Earnings Labs

Canadian Natural Resources Limited (CNQ)

Q2 2019 Earnings Call· Thu, Aug 1, 2019

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Transcript

Operator

Operator

Good morning, ladies and gentlemen, and welcome to the Canadian Natural’s Q2 2019 Earnings Results Conference Call. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, August 1, 2019 at 9:00 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Corey Bieber, Executive Advisor. Please go ahead, Mr. Bieber.

Corey Bieber

Management

Thank you, operator. And good morning, everyone. Thank you for joining our Q2 2019 conference call. With me this morning are Steve Laut, our Executive Vice Chairman, who will briefly discuss our strategic focus on creating shareholder value and highlight some of the factors that set us apart from our peers. Steve will also provide an update on Canadian Natural and our industry's efforts on the environmental front where significant performance and game changing achievements are not well understood. Tim McKay, our President, will provide a more detailed update on the quarter as well as discuss our ongoing projects and operations. 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 like to refer you to the comments regarding forward-looking statements contained in our press release. And also note that all amounts are in Canadian dollars and production and reserves are expressed as before royalties, unless otherwise stated. With that, I'll now pass the call over to Steve.

Steve Laut

Management

Thank you, Corey. And good morning everyone. I just seen from the quarterly results and indeed the last dozen or so quarter results. Canadian Natural delivered strong, sustainable, free cash flow. Very few companies can deliver this level of sustainable free cash flow that is safe, secure, and provides substantial upside going forward. Canadian Natural maximizes the value of our free cash flow for shareholders by optimizing our cash 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. We utilize the advantage of our owned and controlled infrastructure, the economies of scale we can leverage with our size and our culture that is entrepreneurial, accountable and leverages our operational, technical and financial expertise to execute at high levels. Combined, we drive top tier value creation from both an economic and environmental perspective, strengthening our four pillars. Our balance sheet with our target of trailing debt-to-EBITDA down from 1.8 from 2 at the 2018 year end. Returns to shareholders, a 23% dividend growth and $711 million in share buybacks year-to-date. Opportunistic acquisitions with Devon assets being the latest example of our ability to leverage our competitive advantages to grow value and production in a constrained market access environment. Resource development where we’ve taken this opportunity in a constrained market action environment to progress engineering and value engineering on our projects to create even greater value by leveraging technology, optimizing design, configuration, strategies and execution plans and importantly focus on driving enhanced margin growth on existing and future production. As we all know, market access has an effect in a cloud hanging over the Canadian oil and gas industries had for some time now and rightly so. Major pipeline projects have been…

Tim McKay

President

Thank you, Steve. Good morning, everyone. Canadian Natural assets have well balanced and diverse. The strength of this model has the high levels of operational flexibility is reflected in our Q2 results, where we’ve been able to effectively execute our curtailment optimization strategy to maximize production in net backs, drawing unplanned and proactive downtime in our oil sands area. As a result, we exceeded production guidance in both conventional and thermal assets. We now forecast there’ll be some level of production curtailment for all of 2019. This level of curtailment was not included in our original 2019 guidance. However, despite the impact on volumes, Canadian Natural will still be within our original guidance. Another reflection of the strength of our assets, our operational flexibility and our ability to effectively execute our curtailment optimization strategy. This combined with our effective capital allocation, maximize free cash flow and value for our shareholders. I will now do a brief overview of our assets. Starting with natural gas, our second quarter production of 1.532 Bcf, was up from Q1 2019 of 1.51 Bcf, primarily as a result of good operational performance in all areas. North American operations was 1.482 Bcf with operating costs of a $1.15 per Mcf, which is down compared to Q1 2019 of a $1.30 and Q2 2018 of a $1.28 primarily result of our continued focus on operational excellence and our operating costs. At Septimus, the company’s high value liquid rich Montney area five net wells with a target production capacity of 2,100 barrels a day of NGLs and 30 million a day of natural gas were completed in late Q2. Septimus operating costs in Q2 of $0.33 per Mcfe or top tier. And with these new wells, the plant is targeted to be at full capacity for the remainder…

