Canadian Natural sees strength in gas as it contemplates crude reductions

Calgary — Canadian Natural Resources may bolster its position as one of Canada's largest natural gas producers to offset some of its heavy oil production that has been hit by a demand slump.

Canada's largest oil company by volume said that its 1.4 Bcf/d of gas production is a bright spot in an otherwise bleak outlook for upstream energy companies.

Canadian Natural is "well-positioned to capture additional value" as gas prices have firmed at Canada's benchmark AECO C hub, President and Director Tim McKay said on a Thursday conference call. Gas production makes up approximately 20% of the company's output of more than 1 million boe/d.

"If you look back the last few years, AECO has been relatively depressed, and as such we have let our natural gas production decline," McKay said. "We've always had opportunities to add gas volumes cheaply, but they would just never compete against the other value-adding opportunities we have in our portfolio."

S&P Global Platts Analytics estimates that roughly 1 million b/d of crude cuts have been announced by Canadian producers so far.

The shut-in of crude production in the US has led to a similar decline in associated natural gas production in shale oil regions like the Bakken in North Dakota and the Permian Basin in Texas. Gas prices have risen as buyers seek alternate supplies.

McKay said operating cash flow from his company's natural gas operations could be as high as C$700 million over the next year. Canadian Natural is drilling additional wells in its existing network to boost production in the near term. The new wells could achieve payout in less than six months, McKay said.

"What we're seeing today is that, with the lower oil prices, natural gas has been quite resilient," McKay said. "I think in the US we may see a pretty significant decline on the natural gas side, and we're seeing strengthening AECO prices this summer and going into the winter. So being nimble and being creative, we look at that as an opportunity to add some natural gas volumes that will add value to our bottom line."

Canadian Natural removed its production guidance for 2020 because of the uncertainty around the coronavirus pandemic.

"However, if the current strip pricing continues for the remainder of 2020, the Company forecasts that targeted production will meet the previous issued corporate guidance range," it said in a release.

The NYMEX December 2020 contract was trading around $30.31/b midday Thursday, while the June 2021 contract was trading around $32.84/b.

COMPANY DETAILS LOWER OUTPUT

Canadian Natural expects its higher-cost North American conventional crude production to be 36,000 b/d lower in May "than it would be in a more normalized price environment."

The company's thermal in situ output is expected to be 38,000 b/d lower in May.

The company has also planned de-coking activities at its Horizon project, which will result in a drop of 50,000 b/d of Horizon volumes in May.

Planned turnaround activities in the second half of the year at both the AOSP and Horizon mines should cause AOSP production to average 100,000 b/d below normal in July and August.

At Horizon, maintenance is expected to lower output by 80,000 b/d over a two month period that has yet to be finalized, the company said.

The bulk of Canadian Natural's oil production comes from giant oil sands mines and upgraders it operates in Alberta, which transform tar-like bitumen to refinery ready crude. The company also operates conventional heavy oil wells in Canada and has offshore light crude operations in Côte d'Ivoire and the UK North Sea.

As the company cuts heavy crude production because of reduced demand, it is working to preserve the integrity of its reservoirs — which can be damaged by shut-ins — by shifting maintenance work. McKay said many of the company's peers are doing the same.

"I know many companies have been moving their turnarounds and activities to coincide with this lower-price period," McKay said. "So I would suspect that you will see a larger amount of oil come off the system as every company looks for an opportunity to do maintenance during a low-pricing period and take oil off the system."