 2018 are taking greater portion of the curtailment. I can say that through a great work done by our teams post the change, we're able to mitigate some of that impact to Canadian Natural in the first quarter, which I will talk later in the call.

For heavy oil on an annual basis, our production was 86,312 barrels a day, down from 2017 levels of 95,530 barrels per day, approximately 10% lower as we proactively curtail production, reduced drilling and completion work over recompletion activities in heavy oil. Annual operating costs were 16.60 a barrel, up 6% versus the 2017 cost of 15.71 per barrel. Q4 production was 79,678 as we curtailed production further with operating costs of 16.85 as compared to Q4 2017 of 16.28 per barrel and Q3 operating cost of 15.58 per barrel. In Q4, we drilled 24 net heavy oil wells across our vast premium land base. And as we talked about last quarter, we're only drilling strategic wells that set us up for the future. Canadian Natural is focused on creating value. And with the curtailment and Alberta, it continues to make sense only to drill wells that set us up for future growth. As such, we are targeting six heavy oil wells in the first quarter.

Key component our long-life low-decline transition is our world-class Pelican lake pool, where our leading edge polymer flood is driving significant reserves and value growth. Our annual production volumes were 63,082 barrels a day with very low operating cost of 6.72 per barrel, both which are very compressive considering we reinstated the polymer flood to 62% of the acquired property during 2018. In Q4 2018, production was 62,428 barrels a day versus a Q3 average of 62,727 barrel a day as we see the polymer flood on their acquired property starting to stabilize the decline. Pelican continues to have very strong operating cost in Q4 and $6.40 per barrel, essentially flat for my Q3 operating costs of $6.43 per barrel.

In Q4, we drill four net producers on their acquired land, which were very successful with approximately 100 barrels per day per well. And the company has identified additional 31 opportunities on those lands. In 2019, we target to further consolidate operations as we capture synergy between the properties and target to produce operating cost by approximately $6 million per year, enhancing our already low cost of operations. With our low decline and very low operating cost, Pelican Lake continues to have excellent netback in this exploration. Our thermal line annual production 17,839 barrels a day, primarily a result of our curtailing volume during the year versus our 2017 average approximately 120,000 barrels per day with overall life of 2018 operating costs of $13.20 per barrel versus $11.81 per barrel in 2017. Fourth quarter production was approximately 102,000 barrels a day versus the Q3 production of approximately 112,500 barrels a day, as we voluntarily curtail production in the quarter.

At Kirby South, annual production was steady at approximately 35,000 barrels a day with excellent operating costs of $9.54 per barrel, including fuel, which is very consistent with last year's productions of 36,000 barrels a day and $9.50 per barrel, which is a great job done by our team. At Primrose, annual production was approximately 70,000 barrels a day, down from the 2017 production of approximately 81,500 barrels a day as we curtailed production and have smaller CSS cycles in late life wells. Our thermal operating at Primrose continue to be effective and efficient with annual operating cost of $14.03 per barrel, up from 2017 of $12.32 per barrel, primarily related to lower production volumes. We continue to execute on our growth projects at Primrose and Kirby north, both are on cost and ahead of schedule. At Kirby North, the company's 40,000 barrels a day SAGD project, which is originally targeted first oil in Q1 2020, we have continued to have top tier execution and very strong productivity.


Project is now quarters ahead of schedule and targeting first oil in Q3 2019, wrapping up to 40,000 barrels a day in late 2020. Cost performance remains on budgets and the central processing facility is now at 94% complete as of the end of the period. At Primrose, drilling is complete and the completions and facility construction on our highly profitable pad add continues on cost and ahead of schedule with planned theme in Q3, 2019, which is targeted at a rate of approximately 10,000 barrels a day in the fourth quarter of 2019. It is targeted at approximately 26,000 barrels a day in the first 12 months on production. The thermal's Q1 production guidance is 92,000 barrels to 98,000 barrels per day for the quarter.

We're very proud of our oil sands mining operations, which had an excellent year. We had record annual production of 426,190 barrels a day with an industry leading operating cost of $21.75 per barrel on adjusted basis, a great job done by our team at both site as we leverage synergies, safely increasing reliability and reducing costs. At our oil sands mining operations in the fourth quarter, we produced 447,048 barrels a day at the midpoint of the guidance. While an industry leading operating cost were very impressive at $19.97 per barrel on adjusted basis. Our team had an excellent quarter. We continue to capture synergies between the two sites, leveraging technical expertise, services, buying power, as well as operating efficiencies.

