Canadian Natural Resources Limited (CNQ) Q4 2019 Results - Earnings Call Transcript

Canadian Natural Resources Limited (NYSE:CNQ) Q4 2019 Earnings Conference Call March 5, 2020 11:00 AM ET

Company Participants

Corey Bieber - Executive Advisor

Steve Laut - Executive Vice Chairman

Tim McKay - President

Scott Stauth - Chief Operating Officer for Oil Sands

Darren Fichter - Chief Operating Officer, Exploration and Production

Mark Stainthorpe - Chief Financial Officer

Conference Call Participants

Greg Pardy - RBC Capital Markets

Benny Wong - Morgan Stanley

Dennis Fong - Canaccord Genuity

Asit Sen - Bank of America

Manav Gupta - Credit Suisse

Emily Chieng - Goldman Sachs

John Royall - JP Morgan

Mike Dunn - Stifel FirstEnergy

Operator

Good morning, ladies and gentlemen. And welcome to the Canadian Natural Resources Q4 '19

Earnings Results Conference Call and Webcast. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today March 5, 2020 at 9:00 A.M. Mountain Time.

I would now like to turn the meeting over to your host for today's call, Corey Bieber, Executive Advisor. Please go ahead, Mr. Bieber. Thank you.

Corey Bieber

Thank you, operator. Good morning, everyone. And thank you for joining our fourth quarter and year-end 2019 conference call. With me this morning are, Steve Laut, Executive Vice Chairman; Tim McKay, President; Scott Stauth, Chief Operating Officer for Oil Sands; Darren Fichter, Chief Operating Officer, Exploration and Production; and Mark Stainthorpe, our Chief Financial Officer.

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

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

Steve Laut

Thank you, Corey. And good morning, everyone. As you've seen Canadian Natural's fourth quarter was a very strong, delivering strong sustainable free cash flow. Very few companies can deliver this level of sustainable free cash flow that is safe, secure and provide substantial upside going forward. I'll leave Tim, Darren, Scott and Mark, to provide more for some comments on how Canadian Natural has leveraged our competitive advantages, optimized cash flow allocation between our four pillars and as a result, maximized our free cash flow and driven top tier value creation.

I'll spend a bit of time talking about how we see the future unfolding for the oil and gas sector, and how Canadian Natural is advantaged in all outcomes. Canadian Natural views the role of natural gas in the future based on the IEA latest forecast to grow with the downside case flat at these levels. We expect all demand to be bracketed between the IEA stated policy and the sustainable scenarios, with a downside of 65 million barrels a day by 2040 in a sustainable scenario.

For reference, the more aggressive scenarios in the December 2018 UN Intergovernmental Panel on Climate Change report for 1.5 degrees limit has a midpoint of oil demand of roughly 70 million barrels a day in 2040, pretty much the same as the IEA sustainable scenario. Oil demand is still substantial.

In the downside scenario, Canadian Oil Sands Mining and Upgrading projects are advantaged with long life, no decline, no reserve replacement cost or risk. It's essentially a manufacturing operation with low total cost and importantly, a strong likelihood that net zero greenhouse gas emissions are attainable through technology and innovation. Natural gas and in particular Canadian Natural’s gas assets are guidance with low emissions intensity and low costs. Canadian Natural is in a very strong position going forward even in the downside scenarios.

ESG performance is becoming increasingly important as it should be and in Canada and the Canadian oil and gas sector, not surprisingly, leads the global pack with outstanding performance. For the last number of conference calls, I spent some time talking about the environment. I won't go through all the details as I have in the past but summarize the key points of what I consider to be a very impressive Canadian success story.

A story we've been telling to our broader Canadian audience, it's the success story that all Canadians can be proud of and it's been greeted with some surprise and strong support. A story we continue to tell to an even broader audience. Because when it comes to the environmental performance, Canadian Natural and indeed the entire Canadian oil and gas sector, has delivered game changing environmental 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. Essentially, Canada's oil and gas sector has taken what was branded as high intensity oil in 2009, and made it what I would call, the premium oil on the global stage, all in 10 years. And the Canadian oil gas sector is committed to do even better in the future.

Canadian Natural has already reduced our overall corporate emissions intensity by 29% since 2012. At horizon, our intensity is down 37% and our primary heavy oil intensity is down 78% and we are a leading capturer and sequester of CO2 in the oil and gas sector worldwide. In just these three areas, Canadian Natural is taking the equivalent of over 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. And for the record 100% of Canadian Natural Alberta oil sands in situ and mining emissions are third party verified.

Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high intensity oil on a well to combustion basis in 2009 to below the global average, and the success story is just getting started. We can with new projects leverage technology and Canadian ingenuity to do even better with Canadian Natural’s aspirational goal of reaching net zero emissions. It's not 2009 anymore. Canadian oil and gas is now the premium product, something all Canadians should be proud of.

