Canadian Natural Resources Ltd Q2 FY2022 Earnings Call

Good morning. We would like to welcome everyone to the Canadian Natural Resources 2022 Second Quarter Earnings Conference Call and Webcast. After the presentation, we will conduct a question-and-answer session. Instructions will be given at that time. Please note that this call is being recorded today, August 4, 2022, at 9:00 a.m. Mountain Time. I would now like to turn the meeting over to your host for today's call, Lance Casson, Manager of Investor Relations. Please go ahead, sir.

Thank you, operator, good morning everyone, and welcome to Canadian Natural's Second Quarter 2022 Results Conference Call. Before we begin, I would like to remind you of our forward-looking statements and it should be noted that in our reporting disclosures, everything is in Canadian dollars unless otherwise stated, and reported reserves and production before royalties. Additionally, I would suggest you review our comments on non-GAAP disclosures in our financial statements. With me this morning is Tim McKay, our President, and Mark Stainthorpe, our Chief Financial Officer. Tim will first provide highlights of our ESG achievements evident in our 2021 stewardship report to stakeholders that was published today and how strong execution and efficiency so far this year have Canadian Natural in a unique position to maximize value for our shareholders by executing on additional strategic growth opportunities. This will be followed by an overview of the quarter, including specifics of our world-class assets and operations. Mark will then provide an update on our strong financial position, substantial free cash flow generation, and increasing returns to shareholders. To close, Tim will summarize our call prior to opening up the line for questions. With that, I'll turn it over to you Tim.

