Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Canadian Natural Resources Ltd (NYSE:CNQ)
Q4 2019 Earnings Call
Mar 5, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources Q4 2019 Earnings Results Conference Call Webcast. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, March 5th, 2020, at 9 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. Thank you.

Corey B. Bieber -- Executive Advisor

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

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

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

Steve W. Laut -- Executive Vice Chairman

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

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

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

In the downside scenario, Canadian oil sands mining and upgrading projects are advantaged with long-life, no decline, no reserve replacement cost or risk. It's essentially a manufacturing operation with low total cost and importantly a strong likelihood that net zero greenhouse gas emissions are attainable to technology and innovation. Natural gas, and in particular, Canadian Natural's gas assets are advantaged with low emissions intensity and low cost. Canadian Natural is in a very strong position going forward, even in the downside scenarios.

ESG performance is becoming increasingly important as it should be, and in Canada, -- and the Canada oil gas sector not surprisingly leads the global pack with outstanding performance.

In the last conference call, so I spent some time talking about the environment. I will go through all the details as I had in the past, but summarize the key points of what I consider to be a very impressive Canadian success story. A story we've been telling to our broader Canadian audience is a success story that all Canadians can be proud of, and it's been greeted with some surprise and strong support. A story we continued to tell to an even broader audience, because when it comes to the environmental performance, Canadian Natural, and indeed the entire Canadian oil and gas sector has delivered game changing environmental performance.

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

Canadian Natural has already used our overall corporate emissions intensity by 29% since 2012. At Horizon, our intensity is down 37% and our primary heavy oil intensity is down 78%, and we are a leading capture 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 and mining emissions are third-party verified.

Canadian ingenuity and our ability to innovate and leverage technology has taken what was very high intensity oil on a wells-to-combustion basis in 2009 to below the global average, and the success story is just getting started. We can with new projects leverage technology and Canadian ingenuity to do even better, with Canadian Natural's aspirational goal of reaching net zero emissions. It's not 2009 any more. Canadian oil and gas is now the premium product something all Canadians should be proud of. Canadian Natural has multiple pathways to achieve net zero, with actions identified in the near, mid and long term. And you can check our website for more details on the technology that will help us get there.

The strength of Canadian Natural's model is evident in all aspects of the Company, including ESG, where we're delivering leading ESG performance. Our assets are advantaged for the downside scenarios, and we have a track record of leveraging technology, innovation and continuous improvement to deliver ever improving environmental performance with multiple pathways to attaining net zero emissions in oil sands. The Canadian oil sands, because of its asset advantages, long life, no decline and manufacturing style operations are one of the clearest routes, if not the clearest route to net zero of any global oil asset.

In 1.5-degree limit world, even at downside scenario, oil and natural gas will still have those substantial role in providing the energy the world needs. Who should supply that energy should be those that deliver the highest ESG standards and the lowest greenhouse gas intensity. As a result, Canadian Natural should be an ESG investment priority.

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

Tim S. McKay -- President

Thank you, Steve. Good morning, everyone. Canadian Natural had top tier operational results for 2019. Production from our assets were strong, as we executed our curtailment optimization strategy, and over and above that we continued to drive effective and efficient operations, reducing our operating costs even under curtailment in Alberta. This is a reflection of our operational excellence of our people, the strength of our vast, well balanced and diverse asset base and our ability to effectively execute our curtailment optimization strategy to maximize free cash flow for our shareholders. We have a history of capital discipline, operational excellence, and we have robust, economic, long life, low decline assets and relative to most of our peers the ability to enhance our margins and grow production.

As we talked about the last few quarters, Canadian Natural continues to strongly support the government decision to curtail production as differentials for both WCS and synthetic oil in 2019 have stabilized to more reasonable levels. The outcome of this decision has been very positive and proven very effective in helping to manage the volatility of differentials in the market when egress restrictions occur, as they did in October 2019. Even as storage levels rose, the discount for Canadian oil stayed within reason versus what we experienced in Q4 2018.

