Mark A. Stainthorpe - Director, Treasury and Investor Relations Steve W.

Laut - President & Non-Independent Director Tim S. McKay - Chief Operating Officer Corey B.

Bieber - Chief Financial Officer & Senior Vice-President, Finance

Greg Pardy - RBC Dominion Securities, Inc. Harry Mateer - Barclays Capital, Inc.

Philip M. Gresh - JPMorgan Securities LLC Nima Billou - Veritas Investment Research Corp.

Paul Sankey - Wolfe Research LLC

Thanks, Andrew. Good morning everyone and thank you for joining our Second Quarter 2016 Conference Call, where we'll discuss our operational and financial results and provide an update regarding our ongoing projects and operations.

With me this morning are Steve Laut, our President; Tim McKay, our Chief Operating Officer; and Corey Bieber, our Chief Financial Officer. Before we begin, I would like to refer you to the comments regarding forward-looking information contained in our press release and also note that all amounts are in Canadian dollars, and production and reserves are expressed as before royalties unless otherwise stated.

I'll now pass the call over to Steve Laut. Steve?

Thanks, Mark, and good morning, everyone. The second quarter was a good quarter for Canadian Natural.

We delivered strong cash flow in the quarter, while facing a number of challenges ranging from low commodity prices, pipeline and facility issues at a third-party owned and operated natural gas facility, which impacted quarterly production. Yearly gas guidance has been impacted by this outage, but importantly, oil production guidance remains unchanged.

At Horizon, we have essentially completed the turnaround and are now just closing up and expect to have on-spec production on August 11, with all the Phase 2B tie-ins completed as planned. Horizon Phase 2B and Phase 3 expansion are on track.

Horizon 2B is now very close to start up in October and full 182,000 barrel a day production targeted for November. We also continue to lower our cost structure, a cost structure that is already top tier.

During the first half of 2016 to the first half of 2015, we have saved $430 million in op cost alone. With stronger commodity prices and continued lower costs, we look forward to a very strong second half, particularly with the stronger Horizon production and moving into the higher production phase of the cyclic Primrose operations.

Canadian Natural is in a very good position. We have a strong, large, diverse and well-balanced asset base, an asset base that is not only balanced and has a deep inventory of near, mid and long-term projects, but a balance between long life, low-decline assets and low capital exposure assets.

Low capital exposure assets – projects have quick payouts, significant capital flexibility and higher returns on capital allowing us to affectively allocate capital at our discretion, grow production as we choose and maximize value. Canadian Natural has significant competitive advantages, a deep inventory of projects, large concentrated land base, owned and operated infrastructure and a culture that is value and results driven.

As a result, Canadian Natural is effective and efficient with a track record of execution and optimizing capital allocation. Optimizing capital allocation has allowed Canadian Natural to effectively complete the Horizon expansion, a capital allocation strategy that has been tested as we successfully navigate this low price environment.

Canadian Natural is in the final stages of our transition to a long life, low decline assets with a 45,000 barrel a day Horizon Phase 2B expansion starting up in October with full 182,000 barrel a day production mark expected to be achieved in November and the 80,000 barrels a day Horizon Phase 3 starting up in Q4 2017. As a result, in Q4, our asset base strengthens significantly and we become an even stronger, more robust company.

Horizon expansion capital dropped significantly in Q4 2016 to $250 million with Horizon 2017 capital dropping to roughly $1 billion and then to zero in 2018. Horizon op costs dropped to roughly $25 a barrel in Q4 2016 and below $25 a barrel in Q4 2017.

Very conservative targets, considering we delivered op costs of $26.82 a barrel in Q2. Lower op costs enhance netbacks and add significant value to the Horizon production stream.

With the larger portion of Canadian Natural's asset base being long life, low decline, our average corporate decline rate drops to 11.7% in 2018. As a result, our maintenance capital to hold production flat is significantly less compared to a typical E&P company.

Importantly, Canadian Natural's Q4 2016 cash flow at $30 WTI, well below the current strip, covers our capital spend and dividend. In my view, few companies have the ability to effectively complete this transition, while keeping our portfolio and our competitive advantages intact, deliver shareholder-friendly actions, such as increasing dividends and appraise guide distribution and at the same time grow production.