Thank you, Lance. Good morning, everyone. Canadian Natural posted impressive operational results in the second quarter of 2022. We reached a quarterly production of about 1.21 million BOEs per day, including a record natural gas output of around 2.1 Bcf per day. Our liquids production was strong at approximately 860,000 barrels per day after completing planned maintenance on our oil sands mining assets. This, along with our commitment to capital discipline, generated substantial free cash flow as we balanced this with our four pillars of capital allocation, significantly benefiting our shareholders with about $6.4 billion returned through dividends and share buybacks. We are applying the same effort to our ESG initiatives, which are crucial for our long-term sustainability. Moving forward, we will continuously outline our strategy to reduce carbon emissions across our assets, working towards our goal of net-zero GHG emissions in the oil sands by 2050. Canadian Natural leads in R&D investments, having increased expenditure in this area by 33% compared to 2020, culminating in a $450 million investment in 2021. This investment will grow as we engage with the Pathways Alliance. Canadian Natural also collaborates with 144 indigenous-owned businesses, having awarded $572 million in contracts in 2021, a 17% increase over the previous year. The oil sands pathway to net-zero initiative, now termed the Pathway Alliance, was introduced in June 2021 with a clear plan to cut annual emissions by 22 megatons by 2030 and achieve net-zero emissions by 2050. The support from the federal government via the investment tax credit, along with additional backing from the Alberta government, will be vital to achieving these emission reductions. The tax credit represents a commendable approach, allowing industry and government to co-invest in CCUS infrastructure, significantly reducing Canada's GHG emissions. Recently, Environment and Climate Change Canada proposed a GHG emission cap for the oil and gas sector, which we view as unnecessary and overly ambitious, as we believe collaboration is essential to reach significant emission reduction targets. Thus, it’s imperative that all parties continue to cooperate. Canadian Natural has executed strongly with its drilling program in 2022, drilling 22 net-operated wells ahead of projections, split evenly between thermal in situ and conventional E&P wells, with per well drilling costs aligning with the budget while enhancing efficiencies to counter inflationary pressures. Consequently, we are adjusting our 2022 capital expenditures, raising the base capital by around 5%, or $200 million, now targeting approximately $3.845 billion primarily due to inflationary expectations across all operational areas including steel, manufactured goods, services, and labor. We now aim to direct roughly $1,075 million towards strategic growth capital, an increase of about $375 million from original projections, which will enable drilling of an additional 41 net conventional E&P wells and 50 net thermal in situ wells, effectively filling the latter half of our drilling program, including pipelines, facility work, and extra non-op activity. We will advance liquid-rich Montney natural gas projects, which will boost capacity by roughly 140 million cubic feet of natural gas and 25,500 barrels a day of liquids in future years, alongside long-lead thermal in situ initiatives offshore Africa, and additional shovels and tailings pipe for Horizon. Consequently, our guidance has increased to a production range of 1,295,000 to 1,535,000 BOEs per day, driven by efficiency gains and heightened capital investment in both conventional natural gas and E&P crude oil liquids. I will now provide a summary of our assets, starting with natural gas. Our overall natural gas production for Q2 2022 reached 2.1 Bcf, a record for the company and a 5% increase over Q1 2022. Our North American operations generated 2.05 Bcf in Q2, up from 1.99 Bcf in Q1, mainly due to our strategic decision to invest in our drilling field strategy, enhancing low-cost, high-value liquid-rich natural gas production volumes, complemented by opportunistic acquisitions. Our Q2 2022 natural gas operating costs were robust at $1.15 per Mcf, a 10% decrease compared to Q1 2022's $1.28, showcasing solid operational performance as our teams remain focused on operational excellence. Notable highlights include six wells at Townsend producing in Q2 2022 with a strong capital efficiency of approximately $4,500 per BUED, with July production at roughly 54 million cubic feet per day. At Essence, three wells came online late in Q1 2022, achieving about $2,800 per BUED, with total July production of approximately 32 million cubic feet per day and 560 barrels a day of liquids. Canadian Natural's diversified sales for natural gas saw pricing at $7.93 per Mcf in Q2, marking a 51% rise compared to Q1 2022 and about 30% above the key benchmark price in Q2, thus enhancing the economics of our low-cost liquid-rich natural gas projects. For North American light oil and NGL, Q2 production increased by 2% from Q1 2022, mainly attributed to strong drilling outcomes and earlier acquisitions. Q2 2022 operating costs were $1,519 per barrel, on par with Q1 2022's $1,524. At Wembley, nine liquid-rich Montney wells are currently producing around 8,200 barrels a day of liquids and 27 million cubic feet of natural gas in July, exceeding budget while maximizing existing facility capacity at a capital efficiency of approximately $3,400 per BUED. Our international assets produced 25,097 barrels of oil in Q2, a decline from Q1 levels primarily due to unplanned maintenance in New York. Offshore Africa's annual production in Q2 was 15,119 barrels per day, down from 15,742 barrels per day in Q1, with Q2 operating costs at $1,573 per barrel. In the North Sea, average production in Q2 was only 10,788 barrels per day compared to 15,961 barrels per day in Q1, with Q2 operating costs at $8,438 per barrel. Our international assets continue to generate free cash flow and value for the company. Regarding heavy oil production, it averaged 66,521 barrels per day in Q2, increasing by 5% from Q1, mainly due to strong drilling results and heightened development activity. Q2 operating costs rose to $2,286 per barrel from $2,200 per barrel in Q1, primarily due to increased trucking costs. At Smith, in the Clearwater play, Canadian Natural drilled 12 horizontal multilateral wells on four pads, with current production from these wells around 4,400 barrels a day, achieving a strong capital efficiency of approximately $6,300 per BOE per day. Canadian Natural has now completed a total of 19 wells in 2022, with Clearwater production exceeding 10,000 barrels a day, up from approximately 3,900 barrels a day at the start of the year. As part of our strategic capital growth plan, we are identifying further opportunities on our extensive undeveloped Clearwater land base of about 940,000 net acres. A key aspect of our long-life low decline assets includes the world-class Pelican Lake pool, where a cutting-edge polymer flood continues to provide significant value. Q2 production averaged 51,112 barrels per day, slightly down from the Q1 average of 51,991 barrels per day, reflecting the low decline nature of this property. Our teams continue to perform admirably. We recorded favorable Q2 operating costs of $799 per barrel, up from $748 per barrel in Q1 2022. Given our low decline and very low operating costs, Pelican Lake continues to deliver excellent netback. In our thermal in situ operations for 2022, we are leveraging a culture of continuous improvement and our expertise to execute effective and efficient operations. Q2 2022 production fell to 249,938 barrels a day from 261,743 barrels a day in Q1. Q2 operating costs were $18.93 per barrel, higher compared to Q1 of 2022, where costs were at $1,435 per barrel, largely due to rising energy costs. As part of our initial thermal in situ strategic growth plan released in January, and due to efficiencies achieved so far, we are now aiming for an extra 15 net in situ wells originally planned for 2023, totaling around $45 million in capital investment, which encompasses pipelines and facilities. Canadian Natural is now targeting to drill a total of 117 net in situ wells in 2022. In line with our capital update, we plan to advance engineering and long leads for two thermal in situ pads, aiming to add approximately 28,000 barrels a day of capacity by 2026. At the company’s oil sands' Mining and Upgrading assets, Q2 production averaged 356,953 barrels a day of SCO, down from Q1 levels mainly due to major turnarounds at Scotford and Horizon plants during the quarter. Q2 operating costs were $3,376 per barrel of SCO, driven primarily by decreased production volumes from turnarounds and increased energy-related costs. The planned turnaround at Horizon was completed very successfully, eight days ahead of the anticipated 32-day schedule, while at the non-op Scotford Upgrader, it extended 17 days beyond the estimated 65 days. At Horizon, the reliability enhancement project is advancing according to plan. As part of the capital update, we are set to add further shovels and tailings pipe at Horizon to support this reliability initiative. I'll now turn it over to Mark for the financial review.

