Prepared remarks
Good morning. We would like to welcome everyone to Canadian Natural's 2026 Second Quarter Earnings Conference Call and Webcast. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, 08/06/2026 at 9:00 AM Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance J. Casson, Manager of Investor Relations.
Good morning, everyone. Thank you for joining Canadian Natural's 2026 second quarter results conference call. Before we begin, I would like to remind you of our forward-looking statements. It should be noted that in our reporting disclosures, everything is in Canadian dollars unless otherwise stated, and we report reserves and production before royalties. I also suggest you review the advisory section of our financial statements that include comments on non-GAAP disclosures. Speaking on today's call will be Scott G. Stauth, our President, and Victor Clinton Darel, our Chief Financial Officer. As usual, in the room with us this morning are Robin Sean Zabek, COO of E&P; Jay E. Froc, CEO of Oil Sands; and Ronald Keith Laing, Chief Commercial Officer. Scott will begin by going through our numerous operational records and leading operating costs as our teams continue to execute through the quarter. Victor will then go through our strong financial results, significant returns to shareholders and material net debt reduction. To close, Scott will summarize prior to opening up the line for questions. With that, over to you, Scott.
Thank you, Lance, and good morning, everyone. Q2 2026 was a very strong quarter, reflecting our continued focus on operational excellence, capital efficiency and continuous improvement, which drove eight new operational and financial records across our asset base. An example of this performance was achieved in our world-class oil sands mining and upgrading operations. We experienced challenging weather elements like other oil sands operations; however, our teams successfully managed those challenges, allowing the company to not only exceed our budget, but also achieve the highest quarterly production in the company's history, averaging approximately 625 thousand barrels per day in Q2 with high upgrader utilization of 106%. Oil sands mining and upgrading production in the quarter represents an increase of approximately 161 thousand barrels per day, or 35%, compared to Q2 2025 levels, reflecting strong operational performance, the additional working interest in the AOSP mines acquired in Q4 of 2025, and the turnaround at AOSP completed last year. These world-class assets provide high-value synthetic crude oil, which captured robust pricing in Q2 with the SCO premium to WTI averaging $8.37 per barrel in the quarter. When combined with industry-leading low operating costs of $22.19 per barrel, this resulted in the highest oil sands mining and upgrading per-barrel netback ever achieved by the company during the quarter at approximately $78 per barrel. Cash flow generation from our oil sands mine and upgrading assets was significant and operations delivered strong results. In addition to record oil sands mining and upgrading production, we also achieved record quarterly total corporate production of approximately 1.68 million BOE per day in Q2, resulting in year-over-year growth of approximately 206 thousand BOE per day, or 18%, from Q2 2025 levels. Other Q2 2026 production records include record total liquids production of approximately 1.25 million barrels per day, an increase of 230 thousand barrels per day, or 23%, from Q2 2025 levels. Importantly, two-thirds of our total liquids production in Q2 is high-value SCO, light crude oil and NGLs, generating significant cash flow. We also achieved record North American conventional E&P liquids production of approximately 338 thousand barrels per day, representing an increase of 67 thousand barrels per day, or 25%, from Q2 2025 levels. Included in this is record North American light crude oil and NGL production of approximately 205 thousand barrels per day, up approximately 64 thousand barrels per day, or 45%, from Q2 2025, primarily reflecting accretive acquisitions and strong drilling results. Thermal in situ production was strong as well, with record production at Jackfish of approximately 136 thousand barrels per day, exceeding our facility nameplate capacity of 120 thousand barrels per day. Strong production at Jackfish was supported by the two new SAGD pads at Pike 1, which are currently averaging approximately 46 thousand barrels per day with an SOR of 1.8. The resource at Pike is top tier, with results continuing to exceed our expectations. In addition to production records achieved this quarter, we also set some record financial results, including adjusted net earnings and adjusted funds flow, which Victor will provide more details on later in the call. Our financial results include the benefit from our material sulfur production, as we produce approximately 30% of Canada's sulfur supply, which generated significant net revenue of approximately $450 million in the first two quarters of this year. With record production and strong performance across our asset base, along with an accretive acquisition completed in Q2, we are increasing our annual production guidance range for the second time this year. Annual production is now targeted to be between 1.64 million BOE per day and 1.68 million BOE per day, a 20 thousand BOE per day increase at the midpoint from the previous guidance range. We remain focused on executing our prudent and efficient 2026 capital program; our capital program remains unchanged at approximately $6 billion before net acquisition costs. Our ability to effectively allocate capital across our large and diverse asset base provides us with a unique competitive advantage, and when combined with accretive acquisitions, continues to create significant long-term value for our shareholders. With that, I will pass it over to Victor for our Q2 financial review.