Canadian Natural has a unique combination of asset-based strength, diversity and balance. Combined with our strategy and competitive advantages, effective capital allocation and a management team that is more aligned with shareholders than any of our peers allows us to deliver the best of all worlds.

Delivering the best of all worlds means delivering sustainable production and substantial free cash flow from our long life, low decline assets that are very resilient to price volatility, an asset base that can add an additional 210,000 barrels a day capacity at or below $50 WTI and deliver a 15% after-tax return. This capacity is over and above the 140,000 barrels a day being added from Horizon Phase 2B and Phase 3 and comes from Pelican Lake, thermal heavy oil and Horizon post Phase 3.

In a $60 world that capacity grows to 317,000 barrels a day. It also means delivering high returns from Canadian Natural's large, high quality inventory of low capital exposure projects in primary heavy oil, natural gas and light oil in Canada and Côte d'Ivoire, which provides significant capital flexibility, quick payouts and higher return on capital, particularly where we can leverage our infrastructure advantage to keep costs low.

Our low capital exposure assets can add 155,000 barrels a day of oil and 1.7 Bcf equivalent day of natural gas and liquids at or below $50 WTI and $2 AECO and deliver a 15% after-tax return. At $60 WTI and $2.50 AECO, that capacity grows to 210,000 barrels a day and 4.5 Bcf equivalent a day.

Canadian Natural may be the only company in our peer group that has quality in both asset types, the technical and operational expertise to execute in both these asset types and deliver effective and efficient operations, and importantly, the discipline to effectively allocate capital, to grow production and maximize cash flow. The strength, size and power of both asset types combined with the effective capital allocation makes Canadian Natural very robust and maximizes cash flow.

Maximizing cash flow is an important goal. More importantly, though, is how you balance and optimize the allocation of cash flow to maximize shareholder value.

At Canadian Natural, we believe it's critical that we balance and optimize what we call the four pillars of cash flow allocation: balance sheet strength, returns to shareholders, resource development and opportunistic acquisitions. How we balance the pillars depends on where we are in the commodity price cycle, where we are in the transition to long-life assets and other potential opportunities.

At all times, the primary goal of balancing the four pillars is to maximize shareholder value. We're often asked, what are you going to do with the cash flow when the Horizon expansion comes on?

The answer is always the same, maximize shareholder value. We do that by balancing the four pillars of cash flow allocation, something we've been very good at for the last 25-plus years, and I expect we'll continue this highly effective track record into the future, and the future looks very bright.

We target delivering significant production growth, an 8% CAGR in a $60 WTI world, with capital spending in the $4.5 billion range, well below cash flow. If commodity prices are low, $45 in 2017 and $48 thereafter, and our priorities change, weighted more towards protecting the balance sheet and returns to shareholders, we'd spend in the $2.4 billion to $2.7 billion range and keep production essentially flat.

Canadian Natural is in a very enviable position. We have capital flexibility to adjust capital spending to the commodity price environment and dial up various levels of production growth, while ensuring the balance sheet is strong and returns to shareholders are protected.

In a more normal price environment, production growth is robust and provides for balance sheet strength and returns to shareholders. In a $60 world, strong production and effective and efficient operations deliver strong growth in EBITDA.

In 2017, EBITDA is $7.6 billion growing to roughly to $10 billion to $11 billion in 2018 and 2019. In a low-price world, EBITDA is $4.6 billion in 2017 and grows to $5.7 billion and $6 billion range in 2018 and 2019.

Capital spending is well below EBITDA. As a result, our debt drops dramatically and our debt-to-EBITDA strengthens very quickly to well within our target range of 1.8 to 2.2.

Importantly, from a free cash flow perspective, we see free cash flow rising to $1.4 billion in 2017, $3 billion in 2018 and $3.5 billion in 2019 in a $60 WTI world. In a low-price world, free cash flow is still robust, with over $600 million in 2017 and growing to $1.5 billion in 2018, which is very, very strong numbers.