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

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

We continued to focus on operational excellence, and our annual North American natural gas operating cost was very strong at a CAD1.16 per Mcf, which is down 7% when compared to 2018 of CAD1.25. Fourth quarter North American production was 1.41 Bcf versus 1.42 Bcf for Q3. Operating costs were CAD1.11 as expected, up from Q3 of CAD1.07 due to seasonal differences. Impressive operating cost performance in light of our strategic decision to allow natural gas production to decline.

At Septimus, the Company's high value liquid rich Montney area, the third production cycle has now commenced, and most importantly proven the lakes concept. As a reminder, the lakes process uses dry natural gas and is reinjected into the reservoir, and then the liquid rich gas is produced back, which has the potential to increase liquid rates and recovery by 30% to 70%, adding significant value. The compressor will now be moved to the Wembley area in Alberta, with injections targeted to start late Q2. This will further derisk the lakes potential in the liquid rich areas of the Montney, which could add significant long-term value to the Company.

In the Fourth quarter, the Canadian Natural -- Canadian operations realized natural gas price of CAD2.52 per Mcf. Canadian Natural has a diverse natural gas sales portfolio of which 44% is used in our operations, 34% is exported and only 22% is exposed to AECO pricing based on 2019 production. Our 2019 annual North American light oil NGL production was 96,984 barrels a day, up 3% for 2018. Annual operating costs were strong at CAD15.21 per barrel, which is slightly lower than the 2018 annual operating costs of CAD15.29. Q4 production was 93,909 barrels per day, down 2% when comparing Q3 2019. Fourth quarter operating costs of CAD15.41 per barrel, as compared to Q3 operating costs of CAD14.96.

Overall, our international assets had a strong year with annual oil production of 49,000 -- approximately 49,300 barrels a day, a 13% increase over 2018, which generated significant free cash flow and value for the Company. Offshore Africa production was 21,371 barrels a day when compared to 2018 of 19,662 due to the successful Baobab drilling program completed in early 2019, offset by natural field decline. CDI operating costs in 2019 were strong at CAD11.21 per barrel, a decrease of 16% from 2018.

In the North Sea, annual production averaged 27,919 barrels a day in 2019, up from 2018 of 23,965 barrels a day, as a result of the successful drilling program that was completed in Q3 with annual operating costs of CAD36.39, which is down 9% from 2018. In South Africa, the operator has secured a rig and is targeting spud the exploration well in Q2 of 2020 and contingent on results an additional exploration well could be drilled on the blocks as it target gas condensate on identified structures that could have significant potential.

Annual heavy oil production was 82,189 barrels a day in 2019, versus 86,312 barrels a day in 2018, reflecting the impact of the lack of investment due to Alberta curtailment rules offset by the additional Devon volumes acquired mid-2019. Annual operating costs were strong at CAD16.66 per barrel compared to the 2018 operating costs of CAD16.60, reflecting the Company's focus on cost control and capturing synergies with the acquired Devon-owned properties.

Fourth quarter production was 94,262 barrels a day, up from Q3 of approximately 88,000 barrels a day, as volumes were optimized as per our curtailment strategy, while operating costs were very strong at CAD15.03 per barrel, down 12% from Q3 of 2019 and CAD17.08, down 11% compared to 2018 Q4. The Company remains focused on effective efficient operation in an ability to capture synergies. A key component of our long life, low decline assets is a world-class Pelican Lake pool, where our leading-edge polymer flood continues to deliver significant value. 2019 annual production was 58,855 barrels a day, versus its 2018 average of 63,082 barrels, which was impacted by limited investment to the Alberta curtailment and the temporary shut-in due to the wildfires in the summer of last year.

