Good morning, ladies and gentlemen, and welcome to the Canadian Natural's Q3 2018 Earnings Results Conference Call. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, November 1, 2018, at 9:00 AM Mountain Time. I would now like to turn the meeting over to your host for today's call, Mark Stainthorpe, Vice President, Finance, Capital Markets of Canadian Natural Resources. Please go ahead, Mr. Stainthorpe.

Thank you, Mike. Good morning, everyone, and thank you for joining our third quarter 2018 conference call. In addition to discussing our third quarter results, we will provide an update on our strategy, operations, ongoing activities, and strong financial position. With me this morning are Steve Laut, our Executive Vice Chairman; Tim McKay, our President; and Corey Bieber, our Chief Financial Officer. Before we begin, I would like to refer you to the comments regarding forward-looking information contained in our press release. And also, note that all amounts are in Canadian dollars; and production and reserves are expressed as before royalties unless otherwise stated. With that, I'll now pass the call over to Steve.

Thanks, Mark, and good morning, everyone, and thank you for joining the call this morning. The third quarter was a very good quarter with strong cash flow per share, up 4.5% from Q2 at $2.31 a share. And importantly, earnings per share, up 83% percent from Q2 at $1.47 a share, driving increasing returns on capital employed. Canadian Natural is in a very strong and enviable position, with significant competitive advantages, competitive advantages we are leveraging to generate significant, sustainable and growing free cash flow. 72% of our oil assets are long life low decline assets and are the key drivers of our sustainable free cash flow. Long life low decline assets are very valuable as reservoir risk is low to non-existent, and the scale these operations matters, allowing Canadian Natural to leverage technology and use continuous improvement processes to minimize our environment footprint, maximize utilization, reliability, and deliver ever-increasing effective and efficient operations. The impact of long life low decline assets on our sustainability is significant. Our average corporate decline rate is targeted at 9%. As a result, our maintenance capital to hold production is flat is significantly less compared to a typical E&P company, making Canadian Natural more robust and generating more free cash flow. Canadian Natural's ability to generate significant and sustainable free cash flow sets us apart from our peers. So far in 2018, you've seen us deliver or maximizing value by optimizing our allocation to the four pillars. Balance sheet strength, which was allocated 30% of our cash flow, along with FX result in our balance sheet strengthening by $32 billion, since Q3 2017. Return to shareholders was allocated 26% of our cash flow with dividends at $1.6 billion for the year, up 20% and a significant ramp up in share buybacks at $1.1 billion…

Thank you, Steve. Good morning, everyone. Our strength and ability to execute shows in our third quarter results, as we exceeded the midpoint of guidance in many areas and generated significant adjusted fund flow. We continue to be effective and allocate capital to maximize our value to our shareholders. With that, I will do a brief overview of our assets. Starting with natural gas, our third quarter production at 1.553 Bcf was expected at a midpoint of Q3 guidance. In the third quarter, the Pine River plant started at four weeks turnaround outage, which was completed mid-October, but due to additional integrity issues encountered is now targeting a mid-November startup. While the facility was down on turnaround, our team was able to complete an assessment of plants potential to match our fuel capacity of 145 million a day, which would add significant value. This investment decision is currently being assessed and would be included in the 2019 budget should we decide to proceed. As well, we continue to wait on regulatory approval for the transfer the plant, and once received, we will look to take over the facility later this year. So overall, third quarter natural gas production for North America was 1.489 Bcf. Our field operations team have been very focused at reducing our natural gas costs across the company. With Q3 operating cost averaging above 20, which is down from Q2 of $1.28 and Q1 of $1.31, which shows the benefit owned and operated infrastructure giving us flexibility to reduce volumes without materially impacting our cost. Impressive, considering we have deferred activity, curtailed and shut in natural gas to the tune of 146 million cubic feet per day year-to-date. Q4 2018 natural gas guidance is targeted to be 1.48 to 1.51 Bcf, down from Q3 primarily due to…

