EX-99.3 4 eh1700829_ex9903.htm EXHIBIT 99.3
EXHIBIT 99.3
 

 


Canadian Natural Resources Limited
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016
 
 
 
CONSOLIDATED BALANCE SHEETS
As at
                
(millions of Canadian dollars, unaudited)
  
Note
    
Jun 30
2017
    
Dec 31
2016
  
ASSETS
                  
Current assets
                  
Cash and cash equivalents
        
$
50
    
$
17
  
Accounts receivable
          
1,627
      
1,434
  
Current income taxes receivable
          
573
      
851
  
Inventory
          
929
      
689
  
Prepaids and other
          
324
      
149
  
Investments
    
6
      
832
      
913
  
Current portion of other long-term assets
    
7
      
34
      
283
  
 
            
4,369
      
4,336
  
Exploration and evaluation assets
    
3
      
2,635
      
2,382
  
Property, plant and equipment
    
4
      
64,317
      
50,910
  
Other long-term assets
    
7
      
1,069
      
1,020
  
 
          
$
72,390
    
$
58,648
  
 
                        
LIABILITIES
                        
Current liabilities
                        
Accounts payable
          
$
656
    
$
595
  
Accrued liabilities
            
2,044
      
2,222
  
Current portion of long-term debt
    
8
      
1,946
      
1,812
  
Current portion of other long-term liabilities
    
9
      
793
      
463
  
 
            
5,439
      
5,092
  
Long-term debt
    
8
      
21,330
      
14,993
  
Other long-term liabilities
    
9
      
4,088
      
3,223
  
Deferred income taxes
            
10,547
      
9,073
  
 
          
 
41,404
      
32,381
  
SHAREHOLDERS’ EQUITY
                        
Share capital
    
11
      
8,771
      
4,671
  
Retained earnings
            
22,203
      
21,526
  
Accumulated other comprehensive income
    
12
      
12
      
70
  
 
            
30,986
      
26,267
  
 
          
$
72,390
    
$
58,648
  
Commitments and contingencies (note 16).

Approved by the Board of Directors on August 2, 2017.
 
Canadian Natural Resources Limited
 1 
Six Months Ended June 30, 2017
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
         
Three Months Ended
    
Six Months Ended
  
(millions of Canadian dollars, except per
 common share amounts, unaudited)
  
Note
    
Jun 30
2017
    
Jun 30
2016
    
Jun 30
2017
    
Jun 30
2016
  
Product sales
        
$
3,927
    
$
2,686
    
$
7,799
    
$
4,949
  
Less: royalties
          
(216
)
    
(134
)
    
(446
)
    
(219
)
Revenue
          
3,711
      
2,552
      
7,353
      
4,730
  
Expenses
                                      
Production
          
1,272
      
991
      
2,374
      
2,013
  
Transportation, blending and feedstock
          
583
      
491
      
1,225
      
1,001
  
Depletion, depreciation and amortization
    
4
      
1,210
      
1,174
      
2,509
      
2,393
  
Administration
            
75
      
91
      
162
      
177
  
Share-based compensation
    
9
      
(104
)
    
122
      
(77
)
    
239
  
Asset retirement obligation accretion
    
9
      
39
      
35
      
75
      
71
  
Interest and other financing expense
            
145
      
86
      
279
      
178
  
Risk management activities
    
15
      
(19
)
    
(3
)
    
(71
)
    
67
  
Foreign exchange (gain) loss
            
(347
)
    
49
      
(403
)
    
(266
)
Gain on acquisition and disposition of
properties
    
3, 5
      
(265
)
    
—
      
(265
)
    
(32
)
(Gain) loss from investments
    
6, 7
      
(33
)
    
(7
)
    
56
      
(166
)
             
2,556
      
3,029
      
5,864
      
5,675
  
Earnings (loss) before taxes
            
1,155
      
(477
)
    
1,489
      
(945
)
Current income tax recovery
    
10
      
(79
)
    
(96
)
    
(26
)
    
(288
)
Deferred income tax expense (recovery)
    
10
      
162
      
(42
)
    
198
      
(213
)
Net earnings (loss)
          
$
1,072
    
$
(339
)
  