The team continues to do a great job, and we have strong annual operating costs of CAD6.22 per barrel, a 7% reduction versus our 2018 operating costs of CAD6.72. Fourth quarter production was 59,000 -- approximately 59,000 barrels a day, slightly down from the Q3 of 60,146 barrels a day. Operating costs were very strong at CAD5.38 per barrel, versus Q3 operating costs of CAD6.10. At Pelican Lake, our team continues to drive operational excellence and has been able to mitigate the impact of decline in production over the last four years, holding our annual operating costs on a BOE basis below CAD7 a barrel, an excellent accomplishment by the team.

With our low decline and very low cost, Pelican Lake continues to have excellent netback. Overall, strength of our conventional assets, our ability to be nimble with our capital, and having effective and efficient operations gave us top tier results in a curtailed environment in 2019.

I will now turn it over to Scott to do a brief overview of the assets.

Scott G. Stauth -- Chief Operating Officer, Oil Sands

Thank you, Tim. Scott here. I will talk to both thermal and mining assets. Starting with thermal. We had a very strong year in our thermal operations in 2019, as we continued to leverage our continuous improvement culture and our expertise to deliver effective and efficient operations. In 2019, our thermal production reached a record of approximately 168,000 barrels per day, as we optimized production throughout the year under our curtailment optimization strategy, successfully integrated the acquired Jackfish assets in the third quarter of 2019. We immediately began capturing operational synergies at Jackfish, which supported annual thermal operating costs of CAD10.83 per barrel, a decrease of 18% from 2018 levels of CAD13.20 per barrel.

In the fourth quarter, production reached a record of approximately 259,000 barrels per day, and our thermal operating costs were very strong at CAD8.65 per barrel, a decrease of 35% from the fourth quarter of 2018 of CAD13.28 per barrel. This strong performance reflects increased production from economic pad additions at Primrose. Ramping up production at Kirby North and additional cost synergies captured a Jackfish. In the fourth quarter, the Kirby project area, which includes both the north and south areas achieved combined production of approximately 47,000 barrels per day. At Primrose, production was approximately 106,000 barrels per day, as we optimized production from our successful Primrose pad adds to maximize overall corporate production and adjusted funds flow.

At Jackfish, production in the fourth quarter averaged approximately 102,000 barrels per day, a 5% increase over Q3 2019, as we optimized volumes under our curtailment strategy. We have successfully integrated the Jackfish operations and have captured synergies with our Kirby operations and now target 2020 operating costs of between CAD8 and CAD9 per barrel, including fuel, a reduction of CAD3.50 per barrel or 30% at the midpoint from original targeted operating cost at the time of the acquisition. In the fourth quarter, we also completed the previously announced well tie-ins at Jackfish for a low incremental cost of CAD8 million. These wells are targeted to have peak production capacity of 21,000 barrels per day and will be available to the Company as part of our curtailment optimization strategy.

Moving to Canadian Natural's world-class oil sands mining and upgrading operations. We delivered another strong year. Our mining operations achieved annual production of approximately 395,000 barrels per day, with industry-leading operating cost to CAD22.56 per barrel, slightly higher than our record-low of CAD21.75 per barrel in 2018. Impressive results, given our proactive decision to replace piping at our hydrogen plant at Horizon in the fourth quarter. Throughout 2019, our teams continued to capture synergies between our two mine sites, leveraging our technical expertise and shared services, focusing on operational excellence to reduce operating costs, excluding fuel by CAD91 million from 2018 levels.

Since completing the AOSP acquisition in 2017, Canadian Natural has successfully increased gross production capacity at the Albian mines by approximately 40,000 barrels per day to 320,000 barrels per day, representing a 14% increase in capacity, while reducing AOSP's operating costs by approximately 34% or CAD10 a barrel, since the announcement of the acquisition through increased reliability, process improvements and optimization projects; a great job by our teams.