Thanks, Tim. Good morning, everyone. Our second quarter financial results were very strong on the back of safe, effective, and efficient operations and a robust pricing environment, including a strong SCO premium to WTI. In Q2, net earnings were $3.5 billion, and adjusted funds flow were $5.4 billion, allowing for significant allocation to shareholder returns through dividends and share buybacks, further debt repayment, and to strategic growth opportunities, all providing long-term shareholder value. Returns to shareholders have been significant and increasing through 2022. We have returned a total of approximately $6.4 billion to shareholders through $2.4 billion in dividends and $4 billion through share repurchases, equating to about 56 million shares year-to-date, up until August 3. Our base dividend is growing and sustainable, supported by our long life low decline assets. On March 2, 2022, the Board of Directors approved a 28% increase to our quarterly dividend to $0.75 per share, or $3 per share annually. This continues the company's leading track record of 22 consecutive years of dividend increases, with a significant compound annual growth rate of 22% over that period. Strong execution across the company's operations has resulted in substantial free cash flow generation, driven by our large and balanced asset base with a top-tier cost structure. As a result, our financial position continues to strengthen with net debt balances targeted to continue to decrease, and we remain committed to being balanced on allocation to our four pillars. This includes incremental strategic capital to growth opportunities that provide incremental production, and to increasing returns to shareholders, where the Board of Directors approved a special dividend of $1.50 per share, payable on August 31, 2022, to shareholders of record on August 23, 2022, which is an addition to our regular quarterly dividend. At the same time, shareholder returns have significantly increased in 2022, and our strong financial position continues to get stronger. Net debt decreased to $12.4 billion in Q2, down $1.4 billion in the quarter, and it is targeted to decline further through the year. As part of our financial strength, we continue to maintain strong liquidity, including revolving bank facilities, cash, and short-term investments, with liquidity at the end of Q2 approximately $6.1 billion. We remain committed to our balanced approach to capital allocation as our unique high-quality reserve base, long life low decline production, and leading cost structure drives substantial and sustainable free cash flow. This provides significant opportunity for value growth, increasing returns to shareholders, and further financial strength, setting Canadian Natural apart from the global peer group. With that, I'll turn it back to you Tim.