This provides significant free cash flow to allocate to our four pillars of cash flow and allows us to maximize value for shareholders. Now, I'll turn the call over to Tim McKay to update you on our effective operations and financial discipline.

Tim?

Thank you, Steve. Good morning, everyone.

I will now do a brief overview of our assets and talk to our second quarter 2016. Starting with natural gas, our gas production capacity was strong as expected, however the second quarter volumes of 1.689 Bcf was a decrease of approximately 5% from Q1 2016.

This was primarily impacted by a third-party plant and an infrastructure damage due to flooding in Northeast B.C. in mid-June.

The Pine River Gas Plant has been shut down and Canadian Natural has shut in 176 million cubic feet of natural gas. We are working with the third party to reroute 50 million a day of the gas and target to have it reinstated on August 8.

Then an additional 40 million is to come back on in late September, with the balance of 86 million cubic feet targeted to be in December. The timeline for this reinstatement of gas is now reflected in our corporate guidance for Q3 and the annual corporate guidance now sits at 1.705 to 1.735 Bcf per day.

Natural gas operating costs, we continue to see cost savings and we have reduced our natural gas operating costs by 9% when comparing Q1 2016, Q2 2016 to Q2 2015, particularly impressive considering the third-party impacts on our production. While this result is good, we expect further cost reductions in 2016.

As expected, our North American light oil and NGL production in Q2 2016 was approximately 83,800 barrels a day, down 6% from Q1 2016. In all areas, we continue to optimize water floods, stimulate wells and leverage technology to maintain our volumes.

As well we continue to drive our operating costs down 10% when comparing Q2 2016 to Q2 2015, with current operating costs of $13.84 per barrel. In the second half of 2016, we're targeting a small, high-graded drill program of five net light oil wells.

Offshore Africa production was strong at 30,858 barrels a day, a 13,788 barrel increase over Q2 2015, as a result of our very successful drilling program completed in Q1 2016. Our operating costs were $20.13 a barrel, a 54% decrease on Q2 2015.

In the North Sea, we continue to leverage our ability to deliver effective and efficient operations by improving reliability, optimizing the water floods and enhancing production capacity. When comparing Q2 2016 of 23,360 barrels a day versus Q2 2015 of 20,300, we have seen a 3,000 barrel increase, which is a great result.

Operational improvements are continuing to help reduce our operating costs in the North Sea down an impressive 33% from Q2 2015. For Q3 2016, we're targeting to average between 49,000 barrels to 53,000 barrels a day from our International division, up 15% from Q3 2015.

In heavy oil, production declined as expected. In Q2 2016, we averaged approximately 104,000 barrels a day versus Q1 average of approximately 114,000 barrels a day.

At the end of the quarter, we had approximately 15,000 a day shut in due to low prices, and we do not expect to shut in any significant volumes at the current strip pricing. Our heavy oil operating costs continue to be industry leading and we continue to drive effectiveness and efficiency in this core area, leveraging our infrastructure with an 8% reduction in operating costs from Q2 2015.

Q2 2016 operating costs were $13.70 a barrel. In the second half of 2016, Canadian Natural is targeting to drill 125 net heavy oil wells from a very large inventory, which has the capacity to bring on 45,000 barrels a day of primary heavy oil that achieves our 15% after-tax return on capital with prices between $40 WTI and $45 WTI.

A key component to our long-life, low decline transition is our world class Pelican pool, where our leading edge polymer flood is driving significant reserves and value growth. Q2 2016 production was approximately 47,800 barrels a day, as we completed well bore cleanouts on some injectors and producers in this quarter, offset by the normal primary decline as only 55% of the pool is under polymer flood.

At Pelican Lake, we've been able to take our industry-leading operating costs down a further 2%, with second quarter operating costs of $6.81 a barrel compared to Q2 2015. As a result, Pelican Lake has excellent netbacks and recycle ratios.

In Q2 2016, our thermal properties combined to produce just over 93,200 barrels a day. Our Kirby South project had an excellent quarter, producing approximately 38,700 barrels a day with a very good thermal efficiency SOR of 2.55, with excellent operating costs for the quarter of $8.56 per barrel, a 37% reduction from Q2 2015.

