Canadian Natural Resources Sees Record 1Q07 Cash Flow

Canadian Natural Resources Limited (Toronto:CNQ.TO) (NYSE:CNQ): In commenting on first quarter 2007 results, Canadian Natural's Chairman, Allan Markin stated, "It was a very successful quarter yielding strong crude oil and natural gas production volumes. We completed the integration of the Anadarko Canada assets with their performance overall better than expected. Through focused execution we have been able to maximize the efforts of our winter natural gas drilling program. A reduced program from first quarter of 2006 levels allowed us to concentrate on operational efficiencies and we were able to maximize the value of every dollar spent. The result was production at the top end of our first quarter guidance generated with capital expenditures within our original targets. This capital discipline is being maintained throughout our organization and is exemplified through the winter drilling program as well as continued cost controls at the Horizon Oil Sands Project."

Further comment from John Langille, Vice Chairman, included, "The successful drilling program and volumetric growth enabled us to generate record cash flows in Q1/07. We expect that our conventional business will generate 2007 cash flows of $6.0 to $6.5 billion based upon today's strip pricing. After conventional capital requirements of $3.1 billion, the conventional business is generating free cash flow of approximately $3 billion. In 2007, a large portion of that free cash flow is being directed toward construction costs at the Horizon Project which remains on target for first oil for the third quarter of 2008. We are continuing to deliver on our defined plan, and the cash flow potential of our businesses should be more than sufficient to fund the plan."

Steve Laut, President and Chief Operating Officer of Canadian Natural added, "The execution of our defined plan is a dynamic one, based upon maximizing shareholder value. Reflecting this principal, during the first quarter we made the strategic decision to reduce natural gas drilling in favor of higher return heavy oil projects. Similarly, we made the strategic decision to defer further work on a second heavy oil upgrader to handle our in-situ production growth pending stability in construction costs and clarification on how various government initiatives will be implemented. The acceleration of re-drilling at Baobab, where a portion of our 2008 capital budget will now be directed to accommodate the recent availability of a deepwater drilling rig is another example. In essence, we retain flexibility in our ongoing programs such that capital allocation for projects is continually high-graded."

- Natural gas production volumes reached record levels and represented 47% of the Company's total production. Natural gas production for Q1/07 averaged 1,717 mmcf/d compared to 1,436 mmcf/d for Q1/06 and 1,620 mmcf/d for Q4/06. The increase in natural gas production from the comparable periods primarily reflected a full quarter of additional natural gas production from the Anadarko Canada Corporation ("ACC") acquisition completed in November 2006 along with a very successful natural gas winter drilling program.

- Total crude oil and NGLs production of 327,001 bbl/d was comparable to 323,662 bbl/d for Q1/06, and decreased 5% from 343,705 bbl/d for Q4/06. The decrease from the prior quarter was anticipated due to the timing of steaming cycles related to the Company's thermal crude oil projects in North America and planned maintenance activities at the Espoir Field.

- Quarterly cash flow of $1.6 billion, an increase of 25% from Q4/06 and 56% from Q1/06. The increase from Q1/06 reflects the impact of increased crude oil pricing related to a narrower heavy crude oil differential from WTI, increased natural gas sales volumes, decreased realized risk management losses, and a slightly weaker Canadian dollar relative to the US dollar.

- Quarterly net earnings of $269 million, representing a 14% decrease from Q4/06 and a 372% increase from Q1/06. Net earnings in Q1/07 included unrealized after-tax expenses of $352 million related to the effects of risk management activities, foreign exchange gains, stock-based compensation expense, and statutory tax rate changes on future income tax liabilities.

- Quarterly adjusted net earnings from operations of $621 million, 51% higher than Q4/06 results and a 132% increase from Q1/06, reflecting stronger cash flow.

- Completed a Q1/07 drilling program of 193 net crude oil wells and 201 net natural gas wells, excluding stratigraphic test and service wells, with an 87% success ratio. The success rate is a reflection of Canadian Natural's strong, predictable, low-risk asset base. Crude oil drilling increased 110%, compared to Q1/06. Natural gas drilling decreased by 54% compared to Q1/06, representing Canadian Natural's reallocation of capital towards a higher return crude oil drilling program and reduced natural gas drilling program.

- Maintained a strong undeveloped conventional core land base in Canada of 12.4 million net acres - a key asset in today's highly competitive industry.

- The Horizon Oil Sands Project ("Horizon Project") exited Q1/07 ahead of schedule at 66% complete, with approximately $5.3 billion in purchase orders and contracts having been awarded to date.

