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Canadian Natural Resources Ltd (NYSE:CNQ)
Q3 2019 Earnings Call
Nov 7, 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 the Canadian Natural Resources Q3 2019 Earnings Results Conference Call and Webcast. [Operator Instructions] Please note that this call is being recorded today, November 7, 2019, at 9 o'clock AM 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 B. Bieber -- Executive Advisor, Finance

Thank you, operator. Good morning, everyone, and thank you for joining our Third Quarter 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 environmental front where significant performance and game changing achievements are now[Phonetic] well understood. Tim McKay, our President, will provide a more detailed update on the quarter as well as discuss our ongoing projects and operations, then 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 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 reserves are expressed as before royalties, unless otherwise stated.

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

Steve W. Laut -- Executive Vice-Chairman

Thank you. Cory, and good morning everyone. As you've seen Canadian Natural's third quarter was very strong, delivering strong sustainable free cash flow. Very few companies can deliver this level sustainable free cash flow that is safe, secure and provide substantial upside going forward. Canadian Natural maximize the value of our free cash flow for shareholders by optimizing our cash flow 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. The advantage of owned and controlled infrastructure, the economies of scale, which we can leverage with our size and our culture that is entrepreneurial, accountable and leveraged with our operational, tactical[Phonetic] and financial expertise to execute at high levels.

Our ability to leverage our competitive advantages is reflected in our third quarter where we delivered strong and increasing free cash flow significantly, lower operating costs, and production growth per share up an impressive 14% all in a curtailed production environment. Combining our competitive advantages with our optimized cash flow allocation, drives top tier value creation from both an economic and environmental perspective, strengthening our four pillars.

Our balance sheet, with our targeted year-end debt to EBITDA at or below 1.9x returns to shareholders with $2.1 billion returned to shareholders in the first nine months, $1.3 billion through dividends and $0.8 billion to share buybacks. Opportunistic acquisitions and 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 and resource development, where we've taken the opportunity in the current market 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 margin growth on our existing and future production that's clearly reflected in our Q3 oil costs.

For the last number of conference calls, I have spent some time talking about the environment. I'm not going to go through all the details as I have in the past, but summarize the key points of what I consider to be a very impressive Canadian success story. A story we have been telling to a broader Canadian audience. It is a success story that all Canadians can be proud of because when it comes to environmental performance, Canadian Natural [Indecipherable] the Canadian oil and gas sector entire Canadian oil and gas sector has delivered game changing environmental performance.

Canadian Natural and Canada's oil and gas sector recognize the need to reduce greenhouse gas emissions, and we've been able to leverage technology and Canadian ingenuity delivering impressive results. Essentially Canadian oil and gas sector has taken what was branded as a high intensity oil in 2009 and I made it what I would call the premium oil on the global stage all in 10 years and the Canadian oil and gas sector is committed to do even better in the future.

Canadian Natural has already reached our overall corporate emissions intensity by 29% since 2012. At Horizon our intensity is down 37%. Our primary heavy oil intensity is down 78% and we are the fifth largest capturer and sequester of CO2 in the oil and gas sector worldwide. 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. And for the record, 100% of Canadian Natural's Alberta oil sands in situ mining emissions are third-party verified. Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high intensity oil on a wells-to-combustion basis in 2009 to below the global average and a success story is just getting started. We can, with new projects leverage technology and Canadian ingenuity to do even better, with Canadian Natural's aspirational goal of reaching net zero emissions.

Net zero emissions is a lofty goal and we plan to get there, not by buying carbon offsets by leveraging technology and Canadian ingenuity, it's not 2009 anymore, Canadian oil and gas is now the premium product something all Canadians should be proud of. If you view climate change from a global perspective as climate change is a global issue, not a national issue then it makes sense that having more Canadian oil and gas on the global markets will reduce greenhouse gas emissions.

And if you believe action needs to be taken on climate change, then you should, you must advocate for greater market access for Canadian oil and natural gas. It's very clear that delivering Canada's oil, natural gas to global markets should be a climate change and economic priority for Canada, which brings me to the ESG criteria that most institutional investors that have developed or developing.