Canadian Natural has multiple pathways to achieve net zero with actions identified in the near, mid and long-term. And you can check our Web site for more details on the technology that will help us get there. The strength of Canadian Natural's model is evident in all aspects of the Company, including ESG, where we're delivering leading ESG performance. Our assets advantage for the downside scenarios and we have a track record of leveraging technology, innovation and continuous improvement to deliver ever improving environmental performance with multiple pathways to attaining net zero emissions in the oil sands.

The Canadian oil sands, because of its asset advantages, long life, low decline and manufacturing style operations and one of the clearest routes, if not the clearest route than net zero of any global oil asset. In a 1.5 degree limit world even at downside scenario, oil and natural gas will still have a substantial role in providing the energy the world needs. Who should supply that energy should be those that deliver the highest ESG standards and the lowest greenhouse gas intensity. As a result, Canadian Natural should be an ESG investment priority.

It's clear but not well understood that getting Canadian oil gas on global markets reduces global greenhouse gas emissions. If you believe action needs to be taken on climate change then you should, you must, advocate for greater market access for Canadian oil and natural gas. It's very clear that delivering Canada's oil natural gas to global markets should be a climate change and economic priority for Canada. Tim?

Tim McKay

Thank you, Steve. Good morning, everyone. Canadian Natural has top tier operational results for 2019. Production from our assets was strong as we executed our curtailment optimization strategy and over and above that, we continued to drive effective and efficient operations, reducing our operating costs even under curtailment in Alberta. This is a reflection of our operational excellence of our people, the strength of our vast, well balanced and diverse asset base and our ability to effectively execute our curtailment optimization strategy, to maximize free cash flow for our shareholders.

We have a history of capital discipline, operational excellence and we have robust economic long life low decline assets and relative to most of our peers, the ability to enhance our margins and grow production. As we talked about the last few quarters, Canadian Natural continues to strongly support the government decision to curtail production as differentials for both WCS and synthetic oil in 2019 have stabilized to more reasonable level. The outcome of this decision has been very positive and proven very effective in helping to manage the volatility of differentials in the market when egress restrictions occur as they did in October 2019. Given our storage levels rose, the discount for Canadian oil stayed within reason versus what we experienced in Q4 2018.

We see improved egress in 2020. Enbridge, Express and the base Keystone pipeline, each are targeting an additional 50,000 barrels a day and NWR is targeting to start taking incremental heavy oil of approximately 40,000 barrels a day, so a total of 190,000 barrels a day of additional egress capacity. TMX looks to be progressing forward as well. Crude by rail in December was approximately 350,000 barrels a day, all positive momentum for Canadian producers.

I will now do a brief overview of our conventional assets then Scott Stauth, Chief Operating Officer for oil sands, will do a brief overview of our oil sands assets. Starting with natural gas, overall annual production of 1.49 Bcf was down from 2018 production of 1.548 Bcf as expected, with North American annual natural gas production of 1.44 as a result of the company's strategic decision to reduce investment in natural gas.

We continued to focus on operational excellent and our annual North American natural gas offering cost was very strong at $1.16 per Mcf, which is down 7% when compared to 2018 of $1.25. Fourth quarter North American production was 1.41 Bcf versus 1.42 Bcf for Q3. Operating costs were $1.11 as expected, up from Q3 of $1.07 due to seasonal differences. Impressive operating cost performance in light of our strategic decision to allow natural gas production to decline.

At Septimus, the Company's high value liquids rich Montney area. The third production cycle has now commenced and most importantly, proven the Lakes concept. As a reminder, the Lakes process uses dry natural gas and it's re-injected into the reservoir and then the liquid rich gas is produced back, which has the potential to increase liquid rates and recovery by 30% to 70%, adding significant value.

The compressor will now be moved to the Wimbley area in Alberta with injections targeted to start in late Q2.This will further de-risk the Lakes potential in the liquid rich areas of the Montney, which could add significant long term value to the company. In the fourth quarter, the Canadian operations realized natural gas price of $2.52 per Mcf. Canadian Natural has diverse natural gas sales portfolio, of which 44% is used in our operations, 34% is exported and only 22% is exposed to AECO pricing based on 2019 production. Our 2019 annual North American light oil NGL production was 96,984 barrels a day, up 3% from 2018.

Annual operating costs were strong at 1,521 per barrel, which is slightly lower than the 2018 annual operating costs of 1,529. Q4 production was 93,909 barrels per day, down 2% when comparing Q3 2019 fourth quarter operating costs of 1,541 per barrel as compared to Q3 operating costs of 1,496. Overall, our international assets had a strong year with annual oil production of approximately 49,300 barrels a day, a 13% increase over 2018, which generated significant free cash flow and value for the company.