Mark Stainthorpe

Chief Financial Officer

Thanks Tim. Canadian Natural’s financial performance in the quarter demonstrated our continued focus on financial strength and our ability to be flexible to capture opportunities. Net earnings of approximately $2.8 billion, adjusted net earnings of over $1 billion, cash flow from operations of over $2.8 billion and adjusted funds flow in excess of $2.6 billion were achieved in the quarter. All results are up substantially from Q1 2019, a stronger realized pricing, lower production costs in our E&P segment and our ability to execute on our curtailment optimization strategy were evident in the results. Net earnings include a onetime reduction in deferred income tax expense of approximately $1.6 billion relating to the reduction in Alberta tax rates. Our prudent capital program resulted in approximately $910 million invested in the quarter before considering the Devon asset acquisition. This resulted in free cash flow generated of $1.3 billion after dividends of $450 million in the quarter, again before the Devon asset acquisition. Capital in the first six months is approximately $190 million less than original budget showing strong discipline on capital spending with flexibility for potential execution of these projects later in 2019 or into 2020. Additionally, share buybacks total over 390 million in the quarter or 10.45 million shares purchased for cancellation. Together with the dividend, returns to shareholders were over 840 million in the second quarter. In the first half of 2019, returns to shareholders have amounted to approximately $1.5 billion a way of approximately $850 million in dividends and $630 million in share buybacks as we continue to execute our free cash flow allocation policy. Free cash flow allocation policy is also evident in our debt balance with a reduction of $1.2 billion from Q1 2019 levels when excluding the Devon asset acquisition and an increase of $2.2 when including the asset acquisition in the quarter. Acquisition financing included a three-year $3.25 billion syndicated term loan facility that was successfully closed in the quarter. Our debt metrics remain strong and are targeted to get even stronger throughout 2019. Our current strip pricing and based on our corporate guidance, we target to exit 2019 with a debt to adjusted EBITDA, debt to cash flow and debt to book capital at levels below those existing at December 31, 2018, despite the completion of the Devon acquisition financed on our balance sheet along with returns to shareholders by ways of dividends and share purchases throughout the year. Finally, available liquidity represented by bank facilities and cash at quarter end was approximately $4.6 billion, an increase of $330 million over Q1 2019 levels and includes the repayment of medium term notes of $500 million in the second quarter, providing flexibility to manage throughout the business cycle and drive increasing shareholder value. With that, I’ll turn it back to you Tim.

Tim McKay

President

Thanks Mark. In summary, we are delivering sustainable top tier free cash flow. Canadian Natural has many advantages. Our balance sheet is strong and will continue to strengthen. We have a well balanced, diverse and large asset base. A significant portion of our asset base is long life low decline assets which require less capital to maintain volumes. We have a balance in our commodities, with approximately 51% of our BOEs light oil and SCO, 24% heavy, 25% natural gas in Q2, which lessens our exposure to the volatility in any one commodity. Canadian Natural will continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation, effective and efficient operations and by our teams who deliver top-tier results. We have a robust sustainable free cash flow. Our dividend was increased earlier in the year and it was our 19th consecutive year of dividend increases, which has a CAGR of 21%. Share purchases year-to-date to July 31, were 19 – approximately 19.4 million shares or approximately $711 million. And when combined with our 2018 shares, approximately 30.9 million shares equals to cumulative total of approximately 50.3 million shares or approximately $2 billion returned to shareholders through our share purchase alone. With that, we will now open the call up for questions.

Operator

Operator

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

Neil Mehta

Analyst · Goldman Sachs. Go ahead please, your line is open

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

Tim McKay

President

Sure. Thanks Neil. So currently the Alberta Government is going through a process here that's to conclude here later in August on their rail contracts. So currently we're in the process and we're walking through that piece today. And to go forward with it, obviously it has to make economic sense. But we're in the process and we're looking at it. In terms of pipelines, what we see ahead of us is that there are many projects that have been announced, many optimization projects that are looking to go ahead. So we see pipeline egress, happening, it's happening differently than obviously what we originally envisioned a year ago. But we're very confident the pipelines will go forward. And how it unravels is getting, I would say, less and less blurry as each hurdle is being overcome either through regulatory or through the legal system.