At Primrose, the production was impacted by the proactive temporary shut in of the above-ground Primrose East pipeline due to concerns around stress corrosion cracking that was previously talked about in May. The pipeline was thoroughly inspected and repaired and was put in back into service May 17.

A detailed analysis of the mechanism that is causing the cracking is being conducted and results are expected in Q4. Overall, our thermal operations continue to be effective and efficient with $12.19 operating costs, an excellent result when considering the lower production volumes in the quarter.

At Horizon, we continue focus on safe, reliable production as we continue to improve our operating costs and prepare to bring Phase 2B on production and target to exit 2016 at 182,000 barrels a day. In the second quarter of 2016, we produced 119,511 barrels.

During the second quarter, we successfully managed through forest fires, helping many families, communities. At the same time, we continued to progress Phase 2B construction and maintain strong production levels.

We delivered industry-leading operating costs, down 8% when comparing Q2 2016 to Q2 2015. Our Q2 operating costs was $26.82 a barrel and we're well on our way to achieving our targeted operating costs of $25 a barrel in Q4 with Phase 2B on production at 182,000 barrels a day.

We are adjusting the process and completing the Horizon turnaround, in which we have proactively extended it four days longer as we found more work to be completed than anticipated and SCO ramp-up will commence August 11. This change was necessary to ensure we have reliable operations to handle the additional 45,000 barrel a day increase over the previous capacity as we ramp up to 182,000 barrels a day.

Phase 2B expansion is on track. All the critical tie-ins were completed.

We are progressing the stage commissioning, and this allows us to take a disciplined, systematic approach, which will enhance our ability to safely and effectively start-up Phase 2B in October with full production in November. In summary, Canadian Natural is an effective and efficient operator.

Our position that has been enhanced by our ability to realize significant gains and optimizing our production and reducing costs across the company. We will continue to look ways to become more effective and efficient and further reduce our costs in 2016.

We'll continue to focus on safe, reliable operation and enhance our top tier operation in this low price environment. I will now turn it over to Corey for the financial review.

Thank you, Tim, and good morning, everyone. Our second quarter cash flows from operations of $938 million represented a 43% over first quarter 2016 levels, a strong achievement in the context of poor natural gas pricing, third-party gas plant outages and our proactive pipeline maintenance outages experienced during the quarter.

Importantly, at the same time we continue to drive efficiencies in our operations and cost structure. You will note that production expenses have been reduced by about $430 million for the first half of 2016 in comparison with the prior year.

That translates into about a 14% reduction in operating costs per BOE. During the second quarter, we maintained our dividend levels, while also completing our $546 million return of capital to shareholders in the form of the PrairieSky distribution.

This resulted in total distribution to shareholders of about $800 million in the second quarter and over $1.05 billion in the first half. As a result of the return of capital, the company's ownership interests in PrairieSky decreased to approximately 22.6 million shares with the current market value of about $575 million.

This ownership stake now represents less than 10% of the issued common shares and PSK. Our capital program for 2016 remains on track, as does our annual production guidance, with the exception of full year national gas production levels, which have been reduced to reflect the impact of the operational issues as a third-party owned and operated Pine River infrastructure.

Our financial metrics at the end of the quarter stood at a debt-to-EBITDA of 3.3 times and debt-to-book capitalization ratio of 40%. All things being equal, we currently target that debt levels will reach their peak during Q3 of 2016 when upon completion of Horizon Phase 2B, we will reach an inflection point.

At this inflection point our productive capacity at Horizon increases, resulting in higher operating cash flow, while at the same time our levels of major project expansion capital significantly decreases. A second transformative milestone is then reached the end of 2017, when the expansion of Horizon to 250,000 barrels a day is complete and major project expansion capital has ceased.

To put this in greater clarity, let's consider the second quarter results, where we incurred capital expenditures of $1.15 billion comprising approximately $583 million of CapEx related to Horizon construction and about $575 million for all other capital expenditures supporting conventional operations and existing Horizon production. Putting the underlying results together, second quarter cash flows from operations of $938 million were about $111 million in excess of capital supporting our existing production of $575 million as well as regular dividends at $252 million.

