EXHIBIT 99.1
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[GRAPHICS OMITTED - LOGO, PHOTOGRAPHS] | CANADIAN NATURAL
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| FIRST QUARTER REPORT
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diverse |
asset base | disciplined growth | strong leadership | Three months ended
| March 31, 2008
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CANADIAN NATURAL RESOURCES LIMITED ANNOUNCES
2008 FIRST QUARTER RESULTS
Commenting on first quarter 2008 results, Canadian Natural's Chairman, Allan
Markin stated, "It has been a good start to the year for Canadian Natural. We
completed our winter drilling program in advance of spring break-up, meeting
our targets. Our teams were presented with several weeks of cold weather,
leading to many weather related issues. The teams rose to the challenge and
delivered impressive results. At the Horizon Project, severe weather conditions
factored into lower productivity. As the weather became warmer, efficiencies
improved and first oil remains targeted for the third quarter of this year."
John Langille, Vice-Chairman, stated, "First quarter cash flow was a reflection
of higher realized crude oil pricing, resulting from a lower heavy crude oil
differential. The heavy crude oil differential improved due to reduced refinery
cracking margins that influence demand for heavy crude oil. Stronger natural
gas pricing also added to the bottom line as a cold, late winter resulted in a
draw on natural gas inventories. Natural gas pricing was also affected by fewer
liquefied natural gas imports to North America and reduced production coming
out of Canada. As a result of the increases in both crude oil and natural gas
realized strip prices, our cash flow for the year is projected to be in balance
with our capital program. Our balance sheet should continue to strengthen as we
expect solid earnings throughout 2008."
Steve Laut, President and Chief Operating Officer of Canadian Natural
commented, "During Q1/08, we saw the continued benefits of our high-graded
natural gas drilling program with strong and steady production delivering on
budget. Our North American crude oil drilling program also produced excellent
results, particularly from our Pelican Lake assets. Looking ahead, work at the
Primrose East Thermal Project continues on schedule, with production expected
for early 2009, a further step towards unlocking the significant value of
Canadian Natural's thermal crude oil resource base. Our International crude oil
projects are also making significant strides with the Olowi Project in Offshore
Gabon continuing on track for first oil targeted for late 2008, along with the
mobilization of the deep water drilling rig for Baobab in Offshore Cote
d'Ivoire. The Horizon Project remains targeted for a Q3/08 start up with
operations readiness on schedule to date. The year of execution has started off
extremely well."
HIGHLIGHTS
Three Months Ended
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MAR 31 Dec 31 Mar 31
($ millions, except as noted) 2008 2007 2007
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Net earnings $ 727 $ 798 $ 269
Per common share, basic and diluted $ 1.35 $ 1.48 $ 0.50
Adjusted net earnings from operations (1) $ 872 $ 546 $ 621
Per common share, basic and diluted $ 1.61 $ 1.02 $ 1.15
Cash flow from operations (2) $ 1,725 $ 1,486 $ 1,622
Per common share, basic and diluted $ 3.19 $ 2.75 $ 3.01
Capital expenditures, net of dispositions $ 1,753 $ 1,514 $ 2,009
Daily production, before royalties
Natural gas (mmcf/d) 1,538 1,589 1,717
Crude oil and NGLs (bbl/d) 327,217 337,240 327,001
Equivalent production (boe/d) 583,488 601,908 613,114
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(1) Adjusted net earnings from operations is a non-GAAP measure that the
Company utilizes to evaluate its performance. The derivation of this
measure is discussed in the Management's Discussion and Analysis ("MD&A").
(2) Cash flow from operations is a non-GAAP measure that the Company considers
key as it demonstrates the Company's ability to fund capital reinvestment
and debt repayment. The derivation of this measure is discussed in the
MD&A.
o Natural gas production volumes for the first quarter represented 44% of
the Company's total production. Natural gas production for Q1/08 averaged
1,538 mmcf/d, down 10% from 1,717 mmcf/d for Q1/07 and down 3% from 1,589
mmcf/d for Q4/07. As expected, volumes in Q1/08 reflected a strong winter
drilling program offset by the natural decline in base production and
continued reallocation of capital towards higher return projects in crude
oil.
o Total crude oil and NGLs production for Q1/08 was 327,217 bbl/d. Q1/08
production volumes were slightly higher than Q1/07 volumes of 327,001
bbl/d, and decreased 3% from Q4/07 volumes of 337,240 bbl/d. Volumes in
Q1/08 reflect the transition between steam and production cycles for
Primrose thermal wells and continued conversion of production wells to
polymer injection wells at Pelican Lake.
o Quarterly cash flow from operations was $1.73 billion, an increase of 6%
from Q1/07 and an increase of 16% from Q4/07. The increase from Q1/07 and
Q4/07 primarily reflected higher crude oil and natural gas realizations,
partially offset by realized hedging losses.
o Quarterly net earnings for Q1/08 were $727 million. Quarterly adjusted net
earnings from operations for Q1/08 were $872 million.
o Maintained a strong undeveloped conventional core land base in Canada of
11.8 million net acres - a key asset for continued value growth.
o Continued production improvements at the Pelican Lake Field were realized
from new drilling activity and the expansion of the enhanced crude oil
recovery program. Pelican Lake crude oil production averaged approximately
37,000 bbl/d during the first quarter of 2008, up significantly by 5,000
bbl/d from Q1/07 and up 1,000 bbl/d from Q4/07.
o The Primrose East Expansion, which is targeted to add 40,000 bbl/d of
capacity, made significant progress and is targeted for first steaming in
late 2008 and production in early 2009.
o Secured a deep water drilling rig for the Baobab Field. The equipment was
mobilized in early Q2/08, enabling work to begin on the restoration of
shut-in production. It is targeted that a minimum 3 of the 5 Baobab wells
come on stream over the course of 2008 and 2009.
CANADIAN NATURAL RESOURCES LIMITED 2
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o The Olowi Project in Offshore Gabon continues on track. The drilling rig
has been mobilized and arrived on site in late April. First crude oil
production is targeted for Q4/08.
o Work progress on the Horizon Oil Sands Project ("Horizon Project") exited
Q1/08 at 94% complete and first oil is targeted for Q3/08.
o Commencing January 1, 2009, the Company's commodity hedging program has
been revised by its Board of Directors to allow for the hedging of up to
50% (currently 75%) of the near 12 months budgeted production and up to
25% (currently 50%) of the following 13 to 24 months estimated production.
The purchase of put options will continue to be in addition to the above
parameters. The Company continues to believe that its risk management
program meets its objective of securing funding for its capital projects.
o Declared a quarterly cash dividend on common shares of C$0.10 per common
share, payable July 1, 2008.
CANADIAN NATURAL RESOURCES LIMITED 3
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OPERATIONS REVIEW AND CAPITAL ALLOCATION
In order to facilitate efficient operations, Canadian Natural focuses its
activities in core regions where it can dominate the land base and
infrastructure. Undeveloped land is critical to the Company's ongoing growth
and development within these core regions. Land inventories are maintained to
enable continuous exploitation of play types and geological trends, greatly
reducing overall exploration risk. By dominating infrastructure, the Company is
able to maximize utilization of its production facilities, thereby increasing
control over production costs. Further, the Company maintains large project
inventories and production diversification among each of the commodities it
produces; namely natural gas, light/medium and heavy crude oil and NGLs. A
large diversified project portfolio enables the effective allocation of capital
to higher return opportunities.
OPERATIONS REVIEW
ACTIVITY BY CORE REGION
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NET UNDEVELOPED LAND DRILLING ACTIVITY
AS AT THREE MONTHS ENDED
MAR 31, 2008 MAR 31, 2008
(THOUSANDS OF NET ACRES) (NET WELLS) (1)
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Canadian conventional
Northeast British Columbia 2,348 20.2
Northwest Alberta 1,451 53.3
Northern Plains 6,528 170.8
Southern Plains 920 68.3
Southeast Saskatchewan 122 10.1
In-situ Oil Sands 476 35.1
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11,845 357.8
Horizon Oil Sands Project 115 -
United Kingdom North Sea 268 1.6
Offshore West Africa 206 0.6
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12,434 360.0
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(1) Drilling activity includes stratigraphic test and service wells Drilling
activity (number of wells)
Three Months Ended Mar 31
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2008 2007
GROSS NET Gross Net
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Crude oil 184 173 210 193
Natural gas 191 161 246 201
Dry 13 11 68 60
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Subtotal 388 345 524 454
Stratigraphic test / service wells 15 15 234 234
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Total 403 360 758 688
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Success rate (excluding stratigraphic test / service wells) 97% 87%
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CANADIAN NATURAL RESOURCES LIMITED 4
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NORTH AMERICA CONVENTIONAL
NORTH AMERICA NATURAL GAS
Quarterly Results
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Q1/08 Q4/07 Q1/07
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Natural gas production (mmcf/d) 1,513 1,562 1,694
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Net wells targeting natural gas 167 92 245
Net successful wells drilled 161 80 201
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Success rate 96% 87% 82%
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o Q1/08 North American natural gas production decreased 11% from Q1/07 and
decreased 3% from Q4/07, reflecting natural declines in base production
and the Company's strategic decision to reduce spending on natural gas
drilling. Despite the decrease in production, the Company had a highly
successful winter drilling program with all planned wells drilled and all
planned tie-ins completed prior to spring break-up.
o Canadian Natural drilled 167 net targeted natural gas wells in Q1/08 with
an active program across the Company's core regions. In Northeast British
Columbia, 20 net wells were drilled, while in Northwest Alberta, 50 net
wells were drilled. In the Northern Plains, 44 net wells were drilled,
with 53 net wells drilled in the Southern Plains.
o Planned drilling activity for Q2/08 includes 8 natural gas wells compared
to drilling activity for Q2/07 of 6 natural gas wells.
NORTH AMERICA CRUDE OIL AND NGLS
Quarterly Results
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Q1/08 Q4/07 Q1/07
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Crude oil and NGLs production (bbl/d) 248,960 256,843 237,489
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Net wells targeting crude oil 176 172 207
Net successful wells drilled 171 168 191
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Success rate 97% 98% 92%
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o Q1/08 North America crude oil and NGLs production increased 5% from Q1/07
and decreased 3% from Q4/07 levels. The majority of the incremental
production volume from Q1/07 was contributed by thermal crude oil and
Pelican Lake crude oil. The decrease from Q4/07 is a reflection of
transitioning off the production cycle peaks at Primrose North pads.
o The Company has decided to accelerate the drilling of additional Primrose
North pads originally scheduled for 2009 requiring additional capital in
2008 of approximately $130 million; approximately 49 additional horizontal
wells of the 120 well program will be drilled in 2008 with the remainder
drilled in 2009. Steaming of these wells will commence in Q4/09.
o The Primrose East Expansion, a new facility located 15 kilometers from the
existing Primrose South steam plant and 25 kilometers from the Wolf Lake
central processing facility, is targeted to add approximately 40,000 bbl/d
of crude oil. Drilling and construction is on schedule, and production is
targeted to commence in early 2009. Primrose East is the second phase of
the 300,000 bbl/d conventional expansion plan identified to unlock the
value from Canadian Natural's thermal crude oil resource base.
o In early 2007, Canadian Natural announced its proposed third phase of the
thermal growth plan with a development plan for the 45,000 bbl/d Kirby
In-Situ Oil Sands Project located approximately 85 km northeast of Lac La
Biche in the Regional Municipality of Wood Buffalo. The Company has filed
its formal regulatory application documents for this project as part of
the Company's normal course of business.
CANADIAN NATURAL RESOURCES LIMITED 5
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o Development of new pads and secondary recovery conversion projects at
Pelican Lake continued as expected throughout Q1/08. In Q1/08, the Company
drilled 25 horizontal wells with plans to drill an additional 57
horizontal and 7 vertical service wells throughout the remainder of 2008.
Pelican Lake production averaged approximately 37,000 bbl/d for Q1/08
compared to approximately 32,000 bbl/d for Q1/07 and approximately 36,000
bbl/d for the prior quarter. The response from the polymer flood project
continues to be positive and the Company is moving forward on converting
regions currently under waterflood to polymer flood and expanding the
polymer flood to new areas.
o Conventional heavy crude oil production volumes decreased slightly in
Q1/08 compared to Q4/07, reflecting expected declines in certain older
fields and higher than forecast downtime due to cold weather.
o During Q1/08, drilling activity targeted 176 net wells including 96 wells
targeting heavy crude oil, 25 wells targeting Pelican Lake crude oil, 22
wells targeting thermal crude oil and 33 wells targeting light crude oil.
o Planned drilling activity for Q2/08 includes 62 net crude oil wells,
excluding stratigraphic test and service wells.
INTERNATIONAL
Quarterly Results
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Q1/08 Q4/07 Q1/07
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Crude oil production (bbl/d)
North Sea 49,568 52,709 61,869
Offshore West Africa 28,689 27,688 27,643
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Natural gas production (mmcf/d)
North Sea 11 13 15
Offshore West Africa 14 14 8
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Net wells targeting crude oil 2.2 0.6 2.8
Net successful wells drilled 2.2 0.6 2.8
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Success rate 100% 100% 100%
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NORTH SEA
o During Q1/08, 1.6 net wells were drilled and completed with an additional
1.6 net wells drilling at quarter end. Crude oil production was down 6% in
Q1/08 to 49,568 bbl/d from 52,709 bbl/d in Q4/07 as a result of the
disposal of Canadian Natural's interests in the B-Block Fields in December
2007, higher than anticipated downtime on Banff and further decline in the
Lyell subsea wells.
o Focus on waterflood optimization at Ninian continued with 1 well being
converted to water injection during Q1/08 and a further well scheduled to
be converted to water injection in Q2/08 to increase water injection
capacity. Compared to Q1/07, the Company has increased injection by 45%.
o At Murchison, the first of 2 production wells planned for 2008 was
completed during Q1/08. The second well is scheduled for completion in
Q2/08.
o Following disappointing injection performance from the subsea wells
drilled at Columba E in 2007, the Company has successfully increased
injection by 60% with the optimization of the current pumps to inject
above fracture pressure. As a result, a positive production response is
forecast for later in 2008.
CANADIAN NATURAL RESOURCES LIMITED 6
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OFFSHORE WEST AFRICA
o During Q1/08, 0.6 net crude oil wells were drilled and completed. This
represented the final well in the West Espoir drilling campaign with the
drilling rig being released during the quarter. The project was delivered
on budget and on schedule.
o Offshore West Africa's crude oil production was up 4% in Q1/08 to 28,689
bbl/d from 27,688 bbl/d in Q4/07 following the successful completion of
drilling at West Espoir and stable production from Baobab.
o Progress on the Facility Upgrade Project at Espoir to increase capacity of
the Floating, Production, Storage and Offtake Vessel ("FPSO") is
progressing ahead of schedule and is expected to now be complete in Q3/09,
an acceleration of 3 to 6 months from the original estimate.
o The deep water drilling rig for Baobab was mobilized early in Q2/08,
enabling work to begin on the restoration of shut-in production. It is
targeted that a minimum 3 of the 5 shut-in Baobab wells be on stream over
the course of 2008 and 2009.
o At the Olowi project in Offshore Gabon, a drilling rig was mobilized and
drilling commenced in early May of this year with first crude oil
production targeted for late 2008.
HORIZON PROJECT
o Canadian Natural achieved an overall 94% completion at the end of Q1/08,
with craftspeople actively performing hydrotests, airblows, rotation
checks and various pre-commissioning activities. Operations teams are
walking down the systems in each plant to ensure they are complete prior
to commissioning. The last substation on site has been energized and the
Extraction Plant started operating on water in late April.
o Mine Production commenced operations in the first quarter, using Canadian
Natural mine operators and equipment to work on the overburden removal.
This is the second area of the Horizon Project where operations have
begun, with water systems being the first. This represents a significant
milestone for the Company with early operations providing training
benefits for Canadian Natural operators prior to full start up.
o Commissioning is progressing as 96 plant systems have been turned over and
commissioned (out of an estimated 820); along with 10 mine haul trucks
(out of 23) and 2 hydraulic shovels, all on schedule. The balance of the
mine equipment will be turned over and commissioned to support the ramp up
of oil sands mining and bitumen production.
o At the end of the first quarter, capital spending on Phase 1 of the
Horizon Project was at 111% of the original budget of $6.8 billion.
Looking forward to completion, targeted for Q3/08, anticipated capital
spending on Phase 1 construction will be within the previously announced
range of 25%-28% above the original budget.
o There has been progress in hiring of operators with 89% of required
personnel in place, all maintenance contracts finalized and all
supervision mobilized on site. The plants are prepared to start up and
190,000 barrels of diluent for start up have been delivered to the Horizon
Project site.
o Once commissioning has been completed and operations have begun, it is
anticipated that ramp up to full production will occur over a 3 to 4 month
period. The target is to be at 85% design capacity by year end 2008. Full
capacity is anticipated to be achieved during Q1/09 as planned.
o The sales pipeline which will transport production from the site to
Edmonton is on track for completion in Q2/08. Approximately 750,000
barrels of synthetic crude oil from initial production volumes will be
used to fill the pipeline.
o While focus remains on completion and start up of Phase 1, Canadian
Natural continues to plan for future expansions. Two coke drums have been
received on site along with all components for the two hydrotreating
reactors that will be installed as part of the Phase 2/3 expansion.
CANADIAN NATURAL RESOURCES LIMITED 7
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HORIZON PROJECT STATUS SUMMARY
December 31, 2007 March 31, 2008 June 30, 2008
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Actual Actual Q1/08 Original Q2/08 Original
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Forecast Plan Forecast Plan
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Phase 1 - Work progress (cumulative) 90% 94% 95% 97% 97% 99%
Phase 1 - Construction capital spending* 99% 111% 110% 97% 122% 100%
(cumulative)
*Relative to overall Phase 1 project capital of $6.8 billion
ACCOMPLISHED TO THE END OF THE FIRST QUARTER OF 2008
Procurement
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o Site assembly of Mine Operations equipment (shovels and heavy haul trucks)
is on schedule. o Fixed Plant Maintenance contractors have mobilized.
Modularization
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o All oversized loads for construction have been delivered to site. Ongoing
deliveries of mine equipment (trucks and shovels) will continue through
the summer.
Construction
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o Overall construction progress is 91% complete.
o Mine overburden removal has moved 56.7 million bank cubic meters, which
represents approximately 80% of the total to be moved before start up.
o Completed Tar River Diversion and Fish Habitat construction.
o Substantially completed Extraction Plant in the first quarter and have
introduced water to the plant in April. o Completed construction of Tanks
11 and 12 in the East Tank Farm and filled with diluent for start up.
o Installed 3 nitrogen storage tanks and completed construction of the
Nitrogen Plant, now ready for operations.
o Installed Auxiliary Boiler in Cogeneration.
o Assumed occupancy of Main Warehouse.
o Substations energized for Sulphur Recovery and Gas Treating, representing
the last on-site substations to be energized.
o Substantially completed construction of Amine Plant and moving into
Pre-Commissioning.
o Started construction of Sulphur Pipeline.
o Completed piping in Heat Integration.
Systems Commissioned and Turned Over during the Quarter
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o Firewater in both tank farms.
o Tanks 11 and 12.
o Electrical Distribution to Heat Integration, Coker/DRU, Tank Farms and
Froth Treatment.
o Substations in Sulphur and Gas Treating energized.