- Continued production improvements at the Pelican Lake Field from new drilling activity and the expansion of the enhanced crude oil recovery program. Pelican Lake crude oil production averaged approximately 32,000 bbl/d during the quarter, up 10% or approximately 3,000 bbl/d from Q1/06. Production is expected to continue to increase in Q2/07 and throughout the remainder of 2007.

- Secured a deep water drilling rig for the Baobab Field. The equipment will be mobilized in late 2007 or early 2008, enabling shut-in production to come back on-line over the course of 2008. - Completed the issuance of US$1,100 million principal amount of 5.70% unsecured notes due May 2017 and US$1,100 million principal amount of 6.25% unsecured notes due March 2038. Concurrently, the Company entered into cross currency interest rate swaps to fix the Canadian dollar interest and principal repayment amounts on US$1,100 million of unsecured notes due May 2017 at 5.10% and C$1,287 million. The Company also entered into a cross currency interest rate swap to fix the Canadian dollar interest and principal repayment amounts on US$550 million of unsecured notes due March 2038 at 5.76% and C$644 million.

- Declared a quarterly cash dividend on common shares of C$0.085 per common share, payable April 1, 2007, a 13% increase over the 2006 quarterly dividend. This is the sixth consecutive annual increase.


In order to facilitate efficient operations, Canadian Natural focuses its activities in core regions where it can dominate the land base and infrastructure. Undeveloped land is critical to the Company's ongoing growth and development within these core regions. Land inventories are maintained to enable continuous exploitation of play types and geological trends, greatly reducing overall exploration risk. By dominating infrastructure, the Company is able to maximize utilization of its production facilities, thereby increasing control over production costs. Further, the Company maintains large project inventories and production diversification among each of the commodities it produces; namely natural gas, light / medium and heavy crude oil and NGLs. A large diversified project portfolio enables the effective allocation of capital to higher return opportunities.


- Q1/07 production increased 20% over Q1/06 and increased 6% over Q4/06. These increases reflect full quarter inclusion of ACC production along with a successful winter drilling program.

- Canadian Natural drilled 201 net successful natural gas wells in Q1/07 compared to 440 net natural gas wells in Q1/06, which represents a 54% reduction. High drilling success rates reflect Canadian Natural's low-risk exploitation approach and high quality land base. The Q1/07 natural gas drilling program represented an active program across the Company's core regions. In Northeast British Columbia 49 net wells were drilled, while in Northwest Alberta 78 net wells were drilled. In the Northern Plains, 92 net wells were drilled, with 26 net wells drilled in the Southern Plains.

- Planned drilling activity for Q2/07 includes 13 natural gas wells compared to drilling activity for Q2/06 of 48 natural gas wells. This is a reflection of the Company's decision to proactively reduce exposure to over-inflated service and supply costs, along with the seasonality of natural gas drilling.

- Although third party service costs have not decreased significantly, Canadian Natural has experienced productivity gains as a result of the focused drilling program.

- Q1/07 North America crude oil and NGLs production decreased 5% from Q4/06 and increased 7% over Q1/06. Pelican Lake experienced strong performance and continued production improvements that offset the decrease in Q1/07 that was largely a result of the timing of the normal steaming cycle in thermal crude oil production.

- During Q1/07, drilling activity included 144 net wells targeting heavy crude oil, 36 net wells targeting Pelican Lake crude oil, 9 net wells targeting thermal crude oil and 18 net wells targeting light crude oil. The majority of the wells were drilled in the Northern Plains core region.

- The Primrose East expansion program continues with a planned expansion of the crude oil processing facility from 80,000 bbl/d to 120,000 bbl/d, as well as the construction of a steam generation plant and new pad drilling targeted to add production gains of 40,000 bbl/d in 2009. Primrose East is the second phase of the 300,000 bbl/d conventional expansion plan identified to unlock the value from Canadian Natural's thermal crude oil resource base. Detailed engineering, procurement and site clearing are underway.

- At Pelican Lake, the development and secondary recovery implementation projects continued as planned with 36 horizontal producing wells drilled in Q1/07 and 96 additional horizontal wells planned for the remainder 2007. In addition, 30 production wells were converted to injection wells (9 for water injection and 21 for polymer injection) in Q1/07. Results from the polymer flood continue to be positive and 2 additional polymer skids were installed in Q1/07. The program continues to be optimized and the results will be monitored.