When you look at the environment, the EEE and 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. And when it comes to social and governance the S&G of ESG, Canada clearly performs at the very top of the list.

We believe that Canada's game-changing environmental performance and our well-established position at the top of list on S&G that Canada is clearly top tier when it comes to ESG. As a result, when investors look at Canada from a global perspective Canada should screen [Indecipherable] when it comes to ESG criteria and Canada should actually be an ESG investment priority.

Tim S. McKay -- President

Thank you, Steve. Good morning, everyone. Canada Natural had a very strong third quarter top tier operational results. Production from our assets were strong as we executed our curtailment optimization strategy and over and above that, we continue to reduce our operating costs even under curtailment in Alberta. This is a reflection of our operational excellence of our people to strengthen assets and our ability to execute effectively under the curtailment optimization strategy to maximize free cash flow for our shareholders.

I will now do a brief overview of our assets. Starting with natural gas, overall third quarter production of 1.469 Bcf was down from our Q2 production of 1.532 Bcf as expected and exceeded the Q3 guidance primarily as a result of phasing of turnaround activities and strong operational performance in all areas.

North American natural gas was 1.425 Bcf with operating costs at $1.7 per Mcf, which was down compared to Q2 2019 of a $1.15 and Q3 of 2018 of a $1.33 per Mcf as a result of our continued focus of operational excellence and our operating costs. At Septimus the Company's high value liquids rich Montney area additional natural gas wells came on production in late Q2, as we talked about last quarter. As a result Septimus had top tier operating costs in Q3 of $0.26 per Mcfe down from Q2 of $0.33 per Mcf . Our effective and efficient operations at Septimus supports this high value liquid rich development. At Gold Creek our liquid rich natural gas development, which are not subject to curtailment two net wells came on production averaging approximately 660 barrels per day of liquids and 4 million per well, exceeding expectations of approximately 110 barrels per day per well.

In the third quarter, Canadian Natural realized natural gas price of above $1.64 per Mcf, Canadian Natural has a diverse natural gas sales portfolio of which 44% is used within our operations, 32% is exported and only 24% is exposed to AECO pricing based on Q3 production. For Q3 2019, our North American light oil and NGL production decreased as per our curtailment optimization strategy to approximately 96,100 barrels down 6% from Q2 and is up 3% when compared to Q3 2018 with third quarter operating costs of $14.96 per barrel as compared to Q2 of $14.67 per barrel.

As a result of the impact of the Alberta curtailment, we drilled eight gross wells, in Saskatchewan, results continue to be strong at approximately 100 barrels per well. Within the greater Wembley area, results from the 27 net wells drilled in 2018 and the three net wells drilled in 2019, continue to be strong with production averaging approximately 10,400 barrels a day of liquids and a 68 million cubic feet of gas exceeding expectations of approximately 40%.

We continue to optimize our light oil capital well under curtailment in Alberta, which demonstrates the strength of our assets and the ability, the company's ability to maximize long-term value for our shareholders. Overall, our international assets had another strong quarter, exceeding our guidance at 48,861 barrels per day and generating significant free cash flow and value for the company.

Q3 operating -- offshore Africa production was approximately 21,200 barrels a day down when compared to Q2 2019 of 23,650 barrels a day as expected due to natural field declines. CDI operating costs in Q3 were strong at $11.06 per barrel versus $8.40 for Q2 2019 this variation is primarily a result of timing of liftings from the field.

In the North Sea, production averaged approximately 27,500 barrels a day in Q3 comparable to Q2 of 27,600 barrels a day as a result of our successful drilling program offset by turnaround activity. The company completed its 2019 drilling program in Q3 drilling three high net oil[Phonetic] producer wells. production from the total program, consisting of 4.9 wells is exceeding expectations by approximately 1,300 barrels per day net per well for the quarter.