As we look into the post Horizon Phase 2B world, we would expect that, all things being equal, the additional productive capacity from Horizon would further increase this quarterly cash flow of $111 million after CapEx and dividends. Of course, this free cash flow would again further expand upon completion of Phase 3 at the end of 2017.

Obviously, any future improvements in crude oil above the $45.60 WTI or the $1.18 at GJ AECO natural gas pricing received in Q2 would provide significant upward torque to this quarterly free cash flow level. As outlined in our recent Investor Open House, we strive to balance and optimize our four pillars of cash flow allocation, i.e.

balance sheet strength, returns to shareholders, resource development and opportunistic acquisitions, but we would expect that enhancing balance sheet strength will be a key focus area in the short run. In short, our unique asset blend has helped us weather the volatility of the recent commodity price storm.

Our long-life, low decline assets underpin our financial resilience and provide more financial stability to base cash flow. This strong base of cash flow can then be augmented by our more opportunistic low capital exposure development opportunities, which typically provide quick payout and further enhance returns for shareholders in the right price and cost environments.

When we couple this robust and balanced asset base with our operational excellence and strong corporate culture, it gives me confidence that our exceptional track record of value creation for shareholders will continue into the future. Steve, back to you.

Thanks, Corey and Tim, for that update. As you can see, Canadian Natural is in a very strong and unique position.

We delivered top-tier effectiveness and efficiency. We have significant long-life low-decline assets that provide stable production and cash flow, as well as a deep inventory of low capital exposure projects that allow us to leverage our competitive advantages and infrastructure to maximize value.

Horizon expansion is coming to completion with Horizon 2B starting up in October, with full production in November, delivering additional sustainable production and cash flow, providing additional cash flow allocation opportunities. We are very effective allocators of capital and cash flow and ensuring we optimize the allocation between the four pillars, which maximize value for shareholders in the near, mid and long term.

That concludes our comments this morning, and we'll now open the line for questions.

Thanks. Thanks for the summary this morning, guys.

Steve, I just wanted to dig in a little bit into Primrose, not so much about the pipeline, but just more about what the outlook is from a production standpoint on a go-forward basis. You mentioned the cyclic nature of that steam obviously with CSS.

But in addition to that, when do you start to steam again in earnest? And how should we think about this over the next couple of years in terms of oil prices, what have you?

Thanks, Greg. And I think if you look at our guidance for Q3, you can see we're coming into the higher part of the cycle.

And obviously, when we took the Primrose pipeline, that took longer than we had anticipated. That's a very unique stress corrosion cracking, as Tim talked about.

We made sure that we took the time to do it right and make sure we got this thing set up perfectly for the future going ahead, particularly as we come into the higher production cycle in the third and fourth quarters. Steaming hasn't really changed.

Obviously, we had to slow down the steaming in Primrose East, while we got the pipeline fixed, but the cyclic nature of you're always steaming in and steaming out, so there'll be no real change. If we look into a newer production, which we add in 2016 and 2017, it does take some time when you bring on new PADDs.

And we'll look at that, how we do that when we do the 2017 budget. So it's too early to say what the long-term growth will be in Primrose going forward.

Okay, great. And maybe just to come back to the 130 wells that Tim touched on, the 45,000 barrels a day, pretty big number.

These are what progressive cavity – can you just remind me of maybe the area that this is focused in and just what trajectory typically looks like on these wells?

So, maybe Tim can add a little bit more color, but they're – basically they're 123 heavy oil prime, heavy oil wells, 125. And obviously, the profile on that is you start it with low production, it ramps up, stays fairly flat for four or five years and then goes into a rapid decline.

So they're very quick payout, very good cash on cash returns. Then the others are light oil wells, which are more like a shale oil well.

So you have a high production declining very quickly. And then we do have some thermal SAGD pads we're adding in the Wolf Lake area and Senlac, which will take a while to ramp up, but have very stable production once they go.

Okay. That's great.

Thanks very much.

Hi. Good morning.

Question for Corey. I know the company's on the cusp of an inflection point with Horizon ramping up in just a couple months.