- Planned drilling activity for Q2/07 includes 86 net crude oil wells, excluding stratigraphic test and service wells.

- In early 2007, Canadian Natural issued its proposed development plan for the 30,000 bbl/d Kirby In-Situ Oil Sands Project located approximately 85 km northeast of Lac La Biche in the Regional Municipality of Wood Buffalo. The Company is targeting to file its formal regulatory application documents for this project in the latter half of 2007 pending the results of potential changes to royalty regimes and environmental regulations, and the associated costs resulting there from.

Anticipated Changes to Legislation

- The Alberta provincial government is currently reviewing its crude oil and natural gas royalty regime. It is too early to predict the outcome of this review.

- The Federal and Provincial governments are in the process of drafting policy and legislation to control greenhouse gas emissions. Operating in the high cost and highly regulated environment of the Western Canadian Sedimentary Basin ("WCSB"), additional cost requirements as a result of greenhouse gas legislation will add to the challenge of executing projects within the WCSB.


The Company operates in the North Sea and Offshore West Africa where production of lighter quality crude oil is targeted in conjunction with natural gas that may be produced in association with crude oil production.

North Sea

- Canadian Natural continues to execute its exploitation strategy in the North Sea. The first stage of this exploitation program is based upon optimizing existing facilities and waterfloods. Canadian Natural continues to apply this first stage of exploitation on its holdings in the North Sea. The second stage of exploitation incorporates more near pool development and exploration in order to maximize utilization of the common facilities and ultimately extend all fields' economic lives. Ongoing development at the Columba Terraces and the Lyell Field are examples of this type of work.

- In Q1/07, 1.6 net wells were drilled, with an additional 2.8 net wells drilling at the end of the quarter.

- The development of the Lyell Field continued during the first quarter. Tranche 1 of the Lyell Field development comprises two production wells scheduled for completion during 2007, and an additional 2 production wells and 2 well workovers in 2008.

- Construction of the Columba E Raw Water Injection facilities continued during the quarter. Commissioning is scheduled for Q2/07 at which time water injection wells are due to be completed, with production expected to reach full capacity by 2008.

Offshore West Africa

- During Q1/07, 1.2 net wells were drilled with 0.6 additional net wells drilling at the end of the quarter.

- First oil from West Espoir commenced in 2006 with 3 production wells and 2 injector wells. During Q1/07, 1 additional production well was added. The West Espoir area development drilling will continue until 2008 with producers and injectors being brought on-line as they are completed.

- A deepwater drilling rig has been secured for the Baobab Field. The rig will be mobilized in late 2007 or early 2008, which will enable the Company's shut-in production to be brought back on stream.

- At the 90% owned and operated field in offshore Gabon, activity continued with contracts awarded for the construction of the wellhead towers and for a drilling rig. Drilling is scheduled to commence in Q2/07 and first crude oil is targeted for late 2008. Production is forecasted to plateau at approximately 20,000 bbl/d.

Horizon Project

- Phase 1 of the Horizon Project continues on schedule with first production of 110,000 bbl/d of light, sweet SCO targeted to commence in Q3/08.

- The progress on major milestones, a key component in achieving critical path success, is slightly ahead of schedule.

- During Q1/07, the Company awarded a further $131 million of contracts, including several that were previously deferred in order to optimize pricing. This brings the total awarded contracts to $5.3 billion. To date, all major plants have been through hazard/operability engineering review without requiring major scope change, providing even greater cost certainty. The construction is at a point where the critical foundations are complete, steel is being erected, modules are being placed and equipment is being set.

- Canadian Natural continues to effectively execute its well defined strategies. Overall work progress at the end of Q1/07 (engineering, procurement and construction) was at 66% complete. Field construction itself is over 52% complete. All major vessels have either been erected or are currently on-site as work moves forward into the most labour-intensive portion of the Horizon Project. Work scheduled for the coming months will focus more on mechanical construction efforts, which are scheduled to be completed through a mix of lump sum and reimbursable contracts.

- The Company has now entered into the majority of the construction contracts and as the final 34% of the overall project is undertaken, the aforementioned challenges are causing cost estimates for certain isolated pieces of the project to increase above targeted cost. Our actual spending to date is near plan (69% actual versus 68% plan) and our overall project forecast cost is currently forecasted in a range that is not materially in excess from that approved by the Board of Directors in February 2005, positioning Canadian Natural favorably given the rise in costs that has occurred during the last two years. Our current project completion cost forecast ranges from approximately 5% to 12% over the original $6.8 billion estimate.