Thank you, and good morning, everyone. As Scott already noted, the second quarter was marked by impressive performance with the company setting a number of quarterly records. Adjusted net earnings of $4.6 billion, or $2.20 per share, and adjusted funds flow of $6.9 billion, or approximately $3.30 per share, were the strongest in the history of the company and reflected excellent operational performance and the strong pricing we received for our products in the quarter. The Peace River area acquisitions were completed in the first and second quarters and are already well integrated into our operations and are contributing meaningfully to our already strong returns. Robust cash flow generation continues to provide significant returns to shareholders, totaling approximately $4 billion in the second quarter, including direct returns of $2.4 billion comprised of $1.3 billion in dividends and $1.1 billion in share repurchases, and indirect returns of $1.6 billion through net debt reduction in the quarter, further enhancing long-term shareholder value. Total direct returns to shareholders for the year-to-date now exceed $5.7 billion. The significant level of returns and net debt reduction, even when completing an accretive acquisition in the quarter, is a clear demonstration of the cash-generating capability of our diverse, long-life, low-decline asset base supported by industry-leading cost performance across our operations. Our leading dividend continues with the Board approving a quarterly dividend of $0.625 per common share. Following the dividend increase earlier this year, 2026 is the 26th consecutive year of dividend increases, and this reflects the sustainability of our business model, the strength of our balance sheet and the durability of our asset base. The dividend is payable on October 2, 2026, to shareholders of record at the close of business on September 11, 2026. Our share buyback program, which currently targets to return 75% of free cash flow, and is calculated as funds flow after dividends, capital and abandonment expenditures, continues to be very strong. The program is forward-looking and, with the strong pricing environment, continues to be robust. Our capital expenditure program is disciplined, balanced and effective, and the balance sheet is even stronger. Liquidity is equally strong, with approximately $8 billion of availability supported by internally generated cash flow and undrawn credit facilities, providing us with ongoing financial flexibility to drive resource value growth and deliver on strategic growth opportunities, as demonstrated by the accretive acquisitions this year. Overall, the record results achieved in the second quarter further demonstrate the quality of our assets and the strength of our execution. Combined with a strong balance sheet and a disciplined approach to capital allocation, we remain well positioned to continue delivering meaningful value to our shareholders. With that, Scott, I will turn it back to you.
Thanks, Victor. In summary, our relentless focus on continuous improvement combined with effective and efficient operations from our world-class assets has driven strong performance, low operating costs, high netbacks, and significant free cash flow generation so far in 2026. Our ability to effectively allocate capital across our strong asset base provides us with a competitive advantage. This ability, combined with shareholder alignment and accretive acquisitions, creates significant long-term value for our shareholders. Before I turn it over for questions, I wanted to comment on the recent trilateral memorandum of understanding between the Oil Sands Alliance, the Government of Alberta, and the Federal Government. The trilateral MOU outlines a potential regulatory and fiscal framework intended to support the long-term competitiveness of Canada's energy industry and establishes a positive first step for future economic production growth in Canada, associated with additional egress opportunities and a clear pathway to reduce greenhouse gas emissions. In turn, this will benefit all of Canada by providing more jobs combined with social and economic benefits to our country. We look forward to working with both levels of government on the definitive agreements targeted for completion this fall, which will provide clarity on assessing potential growth projects. Until we have completed these definitive agreements, development of our medium and long-term projects remain on hold. This will include our 30 thousand barrel-per-day Jackfish project and our 70 thousand barrel-per-day Pike 2 project, as well as our longer-term oil sands mining and growth projects at both Albion and Horizon. I also want to remind everyone that, in addition to our future growth and capital allocation being dependent upon the finalization of the definitive agreements, our shareholder returns will not be sacrificed and, if growth projects proceed, they will generate strong returns at mid-cycle pricing. With that, I will turn it over for questions. Thank you.
