CNRL’s profit up, but problems not over
Friday, Aug 11, 2017
Canadian Natural Resources Ltd’s (CNRL) purchase of Royal Dutch Shell’s oil sands assets in Alberta has pushed the Canadian firm’s profit for the second quarter of 2017 above C$1 billion (US$786 million).

However, CNRL’s president, Steve Laut, has warned that the company’s difficulties are not yet over.

CNRL reported C$1.07 billion (US$841 million), or C$0.93 (US$0.73) per share, in net earnings in the second quarter compared with a loss C$339 million (US$266 million), or C$0.31 (US$24) per share in the same period of 2016.

The company’s cash flow from operations almost doubled from a year earlier as production reached 1 million boepd for the first time in June.
“Our balanced and diverse portfolio delivered strong results in the second quarter of 2017,” said Laut in a statement.

“Funds flow from operations was significant at C$1.7 billion [US$1.3 billion], which was a strong result given the downward pressure on crude oil prices throughout the quarter. The Horizon Phase 2B expansion and acquired Athabasca oil sands volumes drove 27% growth in crude oil production volumes and 16% growth on a boe basis, when compared with the second quarter of 2016,” he added.

CNRL completed the acquisition of oil sands assets from Shell and Marathon Oil in June through two deals valued in excess of C$12.7 billion (US$10.0 billion). CNRL acquired an aggregate 70% stake in the Athabasca Oil Sands Project (AOSP), including 70% of the Scotford upgrader and the Quest Carbon Capture and Storage (CCS) project, along with additional working interests in other producing and non-producing oil sands leases.

The deal boosted CNRL’s stake in the AOSP assets to 70%, while Chevron now has a 20% interest and Shell has retained a 10% stake.

As a result of the acquisition, CNRL increased the mid-point of its 2017 annual liquids and boe production guidance by 11,000 bpd and 3,000 boepd respectively. The company’s Horizon oil production reached 191,000 bpd in the second quarter of 2017. However, CNRL also cut its 2017 capital programme by C$180 million (US$142 million) as WTI prices remained below US$50 per barrel.

“I think it’s still very tough out there,” Laut told the Globe and Mail. “If you look at our earnings of C$332 million [US$261 million], on a return-on-capital basis, it’s far from what would be considered normal for any industry, so we’ve got a ways to climb back yet before we say that things are looking stable,” he said.

According to CNRL’s chief financial officer, Corey Bieber, the company exited the second quarter of 2017 with C$3.7 billion (US$2.9 billion) in liquidity. Bieber said in the company statement that CNRL would reach “another inflection point” in the second half of 2017 with full periods of production from the third phase of the Horizon project expansion and AOSP operations.

With Horizon and AOSP driving “positive significant free cash flow growth”, the firm would achieve “continued debt reduction and balanced capital allocation”, Bieber added.

CNRL’s second-quarter profit spike came after the company reported C$245 million (US$193 million) in net earnings in the first quarter of 2017.

Other Canadian oil producers are also seeing their earnings rise after oil prices went up from what they were a year ago. However, this rise has not gone as far as some were expecting, and oil price forecasts are becoming more bearish once again.

A Trivest Wealth Counsel portfolio manager, Martin Pelletier, told the Globe and Mail that any impact of Donald Trump’s US presidential election victory on oil prices had worn off.

“Everyone’s talking about the huge earnings growth, the year-over-year, and how that translates into the broader sector,” Pelletier told the newspaper. “That’s yesterday’s trade. We’re seeing oil prices through this earnings season roll over, and now we’re back to where we were pre-Trump rally, so investors are concerned.” He also questioned how producers could improve their balance sheets if current oil price trends persisted.

Others, too, have raised such concerns. And with shale drillers in the US demonstrating a willingness to respond quickly to any price fluctuation, downward pressure on oil prices will remain strong in the shorter term.

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