$
1,317
    
$
(444
)
Net earnings (loss) per common share
                                        
Basic
    
14
    
$
0.93
    
$
(0.31
)
  
$
1.16
    
$
(0.41
)
Diluted
    
14
    
$
0.93
    
$
(0.31
)
  
$
1.16
    
$
(0.41
)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
   
Three Months Ended
    
Six Months Ended
  
(millions of Canadian dollars, unaudited)
  
Jun 30
2017
    
Jun 30
2016
    
Jun 30
2017
    
Jun 30
2016
  
Net earnings (loss)
  
$
1,072
    
$
(339
)
  
$
1,317
    
$
(444
)
Items that may be reclassified subsequently to net earnings (loss)
                                
Net change in derivative financial instruments
designated as cash flow hedges
                                
Unrealized income during the period, net of taxes of
$6 million (2016 – $3 million) – three months ended;
$6 million (2016 – $nil) – six months ended
    
40
      
25
      
39
      
1
  
Reclassification to net earnings (loss), net of taxes of
$2 million (2016 – $1 million) – three months ended;
$3 million (2016 – $1 million) – six months ended
    
(15
)
    
(3
)
    
(22
)
    
7
  
     
25
      
22
      
17
      
8
  
Foreign currency translation adjustment
                                
Translation of net investment
    
(56
)
    
2
      
(75
)
    
(47
)
Other comprehensive income (loss), net of taxes
    
(31
)
    
24
      
(58
)
    
(39
)
Comprehensive income (loss)
  
$
1,041
    
$
(315
)
  
$
1,259
    
$
(483
)
 
Canadian Natural Resources Limited
 2 
Six Months Ended June 30, 2017
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
         
Six Months Ended
  
(millions of Canadian dollars, unaudited)
  
Note
    
Jun 30
2017
    
Jun 30
2016
  
Share capital
    
11
              
Balance – beginning of period
          
$
4,671
    
$
4,541
  
Issued for the acquisition of AOSP and other assets (1)
    
5, 11
      
3,818
      
—
  
Issued upon exercise of stock options
            
224
      
151
  
Previously recognized liability on stock options exercised for
common shares
            
58
      
21
  
Return of capital on PrairieSky Royalty Ltd. share distribution
            
—
      
(546
)
Balance – end of period
            
8,771
      
4,167
  
Retained earnings
                        
Balance – beginning of period
            
21,526
      
22,765
  
Net earnings (loss)
            
1,317
      
(444
)
Dividends on common shares
    
11
      
(640
)
    
(505
)
Balance – end of period
            
22,203
      
21,816
  
Accumulated other comprehensive income
    
12
                  
Balance – beginning of period
            
70
      
75
  
Other comprehensive loss, net of taxes
            
(58
)
    
(39
)
Balance – end of period
            
12
      
36
  
Shareholders’ equity
          
$
30,986
    
$
26,019
  
 
(1)
In connection with the acquisition of direct and indirect interests in the Athabasca Oil Sands Project ("AOSP") and other assets, the Company issued non-cash share consideration of $3,818 million. See note 5
 
 
 
Canadian Natural Resources Limited
 3 
Six Months Ended June 30, 2017
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
        
Three Months Ended
    
Six Months Ended
  
(millions of Canadian dollars, unaudited)
  
Note
    
Jun 30
2017
    
Jun 30
2016
    
Jun 30
2017
    
Jun 30
2016
  
Operating activities
                              
Net earnings (loss)
        
$
1,072
    
$
(339
)
  
$
1,317
    
$
(444
)
Non-cash items
                                      
Depletion, depreciation and amortization
          
1,210
      
1,174
      
2,509
      
2,393
  
Share-based compensation
          
(104
)
    
122
      
(77
)
    
239
  
Asset retirement obligation accretion
          
39
      
35
      
75
      
71
  
Unrealized risk management (gain) loss
          
(6
)
    
(52
)
    
(46
)
    
22
  
Unrealized foreign exchange (gain) loss
          
(355
)
    
40
      
(415
)
    
(294
)
(Gain) loss from investments
    
6, 7
      
(27
)
    
—
      
69
      
(147
)
Deferred income tax expense (recovery)
            
