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Canadian Natural Resources Limited (NYSE:CNQ)
Q2 2019 Earnings Call
Aug. 1, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Canadian Natural's Q2 2019 Earnings Results Conference Call. 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, August 1, 2019, 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.

Corey Bieber -- Executive Advisor, Capital Markets

Thank you, Operator. Good morning, everyone, and thank you for joining our Q2 2019 conference call. With me this morning are Steve Laut, our Executive Vice Chairman, who will briefly discuss our strategic focus on creating shareholder value and highlight some of the factors that set us apart from our peers. Steve will also provide an update on Canadian Natural and our industry's efforts on the environment front, where significant performance and game-changing achievements are not well understood. Tim McKay, our President, will provide a more detailed update on the quarter, as well as discuss our ongoing projects and operations. And Mark Stainthorpe, our Chief Financial Officer, will provide an update on our robust financial position.

Before we begin, I would refer you to the special note regarding non-GAAP measures contained in our press release. These measures are used to evaluate the company's performance and 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 -- Executive Vice Chairman

Thank you, Corey, and good morning, everyone. As you've seen from the quarterly results and indeed the last dozen or so quarter results, Canadian Natural delivers strong, sustainable free cash flow. Very few companies can deliver this level of sustainable free cash flow that is safe, secure, and provides substantial upside going forward. Canadian Natural maximizes the value of our free cash flow for shareholders by optimizing our cash allocation between our four pillars and leveraging our competitive advantages.

Our competitive advantages include effective and efficient operations, a diverse and balanced asset base with significant development potential. We utilize the advantage of our owned and controlled infrastructure, the economies of scale we can leverage with our size, and our culture that is entrepreneurial, accountable, and leverages our operational, technical, and financial expertise to execute at high levels. Combined we drive top-tier value creation from both an economic and environmental perspective, strengthening our four pillars. Our balance sheet with our target of debt to EBITDA down from 1.8 from 2 at the 2018 year-end. Returns to shareholders a 23% dividend growth and $711 million in share buybacks year to date.

Opportunistic acquisitions with the Devon assets being the latest example of our ability to leverage our competitive advantages to grow value and production in a constrained market access environment. Resource development, we're taking this opportunity in a constrained market access environment to progress engineering and value engineering on our projects to create even greater value by leveraging technology, optimizing design, configuration, strategies, and execution plans. And importantly, focus on driving enhanced margins growth on existing and future production.

As we all know, market access has in effect been a cloud hanging over the Canadian oil and gas industry's head for some time now and rightly so. Major pipeline projects have been going through very long delays as they work their way through what seems like endless regulatory and legal hurdles. This has been very frustrating for all involved. We are, in our view, nearing the end of these hurdles. We're also starting to see a potential break in the clouds as the Trans Mountain pipeline is set to start construction, access to rail shipments is increasing with capacity ramping up to 500,000 barrel a day range and a potential 50,000-barrel day enhancement on Keystone. Although optimism is in short supply, there are some positives out there.

What is a massive positive is the oil and gas industry's ability to leverage technology, innovation, and Canadian ingenuity to create tremendous economic and environmental value? 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. Because when it comes to the environmental performance, Canadian Natural, and indeed the entire Canadian oil and gas sector, has delivered game-changing performance. Canadian Natural and Canada's oil and gas sector recognize the need to reduce greenhouse 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 into what I would call the premium oil on the global stage. All in 10 years. And the Canadian oil and gas sector is committed to doing even better in the future.

Canadian Natural has already reduced our overall corporate emissions by 29% since 2012 and at Horizon our intensity is down 37%. Our primary heavy oil intensity is down 78% when it comes to methane and we're the fifth-largest capturer of and sequester of CO2 in the world. In just these three areas, Canadian Natural has taken 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. Canadian ingenuity and our ability to innovate and leverage technology has taken what was high-intensity oil on a wells combustion basis in 2009 to well below the global average. It's not 2009 anymore. Canadian oil and gas now is a premium product. Something all Canadians should be proud of.

If you view climate change from a global perspective, and climate change is a global issue and not a natural issue, then it makes sense that having more Canadian oil and gas on the global market will reduce 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 and natural gas to global markets should a climate change and economic priority for Canada.

Which brings me to the ESG criteria that most institutional investors have, developed, or are developing. When you look at the environment, the E in ESG, clearly Canada is doing very well if not better than any other jurisdiction. Especially when you take into account Canada's environmental performance on greenhouse gas intensity. When it comes to the social and governance, and SG of ESG, Canada clearly performs at the very top of the list. We believe with Canada's game-changing environmental performance and our well-established position at the top of the list on S&G that Canada clearly blows our competitors out of the water when it comes to ESG. As a result, when you look at Canada from a global perspective, then Canada should screen in when it comes to ESG criteria and Canada should actually be an ESG priority in terms of investment.

I'll turn it over to Tim.

