Canadian Natural Resources Limited
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
As at | Note | Jun 30 2021 | Dec 31 2020 | ||||||||||||||
(millions of Canadian dollars, unaudited) | |||||||||||||||||
ASSETS | |||||||||||||||||
Current assets | |||||||||||||||||
Cash and cash equivalents | $ | 168 | $ | 184 | |||||||||||||
Accounts receivable | 3,184 | 2,190 | |||||||||||||||
Current income taxes receivable | — | 309 | |||||||||||||||
Inventory | 1,214 | 1,060 | |||||||||||||||
Prepaids and other | 325 | 231 | |||||||||||||||
Investments | 6 | 469 | 305 | ||||||||||||||
Current portion of other long-term assets | 7 | 124 | 82 | ||||||||||||||
5,484 | 4,361 | ||||||||||||||||
Exploration and evaluation assets | 3 | 2,406 | 2,436 | ||||||||||||||
Property, plant and equipment | 4 | 64,993 | 65,752 | ||||||||||||||
Lease assets | 5 | 1,565 | 1,645 | ||||||||||||||
Other long-term assets | 7 | 579 | 1,082 | ||||||||||||||
$ | 75,027 | $ | 75,276 | ||||||||||||||
LIABILITIES | |||||||||||||||||
Current liabilities | |||||||||||||||||
Accounts payable | $ | 783 | $ | 667 | |||||||||||||
Accrued liabilities | 2,889 | 2,346 | |||||||||||||||
Current income taxes payable | 371 | — | |||||||||||||||
Current portion of long-term debt | 8 | 2,300 | 1,343 | ||||||||||||||
Current portion of other long-term liabilities | 5,9 | 718 | 722 | ||||||||||||||
7,061 | 5,078 | ||||||||||||||||
Long-term debt | 8 | 16,031 | 20,110 | ||||||||||||||
Other long-term liabilities | 5,9 | 7,443 | 7,564 | ||||||||||||||
Deferred income taxes | 10,285 | 10,144 | |||||||||||||||
40,820 | 42,896 | ||||||||||||||||
SHAREHOLDERS’ EQUITY | |||||||||||||||||
Share capital | 11 | 9,863 | 9,606 | ||||||||||||||
Retained earnings | 24,390 | 22,766 | |||||||||||||||
Accumulated other comprehensive (loss) income | 12 | (46) | 8 | ||||||||||||||
34,207 | 32,380 | ||||||||||||||||
$ | 75,027 | $ | 75,276 |
Commitments and contingencies (note 16).
Approved by the Board of Directors on August 4, 2021.
Canadian Natural Resources Limited | 1 | Three and six months ended June 30, 2021 |
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
(millions of Canadian dollars, except per common share amounts, unaudited) | Note | Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||||
Product sales | 17 | $ | 7,124 | $ | 2,944 | $ | 14,143 | $ | 7,596 | |||||||||||||||||||||||
Less: royalties | (599) | (73) | (1,010) | (225) | ||||||||||||||||||||||||||||
Revenue | 6,525 | 2,871 | 13,133 | 7,371 | ||||||||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||||||
Production | 1,740 | 1,409 | 3,521 | 3,093 | ||||||||||||||||||||||||||||
Transportation, blending and feedstock | 1,515 | 759 | 3,023 | 2,191 | ||||||||||||||||||||||||||||
Depletion, depreciation and amortization | 4,5 | 1,388 | 1,403 | 2,809 | 2,967 | |||||||||||||||||||||||||||
Administration | 87 | 88 | 182 | 196 | ||||||||||||||||||||||||||||
Share-based compensation | 9 | 137 | 23 | 266 | (200) | |||||||||||||||||||||||||||
Asset retirement obligation accretion | 9 | 46 | 51 | 92 | 103 | |||||||||||||||||||||||||||
Interest and other financing expense | 177 | 199 | 362 | 405 | ||||||||||||||||||||||||||||
Risk management activities | 15 | 28 | 32 | 57 | (32) | |||||||||||||||||||||||||||
Foreign exchange (gain) loss | (140) | (430) | (302) | 492 | ||||||||||||||||||||||||||||
Income from North West Redwater Partnership | 7 | (400) | — | (400) | — | |||||||||||||||||||||||||||
(Gain) loss from investments | 6 | (50) | (55) | (169) | 205 | |||||||||||||||||||||||||||
4,528 | 3,479 | 9,441 | 9,420 | |||||||||||||||||||||||||||||
Earnings (loss) before taxes | 1,997 | (608) | 3,692 | (2,049) | ||||||||||||||||||||||||||||
Current income tax expense (recovery) | 10 | 317 | (31) | 614 | (210) | |||||||||||||||||||||||||||
Deferred income tax expense (recovery) | 10 | 129 | (267) | 150 | (247) | |||||||||||||||||||||||||||
Net earnings (loss) | $ | 1,551 | $ | (310) | $ | 2,928 | $ | (1,592) | ||||||||||||||||||||||||
Net earnings (loss) per common share | ||||||||||||||||||||||||||||||||
Basic | 14 | $ | 1.31 | $ | (0.26) | $ | 2.47 | $ | (1.35) | |||||||||||||||||||||||
Diluted | 14 | $ | 1.30 | $ | (0.26) | $ | 2.46 | $ | (1.35) |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
(millions of Canadian dollars, unaudited) | Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||
Net earnings (loss) | $ | 1,551 | $ | (310) | $ | 2,928 | $ | (1,592) | |||||||||||||||||||||
Items that may be reclassified subsequently to net earnings (loss) | |||||||||||||||||||||||||||||
Net change in derivative financial instruments designated as cash flow hedges | |||||||||||||||||||||||||||||
Unrealized income (loss) during the period, net of taxes of $1 million (2020 – $2 million) – three months ended; $2 million (2020 – $3 million) – six months ended | 7 | (13) | 18 | 26 | |||||||||||||||||||||||||
Reclassification to net earnings (loss), net of taxes of $nil (2020 – $nil) – three months ended; $1 million (2020 – $1 million) – six months ended | (1) | (2) | (5) | (9) | |||||||||||||||||||||||||
6 | (15) | 13 | 17 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | |||||||||||||||||||||||||||||
Translation of net investment | (31) | (107) | (67) | 147 | |||||||||||||||||||||||||
Other comprehensive (loss) income, net of taxes | (25) | (122) | (54) | 164 | |||||||||||||||||||||||||
Comprehensive income (loss) | $ | 1,526 | $ | (432) | $ | 2,874 | $ | (1,428) |
Canadian Natural Resources Limited | 2 | Three and six months ended June 30, 2021 |
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Six Months Ended | |||||||||||||||||
(millions of Canadian dollars, unaudited) | Note | Jun 30 2021 | Jun 30 2020 | ||||||||||||||
Share capital | 11 | ||||||||||||||||
Balance – beginning of period | $ | 9,606 | $ | 9,533 | |||||||||||||
Issued upon exercise of stock options | 264 | 35 | |||||||||||||||
Previously recognized liability on stock options exercised for common shares | 39 | 9 | |||||||||||||||
Purchase of common shares under Normal Course Issuer Bid | (46) | (56) | |||||||||||||||
Balance – end of period | 9,863 | 9,521 | |||||||||||||||
Retained earnings | |||||||||||||||||
Balance – beginning of period | 22,766 | 25,424 | |||||||||||||||
Net earnings (loss) | 2,928 | (1,592) | |||||||||||||||
Dividends on common shares | 11 | (1,114) | (1,003) | ||||||||||||||
Purchase of common shares under Normal Course Issuer Bid | 11 | (190) | (215) | ||||||||||||||
Balance – end of period | 24,390 | 22,614 | |||||||||||||||
Accumulated other comprehensive (loss) income | 12 | ||||||||||||||||
Balance – beginning of period | 8 | 34 | |||||||||||||||
Other comprehensive (loss) income, net of taxes | (54) | 164 | |||||||||||||||
Balance – end of period | (46) | 198 | |||||||||||||||
Shareholders’ equity | $ | 34,207 | $ | 32,333 |
Canadian Natural Resources Limited | 3 | Three and six months ended June 30, 2021 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
(millions of Canadian dollars, unaudited) | Note | Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||||
Operating activities | ||||||||||||||||||||||||||||||||
Net earnings (loss) | $ | 1,551 | $ | (310) | $ | 2,928 | $ | (1,592) | ||||||||||||||||||||||||
Non-cash items | ||||||||||||||||||||||||||||||||
Depletion, depreciation and amortization | 1,388 | 1,403 | 2,809 | 2,967 | ||||||||||||||||||||||||||||
Share-based compensation | 137 | 23 | 266 | (200) | ||||||||||||||||||||||||||||
Asset retirement obligation accretion | 46 | 51 | 92 | 103 | ||||||||||||||||||||||||||||
Unrealized risk management loss (gain) | 10 | 1 | 30 | (16) | ||||||||||||||||||||||||||||
Unrealized foreign exchange (gain) loss | (151) | (433) | (323) | 688 | ||||||||||||||||||||||||||||
Realized foreign exchange gain on settlement of cross currency swaps | — | — | — | (166) | ||||||||||||||||||||||||||||
(Gain) loss from investments | 6 | (47) | (53) | (164) | 215 | |||||||||||||||||||||||||||
Deferred income tax expense (recovery) | 129 | (267) | 150 | (247) | ||||||||||||||||||||||||||||
Other | 72 | 13 | (27) | (105) | ||||||||||||||||||||||||||||
Abandonment expenditures | (58) | (40) | (138) | (129) | ||||||||||||||||||||||||||||
Net change in non-cash working capital | (137) | (739) | (147) | (144) | ||||||||||||||||||||||||||||
Cash flows from (used in) operating activities | 2,940 | (351) | 5,476 | 1,374 | ||||||||||||||||||||||||||||