162
      
(42
)
    
198
      
(213
)
Gain on acquisition and disposition of
properties
     5      
(265
)
    
—
      
(265
)
    
(32
)
Other
            
(29
)
    
5
      
(7
)
    
24
  
Abandonment expenditures
            
(105
)
    
(36
)
    
(146
)
    
(110
)
Net change in non-cash working capital
            
39
      
(190
)
    
90
      
(211
)
 
            
1,631
      
717
      
3,302
      
1,298
  
Financing activities
                                        
Issue of bank credit facilities and
commercial paper, net
    
8
      
3,062
      
602
      
2,634
      
1,732
  
Issue of medium-term notes, net
    
8
      
1,791
      
—
      
1,791
      
—
  
Issue (repayment) of US dollar debt securities,
net
    
8
      
2,733
      
—
      
2,733
      
(555
)
Issue of common shares on exercise of stock
options
            
64
      
121
      
224
      
151
  
Dividends on common shares
            
(306
)
    
(252
)
    
(583
)
    
(252
)
 
            
7,344
      
471
      
6,799
      
1,076
  
Investing activities
                                        
Net (expenditures) proceeds on exploration and
evaluation assets
            
(4
)
    
(20
)
    
(41
)
    
10
  
Net expenditures on property, plant and
equipment
            
(780
)
    
(1,102
)
    
(1,548
)
    
(2,098
)
Acquisition of AOSP and other assets, net of
cash acquired (1)
    
5
      
(8,630
)
    
—
      
(8,630
)
    
—
  
Investment in other long-term assets
            
(23
)
    
—
      
(23
)
    
(99
)
Net change in non-cash working capital
            
493
      
(57
)
    
174
      
(232
)
 
            
(8,944
)
    
(1,179
)
    
(10,068
)
    
(2,419
)
Increase (decrease) in cash and cash
equivalents
            
31
      
9
      
33
      
(45
)
Cash and cash equivalents – beginning of
period
            
19
      
15
      
17
      
69
  
Cash and cash equivalents – end of period
          
$
50
    
$
24
    
$
50
    
$
24
  
Interest paid, net
          
$
123
    
$
123
    
$
322
    
$
305
  
Income taxes (received) paid
          
$
(260
)
  
$
4
    
$
(325
)
  
$
(113
)
(1)
The acquisition of AOSP includes net working capital of $291 million and excludes non-cash share consideration of $3,818 million. See note 5.
 
 
Canadian Natural Resources Limited
 4 
Six Months Ended June 30, 2017
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in millions of Canadian dollars, unless otherwise stated, unaudited)
1. ACCOUNTING POLICIES
Canadian Natural Resources Limited (the “Company”) is a senior independent crude oil and natural gas exploration, development and production company. The Company’s exploration and production operations are focused in North America, largely in Western Canada; the United Kingdom (“UK”) portion of the North Sea; and Côte d’Ivoire, Gabon, and South Africa in Offshore Africa.
The “Oil Sands Mining and Upgrading” segment produces synthetic crude oil through bitumen mining and upgrading operations at Horizon Oil Sands (“Horizon”) and through the Company’s direct and indirect interest in the Athabasca Oil Sands Project (“AOSP”).
Within Western Canada, the Company maintains certain midstream activities that include pipeline operations, an electricity co-generation system and an investment in the North West Redwater Partnership (“Redwater Partnership”), a general partnership formed in the Province of Alberta.
The Company was incorporated in Alberta, Canada. The address of its registered office is 2100, 855 - 2 Street S.W., Calgary, Alberta, Canada.
These interim consolidated financial statements and the related notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), applicable to the preparation of interim financial statements, including International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, following the same accounting policies as the audited consolidated financial statements of the Company as at December 31, 2016. These interim consolidated financial statements contain disclosures that are supplemental to the Company’s annual audited consolidated financial statements. Certain disclosures that are normally required to be included in the notes to the annual audited consolidated financial statements have been condensed. These interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016.
2. ACCOUNTING STANDARDS ISSUED BUT NOT YET APPLIED
In June 2017, the IASB issued IFRIC 23 “Uncertainty over Income Tax Treatments”. The interpretation provides guidance on how to reflect the effects of uncertainty in accounting for income taxes where IAS 12 is unclear. The interpretation is effective January 1, 2019. The Company is assessing the impact of this interpretation on its consolidated financial statements.
3. EXPLORATION AND EVALUATION ASSETS
    
