Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Canadian Natural Resources Limited (NYSE:CNQ)
Q4 2017 Earnings Conference Call
March 1, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources Q4 and Year-End 2017 Earnings Results Conference Call. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note this call is being recorded today, March 1st, at 9:00 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Mark Stainthorpe, Director, Treasury and Investor Relations of Canadian Natural Resources. Please go ahead, Mr. Stainthorpe.

Mark A. Stainthorpe -- Director, Treasury and Investor Relations

Thanks, Christine. Good morning, everyone, and thank you for joining our Fourth Quarter and Year-End 2017 Conference Call. With me this morning are: Steve Laut, our Executive Vice-Chairman, who will discuss our strategy and strategic focus on creating shareholder value; Tim McKay, our President, who will provide a more detailed update on the year and quarter as well as discuss our ongoing projects and operations; Darren Fichter, our Chief Operating Officer for E&P, who will provide an update on year-end 2017 reserves; and Corey Bieber, our Chief Financial Officer, who will provide an update on our financial position.

Before we begin, I would like to refer you to the comments regarding forward-looking information 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?

Steve W. Laut -- Executive Vice-Chairman

Thanks, Mark, and good morning, everyone, and thank you for joining the call this morning. As a result of significant capital investment, Canadian Natural has successfully completed the transition to a largely long life low decline asset base with Horizon Phase 3 up and running. Canadian Natural is in a very strong and enviable position. We are generating significant and sustainable free cash flow, cash flow that is growing, driven by our world-class long life low decline assets and complemented by our high-quality, low-capital exposure assets.

In today's commodity price world, long life low decline assets are very valuable and give Canadian Natural a competitive advantage. As risk is low to nonexistent and the scale of these operations matters, allowing Canadian Natural to leverage technology and use continuous improvement processes to minimize our environmental footprint, maximize utilization, reliability, and drive ever-increasing effective and efficient operations.

The impact of long life low decline assets on our sustainability is significant. Our average corporate decline rate is targeted to drop to 9%. As a result, our maintenance capital to hold production flat is significantly less compared to a typical E&P company, making Canadian Natural more robust and generating more free cash flow.

In addition, we're able use Canadian Natural's size to drive economies of scale across all our businesses, including Canadian Natural's large, high-quality inventory at low capital exposure projects in primary heavy oil, natural gas, and light oil in Canada and Cote d'Ivoire, which provides significant capital flexibility, quick payouts, and higher return on capital, particularly where we leverage our infrastructure advantage to keep costs low. Canadian Natural is one of the few companies in our peer group that has quality in both asset types, both technical and operational expertise to execute in both asset types to deliver effective and efficient operations, and importantly, the discipline to effectively allocate capital to grow production and maximize cash flow.

Canadian Natural's unique combination of asset base strength, diversity, and balance, combined with our strategy and competitive advantages, effective capital allocation, and a management team that is more aligned with shareholders than any of our peers, drives sustainability, significant free cash flow, and returns to shareholders.

At this time, as I transition from the President's role to Vice Chairman, I'd like to provide some more strategic thoughts, namely minimizing our environmental footprint and the important impact this has on Canadian Natural's sustainability. As many of you know, Canadian Natural is committed to reducing our environmental footprint, particularly our greenhouse gas emissions. We have taken significant steps to reduce our environmental footprint and delivered meaningful results. Since 2012, we reduced our methane emissions in our conventional heavy oil operations by 71%. In addition, we have invested significant capital to capture and sequester CO2. We have CO2 capture and sequestration facilities at Horizon, our 70% interest in the Quest carbon capture and storage facilities at Scotford, and the capture and sequestration facilities at Northwest refinery when it's up and running in 2018.

As a result, Canadian Natural will be conserving roughly 2.7 million tons of CO2 a year, equivalent to taking 570,000 vehicles off the road, making Canadian Natural the third largest owner in the global oil and gas sector of CO2 capture and sequestration capacity and the fourth largest of all industries in the world, based on data from the Global Carbon Capture Institute. This makes a significant impact on reducing our greenhouse gas emissions intensity with more reductions to come.

In addition, Canadian Natural minimizes our land usage and recycles 90% of our water used in our oil sands mining and upgrading, significantly reducing fresh water usage. Canadian Natural is also the largest investor in research and development in the oil and gas sector and the fourth largest in all sectors in Canada. With investment technology, we have made significant progress in reducing our greenhouse gas emissions and there is a pathway to reducing the greenhouse gas emissions intensity from oil sands production to levels that are below that of the average oil produced globally. For reference, today at Horizon, where we recognize our carbon capture initiatives, our emissions intensity is only slightly higher, 5%, than the average for all global oils.

The impact technology and effective operations has on lowering Canada's oil sands greenhouse gas emissions intensity and our ability to leverage technology to continue to reduce our intensity is generally not well understood. Many external opinions of oil sands operations are based on outdated data from many, many years ago. The 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. This is exactly what has happened and continues to happen as we achieve further improvements.

The oil sands is unique and our collaboration on environmental issues is world-leading. COSIA, Canada's Oil Sands Innovation Alliance, sees the industry work together to tackle important environmental issues in greenhouse gas emissions, air, land, and water, allowing the industry as a whole to progress up the technology curve at exponential rates, a significant Canadian success story. The value of Canada's oil sands is very important to Canada. Not only is the industry making significant strides in reducing our environmental footprint but creating hundreds of thousands of jobs for Canadians and adding significantly to all government revenues, revenues that are important in supporting the government in such areas as healthcare and education, critical to the long-term prosperity of Canada.