COMMISSIONING SCHEDULE
Completed To Date
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o Permanent Potable Water Treatment
o Permanent Sewage Treatment
o Natural Gas Pipeline
o Raw and Recycled Water Pipelines
o River Water Intake and Pumphouse
o Raw Water Pond and Pumphouse
o Recycle Water Pond and Pumphouse
o Electrical Distribution System, including all substations
o Tanks 11 and 12 completed for diluent fill
o Main Piperack (air, water, gas, power)
o Instrument and Utility Air System
CANADIAN NATURAL RESOURCES LIMITED 8
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On Track for Q2 2008
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o Extraction
o Flare System
o Cogeneration (steam)
o Cooling and Heating
o Delayed Coker / Diluent Recovery Unit
o Hydrogen Plant
o Gas Treating and Sulphur Recovery
o West Tank Farm (inter plant)
o Sulphur Block Pipelines
o Synthetic Crude Oil (product) Pipeline
On Track for Q3 2008
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o Ore Preparation Plant
o Froth Treatment
o Cogeneration (power)
o Pipeline Corridors
o Hydrotreater
o Remainder of East Tank Farm (product)
MARKETING Quarterly Results
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Q1/08 Q4/07 Q1/07
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Crude oil and NGLs pricing
WTI(1) benchmark price (US$/bbl) $ 97.96 $ 90.63 $ 58.23
Western Canadian Select blend differential(2) from WTI (%) 22% 37% 27%
Corporate average pricing before risk management (C$/bbl) $ 78.99 $ 58.03 $ 51.71
Natural gas pricing
AECO benchmark price (C$/GJ) $ 6.76 $ 5.69 $ 7.07
Corporate average pricing before risk management (C$/mcf) $ 7.77 $ 6.28 $ 7.74
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(1) Refers to West Texas Intermediate (WTI) crude oil barrel priced at
Cushing, Oklahoma.
(2) Beginning in Q1 2008, the Company has quantified the Heavy Differential
using the Western Canadian Select ("WCS") blend as the heavy crude oil
marker. Prior period amounts have been reclassified.
o In Q1/08, the Western Canadian Select heavy crude oil differential as a
percent of WTI was 22%, compared to 37% in Q4/07. Heavy crude oil
differentials improved in Q1/08 due to the narrowing of cracking spreads
at refineries and a tight supply demand balance in PADD II. The lower
cracking spread resulted in higher demand for heavy crude oil leading to
improved differentials. Total Western Canadian production was down
slightly in the first quarter which also contributed to improved
differentials.
o The Company continues its efforts with other industry players in finding
new markets and easing the logistical constraints in getting Western
Canadian heavy crude oil to new markets, such as the US Gulf Coast.
Canadian heavy crude oil is very competitive against other international
grades available in the US Gulf Coast. For Q1/08, the differential for the
heavy crude oil marker, Mayan grade, was US$16.79/bbl or 17%.
o During Q1/08, the Company contributed approximately 153,000 bbl/d of its
heavy crude oil streams to the Western Canadian Select blend as market
conditions resulted in this strategy offering the optimal pricing for
bitumen.
o Demand for natural gas increased more than expected for Q1/08 leading to
increased natural gas pricing. The quarter saw fewer imports of liquefied
natural gas to North America as a result of stronger pricing in Europe and
Asia, resulting in decreased supply to the United States and Canada. A
cold winter also contributed to increased demand during the quarter along
with renewed consumption from the industrial sector.
CANADIAN NATURAL RESOURCES LIMITED 9
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FINANCIAL REVIEW
o Canadian Natural has structured its financial position to profitably grow
its conventional crude oil and natural gas operations over the next
several years and to build the financial capacity to complete the Horizon
Project and other major projects. A brief summary of the Company's
strengths are:
-- A diverse asset base geographically and by product - produced in
excess of 583,000 boe/d in Q1/08, comprised of approximately 44%
natural gas and 56% crude oil - with 95% of production located in G8
countries with stable and secure economies.
-- Financial stability and liquidity - cash flow from operations of $1.7
billion for Q1/08, available unused bank lines of $2.6 billion at
March 31, 2008 and access to capital debt markets supported by strong
credit ratings.
-- Reduced volatility of commodity prices - a proactive commodity
hedging program to reduce the downside risk of volatility in
commodity prices supporting cash flow for its capital expenditure
program throughout the Horizon Project.
-- A strengthening balance sheet with debt to book capitalization of 44%
and debt to EBITDA of 1.6 times, both within targeted ranges.
o In January 2008, the Company issued US$1,200 million of unsecured notes
comprised of US$400 million of 5.15% unsecured notes due February 2013,
US$400 million of 5.90% unsecured notes due February 2018, and US$400
million of 6.75% unsecured notes due February 2039. Proceeds from the
securities issues were used to repay bankers' acceptances under the
Company's bank credit facilities.
o Commencing January 1, 2009, the Company's commodity hedging program has
been revised by its Board of Directors to allow for the hedging of up to
50% of the near 12 months budgeted production and up to 25% of the
following 13 to 24 months estimated production. The purchase of put
options will continue to be in addition to the above parameters. The
current program allows for hedging of 75% of the near 12 months budget and
production, up to 50% of the following 13 to 24 months estimated
production, and up to 25% of the expected production in months 25 to 48.
The Company continues to believe that its risk management program meets
its objective of securing funding for its capital projects.
o In 2007 and 2008, the Province of Alberta issued certain details of its
proposed changes to the Alberta crude oil and natural gas royalty regime,
effective January 1, 2009. The Company is currently awaiting finalization
and government approval of the royalty regulations, however it expects
that its 2009 and future Alberta royalty payments will increase as a
result of the proposed royalty changes and that its level of activity in
Alberta in aggregate will be reduced from what it otherwise would have
been in the absence of such royalty changes.
o Declared a quarterly cash dividend on common shares of C$0.10 per common
share, payable July 1, 2008.
OUTLOOK
The Company forecasts 2008 production levels before royalties to average
between 1,429 and 1,513 mmcf/d of natural gas and between 316,000 and 366,000
bbl/d of crude oil and NGLs. Q2/08 production guidance before royalties is
forecast to average between 1,479 and 1,513 mmcf/d of natural gas and between
306,000 and 323,000 bbl/d of crude oil and NGLs. Detailed guidance on
production levels, capital allocation and operating costs can be found on the
Company's website at http://www.cnrl.com/investor_info/corporate_guidance/.
CANADIAN NATURAL RESOURCES LIMITED 10
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MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
Certain statements in this document or documents incorporated herein by
reference constitute forward-looking statements or information (collectively
referred to herein as "forward-looking statements") within the meaning of
applicable securities legislation. Forward-looking statements can be identified
by the words "believe", "anticipate", "expect", "plan", "estimate", "target",
"continue", "could", "intend", "may", "potential", "predict", "should", "will",
"objective", "project", "forecast", "goal", "guidance", "outlook", "effort",
"seeks", "schedule" or expressions of a similar nature suggesting future
outcome or statements regarding an outlook. Disclosure related to expected
future commodity pricing, production volumes, royalties, operating costs,
capital expenditures and other 2008 guidance provided throughout this
Management's Discussion and Analysis ("MD&A"), constitutes forward-looking
statements. In addition, statements relating to "reserves" are deemed to be
forward-looking statements as they involve the implied assessment based on
certain estimates and assumptions that the reserves described can be profitably
produced in the future. There are numerous uncertainties inherent in estimating
quantities of proved crude oil and natural gas reserves and in projecting
future rates of production and the timing of development expenditures. The
total amount or timing of actual future production may vary significantly from
reserve and production estimates.
These statements are not guarantees of future performance and are subject to
certain risks and the reader should not place undue reliance on these
forward-looking statements as there can be no assurance that the plans,
initiatives or expectations upon which they are based will occur.
The forward-looking statements are based on current expectations, estimates and
projections about Canadian Natural Resources Limited (the "Company") and the
industry in which the Company operates, which speak only as of the date such
statements were made or as of the date of the report or document in which they
are contained, and are subject to known and unknown risks, uncertainties and
other factors that could cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others: general economic and business conditions which
will, among other things, impact demand for and market prices of the Company's
products; volatility of and assumptions regarding crude oil and natural gas
prices; fluctuations in currency and interest rates; assumptions on which the
Company's current guidance is based; economic conditions in the countries and
regions in which the Company conducts business; political uncertainty,
including actions of or against terrorists, insurgent groups or other conflict
including conflict between states; industry capacity; ability of the Company to
implement its business strategy, including exploration and development
activities; impact of competition; the Company's defense of lawsuits;
availability and cost of seismic, drilling and other equipment; ability of the
Company and its subsidiaries to complete its capital programs; the Company's
and its subsidiaries' ability to secure adequate transportation for its
products; unexpected difficulties in mining, extracting or upgrading the
Company's bitumen products; potential delays or changes in plans with respect
to exploration or development projects or capital expenditures; ability of the
Company to attract the necessary labour required to build its thermal and oil
sands mining projects; operating hazards and other difficulties inherent in the
exploration for and production and sale of crude oil and natural gas;
availability and cost of financing; the Company's and its subsidiaries' success
of exploration and development activities and their ability to replace and
expand crude oil and natural gas reserves; timing and success of integrating
the business and operations of acquired companies; production levels;
imprecision of reserve estimates and estimates of recoverable quantities of
crude oil, bitumen, natural gas and liquids not currently classified as proved;
actions by governmental authorities; government regulations and the
expenditures required to comply with them (especially safety and environmental
laws and regulations and the impact of climate change initiatives on capital
and operating costs); asset retirement obligations; the adequacy of the
Company's provision for taxes; and other circumstances affecting revenues and
expenses. The Company's operations have been, and at times in the future may
be, affected by political developments and by federal, provincial and local
laws and regulations such as restrictions on production, changes in taxes,
royalties and other amounts payable to governments or governmental agencies,
price or gathering rate controls and environmental protection regulations.
Should one or more of these risks or uncertainties materialize, or should any
of the Company's assumptions prove incorrect, actual results may vary in
material respects from those projected in the forward-looking statements. The
impact of any one factor on a particular forward-looking statement is not
determinable with certainty as such factors are interdependent upon other
factors, and the Company's course of action would depend upon its assessment of
the future considering all information then available.
CANADIAN NATURAL RESOURCES LIMITED 11
===============================================================================
Readers are cautioned that the foregoing list of important factors is not
exhaustive. Unpredictable or unknown factors not discussed in this report could
also have material adverse effects on forward-looking statements. Although the
Company believes that the expectations conveyed by the forward-looking
statements are reasonable based on information available to it on the date such
forward-looking statements are made, no assurances can be given as to future
results, levels of activity and achievements. All subsequent forward-looking
statements, whether written or oral, attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements. Except as required by law, the Company assumes no
obligation to update forward-looking statements should circumstances or
Management's estimates or opinions change.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
interim consolidated financial statements for the three months ended March 31,
2008 and the MD&A and the audited consolidated financial statements for the
year ended December 31, 2007.
All dollar amounts are referenced in millions of Canadian dollars, except where
noted otherwise. The financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). This MD&A includes
references to financial measures commonly used in the crude oil and natural gas
industry, such as adjusted net earnings from operations and cash flow from
operations. These financial measures are not defined by GAAP and therefore are
referred to as non-GAAP measures. The non-GAAP measures used by the Company may
not be comparable to similar measures presented by other companies. The Company
uses these non-GAAP measures to evaluate its performance. The non-GAAP measures
should not be considered an alternative to or more meaningful than net
earnings, as determined in accordance with GAAP, as an indication of the
Company's performance. The measures adjusted net earnings from operations and
cash flow from operations are reconciled to net earnings in the "Financial
Highlights" section of this MD&A.
The calculation of barrels of oil equivalent ("boe") is based on a conversion
ratio of six thousand cubic feet ("mcf") of natural gas to one barrel ("bbl")
of crude oil to estimate relative energy content. This conversion may be
misleading, particularly when used in isolation, since the 6 mcf:1 bbl ratio is
based on an energy equivalency at the burner tip and does not represent the
value equivalency at the wellhead.
Production volumes are presented throughout this MD&A on a "before royalty" or
"gross" basis, and realized prices exclude the effect of risk management
activities and transportation and blending costs, except where noted otherwise.
Production on an "after royalty" or "net" basis is also presented for
information purposes only.
The following discussion refers primarily to the Company's financial results
for the three months ended March 31, 2008 in relation to the comparable period
in 2007 and the fourth quarter of 2007. The accompanying tables form an
integral part of this MD&A. This MD&A is dated May 8, 2008. Additional
information relating to the Company, including its Annual Information Form for
the year ended December 31, 2007, is available on SEDAR at www.sedar.com.
CANADIAN NATURAL RESOURCES LIMITED 12
===============================================================================
FINANCIAL HIGHLIGHTS
($ millions, except per common share amounts)
Three Months Ended
-----------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ----------------------------------------------------------------------------------------------------------------------
Revenue, before royalties $ 3,967 $ 3,200 $ 3,118
Net earnings $ 727 $ 798 $ 269
Per common share - basic and diluted $ 1.35 $ 1.48 $ 0.50
Adjusted net earnings from operations (1) $ 872 $ 546 $ 621
Per common share - basic and diluted $ 1.61 $ 1.02 $ 1.15
Cash flow from operations (2) $ 1,725 $ 1,486 $ 1,622
Per common share - basic and diluted $ 3.19 $ 2.75 $ 3.01
Capital expenditures, net of dispositions $ 1,753 $ 1,514 $ 2,009
======================================================================================================================
(1) Adjusted net earnings from operations is a non-GAAP measure that
represents net earnings adjusted for certain items of a non-operational
nature. The Company evaluates its performance based on adjusted net
earnings from operations. The reconciliation "Adjusted Net Earnings from
Operations" below lists the after-tax effects of certain items of a
non-operational nature that are included in the Company's financial
results. Adjusted net earnings from operations may not be comparable to
similar measures presented by other companies.
(2) Cash flow from operations is a non-GAAP measure that represents net
earnings adjusted for non-cash items before working capital adjustments.
The Company evaluates its performance based on cash flow from operations.
The Company considers cash flow from operations a key measure as it
demonstrates the Company's ability to generate the cash flow necessary to
fund future growth through capital investment and to repay debt. The
reconciliation "Cash Flow from Operations" below lists certain non-cash
items that are included in the Company's financial results. Cash flow from
operations may not be comparable to similar measures presented by other
companies.
ADJUSTED NET EARNINGS FROM OPERATIONS
Three Months Ended
------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
------------------------------------------------------------------------------------------------------------------------
Net earnings as reported $ 727 $ 798 $ 269
Stock-based compensation expense (recovery), net of tax (a) - (11) 17
Unrealized risk management loss, net of tax (b) 76 593 362
Unrealized foreign exchange loss (gain), net of tax (c) 110 (41) (27)
Effect of statutory tax rate and other legislative changes on future income tax
liabilities (d) (41) (793) -
------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings from operations $ 872 $ 546 $ 621
========================================================================================================================
(a) The Company's employee stock option plan provides for a cash payment
option. Accordingly, the intrinsic value of the outstanding vested
options is recorded as a liability on the Company's balance sheet and
periodic changes in the intrinsic value are recognized in net earnings
or are capitalized as part of the Horizon Oil Sands Project during the
construction period.
(b) Derivative financial instruments are recorded at fair value on the
balance sheet, with changes in fair value of non-designated hedges
flowing through net earnings. The amounts ultimately realized may be
materially different than reflected in the financial statements due to
changes in prices of the underlying items hedged, primarily crude oil
and natural gas.
(c) Unrealized foreign exchange gains and losses result primarily from the
translation of US dollar denominated long-term debt to period-end
exchange rates, offset by the impact of cross currency swaps, and are
immediately recognized in net earnings.
(d) All substantively enacted adjustments in applicable income tax rates
and other legislative changes are applied to underlying assets and
liabilities on the Company's consolidated balance sheet in determining
future income tax assets and liabilities. The impact of these tax rate
and other legislative changes is recorded in net earnings during the
period the legislation is substantively enacted. Income tax rate
changes in the first quarter of 2008 resulted in a reduction of future
income tax liabilities of approximately $19 million in North America
and $22 million in Cote d'Ivoire, Offshore West Africa. Income tax rate
and other legislative changes in the fourth quarter of 2007 resulted in
a reduction of future income tax liabilities of approximately $793
million in North America.
CANADIAN NATURAL RESOURCES LIMITED 13
===============================================================================
CASH FLOW FROM OPERATIONS
Three Months Ended
------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
--------------------------------------------------------------------------------------------------------
Net earnings $ 727 $ 798 $ 269
Non-cash items:
Depletion, depreciation and amortization 688 719 709
Asset retirement obligation accretion 17 17 18
Stock-based compensation expense (recovery) - (16) 25
Unrealized risk management loss 108 845 536
Unrealized foreign exchange loss (gain) 126 (47) (32)
Deferred petroleum revenue tax (recovery) expense (21) 17 (3)
Future income tax expense (recovery) 80 (847) 100
--------------------------------------------------------------------------------------------------------
Cash flow from operations $ 1,725 $ 1,486 $ 1,622
========================================================================================================
SUMMARY OF CONSOLIDATED NET EARNINGS AND CASH FLOW FROM OPERATIONS
Net earnings for the first quarter of 2008 were $727 million compared to $269
million for the first quarter of 2007 and $798 million for the prior quarter.
Net earnings for the first quarter of 2008 included net unrealized after-tax
expenses of $145 million related to the effects of risk management activities,
fluctuations in foreign exchange rates, fluctuations in stock-based
compensation expense and the impact of statutory tax rate changes on future
income tax liabilities, compared to net unrealized after-tax expenses of $352
million for the first quarter of 2007 and net unrealized after-tax income of
$252 million for the prior quarter. Excluding these items, adjusted net
earnings from operations for the first quarter of 2008 increased to $872
million compared to $621 million for the first quarter of 2007 and $546 million
for the prior quarter. The increase in adjusted net earnings from the first
quarter of 2007 was primarily due to the impact of higher realized pricing,
lower depletion, depreciation and amortization expense, lower interest expense,
and lower administration expense. These factors were partially offset by higher
realized risk management losses, higher royalty and production expense, lower
sales volumes and the impact of the stronger Canadian dollar relative to the US
dollar. The increase from the prior quarter was primarily due to the impact of
higher realized pricing, lower depletion, depreciation and amortization
expense, and the impact of the weaker Canadian dollar relative to the US
dollar, partially offset by higher realized risk management losses, higher
royalty and production expense, and lower sales volumes.
The Company expects that consolidated net earnings will continue to reflect
significant quarterly volatility due to the impact of risk management
activities, stock-based compensation expense and fluctuations in foreign
exchange rates.