Financing activities | ||||||||||||||||||||||||||||||||
(Repayment) issue of bank credit facilities and commercial paper, net | 8 | (1,588) | 184 | (2,988) | 833 | |||||||||||||||||||||||||||
Repayment of medium-term notes | 8 | — | (900) | — | (900) | |||||||||||||||||||||||||||
Issue of US dollar debt securities | 8 | — | 1,481 | — | 1,481 | |||||||||||||||||||||||||||
Proceeds on settlement of cross currency swaps | 15 | — | — | — | 166 | |||||||||||||||||||||||||||
Payment of lease liabilities | 5,9 | (52) | (61) | (105) | (126) | |||||||||||||||||||||||||||
Issue of common shares on exercise of stock options | 191 | 4 | 264 | 35 | ||||||||||||||||||||||||||||
Dividends on common shares | (557) | (502) | (1,060) | (946) | ||||||||||||||||||||||||||||
Purchase of common shares under Normal Course Issuer Bid | 11 | (213) | — | (236) | (271) | |||||||||||||||||||||||||||
Cash flows (used in) from financing activities | (2,219) | 206 | (4,125) | 272 | ||||||||||||||||||||||||||||
Investing activities | ||||||||||||||||||||||||||||||||
Net proceeds (expenditures) on exploration and evaluation assets | 3,17 | 3 | (1) | (1) | (8) | |||||||||||||||||||||||||||
Net expenditures on property, plant and equipment | 4,17 | (1,244) | (380) | (1,981) | (1,122) | |||||||||||||||||||||||||||
Repayment of North West Redwater Partnership subordinated debt advances | 7 | 555 | — | 555 | — | |||||||||||||||||||||||||||
Net change in non-cash working capital | (33) | (312) | 60 | (422) | ||||||||||||||||||||||||||||
Cash flows used in investing activities | (719) | (693) | (1,367) | (1,552) | ||||||||||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | 2 | (838) | (16) | 94 | ||||||||||||||||||||||||||||
Cash and cash equivalents – beginning of period | 166 | 1,071 | 184 | 139 | ||||||||||||||||||||||||||||
Cash and cash equivalents – end of period | $ | 168 | $ | 233 | $ | 168 | $ | 233 | ||||||||||||||||||||||||
Interest paid on long-term debt, net | $ | 142 | $ | 174 | $ | 354 | $ | 387 | ||||||||||||||||||||||||
Income taxes paid (received) | $ | 38 | $ | 31 | $ | (83) | $ | 72 | ||||||||||||||||||||||||
Canadian Natural Resources Limited | 4 | Three and six months ended June 30, 2021 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in millions of Canadian dollars, unless otherwise stated, unaudited)
1. ACCOUNTING POLICIES
Canadian Natural Resources Limited (the "Company") is a senior independent crude oil and natural gas exploration, development and production company. The Company's exploration and production operations are focused in North America, largely in Western Canada; the United Kingdom portion of the North Sea; and Côte d’Ivoire and South Africa in Offshore Africa.
The "Oil Sands Mining and Upgrading" segment produces synthetic crude oil through bitumen mining and upgrading operations at Horizon Oil Sands ("Horizon") and through the Company's direct and indirect interest in the Athabasca Oil Sands Project ("AOSP").
Within Western Canada in the "Midstream and Refining" segment, the Company maintains certain activities that include pipeline operations, an electricity co-generation system and an investment in the North West Redwater Partnership ("NWRP"), a general partnership formed to upgrade and refine bitumen in the Province of Alberta.
The Company was incorporated in Alberta, Canada. The address of its registered office is 2100, 855 - 2 Street S.W., Calgary, Alberta, Canada.
These interim consolidated financial statements and the related notes have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), applicable to the preparation of interim financial statements, including International Accounting Standard ("IAS") 34 "Interim Financial Reporting", following the same accounting policies as the audited consolidated financial statements of the Company as at December 31, 2020, except as disclosed in note 2. These interim consolidated financial statements contain disclosures that are supplemental to the Company's annual audited consolidated financial statements. Certain disclosures normally required to be included in the notes to the annual audited consolidated financial statements have been condensed. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2020.
Critical Accounting Estimates and Judgements
For the three and six months ended June 30, 2021, the novel coronavirus ("COVID-19") continued to have an impact on the global economy, including the oil and gas industry. Business conditions in the second quarter of 2021 continued to reflect the market uncertainty associated with COVID-19, with some improvements to global crude oil demand and supply conditions. The Company has taken into account the impacts of COVID-19 and the unique circumstances it has created in making estimates, assumptions and judgements in the preparation of the unaudited interim consolidated financial statements, and continues to monitor the developments in the business environment and commodity market. Actual results may differ from estimated amounts, and those differences may be material.
2. CHANGES IN ACCOUNTING POLICIES
In August 2020, the IASB issued Interest Rate Benchmark Reform (Phase 2) in response to the Financial Stability Board's mandated reforms to InterBank Offered Rates ("IBORs"), with financial regulators proposing that current IBOR benchmark rates be replaced by a number of new local currency denominated alternative benchmark rates. The Company retrospectively adopted the amendments on January 1, 2021. Adoption of these amendments did not have a significant impact on the Company's financial statements.
Canadian Natural Resources Limited | 5 | Three and six months ended June 30, 2021 |
3. EXPLORATION AND EVALUATION ASSETS
Exploration and Production | Oil Sands Mining and Upgrading | Total | |||||||||||||||||||||||||||||||||||||||
North America | North Sea | Offshore Africa | |||||||||||||||||||||||||||||||||||||||
Cost | |||||||||||||||||||||||||||||||||||||||||
At December 31, 2020 | $ | 2,101 | $ | — | $ | 83 | $ | 252 | $ | 2,436 | |||||||||||||||||||||||||||||||
Additions | 2 | — | 3 | — | 5 | ||||||||||||||||||||||||||||||||||||
Transfers to property, plant and equipment | (35) | — | — | — | (35) | ||||||||||||||||||||||||||||||||||||
At June 30, 2021 | $ | 2,068 | $ | — | $ | 86 | $ | 252 | $ | 2,406 |
4. PROPERTY, PLANT AND EQUIPMENT
Exploration and Production | Oil Sands Mining and Upgrading | Midstream and Refining | Head Office | Total | |||||||||||||||||||||||||||||||||||||
North America | North Sea | Offshore Africa | |||||||||||||||||||||||||||||||||||||||
Cost | |||||||||||||||||||||||||||||||||||||||||
At December 31, 2020 | $ | 73,997 | $ | 7,283 | $ | 3,963 | $ | 45,710 | $ | 457 | $ | 485 | $ | 131,895 | |||||||||||||||||||||||||||
Additions | 801 | 70 | 30 | 1,064 | 3 | 9 | 1,977 | ||||||||||||||||||||||||||||||||||
Transfers from E&E assets | 35 | — | — | — | — | — | 35 | ||||||||||||||||||||||||||||||||||
Derecognitions and other (1) | (190) | — | — | (300) | — | — | (490) | ||||||||||||||||||||||||||||||||||
Foreign exchange adjustments and other | — | (201) | (110) | — | — | — | (311) | ||||||||||||||||||||||||||||||||||
At June 30, 2021 | $ | 74,643 | $ | 7,152 | $ | 3,883 | $ | 46,474 | $ | 460 | $ | 494 | $ | 133,106 | |||||||||||||||||||||||||||
Accumulated depletion and depreciation | |||||||||||||||||||||||||||||||||||||||||
At December 31, 2020 | $ | 49,641 | $ | 5,853 | $ | 2,822 | $ | 7,289 | $ | 168 | $ | 370 | $ | 66,143 | |||||||||||||||||||||||||||
Expense | 1,698 | 81 | 63 | 836 | 7 | 12 | 2,697 | ||||||||||||||||||||||||||||||||||
Derecognitions and other (1) | (190) | — | — | (300) | — | — | (490) | ||||||||||||||||||||||||||||||||||
Foreign exchange adjustments and other | 14 | (167) | (79) | (5) | — | — | (237) | ||||||||||||||||||||||||||||||||||
At June 30, 2021 | $ | 51,163 | $ | 5,767 | $ | 2,806 | $ | 7,820 | $ | 175 | $ | 382 | $ | 68,113 | |||||||||||||||||||||||||||
Net book value | |||||||||||||||||||||||||||||||||||||||||
- at June 30, 2021 | $ | 23,480 | $ | 1,385 | $ | 1,077 | $ | 38,654 | $ | 285 | $ | 112 | $ | 64,993 | |||||||||||||||||||||||||||
- at December 31, 2020 | $ | 24,356 | $ | 1,430 | $ | 1,141 | $ | 38,421 | $ | 289 | $ | 115 | $ | 65,752 |
(1) An asset is derecognized when no future economic benefits are expected to arise from its continued use or disposal.