Tim McKay -- President

Thank you, Steve. Good morning, everyone. Canadian Natural assets are vast, well-balanced, and diverse. The strength of this model, plus the high levels of operational flexibility is reflected in our Q2 results where we've been able to effectively execute our curtailment optimization strategy to maximize production and netbacks during unplanned and proactive downtime in our Oil Sands area. As a result, we exceeded production guidance in both conventional and thermal assets. We now forecast there will be some level of production curtailment for all of 2019. This level of curtailment was not included in our original 2019 guidance. However, despite the impact on volumes, Canadian Natural will still be within our original guidance, another reflection of the strength of our assets, our operational flexibility, and our ability to effectively execute our curtailment optimization strategy. This, combined with our effective capital allocation, maximizes free cash flow and value for our shareholders. I will now do a brief overview of our assets.

Starting with natural gas, our second-quarter production of 1.532bcf was up from Q1 2019 of 1.51bcf. Primarily as a result of good operational performance in all areas. North American operations were 1.482bcf with operating costs of $1.15 per mcf which is down compared to Q1 2019 of $1.30 and Q2 of 2018 of $1.28. Primarily as a result of our continued focus on operational excellence in our operating costs. At Septimus, the company's high-value, liquid-rich Montney area five net wells with a target production capacity of 2,100 barrels a day of NGL and 30 million a day of natural gas were completed in late Q2. Septimus operating costs in Q2 of $0.33 per Mcfe are top-tier and with these new wells, the plant is targeted to be at full capacity for the remainder of 2019 further enhancing our operating costs with a target of $0.29 per Mcfe. Our operational excellence at Septimus supports this high-value, liquid-rich development.

In the second quarter, Canadian Natural operations realized a strong natural gas price of $1.84 per Mcfe. Canadian Natural has a diverse natural gas sales portfolio of which 45% is used internally, 34% is exported, and only 21% is exposed to AECO pricing at the midpoint of our guidance. Q3 2019 natural gas guidance is targeted to be 1.44bcf to 1.46bcf per day.

For Q2 2019, our North American light oil and NGL production increased as per our optimization strategy to approximately 102,400 barrels per day up 7% from Q1 and is up 14% compared to Q2 2018, with second-quarter operating costs of $14.67 per barrel, a decrease of 8% compared to Q1 2019 levels. In the Greater Wembley area, we continue to strategically drill, de-risk our significant Montney oil development opportunities on our 155 net sections of land which has the potential to support approximately 363 wells over time creating significant value for our shareholders. Results continue to exceed expectations.

In the first half of the year, the company brought on 12 net wells on production with initial 30-day liquid production rates averaging approximately 680 barrels per day per well, exceeding expectations of approximately 560 barrels per day per well. With an additional two net wells are targeted to come on in Q3. Also, in the first half of the year, 12 net wells at Karr are currently producing approximately 2,750 barrels a day. With this success, the company is advancing a concept water flood to pool and potentially add an additional 45 locations which demonstrates the strength of our asset base and the company's ability to execute to maximize long-term value for our shareholders.

Overall, our international assets had another strong quarter generating significant free cash flow and value for the company. Q2 offshore Africa production was 23,650 barrels, up when compared to Q1 2019 as the last producer well at Baobab came on late Q1. And it's currently producing at approximately 1,500 barrels net, meeting expectations. CDI operating costs in Q2 were very strong at $8.40 per barrel versus $9.79 per barrel in Q1. In the second quarter, we drilled one gross well, exploration well at Kossipo which flowed at a constrained rate of 7,000 barrels a day, exceeding expectations and the company is now evaluating, which could set us up for another development opportunity in CDI with a potential growth capacity of 20,000 barrels per day tied into the Baobab FPSO.

As previously announced, the company had target events a high-value drill program in Q4 2019 at Espoir. Due to ongoing discussions with Cote d'Ivoire government, the Espoir drilling program has been canceling until such time our foreign exchange practices can be clarified.

In South Africa, the operator targeting to proceed with a second exploration well in 2020. And contingent on results, an additional two more explorations could be drilled on the block. In the North Sea, production averaged 27,594 barrels per day in Q2 up from Q1 as a result of a successful drilling program offset by a 21-day turnaround at Ninian central. The 2019 drilling continues to go as planned; 1.9 net wells are on production in Q2 exceeding the budgeted rate of 4,200 barrels per day net by 1,000 barrels a day. With three more gross producers to be drill in Q3 followed by two more gross injectors in Q4.

Q2 operating costs were $37.31 per barrel, down 6% from Q1 2019. Q3 international guidance is 44,000 to 48,000 barrels per day, reflecting our planned turnarounds in the North Sea an offshore Africa. Based on the strong operational results, the international yearly guidance has been increased to 46,000 to 50,000 barrels per day.

Heavy oil production was up approximately 77,700 barrels a day up from Q1 2019 of approximately 68,500 barrels a day as we increased production, as per our optimization strategy in the second quarter. Operating costs were strong with second-quarter operating costs of $17.52 per barrel as compared to Q1 2019 operating costs of $17.30. We are on track to capture synergies after closing the Devon acquisition. Our team immediately began utilizing the acquired steps sand storage deferring the need for new construction, redirecting approximately 3,700 barrels a day that were being processed at a third-party facility. And reducing our trucking costs and water disposal costs through optimization of the facilities. We are now proceeding with the plan to consolidate the acquired facilities and move the heavy oil production to 100% owned ECHO pipeline by the end of Q3 2019, more than one year ahead of our initial plan targeting approximately $25 million of margin improvement per year.