Phase 2/3 Update

- Originally commenced in mid 2006, Canadian Natural continues to proceed forward with Phase 2/3 of the Horizon Project with significant progress made towards the EDS portion of front end engineering. To date, Canadian Natural has spent approximately $124 million on Phase 2/3, with $203 million budgeted for 2007 for these phases.

- In 2006, Canadian Natural ordered certain major vessels required for Phase 2/3 of the Horizon Project, including the coke drums and the hydrotreating vessels. To date, coker foundations have been built, together with the construction of significant piperack and common service infrastructure. The engineering and construction work that has been completed provides Canadian Natural a distinct and strategic advantage over other projects as Canadian Natural builds the Horizon Project. Canadian Natural is currently evaluating several execution options for the balance of Phase 2/3 construction that will provide flexibility and balance the risks associated with building in the current high cost environment.

Operations Readiness

- Canadian Natural has had operations staff involved in the design, procurement and construction of the Horizon Project from project commencement. Canadian Natural believes this has resulted in a design that will be less difficult to commission and start-up had there been no operations staff involved. The operations staff is responsible for the commissioning and start-up of the facilities and have already prepared a commissioning and start-up schedule which is directly linked to the construction schedule. This allows the project team to identify challenges early on and ensure that adequate contingency plans are in place.

- Currently there are 142 operations staff employed in the development of start-up procedures, preparation of training programs, recruitment of additional staff, establishment of maintenance programs and operation of several plant systems.

- The operations staff has had the opportunity to test-run many programs through the early operation of plant systems. The team is currently operating some mine equipment and several plant facilities such as water treatment, sewage treatment, communications, natural gas and power distribution. As a result, the team has already developed several early learnings that have been incorporated into later start-up plans.

- Throughout 2007, increasing focus will be placed upon commissioning and start-up as operations staff levels increase and procedures are optimized.

- In Q1/07, the Company experienced a narrowing of the heavy oil differential to under 30%, well below seasonal expectations and favorable compared to Q1/06. Canadian Natural has committed to 25,000 bbl/d of pipeline capacity on the Pegasus Pipeline, which transports Company volumes to the U.S. Gulf Coast, as part of the Company's efforts towards working with various industry groups to find new markets for Western Canadian heavy crude oil.

- During Q1/07, the Company contributed approximately 135,000 bbl/d of its heavy crude oil streams to the Western Canadian Select ("WCS") blend as market conditions resulted in this strategy offering the optimal pricing for bitumen.


- Canadian Natural has structured its financial position to profitably grow its conventional crude oil and natural gas operations over the next several years and to build the financial capacity to complete the Horizon Project and other major projects. A brief summary of its strengths are:

-- A diverse asset base geographically and by product - produced in excess of 613,000 boe/d in Q1/07, comprised of approximately 47% natural gas and 53% crude oil - with 95% of production located in G7 countries with stable and secure economies.

-- Financial stability and liquidity - approximately $6.3 billion of bank credit facilities, with an aggregate $1.6 billion of unused bank lines available at March 31, 2007.

- Completed the issuance of US$1,100 million principal amount of 5.70% unsecured notes due May 2017 and US$1,100 million principal amount of 6.25% unsecured notes due March 2038, which have been sold to investors in the United States. The 5.70% unsecured notes were sold at a price of 99.725% per note to yield 5.734% to maturity. The 6.25% unsecured notes were sold at a price of 99.323% per note to yield 6.30% to maturity. Net proceeds from the sale were used to repay bank indebtedness.

Concurrently, the Company entered into cross currency interest rate swaps to fix the Canadian dollar interest and principal repayment amounts on US$1,100 million of unsecured notes due May 2017 at 5.10% and C$1,287 million. The Company also entered into a cross currency interest rate swap to fix the Canadian dollar interest and principal repayment amounts on US$550 million of unsecured notes due March 2038 at 5.76% and C$644 million.

- Declared a quarterly cash dividend on common shares of C$0.085 per common share, payable April 1, 2007, a 13% increase over the 2006 quarterly dividend. This is the sixth consecutive annual increase.


The Company forecasts 2007 production levels before royalties to average between 1,594 and 1,664 mmcf/d of natural gas and between 315 and 360 mbbl/d of crude oil and NGLs. Q2/07 production guidance before royalties is forecast to average between 1,677 and 1,698 mmcf/d of natural gas and between 313 and 329 mbbl/d of crude oil and NGLs.