Offshore Africa production was 21,371 barrels a day when compared to 2018 of 19,662 due to the successful Baobab drilling program completed in early 2019, offset by natural field declines. The high operating costs in 2019 were strong at 1,121 per barrel, a decrease of 16% from 2018. In the North Sea, annual production averaged 27,919 barrels a day in 2019, up from 2018 of 23,965 barrels a day as a result of the successful drilling program that was completed Q3 with annual operating costs of 3,639, which is down 9% from 2018.

In South Africa, the operator has secured a rig and is targeting the exploration wells in Q2 of 2020 and contingent on results an additional exploration wells could be drilled on the block as it targets gas condensate on identified structures that could have significant potential. Annual heavy oil production was 82,189 barrels a day in 2019 versus 86,312 barrels a day in 2018, reflecting the impact of lack of investment die to the Alberta curtailment rules, offset by the additional Devon volume acquired mid 2019.

Annual operating costs were strong at 1,666 per barrel compared to the 2018 operating costs of 16.60, reflecting the company's focus on cost control and capturing synergies with the acquired Devon at properties. Fourth quarter production was 94,262 barrels a day, up from Q3 of approximately 88,000 barrels a day, as volumes were optimized as per our curtailment strategy, while operating costs were very strong at 15.03 per barrel, down 12% from Q3 of 2019 and 17.08, down 11% compared to 2018 Q4.

The company remains focused on effective efficient operations and ability to capture synergies. A key component of our long life low decline asset is a world class Pelican Lake pool where our leading edge polymer flood continues to drive significant value. 2019 annual production was 15,855 barrels a day versus 2018 average of 63,082 barrels, which was impacted by limited investments due to Alberta curtailment and the temporary shut-in due to wildfires in the summer of last year.

The team continues to do a great job and we have strong annual operating costs of 6.22 per barrel, a 7% reduction versus our 2018 operating costs of 6.72. Fourth quarter production was approximately 59,000 barrels a day, slightly down in the Q3 of 60,146 barrels a day. Operating costs were very strong at 5.38 per barrel versus Q3 operating costs of 6.10. At Pelican Lake, our team continues to drive operational excellence and has been able to mitigate the impact of decline in production over the last four years holding our annual operating costs on a Boe basis below $7 a barrel, an excellence accomplishment by the team.

With our low decline and very low cost, Pelican Lake continues to have excellent net back. Overall strength of our conventional assets, our ability to be nimble with our capital and having effective and efficient operations, gave us top tier results in a curtailed environment in 2019. I will now turn it over to Scott to do a brief overview of the oil sands.

Scott Stauth

Thank you, Tim, Scott here. I will talk to both thermal and mining assets. Starting with thermal, we had a very strong year in our thermal operations in 2019. As we continue to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations. In 2019, our thermal production reached a record of approximately 168,000 barrels per day as we optimize production throughout the year under our curtailment optimization strategy and successfully integrated the acquired Jackfish assets in the third quarter of 2019. We immediately began capturing operational synergies at Jackfish, which supported annual thermal operating costs of 10.83 per barrel, a decrease of 18% from 2018 levels of 13.20 per barrel.

In the fourth quarter production reached a record of approximately 259,000 barrels per day and our thermal operating costs were very strong at 8.65 per barrel, a decrease of 35% from the fourth quarter 2018 of 13.28 per barrel. This strong performance reflects increased production from economic pad additions of Primrose, ramping up production at Kirby North and additional cost synergies captured at Jackfish.

In the fourth quarter, the Kirby project area, which includes both the north and south areas, achieved combined production of approximately 47,000 barrels per day. At Primrose, production was approximately 106,000 barrels per day as we optimized production from our successful Primrose pad adds to maximize overall corporate production and adjusted fund flow.

At Jackfish, production in the fourth quarter averaged approximately 102,000 barrels per day, a 5% increase over Q3, 2019 as we optimize volumes under our curtailment strategy. We have successfully integrated the Jackfish operations and have captured synergies with our Kirby operations and now target 2020 operating costs of between $8 and $9 per barrel, including fuel, a reduction of 350 per barrel or 30% at the midpoint from original targeted operating costs at the time of the acquisition.

In the fourth quarter, we also completed the previously announced well tie-ins at Jackfish for a low incremental cost of $8 million. These wells are targeted to have peak production capacity of 21,000 barrels per day and will be available to the company as part of our curtailment optimization strategy.

Moving to Canadian Natural's world-class oil sands mining and upgrading operations. We delivered another strong year. Our mining operations achieved annual production of approximately 395,000 barrels per day with industry leading operating costs at 22.56 per barrel, slightly higher than our record low of 21.75 per barrel in 2018, impressive results given our proactive decision to replace piping at our hydrogen plant at Horizon in the fourth quarter.