Canadian Natural Resources Limited | 6 | Three and six months ended June 30, 2021 |
5. LEASES
Lease assets
Product transportation and storage | Field equipment and power | Offshore vessels and equipment | Office leases and other | Total | |||||||||||||||||||||||||
At December 31, 2020 | $ | 1,038 | $ | 379 | $ | 128 | $ | 100 | $ | 1,645 | |||||||||||||||||||
Additions | 16 | 17 | — | 2 | 35 | ||||||||||||||||||||||||
Depreciation | (58) | (28) | (14) | (12) | (112) | ||||||||||||||||||||||||
Foreign exchange adjustments and other | — | — | (3) | — | (3) | ||||||||||||||||||||||||
At June 30, 2021 | $ | 996 | $ | 368 | $ | 111 | $ | 90 | $ | 1,565 | |||||||||||||||||||
Lease liabilities
The Company measures its lease liabilities at the discounted value of its lease payments during the lease term. Lease liabilities at June 30, 2021 were as follows:
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Lease liabilities | $ | 1,619 | $ | 1,690 | ||||||||||
Less: current portion | 186 | 189 | ||||||||||||
$ | 1,433 | $ | 1,501 |
Total cash outflows for leases for the three months ended June 30, 2021, including payments related to short-term leases not reported as lease assets, were $286 million (three months ended June 30, 2020 – $230 million; six months ended June 30, 2021 – $574 million; six months ended June 30, 2020 – $549 million). Interest expense on leases for the three months ended June 30, 2021 was $16 million (three months ended June 30, 2020 – $17 million; six months ended June 30, 2021 – $32 million; six months ended June 30, 2020 – $34 million).
6. INVESTMENTS
As at June 30, 2021, the Company had the following investments:
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Investment in PrairieSky Royalty Ltd. | $ | 340 | $ | 228 | ||||||||||
Investment in Inter Pipeline Ltd. | 129 | 77 | ||||||||||||
$ | 469 | $ | 305 |
The (gain) loss from the investments was comprised as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | ||||||||||||||||||||||||||
Fair value (gain) loss from investments | $ | (47) | $ | (53) | $ | (164) | $ | 215 | |||||||||||||||||||||
Dividend income from investments | (3) | (2) | (5) | (10) | |||||||||||||||||||||||||
$ | (50) | $ | (55) | $ | (169) | $ | 205 |
The Company's investments in PrairieSky Royalty Ltd. ("PrairieSky") and Inter Pipeline Ltd. ("Inter Pipeline") do not constitute significant influence, and are accounted for at fair value through profit or loss, measured at each reporting date. As at June 30, 2021, the Company's investments in PrairieSky and Inter Pipeline were classified as current assets.
The Company's investment in PrairieSky consists of approximately 22.6 million common shares. As at June 30, 2021, the market price per common share was $15.01 (December 31, 2020 – $10.09; June 30, 2020 – $8.58).
The Company's investment in Inter Pipeline consists of approximately 6.4 million common shares. As at June 30, 2021, the market price per common share was $20.15 (December 31, 2020 – $11.87; June 30, 2020 – $12.64).
Canadian Natural Resources Limited | 7 | Three and six months ended June 30, 2021 |
7. OTHER LONG-TERM ASSETS
Jun 30 2021 | Dec 31 2020 | |||||||||||||||||||||||||
North West Redwater Partnership ("NWRP") | $ | — | $ | 555 | ||||||||||||||||||||||
Prepaid cost of service tolls | 159 | 162 | ||||||||||||||||||||||||
Risk management (note 15) | 203 | 136 | ||||||||||||||||||||||||
Long-term inventory | 128 | 121 | ||||||||||||||||||||||||
Other (1) | 213 | 190 | ||||||||||||||||||||||||
703 | 1,164 | |||||||||||||||||||||||||
Less: current portion | 124 | 82 | ||||||||||||||||||||||||
$ | 579 | $ | 1,082 |
(1) Includes physical product sales contracts valued at $99 million at June 30, 2021 (December 31, 2020 - $111 million).
The Company has a 50% equity investment in NWRP. NWRP operates a 50,000 barrels per day bitumen upgrader and refinery that processes approximately 12,500 barrels per day (25% toll payer) of bitumen feedstock for the Company and 37,500 barrels per day (75% toll payer) of bitumen feedstock for the Alberta Petroleum Marketing Commission ("APMC"), an agent of the Government of Alberta. Sales of diesel and refined products and associated refining tolls are recognized in the Midstream and Refining segment (note 17).
On June 30, 2021, the equity partners together with the toll payers, agreed to optimize the structure of NWRP to better align the commercial interests of the equity partners and the toll payers (the "Optimization Transaction"). As a result, North West Refining Inc. transferred its entire 50% partnership interest in NWRP to APMC. The Company's 50% equity interest remained unchanged.
Under the Optimization Transaction, the original term of the processing agreements was extended by 10 years from 2048 to 2058. NWRP retired higher cost subordinated debt, which carried interest rates of prime plus 6%, with lower cost senior secured bonds at an average rate of approximately 2.55%, reducing interest costs to NWRP and associated tolls to the toll payers. As such, NWRP repaid the Company's and APMC's subordinated debt advances of $555 million each. In addition, the Company received a $400 million distribution from NWRP.
To facilitate the Optimization Transaction, NWRP issued $500 million of 1.20% series L senior secured bonds due December 2023, $500 million of 2.00% series M senior secured bonds due December 2026, $1,000 million of 2.80% series N senior secured bonds due June 2031, and $600 million of 3.75% series O senior secured bonds due June 2051. Additionally, NWRP's existing $3,500 million syndicated credit facility was amended. The $2,000 million revolving credit facility was extended by three years to June 2024, and the $1,500 million non-revolving credit facility was reduced by $500 million to $1,000 million and extended by two years to June 2023.
As at June 30, 2021, the cumulative unrecognized share of the equity loss from NWRP of $129 million and total partnership distributions in excess of the cumulative share of equity income, was $529 million (December 31, 2020 – $153 million; June 30, 2020 – $175 million). For the three months ended June 30, 2021, unrecognized equity income was $7 million, (six months ended June 30, 2021 – unrecognized equity income of $24 million; three months ended June 30, 2020 – unrecognized equity loss of $23 million; six months ended June 30, 2020 – unrecognized equity loss of $116 million).