Q3 operating costs were $37.11 per barrel, which is down from Q2 2019 of $37.31 per barrel. In South Africa, the operator is now targeting to proceed with the second oil exploration well in 2020 and has secured a rig. Contingent on results, an additional exploration well could be drilled on the block in 2020. Heavy oil production was approximately 88,000 barrels a day, up from Q2 2019 of 77,700 barrels a day as we have a full quarter of Devon and reflects the impact of our curtailment optimization strategy in the third quarter. Operating costs were strong in the quarter at $17.08 per barrel, as compared to Q2 2019 operating costs of $17.52 per barrel.

Updating on the Devon acquisition, both heavy oil and thermal. We continue to execute our plan to achieve the identified annual savings of $135 million. As previously announced, approximately $25 million of initial synergies identified are being realized more than one year ahead of the initial plan. Over and above the estimate, we have identified incremental annual savings of approximately $10 million per year and approximately $50 million of one-time capital savings in the short time we have operated these assets, a great result by our teams.

Key component of our long life low decline transition is a world-class Pelican Lake pool where our leading edge polymer flood is driving significant reserves and value growth. Q3 2019 production was 60,146 barrels a day, up from the Q2 average of approximately 55,000 barrels a day, which was impacted by the temporary shut in due to the wildfires.

The team did a great job and in Q3 had very strong operating costs of $6.10 per barrel, primarily a result of the oil battery consolidations that we talked about last quarter and our Q2 operating cost -- down from our Q2 operating costs of $6.72 per barrel. At Pelican, our team continues to drive operational excellence and has been able to impact -- impact of decline over production over the last four years holding operating costs at approximately $6.50 per barrel, an excellent accomplishment by them. With our low decline and very low operating cost Pelican Lake continues to have excellent netback and recycle ratio.

In thermal, our third quarter production was approximately 206,400 barrels a day, exceeding our guidance as we optimize production in the quarter and immediately began capturing operational synergies.

In the Kirby project area, Kirby North is running very well exceeding our targeted pace of ramp up as we target a ramp up to 40,000 barrels a day in 2021. Combined production at Kirby including Kirby North and South in the third quarter was approximately 31,300 barrels a day with excellent operating costs of $8.69 per barrel, including fuel, reflecting both lower energy costs and operating efficiencies.

At Jackfish. We had a strong quarter with operating costs of $9.44 per barrel as we continue to execute on our operating plan for those assets. Production was ramped up for September and October to approximately 110,000 barrels a day as part of our curtailment optimization strategy. As well, we are proceeding with the pad tie-in of wells, were[Phonetic] not tied in as a result of the Alberta curtailment. This pad is targeted to have peak production capacity of approximately 21,000 barrels a day for $8 million and will be available to the company as part of our curtailment optimization strategy for 2020.

At Primrose, third quarter production was optimized to approximately 73,600 barrels a day versus the 71,900 barrels a day in Q2 operations. We continue to be effective and efficient with third quarter operating costs at $9.91 per barrel, down from Q2 2019 of $12.39 per barrel, primarily a result of lower fuel costs and higher operating volumes.

At Primrose, facility constructions at our highly profitable pad adds came on production ahead of schedule and on cost. Incremental production from these pads was approximately 13,600 barrels a day for September, which is part of our curtailment optimization strategy to mitigate[Phonetic] some of the impact of the planned turnaround at Horizon.

At our Oil Sands mining operations, we were top tier in third quarter as we produced at the top end of our guidance at 432,203 barrels per day with industry-leading operating costs of $20.05 per barrel, very close to our record-low of $19.97 in Q4, 2018. Our teams continue to capture synergies between the two sites leveraging technical expertise, services and operating efficiency, driving our costs down with consistency.

Year over year, hard dollar costs excluding fuel, is down by approximately $150 million in the first nine months on an unadjusted basis compared to 2018, as our teams are very focused on driving operational excellence. Completing the AOSP acquisition in 2017, we have successfully improved our margins from the initial midpoint of 2017 guidance of $32 a barrel to roughly $22 per barrel today, so down about $10 per barrel equivalent to approximately $800 million of annual savings compared to 2017 levels, a clear example how Canadian Natural grows our margin and does not include the impact of the synergies captured at Horizon as our teams are continuing to do a great job improving our margins.