Throughout 2019, our team continued to capture synergies between our two mine sites, leveraging our technical expertise and shared services, focusing on operational excellence to reduce operating costs, excluding fuel by $91 million from 2018 levels.

Since completing the AOSP acquisition in 2017, Canadian Natural has successfully increased gross production capacity at the LBN mines by approximately 40,000 barrels per day to 320,000 barrels per day, representing 14% increase in capacity while reducing AOSP's operating costs by approximately 34% or $10 barrel since the announcement of the acquisition through increased reliability, process improvements and optimization projects, a great job by our teams.

As well as part of the company's overall strategy to maximize value and enhance margins, the Scotford Upgrader is targeting to increase capacity to approximately 320,000 barrels per day in Q3 of this year, which will match the capacity of the LBN mine. This additional capacity at AOSP will allow for increased flexibility, margin improvements and additional options to manage through the company's curtailment optimization strategy.

At horizon, during post turnaround startup and as part of the company's proactive inspections, the team identified a need to repair piping in one of the hydrogen manufacturing units. In light of curtailments and Canadian Natural's unique ability to optimize corporate curtailment volumes, we made the strategic decision to replace the piping in December and enhanced reliability and performance going forward. As a result, Horizon ran at restrictive rates of approximately 170,500 barrels per day and returned full rates by January 19th.

Performance at horizon since returning to full rates has been strong with February achieving record SEO production of 262,600 barrels per day. We continue to advance engineering of the identified growth opportunities at Horizon in a disciplined manner, as we look to optimize costs and preserve our growth opportunities of 75,000 to 95,000 barrels per day as we wait for clarity on market access.

And finally we continued to work on the IPEP pilot which looks very positive and we're making enhancements on the technology to improve performance and we'll continue piloting it throughout the year. With that, I will turn it over to Darren.

Darren Fichter

Thank you, Scott. Good morning. I will give you a reserve update. Firstly, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent qualified reserve evaluators. 2019 reserve disclosure is presented in accordance with Canadian reporting requirements using forecast prices and escalated costs.

The Canadian centers also require disclosure reserves on a company working interest share before royalties. In 2019, proved reserves increased 11% to 11 billion BOE for proved proposal reserves increased 6% to 14.3 billion BOE. It is also important to note that 73% of our total proved reserves are proved developed producing reserves at 8 billion BOE.

Mining and development costs and reserve replacements are key indicators of the company's asset strength. In 2019, Canadian National delivered impressive results and our strong performance is reflected in our finding and development costs. The corporate finding, development and acquisition costs, excluding changes in future development costs, are $4.52 per BOE for proved and $5.34 per BOE for proved plus probable reserves.

Canadian Natural's finding, development and acquisition costs, including changes in future development costs, are $7.45 per BOE for proved and $5.75 per BOE for proved plus probable. We replaced 2019 production by 194% for proved developed producing reserves by 374% for proved and by 317% for proved plus probable reserves. [Evidence] of Canadian Natural's transition to a long life low-decline assets base, our top-tier reserve life indices are an impressive 20.2 years for proved developed producing, 27.8 years for proved and 36 years for proved plus probable reserves.

The net present value of future net revenue before income taxes using 10% discount rate and including the full company ARO is $107.6 billion for proved reserves and $127.8 billion for proved plus probable reserves. In summary, the excellent results reflect the ability to execute, as well as the strength of our asset base. Now I will hand over to Mark for the financial highlights.

Mark Stainthorpe

Thanks Darren. Canadian Natural had a strong finish to 2019 with fourth quarter financial results as follows; net earnings of approximately $600 million; adjusted net earnings of approximately $685 million; cash flow from operations of approximately $2.5 billion; and adjusted funds flow of approximately $2.5 billion. As Tim, Scott and Darren discussed, our cultural of continuous improvement, our ability to be effective and efficient and the relentless focus that Canadian Natural in controlling our costs, led to the solid financial results.

Canadian Natural’s unique, long life low decline asset base continue to generate significant free cash flow. In Q4, free cash flow was approximately $1 billion after net capital expenditures of $1.05 billion and dividends of $444 million. This free cash flow in Q4 contributed to full year 2019 free cash flow of $4.6 billion after net capital expenditures and dividends and excluding the Devon acquisition capital, significant results and speaks to the uniqueness of our asset base to deliver over the long-term.

Gross debt reduced by approximately $1.5 billion in the quarter when compared to Q3 '19 levels, including the impacts of foreign exchange. Including in this debt reduction was a repayment and cancellation of the remaining $1 billion on AOSP acquisition facility ahead of its maturity in May 2020 and the repayment of $500 million medium-term note upon maturity. We also successfully increased the term facility in the quarter by $450 million and extended the maturity to 2023.