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

At Horizon, during post turnaround start-up and as part of the Company's proactive inspections, the team identified a need to repair piping in one of the hydrogen manufacturing units. In light of curtailment and Canadian Natural's unique ability to optimize corporate curtailment volumes, we made the strategic decision to replace the piping in December and enhanced reliability and performance going forward. As a result, Horizon ran at restricted rates of approximately 170,500 barrels per day and returned to full rates by January 19th. Performance at Horizon since returning to full rates has been strong, with February achieving record SCO production of 262,600 barrels per day. We continued to advance engineering of the identified growth opportunities at Horizon in a disciplined manner, as we look to optimize cost and preserve our growth opportunities of 75,000 to 95,000 barrels per day, as we wait for clarity on market access.

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

With that I will turn it over to Darren.

Darren M. Fichter -- Chief Operating Officer, Exploration and Production

Thank you, Scott. Good morning. I'll give you a reserve update. Firstly, I'd like to note that 100% of our reserves are externally evaluated and reviewed by independent qualified reserve evaluators. In 2019, reserve disclosure is presented in accordance with Canadian recorded -- reporting requirements, using forecast prices and escalated costs. And Canadian centers also require disclosure reserves on a Company working interest share before royalties. In 2019, proved reserves increased 11% to 11 billion BOE and proved plus probable reserves increased 6% to 14.3 billion BOE. It is also important to note that 73% of our total proved reserves are proved developed producing reserves at 8 billion BOE.

Finding and development costs and reserve placements are key indicators of the Company's asset strength. In 2019, Canadian Natural delivered impressive results and our strong performance is reflected in our finding and development costs. The corporate finding, development and acquisition cost, excluding changes in future development costs, are CAD4.52 per BOE for proved and CAD5.34 per BOE for proved plus probable reserves.

Canadian Natural's finding, development and acquisition costs, including changes in future development costs, are CAD7.45 per BOE for proved and CAD5.75 per BOE for proved plus probable. We replaced 2019 production by 194% for proved developed producing reserves by 374% for proved and by 317% for proved plus probable reserves.

Evidence of Canadian Natural's transition to a long life, low decline asset base are top tier reserve life indices or an impressive 20.2 years for proved developed producing, 27.8 years for proved and 36 years for proved plus probable reserves. The net present value of future net revenue, before income taxes, using a 10% discount rate and including the full Company ARO, is CAD107.6 billion for proved reserves and CAD127.8 billion for proved plus probable reserves.

In summary, the excellent results are results reflect ability to execute, as well as the strength of our asset base.

Now I will hand over to Mark for the financial highlights.

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

Thanks, Darren. Canadian Natural had a strong finish to 2019, with fourth quarter financial results as follows. Net earnings of approximately CAD600 million; adjusted net earnings of approximately CAD685 million; cash flow from operations of approximately CAD2.5 billion; and adjusted funds flow of approximately CAD2.5 billion. As Tim, Scott and Darren discussed, our culture of continuous improvement, our ability to be effective and efficient, and the relentless focus on Canadian Natural and controlling our costs led to the solid financial results.

Canadian Natural's unique long life, low decline asset base continues to generate significant free cash flow. In Q4, free cash flow was approximately CAD1 billion, after net capital expenditures of CAD1.05 billion and dividends of CAD444 million. This free cash flow in Q4 contributed to a full-year 2019 free cash flow of CAD4.6 billion, after net capital expenditures and dividends and excluding the Devon acquisition capital. Significant results that speaks to the uniqueness of our asset base to deliver over the long term.

Gross debt was reduced by approximately CAD1.5 billion in the quarter when compared to Q3 2019 levels, including the impact of foreign exchange. Included in this debt reduction was a repayment and cancellation of the remaining CAD1 billion on the AOSP acquisition facility ahead of its maturity in May 2020 and the repayment of a medium-term note upon maturity. We also successfully increased the term facility in the quarter by CAD450 million and extended the maturity to 2023. Our balance sheet metrics remain strong and we exited 2019 at 1.9 times debt to adjusted EBITDA and 37.4% debt to book cap. These are impressive results as they represent improved levels from 2018 that include both the acquisition of Devon Canada in 2019 and significant returns to shareholders through the year.