Thank you, Tim, for that very comprehensive update on the company strong operational performance for 2018. We also had strong financial performance during the quarter. Net earnings of approximately $1.8 billion were achieved in the third quarter of 2018, accumulating to a robust $3.4 billion over the first nine months of the year. Adjusted earnings from operations were about $1.4 million for the third quarter, up about $1.2 billion, when compared with the third quarter of 2017. Year-to-date adjusted net earnings accumulated to $3.5 billion, up about $2.7 billion from the first nine months of 2017. The third quarter improvement reflects solid crude oil production volumes and effective and efficient operations that Tim spoke about, as offset by slightly weaker crude oil pricing - the oil pricing. Quarterly fund flow from operating activities was $3.6 billion for the quarter and $8.7 billion for the first nine months of 2018. Adjusted fund flow for the corporation was $2.8 billion, 69% higher than that recorded during Q3 of last year. For the first nine months, our adjusted fund flow was a record $7.9 billion, 56% increase over 2017 levels. During the first nine months, we invested approximately $3.4 billion in economic development and tuck-in acquisitions, repaid net debt and deferred acquisition liabilities totaling $3.1 billion and returned over $2 billion of cash to shareholders in the form of dividends and share buybacks, essentially balancing the four pillars of capital allocation. Since the Albian, AOSP acquisition, we have been able to reduce long-term debt and acquisition liabilities by approximately $4.2 billion, improving our debt-to-book capitalization to about 37% from above 43% and debt-to-adjusted EBITDA to $1.7 billion from $3.4 billion, clearly demonstrating our commitment to strengthening the balance sheet. At quarter end, available liquidity was exceptional at $5.35 billion. Based upon current strip…

Thanks, Corey. As you all read, Corey Bieber, our CFO for the last six years had decided to take a somewhat less demanding role in the company as Executive Advisor effective March 31, 2019. As a result of this change, effect of March 31, Mark Stainthorpe will be promoted to Chief Financial Officer. Many of you know Mark, who is a very talented individual with strong financial and leadership skills, and has been mentored by both Corey and Steve over the last 12 years. I'm very confident that he will do a great job in leading a strong financial team. Of course, Corey will still be around to provide Mark and Ron with all the help they will need. Similarly, Ron Kim would be promoted to Principal Accounting Officer effective March 31, 2019, working together with Mark. Ron brings great deal of technical, accounting and taxation expertise. We believe that this team will add significant value to shareholders and complements the experience that Corey has brought to the table. These changes would be subject to board approval in March of next year. In summary, Canadian Natural has many advantages, our balance sheet is strong, we continue to strengthen it, 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. Our balance for commodities with approximately 50% of BOEs, light crude 25% heavy and 25% natural gas, which lessens our exposure and volatility in any one commodity. We're delivering substantial free cash flow, which we're effectively allocating to our four pillars. Canadian Natural will continue to allocate cash flow to our four pillars to maximize value our balance sheet continues to strengthen, we continue with discipline resource development, return to shareholders has been strong at 22% dividend increase earlier this year, and year-to-date we have bought back 27 million shares. Finally, while we have no gaps in our portfolio, potential acquisitions should we choose so. This is all driven by effective capital allocation, effective and efficient operations by our teams deliver top tier results. With that, we will open the call to questions.

[Operator Instructions] Your first question comes from the line of Phil Gresh from JP Morgan.

Hi, good morning.

Good morning.

Good morning.

First question, I guess, would be on the production curtailments 45,000 to 55,000 for November and December. And your comments about the market and your outlook for the next nine to 12 months. I mean, do you - at this point would you say that you see kind of a need to do this in the 2019? And I'm just kind of going off of your press release, where you talked about how these would be factors, you'd be thinking about as you plan ahead for next year. So what would be a current thinking?

Thanks, Phil. It's really - we'll just measure this as we go through the year, if you look back at 2018 with the apportionment issue, it's been all over the map like back in March and April, we had about 51%, 50% and differentials were in the $25 to $27 range. So you know, it's very volatile, we will react to the market as that differential comes in.

I would add, Phil, I think, you'll see entertainments for ourselves and others, and we also believe that there will be some action taken on the apportionment rules. I think this is all going to be very constructive for pricing going forward. And how soon that takes effect will be seen to go forward, but we think there's a lot of constructive things happening.

Yeah, I appreciate that. I guess, embedded partially in my question is whether you think maintenance - refinery maintenance is having a big temporary factor on this or whether you think that we really - it really is going to require waiting until Line 3 and/or apportionment gets fixed?

The maintenance activities is minor in our opinion. Obviously, the apportionment and the rules around the apportionment is a bigger factor and takeaway capacity, which we see leaving itself over the next year.

Sure. Okay. And then, I know, you've - CNQ has been renascent to sign up the rail. You said, you've been doing 10,000 barrels a day, and I think, some of the other companies that have been committing to rail. It hasn't been a 100% fixed cost, I guess, situation in terms of the cost of signing up for that. So - is there any willingness to look at rail on your part? Or you'd rather just - you're confident and you rather just wait it out for the nine months?