Exploration and Production
    
Oil Sands
Mining and Upgrading
    
Total
  
   
North America
    
North Sea
    
Offshore Africa
              
Cost
                              
At December 31, 2016
  
$
2,306
    
$
—
    
$
76
     $
—
    
$
2,382
  
Additions
    
73
      
—
      
4
      
—
      
77
  
Acquisition of AOSP and other assets
(note 5)
    
31
      
—
      
—
      
259
      
290
  
Transfers to property, plant and
equipment
    
(113
)
    
—
      
—
      
—
      
(113
)
Disposals/derecognitions
    
(1
)
    
—
      
—
      
—
      
(1
)
At June 30, 2017
  
$
2,296
    
$
—
    
$
80
    
$
259
    
$
2,635
  
On May 31, 2017, the Company completed the acquisition of AOSP and other assets in the Oil Sands Mining and Upgrading and North America Exploration and Production segments, including exploration and evaluation assets of $290 million. Refer to note 5 regarding the acquisition of AOSP and other assets.
During the six months ended June 30, 2017, the Company disposed of certain North America exploration and evaluation assets with a net book value of $1 million for consideration of $36 million, resulting in a pre-tax cash gain on sale of properties of $35 million.
 
Canadian Natural Resources Limited
 5 
Six Months Ended June 30, 2017
4. PROPERTY, PLANT AND EQUIPMENT
    
Exploration and Production
    
Oil Sands
Mining and Upgrading
    
Midstream
    
Head
Office
    
Total
  
   
North
America
    
North Sea
    
Offshore
Africa
                          
Cost
                                          
At December 31, 2016
  
$
61,647
    
$
7,380
    
$
5,132
    
$
27,038
    
$
234
    
$
395
    
$
101,826
  
Additions
    
1,088
      
96
      
36
      
470
      
2
      
22
      
1,714
  
Acquisition of AOSP and
other assets (note 5)
    
349
      
—
      
—
      
13,832
      
—
      
—
      
14,181
  
Transfers from E&E assets
    
113
      
—
      
—
      
—
      
—
      
—
      
113
  
Disposals/derecognitions
    
(194
)
    
—
      
—
      
(45
)
    
—
      
—
      
(239
)
Foreign exchange
adjustments and other
    
—
      
(248
)
    
(171
)
    
—
      
—
      
—
      
(419
)
At June 30, 2017
  
$
63,003
    
$
7,228
    
$
4,997
    
$
41,295
    
$
236
    
$
417
    
$
117,176
  
Accumulated depletion and depreciation
                                          
At December 31, 2016
  
$
38,311
    
$
5,584
    
$
3,797
    
$
2,828
    
$
115
    
$
281
    
$
50,916
  
Expense
    
1,561
      
401
      
100
      
432
      
4
      
11
      
2,509
  
Disposals/derecognitions
    
(194
)
    
—
      
—
      
(45
)
    
—
      
—
      
(239
)
Foreign exchange
adjustments and other
    
(7
)
    
(214
)
    
(125
)
    