As part of our curtailment optimization strategy during the Horizon turnaround, we were able to ramp up production at Albian, with September and October record months of approximately 318,000 barrels a day of bitumen on a gross basis, up from the 27th capacity[Phonetic] at the time of 280,000 barrels a day. Both these items are great achievement by our team.

At Horizon, the turnaround was completed on time and under budget. During the post turnaround start-up as part of the company's proactive inspection at Horizon, the team identified a need to repair piping on one of the hydrogen manufacturing units. As a result, Horizon is currently running at restricted rates of approximately 155,000 barrels a day and is targeted to return to full rates in early December. As well at Horizon, we continue to advance in 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 continue to, we're making enhancements to improve its performance and prove up this technology and we will now continue piloting it into 2020 As we talked about 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 more normal levels.

The outcome of this decision, has been very positive for Albertans, Alberta producers and the benefits are widely distributed across Canada, Alberta through jobs, taxes, royalties, equalization payments and without curtailment there would have been significant job losses. In the short term, we expect Keystone base system will be back on in the next few weeks and as we move to December Enbridge will start to take an additional 85,000 barrels a day, we see improved egress into 2020 both express pipeline and Keystone base each adding 50,000 barrels a day.

Additionally, the North West upgrader is targeted to take incremental heavy oil at 40,000 barrels a day, so total, 225,000 barrels a day of additional capacity. TMX looks to be progressing[Phonetic] forward and as well crude by rail is steady at over 300,000 barrels a day, all positive momentum for Canadian producers. We will continue our focus on safe, reliable operations and enhancing our top-tier operations.

We are in a very strong position and being nimble which enhances our capacity to create value for our shareholders as we continue to high grade opportunities in the company. Our curtailment optimization strategy is reflection of our ability to be nimble and operate with excellence. As well, Canadian Natural has valid advantage, it's our ability to effectively allocate cash flow to our four pillars in light of market conditions in 2019.

We will continue to balance and optimize our capital allocation delivering free cash flow, strengthen our balance sheet which Mark will highlight further in the financial review. Mark?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Thanks Tim, Canadian Natural had a strong financial quarter with net earnings of over $1 billion, Adjusted net earnings of over $1.2 billion, cash flow from operations of over $2.5 billion and adjusted funds flow of approximately $2.9 billion. As Tim discussed, effective and efficient operations in the quarter, including a continued focus on cost control and our ability to effectively execute our curtailment optimization strategy has again led to the solid financial results.

Canadian Natural's unique long life low decline asset base continues to generate significant free cash flow. In Q3, free cash flow was approximately $1.5 billion after net capital expenditures of $963 million and dividends of $447 million. We continue to execute on our disciplined free cash flow allocation policy as gross debt was reduced by over $1 billion in the quarter and approximately $800 million on a net of cash basis. This included the permanent retirement of bank facility debt of $800 million in the quarter. Subsequent to the quarter-end an additional $500 million of bank facility debt was permanently retired in October. These repayments have meaningfully reduced our debt levels from Q2 '19.

Share buybacks for the first nine months of 2019 have totaled to approximately 22 million shares for over $800 million, including $169 million in Q3 '19 and dividends of totaled $1.3 billion for an impressive total return to shareholders of over $2.1 billion so far in 2019. Our balance sheet metrics remain strong and our target 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.

This is significant as it includes the completion of the Devon Canada acquisition along with very significant 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 $4.7 billion, an increase of 120 million over Q2 '19 levels providing flexibility to manage throughout the business cycle and drive increasing shareholder value.

Canadian Natural's balanced diverse asset base, combined with our effective and efficient operations and disciplined cash flow allocation between our four pillars has strengthened the company's balance sheet, a balance sheet that is set to get even stronger as we move forward.