The Company's commodity hedging program reduces the risk of volatility in
commodity price markets and supports the Company's cash flow for its capital
expenditures throughout the Horizon Oil Sands Project ("Horizon Project")
construction period. This program currently allows for the hedging of up to 75%
of the near 12 months budgeted production, up to 50% of the following 13 to 24
months estimated production and up to 25% of production expected in months 25
to 48. For the purpose of this program, the purchase of put options is in
addition to the above parameters. In accordance with the policy, approximately
61% of budgeted crude oil volumes are hedged for the remainder of 2008,
approximately 18% of budgeted natural gas volumes are hedged for the second and
third quarters of 2008 and approximately 6% of estimated crude oil volumes are
hedged for 2009. In addition, 50,000 bbl/d of crude oil volumes are protected
by put options for the remainder of 2008 at a strike price of US$55.00 per
barrel and 50,000 bbl/d of crude oil volumes are protected by put options for
2009 at a strike price of US$80.00 per barrel.
Commencing January 1, 2009, following the planned completion of Phase 1 of the
Horizon Project, the Company's commodity hedging program has been revised by
its Board of Directors to allow for the hedging of up to 50% of the near 12
months budgeted production and up to 25% of the following 13 to 24 months
estimated production. The purchase of put options will continue to be in
addition to the above parameters.
The Company's outstanding commodity related financial derivatives as at March
31, 2008 are detailed in the "Liquidity and Capital Resources" section of this
MD&A.
CANADIAN NATURAL RESOURCES LIMITED 14
===============================================================================
The commodity derivative financial instruments currently outstanding have not
been designated as hedges for accounting purposes (the "non-designated
hedges"). The fair value of these non-designated hedges is based on prevailing
forward commodity prices in effect at the end of each reporting period and is
reflected in risk management activities in consolidated net earnings. The cash
settlement amount of the risk management derivative financial instruments may
vary materially depending upon the underlying crude oil and natural gas prices
at the time of final settlement of the derivative financial instruments, as
compared to their mark-to-market value at March 31, 2008.
Due to changes in crude oil and natural gas forward pricing and the reversal of
prior period unrealized gains and losses, the Company recorded a net unrealized
loss of $108 million ($76 million after-tax) on its commodity risk management
activities for the three months ended March 31, 2008. Mark-to-market unrealized
gains and losses do not impact the Company's current cash flow or its ability
to finance ongoing capital programs. The Company continues to believe that its
risk management program meets its objective of securing funding for its capital
projects. For further details, refer to the "Risk Management Activities"
section of this MD&A.
For the first quarter of 2008, no stock-based compensation expense was
recognized as the expense associated with options vesting in the normal course
was offset by the impact of the lower share price at March 31, 2008 (Company's
share price as at: March 31, 2008 - C$70.27; December 31, 2007 - C$72.58; March
30, 2007 - C$63.75; December 31, 2006 - C$62.15). As required by GAAP, the
Company records a liability for potential cash payments to settle its
outstanding employee stock options each reporting period based on the
difference between the exercise price of the stock options and the market price
of the Company's common shares, pursuant to a graded vesting schedule. The
liability is revalued quarterly to reflect the changes in the market price of
the Company's common shares and the options exercised or surrendered in the
period, with the net change recognized in net earnings, or capitalized as part
of the Horizon Project during the construction period. The stock-based
compensation liability at March 31, 2008 reflected the Company's potential cash
liability should all the vested options be surrendered for a cash payout at the
market price on March 31, 2008. In periods when substantial share price changes
occur, the Company's net earnings are subject to significant volatility. The
Company utilizes its stock-based compensation plan to attract and retain
employees in a competitive environment. All employees participate in this plan.
Cash flow from operations for the first quarter of 2008 increased to $1,725
million compared to $1,622 million for the first quarter of 2007 and $1,486
million for the prior quarter. The increase from the first quarter of 2007 was
primarily due to the impact of higher realized pricing, partially offset by
higher realized risk management losses, higher royalty and production expense,
higher current income tax expense, lower sales volumes and the impact of the
stronger Canadian dollar relative to the US dollar. The increase from the prior
quarter was primarily due to the impact of higher realized pricing and the
impact of the weaker Canadian dollar relative to the US dollar, partially
offset by higher realized risk management losses, higher royalty and production
expense and higher current income tax expense.
Total production before royalties for the first quarter of 2008 decreased 5% to
583,488 boe/d from 613,114 boe/d for the first quarter of 2007 and 3% from
601,908 boe/d for the prior quarter.
CANADIAN NATURAL RESOURCES LIMITED 15
===============================================================================
SUMMARY OF QUARTERLY RESULTS
The following is a summary of the Company's quarterly results for the eight
most recently completed quarters:
($ millions, except per common share amounts) MAR 31 Dec 31 Sep 30 Jun 30
2008 2007 2007 2007
- ------------------------------------------------------------------------------------------------------------------------
Revenue, before royalties $ 3,967 $ 3,200 $ 3,073 $ 3,152
Net earnings $ 727 $ 798 $ 700 $ 841
Net earnings per common share
- Basic and diluted $ 1.35 $ 1.48 $ 1.30 $ 1.56
========================================================================================================================
Mar 31 Dec 31 Sep 30 Jun 30
($ millions, except per common share amounts) 2007 2006 2006 2006
- ------------------------------------------------------------------------------------------------------------------------
Revenue, before royalties $ 3,118 $ 2,826 $ 3,108 $ 3,041
Net earnings $ 269 $ 313 $ 1,116 $ 1,038
Net earnings per common share
- Basic and diluted $ 0.50 $ 0.58 $ 2.08 $ 1.93
========================================================================================================================
Net earnings over the eight most recently completed quarters generally
reflected fluctuations in realized crude oil and natural gas prices,
fluctuations in sales volumes, the impact of mark-to-market accounting of
financial instruments, fluctuations in depletion, depreciation and amortization
charges, fluctuations in foreign exchange rates, and adjustments to future
income tax liabilities due to statutory tax rate and other legislative changes.
More specifically, volatility in quarterly net earnings was primarily due to:
o Crude oil pricing
Crude oil prices reflected demand growth, continued geopolitical
uncertainties and fluctuations in the Heavy Crude Oil Differential from
WTI ("Heavy Differential") in North America.
o Natural gas pricing
Natural gas prices primarily reflected seasonal fluctuations in both the
demand for natural gas and inventory storage levels and fluctuations in
liquefied natural gas imports into the US.
o Crude oil and NGLs sales volumes
Crude oil and NGLs sales volumes primarily reflected increased production
from the Company's Primrose thermal projects, the results from the Pelican
Lake water and polymer flood projects, development of West and East
Espoir, and additional sales volumes from the Anadarko Canada Corporation
("ACC") acquisition completed in the fourth quarter of 2006. Crude oil and
NGLs sales volumes also reflected fluctuations in production from the
North Sea due to timing of maintenance activities and liftings and the
impact of shut-in Baobab production in Offshore West Africa.
o Natural gas sales volumes
Natural gas sales volumes primarily reflected additional natural gas
volumes as a result of the ACC acquisition and internally generated
growth. The increases were partially offset by production declines due to
the Company's strategic reduction in natural gas drilling activity.
o Foreign exchange rates
A general strengthening of the Canadian dollar relative to the US dollar
has decreased the realized price the Company received for its crude oil
and natural gas sales, as sales prices are based predominately on US
dollar denominated benchmarks. Similarly, unrealized foreign exchange
gains and losses were recorded with respect to US dollar denominated debt
balances and the re-measurement of North Sea future income tax liabilities
denominated in UK pounds sterling to US dollars, partially offset by the
impact of cross currency swaps.
CANADIAN NATURAL RESOURCES LIMITED 16
===============================================================================
o Risk management
Net earnings have fluctuated due to the recognition of realized and
unrealized gains and losses from the mark-to-market of the Company's risk
management activities.
o Changes in income tax expense
Income tax expense (recovery) fluctuations include statutory tax rate and
other legislative changes enacted or substantively enacted in the various
periods.
o Stock-based compensation
Net earnings have fluctuated due to the mark-to-market movements of the
Company's stock-based compensation liability. Stock-based compensation
expense (recovery) reflected fluctuations in the Company's share price
over the eight most recently completed quarters.
o Production expense
Production expense has fluctuated company wide primarily due to the impact
for the demand for services, the industry-wide inflationary cost pressures
experienced in prior years in all segments and the impact of seasonal
costs that are dependent on weather and the fluctuations in product mix.
o Depletion, depreciation and amortization
Depletion, depreciation and amortization expense has fluctuated due to
changes in sales volumes, finding and development costs associated with
crude oil and natural gas exploration, estimated future costs to develop
the Company's proved undeveloped reserves, and a higher depletion base in
North America related to the ACC acquisition.
OPERATING HIGHLIGHTS
Three Months Ended
-------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
CRUDE OIL AND NGLS ($/bbl) (1)
Sales price (2) $ 78.99 $ 58.03 $ 51.71
Royalties 8.70 6.66 4.92
Production expense 14.81 11.53 13.81
- ------------------------------------------------------------------------------------------------------------------
Netback $ 55.48 $ 39.84 $ 32.98
- ------------------------------------------------------------------------------------------------------------------
NATURAL GAS ($/mcf) (1)
Sales price (2) $ 7.77 $ 6.28 $ 7.74
Royalties 1.35 0.94 1.48
Production expense 1.03 0.91 0.97
- ------------------------------------------------------------------------------------------------------------------
Netback $ 5.39 $ 4.43 $ 5.29
- ------------------------------------------------------------------------------------------------------------------
BARRELS OF OIL EQUIVALENT ($/boe) (1)
Sales price (2) $ 65.09 $ 49.23 $ 49.32
Royalties 8.43 6.21 6.76
Production expense 11.02 8.85 10.10
- ------------------------------------------------------------------------------------------------------------------
Netback $ 45.64 $ 34.17 $ 32.46
==================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
(2) Net of transportation and blending costs and excluding risk management
activities.
CANADIAN NATURAL RESOURCES LIMITED 17
===============================================================================
BUSINESS ENVIRONMENT
Three Months Ended
---------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------------
WTI benchmark price (US$/bbl) $ 97.96 $ 90.63 $ 58.23
Dated Brent benchmark price (US$/bbl) $ 96.94 $ 88.65 $ 57.76
WCS blend differential from WTI (US$/bbl) (1) $ 21.41 $ 33.74 $ 15.48
WCS blend differential from WTI (%) (1) 22% 37% 27%
Condensate benchmark price (US$/bbl) $ 98.40 $ 90.89 $ 58.78
NYMEX benchmark price (US$/mmbtu) $ 8.07 $ 7.03 $ 6.96
AECO benchmark price (C$/GJ) $ 6.76 $ 5.69 $ 7.07
US / Canadian dollar average exchange rate $ 0.9958 $ 1.0193 $ 0.8535
====================================================================================================================
(1) Beginning in Q1 2008, the Company has quantified the Heavy Differential
using the Western Canadian Select ("WCS") blend as the heavy crude oil
marker. Prior period amounts have been reclassified.
COMMODITY PRICES
Crude oil sales contracts in the North America segment are typically based on
WTI benchmark pricing. WTI averaged US$97.96 per bbl for the first quarter of
2008, an increase of 68% from US$58.23 per bbl for the first quarter of 2007,
and an increase of 8% from US$90.63 for the prior quarter. WTI pricing during
the first quarter of 2008 generally reflected continued strong demand for crude
oil and continued geopolitical events resulting in increased market
uncertainty.
Crude oil sales contracts for the Company's North Sea and Offshore West Africa
segments are typically based on Dated Brent ("Brent") pricing, which generally
continued to benefit from strong European and Asian demand. Brent averaged
US$96.94 per bbl for the first quarter of 2008, an increase of 68% compared to
US$57.76 per bbl for the first quarter of 2007, and an increase of 9% from
US$88.65 per bbl for the prior quarter.
The Company's realized crude oil prices increased from the first quarter of
2007 and the prior quarter primarily as a result of increased WTI and Brent
pricing and a narrower Heavy Differential, offset by the impact of a strong
Canadian dollar. The Heavy Differential averaged 22% for the first quarter of
2008 compared to 27% for the first quarter of 2007, and 37% for the prior
quarter. The narrowing of the Heavy Differential from the prior period was
primarily due to reduced Canadian production of heavy crude oil and reduced
refinery cracking margins. Realized prices continued to be adversely impacted
by the strong Canadian dollar.
The Company anticipates continued volatility in the crude oil pricing
benchmarks due to the unpredictable nature of geopolitical events and potential
refinery outages. The Heavy Differential is expected to continue to reflect
seasonal demand fluctuations and refinery cracking margins.
NYMEX natural gas prices averaged US$8.07 per mmbtu for the first quarter of
2008, an increase of 16% from US$6.96 per mmbtu for the first quarter of 2007,
and an increase of 15% from US$7.03 per mmbtu for the prior quarter. AECO
natural gas prices for the first quarter of 2008 decreased 4% from $7.07 per GJ
in the first quarter of 2007 to average $6.76 per GJ, and increased 19% from
$5.69 per GJ for the prior quarter. Fluctuations in natural gas prices from the
comparable periods were primarily related to higher overall demand and lower
storage levels, resulting from the colder weather experienced late in the first
quarter of 2008, and lower liquefied natural gas imports into the US during the
first quarter of 2008.
CANADIAN NATURAL RESOURCES LIMITED 18
===============================================================================
OPERATING, ROYALTY AND CAPITAL COSTS
Strong commodity prices in recent years have resulted in increased demand and
costs for oilfield services worldwide. This has lead to inflationary operating
and capital cost pressures throughout the North America crude oil and natural
gas industry, particularly related to drilling activities and oil sands
developments. The strong commodity price environment has also impacted costs in
international basins, due in large part to the high demand for offshore
drilling rigs.
The crude oil and natural gas industry is also experiencing cost pressures
related to environmental regulations, both in North America and
internationally. In Canada, the Federal Government has indicated its intent to
develop regulations that would be in effect in 2010 to address industrial
greenhouse gas ("GHG") emissions. The Federal Government has also outlined
national and sectoral reduction targets for several categories of air
pollutants. In Alberta, GHG regulations came into effect July 1, 2007,
affecting facilities emitting more than 100 kilotonnes of CO2e annually. Two of
the Company's facilities, the Primrose/Wolf Lake in-situ heavy crude oil
facilities and the Hays sour gas plant, are captured under the regulations. In
the UK, GHG regulations have been in effect since 2005. During Phase 1
(2005-2007) of the UK National Allocation Plan the Company operated below its
CO2 allocation. For Phase 2 (2008-2012) the Company's CO2 allocation has been
decreased below the Company's estimated current operations emissions. The
Company continues to focus on implementing reduction programs based on
efficiency audits to reduce CO2 emissions at its major facilities and on
trading mechanisms to ensure compliance with any requirement now in effect.
During the first quarter of 2008, British Columbia announced a carbon tax on
fuel consumed in the province. Commencing July 1, 2008, the carbon tax will be
assessed at $10/tonne of CO2e, increasing to $30/tonne by July 1, 2012.
Continued cost pressures and the final outcome of changes to environmental
regulations may adversely impact the Company's future net earnings, cash flow
and capital projects.
In 2007 and 2008, the Province of Alberta issued certain details of its
proposed changes to the Alberta crude oil and natural gas royalty regime,
effective January 1, 2009. These proposed changes include:
o The implementation of a sliding scale for oil sands royalties ranging from
1% to 9% on a gross revenue basis pre-payout and 25% to 40% on a net
revenue basis post-payout depending on benchmark crude oil pricing; and
o New royalty formulas for conventional crude oil and natural gas that are
to operate on sliding scales ranging up to 50% determined by commodity
prices and well productivity.
The Company is currently awaiting finalization and government approval of the
royalty regulations, however it expects that its 2009 and future Alberta
royalty payments will increase as a result of the proposed royalty changes and
that its level of activity in Alberta in aggregate will be reduced from what it
otherwise would have been in the absence of such royalty changes.
CANADIAN NATURAL RESOURCES LIMITED 19
===============================================================================
PRODUCT PRICES
Three Months Ended
--------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- -------------------------------------------------------------------------------------------------------------------
CRUDE OIL AND NGLS ($/bbl) (1) (2)
North America $ 72.86 $ 50.49 $ 46.09
North Sea $ 99.01 $ 83.44 $ 68.83
Offshore West Africa $ 96.31 $ 81.89 $ 58.60
Company average $ 78.99 $ 58.03 $ 51.71
NATURAL GAS ($/mcf) (1) (2)
North America $ 7.80 $ 6.31 $ 7.79
North Sea $ 3.30 $ 3.62 $ 4.49
Offshore West Africa $ 7.89 $ 5.49 $ 5.97
Company average $ 7.77 $ 6.28 $ 7.74
COMPANY AVERAGE ($/boe) (1) (2) $ 65.09 $ 49.23 $ 49.32
PERCENTAGE OF GROSS REVENUE (2)
(excluding midstream revenue)
Crude oil and NGLs 68% 66% 56%
Natural gas 32% 34% 44%
===================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
(2) Net of transportation and blending costs and excluding risk management
activities.
The Company's realized crude oil prices increased 53% to average $78.99 per bbl
for the first quarter of 2008 from $51.71 per bbl for the first quarter of
2007, and increased 36% from $58.03 per bbl for the prior quarter. The
Company's realized crude oil prices increased from the first quarter of 2007
and the prior quarter primarily as a result of an increased WTI and Brent
benchmark prices and a narrower Heavy Differential, partially offset by a
strong Canadian dollar relative to the US dollar.
The Company's realized natural gas price increased marginally to average $7.77
per mcf for the first quarter of 2008 from $7.74 per mcf for the first quarter
of 2007, and increased 24% from $6.28 per mcf for the prior quarter. The
increase in realized natural gas prices from the prior quarter primarily
reflected colder winter temperatures during the later part of the first quarter
of 2008 and the impact of an overall reduction by the industry for natural gas
drilling in response to industry wide inflationary pressures. The reduced
drilling activity and production volumes and lower liquefied natural gas
imports contributed to a decrease in natural gas inventories closer to
historical levels.
NORTH AMERICA
North America realized crude oil prices increased 58% to average $72.86 per bbl
for the first quarter of 2008 from $46.09 per bbl for the first quarter of
2007, and increased 44% from $50.49 per bbl for the prior quarter. The increase
from the comparable periods was due to the increase in WTI benchmark pricing
and a narrower Heavy Differential, partially offset by the impact of the strong
Canadian dollar.
In North America, the Company continues to focus on its crude oil marketing
strategy, including the development of a blending strategy that expands markets
within current pipeline infrastructure, supporting pipeline projects that will
provide capacity to transport crude oil to new markets, and working with
refiners to add incremental heavy crude oil conversion capacity. During the
first quarter, the Company contributed approximately 153,000 bbl/d of heavy
crude oil blends to the WCS stream.
CANADIAN NATURAL RESOURCES LIMITED 20
===============================================================================
North America realized natural gas prices increased marginally to average $7.80
per mcf for the first quarter of 2008 from $7.79 per mcf for the first quarter
of 2007, and increased 24% from $6.31 per mcf for the prior quarter.
Fluctuations in natural gas prices from the comparable periods in 2007 were
primarily related to the impact of weather and storage levels.
Comparisons of the prices received for the Company's North America production
by product type were as follows:
--------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------------
WELLHEAD PRICE (1) (2)
Light/medium crude oil and NGLs (C$/bbl) $ 88.78 $ 74.96 $ 59.48
Pelican Lake crude oil (C$/bbl) $ 72.77 $ 47.01 $ 44.44
Primary heavy crude oil (C$/bbl) $ 68.61 $ 43.30 $ 41.83
Thermal heavy crude oil (C$/bbl) $ 65.97 $ 42.76 $ 40.31
Natural gas (C$/mcf) $ 7.80 $ 6.31 $ 7.79
====================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
(2) Net of transportation and blending costs and excluding risk management
activities.
