Canadian Natural Resources Limited (CNQ) Q1 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Canadian Natural Resources First Quarter 2015 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this call is being recorded today, Thursday, May 7, 2015, at 8:00 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Doug Proll, Executive Vice President of Canadian Natural Resources. Please go ahead, Mr. Proll.

Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2015 conference call. Today, we will discuss our first quarter financial and operating results, including an update of our ongoing projects and operations. With me this morning are Steve Laut, our President, and Corey Bieber, our Chief Financial Officer. Before we begin, I would like to refer you to the comments regarding forward-looking information contained in our press release and also note that all amounts are in Canadian dollars, and production and reserves are expressed as before royalties unless otherwise stated. I would like to make a few comments before turning the call over to Steve and Corey. I would first like to thank our 2 retiring directors, Eldon Smith and Keith MacPhail, for their long-standing service to Canadian Natural Resources. Eldon has served on our Board of Directors since 1997, and Keith has served since 1993. We will surely miss these 2 gentlemen from the board and board committee representation. You could always count on them for not having to worry about what was on their minds, their leadership qualities and their ability to roll up their sleeves when it mattered. On behalf of the Board of Directors and the management committee, we wish them all the best in their post-CNRL days and say thank you for your contribution over the years. Canadian Natural had a very good first quarter, given the significant downturn in commodity prices. Natural gas production amounted to 1.7 Bcf per day for Q1 2015, up 50% year-over-year. Crude oil and natural gas liquids production amounted to 602,800 barrels a day for Q1 2015, an increase of 23% year-over-year. Our goal to be a balanced producer was evident in the first quarter, where natural gas production amounted to 33%, light oil NGLs and synthetic crude oil production was 30% and Pelican Lake thermal and primary heavy oil production was 37% of total production. In response to volatile and sharply changing product price netbacks, we have increased our focus on reducing our cost structures, both operating and capital, while maintaining or increasing our safety and environmental standards and ensuring that our ability to be nimble in allocating capital is enhanced. This focus includes not only immediate cost savings, but also implementing changes to our processes that will last through commodity price cycles. Our balance sheet is strong, and we maintain strong lines of resources. Thank you, and I will now turn you over to Steve.