Canadian Natural teams are very focused on operational excellence. With the mandated Alberta curtailment, our team at Horizon is now advancing on plants taking maintenance from April to starting in late March. During this period, the Horizon will run at restricted rates of approximately 140,000 barrels a day for 12 days. These volumes will be allocated across the company, reducing the overall production impact caused by the mandated curtailment. With the curtailment continuing into April, Horizon planned maintenance now does not overlap with the planned maintenance at Scotford. Production volumes produced at ASOP will in-turn be allocated across the company, a great work done by our team to lessen the impact of the monthly curtailment on the company.

As announced in third quarter, we acquired the Joslyn lease to the south of Horizon. Work has now begun on the lease as we're about to capture the synergies by adjusting our mining plan we target to save over $500 million in our new mine plan versus the original north pit plan. We continue to advance engineering in a disciplined manner at Horizon to preserve our growth opportunities at 75,000 to 95,000 barrels a day as we wait for clarity on market access. Oil sands mining in Q1 SCO production guidance is 400,000 to 440,000 barrels a day.

Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars in light of market conditions. In 2018, you have seen us deliver on maximizing value by optimizing our allocation to the four pillars. We will continue to execute with excellence and be a safe, effective and efficient operator. We are very strong positioned, being nimble, enhances our capacity to create value for our shareholders, as we continue to high grade opportunities in the company. We will continue to focus on safe reliable operations, enhancing our top tier operations. We will continue to balance and optimize our capital allocation, delivering free cash flow, strengthening the balance sheet that Corey will highlight further in the financial review.

With that, I will now turn it over to Darren for our 2018 reserves review.

Darren Fichter

Thank you, Tim. Good morning. To start, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent qualified reserve evaluators. Our 2018 reserve disclosure is presented in accordance with Canadian reporting requirement, using forecast prices and escalated costs. Canadian standards also require other disclosure reserves on a company gross working interest share before royalties.

Finding and development costs and reserve replacements are key indications of a company's asset strength and ability to execute. In 2018, Canadian Natural continued our track record of delivering impressive results. And our strong performance is reflected in our finding and development costs. Our corporate planning, development and acquisition costs, excluding changes in future development capital, are $3.11 per BOE for proved reserves and $2.31 per BOE for proved plus probable reserves. Canadian Natural's finding, development and acquisition costs, including changes in future development capital are $9.39 per BOE for proved reserves and $10.79 per BOE for proved plus probable reserves. We replaced 2018 production by 281% for proved developed producing reserves, by 359% for proved reserves and by 485% for proved plus probable reserves.

As evidence of Canadian Natural's transition to our long life, low decline asset base, our top tier reserve life indexes have increased to an impressive 21.3 years proved developed producing, 27.7 years for proved and 37.4 years for proved plus probable reserves. In 2018, we increased our proved developed producing reserves by 10% to 7.6 billion BOE. Proved reserves increased 12% to 9.9 billion BOE, and proved plus probable reserves increased 13% to 13.4 billion BOE. The net present value of future net revenue before income taxes using a 10% discount rate increased 19% to $106.6 billion for proved reserves and 14% to $131 billion for proved plus probable reserves.

In summary, these excellent results reflect our ability to execute, as well as the strength, talent and exceptional opportunities we have in our asset base.

Now, I will hand over to Corey for the financial highlights.

Corey Bieber

Thanks Darren for that comprehensive update on the company's reserves performance for 2018. We demonstrated our resilience during the fourth quarter and have strong financial performance during 2018.

During the fourth quarter, pricing on benchmark West Texas Intermediate dropped 15%, which was exacerbated by exceptionally high differentials on both heavy oil, as well as light oil and SCO, significantly impacting all of industry. As noted earlier, CNQ proactively curtailed volumes in 2018, and the impact in Q4 of '18 was about 24,500 barrels a day of production. We also strongly supported the government of Alberta in their mandating and production curtailments in 2019.