A key component of 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. In Q2, the production was approximately 55,000 barrels a day down from Q1 of 61,200 as a result of the temporary shut-in due to the wildfire. The restart and ramp-up of the Pelican Field went very well with July averaging approximately 63,000 barrels a day back to pre-shutdown levels. The team did a great job and in Q2 we had very strong operating costs of $6.72 per barrel compared to our Q1 2019 operating costs of $6.69 per barrel. Also, in Q2, we consolidated operations reducing one oil battery as we target to reduce operating costs by an additional $6 million per year enhancing our already low-cost operations. With our low-decline and very low operating costs, Pelican Lake continues to have excellent netbacks and recycle ratio.

In thermal, Q2 production was approximately 109,600 barrels per day versus Q1 production of 94,200 barrels a day as we optimized production in the quarter and our teams were immediately in the field capturing synergy after closing the Devon acquisition. At Kirby South, second-quarter production was steady at approximately 28,600 barrels a day with excellent operating costs at $10.55 per barrel including fuel, reflecting lower energy costs.

At Primrose, second-quarter production was optimized to approximately 71,900 barrels a day versus 62,000 in Q1 as operations in Primrose continue to effective and efficient with second-quarter operating costs of $12.39 per barrel, down from Q1 of $23 primarily a result of increased production and lower fuel costs. At Kirby North, the company's 40,000 barrel a day SAGD process is now steaming and running very well. While in a curtailed environment, we are controlling the pace of the ramp-up and now we're targeting the ramp-up to 40,000 barrels a day in early 2021.

At Jackfish, a turnaround was completed in June and the field is at its curtailment target. The company is executing on its plan to achieve $135 million of cost savings between thermal and heavy oil assets. For Jackfish, we're proceeding with capturing cost savings and efficiencies and procurement, caps, logistics, service rates, and leveraging expertise across our SAGD operations. At Primrose facility construction at our highly profitable pad adds continues on cost and ahead of schedule with a plan steam in Q3 2019 as we look to mitigate production losses from a plant turnaround at Horizon starting mid-September. Q3 production guidance is 198,000 to 206,000 barrels a day. The yearly thermal guidance is now 157,000 to 172,000 barrels a day which reflects production from Jackfish for the second half of 2019.

At our oil sands mining operations in the second quarter, we produced 374,500 barrels a day with industry-leading operating costs of $24.17. We've continued to capture synergies between the two sites leveraging technical expertise, services, buying power, as well as operating efficiencies. Year over year hard dollar costs excluding fuel is down by approximately $100 million in the first six months as compared to 2018 as our teams are very focused on driving operational excellence.

As previously talked about, a fire that occurred at the Scotford North Upgrader on April 15th. The repairs were successfully completed for approximately $21 million gross and resumed full production on June 24th, 28 days longer than the originally planned turnaround of 38 days.

At Horizon, as a result of the company's proactive integrity program, a portion of the piping to the amine unit was identified to have reduced thickness. Therefore, the company made the proactive decision to advance maintenance on the piping in Q2, ahead of the planned fall turnaround. During this period, the company was able to increase both conventional and thermal production areas to mitigate some of that production impact.

For July, our Oil Sands operation is very strong with the monthly July average of approximately 463,000 barrels a day. At Horizon, we continue to advance engineering in a disciplined manner as we look to optimize costs and preserve our growth opportunities of 75,000 to 95,000 barrels a day as we wait for clarity on market access.

Work on the IPEP pilot continues to look very positive and we are making enhancements to improve its performance and prove up this technology. Oil Sands Mining Q3 SCO production guidance is 413,000 to 433,000 barrels per day reflecting the turnaround at Horizon of 25 days down from the 28 days, which is targeted to begin mid-September in order to manage the monthly curtailment volumes. 2019 Oil Sands Mining yearly guidance is now 405,000 to 450,000 barrels a day.

As we have 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 oils in 2019 have stabilized to a more normal level. The outcome of this decision has been very positive for all of Albertans, Alberta producers and the benefits are widely distributed across Canada and Alberta through jobs, taxes, royalties and equalization payments. Without curtailment, there would have been significant job losses.

So far in the first half of 2019, WCS differentials have averaged approximately 20% of WTI, similar to historic normal in Q4 2017 when WTI was around $55 per barrel and the WCF differential was $12 per barrel in spite of apportionment staying approximately at 40%. Canadian Natural continues shipping oil by rail of 14,000 barrels a day with strong heavy oil pricing in the U.S. Gulf Coast. However, the safest and lowest impact to the environment is improved market access by building additional pipeline.