If the oil and gas sector is to provide security for hundreds of thousands of Canadian jobs and support for healthcare and education, Canada needs market access for our products. To that end, Canadian Natural supports the Alberta Climate Change Initiative as it relates to the oil and gas sector. We also commend Premier Notley and Prime Minister Trudeau for the support of the Trans Mountain Pipeline, a critical and important infrastructure investment to ensure Canada's prosperity.

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 volatile oil prices and any potential demand forecast scenario, as we believe the oil sands will have the lowest environmental footprint -- at Horizon, we already have taken emissions intensity within 5% of the global average -- and lowest total costs. At Horizon, we've taken operating costs from roughly $40.00 U.S. a barrel to roughly $16.00 U.S. a barrel. And importantly there are no reserve replacement costs, a fundamental factor to Canadian Natural's strategy to invest in the oil sands and be a leader in research and development.

A critical plank in Canadian Natural's strategy is to balance and optimize the allocation of cash flow to maximize value for shareholders. We strive to balance and optimize what we call the Four Pillars of Cash Flow Allocation: balance sheet strength, returns to shareholders, resource development, and opportunistic acquisitions. How we balance the pillars depends on where we are in the commodity price cycle, the risk of creating cost inflation, and other potential opportunities. At all times, the primary goal of balancing the four pillars is to maximize shareholder value. Canadian Natural is delivering substantial, sustainable, and growing free cash flow. As you will hear this morning, we are effectively balancing the pillars. By strengthening the balance sheet, debt to EBITDA to 1.9 by year-end, increasing returns to shareholders, increased 22% today, and taking a disciplined approach to resource development, we're maintaining our capital budget and production guidance.

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 flexible capital 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, strengthen the balance sheet. Canadian Natural is a robust, sustainable, and clearly a unique E&P company.

Not surprisingly, Canadian Natural's management and staff compensation is directly tied to the key metrics that make us sustainable and maximize value. These key metrics include environment and safety performance, returns on capital, total shareholder return, effectiveness and efficiency, balance sheet strength, and production and reserve growth.

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

Tim S. McKay -- President

Thank you, Steve. Good morning, everyone. I will now do a brief overview of our assets and talk to our 2017 fourth quarter and year-end results. Starting with natural gas, the fourth quarter production of 1.656 Bcf/d was essentially flat to our Q3 2017 production. In the fourth quarter there was once again a third-party reliability issue that impacted the quarter by an average of approximately 39 million a day. As well, due to low natural gas prices in the fourth quarter, we proactively shut-in production, which impacted the quarter by approximately 24 million a day. Currently at the third-party plant, we are producing at a constrained rate of approximately 80 million a day, as the plant has only one protest train functioning due to integrity issues.

Overall, the 2017 annual gas production was 1.662 Bcf/d at a North American annual offering cost of $1.19 per Mcf, or within guidance. For Q1 activity, we are targeting four net gas wells, of which two are preserving lands. All four wells have low cost tie-ins and we've been able to ensure our drilling and completion costs are low by being organized and proactive in our execution strategy. Recognizing natural gas prices could be challenging for 2018, we are targeting to only drill 17 net wells. We have diversified our natural gas sales portfolio, in which 32% is used internally, 29% is exported, and only 39% is exposed to equal pricing. Our Q1 natural gas guidance is targeted to be 1.6 to 1.65 Bcf/d.

Our North American light oil and NGL production in Q4 2017 was 94,437 barrels a day, up 2% from Q3 2017 and is up 8% when comparing to Q4 2016. On an annual basis, it was 92,036 barrels a day, up 5% from 2016. In all areas, we continued to optimize our water flood, drill strategic wells, and complete minor accretive property acquisitions. Our annual operating costs were $14.30 per barrel versus the 2016 costs of $13.48 per barrel. For Q1, we're targeting 30 net light oil wells, up from the 23 we did in 2017. 13 wells are targeting Montney light oil areas at Tower, Gordon Dell, and Wembley. Nine wells are in southeast Saskatchewan and seven in southern Alberta and one in the Kaybob area.

Our offshore Africa production was 19,519 barrels a day, an increase from Q3 2017 of 18,776 barrels per day. During the third quarter, we completed planned turnaround on the FPSO at Baobob. Cote d'Ivoire annual operating costs were within guidance at $12.41 per barrel. Total offshore Africa annual operating costs were $24.07 per barrel, as expected, up from the 2016 average of $18.48 due to the relatively fixed FPSO costs and lower production volumes.

In the North Sea, we averaged 19,584 barrels per day in Q4 2017, down from Q3 2017 of 24,832 barrels per day, primarily as a result of the unplanned shutdowns of the Forties Pipeline and the Ninian South Platform in December, which together impacted the quarter by approximately 3,700 barrels per day. Operational improvements are continuing to reduce our annual operating costs in the North Sea, which were down 14% to $36.60 versus 2016. With the positive tax changes in the U.K. that were enacted a couple of years ago, we continue to drill wells in the North Sea. We have started a 5.5 net well drilling program, consisting of 4.6 net producers and 0.9 net injectors, targeted to add approximately 3,000 barrels per day by the fourth quarter this year. Q1 international production guidance is 38,000 to 42,000 barrels per day.

Our Q4 heavy oil production was strong, as expected, averaging 99,326 barrels per day, which is approximately 1% higher than Q3 2017. In the fourth quarter, we drilled 116 net wells from our very large inventory. Results have been good with an average around 50 barrels per day per well. Drilling completion and facility costs continue to be stable. In Q1, we target only 59 net wells and have slowed down the completions and ramp-up of volumes due to the widening heavy oil differentials. We continue to review our capital program in the context of the current market and are evaluating reducing our heavy oil drilling program for the second half of 2018 and substituting a light oil drilling program instead, if it makes sense.