Canadian Natural Resources Limited | 8 | Three and six months ended June 30, 2021 |
8. LONG-TERM DEBT
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Canadian dollar denominated debt, unsecured | ||||||||||||||
Bank credit facilities | $ | — | $ | 1,614 | ||||||||||
Medium-term notes | 3,200 | 3,200 | ||||||||||||
3,200 | 4,814 | |||||||||||||
US dollar denominated debt, unsecured | ||||||||||||||
Bank credit facilities (June 30, 2021 – US$2,973 million; December 31, 2020 – US$3,953 million) | 3,688 | 5,041 | ||||||||||||
Commercial paper (June 30, 2021 – US$550 million; December 31,2020 – US$426 million) | 682 | 544 | ||||||||||||
US dollar debt securities (June 30, 2021 – US$8,750 million; December 31, 2020 – US$8,750 million) | 10,854 | 11,161 | ||||||||||||
15,224 | 16,746 | |||||||||||||
Long-term debt before transaction costs and original issue discounts, net | 18,424 | 21,560 | ||||||||||||
Less: original issue discounts, net (1) | 17 | 18 | ||||||||||||
transaction costs (1) (2) | 76 | 89 | ||||||||||||
18,331 | 21,453 | |||||||||||||
Less: current portion of commercial paper | 682 | 544 | ||||||||||||
current portion of other long-term debt (1) (2) | 1,618 | 799 | ||||||||||||
$ | 16,031 | $ | 20,110 |
(1)The Company has included unamortized original issue discounts and premiums, and directly attributable transaction costs in the carrying amount of the outstanding debt.
(2)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 and Commercial Paper
As at June 30, 2021, the Company had undrawn revolving bank credit facilities of $4,959 million. Additionally, the Company had in place fully drawn term credit facilities of $3,650 million. Details of these facilities are described below. The Company also has certain other dedicated credit facilities supporting letters of credit. At June 30, 2021, the Company had $682 million drawn under its commercial paper program, and reserves capacity under its revolving bank credit facilities for amounts outstanding under this program.
•a $100 million demand credit facility;
•a $2,425 million revolving syndicated credit facility maturing June 2022;
•a $1,000 million non-revolving term credit facility maturing February 2023;
•a $2,650 million non-revolving term credit facility maturing February 2023;
•a $2,425 million revolving syndicated credit facility maturing June 2023; and
•a £5 million demand credit facility related to the Company’s North Sea operations.
Borrowings under the Company's non-revolving term credit facilities may be made by way of pricing referenced to Canadian dollar bankers' acceptances, US dollar bankers’ acceptances, LIBOR, US base rate or Canadian prime rate.
During the first quarter of 2021, the $1,000 million non-revolving term credit facility, originally due February 2022, was extended to February 2023.
During 2019, the Company entered into a $3,250 million non-revolving term credit facility with an original maturity of June 2022, to finance the acquisition of assets from Devon Canada Corporation. During the second quarter of 2021, the outstanding balance of $2,125 million was repaid and the facility was cancelled.
The revolving syndicated credit facilities are extendible annually 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. Borrowings under the Company's revolving term credit facilities may be made by way of pricing referenced to Canadian dollar bankers' acceptances, US dollar bankers' acceptances, LIBOR, US base rate or Canadian prime rate.
Canadian Natural Resources Limited | 9 | Three and six months ended June 30, 2021 |
The Company’s borrowings under its US commercial paper program are authorized up to a maximum of US$2,500 million. The Company reserves capacity under its revolving bank credit facilities for amounts outstanding under this program.
The Company’s weighted average interest rate on bank credit facilities and commercial paper outstanding as at June 30, 2021 was 1.0% (June 30, 2020 – 1.4%), and on total long-term debt outstanding for the six months ended June 30, 2021 was 3.4% (June 30, 2020 – 3.7%).
As at June 30, 2021, letters of credit and guarantees aggregating to $492 million were outstanding.
Medium-Term Notes
As at June 30, 2021, the Company had $2,200 million remaining on its base shelf prospectus that allowed for the offer for sale from time to time of up to $3,000 million of medium-term notes in Canada. Subsequent to June 30, 2021, the Company filed a base shelf prospectus that allows for the offer for sale from time to time of up to $3,000 million of medium-term notes in Canada, which expires in August 2023, replacing the Company's previous base shelf prospectus, which would have expired in August 2021. If issued, these securities may be offered in amounts and at prices, including interest rates, to be determined based on market conditions at the time of issuance.
US Dollar Debt Securities
As at June 30, 2021, the Company had US$1,900 million remaining on its base shelf prospectus that allowed for the offer for sale from time to time of up to US$3,000 million of debt securities in the United States. Subsequent to June 30, 2021, the Company filed a base shelf prospectus that allows for the offer for sale from time to time of up to US$3,000 million of debt securities in the United States, which expires in August 2023, replacing the Company's previous base shelf prospectus, which would have expired in August 2021. If issued, these securities may be offered in amounts and at prices, including interest rates, to be determined based on market conditions at the time of issuance.
Subsequent to June 30, 2021, the Company filed a notice for the early repayment of US$500 million of 3.45% debt securities in August 2021, originally due November 2021.
9. OTHER LONG-TERM LIABILITIES
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Asset retirement obligations | $ | 5,787 | $ | 5,861 | ||||||||||
Lease liabilities (note 5) | 1,619 | 1,690 | ||||||||||||
Share-based compensation | 350 | 160 | ||||||||||||
Risk management (note 15) | 64 | 160 | ||||||||||||
Transportation and processing contracts | 226 | 270 | ||||||||||||
Other (1) | 115 | 145 | ||||||||||||
8,161 | 8,286 | |||||||||||||
Less: current portion | 718 | 722 | ||||||||||||
$ | 7,443 | $ | 7,564 |
(1) Includes $47 million related to the acquisition of the Joslyn oil sands project in 2018, payable in annual installments of $25 million over the next two years.
Canadian Natural Resources Limited | 10 | Three and six months ended June 30, 2021 |
Asset Retirement Obligations
The Company’s asset retirement obligations are expected to be settled on an ongoing basis over a period of approximately 60 years and discounted using a weighted average discount rate of 3.7% (December 31, 2020 – 3.7%) and inflation rates of up to 2% (December 31, 2020 – up to 2%). Reconciliations of the discounted asset retirement obligations were as follows:
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Balance – beginning of period | $ | 5,861 | $ | 5,771 | ||||||||||
Liabilities incurred | 4 | 5 | ||||||||||||
Liabilities acquired, net | — | 13 | ||||||||||||
Liabilities settled | (138) | (249) | ||||||||||||
Asset retirement obligation accretion | 92 | 205 | ||||||||||||
Revision of cost and timing estimates | (6) | (134) | ||||||||||||
Change in discount rates | — | 253 | ||||||||||||
Foreign exchange adjustments | (26) | (3) | ||||||||||||
Balance – end of period | 5,787 | 5,861 | ||||||||||||
Less: current portion | 132 | 184 | ||||||||||||
$ | 5,655 | $ | 5,677 |
Share-Based Compensation
The liability for share-based compensation includes costs incurred under the Company’s Stock Option Plan and Performance Share Unit ("PSU") plans. The Company’s Stock Option Plan provides current employees with the right to elect to receive common shares or a cash payment in exchange for stock options surrendered. The PSU plan provides certain executive employees of the Company with the right to receive a cash payment, the amount of which is determined by individual employee performance and the extent to which certain other performance measures are met.
The Company recognizes a liability for potential cash settlements under these plans. The current portion of the liability represents the maximum amount of the liability payable within the next twelve month period if all vested stock options and PSUs are settled in cash.
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Balance – beginning of period | $ | 160 | $ | 297 | ||||||||||
Share-based compensation expense (recovery) | 266 | (82) | ||||||||||||
Cash payment for stock options surrendered and PSUs vested | (39) | (39) | ||||||||||||
Transferred to common shares | (39) | (21) | ||||||||||||
Other | 2 | 5 | ||||||||||||
Balance – end of period | 350 | 160 | ||||||||||||
Less: current portion | 268 | 119 | ||||||||||||
$ | 82 | $ | 41 |
Included within share-based compensation liability as at June 30, 2021 was $47 million related to PSUs granted to certain executive employees (December 31, 2020 – $49 million).