NORTH SEA
North Sea realized crude oil prices increased 44% to average $99.01 per bbl for
the first quarter of 2008 from $68.83 per bbl for the first quarter of 2007,
and by 19% from $83.44 per bbl for the prior quarter. As revenue in the North
Sea is currently recognized on a liftings basis, realized crude oil prices per
barrel in any particular quarter are dependant on the frequency and timing of
liftings of each field. Realized crude oil prices in the North Sea during the
first quarter continued to benefit from the impact of strong European and Asian
demand, partially offset by the impact of the strong Canadian dollar.
OFFSHORE WEST AFRICA
Offshore West Africa realized crude oil prices increased 64% to average $96.31
per bbl for the first quarter of 2008 from $58.60 per bbl for the first quarter
of 2007, and increased 18% from $81.89 per bbl for the prior quarter. As
revenue in Offshore West Africa is recognized on a liftings basis, realized
crude oil prices per barrel in any particular quarter are dependant on the
frequency and timing of liftings of each field, as well as the terms of the
related sales contracts. Realized crude oil prices in Offshore West Africa
during the first quarter continued to benefit from the impact of strong
European and Asian demand, offset by the impact of the strong Canadian dollar.
CRUDE OIL INVENTORY VOLUMES
The Company recognizes revenue on its crude oil production when title transfers
to the customer and delivery has taken place. The related crude oil volumes by
segment, which have not been recognized in revenue, were as follows:
--------------------
MAR 31 Dec 31 Mar 31
(bbl) 2008 2007 2007
- --------------------------------------------------------------------------------------------------------------------
North America, related to pipeline fill 1,097,526 1,097,526 1,097,526
North Sea, related to timing of liftings 637,755 1,032,723 401,296
Offshore West Africa, related to timing of liftings 260,649 8,578 230,623
- --------------------------------------------------------------------------------------------------------------------
1,995,930 2,138,827 1,729,445
====================================================================================================================
In the first quarter of 2008, an additional 143,000 barrels of crude oil
produced in the Company's international operations, which were deferred and
included in inventory at December 31, 2007, were sold. Notwithstanding the
overall reduction, consolidated cash flow from operations decreased by
approximately $6 million in the first quarter of 2008 as the increase in cash
flow derived from additional sales volumes in the North Sea was more than
offset by the decrease in cash flow due to lower sales volumes in Offshore West
Africa where netbacks are higher.
CANADIAN NATURAL RESOURCES LIMITED 21
===============================================================================
DAILY PRODUCTION, before royalties
Three Months Ended
--------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------
CRUDE OIL AND NGLS (bbl/d)
North America 248,960 256,843 237,489
North Sea 49,568 52,709 61,869
Offshore West Africa 28,689 27,688 27,643
- --------------------------------------------------------------------------------------------------------------
327,217 337,240 327,001
- --------------------------------------------------------------------------------------------------------------
NATURAL GAS (mmcf/d)
North America 1,513 1,562 1,694
North Sea 11 13 15
Offshore West Africa 14 14 8
- --------------------------------------------------------------------------------------------------------------
1,538 1,589 1,717
- --------------------------------------------------------------------------------------------------------------
TOTAL BARRELS OF OIL EQUIVALENT (boe/d) 583,488 601,908 613,114
- --------------------------------------------------------------------------------------------------------------
PRODUCT MIX
Light/medium crude oil and NGLs 23% 23% 24%
Pelican Lake crude oil 6% 6% 5%
Primary heavy crude oil 15% 15% 15%
Thermal heavy crude oil 12% 12% 9%
Natural gas 44% 44% 47%
==============================================================================================================
DAILY PRODUCTION, net of royalties
Three Months Ended
--------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------
CRUDE OIL AND NGLS (bbl/d)
North America 216,585 217,886 204,401
North Sea 49,473 52,586 61,754
Offshore West Africa 23,496 25,123 25,897
- --------------------------------------------------------------------------------------------------------------
289,554 295,595 292,052
- --------------------------------------------------------------------------------------------------------------
NATURAL GAS (mmcf/d)
North America 1,260 1,327 1,367
North Sea 11 13 15
Offshore West Africa 11 12 8
- --------------------------------------------------------------------------------------------------------------
1,282 1,352 1,390
- --------------------------------------------------------------------------------------------------------------
TOTAL BARRELS OF OIL EQUIVALENT (boe/d) 503,250 520,887 523,730
==============================================================================================================
Daily production and per barrel statistics are presented throughout this MD&A
on a "before royalty" or "gross" basis. Production on an "after royalty" or
"net" basis is also presented.
CANADIAN NATURAL RESOURCES LIMITED 22
===============================================================================
The Company's business approach is to maintain large project inventories and
production diversification among each of the commodities it produces; namely
natural gas, light/medium crude oil and NGLs, Pelican Lake crude oil, primary
heavy crude oil and thermal heavy crude oil.
Total production averaged 583,488 boe/d for the first quarter of 2008, a 5%
decrease from 613,114 boe/d for the first quarter of 2007, and a 3% decrease
from 601,908 boe/d for the prior quarter.
Total crude oil and NGLs production for the first quarter of 2008 of 327,217
bbl/d was comparable to 327,001 bbl/d for the first quarter of 2007, and
decreased 3% from 337,240 bbl/d for the prior quarter. The decrease from the
prior quarter was primarily due to lower production in North America and the
North Sea. Crude oil and NGLs production in the first quarter of 2008 was
within the Company's previously issued guidance of 315,000 to 331,000 bbl/d.
Natural gas production continued to represent the Company's largest product
offering, accounting for 44% of the Company's total production. Natural gas
production for the first quarter of 2008 averaged 1,538 mmcf/d compared to
1,717 mmcf/d for the first quarter of 2007 and 1,589 mmcf/d for the prior
quarter. The decrease in natural gas production from the comparable periods
primarily reflected production declines due to the Company's strategic
reduction in natural gas drilling activity. First quarter natural gas
production was within the Company's previously issued guidance of 1,522 to
1,557 mmcf/d.
For 2008, annual production guidance is targeted to average between 316,000 and
366,000 bbl/d of crude oil and NGLs and between 1,429 and 1,513 mmcf/d of
natural gas. Second quarter 2008 production guidance is targeted to average
between 306,000 and 323,000 bbl/d of crude oil and NGLs and between 1,479 and
1,513 mmcf/d of natural gas.
NORTH AMERICA
North America crude oil and NGLs production for the first quarter of 2008
increased 5% to average 248,960 bbl/d from 237,489 bbl/d for the first quarter
of 2007, and decreased 3% from 256,843 bbl/d for the prior quarter. The
fluctuations in crude oil and NGLs production from the prior periods was
primarily due to the cyclic nature of the Company's thermal production.
For the first quarter of 2008, natural gas production decreased 11% to 1,513
mmcf/d from 1,694 mmcf/d for the first quarter of 2007, and decreased 3% from
1,562 mmcf/d for the prior quarter. The decrease in natural gas production from
the prior periods reflected production declines due to the Company's strategic
decision to reduce natural gas drilling activity.
NORTH SEA
North Sea crude oil production for the first quarter of 2008 decreased 20% to
49,568 bbl/d from 61,869 bbl/d for the first quarter of 2007 and by 6% from
52,709 bbl/d for the prior quarter. Production decreased from the prior quarter
due to the sale of the Company's interests in the B-Block Fields in December
2007, higher than anticipated downtime on the Banff Field and further decline
of the 2007 Lyell subsea wells.
OFFSHORE WEST AFRICA
Offshore West Africa crude oil production increased 4% to 28,689 bbl/d for the
first quarter of 2008 from 27,643 bbl/d for the first quarter of 2007, and by
4% from 27,688 bbl/d for the prior quarter. Production increased compared with
the comparable periods in 2007 due to the progress on the West Espoir drilling
program, which was successfully completed in January 2008, coupled with stable
production from the Baobab Field. In Baobab, the Company has secured a
deepwater rig, on location in April 2008, which should enable the Company to
execute its plan to restore certain of its shut-in production over the course
of 2008 and 2009.
CANADIAN NATURAL RESOURCES LIMITED 23
===============================================================================
ROYALTIES
Three Months Ended
-------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
CRUDE OIL AND NGLS ($/bbl) (1)
North America $ 9.63 $ 7.66 $ 6.42
North Sea $ 0.19 $ 0.19 $ 0.13
Offshore West Africa $ 17.43 $ 7.59 $ 3.70
Company average $ 8.70 $ 6.66 $ 4.92
NATURAL GAS ($/mcf) (1)
North America $ 1.36 $ 0.95 $ 1.50
Offshore West Africa $ 1.43 $ 0.52 $ 0.38
Company average $ 1.35 $ 0.94 $ 1.48
COMPANY AVERAGE ($/boe) (1) $ 8.43 $ 6.21 $ 6.76
PERCENTAGE OF REVENUE (2)
Crude oil and NGLs 11% 11% 10%
Natural gas 17% 15% 19%
Boe 13% 13% 14%
==================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
(2) Net of transportation and blending costs and excluding risk management
activities.
NORTH AMERICA
North America crude oil and NGLs royalties per bbl for the first quarter of
2008 continue to reflect strong realized crude oil prices. Crude oil and NGLs
royalties averaged approximately 13% of revenues for the first quarter of 2008,
compared to 14% for the first quarter in 2007 and 15% in the prior quarter.
Crude oil and NGLs royalties per bbl are anticipated to average 14% to 16% of
gross revenue for 2008.
Natural gas royalties per mcf generally fluctuate with natural gas prices.
Natural gas royalties averaged approximately 17% of revenues for the first
quarter of 2008 compared to 19% for the first quarter of 2007 and 15% for the
prior quarter. Natural gas royalties are anticipated to average 17% to 20% of
gross revenue for 2008.
NORTH SEA
North Sea government royalties on crude oil were eliminated effective January
1, 2003. The remaining royalty is a gross overriding royalty on the Ninian
Field.
CANADIAN NATURAL RESOURCES LIMITED 24
===============================================================================
OFFSHORE WEST AFRICA
Offshore West Africa production is governed by the terms of the various
Production Sharing Contracts ("PSCs"). Under the PSCs, revenues are divided
into cost recovery oil and profit oil. Cost recovery oil allows the Company to
recover its capital and production costs and the costs carried by the Company
on behalf of the Government State Oil Company. Profit oil is allocated to the
joint venture partners in accordance with their respective equity interests,
after a portion has been allocated to the Government. The Government's share of
profit oil attributable to the Company's equity interest is allocated between
royalty expense and current income tax expense in accordance with the PSCs. The
Company's capital investments in the Espoir Fields were fully recovered in the
first quarter of 2007, increasing royalty rates and current income taxes in
accordance with the terms of the PSCs.
Royalty rates as a percentage of revenue averaged approximately 18% for the
first quarter of 2008 compared to 6% for the first quarter of 2007 and 9% for
the prior quarter. Royalty expense in the first quarter reflected the
relatively high proportion of Espoir sales in the period and the increase in
allocation of the Government's share to royalties due to the reduction in the
Cote d'Ivoire corporate income tax rate enacted in the first quarter of 2008.
Offshore West Africa royalty rates are anticipated to average 12% to 17% of
gross revenue for 2008.
PRODUCTION EXPENSE
Three Months Ended
-------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Crude oil and NGLs ($/bbl) (1)
North America $ 13.88 $ 10.54 $ 13.00
North Sea $ 22.35 $ 18.95 $ 18.57
Offshore West Africa $ 8.03 $ 9.32 $ 8.93
Company average $ 14.81 $ 11.53 $ 13.81
Natural gas ($/mcf) (1)
North America $ 1.01 $ 0.90 $ 0.95
North Sea $ 2.33 $ 1.50 $ 2.58
Offshore West Africa $ 1.25 $ 1.89 $ 1.48
Company average $ 1.03 $ 0.91 $ 0.97
Company average ($/boe) (1) $ 11.02 $ 8.85 $ 10.10
==================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
NORTH AMERICA
North America crude oil and NGLs production expense for the first quarter of
2008 increased 7% to $13.88 per bbl from $13.00 per bbl for the first quarter
of 2007 and increased 32% from $10.54 per bbl for the prior quarter. The
increase in production expense per barrel for the first quarter of 2008 was a
result of the timing of steam cycles, higher cost of natural gas for fuel for
the Company's thermal operations, and increased seasonal costs related to
winter access areas.
North America natural gas production expense for the first quarter of 2008
increased 6% to $1.01 per mcf from $0.95 per mcf for the first quarter of 2007
and increased 12% from $0.90 per mcf for the prior quarter. The increase in
production expense per mcf was a result of lower sales volumes on the fixed
cost portion of production costs and increased seasonal costs related to winter
access areas.
CANADIAN NATURAL RESOURCES LIMITED 25
===============================================================================
NORTH SEA
North Sea crude oil production expense increased on a per barrel basis from the
comparable quarters in 2007 due to lower production volumes on a relatively
fixed cost base and the timing of liftings from various fields.
OFFSHORE WEST AFRICA
Offshore West Africa crude oil production expense decreased on a per barrel
basis from the comparable quarters in 2007 primarily due to the impact of the
timing of liftings at the Baobab and Espoir Fields, resulting in a greater
proportion of relatively lower fixed cost Espoir sales in the quarter.
MIDSTREAM
Three Months Ended
-------------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 20 $ 19 $ 19
Production expense 5 6 6
- ------------------------------------------------------------------------------------------------------------------
Midstream cash flow 15 13 13
Depreciation 2 2 2
- ------------------------------------------------------------------------------------------------------------------
Segment earnings before taxes $ 13 $ 11 $ 11
==================================================================================================================
The Company's midstream assets consist of three crude oil pipeline systems and
a 50% working interest in an 84-megawatt cogeneration plant at Primrose.
Approximately 80% of the Company's heavy crude oil production is transported to
international mainline liquid pipelines via the 100% owned and operated ECHO
Pipeline, the 62% owned and operated Pelican Lake Pipeline and the 15% owned
Cold Lake Pipeline. The midstream pipeline assets allow the Company to control
the transport of its own production volumes as well as earn third party
revenue. This transportation control enhances the Company's ability to manage
the full range of costs associated with the development and marketing of its
heavier crude oil.
DEPLETION, DEPRECIATION AND AMORTIZATION (1)
Three Months Ended
---------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------------
Expense ($ millions) $ 686 $ 717 $ 707
$/boe (2) $ 12.87 $ 12.99 $ 12.73
====================================================================================================================
(1) DD&A excludes depreciation on midstream assets.
(2) Amounts expressed on a per unit basis are based on sales volumes.
Depletion, Depreciation and Amortization ("DD&A") for the first quarter of 2008
decreased in total from the prior quarter and the first quarter of 2007. The
decrease in DD&A expense from the prior periods was primarily due to the impact
of lower sales volumes.
CANADIAN NATURAL RESOURCES LIMITED 26
===============================================================================
ASSET RETIREMENT OBLIGATION ACCRETION
Three Months Ended
------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Expense ($ millions) $ 17 $ 17 $ 18
$/boe (1) $ 0.31 $ 0.31 $ 0.32
==================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
Asset retirement obligation accretion expense represents the increase in the
carrying amount of the asset retirement obligation due to the passage of time.
Accretion expense for the first quarter of 2008 was consistent with the
comparable periods.
ADMINISTRATION EXPENSE
Three Months Ended
-------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Expense ($ millions) $ 43 $ 42 $ 60
$/boe (1) $ 0.80 $ 0.76 $ 1.08
==================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
Administration expense for the first quarter of 2008 decreased in total and on
a boe basis from the first quarter of 2007 primarily due to decreased staffing
costs, including costs related to the Company's share bonus program.
STOCK-BASED COMPENSATION EXPENSE (RECOVERY)
Three Months Ended
------------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Expense (recovery) $ - $ (16) $ 25
==================================================================================================================
The Company's Stock Option Plan (the "Option Plan") provides current employees
(the "option holders") with the right to elect to receive common shares or a
direct cash payment in exchange for options surrendered. The design of the
Option Plan balances the need for a long-term compensation program to retain
employees with the benefits of reducing the impact of dilution on current
Shareholders and the reporting of the obligations associated with stock
options. Transparency of the cost of the Option Plan is increased since changes
in the intrinsic value of outstanding stock options are recognized each period.
The cash payment feature provides option holders with substantially the same
benefits and allows them to realize the value of their options through a
simplified administration process.
For the first quarter of 2008, no stock-based compensation expense was
recognized as the expense associated with options vesting in the normal course
was offset by the impact of the lower share price at March 31, 2008 (Company's
share price as at: March 31, 2008 - C$70.27; December 31, 2007 - C$72.58; March
31, 2007 - C$63.75; December 31, 2006 - C$62.15). As required by GAAP, the
Company's outstanding stock options are valued each reporting period based on
the difference between the exercise price of the stock options and the market
price of the Company's common shares, pursuant to a graded vesting schedule.
The liability is revalued quarterly to reflect changes in the market price of
the Company's common shares and the options exercised or surrendered in the
period, with the net change recognized in net earnings, or capitalized during
the construction period in the case of the Horizon Project. For the three
months ended March 31, 2008, the Company recorded a $5 million recovery on
previously capitalized stock-based compensation on the Horizon Project (March
31, 2007 - $9 million capitalized). The stock-based compensation liability
reflected the Company's potential cash liability should all the vested options
be surrendered for a cash payout at the market price on March 31, 2008. In
periods when substantial stock price changes occur, the Company is subject to
significant earnings volatility.
CANADIAN NATURAL RESOURCES LIMITED 27
===============================================================================
For the three months ended March 31, 2008, the Company paid $80 million for
stock options surrendered for cash settlement (March 31, 2007 - $136 million).
INTEREST EXPENSE
Three Months Ended
---------------------
MAR 31 Dec 31 Mar 31
($ millions, except per boe amounts) 2008 2007 2007
- ---------------------------------------------------------------------------------------------------------------------
Expense, gross $ 160 $ 160 $ 154
Less: capitalized interest, Horizon Project 111 109 71
- ---------------------------------------------------------------------------------------------------------------------
Expense, net $ 49 $ 51 $ 83
$/boe (1) $ 0.92 $ 0.92 $ 1.49
Average effective interest rate 5.5% 5.5% 5.4%
=====================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
Gross interest expense and the Company's average effective interest rate
increased from the first quarter in 2007 primarily due to an increased
proportion of higher cost US dollar denominated debt, offset by decreased short
term borrowing rates in the first quarter of 2008 and the impact of the strong
Canadian dollar.
On commencement of operations of Phase 1 of the Horizon Project, interest
capitalization will cease on this Phase, increasing interest expense
accordingly.
RISK MANAGEMENT ACTIVITIES
The Company utilizes various derivative financial instruments to manage its
commodity price, currency and interest rate exposures. These derivative
financial instruments are not intended for trading or speculative purposes.