19
      
—
      
—
      
(327
)
At June 30, 2017
  
$
39,671
    
$
5,771
    
$
3,772
    
$
3,234
    
$
119
    
$
292
    
$
52,859
  
Net book value
                                                        
 - at June 30, 2017
  
$
23,332
    
$
1,457
    
$
1,225
    
$
38,061
    
$
117
    
$
125
    
$
64,317
  
 - at December 31, 2016
  
$
23,336
    
$
1,796
    
$
1,335
    
$
24,210
    
$
119
    
$
114
    
$
50,910
  

Project costs not subject to depletion and depreciation
Jun 30
2017
  
Dec 31
2016
  
Kirby Thermal Oil Sands – North
  
$
877
    
$
846
  
On May 31, 2017, the Company completed the acquisition of AOSP and other assets in the Oil Sands Mining and Upgrading and North America Exploration and Production segments, including property, plant and equipment of $14,181 million. Refer to note 5 regarding the acquisition of AOSP and other assets.
During the six months ended June 30, 2017, the Company acquired a number of other producing crude oil and natural gas properties in the North America Exploration and Production segment for net cash consideration of $72 million. These transactions were accounted for using the acquisition method of accounting. In connection with these acquisitions, the Company assumed associated asset retirement obligations of $30 million. No net deferred income tax liabilities or pre-tax gains were recognized on these acquisitions.
The Company capitalizes construction period interest for qualifying assets based on costs incurred and the Company’s cost of borrowing. Interest capitalization to a qualifying asset ceases once the asset is substantially available for its intended use. For the six months ended June 30, 2017, pre-tax interest of $43 million (June 30, 2016 – $128 million) was capitalized to property, plant and equipment using a weighted average capitalization rate of 3.9% (June 30, 2016 – 3.9%).
 
Canadian Natural Resources Limited
 6
Six Months Ended June 30, 2017
5. ACQUISITION OF INTERESTS IN THE ATHABASCA OIL SANDS PROJECT AND OTHER ASSETS

On May 31, 2017, the Company completed the acquisition of a direct and indirect 70% interest in AOSP from Shell Canada Limited and certain subsidiaries (“Shell”) and an affiliate of Marathon Oil Corporation (“Marathon"), including a 70% interest in the mining and extraction operations north of Fort McMurray, Alberta, 70% of the Scotford Upgrader and Quest Carbon Capture and Storage ("CCS") project, and a 100% working interest in the Peace River thermal in situ operations and Cliffdale heavy oil field, as well as other oil sands leases. The Company also assumed certain pipeline and other commitments (see note 16). The Company consolidates its direct and indirect interest in the assets, liabilities, revenue and expenses of AOSP and other assets in proportion to the Company’s interests.
Total purchase consideration of $12,541 million, subject to closing adjustments, was comprised of cash payments of $8,217 million, approximately 97.6 million common shares of the Company issued to Shell, with a fair value of approximately $3,818 million, and deferred purchase consideration of $506 million (US$375 million) payable to Marathon in March 2018. The fair value of the Company's common shares was determined using the market price of the shares as at the acquisition date.
In connection with the acquisition of AOSP and other assets, the Company arranged acquisition financing of $1.8 billion of medium-term notes in Canada, US$3 billion of long-term notes in the United States and a $3 billion non-revolving term loan facility (see note 8).
The acquisition has been accounted for as a business combination using the acquisition method of accounting. The allocation of the purchase price was based on management's best estimates of the fair value of the assets and liabilities acquired as at the acquisition date. Key assumptions used in the determination of estimated fair value were future commodity prices, expected production volumes, quantity of reserves, asset retirement obligations, future development and operating costs, discount rates, income taxes and foreign exchange rates. The fair value of accounts receivable, inventory, accounts payable and accrued liabilities approximate their carrying values due to the liquid nature of the assets and liabilities.
The following provides a summary of the net assets acquired and (liabilities) assumed relating to the acquisition:
Cash
  
$
93
  
Other working capital
    
291
  
Property, plant and equipment
    
14,181
  
Exploration and evaluation assets
    
290
  
Asset retirement obligations
    
(721
)
Other long-term liabilities
    
(73
)
Deferred income taxes
    
(1,287
)
Net assets acquired
  
$
12,774
  
         
Total purchase consideration
    
12,541
  
Gain on acquisition before transaction costs
  
$
233
  
The Company recognized a gain of $230 million, net of transaction costs of $3 million, representing the excess of the fair value of the net assets acquired compared to total purchase consideration. The above amounts are estimates, and may be subject to change based on the receipt of new information.
As a result of the acquisitions, revenue increased by $355 million to $7,353 million and net operating income (comprised of revenue less production, and transportation, blending, and feedstock expense) increased by $132 million to $3,754 million for the six months ended June 30, 2017. If the acquisitions had occurred on January 1, 2017, the Company estimates that pro forma revenue would have increased by $2,181 million to $9,534 million and pro forma net operating income would have increased by $735 million to $4,489 million for the six months ended June 30, 2017. Readers are cautioned that pro forma revenue and pro forma net operating income are not necessarily indicative of the results of operations that would have resulted had the acquisition actually occurred on January 1, 2017, or of future results. Actual results would have been different and those differences may have been material in comparison to the pro forma information provided. Pro forma results are based on available historical information for the assets as provided to the Company and do not include any synergies that have or may arise subsequent to the acquisition date.
 