Thank you, Mark. Canadian Natural's advantage is our ability to effectively allocate cash flow to our four pillars. We have a well-balanced, diverse, large asset base, with a significant portion being long life low decline, which requires less capital to maintain. We continue to allocate cash flow to our four pillars in a disciplined manner to maximize value for our shareholders, which is all driven by effective capital allocation and our teams who delivered top-tier results. We have robust, sustainable free cash flow. Through our free cash flow allocation policy, returns to shareholders are significant. Our dividend was increased by 28% for the 22nd consecutive year in March, with a CAGR of over 22% over that time. Year-to-date, up to including August 3, Canadian Natural has returned approximately $6.4 billion to shareholders through approximately $2.4 billion in dividends and $4 billion in share repurchases. In August, the Board of Directors approved an increase to returns to shareholders by declaring a special dividend of $1.50 per share payable on August 31, to shareholders of record on August 23, 2022. In summary, we continue to focus on our safe, reliable operations, and enhancing our top tier operations will continue to drive our environmental performance. We are in a very strong position, being nimble, and enhancing our ability to create value for our shareholders. Canadian Natural delivers top-tier free cash flow generation, which is unique, sustainable, robust, and clearly demonstrates our ability to both economically grow the business and deliver returns to shareholders by balancing our four pillars. With that, I'll now open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. One moment, please for your first question. Your first question comes from Dennis Fong of CIBC World Markets. Please go ahead.

Hi, good morning, and thanks for taking my questions. I think I'm going to start with the capital allocation perspective. Having announced this $1.50 per share special, how should we be thinking about and understanding that you continue to allocate 50:50 between buybacks and debt repayment? How should we be thinking about potential future special dividends? And what were some of the prior catalysts that drove that decision here today?

Hi, Dennis, it's Mark. I think the best way to answer that is, we are committed to our balanced allocation, as Tim and I talked about today on the free cash flow, and that includes shareholder returns. And that's shown in our track record. As you mentioned, our free cash flow allocation policy. Our board will continue to review incremental returns to shareholders going forward as part of our quarterly process and our free cash flow allocation policy.

Great, thanks. Maybe the follow-up that I have here is around the Pike asset you discussed to thermal at Pike. Obviously, now that you've consolidated the working interest as an asset, is it more along the lines of that you're sourcing steam from one of your existing either Kirby South or Jackfish? Or is there a kind of a new Central Processing Facility and steam generation capacity in that region to tackle that 20,000 barrels a day?

Yes, it's Tim McKay here. Yes, with the Pike assets, as you indicated, we've consolidated that and we're now 100%. With that, we're able to leverage the Jackfish and Kirby facilities to basically use existing assets to increase production. So yes, it's very cost-effective. As you know, doing pad adds versus Greenfield facilities. So, yes, with the facilities we have in the area, we're able to leverage that and do these pad adds into those various facilities.

Great, thanks. I'll turn it back. Thank you.

Thank you.

Thank you. The next question comes from Greg Pardy of RBC. Please go ahead.

Thanks and thanks for the rundown. A couple of operating questions, Tim, probably more aimed at you. The first one is just on your input extraction, just reading the release, it looks as though you're a bit more serious on that, and then also interested in whether you're pursuing autonomous haul trucks, just in ASOP Horizon?

Yes, the in-pit is just work in progress. Obviously, with most of these projects, you have to do a lot of engineering work upfront. To me, it's just normal course. If there's an opportunity there, we'll bring it forward to the board for their blessing. Right now, it's not in our plan, but the teams at both mining sites are looking at a lot of different options to increase our production, whether it's parasitic or increasing the SEO production at both sites. The teams are always looking for creative ways to increase production and lower costs. So that's really what it's all about.

Okay. And then just related to autonomous haul trucks; are you considering that option?

It may be an option in the future but if you look at our efficiencies on our trucks and the way we operate, it's not necessarily a good option today. Our people are very safe, and we have very high efficiency on our trucks. So at this time, it's an option; it's available maybe in the future but right now, our teams are doing such a great job that it really doesn't make sense at this time.