Currently, conventional production declines, turnaround activities are reducing production capacity, combined with the strong crude by rail volumes. Storage levels have decreased by almost 10 million barrels since April, which continues to be positive for Alberta oil production in Alberta. While curtailment volumes have continued to be reduced throughout the year, we are forecasting the mandatory curtailment to last to the end of 2019 at September level. While mandatory curtailment continues, we will optimize our turnaround schedules, pit stops, to minimize the impact to the company. As we moved to the fourth quarter, NWR is targeting to start taking incremental oil at 50,000 barrels a day in December. As well, many smaller pipeline optimization projects have been announced which will improve egress.

Trans Mountain looks to be progressing forward as well crude by rail is targeted to increase by more than 150,000 barrels a day to a total of 500,000 barrels a day, including the government Alberta Commitment, which as we moved to 2020, it's all positive momentum for Canadian producers. Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars in light of market conditions in 2019. We will continue to execute with excellence and be a safe, effective, and efficient operator.

We are in a very strong position being nimble, which enhances the capacity to create value for our shareholders as we continue to high-grade opportunities in the company. Our curtailment optimization strategy is a reflection of our ability to be nimble and operate with excellence. We continue to be focused on safe, reliable operations, enhancing our top-tier operations. We continue to balance and optimize our capital allocation, deliver free cash flow, and strengthen the balance sheet that Mark will highlight further in the financial review.

With that, I'll turn it to Mark.

Mark Stainthorpe -- Chief Financial Officer

Thanks, Tim. Canadian Natural's financial performance in the quarter demonstrated our continued focus on the financial strength and our ability to be flexible to capture opportunities. Net earnings of approximately $2.8 billion, adjusted net earnings of over $1 billion, cash flow from operations of over $2.8 billion, and adjusted funds flow in excess of $2.6 billion were achieved in the quarter. All results are up substantially from Q1 2019 as stronger realized pricing, lower production costs in our E&P segment and our ability to execute on our curtailment optimization strategy were evident in the results.

Net earnings include a onetime reduction in deferred income tax expense of approximately $1.6 billion relating to the reduction in Alberta tax rates. Our prudent capital program resulted in approximately $910 million invested in the quarter before considering the Devon asset acquisition. This resulted in free cash flow generated of $1.3 billion after dividends of $450 million in the quarter, again before the Devon asset acquisition.

Capital in the first six months is approximately $190 million less than the original budget showing strong discipline on capital spending with flexibility for potential execution of these projects later in 2019 or into 2020. Additionally, share buybacks total over $390 million in the quarter or 10.45 million shares purchased for cancellation. Together with the dividend, returns to shareholders were over $840 million in the second quarter. In the first half of 2019, returns to shareholders have amounted to approximately $1.5 billion by way of approximately $850 million in dividends and $630 million in share buybacks as we continue to execute our free cash flow allocation policy.

The free cash flow allocation policy is also evident in our debt balance with a reduction of $1.2 billion from Q1 2019 levels when excluding the Devon asset acquisition and an increase of $2.2 when including the asset acquisition in the quarter. Acquisition financing included a three-year $3.25 billion syndicated term loan facility that was successfully closed in the quarter.

Our debt metrics remain strong and are targeted to get even stronger throughout 2019. Our current strip pricing and based on our corporate guidance, we target to exit 2019 with a debt to adjusted EBITDA, debt to cash flow, and debt to book capital at levels below those existing at December 31, 2018, despite the completion of the Devon acquisition financed on our balance sheet along with returns to shareholders by way of dividends and share purchases throughout the year. Finally, available liquidity represented by bank facilities and cash at quarter-end was approximately $4.6 billion, an increase of $330 million over Q1 2019 levels and includes the repayment of medium-term notes of $500 million in the second quarter, providing flexibility to manage throughout the business cycle and drive increased shareholder value.

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

Tim McKay -- President

Thanks, Mark. In summary, we are delivering sustainable top-tier free cash flow. Canadian Natural has many advantages. Our balance sheet is strong and will continue to strengthen. We have a well-balanced, diverse, and large asset base. A significant portion of our asset base is long-life low-decline assets which require less capital to maintain volumes. We have a balance in our commodities, with approximately 51% of our BOEs light oil and SCO, 24% heavy, 25% natural gas in Q2, which lessens our exposure to the volatility in any one commodity.

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 and efficient operations, and by our teams who deliver top-tier results. We have a robust sustainable free cash flow. Our dividend was increased earlier in the year and it was our 19th consecutive year of dividend increases, which has a CAGR of 21%. Share purchases year to date to July 31, were approximately 19.4 million shares or approximately $711 million. And when combined with our 2018 shares, approximately 30.9 million shares equals to a cumulative total of approximately 50.3 million shares or approximately $2 billion returned to shareholders through our share purchase alone.

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

Questions and Answers:

Operator

At this time I'd like to remind everyone in order to ask a question, please press * followed by 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

And your first question comes from the line of Neil Mehta from Goldman Sachs. Go ahead, please. Your line is open.

Neil Mehta -- Goldman Sachs -- Analyst

Yes, thanks very much and congrats on a good quarter here. I guess the first question is around the egress coming out of Western Canada. I'm just curious about your views on how this plays out from here in terms of getting crude to the market. And I'm thinking on a couple of different fronts. One is how do you see the government's rail contracts playing out from here? Two is ultimately some of the big pipelines there being talked about whether TMX or Line 3, how do you see the risk from there? And then three about crude by rail, so if you can kind of step back and give us the kind of the ecosystem getting Canadian crude out of the basin, it will be helpful.