Our 2017 annual heavy oil volumes were 95,530 barrels per day, down as expected from 2016 levels, with operating costs of $15.71 per barrel, up from our 2016 costs of $13.55 per barrel, primarily a result of higher leased maintenance, fuel, and trucking costs. We continue to look for opportunities to drive effective efficiencies in this core area, leveraging our infrastructure.

A key component to 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. Q4 2017 production was 65,654 barrels per day, up from the Q3 average of 47,604 barrels per day as a result of the previous amount acquisition. On that property, we have started converting existing water flood areas to polymer flooding and complete well board cleanouts as needed. It's on track, as we target to have 64% under polymer flood by the end of 2018. At Pelican Lake, Q4 operating costs were up on a combined basis to $6.81 per barrel, as we integrated the acquired assets in this quarter.

Pelican Lake 2017 annual production was 51,743 barrels a day, with a record low annual operating cost of $6.42 per barrel, compared to our 2016 operating cost of $6.60 per barrel. The transition continues to go well as we capture synergies between the properties to reduce costs and enhance operations. With our low decline and very low operating costs, Pelican has excellent FX and recycle ratios. Q1, we are targeting to drill eight producers and one injector by the end of the quarter.

In Q4 2017, our thermal operations combined to produce 124,121 barrels per day. Our Kirby South project had a strong quarter, producing 35,320 barrels with a very good thermal efficiency CSOR of 2.94. The SOR is higher, as 16 wells drilled in Q3 and Q4 were put on circulation. By the end of the quarter, nine wells had been put on to production and are targeted to ramp up to approximately 600 barrels per day per well within six months. In the first quarter of 2018, the other seven wells will also come off circulation and go on to production and start to ramp up. This program essentially keeps Kirby South at its capacity of 40,000 barrels per day. Our 2017 annual operating costs were excellent, at $9.50 per barrel including fuel, which is comparable to our 2016 costs of $9.33.

At Primrose, production was strong in the steam flood area, with 2017 average production averaging 39,300 barrels per day, significantly up from our 2016 average of 10,900 barrels per day. Our thermal operations continue to be effective and efficient, at $11.16 per barrel operating cost including fuel in Q4 2017, and on an annual basis, $12.33 per barrel, flat to our 2016 cost of $12.36 per barrel.

At Kirby North, the project is trending ahead of schedule and cost performance is trending on budget. Civil work at the plant site has been completed, building equipment modules have been set at the plant site, major electrical work is starting to ramp up as the mechanical work is completed. Construction and drilling manpower is currently at about 740 people including satellite and module yards. The project is targeted to add 40,000 barrels per day, with steam-in targeted for late 2019 and first production targeted in early 2020.

The Q1 thermal production guidance is 108,000 to 114,000 barrels per day.

Since the incident with the Keystone Pipeline in November, the differentials have widened. Although oil is moving, the differentials are behaving as if the oil can't move. This anomaly is created by the current apportionment rules, which we believe is temporary. In the short term, as a result we will be slowing down the ramp-up of wells and temporarily delaying the completions on some of our heavy oil wells, as well as moving our Peace River turnaround into March and Primrose, as originally planned, into early April.

At Horizon, in the fourth quarter of 2017, we produced 141,275 barrels per day as we completed the Phase 3 tie-ins, turnaround, and the successful ramp-up of Phase 3 facilities. Q4 operating costs were normalized for downtime for the quarter and were very strong, at $21.13 per barrel. On an annual basis, Horizon production volumes were 170,089 barrels per day while our operating costs were very good at $24.98 per barrel, below our midpoint of guidance for 2017. In the month of December, we achieved approximately 247,200 barrels per day of SCO, exceeding our 240,000 barrels per day we had targeted. As well, in the month of December, operating costs were under $20.00 per barrel, a great achievement by our Horizon team.

As we talked, too, at our last open house, our in-pit extraction process pilot is on track to start up in Q2, which will test if we can produce stackable dry tailings. A review of the enhancement capacity opportunities at Horizon is under way. The engineering study is aimed at capturing any process enhancements at Horizon that will allow us to take advantage of any potential creep capacity. We anticipate completing the study in early Q2 and from there, start procuring equipment mid-2018, with installation of tie-ins during the 2019 turnaround, and potentially long lead equipment installation in 2020. Finally, the engineering and design work is proceeding as planned for the potential paraffinic and BGO expansions at Horizon.

For the fourth quarter at AOSP mines, we continue to deliver safe and reliable operations. Our fourth quarter production was 180,221 barrels per day net, which included planned turnaround pit stops at both mines. As well, we achieved a very good operating cost of $27.95 per barrel. We continue to be focused on improving our reliability and delivering safe, cost-effective operations. Yearly volumes of 111,937 barrels per day exceeded our midpoint of guidance, while the annual operating costs were $26.34 per barrel, below our guidance, as we captured operating cost savings.

At both sites, we're taking a systematic three-pronged approach: 1.) understand the reliability enhancement opportunities we can complete and execute them; 2.) with enhanced reliability, we can focus on reducing our operating costs; and 3.) we can complete engineering work at both sites to increase production by enhancing our modified equipment to gain creep capacity cost-effectively. As well, we continue to look for operating cost reduction synergies, opportunities that will positively impact both sites.

Oil Sands Mining Q1 production guidance is 435,000 to 465,000 barrels per day, with a yearly operating cost between $22.50 to $26.50.

In summary, Canadian Natural is an effective and efficient operator, a position that has been enhance by our ability to realize significant gains in optimizing our production, reducing our costs across the company. We continue to look for ways to become more effective and efficient in 2018. We have balanced our commodities with approximately 50% of our BOEs light crude oil, 25% heavy, and 25% natural gas, which lessens our exposure to the volatility of any one commodity. We will continue to focus on safe, reliable operations, enhancing our top-tier operations. We will continue to optimize our capital allocation, deliver free cash flow, and strengthen the balance sheet that Corey will highlight further in the financial review.