Okay, and just raising the second question then I guess would have been on just your oil sands mining OpEx rate. I mean, the plan a few years ago and numbers you've hit before were around CAD 20 a barrel. Gas prices are a lot higher, diesel is higher, and everything else, like when you're kind of running down the fairway with Horizon ASOP in the world we're living in now, how should we think about OpEx?

Well, when you look at the underlying efficiencies, the teams are actually doing a very good job managing the costs we can control. We'll probably be in the low 20s as an average, but if you look at the underlying fuel costs, they have basically doubled. They were at $1.50, and now they're close to $3. So just in that piece, the underlying costs show that our teams are doing very well. If we get the production volumes and keep it reliable on both sites, it will remain in the low 20s.

Thank you. The next question comes from Doug Leggate from Bank of America. Please go ahead.

Hello, this is David Fernandez in for Doug. Just wanted to touch first on the realization front on the gas side, particularly robust in the quarter. Can you provide maybe some color around the mix with regard to the diversified points of sales and your ability to optimize the portfolio to redirect the volumes to premium pricing locations?

Yes, Dave. We've always taken a diverse product diversification portfolio on the natural gas side. If you look at our total portfolio, 37% is allocated for exports. So that's really what it is; we've diversified our portfolio, which we've always indicated was the best way to maximize value, not just for the fact that markets do change at times. We are seeing those benefits this last quarter.

Got it. And on the capital raise, the increase in Montney activity. Can you maybe speak on, beyond the broader supportive natural gas price environment? Are there any underlying takeaways regarding your view around the regulatory front, particularly as it relates to your mining acreage in BC versus Alberta? How that might have impacted your plans?

We are confident that the BC government will address the BC issue in the near future, but it is not currently affecting us. The Federal Creek project is fully on-site, primarily focused on managing the liquid-rich Montney. There will be no short-term impact. The facility is grounded in our Montney Grand Prairie acreage, and at this moment, it does not affect us, and we believe the BC government will resolve it.

Got it, well I appreciate the color. Thank you for taking my questions.

Thank you.

Thank you. The next question comes from Menno Hulshof with TD Securities. Please go ahead.

Thanks, good morning, everyone. I'll start with a question on the Clearwater; you mentioned that you have a lot of runway with 940,000 net acres, current production in that 10,000 barrel per day range at the moment, which is obviously very small in the context of the broader portfolio. What is your plan for the asset for the next couple of years? How much do you realistically think you can scale it up with TMX becoming fully available in 2024?

Yes, well you never want to speculate on the future, in terms of pricing and that piece. But for the Clearwater, what's really nice about it is we have a lot of acres; a lot of it is very consolidated. During the fall and winter, we have programs to delineate various areas that we think are comparable to what we have at Smith. So it's just early days; the teams have been working behind the scenes on various opportunities. What is also unique about it is we're able to leverage our facilities in the Pelican area. So between the Smith Pelican area, we have good infrastructure that we can leverage off, so it's a great opportunity. It's just another opportunity in our portfolio.

Okay, so fair to say it's the first call on capital within your conventional oil-weighted business?

It looks to be a very good opportunity.

Okay, thanks Tim. And just to wrap things up on the turnaround, as you just completed Scotford in the Horizon. My question is, what should we be expecting for turnaround activity in 2023? Are there any out-of-cycle larger turnarounds that we should be aware of? I'm thinking along the lines of the tie-in of the VDU and DRU furnaces at Horizon, as an example.

Yes, it's hard to say, but I would suspect Horizon would be very similar to this year, with a 24 to 30-day outage. You're right that we'll be doing the final tie-ins and work related to the BDU there. Scotford should be off-cycle for next year, so it should be pretty minor for what they need to do at Scotford.

Thank you. The next question comes from Neil Mehta of Goldman Sachs. Please go ahead.

Hi, this is Carly Davenport on for Neil. Thanks for taking the questions. I wanted to just start on the CapEx side. Can you talk a little bit about the $200 million add that was mainly due to inflation and any read across for how those pressures could evolve into next year? And then what kind of steps you're taking to mitigate inflation more broadly across the portfolio?

