CNRL gets ready to wrap up the last phase of expansion at Horizon - at least for now
Canadian Natural Resources (CNRL) reported another net loss for the second quarter as the company continues to spend on growing its production from Horizon.
Cash flow from operations declined almost 40% y/y to $938 million, blamed on lower oil and gas prices and a decline in production. Net losses widened to $339 million, versus a loss of $105 million in Q1. Production of both oil and gas declined slightly for the quarter, lowering total production 3% to 783,988 boe/day. The drop was blamed on natural production declines, less drilling activity from conventional assets as well as weather and pipeline-related outages.
THERMAL IN-SITU PRODUCTION
Kirby South had a record quarter, producing an average of 38,695 bbl/day. Operating costs continue to fall, now averaging $8.56/bbl. The steam-to-oil ratio for the in-situ facility was 2.55 for the quarter, inline with the yearly target of 2.5 to 2.6.
CNRL also plans to drill 3 wells at Primrose/Wolf Lake and one SAGD well pair at the Senlac thermal in situ property in the second half of 2016. The company's total thermal production from Kirby South, Primrose and Wolf-Lake is expected to average 110,000 to 130,000 bbl/day for the full year 2016. Operating costs in Q2 were approximately unchanged from the previous quarter, averaging $12.19/bbl.
During the second quarter, synthetic crude oil (SCO) production at Horizon averaged 119,511 bbl/day, down 6.5% from Q1. The decline was blamed on a a minor unplanned outage undertaken to optimize the Diluent Recovery Unit (DRU). Operating costs were reported at $26.82/bbl, comparable to Q1 costs but an 8% decrease from the same time last year.
SCO from Horizon netted an average sale price of $61.78/bbl for the quarter. Transportations costs declined to just $1.34/bbl.
The company recently completed a major maintenance turnaround at the Horizon Upgrader in order to tie-in components of its Phase 2B expansion. SCO production should return to normal by August 11th. The turnaround lasted over a month and will obviously impact Q3's production numbers, which is expected to average between 72,000 and 80,000 bbl/day. The company has therefore revised its guidance for the third quarter and full year 2016.
Horizon was the only oil sands mine not affected by the May wildfires thanks to its geography. Horizon is located almost 100 km north of Fort McMurray on the west side of the Athabasca River, and was therefore not as badly impacted by fire and smoke that travelled eastward from the city. CNRL provided shelter and logistics support to 2,700 evacuees from Fort McMurray and offered its firefighting services to the city's fire crews.
Despite reporting its second consecutive quarterly loss, there is hope on the horizon (pardon the pun). Start-up of Horizon's Phase 2B expansion is on schedule for an October start-up, with ramp up to full nameplate capacity expected by November. Phase 2B will add another 45,000 bbl/day of SCO capacity to the mining facility. Once completed and fully operational, Horizon's nameplate capacity will increase to 182,000 bbl/day of SCO.
Then comes Phase 3 - the final phase of expansion. Capital costs are expected to decline to just $1 billion next year. Phase 3 is already 83% complete and will add another 80,000 bbl/day of SCO to the company's bottom line by the end of next year. That will bring Horizon's total capacity to 250,000 bbl/d of SCO and hopefully drop operating costs below $25/bbl.
Phase 3 marks the end of a major spending spree by CNRL. The company hopes to return to being cash flow positive by 2018 and well on its way to strengthening its balance sheet and possibly making more strategic acquisitions.
CNRL stock (CNQ) trades on both of TSX and NYSE, yielding a dividend of approximately 2.3%.