I will now turn it over to Darren to talk to our 2017 reserves review.

Darren Fichter -- Chief Operating Officer, Exploration and Production

Thank you, Tim. Good morning, ladies and gentlemen. To start, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent, qualified reserve evaluators. Our 2017 reserve disclosure is presented in accordance with Canadian reporting requirements using forecast prices and escalated costs. The Canadian standards also require the disclosure of reserves on our company gross working interest share before royalties.

In 2017, we had a great year and our strong performance is reflected in our finding and development costs. Our approved corporate finding, development, and acquisition costs, excluding the change in future development capital, is $5.15 per BOE. Approved plus probable FD&A is $5.52 per BOE. Note that these FD&A results include the AOSP acquisition. Excluding AOSP, the 2017 FD&A are $5.13 per BOE for approved and $8.83 per BOE for approved plus probable.

In 2017, Canadian Natural's finding, development, and acquisition costs including the change in future development capital are $12.29 per BOE for approved and $12.17 per BOE for approved plus probable. Again, these results include AOSP. Excluding AOSP, the FD&A including FDC is $10.81 per BOE for both approved and approved plus probable.

Canadian Natural replaced proved, developed, producing, proved, and proved plus probable reserves by 887%, 927%, and 866% of 2017 production. Excluding AOSP, we replaced production for proved, developed, producing, proved, and proved plus probable by an impressive 256%, 301%, and 175%.

As evidence of Canadian Natural's transition to a long life low decline asset base, the proved, developed, producing reserve life index of the company is now 19.2 years, the reserve life index for approved is 24.6 years, and proved plus probable is 33 years.

In 2017, we increased our proved, developed, producing reserves by 67% to 6.91 billion BOEs. The total approved reserves increased 49% to 8.87 billion BOEs. And our total improved plus probable increased 29% to 11.87 billion BOEs. The approved net present value of future net revenue before income tax using a 10% discount rate increased 30% to $89.8 billion and increased 24% to $114.5 billion for approved plus probable.

In summary, these excellent results reflect the strength, balance, and great opportunities we have in our asset base. Now, I will hand over to Corey for the financial highlights.

Corey B. Bieber -- Chief Financial Officer

Thank you, Darren, for that comprehensive update on the company reserves performance for 2017. We also had strong financial performance during the year 2017. Net earnings of almost $2.4 billion were achieved in 2017 as compared to the loss of $204 million during the same period of 2016. This improvement reflects stronger commodity pricing, as well as higher crude oil production volumes and the effective and efficient operations that Tim spoke about.

Adjusted earnings for 2017 were $1.4 billion as compared with a loss of $669 million in 2016, again reflecting higher commodity pricing and crude oil production volumes. 2017 funds flow for the corporation were also very robust at $7.35 billion, 70% higher than that recorded during 2016. Funds flow was over $2.3 billion higher than CAPEX, excluding AOSP acquisition costs, meaning the company is generating very significant free cash flow.

As previously stated, one of the current focuses for the company of free cash flow is debt reduction. Following the net debt reduction of about $650 million during the third quarter of 2017, a further reduction of $260 million was realized during the fourth quarter. This represents a combined net debt reduction of about $905 million since the AOSP acquisition, even with downtime taken for the Horizon turnaround and tie-ins as well as the $975 million Pelican Lake acquisition. Correspondingly, liquidity exited the year at $4.25 billion, about $600 million stronger than the amount at June 30th, and over $1.2 billion stronger than December 2016.

Interestingly, if you compare our Q4 '17 ending net debt of $22.3 billion and compare that to Q3 of '16 net debt of $17.3 billion, and adjust for the $8.24 billion of cash paid for the AOSP transaction, underlying net debt has reduced by over $3 billion over the five quarters since the completion of Horizon Phase 2B, largely as a result of repayments from fund flow. During those five quarters, WTI averaged just over $50.00 a barrel. Beyond this and subsequent to year-end, we have successfully retired about $1.5 billion in Canadian-equivalent debts. These were comprised of two notes accumulating to U.S. $1 billion and $275 million in canceled to drawn bank facilities. All in all, this is a very strong indicator of a robust free cash flow enterprise and continuing improving debt metrics.

Based upon current strip pricing, we would expect to exit the year at about under two times debt to EBITDA, with debt to book capitalization in the range of 35% to 40%. However, returns to shareholders are also a critical pillar of our strategy. Based upon the financial resilience and operational robustness of the company's assets and the Board's confidence in the business plans of the company, they have increased the regular quarterly dividend by $0.06 or 22% effective April 1st.

Following this increase, and based upon our estimates of capital required to maintain production, we believe that our current dividend and production levels remain resilient to under $40.00 WTI, a rarity in our industry. This is reflective of our strong asset base, of which almost 60% is considered long life low decline in nature, and our low cost profile, underpinned by our no decline oil sands mines, which account for almost 40% of our BOEs. This substantial increase represents the 18th consecutive year of dividend increases, also a rare achievement for any company in any industry.

Delivery of the defined plan continues and our teams remain focused on growing value for our shareholders. In closing, I believe that Canadian Natural continues to represent a sustainable, flexible, and balanced E&P with a high degree of resilience to commodity price volatility. With that, I hand it back to you, Steve, for your closing comments.