Three Months Ended
---------------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
- ---------------------------------------------------------------------------------------------------------------------
Crude oil and NGLs financial instruments $ 463 $ 308 $ (5)
Natural gas financial instruments (47) (127) (83)
- ---------------------------------------------------------------------------------------------------------------------
Realized loss (gain) $ 416 $ 181 $ (88)
- ---------------------------------------------------------------------------------------------------------------------
Crude oil and NGLs financial instruments $ 51 $ 770 $ 330
Natural gas financial instruments 59 75 206
Foreign currency swaps (2) - -
- ---------------------------------------------------------------------------------------------------------------------
Unrealized loss $ 108 $ 845 $ 536
- ---------------------------------------------------------------------------------------------------------------------
Net loss $ 524 $ 1,026 $ 448
=====================================================================================================================
The net realized loss (gain) from crude oil and natural gas financial
instruments would have decreased (increased) the Company's average realized
prices as follows:
Three Months Ended
--------------------
MAR 31 Dec 31 Mar 31
2008 2007 2007
- --------------------------------------------------------------------------------------------------------------------
Crude oil and NGLs ($/bbl) (1) $ 15.47 $ 9.99 $ (0.17)
Natural gas ($/mcf) (1) $ (0.33) $ (0.87) $ (0.54)
====================================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
CANADIAN NATURAL RESOURCES LIMITED 28
===============================================================================
Complete details related to outstanding derivative financial instruments at
March 31, 2008 are disclosed in note 10 to the Company's unaudited interim
consolidated financial statements.
The commodity derivative financial instruments currently outstanding have not
been designated as hedges for accounting purposes (the "non-designated
hedges"). The fair value of these non-designated hedges is based on prevailing
forward commodity prices in effect at the end of each reporting period and is
reflected in risk management activities in consolidated net earnings. The cash
settlement amount of the risk management derivative financial instruments may
vary materially depending upon the underlying crude oil and natural gas prices
at the time of final settlement of the derivative financial instruments, as
compared to their mark-to-market value at March 31, 2008. Due to changes in
crude oil and natural gas forward pricing and the reversal of prior period
unrealized gains and losses, the Company recorded a net unrealized loss of $108
million ($76 million after-tax) on its commodity risk management activities for
the three months ended March 31, 2008 (December 31, 2007 - unrealized loss of
$845 million, $593 million after-tax; March 31, 2007 - unrealized loss of $536
million, $362 million after-tax).
FOREIGN EXCHANGE
Three Months Ended
--------------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Net realized (gain) loss $ (12) $ - $ 5
Net unrealized loss (gain) (1) 126 (47) (32)
- ------------------------------------------------------------------------------------------------------------------
Net loss (gain) $ 114 $ (47) $ (27)
==================================================================================================================
(1) Amounts are reported net of the hedging effect of cross currency swaps as
described in Risk Management Activities.
The Company's operating results are affected by fluctuations in the exchange
rates between the Canadian dollar, US dollar, and UK pound sterling. A majority
of the Company's revenue is based on reference to US dollar benchmark prices.
An increase in the value of the Canadian dollar in relation to the US dollar
results in decreased revenue from the sale of the Company's production.
Conversely, a decrease in the value of the Canadian dollar in relation to the
US dollar results in increased revenue from the sale of the Company's
production. Production expenses in the North Sea are subject to foreign
currency fluctuations due to changes in the exchange rate of the UK pound
sterling to the US dollar, while production expenses in Offshore West Africa
are subject to foreign currency fluctuations due to changes in the exchange
rate of the Canadian dollar to the US dollar. The value of the Company's US
dollar denominated debt is also impacted by the value of the Canadian dollar in
relation to the US dollar.
The net unrealized foreign exchange loss for the first quarter of 2008 was
primarily related to the weakening of the Canadian dollar in relation to the US
dollar with respect to the US dollar debt, together with the impact of the
re-measurement of North Sea future income tax liabilities denominated in UK
pounds sterling to US dollars. Included in the net unrealized loss for the
three months ended March 31, 2008 was an unrealized gain of $75 million (three
months ended March 31, 2007 - unrealized loss of $37 million) related to the
impact of the cross currency swaps. The net realized foreign exchange gain for
the three months ended March 31, 2008 was primarily due to the result of
foreign exchange rate fluctuations on settlement of working capital items
denominated in US dollars or UK pounds sterling. The Canadian dollar ended the
first quarter at US$0.9729 compared to US$1.0120 at December 31, 2007 (March
31, 2007 - US$0.8674).
CANADIAN NATURAL RESOURCES LIMITED 29
===============================================================================
TAXES
Three Months Ended
------------------
MAR 31 Dec 31 Mar 31
($ millions, except income tax rates) 2008 2007 2007
- ------------------------------------------------------------------------------------------------------------------
Current $ 70 $ 16 $ 66
Deferred (21) 17 (3)
- ------------------------------------------------------------------------------------------------------------------
Taxes other than income tax $ 49 $ 33 $ 63
==================================================================================================================
North America $ 21 $ 31 $ 25
North Sea 96 65 35
Offshore West Africa 38 27 10
- ------------------------------------------------------------------------------------------------------------------
Current income tax 155 123 70
Future income tax expense (recovery) 80 (847) 100
- ------------------------------------------------------------------------------------------------------------------
235 (724) 170
Income tax rate and other legislative changes (1) (2) 41 793 -
- ------------------------------------------------------------------------------------------------------------------
$ 276 $ 69 $ 170
- ------------------------------------------------------------------------------------------------------------------
Effective income tax rate before non-recurring benefits 28.7% 93.2% 38.7%
==================================================================================================================
(1) Includes the effect of a one time recovery of $19 million due to British
Columbia corporate income tax rate reductions and $22 million due to Cote
d'Ivoire corporate income tax rate reductions enacted or substantively
enacted during the first quarter of 2008.
(2) Includes the effect of a one time recovery of $793 million due to Canadian
Federal income tax rate reductions and other legislative changes enacted
or substantively enacted during the fourth quarter of 2007.
Taxes other than income tax primarily includes current and deferred petroleum
revenue tax ("PRT"). PRT is charged on certain fields in the North Sea at the
rate of 50% of net operating income, after allowing for certain deductions
including abandonment expenditures.
Taxable income from the conventional crude oil and natural gas business in
Canada is primarily generated through partnerships, with the related income
taxes payable in a future period. North America current income taxes have been
provided on the basis of the corporate structure and available income tax
deductions and will vary depending upon the nature, timing and amount of
capital expenditures incurred in Canada in any particular year. In particular,
current taxes in a specific year are sensitive to the timing of when the
Horizon Project capital expenditures are deductible for Canadian income tax
purposes.
CANADIAN NATURAL RESOURCES LIMITED 30
===============================================================================
CAPITAL EXPENDITURES (1)
Three Months Ended
---------------------
MAR 31 Dec 31 Mar 31
($ millions) 2008 2007 2007
- -----------------------------------------------------------------------------------------------------------------------------
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
Net property (dispositions) acquisitions $ (8) $ (107) $ 46
Land acquisition and retention 12 15 29
Seismic evaluations 27 17 50
Well drilling, completion and equipping 452 341 714
Production and related facilities 319 390 334
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NET RESERVE REPLACEMENT EXPENDITURES 802 656 1,173
- -----------------------------------------------------------------------------------------------------------------------------
Horizon Project:
Phase 1 construction costs 665 691 674
Phase 1 operating and capital inventory 41 - -
Phase 1 commissioning costs 49 - -
Phases 2/3 costs 77 33 44
Capitalized interest, stock-based compensation and other 109 108 91
- -----------------------------------------------------------------------------------------------------------------------------
Total Horizon Project 941 832 809
- -----------------------------------------------------------------------------------------------------------------------------
Midstream 1 2 2
Abandonments (2) 6 16 20
Head office 3 8 5
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NET CAPITAL EXPENDITURES $ 1,753 $ 1,514 $ 2,009
=============================================================================================================================
BY SEGMENT
North America $ 663 $ 570 $ 998
North Sea 45 44 138
Offshore West Africa 94 43 36
Other - (1) 1
Horizon Project 941 832 809
Midstream 1 2 2
Abandonments (2) 6 16 20
Head office 3 8 5
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,753 $ 1,514 $ 2,009
=============================================================================================================================
(1) The net capital expenditures exclude adjustments related to differences
between carrying value and tax value.
(2) Abandonments represent expenditures to settle asset retirement obligations
and have been reflected as capital expenditures in this table.
CANADIAN NATURAL RESOURCES LIMITED 31
===============================================================================
The Company's strategy is focused on building a diversified asset base that is
balanced among various products. In order to facilitate efficient operations,
the Company concentrates its activities in core regions where it can dominate
the land base and infrastructure. The Company focuses on maintaining its land
inventories to enable the continuous exploitation of play types and geological
trends, greatly reducing overall exploration risk. By dominating
infrastructure, the Company is able to maximize utilization of its production
facilities, thereby increasing control over production costs.
Net capital expenditures for the three months ended March 31, 2008 were $1,753
million compared to $2,009 million for the three months ended March 31, 2007.
Capital expenditures in the first quarter of 2008 primarily reflected the
continued progress on the Company's larger, future growth projects, most
notably the Horizon Project, offset by the effects of an overall strategic
reduction in the North America natural gas drilling program.
For the three months ended March 31, 2008, the Company drilled a total of 360
net wells consisting of 161 natural gas wells, 173 crude oil wells, 15
stratigraphic test and service wells and 11 wells that were dry. This compared
to 688 net wells drilled for the three months ended March 31, 2007 and 271 net
wells drilled in the prior quarter. The Company achieved an overall success
rate of 97% for the three months ended March 31, 2008, excluding stratigraphic
test and service wells, compared to 87% for the first quarter of 2007 and 94%
for the prior quarter.
NORTH AMERICA
North America, including the Horizon Project, accounted for approximately 92%
of the total capital expenditures for the three months ended March 31, 2008
compared to approximately 91% for the first quarter of 2007 and 94% for the
prior quarter.
During the first quarter of 2008, the Company targeted 167 net natural gas
wells, including 20 wells in Northeast British Columbia, 44 wells in the
Northern Plains region, 50 wells in Northwest Alberta, and 53 wells in the
Southern Plains region. The Company also targeted 176 net crude oil wells
during the same period. The majority of these wells were concentrated in the
Company's crude oil Northern Plains region where 96 heavy crude oil wells, 25
Pelican Lake crude oil wells, 22 thermal crude oil wells and 4 light crude oil
wells were drilled. Another 29 wells targeting light crude oil were drilled
outside the Northern Plains region.
Due to significant changes in relative commodity prices between crude oil and
natural gas during the first quarter of 2008, the Company continued to access
its large crude oil drilling inventory to maximize value in both the short and
long term. Due to the Company's focus on drilling crude oil wells in 2007 and
2008, natural gas drilling activities have been reduced to manage overall
capital spending. Deferred natural gas well locations have been retained in the
Company's prospect inventory.
As part of the phased expansion of its In-Situ Oil Sands Assets, the Company is
continuing to develop its Primrose thermal projects. Overall Primrose thermal
production for the first quarter of 2008 averaged approximately 69,000 bbl/d
compared to approximately 58,000 bbl/d for the first quarter of 2007 and
approximately 74,000 bbl/d for the prior quarter.
The Primrose East Expansion, a new facility located 15 kilometers from the
existing Primrose South steam plant and 25 kilometers from the Wolf Lake
central processing facility, is anticipated to add approximately 40,000 bbl/d
when complete. Drilling and construction are currently underway, and production
is targeted to commence in 2009.
The next phase of the Company's In-Situ Oil Sands Assets expansion is the Kirby
project located 120 kilometers north of the existing Primrose facilities. The
Kirby project is anticipated to add approximately 45,000 bbl/d of production
growth. During 2007, the Company filed a combined application and Environmental
Impact Assessment for this project with Alberta Environment and the Alberta
Energy and Utilities Board. Final corporate sanction and project scope will be
impacted by environmental regulations and their associated costs.
Development of new pads and secondary recovery conversion projects at Pelican
Lake continued as expected throughout the first quarter of 2008. Drilling
consisted of 25 horizontal wells in the first quarter. The response from the
water and polymer flood projects continues to be positive. Pelican Lake
production averaged approximately 37,000 bbl/d for the first quarter of 2008
compared to 32,000 bbl/d for the first quarter of 2007 and approximately 36,000
bbl/d for the prior quarter.
For the second quarter of 2008, the Company's overall drilling activity in
North America is expected to be comprised of 8 natural gas wells and 62 crude
oil wells excluding stratigraphic and service wells.
CANADIAN NATURAL RESOURCES LIMITED 32
===============================================================================
HORIZON PROJECT
Work progress on the Horizon Project was 94% complete at the end of the first
quarter. First production is targeted to commence in the third quarter of 2008.
The project status as at March 31, 2008 was as follows:
o Site assembly of Mine Operations equipment (Shovels and Heavy Haul Trucks)
is on schedule;
o Fixed Plant Maintenance contractors have been mobilized;
o All oversized loads for construction have been delivered to site. Ongoing
deliveries of mine equipment (trucks and shovels) will continue through
the summer;
o Overall construction 91% completed;
o Mine overburden removal has moved 56.7 million bank cubic meters, which
represents approximately 80% of the total to be moved before start up;
o Completed Tar River Diversion and Fish Habitat construction;
o Substantially completed Extraction Plant in the first quarter and have
introduced water to the plant in April;
o Completed construction of Tanks 11 and 12 in the East Tank Farm and filled
with diluent for start up;
o Installed 3 nitrogen storage tanks and completed construction of the
Nitrogen Plant, now ready for operations;
o Installed Auxiliary Boiler in Cogeneration;
o Assumed occupancy of Main Warehouse;
o Substations energized for Sulphur Recovery and Gas Treating, representing
the last on-site substations to be energized;
o Substantially completed construction of Amine Plant and moving into
Pre-Commissioning;
o Started construction of Sulphur pipeline;
o Completed piping in Heat Integration.
The Company has budgeted construction costs of approximately $1.1 billion to
$1.3 billion for the remainder of 2008 related to the planned completion of
Phase 1 of the Horizon Project.
NORTH SEA
In the first quarter of 2008, the Company continued with its planned program of
infill drilling, recompletions, workovers and waterflood optimizations. During
the quarter, 1.6 net wells were drilled, with an additional 1.6 net wells
drilling at the end of the quarter.
At Ninian, the Company continued with its planned investment in its long-term
facilities and infrastructure strategy. One well was converted to water
injection during the quarter and a further water injection well is drilling and
due for completion in the second quarter. At the Murchison Platform, the first
of 2 production wells planned for 2008 was completed, with the second scheduled
for completion in the second quarter. At Columba E, the Company successfully
increased water injection rates, thereby increasing reservoir pressure with the
goal of increasing production.
OFFSHORE WEST AFRICA
During the first quarter of 2008, 0.6 net wells were drilled.
Crude oil production from West Espoir commenced in mid 2006 with the final
production well in the program added during the first quarter of 2008. The
drilling program was completed on budget and on schedule.
At the 90% owned and operated Olowi Field in offshore Gabon, all major
construction contracts have been awarded and construction activity on the
wellhead towers, subsea facilities and the floating production storage and
offtake vessel ("FPSO") are progressing as planned. Drilling commenced early in
the second quarter of 2008 and first crude oil is targeted for late 2008. Olowi
production is targeted to plateau at approximately 20,000 bbl/d net to the
Company.
CANADIAN NATURAL RESOURCES LIMITED 33
===============================================================================
LIQUIDITY AND CAPITAL RESOURCES
-----------------
($ millions, except ratios) MAR 31 Dec 31 Mar 31
2008 2007 2007
- ---------------------------------------------------------------------------------------------------------------
Working capital deficit (1) $ 1,572 $ 1,382 $ 1,104
Long-term debt (2) $ 11,230 $ 10,940 $ 11,307
Share capital $ 2,725 $ 2,674 $ 2,635
Retained earnings 11,248 10,575 8,374
Accumulated other comprehensive income (loss) 95 72 (45)
- ---------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 14,068 $ 13,321 $ 10,964
Debt to book capitalization (2) (3) 44% 45% 51%
Debt to market capitalization (2) (4) 23% 22% 25%
After tax return on average common
shareholders' equity (5) 24% 22% 28%
After tax return on average capital employed (2) (6) 14% 12% 17%
===============================================================================================================
(1) Calculated as current assets less current liabilities.
(2) Long-term debt is stated at its carrying value, net of fair value
adjustments, original issue discounts and transaction costs.
(3) Calculated as long-term debt; divided by the book value of common
shareholders' equity plus long-term debt.
(4) Calculated as long-term debt; divided by the market value of common
shareholders' equity plus long-term debt.
(5) Calculated as net earnings for the twelve month trailing period; as a
percentage of average common shareholders' equity for the period.
(6) Calculated as net earnings plus after-tax interest expense for the twelve
month trailing period; as a percentage of average capital employed for the
period. Average capital employed is the average shareholders' equity and
long-term debt for the period, including $7,876 million in average capital
employed related to the Horizon Project (December 31, 2007 - $7,001
million; March 31, 2007 - $4,507 million).
The Company's capital resources at March 31, 2008 consisted primarily of cash
flow from operations, available credit facilities and access to debt capital
markets. Cash flow from operations is dependent on factors discussed in the
"Risks and Uncertainties" section of the Company's December 31, 2007 annual
MD&A. The Company's ability to renew existing credit facilities and raise new
debt is also dependent upon these factors, as well as maintaining an investment
grade debt rating and the condition of capital and credit markets. Management
believes internally generated cash flows supported by the implementation of the
Company's hedge policy, the flexibility of its capital expenditure programs
supported by its multi-year financial plans, the Company's existing credit
facilities and the Company's ability to raise new debt on commercially
acceptable terms, will be sufficient to sustain its operations and support its
growth strategy. The Company's current debt ratings are BBB (high) with a
negative trend by DBRS Limited, Baa2 with a stable outlook by Moody's Investors
Service and BBB with a stable outlook by Standard & Poor's. The Company does
not have any direct exposure to asset-backed commercial paper.
At March 31, 2008, the Company had undrawn bank lines of credit of $2,626
million. Details related to the Company's long-term debt at March 31, 2008 are
disclosed in note 3 to the Company's unaudited interim consolidated financial
statements.
At March 31, 2008, the Company's working capital deficit was $1,572 million and
included the current portion of the stock-based compensation liability of $342
million and the current portion of the net mark-to-market liability for risk
management derivative financial instruments of $1,365 million. The settlement
of the stock-based compensation liability is dependent upon both the surrender
of vested stock options for cash settlement by employees and the value of the
Company's share price at the time of surrender. The cash settlement amount of
the risk management derivative financial instruments may vary materially
depending upon the underlying crude oil and natural gas prices at the time of
final settlement of the derivative financial instruments, as compared to their
mark-to-market value at March 31, 2008.
CANADIAN NATURAL RESOURCES LIMITED 34
===============================================================================
The Company believes it has the necessary financial capacity to complete the
Horizon Project, while at the same time not compromising conventional crude oil
and natural gas growth opportunities. The financing of Phase 1 of the Horizon
Project development is guided by the competing principles of retaining as much
direct ownership interest as possible while maintaining a strong balance sheet.