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

Tim S. McKay -- President

Thanks, Mark. In summary, we are delivering robust and 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 requires less capital to maintain volumes.

We have a balance in our commodities with approximately 48% of our BOEs light crude oil and SCO, 31% heavy 21% natural gas in Q3 which lessens our exposure and volatility to 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 delivered top tier results.

We have a robust sustainable free cash flow, our dividend was increased approximately 12% earlier this year and we have 19 consecutive years of dividend increases, which has a CAGR of 21%. Share purchases, year-to-date were approximately 23.5 million shares or $846 million and when combined with 2018 shares of about 30.9 million -- equals to cumulative of 54.4 million shares or approximately $2.1 million returned to shareholders through share purchases alone.

In summary, Canadian Natural has top tier free cash flow generation. It is unique, sustainable and robust. With that, we will open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question here comes from the line of Greg Pardy with RBC. Please go ahead, your line is now open.

Greg Pardy -- RBC -- Analyst

Yeah, thanks, good morning and great results to say the least. You've identified a number of areas where you are going to be boosting production. Primrose, Jackfish, Kirby North, just to mention a few. And then you've observed the optimization of the pipes. Question for me is, can you move all of those barrels by pipe or do you kind of envision crude by rail playing a bigger role in the egress mix for you?

Tim S. McKay -- President

Thanks, Greg. It's Tim here. Yeah, what we see here with the 225,000 barrels a day that's coming into next year is that we should be able to move, majority of our production -- all of our production by pipe. At present the company has approximately 30,000 to 50,000 barrels a day of production that we can produce for short periods as per our curtailment optimization strategy. But this volume is not on a sustained basis. But it can be done in short-term to mitigate both planned and unplanned production outages that we would have the across the company.

Greg Pardy -- RBC -- Analyst

Okay. And I know you were running about 14,000 barrels a day of crude by rail. I mean, do you have appetite for more under the right terms?

Tim S. McKay -- President

Well, Canadian Natural is in the process with the Alberta government and with respect to crude by rail, the contractual terms of very complex as only a portion of it will cost to move crude by rail to the delivery points covered. So as a result, process is taking some time for the parties to understand the complexity and how to bridge the missing contractual pieces.

So it's hard to say where that will head, but again, as the importance of crude by rail is decreasing and pipelines are still preferred to be the safest and most ESG-friendly option and we see it becoming less important going into 2020 with that 225,000 barrels a day of incremental egress happening.

Greg Pardy -- RBC -- Analyst

Okay. Thanks, Tim. And just one more from me, just you touched on the Keystone outage and expectation you expect it to come back here in the next few weeks and so on. Is it having a material impact on your ops and should we be thinking about inventory builds with you guys in the fourth quarter?

Tim S. McKay -- President

No, in fact, it's had very little impact on us here today.

Greg Pardy -- RBC -- Analyst

Okay, thanks very much.

Tim S. McKay -- President

Thank you, Greg.

Operator

Your next question comes from the line of Benny Wong with Morgan Stanley. Please go ahead, your line is now open.

Benny Wong -- Morgan Stanley -- Analyst

Hi, good morning. Thanks for taking my question. My first one is really around your debt reduction. I noticed you paid out quite a bit of debt while you kind of moderated your buyback a little bit, which I think most people appreciate it. Hoping you'd give some color around the rationale behind this. Is it more of a strategic shift or more of an opportunistic situation and how do you think about balancing between the buyback and debt reduction for the rest of the year and into next year?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Thanks, Benny, it's Mark. Just to remind everybody, we have our free cash flow allocation policy where we take our adjusted funds flow less our capital expenditures, less our dividend and the free cash flow that remains is allocated 50% to buybacks and 50% to debt and that allocation policy is really meant over a longer term period, so we continue to monitor that. The targets continue to be that allocation, Benny, So 50-50 on a longer-term basis. When you look from quarter to quarter, you will see a changes as we've had quarters with higher share buybacks and debt repayment. In this quarter, we had significant debt repayment. So, no, there is no change in the strategy going forward.