Steve W. Laut -- Executive Vice-Chairman

Thanks, Corey. And before I turn it over to Tim for some concluding remarks, I'll point out another Canadian Natural strength and, I believe, competitive advantage. Namely, the strength, depth, and breadth of our management team and the effectiveness of our succession plans. As we announced in December, today Tim will be taking over the role of President. Darren Fichter and Scott Stauth will be taking on the role of Chief Operating Officers for Conventional and Oil Sands Operations respectively. All these successions are internal. Everyone has a long history at Canadian Natural and has an intimate understanding of Canadian Natural's culture, business practices, operations, and strategies.

I'll be taking on the role of Executive Vice-Chairman and will remain on the management committee and be involved in all management community matters as well as other strategic activities. This will allow for a very smooth transition and leadership continuity. This is a highly effective Canadian Natural business practice and has been successfully utilized in the past. When I took on the President's role from John Langille in 2005, John stayed on for over six years as Vice-Chairman. Additionally, Doug Prole transitioned from the CFO position to Executive Vice President, allowing Corey to successfully take over the role of CFO, but Doug stayed on for roughly three years as Executive Vice-Chairman.

With that, over to you, Tim.

Tim S. McKay -- President

Thank you, Steve. In summary, Canadian Natural has many advantages. Our balance sheet is strong and it will continue to strengthen in 2018. We have a well-balanced, diverse, and large asset base with a significant portion of our asset base long life low decline assets, which requires less capital to maintain volumes. As a result, we deliver significant free cash flow. We continue to deliver year after year strong F&D costs and replacement numbers. With a balance in our commodities, we have approximately 50% of our BOEs light crude oil, 25% heavy, and 25% natural gas, which lessens our exposure to the volatility in any one commodity. For natural gas, we have further diversified our portfolio, in which 32% is used internally, 29% is exported, and only 39% is exposed to equal pricing.

We can deliver sustainable and substantial free cash flow which we are effectively allocating to our portfolios. These strengths allow Canadian Natural to allocate cash flow to our four pillars to maximize value: our balance sheet strengthened, debt is down $460 million; we continue disciplined resource development; returns to shareholders with a dividend increase of 22% with potential share buybacks, if we choose so; and finally, optimistic acquisitions, all driven by effective capital allocation, effective and efficient operations by our teams delivering top-tier results.

With that, I will now open the floor for questions.

Questions and Answers:

Operator

Thank you. In order to ask a question, please press "*1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Benny Wong from Morgan Stanley. Your line is open.

Benny Wong -- Morgan Stanley-- Analyst

Yeah, thanks. Appreciate the short-term views in today's prepared remarks but wondering if we can an update on how you're thinking about the heavy oil differentials over the next couple of years and if you have any increased confidence of these major pipelines happening, given the recent headlines? And if you can remind us what your strategy is around the differentials until those pipelines fall into place, with the appreciation that over half your volume is light oil priced.

Tim S. McKay -- President

Okay, Benny, a few questions there. We view the differentials here, this wide new differential, as basically a result of the Keystone incident back in November there, were for 13 days there was basically roughly 600,000 barrels a day backed up into Alberta. We view this that, over the long term, it will sort itself, with the pipeline being back to service, as well as additional rail over time will fill in those incremental barrels. So we see the differentials basically strengthening back into the pre-November differentials of over around $15.00 per barrel.

Benny Wong -- Morgan Stanley-- Analyst

Great. Thanks for that. And just wondering if you can give us an update on the Sturgeon refinery. Is that still targeted to be completed this year? And if there's an opportunity to increase your stake, would you be interested in that?

Steve W. Laut -- Executive Vice-Chairman

Yeah, Benny, Steve here. The refinery in North West is on track. In fact, it actually is running as a light oil refinery right today, producing off of low sulfur diesel and EGO and some NAPTA. So we're running SCO. We're just waiting for the gasifier and LC fire to be completed and commissioned. So that will start up in late Q2 taking heavy oil. As you know, increased demand for heavy oil in Alberta, about 80,000 barrels a day, and I'll just point out that 80,000 barrels a day will not require pipeline access out of Alberta and will help the differentials for the reason Tim was talking about. Expect differentials to come back to more normal levels.

As far as going forward, I think our plan here is just make sure the plant runs effectively and efficiently and when we see that, we'll make a decision whether to participate in any kind of expansion, if it makes sense.

Benny Wong -- Morgan Stanley-- Analyst

Great. Thanks for that. And just one final one, if I may. It seems like one thing weighing on the stock is overhang of stock that Shell owns. I know that you guys historically have not been particularly active in buying back shares but wondering if: a.) that's something that might make sense thinking about in this unique situation, and b.) especially a lot of other producers talk about it, seeing if it makes sense to be a bigger part of the capital allocation decision going forward. I'd leave it there. Thanks.

Steve W. Laut -- Executive Vice-Chairman

So what we do is we look at returns to shareholders through dividends and buybacks. We do both. As you know, we're biased toward dividends. Share buybacks is something we'll look at. I think for us, an important thing to do first is we like to strengthen balance sheet as a priority over buybacks. So we'll do that. We're not averse to buybacks and we may do more of that as we go forward here shortly but balance sheet is the first strength.

Benny Wong -- Morgan Stanley-- Analyst

Thanks, guys.

Operator

Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.

Emily Chang -- Goldman Sachs -- Analyst

Hi, guys, this is Emily Chang on behalf of Neil. First of all, congrats on the 22% dividend. I guess can you provide some insight as to why $0.335 was the right number for the quarter? Was there anything in particular you guys were trying to solve for and do you have perhaps a dividend growth target going forward?

Tim S. McKay -- President

We'll have Corey answer that question.