Long-term debt was $11,230 million at March 31, 2008, resulting in a debt to
book capitalization ratio of 44% (December 31, 2007 - 45%; March 31, 2007 -
51%). While this ratio is at the high end of the 35% to 45% range targeted by
management, the Company remains committed to maintaining a strong balance sheet
and flexible capital structure, and expects its debt to book capitalization
ratio to be near the midpoint of the range in late 2008. While the Company
believes that it has the balance sheet strength and flexibility to complete
Phase 1 of the Horizon Project, as well as its other planned capital
expenditure programs, the Company has hedged a significant portion of its crude
oil and natural gas production for 2008 at prices that protect investment
returns. In the future, the Company may also consider the divestiture of
certain non-strategic and non-core properties to gain additional balance sheet
flexibility.
The Company's commodity hedging program reduces the risk of volatility in
commodity price markets and supports the Company's cash flow for its capital
expenditures throughout the Horizon Project construction period. This program
currently allows for the hedging of up to 75% of the near 12 months budgeted
production, up to 50% of the following 13 to 24 months estimated production and
up to 25% of production expected in months 25 to 48. For the purpose of this
program, the purchase of put options is in addition to the above parameters. In
accordance with the policy, approximately 61% of budgeted crude oil volumes are
hedged for the remainder of 2008, approximately 18% of budgeted natural gas
volumes are hedged for the second and third quarters of 2008 and approximately
6% of estimated crude oil volumes are hedged for 2009. In addition, 50,000
bbl/d of crude oil volumes are protected by put options for the remainder of
2008 at a strike price of US$55.00 per barrel and 50,000 bbl/d of crude oil
volumes are protected by put options for 2009 at a strike price of US$80.00 per
barrel.
Commencing January 1, 2009, following the planned completion of Phase 1 of the
Horizon Project, the Company's commodity hedging program has been revised by
its Board of Directors to allow for the hedging of up to 50% of the near 12
months budgeted production and up to 25% of the following 13 to 24 months
estimated production. The purchase of put options will continue to be in
addition to the above parameters.
The Company has the following commodity related net financial derivatives
outstanding as at March 31, 2008:
Remaining term Volume Weighted average price Index
- -----------------------------------------------------------------------------------------------------------------------
CRUDE OIL
Crude oil price collars Apr 2008 - Jun 2008 25,000 bbl/d US$60.00 - US$80.44 WTI
Apr 2008 - Sep 2008 25,000 bbl/d US$60.00 - US$80.46 WTI
Jul 2008 - Sep 2008 25,000 bbl/d US$70.00 - US$123.75 WTI
Apr 2008 - Dec 2008 20,000 bbl/d US$50.00 - US$65.53 Mayan Heavy
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$75.22 WTI
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$76.05 WTI
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$76.98 WTI
Oct 2008 - Dec 2008 25,000 bbl/d US$70.00 - US$112.63 WTI
Jan 2009 - Dec 2009 25,000 bbl/d US$70.00 - US$111.56 WTI
Crude oil puts Apr 2008 - Dec 2008 50,000 bbl/d US$55.00 WTI
Jan 2009 - Dec 2009 50,000 bbl/d US$80.00 WTI
=======================================================================================================================
NATURAL GAS
AECO price collars Apr 2008 - Sep 2008 290,000 GJ/d C$7.50 - C$8.69 AECO
=======================================================================================================================
The Company's outstanding commodity financial derivatives are expected to be
settled monthly based on the applicable index pricing for the respective
contract month.
CANADIAN NATURAL RESOURCES LIMITED 35
===============================================================================
LONG-TERM DEBT
As at March 31, 2008, the Company had in place unsecured bank credit facilities
of $6,211 million, comprised of:
o a $100 million demand credit facility;
o a non-revolving syndicated credit facility of $2,350 million maturing
October 2009;
o a revolving syndicated credit facility of $2,230 million maturing June
2012;
o a revolving syndicated credit facility of $1,500 million maturing June
2012; and
o a (pound)15 million demand credit facility related to the Company's North
Sea operations.
The revolving syndicated credit facilities are extendible annually for one year
periods at the mutual agreement of the Company and the lenders. If the
facilities are not extended, the full amount of the outstanding principal would
be repayable on the maturity date.
In addition to the outstanding debt, letters of credit and financial guarantees
aggregating $351 million, including $300 million related to the Horizon
Project, were outstanding at March 31, 2008.
MEDIUM-TERM NOTES
The Company has $2,600 million remaining on its outstanding $3,000 million base
shelf prospectus filed in September 2007 that allows for the issue of
medium-term notes in Canada until October 2009. If issued, these securities
will bear interest as determined at the date of issuance.
US DOLLAR DEBT SECURITIES
In January 2008, the Company issued US$1,200 million of unsecured notes under a
US base shelf prospectus, comprised of US$400 million of 5.15% unsecured notes
due February 2013, US$400 million of 5.90% unsecured notes due February 2018,
and US$400 million of 6.75% unsecured notes due February 2039. Proceeds from
the securities issued were used to repay bankers' acceptances under the
Company's bank credit facilities. After issuing these securities, the Company
has US$1,800 million remaining on its outstanding US$3,000 million base shelf
prospectus filed in September 2007 that allows for the issue of US dollar debt
securities in the United States until October 2009. If issued, these securities
will bear interest as determined at the date of issuance.
SHARE CAPITAL
As at March 31, 2008, there were 540,465,000 common shares outstanding and
27,835,000 stock options outstanding. As at May 6, 2008, the Company had
540,543,000 common shares outstanding and 26,659,000 stock options outstanding.
The Company did not purchase any common shares for cancellation pursuant to the
Normal Course Issuer Bid previously filed for the twelve month period beginning
January 24, 2007 and ending January 23, 2008. The Company has decided not to
renew the Normal Course Issuer Bid until subsequent to the completion of Phase
1 of the Horizon Project.
In February 2008, the Company's Board of Directors approved an increase in the
annual dividend paid by the Company to $0.40 per common share for 2008. The
increase represents an 18% increase from 2007, recognizes the stability of the
Company's cash flow, and provides a return to Shareholders. This is the eighth
consecutive year in which the Company has paid dividends and the seventh
consecutive year of an increase in the distribution paid to its Shareholders.
The dividend policy undergoes a periodic review by the Board of Directors and
is subject to change.
CANADIAN NATURAL RESOURCES LIMITED 36
===============================================================================
COMMITMENTS AND OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, the Company has entered into various
commitments that will have an impact on the Company's future operations. These
commitments primarily relate to debt repayments; operating leases relating to
offshore FPSOs, drilling rigs and office space; firm commitments for gathering,
processing and transmission services; as well as expenditures relating to asset
retirement obligations. As at March 31, 2008, no entities were consolidated
under the Canadian Institute of Chartered Accountants Handbook Accounting
Guideline 15, "Consolidation of Variable Interest Entities". The following
table summarizes the Company's commitments as at March 31, 2008:
Remaining
($ millions) 2008 2009 2010 2011 2012 Thereafter
- ----------------------------------------------------------------------------------------------------------------------------
Product transportation and
pipeline $ 180 $ 163 $ 149 $ 123 $ 107 $ 1,099
Offshore equipment operating
lease (1) $ 98 $ 130 $ 118 $ 116 $ 94 $ 405
Offshore drilling (2) (3) $ 274 $ 187 $ 47 $ - $ - $ -
Asset retirement obligations (4) $ 28 $ 4 $ 5 $ 4 $ 4 $ 4,484
Long-term debt (5) $ 40 $ 2,374 $ 400 $ 411 $ 360 $ 6,505
Interest expense (6) $ 429 $ 586 $ 499 $ 477 $ 424 $ 5,390
Office lease $ 19 $ 26 $ 29 $ 22 $ 2 $ -
Electricity and other $ 126 $ 267 $ 162 $ 4 $ - $ -
============================================================================================================================
(1) Offshore equipment operating leases are primarily comprised of obligations
related to FPSOs. During 2006, the Company entered into an agreement to
lease an additional FPSO commencing in 2008, in connection with the
planned offshore development in Gabon, Offshore West Africa. During the
initial term, the total annual payments for the Gabon FPSO are estimated
to be US$50 million.
(2) During 2007, the Company entered into a one-year agreement for offshore
drilling services related to the Baobab Field in Cote d'Ivoire, Offshore
West Africa. The agreement is scheduled to commence in the second quarter
of 2008, on delivery of the rig. Estimated total payments of US$100
million, after joint venture recoveries, have been included in this table
for the period 2008 - 2009.
(3) During 2007, the Company awarded contracts for a drilling rig and for the
construction of wellhead towers in connection with the planned offshore
development in Gabon, Offshore West Africa. Estimated total payments of
US$392 million have been included in this table for the period 2008 -
2010.
(4) Amounts represent management's estimate of the future undiscounted
payments to settle asset retirement obligations related to resource
properties, facilities, and production platforms, based on current
legislation and industry operating practices. Amounts disclosed for the
period 2008 - 2012 represent the minimum required expenditures to meet
these obligations. Actual expenditures in any particular year may exceed
these minimum amounts.
(5) The long-term debt represents principal repayments only and does not
reflect fair value adjustments, original issue discounts or transaction
costs. No debt repayments are reflected for $1,182 million of revolving
bank credit facilities due to the extendable nature of the facilities.
(6) Interest expense amounts represent the scheduled fixed-rate and
variable-rate cash payments related to long-term debt. Interest on
variable-rate long-term debt was estimated based upon prevailing interest
rates as at March 31, 2008.
In addition to the amounts disclosed above, the Company has budgeted
construction costs of approximately $1.1 billion to $1.3 billion for the
remainder of 2008 related to the planned completion of Phase 1 of the Horizon
Project.
LEGAL PROCEEDINGS
The Company is defendant and plaintiff in a number of legal actions that arise
in the normal course of business. In addition, the Company is subject to
certain contractor construction claims related to the Horizon Project. The
Company believes that any liabilities that might arise pertaining to any such
matters would not have a material effect on its consolidated financial
position.
CANADIAN NATURAL RESOURCES LIMITED 37
===============================================================================
CRITICAL ACCOUNTING ESTIMATES AND CHANGE IN ACCOUNTING POLICIES
The preparation of financial statements requires the Company to make
judgements, assumptions and estimates in the application of generally accepted
accounting principles that have a significant impact on the financial results
of the Company. Actual results could differ from those estimates. A
comprehensive discussion of the Company's significant accounting policies is
contained in the MD&A and the audited consolidated financial statements for the
year ended December 31, 2007.
For the impact of new accounting standards related to capital disclosures,
inventory and financial instruments, refer to note 2 of the unaudited interim
consolidated financial statements as at March 31, 2008.
SENSITIVITY ANALYSIS
The following table is indicative of the annualized sensitivities of cash flow
from operations and net earnings from changes in certain key variables. The
analysis is based on business conditions and sales volumes during the first
quarter of 2008, excluding mark-to-market gains (losses) on risk management
activities, and is not necessarily indicative of future results. Each separate
line item in the sensitivity analysis shows the effect of a change in that
variable only with all other variables being held constant.
CASH FLOW CASH FLOW FROM NET
FROM OPERATIONS NET EARNINGS
OPERATIONS (PER COMMON EARNINGS (PER COMMON
($ MILLIONS) SHARE, BASIC) ($ MILLIONS) SHARE, BASIC)
- -----------------------------------------------------------------------------------------------------------------
PRICE CHANGES
Crude oil - WTI US$1.00/bbl (1)
Excluding financial derivatives $ 95 $ 0.18 $ 70 $ 0.13
Including financial derivatives $ 40 $ 0.07 $ 31 $ 0.06
Natural gas - AECO C$0.10/mcf (1)
Excluding financial derivatives $ 40 $ 0.07 $ 28 $ 0.05
Including financial derivatives $ 35 $ 0.06 $ 25 $ 0.05
VOLUME CHANGES
Crude oil - 10,000 bbl/d $ 177 $ 0.33 $ 106 $ 0.20
Natural gas - 10 mmcf/d $ 20 $ 0.04 $ 9 $ 0.02
FOREIGN CURRENCY RATE CHANGE
$0.01 change in US$ (1)
Including financial derivatives $ 87 - 89 $ 0.16 $ 30 $ 0.05 - 0.06
INTEREST RATE CHANGE - 1% $ 30 $ 0.06 $ 30 $ 0.06
=================================================================================================================
(1) For details of outstanding financial instruments in place, refer to note
10 of the Company's unaudited interim consolidated financial statements.
CANADIAN NATURAL RESOURCES LIMITED 38
===============================================================================
OTHER OPERATING HIGHLIGHTS
NETBACK ANALYSIS
Three Months Ended
--------------------
MAR 31 Dec 31 Mar 31
($/boe) (1) 2008 2007 2007
- --------------------------------------------------------------------------------------------------------------
Sales price (2) $ 65.09 $ 49.23 $ 49.32
Royalties 8.43 6.21 6.76
Production expense (3) 11.02 8.85 10.10
- --------------------------------------------------------------------------------------------------------------
NETBACK 45.64 34.17 32.46
Midstream contribution (3) (0.27) (0.24) (0.24)
Administration 0.80 0.76 1.08
Interest, net 0.92 0.92 1.49
Realized risk management loss (gain) 7.82 3.27 (1.58)
Realized foreign exchange (gain) loss (0.22) - 0.10
Taxes other than income tax - current 1.32 0.30 1.18
Current income tax - North America 0.40 0.56 0.45
Current income tax - North Sea 1.79 1.18 0.62
Current income tax - Offshore West Africa 0.71 0.50 0.18
- -------------------------------------------------------------------------------------------------------------
CASH FLOW $ 32.37 $ 26.92 $ 29.18
==============================================================================================================
(1) Amounts expressed on a per unit basis are based on sales volumes.
(2) Net of transportation and blending costs and excluding risk management
activities.
(3) Excluding intersegment elimination.
CANADIAN NATURAL RESOURCES LIMITED 39
===============================================================================
FINANCIAL STATEMENTS
Consolidated Balance Sheets
---------------------
MAR 31 Dec 31
(millions of Canadian dollars, unaudited) 2008 2007
- ---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27 $ 21
Accounts receivable and other 2,135 1,662
Future income tax 506 480
Current portion of other long-term assets - 18
- ---------------------------------------------------------------------------------------------------------
2,668 2,181
Property, plant and equipment (note 12) 35,051 33,902
Other long-term assets 36 31
- ---------------------------------------------------------------------------------------------------------
$ 37,755 $ 36,114
=========================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 455 $ 379
Accrued liabilities 2,078 1,567
Current portion of other long-term liabilities (note 4) 1,707 1,617
- ---------------------------------------------------------------------------------------------------------
4,240 3,563
LONG-TERM DEBT (note 3) 11,230 10,940
OTHER LONG-TERM LIABILITIES (note 4) 1,386 1,561
FUTURE INCOME TAX 6,831 6,729
- ---------------------------------------------------------------------------------------------------------
23,687 22,793
- ---------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 6) 2,725 2,674
RETAINED EARNINGS 11,248 10,575
ACCUMULATED OTHER COMPREHENSIVE INCOME (note 7) 95 72
- ---------------------------------------------------------------------------------------------------------
14,068 13,321
- ---------------------------------------------------------------------------------------------------------
$ 37,755 $ 36,114
=========================================================================================================
Commitments (note 11)
CANADIAN NATURAL RESOURCES LIMITED 40
===============================================================================
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
--------------------
(millions of Canadian dollars, except per common share amounts, MAR 31 Mar 31
unaudited) 2008 2007
- -------------------------------------------------------------------------------------------------------
REVENUE $ 3,967 $ 3,118
Less: royalties (449) (376)
- -------------------------------------------------------------------------------------------------------
REVENUE, NET OF ROYALTIES 3,518 2,742
- -------------------------------------------------------------------------------------------------------
EXPENSES
Production 587 565
Transportation and blending 485 359
Depletion, depreciation and amortization 688 709
Asset retirement obligation accretion (note 4) 17 18
Administration 43 60
Stock-based compensation expense (note 4) - 25
Interest, net 49 83
Risk management activities (note 10) 524 448
Foreign exchange loss (gain) 114 (27)
- -------------------------------------------------------------------------------------------------------
2,507 2,240
- -------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES 1,011 502
Taxes other than income tax 49 63
Current income tax expense (note 5) 155 70
Future income tax expense (note 5) 80 100
- -------------------------------------------------------------------------------------------------------
NET EARNINGS $ 727 $ 269
=======================================================================================================
NET EARNINGS PER COMMON SHARE (note 9)
Basic and diluted $ 1.35 $ 0.50
=======================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 41
===============================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended
-------------------
MAR 31 Mar 31
(millions of Canadian dollars, unaudited) 2008 2007
- --------------------------------------------------------------------------------------------------------------------------
SHARE CAPITAL (note 6)
Balance - beginning of period $ 2,674 $ 2,562
Issued upon exercise of stock options 9 13
Previously recognized liability on stock options exercised for common shares 42 60
- --------------------------------------------------------------------------------------------------------------------------
Balance - end of period 2,725 2,635
- --------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance - beginning of period 10,575 8,151
Net earnings 727 269
Dividends on common shares (note 6) (54) (46)
- --------------------------------------------------------------------------------------------------------------------------
Balance - end of period 11,248 8,374
- --------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (note 7)
Balance - beginning of period 72 146
Other comprehensive income (loss), net of taxes 23 (191)
- --------------------------------------------------------------------------------------------------------------------------
Balance - end of period 95 (45)
- --------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY $ 14,068 10,964
==========================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended
-------------------
MAR 31 Mar 31
(millions of Canadian dollars, unaudited) 2008 2007
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 727 $ 269
- --------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN DERIVATIVE FINANCIAL INSTRUMENTS DESIGNATED AS CASH FLOW HEDGES
Unrealized income during the period, net of taxes of $2 million (2007 - $55 million) 24 (116)
Reclassification to net earnings, net of taxes of $8 million (2007 - $35 million) (17) (74)
- --------------------------------------------------------------------------------------------------------------------------
7 (190)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Translation of net investment 16 (1)
- --------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES 23 (191)
- --------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 750 $ 78
==========================================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 42
===============================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
----------------
MAR 31 Mar 31
(millions of Canadian dollars, unaudited) 2008 2007
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 727 $ 269
Non-cash items
Depletion, depreciation and amortization 688 709
Asset retirement obligation accretion 17 18
Stock-based compensation expense - 25
Unrealized risk management loss 108 536
Unrealized foreign exchange loss (gain) 126 (32)
Deferred petroleum revenue tax recovery (21) (3)
Future income tax expense 80 100
Other 13 (13)
Abandonment expenditures (6) (20)
Net change in non-cash working capital (166) (119)
- --------------------------------------------------------------------------------------------------
1,566 1,470
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of bank credit facilities, net (1,172) (2,013)
Repayment of medium-term notes - (125)
Issue of US dollar debt securities 1,223 2,553
Issue of common shares on exercise of stock options 9 13
Dividends on common shares (46) (40)
Net change in non-cash working capital 5 (22)
- --------------------------------------------------------------------------------------------------
19 366
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on property, plant and equipment (1,756) (1,993)
Net proceeds on sale of property, plant and equipment 9 4
- --------------------------------------------------------------------------------------------------
Net expenditures on property, plant and equipment (1,747) (1,989)
Net change in non-cash working capital 168 144
- --------------------------------------------------------------------------------------------------
(1,579) (1,845)
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6 (9)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 21 23
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 27 $ 14
==================================================================================================
INTEREST PAID $ 146 $ 158
TAXES PAID
Taxes other than income tax $ 31 $ 35
Current income tax $ 53 $ 71
==================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 43
===============================================================================
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in millions of Canadian dollars, unless otherwise stated,
unaudited)
1. ACCOUNTING POLICIES
The interim consolidated financial statements of Canadian Natural Resources
Limited (the "Company") include the Company and all of its subsidiaries and
partnerships, and have been prepared following the same accounting policies as
the audited consolidated financial statements of the Company as at December 31,
2007, except as described in note 2. The interim consolidated financial
statements contain disclosures that are supplemental to the Company's annual
audited consolidated financial statements. Certain disclosures that are
normally required to be included in the notes to the annual audited
consolidated financial statements have been condensed. These interim financial
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 2007.