Benny Wong -- Morgan Stanley -- Analyst

Okay, I appreciate that. And my next question is on AOSP, it seems like you had a very strong robust production this quarter, can you tell us what you're doing differently there and is that level of project can operate at that run rate on a sustainable basis. If there was no curtailments going forward?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Yes, good question. Benny. Yeah, well, first of all, we're really not doing anything different than what we normally do. Our teams are very focused on looking for opportunities to find incremental capacity whether it's at Horizon, Jackfish or AOSP, so that part, I think, our teams are very focused on doing the right work to increase the reliability and increase our production as well as reduce our costs. So that part is really no different than what we do across the company.

As far as the run rate, I would say, it probably won't be at 318,000 barrels a day. I mean, this is our first test obviously under curtailment it is very difficult to have anything sustained because it impacts other areas of the company. So while Horizon is down, it's a nice to have to be able to crank up our production, whether it's at AOSP, Jackfish, Primrose, so to me I look at it as one of the levers we can use to manage our overall production. And, but I would think that -- and we'll see over the coming months if that 318,000 is closer to 318,000 or something a little less.

Benny Wong -- Morgan Stanley -- Analyst

Great, thank you very much.

Operator

Your next question comes from the line of Phil Gresh with JP Morgan. Please go ahead, your line is now open.

Phil Gresh -- JP Morgan -- Analyst

Yes, hi, good morning. First question would just be, whether you have any thoughts around 2020 capital spending at this point based on some of the comments you made about the uncertainties and take away and things like that, it sounds like you're probably going to be closer to flattish than not. But any color you might be able to share?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Sure. Phil, thank you for the question. At Present we're working through the 2020 budget currently and I would say this year, which is a little different than past years, there is additional complexities and uncertainties around curtailment, crude by rail SPAs[Phonetic] , so normally for our budget, we would have it ready for the open house I don't know if that will be or not be the case this year, but there are many complexities in regards to finalizing our budget.

Phil Gresh -- JP Morgan -- Analyst

Okay, understood. Last year definitely you guys did a nice job. I'm just giving scenarios around it.

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Just from a ballpark, from a ballpark way to view it, I mean I don't see it really much different than it was this year. You know you had in a little bit of Devon ceding [Phonetic] capital and you're pretty well at kind of at around that $4 billion mark.

Phil Gresh -- JP Morgan -- Analyst

Yeah, OK. That's what I figured. Okay. Second question, I guess this is for Mark, on the working capital, last year was a big source, this year has been a big use, I think maybe earlier this year you had thought perhaps some of this would turnaround in the second half, but then this quarter it was a headwind, so is there any thought as to whether you get some tailwind for working capital, is any of that contemplated in the end of the year leverage target that you gave?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Yeah, you know, Phil. It's really, it really comes down to how the revenue gets paid and received. Right. So the way it works, of course, is that we get paid the following month for cash flow in a month, so if you're looking at a September production, you actually get paid for that in October. So it depends on the pricing and receivables that you go through in a quarter that roll into the cash in the next quarter. So it's hard to predict quarter-to-quarter, but over time, it does kind of unwind itself.

And what you saw, Phil, when we talked back in for Q4 was the big adjustment, because of course December pricing was way down.

Phil Gresh -- JP Morgan -- Analyst

Sure. And your 1.9 times leverage target is a fairly neutral assumption I guess than versus the end of the quarter?

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Yes, it's neutral.

Phil Gresh -- JP Morgan -- Analyst

Right , OK. And then I guess last one would just be, long-term you have, I believe from the last Analyst Day, you have a target in mind I think of something closer to $15 billion of net debt at some stage. I guess could you confirm, if that's still the right way to think about it and with respect to your earlier question about the 50-50 split and whatnot, is there any idea of maybe accelerating that a bit to get to the $15 billion faster? Thank you.

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

So, I mean the strategy around the 50-50 remains. So, that over a period of time is what is currently in place and we plan to continue to execute over a period of time. So the $15 billion and 1.5 times debt to EBITDA remains the targets. Now of course that will -- the pace of those, of getting to those will depend on pricing and cash flow and those sorts of things, so we continue to manage that on a go-forward and on-going basis.