Our balance sheet metrics remain strong and we exited 2019 at 1.9 times debt to adjusted EBITDA and 37.4% debt to book cap. These are impressive results as they represent improved levels from 2018, yet include both the acquisition of Devon Canada in 2019 and significant returns to shareholders through the year. Share buybacks for full year 2019 totaled 25.9 million shares for $941 million, including $140 million in Q4 '19 and dividends total $1.7 billion for an impressive return to shareholders of over $2.6 billion in 2019.

Given the confidence and the strength and robustness of our assets and the sustainability of our free cash flow profile, the Board of Directors has increased the dividend for the 20th consecutive year with 13% increase to $1.70 per share annually with the first quarterly payment on April 1st. Additionally, in 2020 through to March 4th, we have purchased for cancellation 6.6 million shares for approximately $260 million.

We continue to execute our free cash flow allocation policy where free capital is defined as adjusted funds flow less capital expenditures and dividends. We’re targeting to allocate this free cash flow 50% to debt and 50% to share buybacks with targets of $15 billion in absolute debt and 1.5 times debt to EBITDA.

Finally, available liquidity represented by bank facilities in cash at quarter end was approximately $4.9 billion, an increase of approximately $200 million over Q3 '19 levels, providing flexibility to manage through the business and commodity price cycles. Our financial results throughout 2019 demonstrate our commitment to effective and efficient operations, our capital and operating discipline and our effective execution on our four pillars of capital allocation.

With that, I'll turn it back to you Tim.

Tim McKay

Thanks Mark. As you're aware, Steve took the role of Executive Vice Chairman two years ago and has been an integral part of Canadian Natural for 28 years, and has now decided to retire this May. Steve has done a fantastic job over the many years as the company transitioned to the more robust long life, low decline company we are today. As well through the many years, Steve has mentored all of the MCM members, ensuring a smooth transition, which is a strength of the company and the people we develop. We look forward to continuing to work with Steve as he will continue to contribute to our success as an active Board member.

Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars. We will continue balanced, optimize our capital allocation, deliver free cash flow and strengthen our balance sheet. We have a well balanced, diverse, large asset base a significant portion of our asset base is long life low decline assets, which require less capital to maintain volumes. We have balance in our commodities with approximately 49% of our BOE, light crude oil and SEO, 28% heavy and 23% natural gas, which lessens our exposure to the volatility in any one commodity as we move through 2020.

Canadian Natural will continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective efficient operations and by our team who delivered top-tier results. We have robust sustainable free cash flow and in 2019 returns to shareholders were significant, $1.7 billion dividend, $9.9 billion in share purchases for a total of $2.6 billion. Today, our dividend was increased by 13% and we have 20 consecutive years of dividend increases, which has a CAGR of 20%. Share purchases in 2020 were approximately $6.6 million shares or $260 million year-to-date as we continue as per free cash flow allocation policy.

In 2020, as a result of the volatility of oil pricing, Canadian Natural has reduced its capital budget by approximately $100 million in our oil sand business, deferring work into 2020 that we can plan and execute more effectively and efficiently, which has no impact on 2020 production volume. In 2020, we will continue to drive our environmental performance to meet and exceed our targets we set in December 2019.

In summary, we will continue to focus on safe, reliable operations and enhancing our top-tier operations. We are in a very strong position and being nimble, which enhances our capacity to create value for our shareholders. Our procurement optimization strategy is a reflection of our ability to be nimble and operate with excellence. Canadian Natural is delivering top-tier free cash flow generation and is unique, sustainable and robust and clearly demonstrates our ability to both economically grow the business and deliver returns to shareholders by balancing our four pillars.

With that, we will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instruction] Your first question comes from Greg Pardy with RBC Capital Markets.

Greg Pardy

I guess just first off, Steve, all the very best, I think it's like 20 years or something of meetings. So thanks for tolerating me over that timeframe. Just maybe a couple things on the IPEP, I'm wondering if you could dig into that a little bit maybe just in terms of progress or the milestones that we should be looking for. And once you're through the piloting process, what's possible maybe in terms of implementation down the road?

Steve Laut

I'll get Scott Stauth to just give you a little bit of a rundown of where we're at with that.

Scott Stauth

So Greg, we are continued to implement changes as we've worked through the pilot process here. There's different components that we're adding to help augment processability of the getting dry sand and recovery of the bitumen. So we're just stepping through that process. At probably every several months here we're making changes to improve it, Greg, and we're working on -- at the same time, we're working on DBM to try to come up with what it would look like for estimates in terms of commercial operation that would probably be out a few years from now in terms of getting to that stage, probably in the 2023 range Greg is what we're estimating right now. But for this year, it's focused on the pilot, look to get the recovery that we want to achieve and the dry sand that we want to achieve. So that's the focus for 2020.

Gary Chapman

I mean, do you think by the end of this year, you're in a position where you can say we think this works on a pilot level and then it's really question whether you can scale it, or is that expiration process going to extend do you think in the next year?