Canadian Natural Resources Limited | 11 | Three and six months ended June 30, 2021 |
10. INCOME TAXES
The provision for income tax was as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
Expense (recovery) | Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||
Current corporate income tax – North America | $ | 324 | $ | (34) | $ | 609 | $ | (228) | |||||||||||||||||||||
Current corporate income tax – North Sea | (5) | 1 | 6 | 10 | |||||||||||||||||||||||||
Current corporate income tax – Offshore Africa | 7 | 2 | 11 | 6 | |||||||||||||||||||||||||
Current PRT (1) – North Sea | (12) | — | (17) | — | |||||||||||||||||||||||||
Other taxes | 3 | — | 5 | 2 | |||||||||||||||||||||||||
Current income tax | 317 | (31) | 614 | (210) | |||||||||||||||||||||||||
Deferred income tax | 129 | (267) | 150 | (247) | |||||||||||||||||||||||||
Income tax | $ | 446 | $ | (298) | $ | 764 | $ | (457) |
(1) Petroleum Revenue Tax
11. SHARE CAPITAL
Authorized
Preferred shares issuable in a series.
Unlimited number of common shares without par value.
Six Months Ended Jun 30, 2021 | ||||||||||||||
Issued common shares | Number of shares (thousands) | Amount | ||||||||||||
Balance – beginning of period | 1,183,866 | $ | 9,606 | |||||||||||
Issued upon exercise of stock options | 7,369 | 264 | ||||||||||||
Previously recognized liability on stock options exercised for common shares | — | 39 | ||||||||||||
Purchase of common shares under Normal Course Issuer Bid | (5,640) | (46) | ||||||||||||
Balance – end of period | 1,185,595 | $ | 9,863 |
Dividend Policy
The Company has paid regular quarterly dividends in each year since 2001. The dividend policy undergoes periodic review by the Board of Directors and is subject to change.
On March 3, 2021, the Board of Directors declared a quarterly dividend of $0.47 per common share, an increase from the previous quarterly dividend of $0.425 per common share.
Normal Course Issuer Bid
On March 9, 2021, the Company's application was approved for a Normal Course Issuer Bid to purchase through the facilities of the Toronto Stock Exchange, alternative Canadian trading platforms, and the New York Stock Exchange, up to 59,278,474 common shares, over a 12-month period commencing March 11, 2021 and ending March 10, 2022.
For the six months ended June 30, 2021, the Company purchased 5,640,000 common shares at a weighted average price of $41.89 per common share for a total cost of $236 million. Retained earnings were reduced by $190 million, representing the excess of the purchase price of common shares over their average carrying value. Subsequent to June 30, 2021, the Company purchased 5,404,400 common shares at a weighted average price of $42.12 per common share for a total cost of $228 million.
Canadian Natural Resources Limited | 12 | Three and six months ended June 30, 2021 |
Share-Based Compensation – Stock Options
The following table summarizes information relating to stock options outstanding at June 30, 2021:
Six Months Ended Jun 30, 2021 | ||||||||||||||
Stock options (thousands) | Weighted average exercise price | |||||||||||||
Outstanding – beginning of period | 48,656 | $ | 37.53 | |||||||||||
Granted | 11,390 | $ | 32.93 | |||||||||||
Exercised for common shares | (7,369) | $ | 35.89 | |||||||||||
Surrendered for cash settlement | (451) | $ | 37.25 | |||||||||||
Forfeited | (2,070) | $ | 35.79 | |||||||||||
Outstanding – end of period | 50,156 | $ | 36.80 | |||||||||||
Exercisable – end of period | 14,333 | $ | 40.79 |
The Stock Option Plan is a "rolling 7%" plan, whereby the aggregate number of common shares that may be reserved for issuance under the plan shall not exceed 7% of the common shares outstanding from time to time.
12. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income, net of taxes, were as follows:
Jun 30 2021 | Jun 30 2020 | |||||||||||||
Derivative financial instruments designated as cash flow hedges | $ | 82 | $ | 88 | ||||||||||
Foreign currency translation adjustment | (128) | 110 | ||||||||||||
$ | (46) | $ | 198 |
13. CAPITAL DISCLOSURES
The Company has defined its capital to mean its long-term debt and consolidated shareholders’ equity, as determined at 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 financial measure referred to as its "debt to book capitalization ratio", which is the arithmetic ratio of net current and long-term debt divided by the sum of the carrying value of shareholders’ equity plus net current and long-term debt. The Company's internal targeted range for its debt to book capitalization ratio is 25% to 45%. This range may be exceeded in periods when a combination of capital projects, acquisitions, or lower commodity prices occurs. The Company may be below the low end of the targeted range when cash flow from operating activities is greater than current investment activities. At June 30, 2021, the ratio was within the target range at 34.7%.
Readers are cautioned that the debt to book capitalization ratio is not defined by IFRS and this financial measure may not be comparable to similar measures presented by other companies. Further, there are 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 in the future.
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Long-term debt, net (1) | $ | 18,163 | $ | 21,269 | ||||||||||
Total shareholders’ equity | $ | 34,207 | $ | 32,380 | ||||||||||
Debt to book capitalization | 34.7% | 39.6% |
(1)Includes the current portion of long-term debt, net of cash and cash equivalents.
The Company is subject to a financial covenant that requires debt to book capitalization as defined in its credit facility agreements to not exceed 65%. At June 30, 2021, the Company was in compliance with this covenant.
Canadian Natural Resources Limited | 13 | Three and six months ended June 30, 2021 |
14. NET EARNINGS (LOSS) PER COMMON SHARE
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||||||
Weighted average common shares outstanding – basic (thousands of shares) | 1,185,301 | 1,180,925 | 1,185,425 | 1,182,031 | ||||||||||||||||||||||||||||
Effect of dilutive stock options (thousands of shares) | 5,163 | — | 3,038 | — | ||||||||||||||||||||||||||||
Weighted average common shares outstanding – diluted (thousands of shares) | 1,190,464 | 1,180,925 | 1,188,463 | 1,182,031 | ||||||||||||||||||||||||||||
Net earnings (loss) | $ | 1,551 | $ | (310) | $ | 2,928 | $ | (1,592) | ||||||||||||||||||||||||
Net earnings (loss) per common share | – basic | $ | 1.31 | $ | (0.26) | $ | 2.47 | $ | (1.35) | |||||||||||||||||||||||
– diluted | $ | 1.30 | $ | (0.26) | $ | 2.46 | $ | (1.35) |
15. FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments by category were as follows:
Jun 30, 2021 | ||||||||||||||||||||||||||||||||
Asset (liability) | Financial assets at amortized cost | Fair value through profit or loss | Derivatives used for hedging | Financial liabilities at amortized cost | Total | |||||||||||||||||||||||||||
Accounts receivable | $ | 3,184 | $ | — | $ | — | $ | — | $ | 3,184 | ||||||||||||||||||||||
Investments | — | 469 | — | — | 469 | |||||||||||||||||||||||||||
Other long-term assets | — | 3 | 200 | — | 203 | |||||||||||||||||||||||||||
Accounts payable | — | — | — | (783) | (783) | |||||||||||||||||||||||||||
Accrued liabilities | — | — | — | (2,889) | (2,889) | |||||||||||||||||||||||||||
Other long-term liabilities (1) | — | (64) | — | (1,666) | (1,730) | |||||||||||||||||||||||||||
Long-term debt (2) | — | — | — | (18,331) | (18,331) | |||||||||||||||||||||||||||
$ | 3,184 | $ | 408 | $ | 200 | $ | (23,669) | $ | (19,877) |
Dec 31, 2020 | ||||||||||||||||||||||||||||||||
Asset (liability) | Financial assets at amortized cost | Fair value through profit or loss | Derivatives used for hedging | Financial liabilities at amortized cost | Total | |||||||||||||||||||||||||||
Accounts receivable | $ | 2,190 | $ | — | $ | — | $ | — | $ | 2,190 | ||||||||||||||||||||||
Investments | — | 305 | — | — | 305 | |||||||||||||||||||||||||||
Other long-term assets | 555 | — | 136 | — | 691 | |||||||||||||||||||||||||||
Accounts payable | — | — | — | (667) | (667) | |||||||||||||||||||||||||||
Accrued liabilities | — | — | — | (2,346) | (2,346) | |||||||||||||||||||||||||||
Other long-term liabilities (1) | — | (52) | (108) | (1,762) | (1,922) | |||||||||||||||||||||||||||
Long-term debt (2) | — | — | — | (21,453) | (21,453) | |||||||||||||||||||||||||||
$ | 2,745 | $ | 253 | $ | 28 | $ | (26,228) | $ | (23,202) |
(1)Includes $1,619 million of lease liabilities (December 31, 2020 – $1,690 million) and $47 million of deferred purchase consideration payable over the next two years (December 31, 2020 – $72 million).