Good morning, everyone. As we all know, a significant reduction in commodity prices has had a significant impact on the global oil and natural gas industry. Canadian Natural is not immune to the impact the commodity prices have had on our cash flow and earnings. That being said, the resilience of our strong, diverse and well balanced asset base, robustness of our business model and the effectiveness of our strategies combined with our ability to execute these strategies is shining through. In the first quarter, we delivered another very strong operational quarter with record quarterly production. Oil production is up 23%, gas production up 51% from Q1 2014. Canadian Natural's operations continue to be effective and efficient, with operating costs down 22% for liquids and 10% for gas in Canada Q1 2015 over Q1 2014. Canadian Natural's balance sheet remains strong, and we maintained significant capital flexibility, effectively allocating capital and keeping our transition to our longer-life, low-decline asset base intact. In low commodity price periods, Canadian Natural's strengths and capabilities become even more important, allowing us to further differentiate ourselves from the peer group. These strengths and capabilities will also be important as we move into a period of political uncertainty in Alberta, a topic that is a top of mind for everyone. Although there's no certainty around what might transpire, from what premier-elect Notley has stated in her platform, she will look to raise corporate taxes from 10% to 12% and initiate a review of royalties on a regular basis. Clearly, this is not good for the industry. That being said, we are heartened by her statement that they will be a good partner for the oil and gas industry. We believe that the premier-elect Notley understands the importance of the oil and gas industry to Alberta. That investment in industry creates employment, generates significant revenue for all Albertans as well as providing leadership in developing resources and new technologies to enhance development of these resources as well as reduce the environmental footprint. We will work with her to ensure she understands the importance of also having a healthy and fiscal competitive environment. Getting the balance between spending and revenue will be difficult. As the past increases in government takes during high commodity prices in 2007 in Alberta and 2013 in U.K. show, how easy it is to get it wrong. And that puts less revenue overall than was collected at lower government takes and royalties, generating a lose-lose outcome for the industry and government in both cases. The oil and gas industry is a global industry and capital will flow to areas with the greatest return. In this period of technology change, bringing on increasing supply, there are many alternatives for global investment. We believe premier-elect Notley understands this dynamic and the increased difficulty of getting it right. We also believe premier Notley understands that making sizable investments of capital for long-term projects with uncertain fiscal regimes is difficult. Hence, providing fiscal clarity to business will become as important as commodity prices in coming months. As one of the leading oil and gas and natural gas companies in Alberta, we are committed to working with the new government. We share a common goal, a strong and prosperous Alberta that is fair to all Albertans. The oil and natural gas industry has had and has going forward important role to play in delivering that goal. Now turning back to Canadian Natural and our strengths we are utilizing in this period of low commodity pricing. In 2015, we have exercised our capital flexibility deferring $2.4 billion on our capital spending in January, with another $150 million of capital optimization announced in March. And today, we have announced $300 million in capital cost reductions for the remainder of the year. These cost reductions come with no decrease in scope. In fact, we're increasing our primary heavy oil drilling program by 17 wells. As a result, the 2015 capital budget is set at $5.75 billion, with $2.15 billion allocated to the execution of Horizon Phase 2/3 expansion. A major component of our transition to a longer-life, low-decline asset base, capital spending that delivers no additional production in 2015. On the operating costs side, we've been able to achieve significant cost savings compared to our operating costs in 2014 as well as into 2015. Compared to our January forecast and guidance for 2015, we've been able, through better efficiencies, effectiveness and innovation, reduce our operating costs by $400 million. As a result, we'll be -- we'll move towards the lower end of our operating cost guidance for 2015 as compared to our original 2015 operating cost guidance released in November 2014. With the exception of Horizon, we're lowering our operating cost guidance by $1 a barrel to $31 to $34 a barrel, and natural gas, we have lowered guidance by $0.05 an Mcf. To look at it another way, comparing unit operating costs in 2015, to those realized in 2014, we will see all cost savings of $925 million based on a lower unit of cost, a reflection of the strength of our assets and infrastructure and the ability of our teams to focus on effectiveness, efficiency, innovation as well as lower energy costs. From a production perspective, our production guidance remains unchanged. Importantly, using strip pricing of $58 WTI for 2015 and Q1 at $48.57 rising to $63 in Q4 and a $2.71 AECO price, at the midpoint of production guidance, Canadian Natural generates $6.6 billion of cash flow. Dividends are $1 billion, and with the current capital program of $5.75 billion, we'll utilize $150 million on our balance sheet to fund the $2.15 billion of capital allocated to Horizon Phase 2/3 expansion. Our balance sheet remains strong and is projected to end of the year at 35% debt to book and debt to EBITDA at 2.2. We're also committed to monetizing Canadian Natural's royalty assets, assets that generate $160 million a year on an annualized Q4 basis and are growing. We target this monetization in 2015. The timing of the monetization will be somewhat dependent on commodity price outlooks, and this provides Canadian Natural with additional balance sheet flexibility. As you can see, Canadian Natural is built for the low commodity price cycle. Our focus on effectiveness, efficiency and innovation is well underway, and we're just getting in stride. As we progress through 2015, we'll continue to strengthen our capacity to deliver value throughout the commodity price cycles by stepping up our focus on these key determinants of success as well as leveraging our diversified and well balanced asset base. Touching on each of the assets, starting with the E&P assets. Natural gas production in North America was up 49% in Q1 2015 over Q1 2014, driven largely by acquisitions and our horizontal liquids-rich programs in the Montney and Deep Basin in 2014. The 2015 drilling program is at 20 wells versus 76 in 2014. Production growth for 2015 will be 10%. Production growth in our light oil and NGL assets in Canada was 29% higher in Q1 2015 over 2014, driven by the 2014 acquisitions and drilling program. In 2015, our drilling program is down to 9 wells from 101 wells in 2014. As a result, we target 5% production growth in 2015. In our international light oil operations, we have stopped all drilling in the high-tax North Sea basin. In March 2015, the U.K. government reduced the supplementary charge on oil and gas profits of 32% to 20% effective January 1, 2015. In addition, the legislation reduced the PRT rate from 50% to 35% effective January 2016. They also replaced the existing brownfield allowance program with a new investment allowance effective April 1, 2015, which should be more administratively effective. These changes are welcome and have [ph] the competitiveness and development activity in the North Sea. However, at current commodity price levels, these projects do not compete for capital in Canadian Natural's portfolio. In offshore Africa, our Espoir and Baobab drilling programs are underway, and we're achieving execution efficiencies and excellent results. At Espoir, the first and second well are now in production at 3,000 and 2,100 barrels a day, respectively, well above expectations, with costs tracking below control estimates. Drilling and completion operations are very effective, and the 10 net well program will be complete in 2016, and the production targeted from this program is 5,900 BOE/ds. At Baobab, the first well has started [ph] drilling and expected to onstream in June 2015. Drilling and completion operations are also going very well at Baobab, and we expect to complete the 6 