Scott Stauth

Yes, it'll partially extend into next year, Greg. I think it's too early to say that we're having that 100% confidence right now, but I think we -- as each quarter goes by, we make adjustments, make improvements and we look back at the results and it's been very successful thus far. So we just want to make sure we step through it cautiously and continue the engineering efforts there to improve it.

Gary Chapman

And then the second one, I hate asking modeling questions, but your new and improved guidance is just a little skinnier than we're used to seeing. Two thoughts there, one is that the new standard and then secondly is especially as it relates to cash tax. Could we use the guidance you provided back in December as a reasonable indication under what was then strip?

Mark Stainthorpe

When you look at the previous guidance for cash tax, you just obviously have to be cognizant of the pricing assumptions used. So we can help you through the IR group on that but that's going to be a big driver so just depending on what price stack you're using.

Gary Chapman

And just guidance wise, I mean I know you guys had super detailed guidance for the quarter and I know that questions at times. But is this going to be the new standard?

Mark Stainthorpe

Yes, it is.

Operator

Next question comes from Benny Wong with Morgan Stanley.

Benny Wong

Just my first question is really how to think about your budget, especially with where commodity prices are today. Are you comfortable with it as long as your cash flow coverage, your cash commitments and I guess if needed, how much flexibility do you think you have to reduce capital further if you need to?

Tim McKay

We're very comfortable with our budget. Obviously, when we announced it back in December of 2019, it was a very conservative budget based on the fact that we were being curtailed in Alberta for 2020. So if you look at our maintenance capital, it's approximately 3.7. So we could, if needed to, reduce the capital further by probably anywhere from $300 million to $400 million if needed. So we were very comfortable we have low maintenance capital, which is a big strength of our company.

Benny Wong

And just wanted to follow-up on the color around Scotford Upgrader capacity increase. Can you maybe provide some color about what you're doing there and any associated cost that comes with it? And how do we think about the product afterwards particular between premium synthetic and heavy synthetic? And just any thoughts around if your partner plans to expand Scotford refinery, or should we think the incremental volumes gets sold into the market?

Tim McKay

So as far as the Scotford refinery that expansion piece was planned by our partners Shell for many years. And so it was part of the execution plan that growth cost is approximately $70 million and they're looking to execute it here in the fall. Obviously, what's really happened with the great work of our team up at Albion is that the Albion mine has now been able to outpace the Upgrader. So really, it's a really nice fit and the fact that the oil sands at Albion can pace at 320,000 barrels a day, and basically keep that Upgrader full after its expansion here in the fall.

Operator

Next question comes from Dennis Fong with Canaccord Genuity.

Dennis Fong

The first if I would, just maybe delving a little bit into the OpEx cost at Jackfish. I know that you outlined a little bit within the context of your Investor Open House on some of the cost savings there, and kind of indicated about a six month window to achieve about 25% of it. Can you talk a little bit about kind of the cadence of some of those improvements? And maybe some of the major items that contribute to some of the cash cost savings, is it more volume related, is it technology related and so forth? And I have a second question.

Tim McKay

What we talked about with Jackfish is that with Kirby, Kirby North, Kirby South and Jackfish that we felt very comfortable we could capture economies of scale and capture synergies between all the sites. So we talked about logistics that we each had an airport so there’s two different airports, two different aerodromes. In terms of parts and services we were able to consolidate those very quickly. So right now, we have -- similar to what we did with data AOSP, we have tremendous people on both sides that we are essentially salt and peppering across the organization.

So some of the Jackfish people are now in Kirby in the Kirby areas and some of the Canadian Natural people are in the Jackfish area. So you get new set of eyes people look for opportunities to drive operational efficiencies and create value for the company long term. So I don't believe it's anything unique so much as we're very effective in terms of the way we operate and the way we integrate operations to maximize value.

Dennis Fong

And then maybe just a bit of an extension in terms of the maintenance capital component from Benny's question is given that you guys are looking at, we'll call it, trading a little bit of within your fulfillment management policy, obviously, the lower decline and long lived assets in your thermal production areas versus the more conventional heavy oil areas. How should I’d be thinking about the $3.7 billion maintenance CapEx that you guys outlined just prior to and in the context of, obviously, a larger wage of those long lived assets and low decline assets?

Tim McKay

I’m not sure I follow. The 3.7 billion that we've quoted was essentially to keep production flat based on decline. What we're doing under curtailment is essentially flexing our assets. So a good example is that on Primrose with the cyclic nature of that product when we do a turnaround for example in late Q1, we’ll be doing a turnaround at Jackfish. And we can supplement volumes out of Primrose to backfill those losses, so you speak, when we do maintenance. And that's exactly what we'll be doing when Scottford goes on its turnaround in April is we'll be using our levers to ensure that we can make our curtailment volumes.