Yes, so there are cost pressures primarily concerning manufacturing, where you use a lot of steel, so your vessels, pipes, and equipment manufacturing. We see probably the highest pressure starting there, and less pressure on labor pieces, and it's bits that point. Broadly, there are more focused efforts on the facility side at this point. Having said that, our drilling completions, pipelines, and facilities teams are doing a great job finding efficiencies and opportunities to mitigate a lot of the pressures. Looking at the drilling costs for the first half of the year, they were within approximately 1% to 2% of the per well cost. While they’re over, a lot of work has been done to try and mitigate those costs. It's always hard looking ahead to predict what that number will be going into next year, but today, I think our teams are doing a really good job mitigating as much of the inflationary pressures as they can.

Great, that's really helpful color. The follow-up would just be on the outlook for the incremental production ads that you talked about in 2023 and 2025. Could you just talk about how you arrived at the optimal split between the liquids versus gas production ads, and how we should think about the split of spend between the two more broadly going forward?

What we always do is rank our projects from the highest return opportunities. With that, we had essentially 13 rigs working. What you see is just a combination of what's the capability of the rigs? Where are they in their location? And how could we optimize that to keep our costs down and maximize value in terms of that commodity in that area? For example, in the heavy oil area, there are certain rigs that can only do certain types of work, and therefore, determining what's the maximum value is key. It's really a two-fold opportunity: understanding what the rigs are capable of proximity and how to maximize value from those rigs.

Great, thanks for the time.

Thank you.

Thank you. The next question comes from John Royall, JPMorgan. Please go ahead.

Hey, good morning, guys. Thanks for taking my question. Just a follow-up on the OpEx at the mine in the second quarter. Looking at $1 million bases, not on the per barrel? It looks like it's up about 10% over Q1. You mentioned energy costs, but I'm wondering if there's any portion of that that's related to the maintenance overruns. I'm just trying to think through how to evaluate the second half from a total OpEx perspective at the mine. Is there anything kind of hidden in Q2 that wouldn't repeat?

No, really, what it is, is it's all based on barrels. One of our mantras is safe and reliable operations. If you look at it, if the facilities are running reliably, we're in excess of 480,000 barrels a day. In that quarter with the downtime for the planned maintenance, a lot of those costs are still fixed, so you carry them through your turnarounds. In the case of Horizon, they did a great job getting to that turnaround very efficiently. On Scotford, they had a few issues around loggers. However, really on the oil sands mining side, a huge portion is just efficiencies and maximizing value barrels.

Right. Thank you. And just curious on your thoughts on the SCO premium to WTI right now. I know there has been some maintenance and synthetic crude has a high destroyed cut. Are there just any other drivers I should be thinking about there, and how do you expect that to shape up in the back half of the year?

Yes, I think you're exactly right with crack spreads and distilling. We got an extremely good premium this last quarter. It is softening with the crack spreads tightening. In September, I believe it's closer to about $7 to $8 premium. It's all just the supply-demand equation; with the synthetic cuts being so high, we were receiving a premium. I suspect it’ll tighten a bit and the same time, you’ll experience tightening as well.

Thank you very much.

Thank you.

Thank you. The next question comes from Manav Gupta of Credit Suisse. Please go ahead.

Hey, guys. My first question here is, if you could help us a little more on how to model the royalty rate for oil sands now that horizon is in a post-payout. This quarter was a bit of an anomaly given the number of barrels produced. Anything you could help us with on how we can model the royalty rate per barrel on a go-forward basis?

Hi, Manav, it's Mark. You're right; now that Horizon is in payout for the whole quarter in Q2, I think a good way to look at it is, although the royalty is based on a bitumen price, which we do publish in our MD&A, a good way to look at it is from Q2 to Q3. I would expect the royalty rate based on gross pricing to be fairly consistent as you go through. Of course, the sliding scale rate will change with WTI pricing. In the current environment, I guess we've come off a little bit in recent environments; we've been at the maximum rates. At a starting point, if you look at the rate based on SCO or gross revenue, you'll see that it's pretty consistent now from Q2 to Q3. We can help with that, but that's kind of a good starting point.