Share buybacks for full-year 2019 totaled 25.9 million shares for CAD941 million, including CAD140 million in Q4 2019, and dividends totaled CAD1.7 billion for an impressive return to shareholders of over CAD2.6 billion in 2019. Given the confidence in the strength and robustness of our assets and the sustainability of our free cash flow profile, the Board of Directors has increased the dividend for the 20th consecutive year with a 13% increase to CAD1.70 per share annually, with the first quarterly payment on April 1st. Additionally, in 2020 through to March 4th, we have purchased for cancellation 6.6 million shares for approximately CAD260 million.

We continued to execute our free cash flow allocation policy, where free cash flow is defined as adjusted funds flow, less capital expenditures and dividends. We target to allocate this free cash flow, 50% to debt and 50% to share buybacks with targets of CAD15 billion in absolute debt and 1.5 times debt to EBITDA. Finally, available liquidity represented by bank facilities and cash at quarter end was approximately CAD4.9 billion, an increase of approximately CAD200 million over Q3 2019 levels, providing flexibility to manage through the business and commodity price cycles.

Our financial results throughout 2019 demonstrate our commitment to effective and efficient operations, our capital and operating discipline and our effective execution on our four pillars of capital allocation.

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

Tim S. McKay -- President

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

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

Canadian Natural will continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective efficient operations and by our teams, who delivered top tier results. We have a robust sustainable free cash flow. And in 2019, returns to shareholders were significant, CAD1.7 billion dividends, 9.9 billion in share purchases for a total of CAD2.6 billion. Today, our dividend was increased by 13%, and we have 20 consecutive years of dividend increases, which has a CAGR of 20%. Share repurchases in 2020 were approximately 6.6 million shares or CAD260 million year-to-date, as we continue as per our free cash flow allocation policy.

In 2020, as a result of the volatility of oil pricing, Canadian Natural has reduced its capital budget by approximately CAD100 million in our oil sands businesses, deferring work into 2020 that we can plan and execute more effectively and efficiently, which has no impact on 2020 production volume. In 2020, we will continue to drive our environmental performance to meet and exceed our targets we set in December 2019.

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

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

Questions and Answers:

Operator

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

Greg Pardy -- RBC Capital Markets -- Analyst

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

Steve W. Laut -- Executive Vice Chairman

Okay. Greg, I'll get Scott Stauth to just give you a little bit of a rundown of where at [Indecipherable].

Scott G. Stauth -- Chief Operating Officer, Oil Sands

Thanks, Greg. So Greg, as we are -- continued implement changes as we work through the pilot process here, there is different components that we're adding to help augment the possibility of getting dry sand and the recovery of the bitumen. So we're just stepping through that process. Probably every several months here, we're making changes to improve it, Greg, and we're working on -- at the same time, we're working on a DBM to try to come up with what it would look like for estimates in terms of the commercial operation. That would probably be out a few years from now in terms of getting to that stage, probably in the 2023 range, Craig, is what we're estimating right now. But for this year, it's focused on the pilot look to get the recovery that we want to achieve and the dry sand that we want to achieve. So that's the focus for 2019 -- 2020.

Greg Pardy -- RBC Capital Markets -- Analyst

2020? I mean, do you think by the end of this year you're in a position where you can say, "We think this works on a pilot level", and then, it's really a question whether you can scale it or is that exploration process going to extend do you think into next year?

Scott G. Stauth -- Chief Operating Officer, Oil Sands

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

Greg Pardy -- RBC Capital Markets -- Analyst

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

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

Hey, Greg. It's Mark. Of course, when you look at the previous guidance for cash tax, you just obviously have to be cognizant of the pricing assumptions used. So we can help you through the IR group on that, but that's going to be a big driver. So it's just depending on what price deck you're using.

Greg Pardy -- RBC Capital Markets -- Analyst

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

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

Yes, it is.

Greg Pardy -- RBC Capital Markets -- Analyst

Alright. Thanks very much.

Operator

Next question comes from Benny Wong with Morgan Stanley.