(2)Includes the current portion of long-term debt.
Canadian Natural Resources Limited | 14 | Three and six months ended June 30, 2021 |
The carrying amounts of the Company's financial instruments approximated their fair value, except for fixed rate long-term debt. The fair values of the Company's investments, recurring other long-term assets (liabilities) and fixed rate long-term debt are outlined below:
Jun 30, 2021 | |||||||||||||||||||||||||||||
Carrying amount | Fair value | ||||||||||||||||||||||||||||
Asset (liability) (1) (2) | Level 1 | Level 2 | Level 3 (4) | ||||||||||||||||||||||||||
Investments (3) | $ | 469 | $ | 469 | $ | — | $ | — | |||||||||||||||||||||
Other long-term assets | $ | 203 | $ | — | $ | 203 | $ | — | |||||||||||||||||||||
Other long-term liabilities | $ | (111) | $ | — | $ | (64) | $ | (47) | |||||||||||||||||||||
Fixed rate long-term debt (6) (7) | $ | (13,961) | $ | (16,093) | $ | — | $ | — |
Dec 31, 2020 | |||||||||||||||||||||||||||||
Carrying amount | Fair value | ||||||||||||||||||||||||||||
Asset (liability) (1) (2) | Level 1 | Level 2 | Level 3 (4) (5) | ||||||||||||||||||||||||||
Investments (3) | $ | 305 | $ | 305 | $ | — | $ | — | |||||||||||||||||||||
Other long-term assets | $ | 691 | $ | — | $ | 136 | $ | 555 | |||||||||||||||||||||
Other long-term liabilities | $ | (232) | $ | — | $ | (160) | $ | (72) | |||||||||||||||||||||
Fixed rate long-term debt (6) (7) | $ | (14,254) | $ | (16,598) | $ | — | $ | — |
(1)Excludes financial assets and liabilities where the carrying amount approximates fair value due to the short-term nature of the asset or liability (cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities).
(2)There were no transfers between Level 1, 2 and 3 financial instruments.
(3)The fair values of the investments are based on quoted market prices.
(4)The fair value of the deferred purchase consideration included in other long-term liabilities is based on the present value of future cash payments.
(5)The fair value of NWRP subordinated debt was based on the present value of future cash receipts.
(6)The fair value of fixed rate long-term debt has been determined based on quoted market prices.
(7)Includes the current portion of fixed rate long-term debt.
Risk Management
The Company periodically uses derivative financial instruments to manage its commodity price, interest rate and foreign currency exposures. These financial instruments are entered into solely for hedging purposes and are not used for speculative purposes.
The following provides a summary of the carrying amounts of derivative financial instruments held and a reconciliation to the Company's consolidated balance sheets.
Asset (liability) | Jun 30 2021 | Dec 31 2020 | ||||||||||||
Derivatives held for trading | ||||||||||||||
Natural gas fixed price swaps | $ | (26) | $ | (5) | ||||||||||
Natural gas basis swaps | (38) | (40) | ||||||||||||
Foreign currency forward contracts | 3 | (7) | ||||||||||||
Cash flow hedges | ||||||||||||||
Foreign currency forward contracts | 67 | (108) | ||||||||||||
Cross currency swaps | 133 | 136 | ||||||||||||
$ | 139 | $ | (24) | |||||||||||
Included within: | ||||||||||||||
Current portion of other long-term assets | $ | 75 | $ | 5 | ||||||||||
Current portion of other long-term liabilities | (39) | (131) | ||||||||||||
Other long-term assets | 128 | 131 | ||||||||||||
Other long-term liabilities | (25) | (29) | ||||||||||||
$ | 139 | $ | (24) |
Canadian Natural Resources Limited | 15 | Three and six months ended June 30, 2021 |
For the six months ended June 30, 2021, the ineffectiveness arising from cash flow hedges was $nil (year ended December 31, 2020 – loss of $1 million).
The estimated fair values of derivative financial instruments in Level 2 at each measurement date have been determined based on appropriate internal valuation methodologies and/or third party indications. Level 2 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 primarily relied on external, readily-observable quoted market inputs as applicable, including crude oil and natural gas forward benchmark commodity prices and volatility, Canadian and United States interest rate yield curves, and Canadian and United States forward foreign exchange rates, discounted to present value as appropriate. 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:
Asset (liability) | Jun 30 2021 | Dec 31 2020 | ||||||||||||
Balance – beginning of period | $ | (24) | $ | 178 | ||||||||||
Net change in fair value of outstanding derivative financial instruments recognized in: | ||||||||||||||
Risk management activities | (9) | (32) | ||||||||||||
Foreign exchange | 158 | (168) | ||||||||||||
Other comprehensive income (loss) | 14 | (2) | ||||||||||||
Balance – end of period | 139 | (24) | ||||||||||||
Less: current portion | 36 | (126) | ||||||||||||
$ | 103 | $ | 102 |
Net loss (gain) from risk management activities were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
Jun 30 2021 | Jun 30 2020 | Jun 30 2021 | Jun 30 2020 | |||||||||||||||||||||||||||||||||||
Net realized risk management loss (gain) | $ | 18 | $ | 31 | $ | 27 | $ | (16) | ||||||||||||||||||||||||||||||
Net unrealized risk management loss (gain) | 10 | 1 | 30 | (16) | ||||||||||||||||||||||||||||||||||
$ | 28 | $ | 32 | $ | 57 | $ | (32) |
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.
Canadian Natural Resources Limited | 16 | Three and six months ended June 30, 2021 |
Commodity price risk management
The Company periodically uses commodity derivative financial instruments to manage its exposure to commodity price risk associated with the sale of its future crude oil and natural gas production and with natural gas purchases.
At June 30, 2021, the Company had the following derivative financial instruments outstanding:
Remaining term | Weighted average volume | Weighted average price | Index | |||||||||||||||||||||||
Natural Gas | ||||||||||||||||||||||||||
Fixed price swap | Jul 2021 | – | Dec 2021 | 32,584 GJ/d | $2.00/GJ | AECO | ||||||||||||||||||||
Jul 2021 | – | Dec 2021 | 20,027 MMBtu/d | US$2.40/MMBtu | DAWN | |||||||||||||||||||||
Jul 2021 | – | Dec 2021 | 16,685 MMBtu/d | US$2.52/MMBtu | NYMEX | |||||||||||||||||||||
Jul 2021 | – | Dec 2021 | 15,000 MMBtu/d | US$2.62/MMBtu | SUMAS | |||||||||||||||||||||
Differential swap | Jul 2021 | – | Aug 2021 | 20,000 GJ/d | $0.29/GJ | AECO-STN 2 | ||||||||||||||||||||
Basis swap | Jul 2021 | – | Dec 2023 | 54,978 MMBtu/d | US$1.23/MMBtu | AECO | ||||||||||||||||||||
Jan 2024 | – | Dec 2025 | 20,000 MMBtu/d | US$0.97/MMBtu | AECO | |||||||||||||||||||||
Jul 2021 | – | Dec 2021 | 20,000 MMBtu/d | US$0.09/MMBtu | DAWN |
The Company's outstanding commodity derivative financial instruments are expected to be settled monthly based on the applicable index pricing for the respective contract month.
Interest rate risk management
The Company is exposed to interest rate price risk on its fixed rate long-term debt and to interest rate cash flow risk on its floating rate long-term debt. The Company periodically enters into interest rate swap contracts to manage its fixed to floating interest rate mix on long-term debt. Interest rate swap contracts require the periodic exchange of payments without the exchange of the notional principal amounts on which the payments are based. At June 30, 2021, the Company had no interest rate swap contracts outstanding.
Foreign currency exchange rate risk management
The Company is exposed to foreign currency exchange rate risk in Canada primarily related to its US dollar denominated long-term debt, commercial paper and working capital. The Company is also exposed to foreign currency exchange rate risk on transactions conducted in other currencies and in the carrying value of its foreign subsidiaries. The Company periodically enters into cross currency swap contracts and foreign currency forward contracts to manage known currency exposure on US dollar denominated long-term debt, commercial paper and working capital. The cross currency swap contract requires the periodic exchange of payments with the exchange at maturity of notional principal amounts on which the payments are based.