Canadian Natural Resources Limited
 7
Six Months Ended June 30, 2017
6. INVESTMENTS
As at June 30, 2017, the Company had the following investments:
   
Jun 30
2017
    
Dec 31
2016
  
Investment in PrairieSky Royalty Ltd.
  
$
669
    
$
723
  
Investment in Inter Pipeline Ltd.
    
163
      
190
  
   
$
832
    
$
913
  
Investment in PrairieSky Royalty Ltd.
The Company’s investment of 22.6 million common shares of PrairieSky Royalty Ltd. (“PrairieSky”) does not constitute significant influence, and is accounted for at fair value through profit or loss, remeasured at each reporting date. As at June 30, 2017, the Company’s investment in PrairieSky was classified as a current asset.
The (gain) loss from the investment in PrairieSky was comprised as follows:
 
Three Months Ended
  
Six Months Ended
  
 
Jun 30
2017
  
Jun 30
2016
  
Jun 30
2017
  
Jun 30
2016
  
Fair value (gain) loss from PrairieSky
  
$
(34
)
  
$
(3
)
  
$
54
    
$
(124
)
Dividend income from PrairieSky
    
(4
)
    
(7
)
    
(8
)
    
(19
)
   
$
(38
)
  
$
(10
)
  
$
46
    
$
(143
)
Investment in Inter Pipeline Ltd.
The Company’s investment of 6.4 million common shares of Inter Pipeline Ltd. (“Inter Pipeline”) does not constitute significant influence, and is accounted for at fair value through profit or loss, remeasured at each reporting date. As at June 30, 2017, the Company’s investment in Inter Pipeline was classified as a current asset.
The loss from the investment in Inter Pipeline was comprised as follows:
 
Three Months Ended
  
Six Months Ended
  
 
Jun 30
2017
  
Jun 30
2016
  
Jun 30
2017
  
Jun 30
2016
  
Fair value loss from Inter Pipeline
  
$
17
    
$
—
    
$
27
    
$
—
  
Dividend income from Inter Pipeline
    
(2
)
    
—
      
(5
)
    
—
  
   
$
15
    
$
—
    
$
22
    
$
—
  

 
Canadian Natural Resources Limited
 8
Six Months Ended June 30, 2017

7. OTHER LONG-TERM ASSETS
   
Jun 30
2017
    
Dec 31
2016
  
Investment in North West Redwater Partnership
  
$
273
    
$
261
  
North West Redwater Partnership subordinated debt (1)
    
425
      
385
  
Risk Management (note 15)
    
247
      
489
  
Other
    
158
      
168
  
     
1,103
      
1,303
  
Less: current portion
    
34
      
283
  
   
$
1,069
    
$
1,020
  
(1)
Includes accrued interest.
 