Corey B. Bieber -- Chief Financial Officer

Sure. Emily, our Board of Directors looks at a number of items, including forecast, volatility, capital expenditure plans, funds flow, and most importantly resilience through the business cycle. And as I said in my remarks, at this point in time we would believe that that dividend is very resilient right through $40.00 WTI and below. There is no formula that the Board uses. The Board makes common sense decisions based on the information they have and I can tell you they ask an awful lot of questions and a lot of different metrics and come to a decision on what makes sense in that situation, and as I say, importantly what's resilient through the price cycle.

Emily Chang -- Goldman Sachs -- Analyst

Great. And I guess my second question is just on costs. In particular, costs at Horizon surprised us to the downside despite there being a fairly significant turnaround in the fourth quarter. And you mentioned that costs there were running below $20.00 a barrel in December. Can you talk us through what you're seeing in West Canada, as well as internationally, and I guess how much further downside can we expect to see?

Tim S. McKay -- President

Okay. With relation to Horizon, our cost performance has been very good and they continue to drive efficiencies at both Horizon and AOSP. In terms of the macro picture, internationally very little cost pressure. Activity is still what I would call somewhat muted. Domestically there is certain areas that are feeling some cost pressures. Obviously with the price of oil, our cost of diesel, trucking costs are feeling that pinch. Certain services, fracking in particular, feel that cost pressure. But drilling costs have been stable and we are seeing some pressure on service costs.

Emily Chang -- Goldman Sachs -- Analyst

Great. Thanks a lot, guys.

Operator

Your next question comes from the line of Joe Gemino from Morningstar. Your line is open.

Joe Gemino -- Morningstar -- Analyst

Hi, guys. You provided a little insight as to natural gas production next year. In your opinion, what will it take to ramp up drilling with your natural gas in North America and how far off do you think that is from happening?

Tim S. McKay -- President

Well, the key piece that we need is market access, which Steve alluded to. Both the crude oil and natural gas pipelines are at capacity. So until we get better pipelines to give us better market access, it will be difficult to grow much beyond where we are today.

Joe Gemino -- Morningstar -- Analyst

Sure. And how do you think about that in terms with TransCanada's proposed NOVA gas expansion projects? Was that something that you see as would expand your market access?

Tim S. McKay -- President

I'll pass this to Steve.

Steve W. Laut -- Executive Vice-Chairman

I think just adding to what Tim said, obviously there are -- TCL is expanding within Alberta to get rid of the bottlenecks which will be helpful. We also need to get export capacity out of Alberta and Western Canada. And I think if you look at all the various proposals out there, there's about 2.5 Bcf/d of export capacity you can see coming by 2020. That will help and that will be able to allow production in Alberta to grow. And we will take our share of that. So if you look at all the pipelines, Alliance, Spectra, and TCPL, there's about 2.5 Bcf/d of egress capacity. We see demand growing in North America by about 13 Bcf/d and we believe that Canada should be able to capture about 2.5 Bcf/d of that.

Joe Gemino -- Morningstar -- Analyst

Great. I appreciate that. Thank you very much.

Operator

Your next question comes from the line of Paul Cheng from Barclays. Your line is open.

Paul Cheng -- Barclays -- Analyst

Good morning, guys. Just curious, I understand the balance sheet strengthening is the near-term priority. And at what point that priority will give way to more of the shareholder return on the buybacks?

Tim S. McKay -- President

Corey?

Corey B. Bieber -- Chief Financial Officer

Yeah, I think what we do is we look at all four of our pillars in concert with each other. So, again, similar to the dividend question, there is no magic number in terms of where the debt level is. It's really opportunity based and what's gonna create the most value for our shareholders in our and our Board's view. Certainly the debt metrics are getting very strong and that significantly increases capacity over the medium term to look at other opportunities like share buybacks or reinvestment in the basin, if it's economic. So I don't think, again, there's a formula that we'll be held to. I think it's what makes sense in the business circumstance and what is the opportunity set. And today what we're effectively doing is building capacity so we have options under any of the other three pillars.

Paul Cheng -- Barclays -- Analyst

As the company strengthens your balance sheet, will the Board and the management team relook at your hedging program and whether that is still necessary going forward?

Corey B. Bieber -- Chief Financial Officer

I'll take that one as well. In terms of the hedging program, as we look out where we are today, there's really no significant capital expenditure program, major capital expenditure program, like we had with the Horizon buildout. And as I said before, we're very resilient right into the high 30s, low 40s, in terms of maintaining our capital and our dividend. So I think the hedge policy remains there but I think it's more unlikely that we would be utilizing hedging at this point in the marketplace. There's really no need for it today.

Steve W. Laut -- Executive Vice-Chairman

And just to add to that, Corey, our hedging program we use only to ensure we have the cash flow to do our capital program. As Corey said, we don't have a significant capital program, have significant free cash flow, so the need to hedge is just not there.

Paul Cheng -- Barclays -- Analyst

I would say that for most of the analysts, we appreciate you don't hedge. And just curious then on the next several years, you gave the CAPEX for this year, and how should we look at this as the baseline and you're going to be pretty close to this CAPEX level, given that the bulk of your most significant, heavy CAPEX is now behind you. Or whether that's still going to fluctuate substantially.

Steve W. Laut -- Executive Vice-Chairman

No. We see it as relatively flat. There could be little bumps. Obviously we have our Kirby North expansion program that we're doing. We have potentially small BGO and paraffinic opportunities ahead of us. So relatively it's probably pretty flat but there could be some years where it's a little bumped up with some of these expansion opportunities ahead of us.

Paul Cheng -- Barclays -- Analyst

Okay. Two final questions. One, some of your peers are going to roll out with the autopilot trucks. I'm curious at whether that is in the game plan for you guys in Horizon and AOSP. And secondly, with you are the operator in both operations, have you been able to go back and look at a deep dive and be able to identify any kind of operating synergies you may be able to drive through? Or this is just too early since you just took over AOSP?