Thank you. My quick follow-up here is, when we look at the growth situation, in your opinion, are we four or five quarters away from the point where TMS expansion could still come online? Is that the timeframe we should be looking at?

Really, for Trans Mountain, you need to speak to them. We are just like you; we get updates from time to time and as far as I know, it’s still on track for Q4 '23.

Thank you. The next question comes from Roger Reed of Wells Fargo. Please go ahead.

Hey, good morning.

Good morning.

I apologize; I missed the beginning of the call because of some conflicts in other coverage. If you've addressed it or the question has been asked, I apologize. But I just wanted to understand as you set up for some modest production growth, there's obviously been some pipeline constraints adjusted for some pipeline improvements. Just wondering how you're set up for the ability to export as needed, and whether or not you see a situation developing where you could actually end up with some access. Is there an overall statement between Canada and the lower 48?

Is that in terms of the natural gas piece, Roger?

Oil only was my main focus?

Okay. It's always a little difficult to forecast every individual company's forecast in terms of how it will impact the export pieces, but looking ahead, it looks pretty reasonable for this year. Going into 2023, depending on commodity prices, it'll be very good timing to have Trans Mountain come on. Many of our projects, particularly on the thermal side, take one to two years for the oil to start ramping up and peaking. The biggest piece is on that thermal side; we’ll see that ramp up over the next few years. Hopefully, by then, GMX is on and covers that growth.

Okay. And then one other question along the production side. As you've come through the various turnarounds, a lot of these facilities are still fairly young. Just curious, are you seeing operational improvements post-turnaround or debottlenecking that's helping out?

Yes. I'm really impressed with how the teams on both mining sides have kept looking for opportunities to improve our operations and find incremental capacities. Through the reliability project, we'll see an incremental increase of 5,000 barrels a day next year, which goes to 14,000 in 2025. The teams are looking at more opportunities to heat that up. As the teams do the work and engineering, which is a lot of work, I shouldn't underestimate it. As they work through the details, they're pushing them forward for sanction. Every barrel is a low-cost barrel addition, so they're very economic, provided the costs are right.

Thank you. Our next question comes from Patrick O'Rourke of RBC Capital Markets. Please go ahead.

Good morning, guys. Thanks for taking my question. A lot of what I had to ask has been covered off. But I'm wondering, in terms of the M&A markets and the outlook for potential acquisitions, I know there's no real gaps in the portfolio in any way. But you've been pretty acquisitive over the last several years. Are there any opportunities out there? What's your overall feel for the M&A market? I know we saw a large transaction this week on the private side?

Yes, the M&A market is always interesting. The volatility of pricing causes what I would call a bid-ask disconnect because it is very difficult to look forward and determine a good price or a good opportunity. Currently, I don't really see anything—we have no gaps, and generally, we try and find good opportunities that have a lot of growth potential for the future to maximize value. I don't see too much there, and I think the bid-ask today doesn't create a good environment for M&A.

Okay, great. And then a lot of focus on the liquid side, but in terms of the gas side here, obviously, LNG markets and waterborne prices are pretty strong. Any intent to look to participate in those in the future with your large gas portfolio?

There are opportunities once they're up and running. Our gas marketing folks are generally talking with a lot of different groups and a lot of different ways. They're always looking for some diversification as long as it maximizes the value of the product. Our teams are always working with different parties to look for opportunities on the natural gas side. As you saw with our realized pricing in the second quarter, they've done a really good job.

Okay, thank you very much.

Thank you. There are no further questions at this time. I will turn the call back to Mr. Casson for closing remarks.

Thank you, operator. And thank you to those who joined us this morning. If you do have any follow-up questions, please give us a call. Thanks. Have a great day.

Thank you. This does conclude our conference call for today. We thank you for participating and ask that you please disconnect your lines.