Questions and answers
Ladies and gentlemen, we will now begin the question-and-answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the 2. If you are using a speakerphone, please ensure your mute function is turned off. We have our first question from Dennis Fong with CIBC.
Hi, good morning. Thanks for taking my questions and congratulations on a very strong operational quarter. My first question — and I really appreciate, frankly, the color and commentary you provided in the initial remarks — when you talk towards your strong performance in the oil sands mining operations region, clearly you managed through very tough environmental conditions out in the field. Can you talk to some of the learnings you might have had, some examples of what you were able to do to manage through a tough quarter with a high amount of snowmelt and rain, and why some of the operating models were able to weather these conditions as well as you guys were? My second question shifts the focus towards Kirby. It looks like you are shifting now towards a solvent rollout using diluent for the first quarter of 2027. Can you talk to the scale of that rollout and potentially the upside that could exist as you move forward with the use of solvent technology at a much larger commercial scale? I'll turn it back.
Thanks, Dennis. If you look at the spring runoff combined with heavy rain conditions that we typically see during the second quarter, there are several factors that come into play. Our teams have been focused on these conditions for years, and part of that focus is how we manage our haul roads, how we have materials ready for managing those roads in adverse weather conditions, how we ensure ore availability, and importantly, how our team on the ground is able to navigate through the challenging conditions with manpower and equipment. They are able to assess situations on a second-by-second, minute-by-minute basis, make judgment calls, and work through these challenges in a very prepared manner, anticipating what is going to happen based on future forecasts. Those general practices are summarized simply, but being on top of all of that is very important to our team and they take great pride in it. Regarding the solvent deployment at Kirby South, this is part of our ongoing strategy to evaluate the returns we would achieve by deployment of solvents and to help reduce our greenhouse gas emissions. One of the key factors we look at — and one we have experienced — is that solvent costs are significant. To improve the returns, we need to ensure that we are using the most effective and efficient solvents. In this case, we will deploy diluent as it is a lower-cost product to use as a solvent. In terms of scale, Dennis, this is another small pilot at Kirby South. These are wells drilled off existing pads at Kirby South. Performance from those wells is strong. We anticipate that by Q1 2027 we will be introducing diluent through that pilot into those wells and monitoring the results. We are taking our time to understand full-cycle economics on solvents and their applicability in areas where we can achieve the best results by deploying that solvent. Thanks, Dennis.
We have our next question from Patrick O'Rourke with ATB Capital Markets.
Good morning, guys. Thanks for taking my question and congratulations again on a very strong quarter, particularly in a challenging mining environment. Just wondering — and I know you have the naphtha addition coming up — the upgrader output has been consistently above 100% for several quarters. From a comfort level, are you considering rerating these assets in terms of capacity, and what's the incremental upside you could squeeze out? Also, thinking about the trilateral MOU, and I know it's a big if, but if it does meet your expectations for an economic and fiscal framework, given the state of readiness you have shown with the growth projects in the queue, what is the path forward in terms of timeframes around FID and progressing with growth?