Tim S. McKay -- President

Okay. So the first question is on the autonomous trucks. Yes, we are actually gonna conduct a pilot here in 2019. Obviously, with our metrics, we have a different view on where and how they would be utilized, as well as we have our pilot in-pit extraction process, where we're looking at trying to do stackable tailings, which could impact that decision in the future. So we are actually doing two different views of that to try and see how we can do things more efficiently. And that relates to both sites. As well as the operating costs, yes, we are capturing synergies between the two sites. Obviously transportation to the sites. They're very proximal. We are sharing -- obviously, the people, they're under one umbrella and we're sharing technical expertise that will come through helping both sites.

Paul Cheng -- Barclays -- Analyst

Thank you.

Operator

Your next question comes from the line of Phil Gresh from JP Morgan. Your line is open.

Philip Gresh -- JP Morgan -- Analyst

Yes. Hi, good morning. And congratulations to Steve and Tim. First question, just on maintenance for this year, do you have any turnarounds expected at Horizon or AOSP?

Tim S. McKay -- President

Yes. We have two pit stops at AOSP, as well as the Scotford upgrader had an outage in the summer. As well as Horizon, there is turnaround scheduled for September.

Philip Gresh -- JP Morgan -- Analyst

Okay. Got it. The second question is just on the 1Q guidance. You mentioned a couple of factors that you were considering, I think, on the heavy oil side that may have led that guidance to be a little bit lighter in 1Q relative to the full-year. Do you have a quantification of how much of that production was purposely held back?

Tim S. McKay -- President

We're actually doing a combination of items here. Obviously there were turnarounds that were planned later in Q2. So what we're doing is just moving them ahead more into late Q1, early Q2 some of it, and essentially just modifying our profile is the way I would say it. As the only real impact in the short-term is just on our thermal and heavy oil operations and obviously, on the thermal side, these wells would be ramping up. We're just slowing it down so that we can have those ramp ups be more coincidental to better product pricing.

Philip Gresh -- JP Morgan -- Analyst

Got it. Okay. Yeah. There may have been some disappointment with the 1Q guidance that seemed a bit unnecessary, I guess. My next question would just be if you have an updated view -- at the Analyst Day, you gave a view of free cash flow at the strip but obviously the strip has changed quite a bit. So I was curious if you have an updated view.

Tim S. McKay -- President

Corey?

Corey B. Bieber -- Chief Financial Officer

Sure, Phil. Yeah. So generally speaking, our sensitivities were about $250 million for a $1.00 change in WTI and about $90 million for a change in WCS pricing. So based on those, you can largely do your own sensitivities. But from the 2.4, we're probably up about $1 billion, $1.5 billion, depending on what WTI price you want to assume for the year.

Philip Gresh -- JP Morgan -- Analyst

Got it. Okay. Strong free cash flow yield. Thanks.

Tim S. McKay -- President

Thank you.

Operator

Your next question comes from the line of Amir Arif from Cormark Securities. Your line is open.

Amir Arif -- Cormark Securities -- Analyst

Thanks. Good morning, guys. Congrats on a great quarter. First question is on your oil sands operating costs. With Horizon coming in below $20.00, I know in your release you mentioned that you're looking to capture additional cost-saving opportunities in '18, can you highlight what those are or are those simply related to the expansions at the Perf site and other growth opportunities or looking out for de-bottlenecks?

Tim S. McKay -- President

Generally, the oil sands operating costs at both sites, we're capturing opportunities and synergies. There's a number of items. There's not one single thing. If you look back in time here, we've been very methodical and very deliberate in our operating cost reductions. So there's not one major piece to it. Obviously you also have to take into account that December is just one month of the year. So you have to use the average. We do have a turnaround and some outages coming at both sites. So it was a great result. It does tell us that we are on track to operate very efficiently at both sites.

Amir Arif -- Cormark Securities -- Analyst

Okay. And then just on that operating cost side, can you give me a sense of how much of that is natural gas related? Like how much Mcf per barrel on average in the operating cost number?

Steve W. Laut -- Executive Vice-Chairman

I think we can back to you on that, Phil. We don't have that right at the top of our head. But if you want, we can just give you the number offline.

Tim S. McKay -- President

And are you looking for a --

Amir Arif -- Cormark Securities -- Analyst

Yeah, just how much of your operating cost is related to, like, fuel costs, for example, and natural gas consumption. That's fine. Yeah, I can get that number offline. And then just second question, just more on the natural gas side, I know your corporate decline rate is about 9% but could you give me a rough sense of what that might look like for your natural gas assets? I'm just looking at your 1.6, 1.7 Bcf/d, holding it flat with 17 net wells, and just trying to get a better sense of either what the corporate decline rate is or how prolific these 17 wells are, in terms of what you're adding to replace production.

Tim S. McKay -- President

I would say roughly 15%. Darren?

Darren Fichter -- Chief Operating Officer, Exploration and Production

Yeah, it's around 15%. I can give you an exact number, if you want to get the exact number.

Amir Arif -- Cormark Securities -- Analyst

Okay. And then do you have a rough breakdown of how much of that gas is, let's say, Montney/Deep Basin versus legacy production?

Darren Fichter -- Chief Operating Officer, Exploration and Production

I don't have that exact number either. I can get you that number too.

Amir Arif -- Cormark Securities -- Analyst

Okay. And then the 17 wells that you are drilling, is it simply drill-to-fill on existing facilities or are these you're basically adding Montney-type volumes to replace legacy declines?

Darren Fichter -- Chief Operating Officer, Exploration and Production

Yeah, no, they're exactly what you said. They're drill-to-fill. Yeah, exactly.

