More trouble at its Horizon oil sands operation led to a weaker quarter for Canadian Natural Resources Ltd., which saw third-quarter earnings substantially below expectations.
Horizon has experienced a series of problems, including a major fire that knocked out production for much of 2011. But those issues are not over: in the third quarter, CNRL pared output at Horizon amid further mechanical issues. The company said it chose to slow the operation rather than risk damage to the plant, with production of under 100,000 barrels a day, below than the expected 115,000.
"We want to be on the conservative side of everything that we're doing …. going forward on Horizon," president Steve Laut said.
He added: "We're taking a different [tack] and we're willing to sacrifice production to ensure reliably in the long run."
As it works through Horizon problems, it has now cut 2012 spending by $910-million, joining an increasingly long list of oil sands companies that are chopping budgets.
The spending trim comes with Horizon issues extending beyond the third quarter. And the problems extend beyond the third quarter. After conducting some repairs in October, the company had issues in restarting the plant. As a result, it now expects fourth-quarter output to be down substantially again, with a forecast of 85,000 to 92,000 barrels. In addition, third-quarter operating costs rose to $42.69 a barrel, well above the company's expected $35 level, and far higher than its oil sands competitors.
Mr. Laut defended the production cutbacks, which contributed to the higher costs, as prudent.
"All these actions have impacted production in Q3 and Q4. It is the right decision to make as it increases our reliability going forward, especially as we go into the winter months," he said.
But the continuing problems at the oil sands plant, as well as a stock price mired near 2009 levels, have generated new scrutiny from investors, with analysts asking whether the Horizon outages point to serious underlying engineering issues – and whether CNRL might be better served splitting apart the company.
Mr. Laut believes problems have largely stemmed from issues not related to design or engineering.
"I'd say most of it has been in just getting to know the plant and getting the operating experience," he said. CNRL also rejected the idea of hiving off its large natural gas assets from its oil portfolio.
"At this point in time we're not considering that," said John Langille, the company's vice-chairman. "It's something we have always believed that having a balance and a diversified portfolio is best in the long-term."
Investors unease is unusual for CNRL, which has long been seen as one of the most shrewd and steady-handed operators in the oil patch. But the ongoing problems with Horizon are taking a toll.
"We have to get some credibility back on running our Horizon project," Mr. Langille acknowledged.
CNRL has given financial sanction to the Redwater refinery, a joint partnership with North West Upgrading that will make primarily diesel from 50,000 barrels per day of heavy oil. It's an important event – the first new North American refinery in years.
But continued weak natural gas prices are hurting the company, which is Canada's second-largest gas producer. Its third-quarter net earnings of $360-million fell heavily from $753-million in the second quarter. On a per-share basis, its 32-cent operating earnings significantly missed analyst expectations of 51 cents.
"Overall, the company's Q3 results were negative, missing both our estimates and consensus estimates on financials," CIBC World Markets Inc. analyst Andrew Potter wrote in a research note.