net well program in early 2016 on schedule. The Baobab program is targeted at 11,000 BOE/ds. We're effectively executing these projects. As a result, we'll see a cost reduction of roughly USD 100 million gross or $65 million our share for these projects between 2015 and '16. On the exploration side, the Block 514 [indiscernible] exploration well was plugged and abandoned in April. The results from this well will be evaluated and integrated into understanding of the block. We drilled 36 wells in our primary heavy oil assets in the first quarter, down 84% from the 224 wells drilled in Q1 of 2014. As a result, production is down 3% from Q1 2014. In addition, we have shut in roughly 4,000 barrels a day of heavy oil production from heavy oil wells that are high cost, as they are near the end of their life, or in some cases, produced at very high water cuts. We target drilling 186 wells, up 17 wells from our last update in 2015 versus 896 wells in 2014. The yearly production target to be off roughly 8% in 2015 versus 2014. Heavy oil is some of our most flexible capital and can be easily dialed back up or ramped back up again if we choose. At Pelican Lake, production is strong, up 6% from Q1 2014 at 51,085 barrels a day, with industry-leading operating cost target at $7.72 a barrel for 2015, generating significant cash flow even at these lower commodity prices. Pelican Lake production will increase by 6% in 2015 with no wells drilled. The polymer flood at Pelican Lake is a clear example of how Canadian Natural leverages technology to unlock reserves, enhance production and lower operating costs to bring on long-life, low-decline production. Pelican Lake is an important part of our transition to our long-life, low-decline asset base and will add significant and sustainable free cash flow in the near, mid and long term. Our thermal in situ assets are also an important part of our transition to long-life, low-decline assets. Thermal production is largely influenced by the cyclic nature of Primrose operations, with Q1 thermal production was very strong at 146,000 barrels a day, up 78% from Q1 2014. Production was driven from a strong Primrose North performance, our steam flood in Primrose East Area 1, and continued ramp-up at Kirby South. The Primrose East Area 1 steam flood is performing as expected with current production at 11,000 barrels a day, on track to our expected 15,000 barrels a day plateau, confirming the validity of steam flooding in Primrose East Area 1. Although Kirby South production ramp-up has been behind schedule, we're seeing good results from our stimulation program and have excellent thermal efficiencies, with the SOR at 2.3 for the wells in SAGD mode, top-tier thermal efficiency for SAGD operations. Current production is at 29,500 barrels a day, and we've begun to see the production ramp-up gain momentum with the target production plateau of 40,000 barrels a day. Q2 thermal production guidance is between 106,000 and 115,000 barrels a day, as we're now into the low portion of the cycle at Primrose. Turning to Horizon, the cornerstone of our transition to a long-life, low-decline assets. Horizon operations in the first quarter were exceptional, with production at 134,166 barrels a day or utilization at 98% of the 137,000 barrel a day nameplate capacity. A nameplate capacity that we increased in March from 133,000 barrels a day, an excellent result considering the winter months are normally the tougher months to achieve high reliability. Our target utilization range is 92% to 96% and anticipate over the long run to be in this range. Rising -- Horizon operating costs in Q1 were excellent, coming in at $29.73 a barrel or 28% less than Q1 2014, as we continue to focus on effective and efficient operations as well as highlighting the significant impact higher volumes have on our operating costs, which bodes well for the anticipated reduction of op costs we target for Horizon Phase 2/3 expansion. Operating cost guidance for Horizon has been reduced by $1 a barrel to $31 to $34 a barrel, roughly 18% less than 2014 cost. Results in cost savings for 2015 of $303 million versus $214 million unit rate cost. Our April production was not as strong, as we saw solid buildups in our bitumen column, which we took steps to remove, and impacted production somewhat in April. As a result, April production was approximately 123,000 barrels a day or 89% utilization. Through this work, it became apparent that we have an opportunity to further optimize production at Horizon. As a result, we moved forward the shutdown at the Horizon plant for the fall into June. And we'll take an additional 4 days to optimize the bitumen column. We anticipate we'll gain reliability and potentially have [ph] production by moving the shutdown into June. Even with the lower utilization in April, our year-to-date utilization rate is an impressive 96%, significantly higher than the 89% utilization rate in 2014 and 87% utilization rate we achieved in 2013. We continue to improve and are running at utilization rates that are top in class compared to other fully integrated peers in Fort McMurray. Production is running at 128,000 barrels a day today, and we target Q2 production between 107,000 and 113,000 barrels a day, reflecting the turnaround in our plan for Q2. The early production guidance for Horizon remains unchanged at 121,000 to 131,000 barrels a day. The overall Horizon Phase 2/3 expansion is going very well. As we've announced in March, we'll take advantage of some portions of the Phase 2b being completed ahead of schedule. That tie-in work can now be completed early and timed to coincide with the remaining turnaround work or scope in May 2016. We captured execution synergies, lower costs and improved production. Besides the execution synergies, 2016 will be positively impacted, as we will be able to produce roughly an additional 4,000 barrels a day after May 2016, and when the remainder of Phase 2b equipment is recommissioned on the original schedule in the fall of 2016, that commission will be smoother. As a result of ramp-up, the full 45,000 barrels a day in the fourth quarter will likely add an additional 10,000 barrels a day to the originally planned fourth quarter 2016 production volumes. Operating costs will be lower than planned as a result of the higher production volumes. Phase 3, the final 80,000 barrels portion of expansion will take us to 250,000 barrels a day of production is on track. We target mechanical completion in late 2017. And at this point, we do not see Phase 3 moving ahead of the targeted schedule as we see in both Phases 2a and Phase 2b. We're also not, at this point, anticipating any increase in nameplate design capacity of 45,000 barrels a day for Phase 2b or the 80,000 barrels a day for Phase 3, as we have seen in Phase 2a. The day we come fully onstream is getting close, with Phase 2b coming on in stages earlier than expected in 2016, with 45,000 barrels a day in Phase 3, and finally, 80,000 barrels a day completed by the end of 2017. Delivering 250,000 barrels a day of long-life, low-decline, sustainable, high-value, high netback production for decades to come. Horizon expansion is a key part of our transition to long-life, low-decline asset base and will add significant and sustainable free cash flow for decades to come. In a $70 world, we anticipate Horizon will add $3.3 billion of free cash flow per year. And for reference, in a $50 world, Horizon will deliver $1.6 billion of free cash flow per year. Canadian Natural has a strong and diversified balanced asset base that contains significant upside. In 2015, we'll progress that development of that upside with a focus on Horizon and Côte d'Ivoire. We are, however, preserving our resource base that contains significant upside, which as prices stabilize, will be able to develop in a disciplined, cost-effective manner when we choose. Our thermal assets have roughly 11 billion barrels to develop in a cost-effective manner. Falcon Lake roughly 550 million barrels to develop, and we have 8,000 primary heavy oil locations inventory. Significant, liquids-rich gas sands with over 1 million acres in the Montney and very large positions in the liquids-rich Deep Basin, plus nearly 500,000 acres in the Duvernay. Significant upside that our strategy allows us to maintain and develop in a cost-effective manner on a schedule that optimizes value for Canadian Natural's shareholders. Canadian Natural is built to withstand the low commodity price cycles. We have been here many times before, and each and every time, we come out of those cycles stronger than we went into the cycle. I expect this cycle to be no different. With that, I'll turn it over to Corey to talk about our strong financial position.