So we have lots of levers that we were able to use. You can see on the conventional side, the heavy oil side, we're doing exactly the same thing. We slowdown to meet our curtailment volumes and when we have operational issues or planned maintenance, we're able to crank those up and backfill those volumes.

Dennis Fong

Maybe then just maybe ask slightly differently. Is there any preference to running, say the 21,000 barrels a day of potential incremental volumes at Jackfish versus more conventional volumes that you guys could produce from kind of the heavy oil regions that you guys are kind of between the quarters of Alberta and Saskatchewan? And how should I be thinking about your prioritization of producing, we'll call it light barrel?

Tim McKay

So our prioritization is quite simple in that fact that we go with the highest netback first. So obviously, whatever we make the most money on stays on and then we use the other less valuable barrels, let's say primary heavy oil as an example, to curtail volume. So as you can see, we've never curtailed Pelican assets with $6 operating cost, it has better netback than primary heavy oil.

Operator

Next question comes from Asit Sen with Bank of America.

Asit Sen

Tim, thanks for all the details on capital flexibility and sustaining CapEx, just wondering how the capital plan could change in a sustained $45 WTI scenario. How long do you have to see a low price environment to further adjust, in other words, the sensitivity on timing? And could you update us on your hedging policy or strategy in this environment?

Tim McKay

So right now as I talked earlier, we could reduce our capital anywhere from $300 million to $400 million there. Right now we're going into breakups so really we have very little spend here for the next few months. So we'll just evaluate to after in kind of the April, May timeframe, how it's looking into Q3 and Q4 to make those decisions on the various products depending on commodity prices. So we don't look at that we have to spend the money, but we will monitor the pricing on a go forward basis and just make those decisions as we move through the year. In terms of hedging policy, we've never been a big hedger. We look to have the products on a daily basis to maximize value. And I don't think our position on hedging has changed.

Asit Sen

And then moving on to the incremental margin capture, great progress in 2019, but could you speak to the additional $900 million growth opportunity? Where are the main areas of savings? What are the main buckets? And where will the focus be in 2020 for the $180 million outlined?

Tim McKay

So it's across all the assets base. So the way we work as a company is every area, every group, every product has goals and targets that they're looking to hit. And so that's really all I can say is that you see it in the oil sands, they had a $91 million worth of savings conventional, it's across the board. There is not one area that doesn't have a target or goals to achieve in trying to capture more margins.

Operator

Next question comes from Manav Gupta with Credit Suisse.

Manav Gupta

I actually wanted to congratulate you, your dividend hike actually beat even the most foolish estimates on the street. In an environment where some of the global majors are being forced to borrow to pay dividend, you're actually raising dividend and also paying down debt, which speaks to quality of the assets. My question actually relates to Horizon. You hit the record production of 262.6 in February. Can you talk a little bit about what drove the wage and how should we model this asset going ahead?

Tim McKay

Really Horizon did have a great February, but from my perspective our mantra is really safe, reliable consistent production. So while it was a great achievement, I feel very confident the team understands the operation and that really a typical run rate is around the 250, 255 range on a calendar day and that's really, I would say, you should kind of look at it. But Horizon, the people that are doing the job as well they're doing a great job on the operating costs.

Manav Gupta

Second quick follow-up is we are seeing some positive developments on the pipeline at egress front even today we heard, some positive news on TMX. Can you talk a little bit about how you feel about the egress solutions as they are coming along in Canada?

Tim McKay

It is very positive. Looking ahead we are seeing both positive elements, not only on the brownfield side, the incremental opportunities across the board but TMX as well. So obviously, we feel very positive looking forward. But until we get pipe in the ground and oil going through the pipes, we're still very cautious.

Operator

Next question comes from Neil Lumata with Goldman Sachs.

Emily Chieng

This is Emily Chieng on behalf of Neil. Just first question here is just around the dividend growth rate. I realized it was 13% this year. How should we think about that going forward? And maybe just on the capital tons front. Last year, you guys provided some guidance for the buyback in 2019. Is there a number in mind for 2020 at all?

Mark Stainthorpe

Obviously, the board showed some confidence in the free cash flow profile, sustainability of the assets with the dividend increase this quarter. I think going forward, obviously, that's a board decision going forward. So the trajectory is hard to sort of articulate in the call today. I think though of course the board focuses mainly on the sustainability of that dividend through all the business and commodity price cycles. I think the other thing that's important to recognize is the margin growth that we've talked about here that is driving that additional free cash flow overall. As far as the free cash flow allocation policies, I think it's relatively simple. We try and buy it on a go forward basis. So when you take your adjusted funds flow less the capital less your current dividend, 50% of that is going to be allocated to share buybacks over a period of time. So depending on your forecast for commodity prices and things like that will drive a little bit of changes in that share buyback program.