But with $1.7 billion available under your credit lines, can you just update us on how you're thinking about liquidity, given you're not totally done with Horizon yet, the commodity market's obviously uncertain and you do have about $1.8 billion converted of bonds coming due in the next nine months or so?

Right. Yeah, Harry, we do look at the debt capital markets in both Canada and the U.S.

on a very regular basis and look for opportunities to issue in those markets. That being said, we also have several other financial levers in addition to our capital flexibility, which we obviously have been very good at exercising over the last little bit.

And the strong cash flow, as you pointed out, is continuing to ramp up. But in addition to that we also have some levers, including the investment in PrairieSky, again, about $575 million in cross-currency swaps maturing post-2020, so post that Horizon completion window.

And today, they have a mark of around $355 million. So those items are relatively quickly monetizable if we so chose to do.

Right now, there's no current intent to do that today, but we could monetize those if needed. And additionally, there is that royalty land portfolio, about 2,500 BOEs a day, of which about 1,050 BOEs a day are third-party royalty volumes.

And there is a lot of interest in the industry for those assets. So we do look at the debt capital markets, but we're not solely focused on that.

There are a lot of other levers that we have at our disposal to manage that liquidity.

Okay. And the in terms of the credit lines themselves, I know they're a pretty efficient, low cost source of debt capital.

But what do you sort of target to have drawn under those on a mid-cycle average basis?

We would – typically we would like to have in that $2 billion to $3 billion, probably closer to that $3 billion range of available liquidity.

Of available liquidity under the facilities?

Correct. Correct.

Got it. Okay.

All right. Thank you.

Hi, good morning. A couple of quick questions.

First question is just on the guidance for Horizon for the full year. If you could just remind us what you're assuming for Phase 2B contribution in the fourth quarter?

Okay. So what we expect to do, as we said in the calls, we'll start up in October and we expect full production in November.

And so, we'll get full production, it'll be about 182,000. So I think you can sort of target if you wanted to be sort of midpoint and we'd hit that by middle of November.

And the startup would start I would say in mid-October and we'll sort of ramp up to that, but you really won't kick in until the first part of November.

Got. And then as you look – go ahead.

Yes. No, go ahead.

So as you look ahead to 2017, there wouldn't be – there's nothing in particular that would prevent it from running at basically full utilization?

We're going to look at taking another pit stop or turnaround in 2017 and be proactive on that, especially with the Phase 3 tie-ins. So we'll decide that here as we get approach November.

So that may impact the full year not being at $182,000.

Right, okay. Fair enough.

And then my second question is just a bit of a follow-up to the last one. It might be a little difficult to answer, I realize.

But I'm just kind of wondering, as you look at those financial levers available to you, obviously we've seen a pullback in the oil price, just wondering maybe if you could put some parameters around what it would take for you to consider pulling one of those levers? It sounds like you don't want to proactively do it, given that there's an abundance of cash flow ahead.

But just kind of curious if there's something – some particular triggers you would look for to do something on that front.

Phil, to put it in perspective what we do is we look at our forward cash flow and our CapEx and we don't assume strip pricing. We look at a stress case cash flow.

We look at our capital commitments, any capital flexibility that we have, and of course, any upcoming bond maturities. And put all those into the mix, we have a very robust forecast system.

So we have pretty good visibility into where our cash flow is going and our liquidity requirements. And then, we basically look at what are available levers and what has appropriate values.

I would say that if you look at the cross currency swaps, obviously we entered into them for a hedge position. So it isn't necessarily something that we want to do, but it is something that is available to us and it's relatively easy to liquidate.

PrairieSky is actually providing us very reasonable return today. And I think there's actually some upside potential in that stock as well.

So it isn't necessarily that we're looking for specific triggers, it's something that we monitor all the time. We look forward 18 to 36 months and basically try to be proactive in terms of how we're looking at the visibility of the liquidity and the upcoming activities that are coming our way.

I'd add to that, Phil, that you can tell with our answers here, we're very confident in our ability to execute on Horizon Phase 2B and the start-up and full production there. So if we were less confident, I think we'd be looking that more hard and more seriously, but clearly we feel very confident in our ability to execute on Horizon 2B and Horizon 3.