Thank you, Steve, and good morning, everyone. The first quarter of 2015 demonstrated Canadian Natural's financial and operational resilience and flexibility. Following a very significant reduction in commodity pricing, Canadian Natural was very quick and nimble in its reaction. Including the most recent $300 million reduction, since the original 2015 capital budget was issued last November, Canadian Natural has found cost savings or capital deferrals amounting to almost $2.9 billion or 33%. Conversely, based upon midpoint levels of guidance, we anticipate annual production growth of 11% over 2014 levels, a very significant achievement in light of how capital reinvestment has been altered. In my opinion, few companies would be able to effectively execute this type of capital flexibility in such a short period of time. Just as importantly, defined growth plan remained largely intact with the Horizon major project program continuing to help drive our transition to a more sustainable, low-decline, long-life asset base. We have operationally responded to the lower commodity prices. As Steve previously referenced, our average E&P operating cost per BOE has decreased 17% from the first quarter 2014, and our Horizon operating costs have decreased 28% per barrel from the first quarter of 2014. Additionally, through nimble reallocation of capital and cost reduction initiatives, we now expect to generate midpoint cash flow in excess of that required for current operations and dividends and still internally fund the vast majority of our $2.15 billion of major capital spend at Horizon. As Steve noted, at current pricing and production guidance, we would expect to generate approximately $6.6 billion in cash flow. Excluding Horizon major project capital spend, the capital associated with generating this cash flow is approximately $3.6 billion. After spending approximately $1 billion on corporate dividend program, our remaining free cash flow from ongoing operations was $2 billion, virtually in lock step with the targeted Horizon major product spend of $2.15 billion. Based upon strip pricing, foreign exchange rates and midpoint production guidance, we would currently anticipating -- we would currently anticipate exiting 2015 at about 2.2x debt to EBITDA on a trailing 12-month basis. This is well within any covenants and quite reasonable, given the current stage of the pricing cycle. These numbers do not include any potential monetization of the ever-growing royalty revenue streams. I would refer you to our press release to find a few more facts identified with respect to this stream. Turning to the quarterly results and against the backdrop of the 51% drop in WTI crude oil pricing, Q1 of '15 versus Q1 of '14, Canadian Natural incurred a net loss of $252 million. This loss was largely driven by the $413 million after-tax impact of marking our U.S. dollar-denominated debt to a weaker Canadian dollar. The other unusual item during the quarter related to the gain realized on the enactment of certain tax rate changes in the U.K. North Sea. The U.K. government reduced the supplementary charge on profits on oil and gas profits from 32% to 20% effective January 1, 2015, and reduced the petroleum revenue tax or PRT from 50% to 35% effective January 1, 2016. As a result of these changes, our future income tax liabilities were reduced by a combined $228 million. The effect of these changes reduced marginal tax rates, as Steve pointed out, on PRT paying fields from 81% to 67.5%. Importantly, the enactment also provided continued relief on decommissioning relief deeds at historic PRT rates on what amounts to a last-paid, first-recovered basis. So adjusting for these and other nonoperational items, the company generated adjusted net earnings of $21 million on a cash flow of $1.37 billion, largely in line with total capital expenditures of $1.4 billion. Our financial strength is bolstered by significant available liquidity. At the end of Q1 '15, we had approximately $3.3 billion of available bank line liquidity. I believe that we have prudently and methodically managed capital to both preserve capital created to date and value created to date and allow for optionality to generate incremental value to shareholders throughout the business cycle. I believe, Canadian Natural is financially strong and has a well thought-out plan for ongoing creation of shareholder value. The plan is complete with the optionality to protect in the downside and to proactively take advantages when they arise. Thank you. Back to Steve.