Neil Mehta

Analyst · Goldman Sachs. Go ahead please, your line is open

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

Tim McKay

President

Sure. Well tucked on the Devon acquisition, our teams were out in a field essentially that next day after closed, we're executing on that plan. The plan is my mind going very, very well and ahead of our initial plan view of those opportunities. From our perspective we see capturing that $135 million, I would say it's very conservative at this time. And as we dig into the assets, we always find more opportunities with whether it's ASOP or the Devon acquisition on oil sense side we're seeing another a $100 million captured of savings. I would see on the Devon acquisition that process happening to catch those savings more than those savings that we have announced. On the M&A acquisitions, we don't have any gaps. And we always look at opportunities and – but we have no gaps. So that's really all I could say about that.

Neil Mehta

Analyst · Goldman Sachs. Go ahead please, your line is open

Thanks guys.

Operator

Operator

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

Phil Gresh

Analyst · Phil Gresh from JP Morgan. Go ahead please. Your line is open

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

Tim McKay

President

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

Phil Gresh

Analyst · Phil Gresh from JP Morgan. Go ahead please. Your line is open

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

Tim McKay

President

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

Phil Gresh

Analyst · Phil Gresh from JP Morgan. Go ahead please. Your line is open

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

Tim McKay

President

We are ramping Kirby North up, but with the SAGD it’s – what I would say a controlled ramp up on the SAGD. And so all we were doing is we're just slowing that down until we get a little more clarity of where the curtailments are heading. Obviously every volume we add at Kirby has to come out of the system somewhere. So we're trying to just manage that within the curtailments, within the flexibility we have of the different levers within the company. So obviously if – example, if we have a issue in one area that we can't make the curtailment volume, it is nice to have that optionality to be able to ramp up other areas to make those volumes.

Phil Gresh

Analyst · Phil Gresh from JP Morgan. Go ahead please. Your line is open

Understood, okay. Thank you very much.

Tim McKay

President

Thanks Phil.

Operator

Operator

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

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

Yes, good morning.

Steve Laut

Management

Morning.

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

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

Steve Laut

Management

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

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

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

Steve Laut

Management

Yes.

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

Okay. And the second question, I have come back and beat kind of the same topic, it's already been hit here. But as you think about cash flows and the use thereof going forward, I mean you've done a great job with the dividend and the share repos, doesn't sound like there's any hole in the portfolio. So as we think about the cash, well as you're going to generate over the next, let's say, foreseeable future the next couple of years. And let's assume no real change on egress for crude at Canada. So, kind of historical differentials within the pipeline expansions, it should occur. What do you do with the cash? I mean, should we think of it as incremental is coming to shareholders? It will go more aggressively to share repurchases. I mean, just generally speaking across the industry, dealing with kind of valuation and discounts and then a little bit more pronounced where you are. So just curious kind of how you evaluate the option of ramping up the share repos from here even?

Mark Stainthorpe

Chief Financial Officer

Yes Roger, it's Mark. What we've established is this free cash flow allocation policy. So we continue to drive towards that. So when you look at cash flow is less our capital, less our dividend, we're allocating 50% to share buybacks and 50% of the balance sheet. We've been trying to manage that on a go-forward basis, looking forward and managing on a week to week basis. Tim mentioned the low capital profile. So we continue to generate and in this kind of environment generate a lot of free cash flow. So I think it's fair to assume that we're going to continue along those lines of that free cash flow allocation policy. You'll see us manage that fifty-fifty.

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

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

Mark Stainthorpe

Chief Financial Officer

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

Roger Reed

Analyst · Roger Reed from Wells Fargo. Go ahead please. Your line is open

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

Operator

Operator

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

Manav Gupta

Analyst · Manav Gupta from Credit Suisse. Go ahead please. Your line is open

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

Tim McKay

President

Okay, so just on the first question, on the Lower Montney, we are seeing a very good opportunity in Lower Montney and as you said, with the very good liquid rates. Yes, it's early in its development we lots of opportunities on land. In terms of doing the three different levels, absolutely if you look at the way we would develop in terms of cost effectiveness, would be and it would make sense to do two or three levels of development on one pad. So, that is a huge opportunity for the industry. And the Monteney, I would say for Alberta is a real gem and a real opportunity.

Manav Gupta

Analyst · Manav Gupta from Credit Suisse. Go ahead please. Your line is open

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

Tim McKay

President

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

Manav Gupta

Analyst · Manav Gupta from Credit Suisse. Go ahead please. Your line is open

Thanks for taking my questions guys.