Tim McKay -- President

Sure. Thanks, Neil. Currently, the Alberta Government is going through a process here that's to conclude here later in August on their rail contracts. Currently, we're in the process and we're walking through that piece today. And to go forward with it, obviously, it has to make economic sense. But we're in the process and we're looking at it.

In terms of pipelines, what we see ahead of us is that there are many projects that have been announced, many optimization projects that are looking to go ahead. So, we see pipeline egress, happening. It's happening differently than obviously what we originally envisioned a year ago. But we're very confident the pipelines will go forward. And how it unravels is getting, I would say, less and less blurry as each hurdle is being overcome either through regulatory or through the legal system.

Neil Mehta -- Goldman Sachs -- Analyst

All right, thank you. And then the follow-up is just around M&A, you successfully completed the Jackfish transaction. So, can you talk a little about early learnings from that integration and how that's going? And is this a moment for the company to digest recent acquisitions, whether that's AOSP or Jackfish and take a pause as it relates to M&A at this point and really focus on deleveraging?

Tim McKay -- President

Sure. To talk on the Devon acquisition, our teams were out in a field essentially that next day after closed. We're executing on that plan. The plan is in my mind going very, very well and ahead of our initial plan view of capturing those opportunities. From our perspective we see capturing that $135 million, I would say it's very conservative at this time. And as we dig into the assets, we always find more opportunities with whether it's ASOP or the Devon acquisition. On oil sand side we're seeing another a $100 million captured of savings. I would see on the Devon acquisition that process happening to catch those savings more than those savings that we have announced.

On the M&A acquisitions, we don't have any gaps. We always look at opportunities, but we have no gaps. So, that's really all I could say about that.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, guys.

Operator

Your next question comes from the line of Phil Gresh from JP Morgan. Go ahead, please. Your line is open.

Phil Gresh -- JP Morgan -- Analyst

Yes, hi. Good morning. My first question is just on capital spending. Obviously, you've kept it at really low levels this year just tweaking it up for the Devon transaction. But any thoughts you could share around 2020? Some of your peers have been kind of highlighting that they're not planning to increase capex at all at this point. And so, given the egress situation and given the opportunities in the portfolio, where would you stand relative to this year's $3.8 billion?

Tim McKay -- President

Thanks, Phil. Certainly to say, but with our low maintenance capital, I could see us very much being in the same ranges that we were in 2019. The beautiful part of having low-decline, long-life assets is that the maintenance capital is very low for our company. I really don't see in this environment any need to push that much further than a little bit about to keep future opportunities open for the company.

Phil Gresh -- JP Morgan -- Analyst

Okay, great. The second question I was just kind of digging through your full-year guidance, and your third-quarter guidance and what it will imply for the fourth quarter. It did seem like if I did my math right, there's a bit of an expectation of a step up in Thermal 3Q to 4Q. Maybe if you could just confirm that and what's driving that?

Tim McKay -- President

Sure, that is correct. So, look there are two items. One is Kirby North, we are doing that ramp up, trying to manage it within the curtailments that we have today. The other item that's probably not well understood is the thermal pad adds at the Primrose. So right now, because we are ahead of schedule, we've adjusted the Horizon turnaround so that we could do a cycle during that Horizon turnaround. These cycles are roughly 30,000 barrels a day. So, with that, we're able to feather in that Primrose production. And then obviously depending on how the November, and December, October, curtailment volumes are allocated, we have that opportunity to even do further on the thermal side, so.

Phil Gresh -- JP Morgan -- Analyst

Okay, got it. And then I thought you had said before, Kirby you weren't expecting to do until 2021.

Tim McKay -- President

We are ramping Kirby North up, but with the SAGD it's what I would say a controlled ramp up on the SAGD. And so, all we were doing is we're just slowing that down until we get a little more clarity of where the curtailments are heading. Obviously, every volume we add at Kirby has to come out of the system somewhere. So, we're trying to just manage that within the curtailments, within the flexibility we have of the different levers within the company.

Obviously, example, if we have an issue in one area that we can't make the curtailment volume, it is nice to have that optionality to be able to ramp up other areas to make those volumes.

Phil Gresh -- JP Morgan -- Analyst

Understood, OK. Thank you very much.

Tim McKay -- President

Thanks, Phil.

Operator

Your next question comes from the line of Roger Reed from Wells Fargo. Go ahead, please. Your line is open.

Roger Read -- Wells Fargo -- Analyst

Yes, good morning.

Steve Laut -- Executive Vice Chairman

Morning.

Roger Read -- Wells Fargo -- Analyst

Just to maybe come back around your comments earlier about the performance of the synergies and integration of the Devon assets. I was just curious, is that operational that we should expect to see you potentially raise the numbers on, or is it something unique to the market conditions today where I mean things are just plain soft? Or is it maybe a third option being you want to be conservative when you first put the numbers out and now you've seen the asset and we should think of it is a fairly straightforward process of outperforming on synergies? Just curious kind of which bucket that might fall into?