Thanks, Corey, and thanks, Doug. So operator, we're open for questions if there are any. Thank you.

[Operator Instructions] Your first question comes from the line of Greg Pardy from RBC Capital Markets.

Steve, 3 questions from me. The first one just around the turnaround in June, I may have missed it in the release. How long is this one at Horizon?

It's going to be 10 days versus 6 days originally planned.

Okay. And then -- okay, perfect. Second, maybe just aside from government policy and so on, you've got Kirby North and Grouse and just a fairly big arsenal of in situ projects to come. You've deferred spending, obviously, on Kirby North for now, but what -- is it strictly a matter of just an oil price recovery, and could we see that one moving back on to the shelf sometime next year?

I think, what we said with Kirby North is we're going to see -- we'll have to see what prices stabilize at. Also, as you can tell, we're working very hard at reducing the cost structure and reducing the costs going forward. Clearly, at Kirby North, a lot of those costs are sunk, as the equipment has been bought and the engineering is complete. So it's all on the construction side. They're working on to be more productive and more effective. So combined with the cost reductions and more stable oil prices, that'll be what the calls make [ph] at this point in time, we're not ready to make that call. So we'll keep you posted as we go along.

Okay. And then, the last thing, just a little bit about Pelican Lake. So this has become a success story, but it's given you guys, I know, challenges, technical challenges over the years. Can you frame it for us a little bit in terms of what the outlook looks like? And also, just interested in what the major lessons learned there on that polymer flood have been.

