CNRL plans for capital budget changes if energy prices continue to slide

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Canadian Natural Resources Ltd.'s North American oil and gas projects will be the first of the company's plans to face cuts if low oil and gas prices force it to rethink its $8.6-billion capital budget for next year.

The company, which has assets around the world, on Thursday said it is capable of quickly trimming $2-billion from its spending plans if commodity prices make certain energy exploration and production unfavourable. The pain would be spread across a number of CNRL's businesses, but the first to take a hit will be CNRL's efforts in Canada and the United States. Development projects far from producing significant volumes of oil and gas would likely be the first to be targeted, CNRL president Steve Laut said.

Investors are hammering energy companies across the board as oil prices continue to spiral downward. Oil and gas companies are rolling out their 2015 budgets now, and trying to reassure investors they are nimble enough to reduce spending in some parts of their businesses if commodity prices get worse.

Mr. Laut said his company would make adjustments in a number of areas, but start on its home turf.

"The very first cutting would be in North America," Mr. Laut said in an interview after the company reported its third-quarter results. "If you had to just step in to it, you'd start seeing North America first, but then you'd see international [assets] come in the second wave."

The company said it can shave roughly $1.44-billion from its plans for North American exploration and production. That would be down 52 per cent from the $2.77-billion the company expects to spend in this area in 2015. CNRL's backup budget also includes cutting $260-million from its thermal oil sands business; $330-million from its international operations; and $20-million from its plans at its Horizon oil sands project. While possible cutbacks have been identified, none are being made right now.

Phil Skolnik, an analyst at Canaccord Genuity, argues CNRL's alternative budget makes it attractive.

CNRL's third-quarter results and budget "demonstrates that it provides both defense in a lower oil price environment while also yielding torque in a rising one," Mr. Skolnik said.

Mr. Laut noted that while CNRL would start cutting the North American budget first, it would not erase the entire $1.44-billion allotment before moving on to the next category.

CNRL is still in the process of cranking up production at its Horizon oil sands mine, which is a young project compared to its competitors. Producing oil in northern Alberta is notoriously expensive, but Mr. Laut believes Horizon can handle depressed energy prices.

Should oil trade at $70 (U.S.) a barrel, he believes Horizon can spin between $3.5-billion to $4-billion in free cash flow a year "for decades to come." If oil hovers around $81 a barrel, Horizon will produce roughly $4.5-billion to $5-billion in free cash flow a year. (This prediction assumes the Alberta benchmark for natural gas will trade at $3.45 a gigajoule, among other factors). Free cash flow is an important benchmark for energy companies. They use it to gauge their ability to fund projects. Investors are keen on companies that align spending with cash flow, particularly when commodity prices are rocky.

CNRL, which is now Canada's largest natural gas producer, reported net income of $1.03-billion or 94 cents a share in the third quarter, compared to $1.16-billion or $1.07 a share in the same quarter last year.