Canadian Oil Producer Earnings ($SU $CVE $CNQ)

[Previously regarding Suncor Energy, Cenovus Energy, and Canadian Natural Resources Limited.]

Canadian Natural Resources Limited
Once again, an outstanding result from the titan of the Canadian energy industry. Third quarter capital expenditures were up only 2.3% with liquids production up 5.2% year-over-year. Their production volume of 1.4 million BOE/d was the highest quarterly volume in the history of the Company.

Management said that "with current strong production volumes and expected free cash flow in Q4/23 and beyond, based on current strip pricing, we are quickly approaching a net debt level of $10 billion, which we forecast to achieve in Q1/24, at which time we target to increase returns to shareholders to 100% of free cash flow." The share count was down 2.4% year-over-year at the end of the third quarter - it would be nice to see the repurchases accelerate.

The current market capitalization of CNQ (at a $67 share price) is $73 billion, and the enterprise value is $82 billion. Cash from operations for the third quarter was $2.6 billion and the company spent $875 million on capital expenditures. The remaining free cash flow for the quarter was $1.7 billion, of which $534 million was used for debt repayment, $718 million was used for dividends, and $434 million was used for share repurchases. The free cash flow yield on the enterprise value was 8.3% based on the quarter's results. 

This was during a quarter with an average WTI price of $82 and an averaged realized price for liquids by CNQ of $64. In its latest investor presentation, CNQ says that free cash flow per share would be 30% higher at $100 WTI than at $85 WTI. (Notice also on slide 8 of the presentation, CNQ management points out that oil sands mining and upgrading requires much less capital expenditure to maintain production than shale.)

On the CNQ conference call, management was asked (by the Goldman Sachs analyst Neil Mehta) whether they were interested in M&A in Canada. The CEO said that "we have a huge reserve base... we don’t have to do any acquisitions to create or find more reserves, so we have that part in the bag."

Suncor Energy Inc.
The current market capitalization of SU (at a $32.50 share price) is $42 billion, and the enterprise value is $51 billion. Cash from operations for the third quarter was $3 billion and the company spent $1.1 billion on capital expenditures. The remaining free cash flow for the quarter was $1.9 billion, of which $1.3 billion was used for debt repayment, $489 million was used for dividends, and $217 million was used for share repurchases. The free cash flow yield on the enterprise value was 14.9% based on the third quarter's (annualized) results. The shareholder returns (repurchases and dividends) for the quarter are a 6.7% shareholder yield. The company has bought back 3.5% of shares outstanding YTD. Suncor's earnings per share were 86 cents, so a P/E of 9x. 

Funds from operations were down versus the third quarter of last year, but up significantly from the second quarter of this year. One key performance metric was that refinery utilization was 99% for the quarter instead of 85% the prior quarter.

Some highlights from the conference call:

*On October 3, we announced a revised deal to acquire Total Canada for $1.468 billion. This is an improved deal versus the original deal. Specifically, we no longer have a contingent payment provision in the acquisition. Similar headline valuation to the earlier Teck deal, but we’ve got additional benefits. Commercial patience and persistence were key here, and we’re pleased with the deal. We’re on track to close the transaction later this month. It addresses long-term bitumen supply uncertainty associated with our upgraders, fills our upgraders for the long-term, but also enables additional value creation, value creation through regional synergies, with mobile equipment deployment, value creation through directing higher yield PFT from Fort Hills to our upgraders, a number of incentives and, as I said, we’re quite pleased with the deal.

*Let me move on to mining fleet performance for context. The cost of physically moving ore from the face of a mine to a crusher for the start of extraction, that’s our single highest cost component in the production of bitumen. Today, we move about 1.3 billion tons of earth per year to support production, and we’ve got a competitive cost gap versus best-in-class, comprehensive efforts to lower our cost per ton. The winning formula, fewer trucks, bigger trucks, more efficient trucks, and, of course, companion or compatible shovels, that’s our mining improvement strategy in a nutshell. So, this year and throughout 2024, we will add via a combination of purchase and lease 55 ultra-class 400-ton trucks to our total fleet, displacing nearly twice as many smaller third-party, less efficient, higher cost vehicles. Each truck will be pre-equipped for ultimate driverless or autonomous operation. The cost for these acquisitions and leases are in our guidance for this year, as well as our guidance that we’ll issue shortly for 2024. Once in place, this action alone is expected to lower our overall corporate breakeven by $1 a barrel.

*I suspect you’ve noticed a few references today in terms of per barrel. This reflects a new and evolving vocabulary within the company, thinking about and communicating the impact of our actions, plans, and improvements in unit per barrel terms. In addition, a subset of us similarly talk about the impact in per share terms. Our vocabulary is part of creating clarity and focus, developing a results-oriented, high-performance culture.

The oil sands segment generated funds from operations for the third quarter of $1.27 billion, with a sales volume of 656 thousand barrels per day and an average crude price realization of $74/bbl.

The refining and marketing segment generated funds from operations of $1.1 billion, processing 463 thousand barrels per day and making a gross margin (LIFO) of $31 per barrel.

Cenovus Energy Inc.
The market capitalization of Cenovus (CVE) is now $33 billion (at a $17.5 share price) and the enterprise value is $40 billion. The upstream segment earned $2.5 billion of operating margin during the third quarter (compared with $2.1 billion the prior year quarter) and the downstream (refining) segment earned $673 million (compared with $358 million).

Their free cash flow (as we define it, CFO less capex) was $1.24 billion for the quarter, which gives a free cash flow yield on the enterprise value of 12.4%.

In the third quarter, the company returned $876 million to shareholders by way of $438 million for the partial payment of the common share warrants obligation, the repurchase of 13.8 million shares for $264 million, and $193 million of common dividends. The shareholder yield on the market cap was 10.6% (annualized).

The company also repaid $973 million of debt. Cenovus’s shareholder returns framework has a target of returning 50% of excess free funds flow to shareholders for quarters where the ending net debt is between $6.5 billion and $2.9 billion. (Net debt is down to $4.3 billion as of the end of the third quarter.)

Capital expenditures for the third quarter in their upstream segment were up 74% year-over-year while production of crude oil was up only 3%. For the current year-to-date, the upstream capital expenditures are up 68% while crude oil production is up only 1% compared to the first nine months of last year.