Phil Gresh -- JP Morgan -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead, your line is now open.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning, Tim, and congrats here on really strong results. The first question I had was just on Keystone. I think you alluded to your expectation, you think we'll be back in the next couple of weeks. Can you provide any more color around what you're seeing there?

Tim S. McKay -- President

I really can't give you any more color on it. All I can say is that if you look back at the 2017 instant, it took about -- I think it was 10 days to 15 days for it to come back in service. So I'm actually just looking at it and say, if it's on a similar path that's what it was back in 2017. It should be on in the next couple of weeks.

Neil Mehta -- Goldman Sachs -- Analyst

Okay, that's helpful. And then just thoughts on the, on the cost side would be helpful. Part of the, the deep versus our expectations at least was year -- operating cost came in lower than our expectations, where are we in terms of being able to drive cost of the business, especially in an environment where our production is still being held back?

Tim S. McKay -- President

Yeah, see, you know, it's a very good question and I think if you look at the company's history, we've always been able to find opportunities to reduce our costs and probably the easiest one is to look at is something like Pelican where it was -- a year ago it was 63,000 barrels a day. Today you know maybe have it 59,000 on a yearly basis, yet our operating costs are staying flat, so the production has declined 6% and we're able to take roughly 6% of our costs on a BOE basis out of it.

You know Horizon and AOSP you've seen a constant march down that not as fast, but there is opportunities to mitigate any inflation in terms of labor costs or anything else, by doing things more efficiently and effective. So I just look at our teams, they're very focused trying to mitigate any cost increases as well as work to be more efficient, effective across the whole business, and they've been able to do a great job. There is not one item that doesn't -- the teams don't look at in terms of trying to do it better and more effectively and more efficiently.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks guys.

Tim S. McKay -- President

Thank you, Neil.

Operator

Your next question comes from the line of Mike Dunn with GMP First Energy. Please go ahead, your line is now open.

Mike Dunn -- GMP FirstEnergy -- Analyst

Thanks everyone. Good morning. A couple of questions, I guess, first one probably for Mark. Are you guys expecting any big changes either next year or the year after, I guess, assuming capital levels are similar to 2019 to your cash tax ability in North America or is that sort of fairly steady thing I guess relative to pre-tax cash flow and I have a follow-up on greenhouse gas. Thanks.

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

I don't, I don't expect any big changes Mike, so I would look at it as [Indecipherable] basis.

Mike Dunn -- GMP FirstEnergy -- Analyst

Great. And then as I'm sure you're all aware, the Alberta government has recently come out with a new greenhouse gas tax structure. I forgot exactly what it's called but I believe the old one -- the CCRR has been suspended at some point here in 2019. So can you guys share in terms of total corporate costs How much do you think it's going to be down in 2019 versus 2018 and then what 2020 might look like in terms of relative changes. I would presume that overall the 2020 GHG taxes you'd be paying Alberta would be less than what they would have otherwise been under the CCIR[Phonetic]. I know that Alberta government thinks that the total taxes ticketing would be less from industry, but any thoughts on that would be helpful.

Tim S. McKay -- President

Yeah, Mike the tiers, the government announced, I believe it earlier the week, the TIER system -- Technology Innovation Emissions Reduction program. And yeah, it is a positive step forward, obviously the government still has to go through to get it equivalency on a federal basis. From an overall perspective, you're correct, we do see a reduction compared to the CCIR. Right now our teams are just working through it. Obviously, there is two parts to it. The large emitters and then of course the smaller sites, which can opt in. So we're just going through it in detail now, but it does look to be pretty good decreased gas compared to the federal program.

Mike Dunn -- GMP FirstEnergy -- Analyst

Okay. Thanks, Tim. And then maybe if you could just clarify for me under the CCIR, I believe your smaller sites like primary heavy oil would have been subject to some GHG tax would you be anticipating that that would still be the case in 2020 I guess under the new system?