Tim McKay -- President

Yes, that would fall into your third bucket, Roger. Obviously, when we look at an acquisition operationally, we have a very good focus on what opportunities are ahead of us. Then once we take over the operations, we generally get a deeper dive into how things could be leveraged further. That's usually what happens on all our acquisitions is I would say we're conservative on the cursory look. And then as we get into it, we will find more and more opportunities. And similarly, we will be able to move the volumes over earlier. You do a cursory look and then you actually look at how you could actually do it operationally better, and more efficient, and faster.

Roger Read -- Wells Fargo -- Analyst

All right, so there is an operational component to it. I would think is fair to say.

Tim McKay -- President

Yes.

Roger Read -- Wells Fargo -- Analyst

Okay. And the second question, I have come back and deep kind of the same topic that's already been hit here. But as you think about cash flows and the use thereof going forward, I mean you've done a great job with the dividend and the share repos, doesn't sound like there's any hole in the portfolio. So, as we think about the cash flow you're going to generate over the next foreseeable future the next couple of years and let's assume no real change on egress for crude out of Canada. So, kind of historical differentials within the pipeline expansions, it should occur.

What do you do with the cash? I mean, should we think of it as incremental is coming to shareholders? It will go more aggressively to share repurchases. I mean, just generally speaking across the industry, dealing with kind of valuation and discounts and then a little bit more pronounced where you are. I'm just curious kind of how you evaluate the option of ramping up the share repos from here even?

Mark Stainthorpe -- Chief Financial Officer

Yes, Roger, it's Mark. What we've established is this free cash flow allocation policy. So, we continue to drive toward that. When you look at cash flow less our capital, less our dividend, we're allocating 50% to share buybacks and 50% to the balance sheet. We've been trying to manage that on a go-forward basis, looking forward and managing on a week to week basis.

Tim mentioned the low capital profile. So, we continue to generate and in this kind of environment generate a lot of free cash flow. I think it's fair to assume that we're going to continue along those lines of that free cash flow allocation policy. You'll see us manage that 50/50.

Roger Read -- Wells Fargo -- Analyst

Yes, I guess I'm just curious, the 50/50 allocation, what did you base that on? I mean, in other words, we're all seeing everybody try to do the same thing, we're not necessarily getting a result. I recognize some of that is out of your hands a lot of it seems to be out of our hands on the sale side despite trying to get people interested in energy. I mean, is there any analysis you've done that says maybe you should be more aggressive on debt repayment relative to share repos or the other way around? I mean 50/50 sounds great, I'm just trying to understand like what the science is behind that.

Mark Stainthorpe -- Chief Financial Officer

Well, there's a little bit of science in the sense that we are targeting some balance sheet metrics. We're looking at $15 billion of absolute debt and 1.5 half times debt to EBITDA. So, there's some science around that that we are focused on. But overall, Roger, I think what we're looking for is balance and you've seen that across the company, whether it be operationally or in this sense as far as returns to shareholders via dividends, and share purchases and debt repayment.

Roger Read -- Wells Fargo -- Analyst

All right, thanks. I'll leave it there.

Operator

Your next question comes from the line of Manav Gupta from Credit Suisse. Go ahead, please. Your line is open.

Manav Gupta -- Credit Suisse -- Analyst

Hey guys. I actually wanted to focus a little bit on Lower Montney results. We are actually seeing some good industry data coming in there. You guys are leading the charge. I'm just trying to understand, I know it's early days, but when you look at Lower Montney, do you think it could be as prolific as the Upper and the Middle Montney? Yesterday we saw some results in Lower Montney, which were like 70% condensate yield. Are you seeing that height of the condensate yield in Lower Montney? And finally, on the same lines, are you already in triple-stack mode, or are you wanting to go to triple-stack where you can hit all the three zones together?

Tim McKay -- President

Okay, so just on the first question, on the Lower Montney, we are seeing a very good opportunity in Lower Montney and as you said, with the very good liquid rates. Yes, it's early in its development. We see lots of opportunities on land. In terms of doing the three different levels, absolutely. If you look at the way it would develop in terms of cost-effectiveness, it would be and it would make sense to do two or three levels of development on one pad.

So, that is a huge opportunity for the industry. And the Montney, I would say for Alberta is a real gem and a real opportunity.

Manav Gupta -- Credit Suisse -- Analyst

A quick follow-up as last time you explained in detail to us how the nomination process is broken and what are the measures that need to be taken. I'm just trying to understand has there been any progress since the new government is in office and you're trying to negotiate and leave the pads over there, but has there been any progress on fixing this broken nomination process?

Tim McKay -- President

Yes. So, there has been no progress on fixing the nomination process. We have been involved, but the government's first priority is obviously to reduce the curtailment. Second priority, is Israel getting that off the table in there. And then the third appears to be the nomination process. So, we're confident the government will get through and to it, but right now there has been no traction in terms of seeing the nomination process.

Manav Gupta -- Credit Suisse -- Analyst

Thanks for taking my questions, guys.