COMPARATIVE FIGURES
Certain prior period figures have been reclassified to conform to the
presentation adopted in 2008.
2. CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008 the Company adopted the following accounting and
disclosure standards issued by the Canadian Institute of Chartered Accountants:
o CAPITAL DISCLOSURES - Section 1535 - "Capital Disclosures" requires
entities to disclose their objectives, policies and processes for managing
capital, as well as quantitative data about capital. The standard also
requires the disclosure of any externally imposed capital requirements and
compliance with those requirements. The standard does not define capital.
This standard affects disclosure only and did not impact the Company's
accounting for capital (note 8).
o INVENTORIES - Section 3031 - "Inventories" replaces Section 3030 -
"Inventories" and establishes new standards for the measurement of cost of
inventories and expands disclosure requirements for inventories. Adoption
of this standard did not have a material impact on the Company's financial
statements.
o FINANCIAL INSTRUMENTS - Section 3862 - "Financial Instruments -
Disclosure" and Section 3863 - "Financial Instruments - Presentation"
replace Section 3861 - "Financial Instruments - Disclosure and
Presentation". Section 3862 enhances disclosure requirements concerning
risks and requires quantitative and qualitative disclosures about
exposures to risks arising from financial instruments. Section 3863
carries forward the presentation requirements from Section 3861 unchanged.
These standards affect disclosures only and do not impact the Company's
accounting for financial instruments (note 10).
CANADIAN NATURAL RESOURCES LIMITED 44
===============================================================================
3. LONG-TERM DEBT
---------------
MAR 31 Dec 31
2008 2007
- --------------------------------------------------------------------------------------------------------------
CANADIAN DOLLAR DENOMINATED DEBT
Bank credit facilities (bankers' acceptances) $ 3,524 $ 4,696
Medium-term notes 1,200 1,200
- --------------------------------------------------------------------------------------------------------------
4,724 5,896
- --------------------------------------------------------------------------------------------------------------
US DOLLAR DENOMINATED DEBT
Senior unsecured notes (2008 - US$62 million; 2007 - US$62 million) 64 61
US dollar debt securities (2008 - US$6,308 million; 2007 - US$5,108 million) 6,484 5,048
Less - original issue discount on senior unsecured notes and US dollar
debt securities (1) (24) (23)
- --------------------------------------------------------------------------------------------------------------
6,524 5,086
Fair value of interest rate swaps on US dollar debt securities (2) 41 9
- --------------------------------------------------------------------------------------------------------------
6,565 5,095
- --------------------------------------------------------------------------------------------------------------
Long-term debt before transaction costs 11,289 10,991
Less - transaction costs (1) (3) (59) (51)
- --------------------------------------------------------------------------------------------------------------
$ 11,230 $ 10,940
==============================================================================================================
(1) The Company has included unamortized original issue discounts and directly
attributable transaction costs in the carrying value of the outstanding
debt.
(2) The carrying values of US$350 million of 5.45% notes due October 2012 and
US$350 million of 4.90% notes due December 2014 have been adjusted by $41
million (2007 - $9 million) to reflect the fair value impact of hedge
accounting.
(3) Transaction costs primarily represent underwriting commissions charged as
a percentage of the related debt offerings, as well as legal, rating
agency and other professional fees.
BANK CREDIT FACILITIES
As at March 31, 2008, the Company had in place unsecured bank credit facilities
of $6,211 million, comprised of:
o a $100 million demand credit facility;
o a non-revolving syndicated credit facility of $2,350 million maturing
October 2009;
o a revolving syndicated credit facility of $2,230 million maturing June
2012;
o a revolving syndicated credit facility of $1,500 million maturing June
2012; and
o a (pound)15 million demand credit facility related to the Company's North
Sea operations.
The revolving syndicated credit facilities are extendible annually for one year
periods at the mutual agreement of the Company and the lenders. If the
facilities are not extended, the full amount of the outstanding principal would
be repayable on the maturity date.
The weighted average interest rate of the bank credit facilities outstanding at
March 31, 2008, was 4.3% (December 31, 2007 - 5.2%).
In addition to the outstanding debt, letters of credit and financial guarantees
aggregating $351 million, including $300 million related to the Horizon Oil
Sands Project ("Horizon Project"), were outstanding at March 31, 2008.
CANADIAN NATURAL RESOURCES LIMITED 45
===============================================================================
MEDIUM-TERM NOTES
The Company has $2,600 million remaining on its outstanding $3,000 million base
shelf prospectus filed in September 2007 that allows for the issue of
medium-term notes in Canada until October 2009. If issued, these securities
will bear interest as determined at the date of issuance.
US DOLLAR DEBT SECURITIES
In January 2008, the Company issued US$1,200 million of unsecured notes under a
US base shelf prospectus, comprised of US$400 million of 5.15% unsecured notes
due February 2013, US$400 million of 5.90% unsecured notes due February 2018,
and US$400 million of 6.75% unsecured notes due February 2039. Proceeds from
the securities issued were used to repay bankers' acceptances under the
Company's bank credit facilities. After issuing these securities, the Company
has US$1,800 million remaining on its outstanding US$3,000 million base shelf
prospectus filed in September 2007 that allows for the issue of US dollar debt
securities in the United States until October 2009. If issued, these securities
will bear interest as determined at the date of issuance.
4. OTHER LONG-TERM LIABILITIES
----------------
MAR 31 Dec 31
2008 2007
- ----------------------------------------------------------------------------------------------
Asset retirement obligations $ 1,110 $ 1,074
Stock-based compensation 402 529
Risk management (note 10) 1,479 1,474
Other 102 101
- ----------------------------------------------------------------------------------------------
3,093 3,178
Less: current portion 1,707 1,617
- ----------------------------------------------------------------------------------------------
$ 1,386 $ 1,561
==============================================================================================
ASSET RETIREMENT OBLIGATIONS
At March 31, 2008, the Company's total estimated undiscounted costs to settle
its asset retirement obligations were approximately $4,529 million (December
31, 2007 - $4,426 million). These costs will be incurred over the lives of the
operating assets and have been discounted using a weighted average
credit-adjusted risk free rate of 6.6% (December 31, 2007 - 6.6%). A
reconciliation of the discounted asset retirement obligations is as follows:
----------------
THREE MONTHS Year
ENDED Ended
MAR 31, 2008 Dec 31, 2007
- ----------------------------------------------------------------------------------------------
Balance - beginning of period $ 1,074 $ 1,166
Liabilities incurred 9 21
Liabilities disposed - (65)
Liabilities settled (6) (71)
Asset retirement obligation accretion 17 70
Revision of estimates - 35
Foreign exchange 16 (82)
- ----------------------------------------------------------------------------------------------
Balance - end of period $ 1,110 $ 1,074
==============================================================================================
CANADIAN NATURAL RESOURCES LIMITED 46
===============================================================================
STOCK-BASED COMPENSATION
The Company recognizes a liability for the potential cash settlements under its
Stock Option Plan. The current portion represents the maximum amount of the
liability payable within the next twelve month period if all vested options are
surrendered for cash settlement.
---------------------
THREE MONTHS Year
ENDED Ended
MAR 31, 2008 Dec 31, 2007
- ------------------------------------------------------------------------------- ------------------------
Balance - beginning of period $ 529 $ 744
Stock-based compensation - 193
Payments for options surrendered (80) (375)
Transferred to common shares (42) (91)
(Recovery) capitalized to Horizon Project (5) 58
- ------------------------------------------------------------ ------------------ ---- -------------------
Balance - end of period 402 529
Less: current portion 342 390
- ------------------------------------------------------------ ------------------ ---- -------------------
$ 60 $ 139
========================================================================================================
5. INCOME TAXES
The provision for income taxes is as follows:
Three Months Ended
---------------------
MAR 31 Mar 31
2008 2007
- ------------------------------------------------------------------------------- ------------------------
Current income tax - North America $ 21 $ 25
Current income tax - North Sea 96 35
Current income tax - Offshore West Africa 38 10
- ------------------------------------------------------------ ------------------ ---- -------------------
Current income tax expense 155 70
Future income tax expense 80 100
- ------------------------------------------------------------ ------------------ ---- -------------------
Income tax expense $ 235 $ 170
========================================================================================================
Taxable income from the conventional crude oil and natural gas business in
Canada is primarily generated through partnerships, with the related income
taxes payable in a future period. North America current income taxes have been
provided on the basis of the corporate structure and available income tax
deductions and will vary depending upon the nature, timing and amount of
capital expenditures incurred in Canada in any particular year.
During the first quarter of 2008, enacted or substantively enacted income tax
rate changes resulted in a reduction of future income tax liabilities of
approximately $19 million in British Columbia and $22 million in Cote d'Ivoire,
Offshore West Africa.
CANADIAN NATURAL RESOURCES LIMITED 47
===============================================================================
6. SHARE CAPITAL
----------------------------------------------
Three Months Ended Mar 31, 2008
ISSUED NUMBER OF SHARES
COMMON SHARES (thousands) Amount
- ----------------------------------------------------------------------------------------------------------------
Balance - beginning of period $ 539,729 $ 2,674
Issued upon exercise of stock options 736 9
Previously recognized liability on stock options
exercised for common shares - 42
- ----------------------------------------------------------------------------------------------------------------
Balance - end of period $ 540,465 $ 2,725
================================================================================================================
NORMAL COURSE ISSUER BID
The Company did not purchase any common shares for cancellation pursuant to the
Normal Course Issuer Bid previously filed for the twelve month period beginning
January 24, 2007 and ending January 23, 2008. The Company has not renewed the
Normal Course Issuer Bid in 2008.
DIVIDEND POLICY
In February 2008, the Board of Directors set the regular quarterly dividend at
$0.10 per common share. The Company has paid regular quarterly dividends in
January, April, July, and October of each year since 2001. The dividend policy
undergoes a periodic review by the Board of Directors and is subject to change.
STOCK OPTIONS
--------------------------------------------
Three Months Ended Mar 31, 2008
STOCK OPTIONS WEIGHTED AVERAGE
(thousands) EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------
Outstanding - beginning of period 30,659 $ 47.23
Granted 346 $ 72.14
Surrendered for cash settlement (1,558) $ 22.68
Exercised for common shares (736) $ 11.94
Forfeited (876) $ 53.35
- --------------------------------------------------------------------------------------------------------------
Outstanding - end of period 27,835 $ 49.65
- --------------------------------------------------------------------------------------------------------------
Exercisable - end of period 8,108 $ 34.27
==============================================================================================================
7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of taxes,
were as follows:
Three Months Ended
---------------------
MAR 31 Mar 31
2008 2007
- ---------------------------------------------------------------------------------------------------------------
Derivative financial instruments designated as cash flow hedges $ 108 $ (31)
Foreign currency translation adjustment (13) (14)
- ---------------------------------------------------------------------------------------------------------------
$ 95 $ (45)
===============================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 48
===============================================================================
8. CAPITAL DISCLOSURES
As required by Canadian generally accepted accounting principles ("GAAP"),
effective January 1, 2008, the Company must provide certain disclosures
regarding its objectives, policies and processes for managing capital, as well
as provide certain quantitative data about capital. As the Company does not
have any externally imposed capital requirements, for the purposes of this
disclosure, the Company has defined its capital to mean its long-term debt and
consolidated shareholders' equity, as determined each reporting date.
The Company's objectives when managing its capital structure are to maintain
financial flexibility and balance to enable the Company to access capital
markets to sustain its on-going operations and to support its growth
strategies. The Company primarily monitors capital on the basis of an
internally derived non-GAAP financial measure referred to as its "debt to book
capitalization ratio", which is the arithmetic ratio of long-term debt divided
by the sum of the carrying value of shareholders' equity plus long-term debt.
The Company aims over time to maintain its debt to book capitalization ratio in
the range of 35% to 45%. However, the Company may exceed the high end of such
target range if it is investing in capital projects, undertaking acquisitions,
or in periods of lower commodity prices. The Company may be below the low end
of the target range when cash flow from operating activities is greater than
current investment activities. The ratio is currently at the high end of the
target range due to the debt financing of a business acquisition in 2006 and
the construction of the Horizon Project.
Readers are cautioned that as the debt to book capitalization ratio has no
defined meaning under GAAP, this financial measure may not be comparable to
similar measures provided by other reporting entities. Further, there can be no
assurances that the Company will continue to use this measure to monitor
capital or will not alter the method of calculation of this measure at some
point in the future.
---------------------
MAR 31 Dec 31
2008 2007
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 11,230 $ 10,940
Total shareholders' equity $ 14,068 $ 13,321
Debt to book capitalization 44% 45%
==============================================================================================================================
9. NET EARNINGS PER COMMON SHARE
Three Months Ended
---------------------
MAR 31 Mar 31
2008 2007
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (thousands) - 540,218 538,890
basic and diluted
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings - basic and diluted $ 727 $ 269
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share - basic and diluted $ 1.35 $ 0.50
==============================================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 49
===============================================================================
10. FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments by category are as
follows:
-------------------------------------------------------------------------
MAR 31, 2008
- -------------------------------------------------------------------------------------------------------------------------------
LOANS AND HELD FOR OTHER FINANCIAL
RECEIVABLES AT TRADING AT LIABILITIES AT
Asset (liability) AMORTIZED COST FAIR VALUE AMORTIZED COST
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ - $ 27 $ -
Accounts receivable 1,615 - -
Accounts payable - - (455)
Accrued liabilities - - (2,078)
Risk management - (1,479) -
Long-term debt - - (11,230)
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,615 $ (1,452) $ (13,763)
===============================================================================================================================
Dec 31, 2007
- -------------------------------------------------------------------------------------------------------------------------------
Loans and Held for Other financial
receivables at trading at liabilities at
Asset (liability) amortized cost fair value amortized cost
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ - $ 21 $ -
Accounts receivable 1,143 - -
Accounts payable - - (379)
Accrued liabilities - - (1,567)
Risk management - (1,474) -
Long-term debt - - (10,940)
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,143 $ (1,453) $ (12,886)
===============================================================================================================================
The carrying value of the Company's financial instruments approximates their
fair value, except for fixed-rate long-term debt as noted below:
-------------------------------------
MAR 31, 2008 Dec 31, 2007
- -------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
VALUE VALUE value value
- -------------------------------------------------------------------------------------------------------------------------------
Fixed-rate long-term debt (1) $ 7,706 $ 7,698 $ 6,244 $ 6,259
===============================================================================================================================
(1) The carrying values of US$350 million of 5.45% notes due October 2012 and
US$350 million of 4.90% notes due December 2014 have been adjusted by $41
million (2007 - $9 million) to reflect the fair value impact of hedge
accounting.
CANADIAN NATURAL RESOURCES LIMITED 50
===============================================================================
RISK MANAGEMENT
The Company uses derivative financial instruments to manage its commodity
price, foreign currency and interest rate exposures. These financial
instruments are entered into solely for hedging purposes and are not intended
for trading or other speculative purposes.
The estimated fair value of derivative financial instruments has been
determined based on appropriate internal valuation methodologies and/or third
party indications. Fair values determined using valuation models require the
use of assumptions concerning the amount and timing of future cash flows and
discount rates. In determining these assumptions, the Company has relied
primarily on external readily observable market inputs including quoted
commodity prices and volatility, interest rate yield curves, and foreign
exchange rates. The resulting fair value estimates may not necessarily be
indicative of the amounts that could be realized or settled in a current market
transaction and these differences may be material.
The changes in estimated fair values of derivative financial instruments
included in the risk management asset (liability) were recognized in the
financial statements as follows:
-----------------------
THREE MONTHS ENDED Year Ended
MAR 31, 2008 Dec 31, 2007
- -----------------------------------------------------------------------------------------------------------------
RISK MANAGEMENT Risk management
Asset (liability) MARK-TO-MARKET mark-to-market
- -----------------------------------------------------------------------------------------------------------------
Balance - beginning of period $ (1,474) $ 128
Retained earnings effect of adoption of financial instrument
standards - 14
Net cost of outstanding put options 120 58
Net change in fair value of outstanding derivative financial
instruments attributable to:
- Risk management activities (108) (1,400)
- Interest expense 32 9
- Foreign exchange 75 (350)
- Other comprehensive income (4) 125
- -----------------------------------------------------------------------------------------------------------------
(1,359) (1,416)
Add: Put premium financing obligations (1) (120) (58)
- -----------------------------------------------------------------------------------------------------------------
Balance - end of period (1,479) (1,474)
Less: current portion (1,365) (1,227)
- -----------------------------------------------------------------------------------------------------------------
$ (114) $ (247)
=================================================================================================================
(1) The Company has negotiated payment of put option premiums with various
counterparties at the time of actual settlement of the respective options.
These obligations have been reflected in the net risk management
(liability) asset.
Net losses (gains) from risk management activities were as follows:
Three Months Ended
------------------
MAR 31 Mar 31
2008 2007
- ----------------------------------------------------------------------------------------------------------
Net realized risk management loss (gain) $ 416 $ (88)
Net unrealized risk management loss 108 536
- ----------------------------------------------------------------------------------------------------------
$ 524 $ 448
==========================================================================================================
CANADIAN NATURAL RESOURCES LIMITED 51
===============================================================================
FINANCIAL RISK FACTORS
a) MARKET RISK
Market risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market prices. The Company's
market risk is comprised of commodity price risk, interest rate risk, and
foreign currency exchange risk.
COMMODITY PRICE RISK
The Company uses commodity price financial derivatives to manage its exposure
to commodity price risk associated with the sale of its future crude oil and
natural gas production. As at March 31, 2008, the Company had the following net
financial derivatives outstanding to manage its commodity price exposures:
Remaining term Volume Weighted average price Index
- ---------------------------------------------------------------------------------------------------------------------
CRUDE OIL
Crude oil price collars Apr 2008 - Jun 2008 25,000 bbl/d US$60.00 - US$80.44 WTI
Apr 2008 - Sep 2008 25,000 bbl/d US$60.00 - US$80.46 WTI
Jul 2008 - Sep 2008 25,000 bbl/d US$70.00 - US$123.75 WTI
Apr 2008 - Dec 2008 20,000 bbl/d US$50.00 - US$65.53 Mayan Heavy
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$75.22 WTI
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$76.05 WTI
Apr 2008 - Dec 2008 50,000 bbl/d US$60.00 - US$76.98 WTI
Oct 2008 - Dec 2008 25,000 bbl/d US$70.00 - US$112.63 WTI
Jan 2009 - Dec 2009 25,000 bbl/d US$70.00 - US$111.56 WTI
Crude oil puts Apr 2008 - Dec 2008 50,000 bbl/d US$55.00 WTI
Jan 2009 - Dec 2009 50,000 bbl/d US$80.00 WTI
=====================================================================================================================
The net cost of outstanding put options and their respective periods of
settlement are as follows:
Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009
- ----------------------------------------------------------------------------------------------------------------------
Cost ($ millions) US$15 US$15 US$15 US$18 US$18 US$18 US$18
======================================================================================================================
Remaining term Volume Weighted average price Index
- ----------------------------------------------------------------------------------------------------------------------
NATURAL GAS
AECO price collars Apr 2008 - Sep 2008 290,000 GJ/d C$7.50 - C$8.69 AECO
======================================================================================================================
The Company's outstanding commodity financial derivatives are expected to be
settled monthly based on the applicable index pricing for the respective
contract month.