At June 30, 2021, the Company had the following cross currency swap contract outstanding:
Remaining term | Amount | Exchange rate (US$/C$) | Interest rate (US$) | Interest rate (C$) | |||||||||||||||||||
Cross currency | |||||||||||||||||||||||
Swap | Jul 2021 | – | Mar 2038 | US$550 | 1.170 | 6.25 | % | 5.76 | % |
The cross currency swap derivative financial instrument was designated as a hedge at June 30, 2021 and was classified as a cash flow hedge.
In addition to the cross currency swap contract noted above, at June 30, 2021, the Company had US$4,056 million of foreign currency forward contracts outstanding, with original terms of up to 90 days, including US$3,523 million designated as cash flow hedges.
b) Credit risk
Credit risk is the risk that a party to a financial instrument will cause a financial loss to the Company by failing to discharge an obligation.
Canadian Natural Resources Limited | 17 | Three and six months ended June 30, 2021 |
Counterparty credit risk management
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. At June 30, 2021, substantially all of the Company's accounts receivable were 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 counterparties that are substantially all investment grade financial institutions. At June 30, 2021, the Company had net risk management assets of $170 million with specific counterparties related to derivative financial instruments (December 31, 2020 – $129 million).
The carrying amount of financial assets approximates the maximum credit exposure.
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, commercial paper and access to debt capital markets, to meet obligations as they become due. The Company believes it has adequate bank credit facilities to provide liquidity to manage fluctuations in the timing of the receipt and/or disbursement of operating cash flows.
The maturity dates of the Company's financial liabilities were as follows:
Less than 1 year | 1 to less than 2 years | 2 to less than 5 years | Thereafter | ||||||||||||||||||||
Accounts payable | $ | 783 | $ | — | $ | — | $ | — | |||||||||||||||
Accrued liabilities | $ | 2,889 | $ | — | $ | — | $ | — | |||||||||||||||
Long-term debt (1) | $ | 2,300 | $ | 4,931 | $ | 3,109 | $ | 8,084 | |||||||||||||||
Other long-term liabilities (2) | $ | 250 | $ | 189 | $ | 414 | $ | 877 | |||||||||||||||
Interest and other financing expense (3) | $ | 694 | $ | 629 | $ | 1,505 | $ | 4,123 |
(1)Long-term debt represents principal repayments only and does not reflect interest, original issue discounts and premiums or transaction costs.
(2)Lease payments included within other long-term liabilities reflect principal payments only and are as follows; less than one year, $186 million; one to less than two years, $153 million; two to less than five years, $403 million; and thereafter, $877 million.
(3)Includes interest and other financing expense on long-term debt and other long-term liabilities. Payments were estimated based upon applicable interest and foreign exchange rates at June 30, 2021.
Canadian Natural Resources Limited | 18 | Three and six months ended June 30, 2021 |
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has committed to certain payments. The following table summarizes the Company's commitments as at June 30, 2021:
Remaining 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||
Product transportation and processing (1) | $ | 442 | $ | 838 | $ | 907 | $ | 846 | $ | 811 | $ | 10,360 | |||||||||||||||||||||||
North West Redwater Partnership service toll (2) | $ | 63 | $ | 123 | $ | 123 | $ | 122 | $ | 119 | $ | 3,784 | |||||||||||||||||||||||
Offshore vessels and equipment | $ | 33 | $ | 41 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Field equipment and power | $ | 14 | $ | 21 | $ | 21 | $ | 21 | $ | 21 | $ | 246 | |||||||||||||||||||||||
Other | $ | 14 | $ | 21 | $ | 20 | $ | 21 | $ | 21 | $ | 16 |
(1)Includes commitments pertaining to a 20-year product transportation agreement on the Trans Mountain Pipeline Expansion.
(2)Pursuant to the processing agreements, the Company pays its 25% pro rata share of the debt component of the monthly fee-for-service toll. Included in the toll is $1,546 million of interest payable over the 40-year tolling period (note 7).
In addition to the commitments disclosed above, the Company has entered into various agreements related to the engineering, procurement and construction of its various development projects. These contracts can be cancelled by the Company upon notice without penalty, subject to the costs incurred up to and in respect of the cancellation.
The Company is defendant and plaintiff in a number of legal actions arising in the normal course of business. In addition, the Company is subject to certain contractor construction claims. 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 | 19 | Three and six months ended June 30, 2021 |
17. SEGMENTED INFORMATION
North America | North Sea | Offshore Africa | Total Exploration and Production | ||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | ||||||||||||||||||||||||||||||||||||||||||||||
(millions of Canadian dollars, unaudited) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
Segmented product sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil and NGLs | 3,446 | 974 | 6,541 | 2,824 | 69 | 99 | 269 | 232 | 140 | 22 | 218 | 106 | 3,655 | 1,095 | 7,028 | 3,162 | |||||||||||||||||||||||||||||||||||||
Natural gas | 453 | 256 | 939 | 531 | 1 | 2 | 2 | 10 | 10 | 12 | 15 | 20 | 464 | 270 | 956 | 561 | |||||||||||||||||||||||||||||||||||||
Other income and revenue (1) | 22 | 21 | 53 | 11 | — | 2 | — | 3 | 1 | 1 | 3 | 3 | 23 | 24 | 56 | 17 | |||||||||||||||||||||||||||||||||||||
Total segmented product sales | 3,921 | 1,251 | 7,533 | 3,366 | 70 | 103 | 271 | 245 | 151 | 35 | 236 | 129 | 4,142 | 1,389 | 8,040 | 3,740 | |||||||||||||||||||||||||||||||||||||
Less: royalties | (395) | (65) | (680) | (179) | (1) | (1) | (1) | (1) | (6) | (1) | (10) | (5) | (402) | (67) | (691) | (185) | |||||||||||||||||||||||||||||||||||||
Segmented revenue | 3,526 | 1,186 | 6,853 | 3,187 | 69 | 102 | 270 | 244 | 145 | 34 | 226 | 124 | 3,740 | 1,322 | 7,349 | 3,555 | |||||||||||||||||||||||||||||||||||||
Segmented expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Production | 714 | 585 | 1,441 | 1,294 | 54 | 67 | 168 | 161 | 26 | 13 | 47 | 35 | 794 | 665 | 1,656 | 1,490 | |||||||||||||||||||||||||||||||||||||
Transportation, blending and feedstock | 1,144 | 546 | 2,290 | 1,616 | 2 | 4 | 4 | 11 | — | — | — | — | 1,146 | 550 | 2,294 | 1,627 | |||||||||||||||||||||||||||||||||||||
Depletion, depreciation and amortization | 881 | 871 | 1,749 | 1,826 | 19 | 76 | 87 | 175 | 44 | 27 | 75 | 68 | 944 | 974 | 1,911 | 2,069 | |||||||||||||||||||||||||||||||||||||
Asset retirement obligation accretion | 25 | 23 | 50 | 50 | 5 | 8 | 10 | 15 | 2 | 2 | 3 | 3 | 32 | 33 | 63 | 68 | |||||||||||||||||||||||||||||||||||||
Risk management activities (commodity derivatives) | 17 | 4 | 36 | 6 | — | — | — | — | — | — | — | — | 17 | 4 | 36 | 6 | |||||||||||||||||||||||||||||||||||||
Income from North West Redwater Partnership | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Total segmented expenses | 2,781 | 2,029 | 5,566 | 4,792 | 80 | 155 | 269 | 362 | 72 | 42 | 125 | 106 | 2,933 | 2,226 | 5,960 | 5,260 | |||||||||||||||||||||||||||||||||||||
Segmented earnings (loss) before the following | 745 | (843) | 1,287 | (1,605) | (11) | (53) | 1 | (118) | 73 | (8) | 101 | 18 | 807 | (904) | 1,389 | (1,705) | |||||||||||||||||||||||||||||||||||||
Non–segmented expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Administration | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest and other financing expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Risk management activities (other) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange (gain) loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Gain) loss from investments | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total non–segmented expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings (loss) before taxes | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Current income tax expense (recovery) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income tax expense (recovery) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings (loss) |