Right, right. And I guess maybe with PrairieSky specifically, I mean you noted you're happy with the cash flows.

It doesn't sound like there is necessarily, I guess, a proactive reason that you would consider looking to sell those shares to provide some excess cash, whether it's to delever more quickly or anything like that.

Not at this point in time. We're happy with PrairieSky shares.

We like them and they perform well, so we're in no hurry.

Okay. Thanks so much.

Thank you. Good morning.

Can you update – obviously because of the production estimates have changed, can you update the cash flow ranges and what the financial – what the benchmark assumptions are behind that for 2016 from your July presentation?

Of our July presentation?

Yeah.

So I don't think – obviously it has a small impact because with the gas prices, it doesn't impact cash flow that much. So our cash flow ranges haven't really changed that much.

We'll still be within the range we had in July.

Okay. So the $3.3 billion to $3.7 billion?

Of capital spending?

Cash flow from operations from July.

Yeah. That's correct.

Okay. And the other thing is you guys have – you've done great at controlling what you can control.

It seems more and more that the oil market may be at risk in terms of rebalancing near-term. You're forward thinking in terms of going after Canadian natural gas assets albeit essentially a bit early, but that's hard to see in hindsight in terms of driving down costs, adding facilities.

Just wanted to know, what do you see in the natural gas market with respect to a path to rebalancing or a path to higher prices? Is it associated gas production declining in the U.S.?

What's going to help bring those prices up? And can you provide a figure as to what your free cash flow breakeven is for Canadian gas operations?

Like what AECO price do you need to breakeven on a free cash flow basis?

Yeah. I think our view on gas pricing is you're not going to see robust growth in gas pricing.

It is very much a situation where prices will ration supply. And as you see gas prices, if they get up towards $3, $3.50 NYMEX, you'll see a lot of gas production come on and push that price right back down.

And as prices get down below $2 NYMEX, then you'll see production declines, drilling will stop, production duct lines will come off and then prices will bounce back up or slowly rise back up. So we see gas pricing being range-bound.

And clearly, if you looked at our Open House presentation we have, in our inventory a lot of gas that makes our 15% return, especially with your infrastructure advantages, between about $1.50 AECO. And that's even more at $2 to $2.50 AECO.

So we're in a very good position here and we think within the range-bound gas prices, we'll be able to maintain and grow production as the market needs additional gas.

And so the key advantage that you reiterated here is the ownership of infrastructure and the ability to drive down costs.

We have the infrastructure. We have the assets and they're high quality assets.

If you look at our Montney Deep Basin assets, the Montney competes as a top tier play. It's either one or two in North America with Marcellus, depending on who does the analysis.

So we're very confident in our ability, and actually the industry's ability here in Western Canada, to compete head-to-head on a supply cost basis.

And suffice it to say, you're happy with the suite of assets you have in the absence of the return to higher pricing. You're not necessarily on the look-out to consolidate or purchase more gas assets or oil assets at this time?

We don't see any gaps in our portfolio, so we don't see any need to do acquisitions. That being said, we look at any property acquisition that will go through our core area.

So we look at them all. We bid on a few of them and we get even less.

So we look, but we don't have any gaps in our portfolio at this point.

Okay. Thank you.

And the final question I have is, I guess given the current strip pricing, I know you've laid out a number of scenarios in terms of the capital you'll deploy, whether it's $60 or a low case. So given sort of current strip pricing, on a company-wide basis, what is your sustaining capital, either on a per BOE basis or a total dollar basis?

Right now, we believe our sustaining capital is about $2.4 billion to $2.7 billion a year to keep production essentially flat.

Production at 2016 year-end guidance?

Yeah.

Okay. All right.

Thank you very much. I appreciate it.

Thank you.

Yeah. Hi, guys.

I don't want this question to sound too negative or cynical, but we've been promised a wall of cash flow many times in the past and it hasn't arrived. What's different this time about the outlook over the next two or three years?

Thanks.

I think, clearly we're making that transition to long-life, low decline assets. We're coming to that.

And I think what you got to look at is our portfolio. There's no gaps in our portfolio.