Against the backdrop of negative pricing volatility in Q4 '18, Canadian Natural's strong asset base still drove cash flow from operating activities of $1.4 billion in Q4 '18, about $350 million greater than quarterly cash flows used in investing activities. For the year 2018, we drove exceptionally strong financial results, again, in the context of a very volatile marketplace. Again, our resilience and strong cash flow, strong free cash flow generating capacity was exhibited. Cash generated from operating activities was a record $10.1 billion with adjusted fund flow coming in at $9.1 billion. This resulted in net earnings of $2.6 billion and adjusted earnings of $3.3 billion. These 2018 adjusted net earnings from operations of $3.3 billion represent an increase of about $1.9 billion when compared with 2017, even with the volatility and realized pricing in the year particularly in Q4 '18. This strong result was largely driven by higher oil sands mining production where we benefited from a full year of Horizon phase three and AOSP production, coupled with a 13% reduction in per barrel on adjusted operating costs on these assets.

Our 2018 adjusted fund flow of $9.1 billion was $4.4 billion in excess of our net capital expenditures. $2.8 billion of this free cash flow was returned to shareholders, $1.56 billion of it through dividends, up 22% from the prior year and $1.28 billion through share repurchases, helping to reduce our float by about 1.7%. Long-term debt was also reduced by $1.8 billion. This was through $2.8 billion in heart-debt repayments, offset by $1 billion in mark-to-market currency adjustments on future U.S. dollar debt repayments. Gross debt to total capitalization decreased to 39.1% from 41.4% at the end of 2017, and adjusted debt to EBITDA dropped to 2 times from 2.7 times at the end of 2017. This was all achieved while the same time increasing liquidity by $575 million to $4.8 billion.

As you can see we're going to continue to drive our four-pillar free cash flow allocation strategy to great effect and this capital and operating discipline continues into 2019. Adjusted fund flow is targeted to increases its heavy oil differentials SCO rebounded into the low teens from the $40 average in Q4 of '18. Similarly, SCO differentials have reverted to more normal ranges versus $21 range in Q4 of '18. This coupled with strong 2018 operating performance and the resilience demonstrated in Q4 '18 has given our Board of Directors the confidence to increase our current dividend by 12% to $0.3705 per quarter payable effective April 1st.

Additionally, through the March 6th, a further 4.3 million shares were purchased at cost of $35.86 per share. Clearly, the company has transitioned into a very sustainable and robust free cash flow enterprise. This has demonstrated by both significant debt reduction and significant cash returns to shareholders. I believe Canadian Natural continues to represent a sustainable, flexible and balanced E&P company with a high degree of resilience to commodity prices and praise volatility.

With that, I'll hand it back to you Tim for closing comments.

Tim McKay

Thanks Corey. As you're aware, Corey Bieber, our CFO for last six years, will move to the new role with the company as an Executive Advisor, effective March 31, 2019. Canadian Natural has a robust succession plan that ensures a smooth transition. And over the years continues to show the strength of our people we develop. We congratulate Mark Stainthorpe on his new role as CFO.

In summary, Canadian Natural has many advantages, our balance sheet strong and it will continue to strengthen. We have a well balanced, diverse and large asset base. A significant portion of our asset base is long life low decline assets, which requires less capital maintain volumes. We have a balance in our commodities with approximately 50% of our BOEs, light oil and SCO, 24% heavy and 24% natural gas, which lessens our exposure to the volatility in any one commodity. We are delivering sustainable substantial free cash flow, which we are effectively allocating to our four pillars. Canadian Natural will continue to allocate cash flow to our four pillars in a disciplined manner and maximize value for our shareholders.

Our disciplined resource development has replaced 2018 production by 359% for proven reserves corporately with D&A costs of $3.11 per BOE, and increased reserve life index to 27.7 years all impressive metrics. Returns to shareholders have been strong with 22% dividend increase in 2018 and our balance sheet, debt reduction of $1.8 billion and will continue to strengthen. We have bought back approximately 30.9 million shares. And finally, we completed two strategic core land area acquisitions that's added significant long term value to Canadian Natural. We target 2019 to be another strong year of allocating to our four pillars, all driven by effective capital allocation, effective and efficient operations and by our teams to deliver top tier results. In 2019, we will continue to be very disciplined with our capital spending. With the announced dividend increase of 12%, it's our 19th consecutive year of dividend increases. And year-to-date we have purchased approximately 3.9 million shares, and we will continue to reduce our debt as per our allocation policy.