Benny Wong -- Morgan Stanley -- Analyst

Hi. Good morning, guys. Thanks for taking my question. Just first off, just wanted to Congrats Steve for the retirement. Best of luck. Just my first question is really how do you think about your budget especially with where commodity prices are today? Are you comfortable with it as long as your cash flow covers your cash commitments. And I guess, if needed, how much flexibility do you have -- do you think you have to reduce capital further if you need to?

Tim S. McKay -- President

Hi, Benny. It's Tim McKay here. Yeah, we're very comfortable with our budget. Obviously, when we announced it back in December of 2019, it was a very conservative budget based on the fact that we were being curtailed in Alberta for 2020. So if you look at our maintenance capital, it's approximately CAD3.7 billion. So we could, if needed to -- we reduced the capital further by probably anywhere from CAD300 million to CAD400 million if needed. So we're very comfortable that we have low maintenance capital, which is a big strength of our Company.

Benny Wong -- Morgan Stanley -- Analyst

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

Tim S. McKay -- President

So as far as the Scotford refinery that expansion piece was planned by our partner, Shell, for many years. And so it was part of the execution plan. The gross cost is approximately CAD70 million, and they're looking to execute it here in the fall. Obviously, what's really -- what's happened with the great work of our team at Albian is that, the Albian mine has now been able to outpace the upgrader. So really -- it's a really nice fit in the fact that the oil sands at Albian can pace at 320,000 barrels a day, and basically keep that Upgrader full after its expansion here in the fall.

Benny Wong -- Morgan Stanley -- Analyst

Got it. Thank you so much.

Operator

Next question comes from Dennis Fong with Canaccord Genuity.

Dennis Fong -- Canaccord Genuity -- Analyst

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

Tim S. McKay -- President

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

So you get new set of eyes. People look for opportunities to drive operational efficiencies and create value for the Company in the long term. So I don't believe it's anything unique so much as we're very effective in terms of the way we operate and the way we integrate operations to maximize value.

Dennis Fong -- Canaccord Genuity -- Analyst

Great. Thanks. And then maybe just a bit of an extension in terms of the maintenance capital component from Benny's question is given that you guys are looking at -- well, call it trading a little bit of within your curtailment management policy from the -- obviously, the lower decline long-lived assets in your thermal production areas versus the more conventional heavy oil areas. How should I be thinking about the CAD3.7 billion of maintenance capex that you guys outlined just prior to and in the context of obviously a larger wedge of those long-lived assets and low decline assets?

Steve W. Laut -- Executive Vice Chairman

Yeah. I'm not sure, Fong [Phonetic]. The CAD3.7 billion that we've quoted was essentially to keep production flat based on our 10% decline. What we're doing under curtailment is essentially flexing our asset. So a good example is that on Primrose, with the cyclic nature of the -- of that product, when we do a turnaround, for example, in late Q1 we will be doing a turnaround at Jackfish and the -- we can supplement volumes out of Primrose to backfill those losses so you speak when we do maintenance, and that's exactly what we will be doing when Scotford goes in on its turnaround in April is we will be using our levers to ensure that we can make our curtailment volumes.

So it's -- we have lots of levers that we were able to use. As you can see on the conventional side, the heavy oil side, we're doing exactly the same thing. We slow down to manage -- to meet our curtailment volumes. And when we have operational issues or planned maintenance, we're able to back -- crank those up and backfill those volumes.

Dennis Fong -- Canaccord Genuity -- Analyst

Okay. Maybe then just -- maybe I'll ask slightly differently. Is there any preference to running, say, the 20,000 barrels a day of potential incremental volumes at Jackfish versus more conventional volumes that you guys could produce from kind of the heavy oil region that you guys are kind of between the borders of Alberta and Saskatchewan? And how should I be thinking about your prioritization of producing, well, call it, like barrel?