Canadian Natural Resources Limited | 20 | Three and six months ended June 30, 2021 |
Oil Sands Mining and Upgrading | Midstream and Refining | Inter–segment elimination and other | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | Jun 30 | ||||||||||||||||||||||||||||||||||||||||||||||
(millions of Canadian dollars, unaudited) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
Segmented product sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Crude oil and NGLs (2) | 2,794 | 1,343 | 5,777 | 3,547 | 21 | 20 | 40 | 41 | (88) | 4 | (175) | 35 | 6,382 | 2,462 | 12,670 | 6,785 | |||||||||||||||||||||||||||||||||||||
Natural gas | — | — | — | — | — | — | — | — | 45 | 37 | 108 | 83 | 509 | 307 | 1,064 | 644 | |||||||||||||||||||||||||||||||||||||
Other income and revenue (1) | 30 | 103 | 40 | 100 | 171 | 25 | 302 | 25 | 9 | 23 | 11 | 25 | 233 | 175 | 409 | 167 | |||||||||||||||||||||||||||||||||||||
Total segmented product sales | 2,824 | 1,446 | 5,817 | 3,647 | 192 | 45 | 342 | 66 | (34) | 64 | (56) | 143 | 7,124 | 2,944 | 14,143 | 7,596 | |||||||||||||||||||||||||||||||||||||
Less: royalties | (197) | (6) | (319) | (40) | — | — | — | — | — | — | — | — | (599) | (73) | (1,010) | (225) | |||||||||||||||||||||||||||||||||||||
Segmented revenue | 2,627 | 1,440 | 5,498 | 3,607 | 192 | 45 | 342 | 66 | (34) | 64 | (56) | 143 | 6,525 | 2,871 | 13,133 | 7,371 | |||||||||||||||||||||||||||||||||||||
Segmented expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Production | 850 | 730 | 1,688 | 1,539 | 79 | 29 | 142 | 35 | 17 | (15) | 35 | 29 | 1,740 | 1,409 | 3,521 | 3,093 | |||||||||||||||||||||||||||||||||||||
Transportation, blending and feedstock (2) | 294 | 183 | 591 | 453 | 134 | 22 | 239 | 22 | (59) | 4 | (101) | 89 | 1,515 | 759 | 3,023 | 2,191 | |||||||||||||||||||||||||||||||||||||
Depletion, depreciation and amortization | 441 | 451 | 891 | 891 | 3 | 3 | 7 | 7 | — | (25) | — | — | 1,388 | 1,403 | 2,809 | 2,967 | |||||||||||||||||||||||||||||||||||||
Asset retirement obligation accretion | 14 | 18 | 29 | 35 | — | — | — | — | — | — | — | — | 46 | 51 | 92 | 103 | |||||||||||||||||||||||||||||||||||||
Risk management activities (commodity derivatives) | — | — | — | — | — | — | — | — | — | — | — | — | 17 | 4 | 36 | 6 | |||||||||||||||||||||||||||||||||||||
Income from North West Redwater Partnership | — | — | — | — | (400) | — | (400) | — | — | — | — | — | (400) | — | (400) | — | |||||||||||||||||||||||||||||||||||||
Total segmented expenses | 1,599 | 1,382 | 3,199 | 2,918 | (184) | 54 | (12) | 64 | (42) | (36) | (66) | 118 | 4,306 | 3,626 | 9,081 | 8,360 | |||||||||||||||||||||||||||||||||||||
Segmented earnings (loss) before the following | 1,028 | 58 | 2,299 | 689 | 376 | (9) | 354 | 2 | 8 | 100 | 10 | 25 | 2,219 | (755) | 4,052 | (989) | |||||||||||||||||||||||||||||||||||||
Non–segmented expenses | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Administration | 87 | 88 | 182 | 196 | |||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | 137 | 23 | 266 | (200) | |||||||||||||||||||||||||||||||||||||||||||||||||
Interest and other financing expense | 177 | 199 | 362 | 405 | |||||||||||||||||||||||||||||||||||||||||||||||||
Risk management activities (other) | 11 | 28 | 21 | (38) | |||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange (gain) loss | (140) | (430) | (302) | 492 | |||||||||||||||||||||||||||||||||||||||||||||||||
(Gain) loss from investments | (50) | (55) | (169) | 205 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total non-segmented expenses | 222 | (147) | 360 | 1,060 | |||||||||||||||||||||||||||||||||||||||||||||||||
Earnings (loss) before taxes | 1,997 | (608) | 3,692 | (2,049) | |||||||||||||||||||||||||||||||||||||||||||||||||
Current income tax expense (recovery) | 317 | (31) | 614 | (210) | |||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income tax expense (recovery) | 129 | (267) | 150 | (247) | |||||||||||||||||||||||||||||||||||||||||||||||||
Net earnings (loss) | 1,551 | (310) | 2,928 | (1,592) |
(1) Includes the sale of diesel and other refined products and other income, including government grants and recoveries associated with the joint operations partners' share of the costs of lease contracts.
(2) Includes blending and feedstock costs associated with the processing of third party bitumen and other purchased feedstock in the Oil Sands Mining and Upgrading segment.
Canadian Natural Resources Limited | 21 | Three and six months ended June 30, 2021 |
Capital Expenditures (1)
Six Months Ended | ||||||||||||||||||||||||||||||||||||||
Jun 30, 2021 | Jun 30, 2020 | |||||||||||||||||||||||||||||||||||||
Net expenditures (proceeds) | Non-cash and fair value changes (2) | Capitalized costs | Net expenditures | Non-cash and fair value changes (2) | Capitalized costs | |||||||||||||||||||||||||||||||||
Exploration and evaluation assets | ||||||||||||||||||||||||||||||||||||||
Exploration and Production | ||||||||||||||||||||||||||||||||||||||
North America | $ | (2) | $ | (31) | $ | (33) | $ | 7 | $ | (64) | $ | (57) | ||||||||||||||||||||||||||
Offshore Africa | 3 | — | 3 | 1 | — | 1 | ||||||||||||||||||||||||||||||||
$ | 1 | $ | (31) | $ | (30) | $ | 8 | $ | (64) | $ | (56) | |||||||||||||||||||||||||||
Property, plant and equipment | ||||||||||||||||||||||||||||||||||||||
Exploration and Production | ||||||||||||||||||||||||||||||||||||||
North America | $ | 799 | $ | (153) | $ | 646 | $ | 483 | $ | (988) | $ | (505) | ||||||||||||||||||||||||||
North Sea | 76 | (6) | 70 | 43 | (114) | (71) | ||||||||||||||||||||||||||||||||
Offshore Africa | 30 | — | 30 | 41 | (29) | 12 | ||||||||||||||||||||||||||||||||
905 | (159) | 746 | 567 | (1,131) | (564) | |||||||||||||||||||||||||||||||||
Oil Sands Mining and Upgrading (3) | 1,064 | (300) | 764 | 539 | (482) | 57 | ||||||||||||||||||||||||||||||||
Midstream and Refining | 3 | — | 3 | 3 | (1) | 2 | ||||||||||||||||||||||||||||||||
Head office | 9 | — | 9 | 13 | — | 13 | ||||||||||||||||||||||||||||||||
$ | 1,981 | $ | (459) | $ | 1,522 | $ | 1,122 | $ | (1,614) | $ | (492) |
(1)This table provides a reconciliation of capitalized costs, reported in note 3 and note 4, to net expenditures reported in the investing activities section of the statements of cash flows. The reconciliation excludes the impact of foreign exchange adjustments.
(2)Derecognitions, asset retirement obligations, transfer of exploration and evaluation assets, and other fair value adjustments.
(3)Net expenditures includes the acquisition of a 5% net carried interest on an existing oil sands lease in the second quarter of 2021, capitalized interest and share-based compensation.
Segmented Assets
Jun 30 2021 | Dec 31 2020 | |||||||||||||
Exploration and Production | ||||||||||||||
North America | $ | 28,607 | $ | 29,094 | ||||||||||
North Sea | 1,476 | 1,624 | ||||||||||||
Offshore Africa | 1,415 | 1,407 | ||||||||||||
Other | 82 | 81 | ||||||||||||
Oil Sands Mining and Upgrading | 42,343 | 41,567 | ||||||||||||
Midstream and Refining | 912 | 1,301 | ||||||||||||
Head office | 192 | 202 | ||||||||||||
$ | 75,027 | $ | 75,276 |
Canadian Natural Resources Limited | 22 | Three and six months ended June 30, 2021 |
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 July 2019. 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 June 30, 2021: | |||||
Interest coverage (times) | |||||
Net earnings (1) | 7.7x | ||||
Adjusted funds flow (2) | 14.5x |
(1)Net earnings plus income taxes and interest expense; divided by the sum of interest expense and capitalized interest.
(2)Adjusted funds flow plus current income taxes and interest expense; divided by the sum of interest expense and capitalized interest.
Canadian Natural Resources Limited | 23 | Three and six months ended June 30, 2021 |