With that, I will open it up the call to questions.

Question-and-Answer Session

Operator

Thank you [Operator Instructions]. Our first question today comes from Benny Wong from Morgan Stanley. Please go ahead.

Benny Wong

Appreciate your thorough comments on crude takeaway and looking your prepared remarks. Just wondering now with line three delayed and the strong heavy oil pricing we're seeing along the coast. Should we expect CNG to be more inclined to look for more crude by rail than what you're moving now?

Tim McKay

We would continue to value rail options, and we're not first to doing more rail. If it's the right deal for our shareholders on the terms of -- cost and terms. So, if you recall in 2012, we took a flexible approach to crude by rail and at times, we moved up to 35,000 barrels a day. So today, we continue to look at options and if we have the right term and price, we'd look to potentially do more.

Benny Wong

I guess my follow up is related to that and regarding Kirby north in the new Primrose pads. I think as of right now, they’re targeted for a start up later this year. Does that still make sense with the Line 3 being delayed, or to potentially rail bridge that?

Tim McKay

It's really too early to say if we would defer the startup of either project. The way we see it today, northwest upgrader will take an incremental 50,000 barrels a day of incremental heavy oil. We still see declines conservatively at 45,000 barrels a day. And in fact, we were approached by one operator offering to sell their portion of curtailment volume allocation. So we see declines conservatively at 45 that could be much higher with the additional rail, by both industry and government. From our perspective, it's just too early to say whether we'd start those projects up current or delay them. It's a nice part of both is they are ahead of schedule, they're on cost. And we have that optionality to look to defer if we see that it is going to be a problem, the differentials are going to blow. And outflow just defers Kirby north startup, which is not a big issue for the summer month. And then at Primrose with the CSS cycles, they're very flexible. From that aspect, we decide when we put steam in. So Primrose is probably the most flexible option we have.

Benny Wong

And just my final question is, Devon Energy is marketing its Canadian assets. And just wanted to get your view on those assets, and if they'd be a good fit within your strategy at the right price. It seems like Jackfish and Pike is pretty close to Kirby. Just wondering if there will be synergy opportunities there?

Tim McKay

We've always stated we have no gaps in our portfolio. We do look at all items in our core areas, for example, the Joslyn lease we exercised that option, which would add a significant value to Canadian Natural. So we're not opposed to doing or looking at things and doing the right deal for the right opportunity that creates long-term value for shareholders.

Operator

Our next question comes from Manav Gupta from Credit Suisse. Please go ahead.

Manav Gupta

You've indicated earlier in the comment that the entire nominational process is dysfunctional, forced the government hand, which is what most people agree with. I'm just trying to understand what efforts are being made to fix this broken system, if any?

Tim McKay

We continue to work with the government and other industry players to change the rules far as the nomination process. So as an industry, we're still at various opposing of how to fix it. But we have made a recommendation to the Crude Oil Logistics Committee, there are parts of it and have sent that to the government for their feedback.

Manav Gupta

And the follow up is looking at Venezuelan production declining pretty sharply, the sanctions are in. So there is obviously a very strong tight market for heavy thermal barrels. And then obviously, you're indicating that you would like to ramp up volumes at Horizon. You're talking about engineering designs, which could increase production 75 to 95. And then you also indicate that those projects will only be brought online with improved market access. So I'm just trying to understand that comment on improved market access was that comment on line 3 or was that more a comment on the KXL and TMX?

Tim McKay

The comment is meant for all three. Obviously, we're disciplined with line three being delayed but we're confident it will be built in the future. KXL is going through the process and we look to hear that piece, hear by the end of Q1. As well as Trans Mountain as well is going through the process. The NEB hit the first phase and we're just waiting on the second phase of the NEB consultation to have Trans Mountain looking ahead. And we hope with Trans Mountain that that construction could start as soon as this summer.

Operator

Our next question comes from Greg Pardy from RBC Capital Markets. Please go ahead.

Greg Pardy

Tim, you mentioned you've made an adjustment to the Horizon mine plan. I'm just wondering if you can talk about that little bit and maybe how Joslyn fits into that plan.