CANADIAN NATURAL RESOURCES LIMITED 52
===============================================================================
INTEREST RATE RISK
The Company is exposed to interest rate risk on its fixed and floating rate
long-term debt. The Company enters into interest rate swap agreements to manage
its fixed to floating interest rate mix on long-term debt. The interest rate
swap contracts require the periodic exchange of payments without the exchange
of the notional principal amounts on which the payments are based. At March 31,
2008, the Company had the following interest rate swap contracts outstanding:
Remaining term Amount ($ millions) Fixed rate Floating rate
- ---------------------------------------------------------------------------------------------------------
INTEREST RATE
Swaps - fixed to floating Apr 2008 - Oct 2012 US$350 5.45% LIBOR (1) + 0.81%
Apr 2008 - Dec 2014 US$350 4.90% LIBOR (1) + 0.38%
=========================================================================================================
(1) London Interbank Offered Rate
All interest rate related derivative financial instruments designated as hedges
at March 31, 2008 were classified as fair value hedges.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company is exposed to foreign currency exchange rate risk in Canada
primarily related to its US dollar denominated debt. The Company is also
exposed to foreign currency exchange rate risk on transactions conducted in
foreign currencies in its foreign subsidiaries and in the carrying value of its
self-sustaining foreign subsidiaries. The Company enters into cross currency
swap agreements to manage currency exposure on US dollar denominated long-term
debt. The cross currency swap contracts require the periodic exchange of
payments with the exchange at maturity of notional principal amounts on which
the payments are based. At March 31, 2008, the Company had the following cross
currency swap contracts outstanding:
Amount Exchange rate Interest rate Interest rate
Remaining term ($ millions) (US$/C$) (US$) (C$)
- ------------------------------------------------------------------------------------------------------------
CROSS CURRENCY
Swaps Apr 2008 - Aug 2016 US$250 1.116 6.00% 5.40%
Apr 2008 - May 2017 US$1,100 1.170 5.70% 5.10%
Apr 2008 - Mar 2038 US$550 1.170 6.25% 5.76%
============================================================================================================
All cross currency related derivative financial instruments designated as
hedges at March 31, 2008 were classified as cash flow hedges.
CANADIAN NATURAL RESOURCES LIMITED 53
===============================================================================
FINANCIAL INSTRUMENT SENSITIVITIES
The following table summarizes the annualized sensitivities of the Company's
net earnings and other comprehensive income to changes in the fair value of
financial instruments outstanding as at March 31, 2008 resulting from changes
in the specified variable, with all other variables held constant. These
sensitivities are limited to the impact of changes in a specified variable
applied to financial instruments only and do not represent the impact of a
change in the variable on the operating results of the Company taken as a
whole. Further, these sensitivities are theoretical, as changes in one variable
may contribute to changes in another variable, which may magnify or counteract
the sensitivities. In addition, changes in fair value generally can not be
extrapolated because the relationship of a change in an assumption to the
change in fair value may not be linear.
------------------------ -------------------------
Impact on net Impact on other
earnings comprehensive income
- ------------------------------------------------------------------------------- -------------------------
COMMODITY PRICE RISK
Increase WTI US$1.00/bbl $ (42) $ -
Decrease WTI US$1.00/bbl $ 42 $ -
Increase AECO C$0.10/mcf $ (2) $ -
Decrease AECO C$0.10/mcf $ 2 $ -
INTEREST RATE RISK
Increase interest rate 1% $ (19) $ 13
Decrease interest rate 1% $ 19 $ (15)
FOREIGN CURRENCY EXCHANGE RATE RISK
Increase exchange rate by US$0.01 $ (28) $ -
Decrease exchange rate by US$0.01 $ 28 $ -
=========================================================================================================
b) CREDIT RISK
Credit risk is the risk that a party to a financial instrument will cause a
financial loss for the Company by failing to discharge an obligation.
The Company's accounts receivable are mainly with customers in the crude oil
and natural gas industry and are subject to normal industry credit risks. The
Company manages these risks by reviewing its exposure to individual companies
on a regular basis and where appropriate, ensures that parental guarantees or
letters of credit are in place to minimize the impact in the event of default.
Substantially all of the Company's accounts receivables are due within normal
trade terms.
The Company is also exposed to possible losses in the event of nonperformance
by counterparties to derivative financial instruments; however, the Company
manages this credit risk by entering into agreements with substantially all
investment grade financial institutions and other entities. At March 31, 2008,
the Company had net risk management assets of $6 million with specific
counterparties related to derivative financial instruments (December 31, 2007 -
$20 million).
CANADIAN NATURAL RESOURCES LIMITED 54
===============================================================================
c) LIQUIDITY RISK
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities.
Management of liquidity risk requires the Company to maintain sufficient cash
and cash equivalents, along with other sources of capital, consisting primarily
of cash flow from operating activities, available credit facilities, and access
to debt capital markets, to meet obligations as they become due. Due to
fluctuations in the timing of the receipt and/or disbursement of operating cash
flows, the Company maintains adequate bank credit facilities to provide
liquidity.
The maturity dates for financial liabilities are as follows:
Less than 1 to less than 2 to less than Thereafter
1 year 2 years 5 years
- --------------------------------------------------------------------------------------------------------------------------
Accounts payable $ 455 $ - $ - $ -
Accrued liabilities $ 2,078 $ - $ - $ -
Risk management $ 1,362 $ 11 $ (40) $ 146
Long-term debt (1) $ 40 $ 2,374 $ 1,982 $ 5,694
==========================================================================================================================
(1) The long-term debt represents principal repayments only and does not
reflect fair value adjustments, original issue discounts or transaction
costs. No debt repayments are reflected for $1,182 million of revolving
bank credit facilities due to the extendable nature of the facilities.
11. COMMITMENTS
The Company has committed to certain payments as follows:
Remaining
2008 2009 2010 2011 2012 Thereafter
- -------------------------------------------------------------------------------------------------------------------------------
Product transportation and
pipeline $ 180 $ 163 $ 149 $ 123 $ 107 $ 1,099
Offshore equipment operating
leases (1) $ 98 $ 130 $ 118 $ 116 $ 94 $ 405
Offshore drilling (2) (3) $ 274 $ 187 $ 47 $ - $ - $ -
Asset retirement
obligations (4) $ 28 $ 4 $ 5 $ 4 $ 4 $ 4,484
Office leases $ 19 $ 26 $ 29 $ 22 $ 2 $ -
Electricity and other $ 126 $ 267 $ 162 $ 4 $ - $ -
===============================================================================================================================
(1) Offshore equipment operating leases are primarily comprised of obligations
related to floating production, storage and offtake vessels ("FPSO").
During 2006, the Company entered into an agreement to lease an additional
FPSO commencing in 2008, in connection with the planned offshore
development in Gabon, Offshore West Africa. During the initial term, the
total annual payments for the Gabon FPSO are estimated to be US$50
million.
(2) During 2007, the Company entered into a one-year agreement for offshore
drilling services related to the Baobab Field in Cote d'Ivoire, Offshore
West Africa. The agreement is scheduled to commence in the second quarter
of 2008, on delivery of the rig. Estimated total payments of US$100
million, after joint venture recoveries, have been included in this table
for the period 2008 - 2009.
(3) During 2007, the Company awarded contracts for a drilling rig and for the
construction of wellhead towers in connection with the planned offshore
development in Gabon, Offshore West Africa. Estimated total payments of
US$392 million have been included in this table for the period 2008 -
2010.
(4) Amounts represent management's estimate of the future undiscounted
payments to settle asset retirement obligations related to resource
properties, facilities, and production platforms, based on current
legislation and industry operating practices. Amounts disclosed for the
period 2008 - 2012 represent the minimum required expenditures to meet
these obligations. Actual expenditures in any particular year may exceed
these minimum amounts.
In addition to the amounts disclosed above, the Company has budgeted
construction costs of approximately $1.1 billion to $1.3 billion for the
remainder of 2008 related to the planned completion of Phase 1 of the Horizon
Project.
CANADIAN NATURAL RESOURCES LIMITED 55
===============================================================================
12. SEGMENTED INFORMATION
NORTH AMERICA NORTH SEA OFFSHORE WEST AFRICA
(millions of Canadian Three Months Ended Three Months Ended Three Months Ended
dollars, unaudited) Mar 31 Mar 31 Mar 31
--------------- --------------- --------------
2008 2007 2008 2007 2008 2007
- --------------------------------------------------------------------------------------------------------------------------
SEGMENTED REVENUE 3,215 2,535 508 431 237 144
Less: royalties (405) (366) (1) (1) (43) (9)
- --------------------------------------------------------------------------------------------------------------------------
SEGMENTED REVENUE, NET OF 2,810 2,169 507 430 194 135
ROYALTIES
- --------------------------------------------------------------------------------------------------------------------------
SEGMENTED EXPENSES
Production 451 422 112 116 21 22
Transportation and blending 493 365 3 4 - -
Depletion, depreciation and
amortization 566 560 86 107 34 40
Asset retirement obligation
accretion 11 9 6 8 - 1
Realized risk management
loss (gain) 417 (92) (1) 4 - -
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SEGMENTED EXPENSES 1,938 1,264 206 239 55 63
- --------------------------------------------------------------------------------------------------------------------------
SEGMENTED EARNINGS BEFORE 872 905 301 191 139 72
THE FOLLOWING
- --------------------------------------------------------------------------------------------------------------------------
NON-SEGMENTED EXPENSES
Administration
Stock-based compensation
expense
Interest, net
Unrealized risk management
loss
Foreign exchange loss (gain)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL NON-SEGMENTED EXPENSES
- --------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES
Taxes other than income tax
Current income tax expense
Future income tax expense
- --------------------------------------------------------------------------------------------------------------------------
NET EARNINGS
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CANADIAN NATURAL RESOURCES LIMITED 56
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INTER-SEGMENT ELIMINATION
MIDSTREAM AND OTHER TOTAL
(millions of Canadian dollars, Three Months Ended Three Months Ended Three Months Ended
unaudited) Mar 31 Mar 31 Mar 31
---------------- --------------- -------------
2008 2007 2008 2007 2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENTED REVENUE 20 19 (13) (11) 3,967 3,118
Less: royalties - - - - (449) (376)
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENTED REVENUE, NET OF 20 19 (13) (11) 3,518 2,742
ROYALTIES
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENTED EXPENSES
Production 5 6 (2) (1) 587 565
Transportation and blending - - (11) (10) 485 359
Depletion, depreciation and
amortization 2 2 - - 688 709
Asset retirement obligation
accretion - - - - 17 18
Realized risk management
loss (gain) - - - - 416 (88)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SEGMENTED EXPENSES 7 8 (13) (11) 2,193 1,563
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENTED EARNINGS BEFORE
THE FOLLOWING 13 11 - - 1,325 1,179
- ---------------------------------------------------------------------------------------------------------------------------
NON-SEGMENTED EXPENSES
Administration 43 60
Stock-based compensation
expense - 25
Interest, net 49 83
Unrealized risk management
loss 108 536
Foreign exchange loss (gain) 114 (27)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL NON-SEGMENTED EXPENSES 314 677
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES 1,011 502
Taxes other than income tax 49 63
Current income tax expense 155 70
Future income tax expense 80 100
- ---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 727 269
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CANADIAN NATURAL RESOURCES LIMITED 57
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NET ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Three Months Ended
MAR 31, 2008 Mar 31, 2007
----------------------------------------------------
NON Non
CASH/FAIR Cash/Fair
NET VALUE CAPITALIZED Net Value Capitalized
EXPENDITURES CHANGES(1) COSTS Expenditures Changes(1) Costs
- -------------------------------------------------------------------------------------------------------------------------------
North America $ 663 $ 9 $ 672 $ 998 $ 5 $ 1,003
North Sea 45 - 45 138 - 138
Offshore West Africa 94 (1) 93 36 - 36
Other - - - 1 - 1
Horizon Project (2) 941 - 941 809 - 809
Midstream 1 - 1 2 - 2
Head office 3 - 3 5 - 5
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,747 $ 8 $ 1,755 $ 1,989 $ 5 $ 1,994
===============================================================================================================================
(1) Asset retirement obligations, future income tax adjustments related to
differences between carrying value and tax value, and other fair value
adjustments.
(2) Net expenditures for the Horizon Project also include capitalized interest
and stock-based compensation.
Property, plant and equipment Total assets
------------------- ------------------------
MAR 31 Dec 31 MAR 31 Dec 31
2008 2007 2008 2007
- ------------------------------------------------------------------------------------------------------------------------
Segmented assets
North America $ 22,143 $ 22,033 $ 24,172 $ 23,617
North Sea 1,774 1,728 2,063 1,957
Offshore West Africa 1,244 1,188 1,387 1,354
Other 25 25 50 41
Horizon Project 9,592 8,651 9,662 8,740
Midstream 204 205 352 333
Head office 69 72 69 72
- ------------------------------------------------------------------------------------------------------------------------
$ 35,051 $ 33,902 $ 37,755 $ 36,114
========================================================================================================================
CAPITALIZED INTEREST
The Company capitalizes construction period interest based on Horizon Project
costs incurred and the Company's cost of borrowing. Interest capitalization on
a particular development phase ceases once construction is substantially
complete and this phase of the Horizon Project is available for its intended
use. For the three months ended March 31, 2007, pre-tax interest of $111
million was capitalized to the Horizon Project (March 31, 2007 - $71 million).
CANADIAN NATURAL RESOURCES LIMITED 58
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SUPPLEMENTARY INFORMATION
INTEREST COVERAGE RATIOS
The following financial ratios are provided in connection with the Company's
continuous offering of medium-term notes pursuant to the short form prospectus
dated September 2007. These ratios are based on the Company's interim
consolidated financial statements that are prepared in accordance with
accounting principles generally accepted in Canada.
Interest coverage ratios for the twelve month period ended March 31, 2008:
- --------------------------------------------------------------------------------
Interest coverage (times)
Net earnings (1) 5.2x
Cash flow from operations (2) 11.0x
===============================================================================
(1) Net earnings plus income taxes and interest expense; divided by the sum of
interest expense and capitalized interest.
(2) Cash flow from operations plus current income taxes and interest expense;
divided by the sum of interest expense and capitalized interest.
CANADIAN NATURAL RESOURCES LIMITED 59
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CANADIAN NATURAL RESOURCES LIMITED 60
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CANADIAN NATURAL RESOURCES LIMITED 61
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CORPORATE INFORMATION
OFFICERS
Allan P. Markin* Philip A. Keele
Chairman of the Board Vice-President, Mining
N. Murray Edwards* Cameron S. Kramer
Vice-Chairman of the Board Vice-President,
Development Operations
John G. Langille*
Vice-Chairman of the Board Leon Miura
Vice-President, Upgrading
Steve W. Laut*
President & Chief Operating Officer S. John Parr
Vice-President, Production - East
Douglas A. Proll*
Chief Financial Officer & David A. Payne
Senior Vice-President, Finance Vice-President, Exploitation - East
Real M. Cusson* Bill R. Peterson
Senior Vice-President, Marketing Vice-President, Production - West
Real J.H. Doucet* John C. Puckering
Senior Vice-President, Oil Sands Vice-President, Site Development
Allen M. Knight* Timothy G. Reed
Senior Vice-President, International & Vice-President, Human Resources
Corporate Development
Joy P. Romero
Tim S. McKay* Vice-President, Bitumen Production
Senior Vice-President, Operations
Sheldon L. Schroeder
Lyle G. Stevens* Vice-President, Project Control
Senior Vice-President, Exploitation
Ken W. Stagg
Jeff W. Wilson* Vice-President, Exploration - West
Senior Vice-President, Exploration
Scott G. Stauth
Jeffery J. Bergeson Vice-President, Field Operations
Vice-President, Exploitation - West
Steve C. Suche
Corey B. Bieber Vice-President,
Vice-President, Finance & Investor Relations Information & Corporate Services
Mary-Jo E. Case* Domenic Torriero
Vice-President, Land Vice-President, Exploration - Central
William R. Clapperton Grant M. Williams
Vice-President, Regulatory, Stakeholder & Vice-President, Exploration - East
Environmental Affairs
Daryl G. Youck
James F. Corson Vice-President, Exploitation - East
Vice-President, Human Resources, Horizon
Lynn M. Zeidler
Randall S. Davis* Vice-President,
Vice-President, Finance & Accounting Utilities & Offsites and
Horizon Construction Management
Allan E. Frankiw
Vice-President, Production - Central Bruce E. McGrath
Corporate Secretary
Jerry W. Harvey
Vice-President, Commercial Operations
Peter J. Janson
Vice-President, Engineering Integration
*Management Committee
CANADIAN NATURAL RESOURCES LIMITED 62
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STOCK LISTING BOARD OF DIRECTORS
Toronto Stock Exchange Catherine M. Best
Trading Symbol - CNQ N. Murray Edwards
Honourable Gary A. Filmon, P.C., O.M.
New York Stock Exchange Ambassador Gordon D. Giffin
Trading Symbol - CNQ John G. Langille
Steve W. Laut
Keith A.J. MacPhail
REGISTRAR AND TRANSFER AGENT Allan P. Markin
Computershare Trust Company of Canada Norman F. McIntyre
Calgary, Alberta Honourable Frank J. McKenna, P.C., O.N.B., Q.C.
Toronto, Ontario James S. Palmer, C.M., A.O.E., Q.C.
Computershare Investor Services LLC Eldon R. Smith, M.D.
New York, New York David A. Tuer
INTERNATIONAL OPERATIONS
CNR INTERNATIONAL (U.K.) LIMITED
ABERDEEN, SCOTLAND
Terry Jocksch*
Vice-President, and Managing Director
W. David R. Bell
Vice-President, Exploration
Barry Duncan
Vice President, Finance
James A., Edens
Vice-President,
Business Development & Exploitation
David M. Haywood
Vice-President, Operations
INVESTOR RELATIONS
Telephone: (403) 514-7777
Facsimile: (403) 514-7888
Email: ir@cnrl.com
Website: www.cnrl.com
CANADIAN NATURAL RESOURCES LIMITED 63
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C A N A D I A N N A T U R A L R E S O U R C E S L I M I T E D
2500, 855 - 2 Street S.W., Calgary, Alberta T2P 4J8
Telephone: (403) 517-6700 Facsimile: (403) 517-7350
Email: ir@cnrl.com
Website: www.cnrl.com
Printed in Canada