If you go back in history Canadian Natural has never been adverse to doing a rail deal. Onetime, we had over 30,000 barrels a day going by rail. For us, it's always been to do the right deal for the right term. And so we have a deal to do roughly 10,000 barrels a day for 2019. It's flexible deal that we feel is the right amount. So it's always difficult in these situations to go with a longer term deal, when you feel that a lot of these distortions in the market are rather temporary.

I'd add, Phil. If you look, we have 50% percent ownership in North West, which will take 80,000 barrels a day heavy oil here shortly. We also, as you've heard Tim talk about, believe that there will be 600,000 barrels a day of effect of takeaway capacity are coming here over the course of the year, obviously, Line 3 is the biggest part of that in Q4, but a lot of that capacity will come as it progresses through the year, particularly North West. So that sort of influences is how look at rail.

And is the North West refinery running at 100% lights right now, is it actually up to 100%?

It's taking light oil right now, I'll defer you to North West give you more details on that, and they will be taking heavy oil here in the near term.

Okay. Last question just be on the capital allocation framework that's been laid out, certainly appreciates the additional commitment. I guess, I'm trying to read into it, I guess, it sounds like it's going through May of next year. Is that just a technicality is this something that you'd expect to continue beyond that period of time? And I guess, maybe just a little color on why you decided to put something more formal in place?

Phil, it's Corey. Yeah, so it's going through May at the very least that's when our statutory allowance under the exchanges expires. And that also gives our board the right time to reexamine the policy. But right now, the intent is until we hit those debt targets that is our intention. We've been doing it, it's actually isn't really a change in policy, Phil. So we've been doing it. It's - just when you look at more transparent in terms of the approach we've been adopting. But we've been very, very active through this point on the share buyback. So we've been - we've heard a lot of shareholders ask for that transparency, and we're providing that transparency in terms of what our actual plans are.

Okay. Fair enough. Congratulations, Corey and Mark. I'll turn it over.

Thanks.

Thanks very much. I appreciate it.

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

And thanks for the clarity, particularly on the takeaway capacity issues. I don't know, if you can offer any more on that front, but just sort of maybe a little more detail on just sort of the process of how this works like who has to actually make the decision, is it the NAB? Or is it the strict higher up in the federal government? I'm just curious, what - who makes the decision here.

Are you referring to the apportionment rule?

Yes, specifically apportionment.

Yeah. So with that there is a committee, a producer committee or industry committee called the Crude Oil Logistics committee. And what that committee was doing was trying to fix this issue. And obviously, what happens is, because of the committee they had a vote on it, and even though 70% of the players in that committee or part of the committee agreed to the process. So it's 75%, I think for carry forward. So right now, it's kind of in no man's land to say. Obviously, what we would need is some apportionment that could come through the Alberta government or by industry players agreeing that needs to be fixed and move forward with the recommendations of the Crude Oil Logistics committee.

Okay. So essentially there is winners and losers and somewhat is interested and others is changing the setup, I guess?

Yeah. And it's unfortunate in my mind 70% is a very strong majority. And that - it shouldn't be more consensus, we should do what's right to optimize the system.

Yeah, it's a fair argument. For changing gears slightly here to look at the change in production guidance for the fourth quarter, and I totally recognize why you would do it is. But when you look at what to shut in here, what to curtail, what should we think about as an impact on either the margins or on the cost structure of the company. And I'm not just talking about the specific guidance on OpEx, but kind of how we should think about what the mix of what's being shut in here should flow through to kind of top and bottom lines? Or is it not always the lowest margin production that's being curtailed.

No. I think, you're absolutely right. Obviously, we will curtail the most expensive higher operating cost ones first. And then as well on the thermal side, really were able to just dial back on our steaming strategy to modify, when we'll get that oil. So we were - it will not materially impact our bottom line on our operating costs. As you saw with the gas side, we're able to adjust our operating costs and move people to where we need to, to keep our costs low.

Great. Thank you.

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

Good morning, guys.

Good morning.

First just want to say - want to compliment you guys that you gave a more clarity and transparency on the capital allocation process. I really appreciate that. And I think most of your investor that we talk to seems to have to same feeling. So thank you.

Thank you.

Just curious that, with the [prolonged defense] [ph] so initially with heavy oil and then in the last two months, spilling into the light oil. So is it really makes sense that for us to trying to shift the capital from the heavy into the light and trying to increase the production there? We potentially - that causing the bigger problem in the light oil.

So for our program, it's not going to materially impact. The light oil issue obviously the light side has seen a more apportionment. But when you look at the developments we're doing in the Montney area, primarily it's high, I would call, condensate very light oil. As you know, we require a lot of condensate for heavy all operations, and as such won't impact the market.