Tim McKay

So in the third quarter, we acquired the Joslyn lease. And so in their original Horizon mine plan, we were actually looking to go to the North and which was a longer haul, it's more costly. With the Joslyn lease, it's very proximal to our current pit digging, I guess, you would call it. And so with that by just moving south saves us over $500 million. And as well we look to use the opportunity to have that south pit expansion to test IPEP pad in there potentially. So it's just a real nice opportunity and fits well with Canadian Natural's operation at Horizon.

Greg Pardy

And then when do you -- how many years down the road do you think it will be before you're effectively in the shelf to do the Joslyn assets?

Tim McKay

Well, we're in there today, stripping and 2021, we will be moving oil.

Operator

Our next question comes from Phil Gresh from JP Morgan. Please go ahead. Phil, please check your line for mute.

PhilGresh

First question is just on the capital spending for the year, and understanding that you want appreciation or better market access to go for certain projects. Does that mean if we don't hear anything this year that this capital spending number -- you did different scenarios of the analysis. So does that mean at this point you'd be thinking that this capital spending member is what you'd be sticking with? And to the extent there is extra cash flow but not necessarily better market access that we should be thinking debt pay down and more buyback to shareholders would be the plan for the year?

Tim McKay

So the way we see it today, our budget at 3.7 is where we sit. Obviously, from just a corporate execution basis, our teams are ready to execute on future value opportunities, should we see clarity in market access. But the way it sits today, the $3.7 billion budget is stands as is.

PhilGresh

And I might have missed this. But you guys usually give an end of year view at the strength of what the balance sheet would look like. Did you make that comment or can you share it?

Corey Bieber

So debt-to-EBITDA, we would see -- right now, we're in that 2 times range, we'd see that coming down 0.1 or 0.2. And our debt-to-book cap is in that 39% range, it right comes down into that 37.5 range. All things being equal stripped today.

Philip Gresh

Okay, great. Thanks Corey, and of course congratulations to you. One final question, this is just understanding this Line 3 situation. I know you guys view that market does have an natural decline rate to it. And so how things play out over the course of this year in terms of supply demand balances without Line 3 coming on, and assuming you might make for certain projects, et cetera. But do you -- is it your base case assumption at this point that the curtailments would still need to continue into 2020 to keep markets down without Line three, or I just want to clarify in that?

Tim McKay

Yes, it's always hard to say because the activity levels could be different than they currently are. But the way we see it today between the basin declines, the northwest upgrader rail, we see curtailments actually diminishing. Like I said conservatively in our forecast, we have 45,000 a day decline. If you look at debt to basin, if you have a zero activity case basin is probably closer to 300,000 a day barrel of decline. So the wild card, this is always the activities levels but it's clearly the activity levels here in Alberta is less. And so conservatively that 45,000 barrel a day is probably too conservative.

Operator

Our next question comes from Asit Sen from Bank of America Merrill Lynch. Please go ahead.

Asit Sen

I have two questions, one a quick one on operations and one strategic. So, on the northwest Red Water refinery upgrader. What is the current volume and what's the feedstocks slate? I thought I heard a 50,000 barrels a day heavy oil. What timeframe is that?

Darren Fichter

So northwest, and it's probably better to get the inflation directly from northwest. But we can tell you that they're taking between 40,000 and 50,000 barrels of day of SCO. They're still commissioning the gas fire heavy LC finer. Once they're up and running that would switch to about 8,000 barrels a day of blended bitumen. So basically, take 80,000 barrels a day of heavy oil volumes off the pipeline and turn into products here in Alberta. So, when that's up and running it will be a positive impact as Tim pointed out for production in Alberta.

Asit Sen

And then a more big picture question. You all had led out a fairly steady growth profile at the December Analyst Day, I think target is 7.5% production per share CAGR, that's strip pricing at the time. Now, outside of oil prices, what would it take for you to lower the long term growth profile to return more gas to shareholders? In other words, in the current environment and investor debate, how you're thinking about optimally balancing cash returns and growth within your four pillar framework?

Tim McKay

So with that forecast, we actually had very conservative spending profile and growth profile. So it really in my mind doesn't change our forward looking on a per share basis.

Corey Bieber

I think the one thing to look at here is that we are generating a tremendous amount of free cash flow. We have a well defined allocation policy here of all free cash flow will 50% will go to share buybacks, and the rest of the balance sheet for dividends. So we are I think doing a very prudent and responsible way of forecasting. As Tim pointed out in the call here today our assets are very strong. We're able to deliver that growth. And it's really a reflection of the long life low decline -- our assets, so the decline is much lower. So it's easier for us to deliver growth and returns to shareholders, and that's what makes us very unique E&P company compared to our peers.