Patrick, we continue to focus on continuous improvement and optimizing the capacity of all facilities, including the upgraders at our oil sands mining site. It's premature to formally rerate capacity; the teams are focused on optimization and trying to get incremental creep barrels from the facility. One key project you mentioned is the NRU project, but we continue to work on optimization outside of that as well. What's important is the total capacity—the volume of SCO production we're putting through. Whether we report utilization at 100% or 105% is an outcome of our pushing the facilities to maximize assets. We will continue to focus on incremental barrels where we can achieve them through tweaking, optimizing and getting creep capacity. Regarding the trilateral MOU, the focus right now is on completing the definitive agreements. We want to ensure all details in the definitive agreements are aligned with the concepts in the MOU, as those concepts are critical for our assessment of future growth. For projects we've discussed publicly, we would only deploy capital under the right conditions according to our holistic capital allocation framework, and we will not sacrifice shareholder returns. We're very cognizant of managing capital so that medium-term projects do not crowd out other priorities. We're focused on that path forward.
Our next question is from Menno Hulshof with TD Cowen.
Thanks and good morning, everyone. I'll start with pricing. The premium to WTI was really large in the second quarter but there's a lot of day-to-day volatility. What are you currently seeing in terms of supply-demand fundamentals for SCO, and what is a reasonable expectation for that premium through the end of the year? My second question is on M&A and the recent acquisitions in Peace River. What is drawing you to that area? Are there unique attributes Canadian Natural brings in terms of integration synergies on the acquired assets, and are you seeing meaningful opportunities to further consolidate in that region?
Menno, your view is probably as accurate as ours on the day-to-day volatility. It really depends on the draw for diesel production. We're seeing strong diesel demand across North America and elsewhere, so I would expect pricing to be at par or show a slight uptick versus WTI through the rest of the year. If you look at forward curves for WTI and consider diesel demand and refinery requirements, I would suggest SCO will be at par or a few dollars better than WTI on a go-forward basis. Historically SCO has averaged roughly on par with WTI, and the fact that we have about 600 thousand barrels per day of that production is significant to the company, whether pricing is at par or at a premium. On the Peace River acquisitions, what drew us there was the opportunity to capture synergies from size and infrastructure. Consolidation allows us to reduce operating cost versus having multiple smaller operators. We're focused on maximizing liquids production from those assets and leveraging our teams and knowledge to reduce drilling and completions costs. There are opportunities for multi-lateral drilling which has been sparse in the Charlie Lake area, so there is upside from these acquisitions. In short, consolidation adds value by enabling optimization, reducing operating costs and enhancing returns to shareholders.
Our next question is from Neil Mehta with Goldman Sachs.
Yes. Thanks, team. Congrats on a really good quarter. One macro and one micro question. On the trilateral MOU — what are the gating factors to ultimately improving egress and getting pipeline built in the region? How big a deal is this for the industry and what is the biggest risk for this to translate into improved outcomes? Second, on leverage: you've made a lot of progress on long-term debt from $16.2 billion down to $14.5 billion, inching closer to the $13 billion goal. As you look at the forward curves, do you think you get there, and when you do, what does that unlock for you?
Neil, the MOU is potentially transformative for Canada and certainly for the oil sands industry. Egress to the West Coast provides the opportunity to broaden the customer base and help drive stronger overall differential pricing. The Pathways concept, which captures significant greenhouse gas reductions and supports production growth opportunities, is significant for Canada, creating well-paying jobs, increased royalties and taxes. The details within the MOU need to be nailed down through the definitive agreements so we have assurances that the components in the MOU will work through to finalized agreements. From our perspective, if those definitive agreements align with the MOU concepts, it presents a great opportunity for all oil sands players, including Canadian Natural, and is a significant opportunity for Alberta and Canada. There are fiscal and regulatory components to get right, and that's why definitive agreements are important.
Neil, on leverage, pricing has been very strong and net debt levels have come down — about $1.6 billion in the quarter alone. Pricing moves around day to day, so the timing will depend on price. Based on pricing today, we target getting to the $13 billion net debt level in early 2027. When we get there, as you know, we target to return 100% of free cash flow under the share buyback program, and that's very important to us. That is what we are looking at right now.
Also keep in mind that we have our turnaround activity in Q3 and into Q4 of this year, so factor that into the timing as well.
We have no further questions. I will now turn the call over to Lance J. Casson for closing remarks.
Thank you, operator, and thanks to everyone for joining the call this morning. If you have any questions, please do not hesitate to call. Have a great day.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.