Operator

Your next question comes from the line of Greg Pardy from RBC Capital Markets. Go ahead, please. Your line is open.

Greg Pardy -- RBC Capital Markets -- Analyst

Yes, thanks. Good morning. Maybe just to come back to something that Roger was asking and, Mark, maybe if you just qualify this, that when you think about the formulaic approach is it done on a quarterly or an annual basis? And I think what we're driving at is, is when you look at your third and fourth quarter, at least as per our model, I mean, there's significant debt reduction embedded in there.

Tim McKay -- President

Yes. So, I mean, well, what you've seen, Greg, in 2019 of course, is we've increased our debt to do the acquisition, but you quickly see that debt come down. And that's sort of what I was talking about. Even if you look at entry to exit going into 2018, despite $3.2 billion, $3.4 billion acquisition, the debt actually comes down over the year. So, we do have those targets that I mentioned that we're focused on. And again, the free cash flow generation of the company is significant. We do manage it. You're asking on a quarterly or yearly basis. It's actually more like on a weekly basis, Greg, we kind of look at it all the time as we look forward.

Greg Pardy -- RBC Capital Markets -- Analyst

Okay. That's helpful. Is there anything to add just on the ramp-up at Northwest mainly as it relates to just taking incremental bitumen. Just feels like it's a bit of a blind spot. We've been waiting for this 50,000 for a while.

Steve Laut -- Executive Vice Chairman

Yes, Greg. It's Steve here. Now they're working on it and probably best to get the information directly from Northwest, but they're making progress and hopefully, they'll get there soon.

Greg Pardy -- RBC Capital Markets -- Analyst

Okay. The last one from me then is just on, I mean, you guys have been one of the major architects of thinking how curtailment policy has been shaped, and so on. It's obviously been very effective. It's also kind of standing in a way in some ways in terms of incentivizing crude by rail there because we really haven't got spreads that are sufficient to really incentivize those ramp-ups. In your view, I mean, should the curtailments be tapered more quickly, and again, I know that's a government decision, but they're obviously consulting with the industry or is it about right?

Tim McKay -- President

Greg, it's Tim McKay here. In our opinion, it's all about being right. Obviously, it will be devastating for the industry if the differentials again blow out on both the Synthetic and WCS. So, doing a measured approach is in our opinion, the right aspect. I mean, the storage levels are going down. So that is very, very positive. With the rail, obviously, you're absolutely right. With reducing curtailment, there has to be something linked with rail. Obviously, if we're in a curtailed environment and there's no benefit of doing rail, it's going to make it very difficult for companies to economically justify it. So, in our mind we see curtailment and the resolution of the rail have to be somewhat linked to reducing the curtailment.

Greg Pardy -- RBC Capital Markets -- Analyst

Okay. The last one from me, if you'll oblige. Is there simply going to be more rail in your future? I mean, irrespective of what happens with the Alberta government contracts, you've got 40,000 of bitumen and it's even bigger when you gross it up for obviously the deal you're going to need that sitting behind pipe plus a whole bunch of other stuff you can do. Does it not make more sense just to kind of go bite the bullet on multiple fronts if you need to?

Tim McKay -- President

Greg, I really wouldn't want to comment on that because obviously we're a competitor and to us, it's always good to keep our cards close to our chest.

Greg Pardy -- RBC Capital Markets -- Analyst

Okay, understood. Thanks, guys.

Operator

And again, as a reminder, if you'd like to ask a question, please press * followed by the 1 on your telephone keypad.

Your next question comes from the line of Phil Skolnick from Eight Capital. Go ahead, please. Your line is open.

Phil Skolnick -- Eight Capital -- Analyst

Yes, thanks. Just circling back to the Devon acquisition. Talking about the consolidation of the facilities there, what would be the timing around that? And what kind of cap backs associated with that? And how do we think about the cost savings upside to come from that as well?

Tim McKay -- President

Sure. The facility we're talking about consolidating or actually shutting down is actually heavy oil battery. So, the costs to shut it down are very, very low. Obviously, we just have to preserve it. So that part is, I would call de minimis in terms of cost. The real opportunity is really reducing the trucking costs and then as well with going to the ECHO pipeline, we gain that $25 million worth of margins. So, it is actually very easily done, and the teams are working on it. We're very confident it will be done before the end of the Q3.

Phil Skolnick -- Eight Capital -- Analyst

Okay. Thanks. So, there's nothing, I guess then on the facilities side at Jackfish that could be consolidated?

Tim McKay -- President

There are opportunities at Jackfish in terms probably on more on the water side to handling where we can optimize our fuel usage and maybe the way we use the produced water. Our teams are working on it and that's just upside. That was never in our cost savings or the opportunity piece there. But we are working on additional opportunities there. They don't look overly expensive. So, we look at them as a way of growing our margin.

Phil Skolnick -- Eight Capital -- Analyst

Okay, great. Thank you. That's it from me.

Corey Bieber -- Executive Advisor, Capital Markets Thanks, Phil.

Operator

Your next question comes from the line of Gary Chapman from Guardian Capital. Go ahead, please. Your line is open.