I don't know if I've got enough time to give you all those lessons learned on the polymer flood. As you know, this is a leading-edge technology used in heavy oil, probably the first time successfully. We're using with horizontal wells and a unique configuration. So the lessons really have been just as we're learning as we go. And I can give you all the details, but I don't think it's really worthwhile on the call, Greg, but it's just really a technical, operational thing. As you try something, it'll get a different response and we optimize, and then, we learn as we go. The more we do, the more we find. The more we find, the more we can do. So I don't think we're actually at the optimal level at Pelican Lake yet. Even though operating costs are an excellent $7.72 a barrel, we think we can do better. We think production can do better. We only have about 55% of the pool under polymer flood at this point in time, and we will effectively get most of the pool under polymer flood as we proceed. But it's just truly, as you said, a great technology success story for Canadian Natural and Canada.

Your next question comes from Sameer Uplenchwar of GMP Securities.

What I'm trying to understand is -- I mean, everybody is taking CapEx down and hunkering down, trying to save on cash flow. CNQ is one of the largest producers in Canada, in North America. And I'm trying to understand is, what are you seeing within your portfolio where you would put dollars back to work on the cost side? On the commodity side, what would make you change the view that, okay, our cash flow is going higher? Or you can see the cash flow going higher and put money back to work.

I think, Sameer, at this point in time, we need to see some stability, and we need to ensure that we're not getting sort of a lift and then fall back down in commodity prices. So we want to see some stability and longevity of the commodity prices. And we have to ensure that the commodity prices we have generate returns. And our capital has to compete for returns, and we have a 15% after-tax target. And as we get to that point, we feel that the pricing is solid, and we'll put capital back to work, but not before then.

And when you say some stability in commodity, like how -- just in the ballpark, are you seeing like $70 strip for 6 months? Like how should we think about that?

I think that's sort of a subjective answer, Sameer. I think it's sort of -- you have to kind of look at it and say, the strip looks good, but what's all the other outlooks [ph] going on there. So I think it's not one that I'm going to give a definitive answer to. We'll play it as we go along. We'll look at all the macro factors.

And then, on the flip side of the equation, on the costs front, you're seeing costs coming down 22% for liquids, 10% for gas in North America. What I'm trying to understand is, one, how much further can we go down this path? Where do you see it kind of bottoming out? And then the second is, if commodity prices do turn around, how -- what percent of these might be sustainable versus one-time or whatever relates to the commodity downturn, I guess?

Yes, thanks for that question, Sameer, because that's a very good question. As you probably heard in the last call, we're focused on sort of a 6-pronged frontier on reducing costs. And one of those prongs is reducing the margins that we're charged by suppliers, contractors and service providers. Our view is that those margins are not going to be sustainable unless commodity prices come up and that they will increase with time. So those aren't sustainable if commodity prices do rise. Our biggest focus has been on execution and right scoping and just enhancing our productivity. And we believe most of those costs will stay with us when commodity prices, if they do return to higher levels. So that'll be a long-lasting costs or lower-cost structure that we can carry forward with us in the future. So I would say, right now, the cost savings we have, I would say, probably, 25% to 30% of it may be actually from margins, but the rest of it's from just right scoping and productivity and execution enhancements.

Got it, got it. And last from me. I know that -- I mean, you discussed the NDP winning the election in Alberta. I'm just trying to understand, if with that and with the flux that brings into the situation with royalty, with taxes, have you changed any of your view regarding spending plans over the next 18, 24 months in the sense that you need to see more data points or what the NDP comes out with from a policy perspective before you decide to go ahead with any spending projects, anything else?

Yes, I think you know how we operate, Sameer. We like to get the facts and then make a decision on that. So we don't have any facts yet. We just got the platform. So we basically, are willing to work together and provide all the information that's required. And we'll respond appropriately when we understand what the platform and what the policies will be.

Your next question comes from Benny Wong from Morgan Stanley.

Steve, can you update us with your views on how the Kirby South is ramping up compared to your expectations? And do you think that we're kind of finally in the clear for the project to steadily ramp up to capacity?

Thanks, Benny. I'd say, to answer your second question first, yes, we're in the clear. I think we're on the ramp-up now. Obviously, we had facility issues that caused a bunch of well work damage that we're able to get around with stimulation. We had some failures that we fixed. The facilities are running fine and smooth now and have been for a while. And now you're seeing the ramp-up take off. I think what the most heartening thing about this thing is the thermal efficiencies are very, very strong with nice low SORs. So we're very encouraged. It has been delayed, which is unfortunate, but we're back on track now, and we expect to have it continue to ramp up to about 40,000 barrels a day.