One thing, Paul, you look at is there's actually a tremendous amount of condensate imported into Canada at the present time. So as we increase our light oil and liquids rich gas drilling to produce more condensate just actually reducing imports of condensate into Canada. So it actually has a minimal impact on market access issues over experience on the rest of the market.

Okay. And then just curious that means Steve and team with the Kirby South has been progressing faster in that potential rate that can come on stream, say, by the fourth quarter of 2019. But just for argument sake that we then see the [defense] [ph] improving by the midyear. Will you guys do at that point that decide to delay the streaming process and not bringing the fuel on stream or that you and the way that is already done mechanically ready to go. So you would just go ahead.

Yes. You're referring to Kirby North, and that…

Yeah, I'm sorry.

That's okay. That the project is going very well. We evaluate that decision at the time, but one thing with this idea, there is a period of time where it's wrapping up. So it's not as if on day one, it goes to 40,000 barrels a day. We actually have do circulate heat reservoir and it's actually a ramp up. So again, it wouldn't materially impact the market obviously we would look at what is going on in the market, we feel today that we are very well timed with the takeaway capacity. And - so it actually works in our favor today as we see the timing.

Hey, Paul, we're very confident that the market access issues with temporary issue here in the short-term will be like Q4 will be resolved.

I'm just curious that, when you're looking at the well capacity order, well agreement. Do you looking at it, just as a hedge. There's a physical hedge against your own production. And in some way there is no different than that the financial hedge that from time to time, you guys entering into? Or that you're looking at it, saying that, okay. Can I get a good deal in here? So I just curious that, when you're looking at that, I mean, how you determine is it considered as a hedge or considered that whether you think is a good investment at this time?

Well, obviously this time it looks like what we believe, it's a good investment. Obviously, we look at this as a very temporary situation market distortion, and taking oil out of the market in Alberta. It is a positive thing for all Alberta. So you know you could look at it in a number of ways. One, by removing these barrels out of the basin, We're helping the apportionment issue and differentials as well as we see some benefit economically and the reason we did the deal for the one year period.

They do - doesn't sounds like that you would be actively trying to maybe increasing to 50,000 to 60,000 barrels per day kind of volume. So you're happy with the 10,000 that you signed?

We will continue to look at all real deals and all of the options forward, not boxing ourselves in here. So we continue to evaluate all options.

Okay. Thank you.

Your next question comes from the line of Asit Sen from Bank of America Merrill Lynch.

Thanks. Good morning. I appreciate the update on the macro, just wondering if you're thinking about this recovery process over the next two to three quarters. How do you view the recovery in light dips? Or should we expect light oil dips normalize before heavy oil. What are the drivers we should look for any thoughts on that front?

If we could predict the market, it would be a great thing. With the apportionment issues with the industry response on curtailing production ourselves and there's been a few other companies curtailing production is very difficult to predict what will happen in the market. I would, suspect it will strengthen on both accounts that differentials will come in, because as industry does respond and does curtail activity and production differentials will shrink.

Okay, thank. And then on the 2019 CapEx, if we just thinking about it and in terms of the growth projects that are on the docket. Could you remind us on, kind of the capital cost and how you're thinking about those particular growth projects.

Well, first of all, we haven't determined our 2019 budget. Obviously, the key issue ahead of us is the takeaway market access issues, so what we'll do is when we have a recommendation on our 2019 budget, we will go to our board and make that recommendation. But obviously, these market access considerations are very key in terms of our timing, and how we allocate capital going forward.

Great. Thank you.

Your next question comes from the line of Matt Murphy from Tudor, Pickering, Holt.

Hey, good morning and thanks for taking my question. On the topic of curtailments. I'm just curious, if there's a length of time you're comfortable having those volumes shut in before you'd run reservoir risks, perhaps, both in - you're more conventional heavy stuff versus in situ potential to have - you have the potential that you would be unable to bring those back?

Yeah. From our perspective, everything we do in terms of the curtailments and shut ins, we do in the face of making sure it doesn't do any long-term damage to the reservoir. So we are very fortunate with the CSS cycles that the big component of it is how quickly we inject the steam. So as you can appreciate we can slow down the steam injection, slowdown that cycle to help mitigate the potential of any reservoir damage.

Okay. That's helpful. And then on the topic of shifting capital from heavy to light oil, as you talked about obviously seeing some challenges on both conventional light and synthetic grade pricing as well. Just wondering, what kind of impact that you're seeing from apportionment on your - is it on your ability to move barrels or is it just primarily pricing related?