Emily Chieng

And just want to follow-up and is probably a little longer dated. But last year, we did see an application file to integrate Joslyn into the Horizon mine plan. Can you provide some color as to when the current Horizon mine pit will be depleted and when you would expect to need to start external work to extent your Horizon south, and perhaps any initial thoughts around associated capital costs and production upside if any? Thank you.

Tim McKay

Yes, that lease we're talking about was the Joslyn east, which we purchased a few years ago. It's just all the part of our mine plan. It's just being integrated into Horizon. It's one of these excellent opportunities where we’re able to leverage our infrastructure and capture value. So from a mining plan, all it is instead of going north we're headed south for a bit. But really there's, what I would call, zero impact in terms of our capital differences going north or going south.

Emily Chieng

And just any sense of timing on that place?

Tim McKay

It starts in 2022.

Scott Stauth

It's Scott here, Emily. And so we'll be staging through into the Joslyn mine area over the next couple of years here, as Tim mentioned, and it's just progression as we finish out the south that we move into the Joslyn lease.

Operator

Next question comes from Phil Gresh with JP Morgan.

John Royall

This is John Royall sitting in for Phil. So first question is further to the earlier discussion of the buyback. Given the current price environment, if you got any thoughts to changing your 50-50 split and perhaps dialing back on the buybacks a bit to reach your [Technical Difficulty] more quickly?

Tim McKay

I mean, not at this time, the allocation policy still kind of in effect and what we're driving towards. I mean, we monitor it with the Board all the time. So the Board will give us some direction on that as we go forward. But I think if you look at the cash flow and again, we've talked about the asset base and sustainability of the free cash flow and because the maintenance capital and operating costs are low in our business, we're able to generate free cash flow even at these lower prices. So that continues to be able to drive that debt reduction and share buyback program.

John Royall

And then the next one is on royalties, looks like the rate is up a fair amount sequentially in 4Q in North American liquid P&T. I was wondering what the drivers were there given the lower price environment, would have expected maybe down?

Tim McKay

Are you referring to our guidance or you’re referring…?

John Royall

No, I was referring to the 4Q results.

Tim McKay

Q4 results and you're comparing, I'll get back to you on that, John, I'm not sure I have it right off hand.

Operator

Next question comes from Mike Dunn with Stifel FirstEnergy.

Mike Dunn

Two questions for me first, maybe for Mark or for Steve seeing as Steve on the Board. The question I asked Suncor a few weeks ago, but with respect to your dividend policy. Can you just maybe frame for us how you're thinking about what you can afford to pay under maybe what oil price? I think with respect to Suncor, they were thinking about a mid-40s WTI price to funds sustaining capital in the dividend. I think you guys are somewhere in the same vicinity in terms of where your head space. Although, I don't know if you've formalized that policy maybe as much as Suncor has?

Steve Laut

Mike, Steve here. So we look at the dividend to be sustainable to the price cycle. And clearly with the amount free cash flow we have, we're very sustainable in dividend and we believe it can grow keep that track record up. Our breakeven cash flow price is probably in that $35 to $40 range depending on what kind of a differential you have and that would cover the dividends. So we're in really good shape here. And as you can see the board felt very confident in the strength of the assets or ability to deliver effective and efficient operations and execute, and that's why the increase in dividends. So as Mark said, we can't predict what the board will decide, but I think they're very committed to long-term growth and dividend.

Mike Dunn

Steven, just to clarify that 35 to 40 range that was the fund sustaining capital and the dividend?

Steve Laut

Correct, yes.

Mike Dunn

Second question separate topic, but could you just walk us through where the capacity at Scottford Upgrader has gone to in the last few years? I know after the stage two, I think the nameplate was 255, there was some debottlenecking. And I believe, I've seen on Shell's website recently, they have listed the capacity of Scottford at 300,000. So should we be thinking about this year's debottlenecking adding another 20,000 there or not?

Timo McKay

\If you look at what we did here in the fourth quarter, roughly on a gross basis 306,000 barrels a day, so we were basically pacing or restricting our production at LBN to match Scottford. So they can run upwards of 305, but really if you want to use the 300 that it’s good average that's fine too. So they're looking to expand that to 320,000 so depending on what you want to use between 15,000 and 20,000.

Mike Dunn

And then when you bought 70% stake in AOSP, was Scotford capable of 300,000 at that time?

Tim McKay

That was their nameplate, but what they were doing is essentially using some of the LBN production, as well as purchasing third party barrels to match or fill up the upgrader.

Operator

At this time, I'll turn the call over to the presenters.

Corey Bieber

Thank you, operator 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 goals of maximizing shareholder value. If you have any further questions, please don't hesitate to give us a shout. Thank you and goodbye.

Operator

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