Tim S. McKay -- President

So product iteration is quite simple in a fact that we go with the highest netback first. So obviously, whatever we make the most money on stays on and then we use the other less valuable barrels, let's say, primary heavy oil as an example to curtailed volumes. So as you can see, we've never curtailed Pelican as it -- with CAD6 operating costs, it is -- has better net back then primary heavy oil.

Dennis Fong -- Canaccord Genuity -- Analyst

Okay. Perfect. Thank you.

Operator

Next question comes from Asit Sen With Bank of America.

Asit Sen -- Bank of America -- Analyst

Thanks. Good morning. Tim, thanks for all the details on capital flexibility and sustaining capex. Just wondering how the capital plan could change in a sustained CAD45 WTI scenario? How long do you have to see a low price environment to further adjust, in other words, the sensitivity on timing? And could you update us on your hedging policy or strategy in this environment?

Tim S. McKay -- President

Sure. So right now, as I talked earlier, we could reduce our capital anywhere from CAD300 million to CAD400 million there. Right now, we're going into breakup. So really, we have very little spend here for the next few months. So we will just evaluate after in, kind of, the April, May time frame how it's looking into Q3 and Q4 to make those decisions on the various products depending on commodity prices. So we don't look at that we have to spend the money, but we will monitor the pricing on a go-forward basis, and just make those decisions as we move through the year.

In terms of hedging policy, we've never been a big hedger. We look to -- at the products on a daily basis to maximize value. And I don't think our position on hedging has changed.

Asit Sen -- Bank of America -- Analyst

Great. Thanks. And then moving on to the incremental margin capture, great progress in 2019. But could you speak to the additional CAD900 million growth opportunity, what are the main areas of savings, what are the main buckets and where will the focus be in 2024 for the CAD180 million outlined?

Tim S. McKay -- President

So it's across all the asset base. So the way we work as a company is every area, every group, every product has goals and targets that they are looking to hit. And so, that's really all I can say is that you see it in the oil sands, they had CAD91 million worth of savings, conventional, it's across the board. Pelican, there is not one area that doesn't have a target where goals to achieve in China to capture more margins.

Asit Sen -- Bank of America -- Analyst

Okay. Thank you.

Operator

Next question comes from Manav Gupta with Credit Suisse.

Manav Gupta -- Credit Suisse -- Analyst

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

Steve W. Laut -- Executive Vice Chairman

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

Thank you for your...

Asit Sen -- Bank of America -- Analyst

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

Steve W. Laut -- Executive Vice Chairman

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

Asit Sen -- Bank of America -- Analyst

Thank you for taking my questions.

Steve W. Laut -- Executive Vice Chairman

Thank you. Next question comes from Neil Mehta with Goldman Sachs.

Emily Chang -- Goldman Sachs -- Analyst

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

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

Hi, Emily. It's Mark here. Obviously, the Board showed some confidence in the free cash flow profile sustainability of the assets with the dividend increase this quarter. I think going forward, obviously that's a Board decision going forward. So the trajectory is hard to sort of articulate in the call today. I think though, of course, the Board focuses mainly on the sustainability of that dividend through all the business and commodity price cycles. I think the other thing that's important to recognize is the margin growth that we've talked about here that is driving that additional free cash flow overall.

As far as, the free cash flow allocation policy, I think it's relatively simple. We try and buy it on a go-forward basis. So when you take your adjusted funds flow less -- the capital less your current dividend, 50% of that is going to be allocated to share buybacks over a period of time. So depending on your forecast for commodity prices and things like that will drive a little bit of changes in that share buyback program.

Emily Chang -- Goldman Sachs -- Analyst

That's helpful. And just one follow up, and this is probably a little longer dated, but last year we did see an application filed integrate Joslyn into the Horizon mine plant. Can you give us -- can you provide some color as to when the current Horizon mine pit will be completed and when you would expect to need to start executing on work to extend through Horizon South? And perhaps any initial thoughts around associated capital cost and production upside, if any? Thank you.

Tim S. McKay -- President

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

Emily Chang -- Goldman Sachs -- Analyst

And just any sense of timing on that, please?