Tim S. McKay -- President

Yeah, if we can get the equivalency of the TIER system approved, those sites would actually fall under this, the small emitters, under the TIER program and to your point, yes, they would save us money in terms of tax. So that's what we're working on right now to go through that process, but yes under CCIR. It is more cost on the small heavy oil wells and such.

Mike Dunn -- GMP FirstEnergy -- Analyst

Okay. And then also, sorry, just to clarify -- I believe for 2019 all these taxes have been suspended. So overall 2020 over 2019, you'd probably expect overall to pay more?

Tim S. McKay -- President

Yeah, little bit, but I wouldn't know what that difference is. I'm sorry.

Mike Dunn -- GMP FirstEnergy -- Analyst

Okay. Thanks for fielding my questions. That's all from me.

Tim S. McKay -- President

Thanks, Mike.

Operator

Your next question comes from the line of Manav Gupta with Credit Suisse. Please go ahead, your line is now open.

Manav Gupta -- Credit Suisse -- Analyst

Hey guys, congrats on a good result. I was actually surprised to see the Jackfish costs down to $9.44 that's like a 24% reduction from the time you acquired the asset. I'm just trying to understand, was there a lot of low hanging fruit? Is this what you planned? How did you manage to hit synergies or lower cost by 25% in just one quarter of acquiring the asset?

Tim S. McKay -- President

Yeah. So it's a combination of lower fuel costs and as well as the operational efficiencies. The teams immediately jumped on. So if you go back in time, when we talked about the Devon acquisition. There are a lot of synergies between our Kirby operations to the Jackfish operations. So those opportunities [Indecipherable] exercised by the team I can say that closed on the ground in the field, going through how they could execute our high level plan of how to reduce costs and capture the synergies between the two sites.

Manav Gupta -- Credit Suisse -- Analyst

And a quick follow up here is, can you just remind us how much of your volumes are currently curtailed and then Kirby North and Primrose I'm trying to understand if rail over curtailment is approved and you do add rail capacity, what could the production levels look like as you are exiting 2020 if there a state quo is maintained?

Tim S. McKay -- President

Yeah. So what I talked about earlier, is like at the present time, we have approximately 30,000 to 50,000 barrels a day of production that can be produced for short periods, as per our curtailment optimization strategy. So this volume isn't sustainable on a same basis. We can use it to -- these are levers that we are as a company that we're able to use in the short term to mitigate both planned and unplanned production. So we're working through our 2020 budget, as we talked about earlier, so I can't speculate on what the number would be into 2020.

Manav Gupta -- Credit Suisse -- Analyst

The last quick one, is there any update on the NWR refinery start up?

Tim S. McKay -- President

There was an update by NWR I think a couple of days ago. But I would just suggest you go to their website to get all the exact details.

Manav Gupta -- Credit Suisse -- Analyst

Thank you so much.

Tim S. McKay -- President

Thank you.

Operator

And I'm showing no further questions in the queue at this time, I will now turn the call back over to Mr. Corey Bieber for any closing remarks.

Corey B. Bieber -- Executive Advisor, Finance

Thank you, operator. And thank you everyone for attending our conference call this morning. Canadian Natural's large diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver effective and efficient operations with top-tier performance is contributing to substantial and sustainable free cash flow. This together with effective capital allocation contributes to achieving our goal of maximizing shareholder value. If you do have any further questions, please don't hesitate to give our teams a call and thank you and goodbye.

Operator

[Operator Closing Remarks].

Duration: 46 minutes

Call participants:

Corey B. Bieber -- Executive Advisor, Finance

Steve W. Laut -- Executive Vice-Chairman

Tim S. McKay -- President

Mark Stainthorpe -- Chief Financial Officer and Senior Vice President, Finance

Greg Pardy -- RBC -- Analyst

Benny Wong -- Morgan Stanley -- Analyst

Phil Gresh -- JP Morgan -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Mike Dunn -- GMP FirstEnergy -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

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