Gary Chapman -- Guardian Capital -- Analyst

Yes, hi, thanks. I've got three quick questions. One is you're doing a great job on greenhouse gas emissions. Are you having third-party verification just so the general public perception might improve if they think it's been done by a third-party as opposed to coming out of the company? So that's one question.

The second, when you're evaluating rail on economics, is it purely economics or are you including a bit of an insurance element to it? I mean, I have life insurance. It's negative cash flow, but I hope to never win. And secondly, third part, when you look at debt-to-equity at 1.5 times, just to an earlier question, why not 1.0 times? I mean, there would be a transfer of enterprise value from debt holders to equity holders going to 1.0 times. In an environment of extremely volatile energy prices, maybe the equity would be valued at a higher multiple with a lower debt level.

Tim McKay -- President

Sure Gary, OK. So, Steve would you want to talk about greenhouse gas?

Steve Laut -- Executive Vice Chairman

So, the greenhouse gas emissions, Gary, we get asked for the verification. And I think you have to remember here there's a lot of reporting that goes on greenhouse gas emissions that has to go through the Alberta government. So, they are in a sense verified through that process. We'll look at third-party verification, we just to make sure it adds value. And I think what you have to really look at is greenhouse gas emissions are going down dramatically in terms of intensity. So, it's really positive for the Canadian economy and Canadian contribution to climate change as a whole.

Tim McKay -- President

And then on the rail side, yes. To your point, it is more than just one element. You have to look at the timing of a potential increase in egress. What that likelihood is to your point, insurance, and the economics. So, it is actually a very complex item and we look at all aspects to make sure that a key is that it adds long-term value for our shareholders. The debt-equity?

Mark Stainthorpe -- Chief Financial Officer

Yes, and, Gary, on the question around debt to equity, debt to capital. The 1.5 times in $15 billion is considered more of an initial target. So, we developed this free cash flow policy in late 2018 with these targets. And the idea would be you'd revisit it at that point. So, depending on where we are, and the environment and everything that's going on, there'll be decisions around what does a new target look like. So, and then that's at the Board level and we will review that and look at it every quarter.

Gary Chapman -- Guardian Capital -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Benny Wong from Morgan Stanley. Go ahead, please. Your line is open.

Benny Wong -- Morgan Stanley -- Analyst

Hey, guys, thanks for taking my question. One of your smaller peers that runs volumes through the Access Pipeline has started talking about looking at using less condensate or even using butane instead to reduce blending costs on the volume centered to pipe. I know you guys, obviously, you guys upgraded the Devon assets a little bit now and send barrels on that line. Is that something you think is feasible? Is that something you would consider exploring?

Tim McKay -- President

Yes, we've been doing many different things on our ECHO pipeline and systems, heavy oil systems for years to improve the margins.

Benny Wong -- Morgan Stanley -- Analyst

Okay, thanks. And my follow-up is really I want to get your long-term perspective of how you think about your portfolio. I understand integrating and optimizing the Devon assets are the main focus. Appreciate you guys have no gaps in the portfolio. But as we think about value creation in a world that seems to no longer want growth integration seems like a potential strategy and you guys are unique among your peers with all the downstream business.

I guess my question is, how do you think about the refining business today? Would it make sense to increase your ability to capture more margin with refinery assets if the prices rise, or do you envision seeing you stick to what it's great at and stay as a dominate E&P focused company?

Tim McKay -- President

Well, I think you've seen us somewhat diversify over time. We are a 50% owner of the Northwest Upgraders. So that is part of our DNA, I would say. So, in all cases, the key is how does it integrate with our operations and can we see a value proposition? And I would say that whether it's upstream or downstream, we look at it, how would it integrate with our business and how could Canadian Natural capture more value for our shareholders?

Benny Wong -- Morgan Stanley -- Analyst

Great. Thanks for your thought's guys.

Steve Laut -- Executive Vice Chairman

Thank you.

Operator

And with that, there are no further questions in the queue. I'd like to turn the call back over to Mr. Bieber.

Corey Bieber -- Executive Advisor, Capital Markets

Thank you, operator. As you can see Canadian Natural's large well diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver efficient and effective operations with top-tier performance is contributing to substantial and sustainable free cash flow. This, together with effective capital allocation, contributes to achieving our goal of maximizing shareholder value.

If you have any further questions, please don't hesitate to give us a shout. And thank you again, everyone, for attending our conference call this morning. We look forward to our 2019 third-quarter conference call in early November.

Operator

Thanks. And enjoy the day.

Duration: 57 minutes

Call participants:

Corey Bieber -- Executive Advisor, Capital Markets

Steve Laut -- Executive Vice Chairman

Tim McKay -- President

Mark Stainthorpe -- Chief Financial Officer

Neil Mehta -- Goldman Sachs -- Analyst

Phil Gresh -- JP Morgan -- Analyst

Roger Read -- Wells Fargo -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Greg Pardy -- RBC Capital Markets -- Analyst

Phil Skolnick -- Eight Capital -- Analyst

Gary Chapman -- Guardian Capital -- Analyst

Benny Wong -- Morgan Stanley -- Analyst

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