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

It starts in 2022.

Scott G. Stauth -- Chief Operating Officer, Oil Sands

Yeah. So we'll be -- it's Scott here, Emily. And so we'll be staging through into the Joslyn mine area over the next couple of years here, as Tim mentioned. And it's just progression as we felt that we move into the Joslyn lease.

Emily Chang -- Goldman Sachs -- Analyst

Great. Thank you.

Operator

Next question comes from Phil Gresh with JPMorgan.

John Royall -- JPMorgan -- Analyst

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

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

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

John Royall -- JPMorgan -- Analyst

Great. Thank you. And then, the next one is on royalties. It looks like the rate is up a fair amount sequentially in 4Q in North American with P&T [Phonetic]. I was wondering what the drivers were there given the lower price environment -- would have expected maybe it would be down?

Tim S. McKay -- President

Are you referring to our guidance? Are you referring...

John Royall -- JPMorgan -- Analyst

No, I'm sorry, I was referring to the 4Q results.

Tim S. McKay -- President

Q4 results.

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

And you're comparing to -- I have to get back to you on that. I'm not sure, right off hand.

John Royall -- JPMorgan -- Analyst

Okay. No problem. Thank you.

Operator

Next question comes from Mike Dunn with Stifel FirstEnergy.

Michael Dunn -- Stifel FirstEnergy -- Analyst

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

Steve W. Laut -- Executive Vice Chairman

Thanks, Mike. Steve here. So we look at the dividend to be sustainable through the price cycle. And clearly with the amount of free cash flow we have, we're very sustainable in the dividend. We believe it can grow, keep that track record up. Our breakeven cash flow price is probably in that CAD35 to CAD40 range depending what kind of a differential you have, and I would cover the dividend. So we're in really good shape here. And as you can see the Board feel very confident in the strength of the assets, our ability to deliver effective and efficient operations and execute, and that's why the increase in dividend. So as Mark said, we can't predict what the Board will decide, but I think they are very committed to long-term growth and dividend.

Michael Dunn -- Stifel FirstEnergy -- Analyst

Okay. Thanks, Stephen. Just to clarify that CAD35 to CAD40 range, that was to fund sustaining capital and the dividend?

Steve W. Laut -- Executive Vice Chairman

Correct. Yeah.

Michael Dunn -- Stifel FirstEnergy -- Analyst

Okay. Second question, separate topic, but could you just walk us through where the capacity at the Scotford Upgrader has gone to in the last few years? I know after the Stage 2, I think the nameplate was CAD2.55 [Phonetic]. There were some debottlenecking. And I believe I've seen on Shell's website, recently they had listed the capacity of Scotford at 300,000. So should we be thinking about this year's debottlenecking is adding another 20,000 there or not?

Steve W. Laut -- Executive Vice Chairman

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

Michael Dunn -- Stifel FirstEnergy -- Analyst

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

Steve W. Laut -- Executive Vice Chairman

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

Michael Dunn -- Stifel FirstEnergy -- Analyst

Right. Okay, that's all from me. Thank you, everyone.

Operator

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

Scott G. Stauth -- Chief Operating Officer, Oil Sands

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

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Corey B. Bieber -- Executive Advisor

Steve W. Laut -- Executive Vice Chairman

Tim S. McKay -- President

Scott G. Stauth -- Chief Operating Officer, Oil Sands

Darren M. Fichter -- Chief Operating Officer, Exploration and Production

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

Greg Pardy -- RBC Capital Markets -- Analyst

Benny Wong -- Morgan Stanley -- Analyst

Dennis Fong -- Canaccord Genuity -- Analyst

Asit Sen -- Bank of America -- Analyst

Manav Gupta -- Credit Suisse -- Analyst

Emily Chang -- Goldman Sachs -- Analyst

John Royall -- JPMorgan -- Analyst

Michael Dunn -- Stifel FirstEnergy -- Analyst

More CNQ analysis

All earnings call transcripts

AlphaStreet Logo