Great. And then just -- is there -- can you update us on your views, on your hedging strategy. If we see commodity prices keep -- creep up a little further, could you see yourself maybe layering on a bunch of more hedges to kind of lock in your cash flow?

I think, Benny, when you look at it, look at our balance sheet, which Corey talked about, we're very strong. The balance and diversity in our asset base and the capital flexibility we have, we don't see the need to layer on hedges and commodity prices, particularly when they're at the lower end of this -- of what the range, we think, we should be in long term. So at this point in time, we are hesitant to do any kind of hedging.

Great. And just final one. Just if you can provide some color around the utilization of Horizon in April. I know it dipped a little bit. Was that something expected or is there something more to that?

It wasn't and that's why utilization is what it is. A lot of times, you have unexpected things. So what we had is we had some solids built up in the bitumen column. We took steps to remove that solid buildup, and there's ways to do that, normal techniques. But to do that, it reduces production while you're doing that. We removed much of the solids. But in the process of doing that, and that's why we moved the turnaround ahead, we've seen opportunities to optimize how we run that bitumen column. We can actually change the way the tray design is so that the solid buildups does not become an issue in the future, which will increase reliability going forward. And we believe -- although we can't say for sure, that's why we didn't change guidance. We believe there's an opportunity to actually increase production because of the new tray design. So that's why it's moved into June.

[Operator Instructions] Your next question comes from Chris Feltin from Macquarie.

A couple of quick questions. Here, the first one is pretty simple. I noticed that there was about $140 million of abandonment liabilities. Just wanting to confirm that, that's in the new total CapEx guidance of that $5.75 billion. Second question relates more on the natural gas marketing side here in Alberta specifically. A lot of companies commenting on firm transport versus interruptible transport. Just would like to hear your thoughts on what's going on there with the TCPL, Alliance systems, and how you guys sit in terms of your firm transport exposure versus the interruptible. And maybe a bit of a longer-term view in terms of how you think that this is going to resolve itself over time. Is this a short-term thing in your mind, or something that could be prolonged in terms of pricing for interruptible transport?

Thanks, Chris. I'll answer the second question first. On natural gas marketing, as you know, there has been restrictions on availability of transportation, particularly out of Northwestern Alberta. That hasn't impacted us to a large degree. We did get impacted a little bit there for a while in Q1. That's why our volumes were down a bit on gas. But overall, we believe we have enough firm transportation to handle all our gas going forward for the rest of the year. And I think we'll see these issues with transportation probably for the next couple of years and maybe in 2017 before TCPL gets the system enhanced or debottlenecked to additional gas. The rules have changed, as you know, in terms of how much transportation you have to sign up. You have to sign up for longer term. Until that time, if you're moving interruptible, you're probably going to take a discount on price.

Chris, with respect to the abandonment, yes, I can confirm all those capital costs are within -- are included in the capital cost guidance. So there's about $140 million in Canada, and embedded in the international cost, there's about $200 million-plus on the abandonment [indiscernible]. And if you work with IR, they can get you a little bit more detail on that if you want.

[Operator Instructions] You have another question from the line of Sameer Uplenchwar from GMP Securities.

As a follow-up, Steve, like you had said during this cycle that you wanted to look internally and grow organically versus when I look at the past cycles, you have always looked at deals and come out stronger on the other side and made accretive deals based on that commodity downturn. What is different in this cycle which is making you look inside rather than outside?

I think we look both ways, Sameer. But clearly, our asset base is very strong. There's no gaps in our portfolio. We have a tremendous asset base. And I think what's really important about this cycle, and we are no different than anybody else in the industry, we are taking advantage of this part of the cycle to really refocus on the cost structure and make our business much stronger overall as we go forward. But that doesn't mean we won't look at acquisitions, although we don't need to do any, we don't have any gaps on our portfolio.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, ladies and gentlemen, for participating in our conference call. Canadian Natural has a very strong and diverse asset base, a complementary balance of production and a strong well-developed plan for the systemic -- systematic development of this asset base. We concentrate on safe, efficient and reliable operations and a strong financial position, supported by readily available liquid resources. And finally, Canadian Natural retains significant capital expenditure program, flexibility to proactively adapt to changing market conditions, including volatile commodity prices. If you have any further questions, please give us a call. Thank you, again, and we look forward to our second quarter conference call in early August.

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