It is all pricing related, we - through 2018, we moved every barrel that we would like to. As you have seen through 2018, when the pricing gets too out of sync, Canadian Natural and other producers that will not sell into those anomalous markets and curtail production.

Great. Thanks very much, guys.

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

Thanks guys, and congratulations to Corey, Mark and everyone else on the changes that were announced this morning.

Thanks, Neil.

Hey just want to kick it off on 2019 capital budget, I don't get ahead of our skews here, but just any early thoughts in terms of what the levels would look like especially just looking at the forward curve to help us frame out where your guys head is at as of right now?

I wouldn't want to speculate at this time. We still have to go through our process, and actually do the work before we presented to the board, and I wouldn't want to spec this time.

Okay. Fair enough. And then on the light oil exposure point, I don't spend too much time on this. But is there a back of the envelope or sensitivity to a dollar changing cash - dollar change in, let's say, Syncrude pricing or light oil pricing in Canada that we could then say this is $1 million impact your cash flow over the next year 2019?

Sure. So this is using 2018 sensitivity, Neil. But as we've talked about before a dollar change in WTI's about $250 million change in heavy oil is about $90 million change in light is in that range of $160 million, but I would caution that includes international. So if we go to Canada's loan, it's probably in that range of $145 million to $150 million.

$145 million to $150 million.

Yeah.

Okay, great. And last thing and congrats on the 50-50 split in terms of cash flow, I think the market - has the market definitely want to see that and appreciate a little bit more clarity around capital returns. So just - I guess, the question is how much flexibility is there around that number if cash flows come in low, because were there suppressed by the differential. Could you go above the implied formula in terms of share repurchases, because theoretically that would - you'd have better opportunity of buying the stock below its intrinsic value, when cash flow is more depressed and differentials are wider. So how much flexibility is there around this - the formula that you laid out as opposed to taking a more prescribed approach to buying back stock.

So Neil you understand well our Canadian Natural is all about creating value. And we're going to balances over on an annual basis. So we have quite a bit of flexibility to make sure that we capture the most value for shareholders. So we'll be strategic and how we manage this share buyback program, but we are targeting a 50% level on annual basis.

That's great. Last one for me, a dividend and the next time you'll get a chance to reevaluate that and how should we think about potential growth levels recognizing it's a board decision? Is that an early 2019 decision for you guys, should we think that the last couple of years run rate, which is mid-teens are still a reasonable base case?

Like as you point out, Neil, it is a board decision, so it's not for us to speculate on, but I think you can look at the robustness and strength to Canadian Natural. We still generate a substantial amount of free cash flow even a very low oil prices. So I think that - maybe we can inform you, where the board will look at it. Again it's a board decision so we won't speculate on what that'll happen, but it's a decision that happens every year, early in the year in the first quarter.

I'd just add to that, Steve. Dividends are very important to both us and to the board. And the one key, we always look at when we look at the board is that sustainable and still providing room for growth on an annual basis through the commodity price cycle. And we believe that we stress test at a very, very low price in that $40 range. So that we can maintain current production and pay the current dividend in that price range. So that's very important to us.

And provide growth as well.

Great. Thanks, Steve.

Thank you.

[Operator Instructions] Your next question comes from the line of Mike Dunn from GMP FirstEnergy.

Good morning, everyone. Most of my questions have been answered. I just was wondering, you mentioned the $0.5 billion eventual cost savings from acquiring that Joslyn lease relative to the alternative, I guess, which was to develop the North pit. What would have been the timing on that $0.5 billion of spending, I mean, it was the North Pit project that was near-term or you know 10 or 15 years out? Thanks.

Hi, Mike. So that's really - what it is north mine pit was actually our next phase. So over the next 10 years, we would be progressing North, with this change, we'll head south. And I should say that $500 million savings is probably conservative, as you're aware we are piloting the IPEP project. And if the IPEP project proves to be successful and the early indications are it is quite successful. We actually see those savings actually increasing as we would use IPEP, as we head south.

Great. Thanks, Tim. Thanks, everyone. That's it for me.

Thank you, Mike.

That was our last question at this time. I'll turn the call back over to Mark Stainthorpe for closing remarks.

Thank you, Mike, and thanks everyone for attending our conference call this morning. Canadian Natural as well positioned to create value and navigate changes in the commodity price environment. Our free cash flow generation is significant and sustainable and along with our flexible capital programs facilitates maximizing value by balancing capital distribution to our four pillars. This along with our balance of long life low decline and low capital exposure assets provide significant opportunity and optionality to create long-term shareholder value. If you have any further questions, please give us a call. Thank you, again, and we look forward to our fourth quarter conference call in early March. Thank you.