Tim S. McKay -- President

Except for the East Septimus facility where we're doing a small facility to handle some volumes. The gas will be handled at Septimus so it's kind of a combination of the two.

Amir Arif -- Cormark Securities -- Analyst

Okay. Sounds good. Thank you.

Operator

Your next question comes from the line of Roger Read from Wells Fargo. Your line is open.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah, thanks. Good morning. Just diving into the questions on crude by rail. I know you don't have to be a big user of it but to the extent you would or that you are seeing some pushback from the rails or let's say a demand for longer term contracts, any light you can shed on that? Any changes we've seen thus far in '18?

Tim S. McKay -- President

Okay. On the rail, what we see is that there is increased rail activity. People are evaluating and some are signing up, as we've seen in the news, to move heavy oil barrels out of the basin.

Steve W. Laut -- Executive Vice-Chairman

I think, Roger, one of the things that's happened here is I think the industry anticipated that we would need rail capacity in 2018 and that rail capacity was sort of planned to be brought on in a methodical basis across the year. With the Keystone leak, all that demand all of a sudden, you might say, sort of instantaneously to try to handle the backlog. Clearly, it is very difficult for rails to rally the rail cars and everything on short notice. We expect over time this will be resolved.

Roger Read -- Wells Fargo Securities -- Analyst

Okay. Thanks for that. And then I know it's been hit a couple times, but when you try to think about share repurchases versus acquisitions and with the reserves that you highlighted here and the reserve life, you don't need an acquisition, but I was just kind of wondering from almost a return standpoint, how would you weigh an acquisition versus share repo? Does one have to clearly outweigh the other or if they're sort of tied, you'd prefer one versus the other?

Steve W. Laut -- Executive Vice-Chairman

We evaluate everything, including share repurchases, acquisitions, resource development, on the same criteria. It's just to maximize value. We have a certain return criteria we have to make. Clearly, we'll take a balanced approach if they're equal. Obviously, when you do share buybacks, you can do that essentially at any time. When there's corporate acquisitions that come by or property acquisitions, they're a one-time event. They only come by once. So you have to weigh that into consideration. But generally speaking, we're focused on value creation. Whatever capital we allocate has to create the most return and that's what we're focused on. That's how we'll look at it.

Roger Read -- Wells Fargo Securities -- Analyst

Okay. And then if I could sneak just one more, on the acquisition front, or if you think about bid spreads and attractive value, the things that are coming across at this point, is there a particular region that you would cite as relatively aggressively bid versus one that maybe where you see actual value opportunities? And I'm thinking more international versus domestic gas opportunities.

Tim S. McKay -- President

No, we don't see anything ahead of us there. Our portfolio is very strong. We have a huge amount of assets that we can develop ourselves more cost-effectively.

Roger Read -- Wells Fargo Securities -- Analyst

Okay, thank you.

Tim S. McKay -- President

And just one note. There was a question regarding the fuel costs there on Horizon and AOSP. And it's roughly $1.50 per barrel.

Operator

Again, if you would like to ask a question, press "*1" on your telephone keypad. Your next question comes from the line of Dennis Fong from Canaccord Genuity. Your line is open.

Dennis Fong -- Canaccord Genuity -- Analyst

Hi, good morning, guys. Just quickly on Horizon, I was just wondering, have you guys seen, with respect to the ramp up of Phase 3, have you guys tested the limits of the facility yet? And how does that kind of contribute into your thought process on the bottlenecking and so forth? I understand you have that three-pronged approach. I'm just curious as to whether or not you've actually bumped up against the upper limits of the facility yet. Thanks.

Tim S. McKay -- President

At Horizon, I hate to use the word bumped up to. What we've been doing is we have been doing some testing of the various equipment and as we alluded to previously, the DRU furnaces appear to be where the opportunity lies. Obviously we have to do the work. The process guys are in the process of doing all the testing between the different pieces of equipment. But our opinion and where we sit today is that the DRU furnaces are the limiting factor that we see ahead of us.

Dennis Fong -- Canaccord Genuity -- Analyst

Okay. And then just with respect to the engineering and your potential September turnaround, would the engineering and the procurement of any materials be complete by that point in time or are we expecting more of a 2019 view for some of these kind of low-hanging fruit for Horizon?

Tim S. McKay -- President

It is very hard to say at this point. Obviously they're looking at various scenarios, both short-term, medium-term, and long-term. So it's too early to speculate. Obviously anything we can do in the short-term cost-effectively, we would do.

Dennis Fong -- Canaccord Genuity -- Analyst

Okay. Perfect. Thank you very much.

Operator

There are no further questions at this time. Mr. Mark Stainthorpe, I turn the call back over to you.

Mark A. Stainthorpe -- Director, Treasury and Investor Relations

Thanks, Christine, 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. With the completion of our transition to a long life low decline asset base and continued effective and efficient operations, going forward we generate 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 2018 first quarter conference call in early May. Thank you. Goodbye.

Operator

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

Duration: 62 minutes

Call participants:

Mark A. Stainthorpe -- Director, Treasury and Investor Relations

Steve W. Laut -- Executive Vice-Chairman

Tim S. McKay -- President

Darren Fichter -- Chief Operating Officer, Exploration and Production

Corey B. Bieber -- Chief Financial Officer

Benny Wong -- Morgan Stanley-- Analyst

Emily Chang -- Goldman Sachs -- Analyst

Joe Gemino -- Morningstar -- Analyst

Paul Cheng -- Barclays -- Analyst

Philip Gresh -- JP Morgan -- Analyst

Amir Arif -- Cormark Securities -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Dennis Fong -- Canaccord Genuity -- Analyst

More CNQ analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Canadian Natural Resources
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Canadian Natural Resources wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.