Operator

Operator

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

Greg Pardy

Analyst · Greg Pardy from RBC Capital Markets. Go ahead please. Your line is open

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

Tim McKay

President

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

Greg Pardy

Analyst · Greg Pardy from RBC Capital Markets. Go ahead please. Your line is open

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

Steve Laut

Management

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

Greg Pardy

Analyst · Greg Pardy from RBC Capital Markets. Go ahead please. Your line is open

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

Tim McKay

President

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

Greg Pardy

Analyst · Greg Pardy from RBC Capital Markets. Go ahead please. Your line is open

[indiscernible] (0:47:39):

Tim McKay

President

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

Greg Pardy

Analyst · Greg Pardy from RBC Capital Markets. Go ahead please. Your line is open

Okay, understood. Thanks guys.

Operator

Operator

[Operator Instructions] And your next question comes from the line of Phil Skolnick from Eight Capital. Go ahead please. Your line is open.

Phil Skolnick

Analyst · Phil Skolnick from Eight Capital. Go ahead please. Your line is open

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

Tim McKay

President

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

Phil Skolnick

Analyst · Phil Skolnick from Eight Capital. Go ahead please. Your line is open

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

Tim McKay

President

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

Phil Skolnick

Analyst · Phil Skolnick from Eight Capital. Go ahead please. Your line is open

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

Tim McKay

President

Thanks Phil.

Operator

Operator

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

Gary Chapman

Analyst · Gary Chapman from Guardian Capital. Go ahead please, your line is open

Yes, hi, thanks. I've got three, I think, quick questions. One is you're doing a great job on greenhouse gas emissions. Are you having third-party verification, just so the general public perception might improve if they think it's been done by a third-party as opposed to coming out of the company? So that's one question. The second, when you're evaluating rail on economics, is it purely economics or are you including a bit of an insurance element to it? I mean, I have life insurance. It's negative cash flow, but I hope to never win. And secondly, third part, when you look at debt-to-equity at 1.5 times, just to an earlier question, why not 1.0 times? I mean, there would be a transfer of enterprise value from debt holders to equity holders, going to 1.0 times. And in an environment of extremely volatile energy prices, maybe the equity would be valued at a higher multiple with a lower debt level.

Mark Stainthorpe

Chief Financial Officer

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

Steve Laut

Management

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

Tim McKay

President

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

Mark Stainthorpe

Chief Financial Officer

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

Gary Chapman

Analyst · Gary Chapman from Guardian Capital. Go ahead please, your line is open

Okay. Thank you.

Operator

Operator

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

Benny Wong

Analyst · Benny Wong from Morgan Stanley. Go ahead please, your line is open

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

Tim McKay

President

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

Benny Wong

Analyst · Benny Wong from Morgan Stanley. Go ahead please, your line is open

Okay, thanks. And my follow-up is really I want to get your long-term perspective of how you think about your portfolio. I understand integrating and optimizing the Devon assets are the main focus. And appreciate you guys have no gaps in the portfolio. But as we think about value creation in a world that seems to no longer want growth integration seems like a potential strategy and you guys are unique in most of your peers with all the downstream business. I guess my question is, how do you think about the refining business today? Would it make sense to increase your ability to capture more margin, with refinery assets if the prices rise, or do you envision seeing Q2 stick to what it's great at and stay as a dominate E&P focused company?

Tim McKay

President

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

Benny Wong

Analyst · Benny Wong from Morgan Stanley. Go ahead please, your line is open

Great. Thanks for your thoughts guys.

Steve Laut

Management

Thank you.

Operator

Operator

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

Corey Bieber

Management

Thank you, operator. As you can see Canadian Natural’s large well diverse asset base continues to drive significant shareholder value. The ability of our teams to deliver efficient and effective operations with top tier performance is contributing to substantial and sustainable free cash flow. This, together with effective capital allocation, contributes to achieving our goal of maximizing shareholder value. If you have any further questions, please don't hesitate to give us a shout. And thank you again everyone for attending our conference call this morning. And we look forward to our 2019 third quarter conference call in early November.

Operator

Operator

Thanks. And enjoy the day.