Operator

Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta

The first is on just the dividend bump 11%, nice to see. As you guys go about sizing what the appropriate dividend increase would be. Just talk about your strategy around capital returns with all this uncertainty going on in Alberta.

Corey Bieber

I'd say that dividends are very important to us and to the board, obviously, the shareholders as well. So what the board does is they evaluate our position on payout and yield on a quarterly basis against our cash flow and net earnings, both on a historic as well as on our forward-looking basis. And those metrics provide the board some guidance as the appropriate yields and payout levels for the company. But fundamentally the board's view is that the dividend has to be sustainable and provide room for growth on an annual basis throughout the commodity price cycle. And in order to do that, we do a lot of stress testing at low commodity prices to ensure that the dividend is sustainable. So it's balancing that growth that discipline, that trajectory on the dividend, but also measuring it with the sustainability through the cycle. There are several different factors that are looked at and I don't want to get into all of them here. But it is really is a stress test but providing long-term growth in the dividend.

Neil Mehta

This question might be a little trickier to answer, but anything that you can provide would be helpful. Just with the elections coming up over the next two to three months in Alberta. How do you see different outcomes around curtailments? Enbridge Line 3 getting pushed to the right. Do you think there is a reasonably high probability that the curtailments get extended through the balance of the year. And some of your peers have actually explicitly made comments about whether they think curtailing production is the right thing or the wrong thing to do for the long-term health of the Canadian oil industry. So your thoughts there would be interesting as well.

Corey Bieber

I think elections are tough to predict what’s going to happen. I will point out this that both parties in Alberta that are vying for the election are very supportive of curtailment, and came out strongly in favor of curtailment. I will think you'll see who's ever wins the election will be very judicious on how they manage curtailments, and they'll really look and ensure that there's no marketplace dysfunction that we've had here in the past to make sure that doesn't happen again. So we think curtailment, as Tim pointed out, will probably lessen here as we go forward and we're seeing that already I think. So it's just a managed process. Line 3 is delayed that hurts us. But as Tim pointed out, there's 365,000 barrels a day of effective takeaway capacity coming anyway without Line 3 and with declines, we think you'll see curtailment come down maybe markedly.

Neil Mehta

Last question from me, Tim, would be, if you could drill down into your comments around carbon intensity. Because that kind of flies in the face of conventional wisdom, many participants view Canadian oil as higher in carbon levels and emissions than other types of oil. So could you just talk about the data behind that and provide more color on your angle here?

Tim McKay

I think what you got to look at here is most of the people are using information from 2009 and before. Obviously, we were high intensity oil at that period of time. As I pointed out in my comments earlier, we've made tremendous progress and reduced our emissions intensity by a huge amount. And matter of fact we're actually below the average and we can even do more here's as we go forward, and we will do more. This is not just Canadian Natural this is the whole Canadian oil industry. So when you look at it that way and you look at the intensity and when you look at flaring that we do here, don't do here in Canada versus the rest of the world. If you look at a global perspective, you will actually reduce greenhouse gas emissions in the world globally by producing Canadian oil, Canadian gas and producing that oil and delivering it to global markets than you do today. I think that is essentially a game changing performance, it changes the perspective. I think it'll take some time, because people are slow to adapt to the new data, with the new facts or reality.

But in fact, if you really believe in reducing global emissions then Canadian oil should be sent to global markets as should Canadian gas. And I think it's very clear as the data points that out. That wasn't always the case and I think its tremendous credit to the Canadian oil and gas sector for making those improvements and performance.

Operator

Our next question comes from Dennis Fong from Canaccord Genuity. Please go ahead.

Dennis Fong

Just back at your Investor Day, I believe you guys discussed an aggregate amount of stores that you guys were using in Q4. Just to the curiosity, it sounded like that was relatively full at around the end of the quarter. And are you using that storage in terms of some of your marketing efforts to potentially gain incremental sales in Q1 as they're excluded from the mandatory curtailment?

Tim McKay

So the storage that we have is excluded from the mandatory curtailment. Obviously, we have storage to be -- that's used for operational issues for SCO and as well as heavy oil. So those are more, what I would call, marketing operational versus what you're alluding to being somehow used in the curtailment calculation.