We're able to execute. And if you want to look at a proxy for what we'll do with that cash flow, you can look what we do with the PrairieSky disposition.

Roughly a third of that went to pay down debt to the balance sheet, a third back to shareholders and a third here we're going to reserve and decide what we're going to do with that later. So that's a significant distribution to shareholders, paying down debt, that's the $1.6 billion overall.

So you can see that we're in a good position here and we've actually demonstrated that with the PrairieSky distribution and pay down of debt in a low price environment. So I don't know if this gives you any confidence, but that's we're already doing it.

Sure. I guess that's the implication is that you're almost jumping a step further.

The obvious answer is that the Horizon is the difference, what you're highlighting is that the intention is then to very quickly rotate the free cash flow into distributions.

I think what's going to happen, we're going to balance that cash flow. We talked about those four pillars.

So I think initially probably more of the allocation will be weighted toward the balance sheet to get our balance sheet stronger, and then we'll be fairly well-balanced between the balance sheet, returns to shareholders, resource development and opportunistic acquisitions. And as I said earlier, there's really no gaps in our portfolio, so acquisitions have to make a lot of sense and add a lot of value.

We've got to see if we can add value before we do it. Resource development, we're very disciplined.

We're not going to bring on too much production. Obviously, you could add a lot of gas, but that doesn't make sense in this environment.

So we've been very disciplined in our capital allocation, resource development, which really leave the balance sheet which will strengthen very quickly, as we pointed out earlier. That then leaves returns to shareholders, which would be the allocation that's the easiest and probably the most effective to do.

Perfect. Thank you.

Yeah. Just one follow-up – a couple of follow-up questions.

Steve, I believe you listed once that if oil went back to $70, because everyone right now in Canada is communicating 15% to 20% improvement with respect to driving down capital costs per well across all plays, and in the U.S. it's on the order of 30% to 40% improvement.

You said that, I believe, that if oil goes back to $70, whatever gains you realized now, you'd give back half of them. Is that on an operating cost basis or on a capital cost basis?

Can you just clarify that, because I thought that was an important metric that people under-appreciate as oil prices move higher that you will give some, but not all of these savings back?

Yeah. So let me clarify, I think actually, if you look at our drilling completion costs, facility costs, we're anywhere from 25% to 35% reduction right now.

Operating costs are down 20%, it varies on what product you are. And I think how much is that's sustainable when prices increase and activity picks up will vary across the board.

Obviously, a lot of our operating costs are based on fuel costs, so if gas prices go up, our costs will go up. But we think on an average basis if you look overall, we should be able to keep 50% to 60% of those cost savings as prices increase.

And that applies to both operating and capital?

That's correct, yeah. It'll vary from each product, but in that range on average.

Okay. And the other question was just for the rest of the year, what it sort of implies on a CapEx basis.

So you're quite confident that the second half of the year is going to trail by, it looks like $700 million, $1.5 billion in second half, $2.2 billion to-date. Can you just walk through the mechanics of why CapEx in the back half is going to be lower?

Like what areas are diminishing or declining?

It's all driven by Horizon. Obviously, Horizon Phase 2B is we're – capital spending is going down right now.

Our manpower, we're de-manning right now at Horizon. And so your capital spending once you hit October drops dramatically at Horizon.

We've only got Phase 3, and we're entering into the winter months and we do very little activity and expansion in December and January to better productivity. So that's what's driving it.

And to date you're confident that none of those estimates have changed?

Correct.

Your full year CapEx guidance.

Yeah. Nothing's changed at this point, yeah

Thank you very much.

Thanks, Andrew, and thank you everyone for attending our conference call today. As shown on our results year-to-date, Canadian Natural's balanced and diversified asset base, coupled with a proven and effective strategy, continues to deliver.

Our flexible and effective capital allocation strategy works in all market conditions, and has allowed us to remain on track with Horizon expansions and progress towards the final stages of our transition to long life, low decline assets, all while maintaining a strong financial position in an asset base with significant allocation opportunities to continue maximizing shareholder value as we move forward. If you have any further questions, please give us a call.

Thank you again, and we look forward to our Q3 conference call in November. Thanks and good-bye.