Corey Bieber

Storage was quite low down.

Tim McKay

Our stores levels are quite low. So essentially we had full storage at the open house and today we have very little in storage.

Dennis Fong

And then the second question that I have is just maybe a bit of an extension around some of the bottlenecking initiatives at Horizon. So the primary I guess concern for you guys in terms of potentially sanctioning this is around egress initiative. Can you maybe comment a little bit about notwithstanding back to any components, are there things that may hinder you from to sign to move forward with some of these projects? Or is it just the geographic component that you guys have concerned about with respect to evaluating the economics of these bottlenecking projects at Horizon? Thanks.

Tim McKay

In general, we're looking ahead for better market access. And really for those projects we'll continue to do the engineering work to be ready to execute on that optionality, and it is optionality. So to us when we see greater clarity on the market access or takeaway capacity then we'd look to do that long-term projects. Remember they are two to five years out in terms of when those volumes would come to the market.

Operator

Our next question comes from potion from Paul Cheng from Barclays. Please go ahead.

Paul Cheng

First, I want to say congratulation to say congratulation to Mark and Corey for your corresponding new position. Tim, just want to clarify, the timing for the standup of Kirby north Primrose on the new project. Are they contingent on the Alberta government, lifting the curtailment totally, or that you will be able to being, because I thought the curtailment is asset by asset?

Tim McKay

No, the curtailment is actually done on a corporate basis. So really positive part about Canadian Natural is we actually have a host of various assets Horizon, SOP, thermal, which we can optimize how the curtailment impacts the company. So for example, my example of that is our Horizon. By moving it into March, our corporate allowable doesn't change but we gain 140,000 barrels a day by not overlapping with other assets in terms of the curtailment. So it's a very much corporate basis. And as that, we can use that as an opportunity to maximize our assets that way.

Paul Cheng

We were being pulled by other company that is actually on asset-by-asset basis, but you're seeing that is actually on a company level?

Tim McKay

Yes. If you only have one asset, it would be just that one asset. But Canadian Natural has a lot of different assets and a lot of levers to pull to minimize the impact of the curtailments.

Paul Cheng

And can you tell us that the production quota you received from the government. Is it March equal to February or March is actually different or is slower?

Tim McKay

February and March were the same based on the 250,000. They get increase the April by 25,000 barrels -- or decreased 25,000 barrels a day. So the current allocation is or curtailment is 225,000 barrels a day.

Paul Cheng

So they already announced in April...

Tim McKay

Yes they did.

Paul Cheng

And for the company share price, if I look at value in Texas as of last month, it's about $60 and in [indiscernible] is about $45.70. So we're talking about the spread is $14.30. So you should cut for most of the oil variable cost. But is that spread wide enough for anyone to sign new contract? In other words, does that cover the entire contract price?

Tim McKay

Well, it depends on your agreement. If you -- there's couple of ways you could look at this. If you have a fixed cost and let's say $10 and a variable cost between about $5 that would look to cover your cost. If you look at it from a terms of your fixed cost or sum cost, that you're actually on a variable basis you would beginning value by doing that. So obviously, it depends on what type of agreements you have, terms, cost to say if you'd be making money or…

Paul Cheng

Sorry, that’s not what I mean. I think that I understand that this spread is sufficient to protect the variable cost. I guess my question is that is this spread sufficient to entice anyone to sign new contract, so that the fixed cost is not a sum cost, because you are signing a new contract.

Corey Bieber

I think Paul that the economics today would say that there is money has being made by moving oil by rail. As Tim pointed out, the contracts are fairly complex. So I think people are working through that. But on the surface, yes, you'd make money by moving rail to the Gulf Coast today.

Operator

There are no further questions. So I now turn the call back to Mr. Stainthorpe.

Mark Stainthorpe

Thanks Carol. And thank you everyone for attending our conference call this morning. Canadian Natural's large, well diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver effective and efficient operations with top tier performance is contributing to substantial and sustainable free cash flow. This together with effective capital allocation contributes to achieving our goal of maximizing shareholder value. If you have any further questions, please give us a call. Thank you again and we look forward to our 2019 first quarter conference call in early May. Thank you again and good bye.

Operator

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