Investment in North West Redwater Partnership
The Company’s 50% interest in Redwater Partnership is accounted for using the equity method based on Redwater Partnership’s voting and decision-making structure and legal form. Redwater Partnership has entered into agreements to construct and operate a 50,000 barrel per day bitumen upgrader and refinery (the “Project”) under processing agreements that target to process 12,500 barrels per day of bitumen feedstock for the Company and 37,500 barrels per day of bitumen feedstock for the Alberta Petroleum Marketing Commission (“APMC”), an agent of the Government of Alberta, under a 30 year fee-for-service tolling agreement.
During 2013, the Company along with APMC, initially committed each to provide funding up to $350 million by each party by January 2016 in the form of subordinated debt bearing interest at prime plus 6%, based on a facility capital cost ("FCC") budget at $8,500 million, which has subsequently been increased by approximately 11% to the current estimate of approximately $9,400 million. As a result, the Company and APMC have agreed, each with a 50% interest, to provide additional subordinated debt as required for Project costs in excess of the FCC of $8,500 million to reflect an agreed debt to equity ratio of 80/20 and, subject to the Company being able to meet certain funding conditions, to fund any shortfall in available third party commercial lending required to attain Project completion, which is currently targeted for mid-2018. The Company's share of any additional subordinated debt financing resulting from the increase in the FCC in excess of $8,500 million is not expected to be significant. For the six months ended June 30, 2017, the Company and APMC each contributed an additional $23 million. To June 30, 2017, each party has provided $347 million of subordinated debt, together with accrued interest thereon of $78 million, for a Company total of $425 million.
During the second quarter of 2017, Redwater Partnership issued $750 million of 2.80% series J senior secured bonds due June 2027 and $750 million of 3.65% series K senior secured bonds due June 2035.
As at June 30, 2017, Redwater Partnership had additional borrowings of $931 million under its secured $3,500 million syndicated credit facility.
Under its processing agreement, beginning on the earlier of the commercial operations date of the refinery and June 1, 2018, the Company is unconditionally obligated to pay its 25% pro rata share of the debt portion of the monthly cost of service toll, including interest, fees and principal repayments, of the syndicated credit facility and bonds, over the tolling period of 30 years.
During the three months ended June 30, 2017, the Company recognized an equity gain from Redwater Partnership of $10 million (three months ended June 30, 2016 – loss of $3 million; six months ended June 30, 2017 – gain of $12 million; six months ended June 30, 2016 – gain of $23 million).
Redwater Partnership has entered into various agreements related to the engineering, procurement and construction of the Project. These contracts can be cancelled by Redwater Partnership upon notice without penalty, subject to the costs incurred up to and in respect of the cancellation.
 
Canadian Natural Resources Limited
 9
Six Months Ended June 30, 2017
8. LONG-TERM DEBT
   
Jun 30
2017
    
Dec 31
2016
  
Canadian dollar denominated debt, unsecured
            
Bank credit facilities
  
$
4,660
    
$
2,758
  
Medium-term notes
    
5,300
      
3,500
  
     
9,960
      
6,258
  
US dollar denominated debt, unsecured
                
Bank credit facilities (June 30, 2017 - US$1,220 million;
     December 31, 2016 - US$905 million)
    
1,584
      
1,213
  
Commercial paper (June 30, 2017 - US$500 million;
     December 31, 2016 - US$250 million)
    
649
      
336
  
US dollar debt securities (June 30, 2017 - US$8,650 million;
     December 31, 2016 - US$6,750 million)
    
11,230
      
9,063
  
     
13,463
      
10,612
  
Long-term debt before transaction costs and original issue discounts, net
    
23,423
      
16,870
  
Less: original issue discounts, net (1)
    
(18
)
    
(10
)
transaction costs (1) (2)
    
(129
)
    
(55
)
     
23,276
      
16,805
  
Less: current portion of commercial paper
    
649
      
336
  
current portion of other long-term debt (1) (2)
    
1,297
      
1,476
  
   
$
21,330
    
$
14,993
  
(1)
The Company has included unamortized original issue discounts and premiums, and directly attributable transaction costs in the carrying amount of the outstanding debt.
(2)
Transaction costs primarily represent underwriting commissions charged as a percentage of the related debt offerings, as well as legal, rating agency and other professional fees.
Bank Credit Facilities and Commercial Paper
As at June 30, 2017, the Company had in place bank credit facilities of $11,050 million, as described below, of which $3,671 million was available. This excludes certain other dedicated credit facilities supporting letters of credit.
•
a $100 million demand credit facility;
•
a $750 million non-revolving term credit facility maturing February 2019;
•
a $125 million non-revolving term credit facility maturing February 2019;
•
a $2,200 million non-revolving term credit facility maturing October 2019;
•
a $3,000 million non-revolving term credit facility maturing May 2020;
•
a $2,425 million revolving syndicated credit facility maturing June 2020;
•
a $2,425 million revolving syndicated credit facility with $330 million maturing in June 2019 and $2,095 million maturing June 2021; and
•
a £15 million demand credit facility related to the Company’s North Sea operations.

During the second quarter of 2017, the Company extended $2,095 million of the $2,425 million revolving syndicated credit facility originally due June 2019 to June 2021. The remaining $330 million outstanding under this facility will continue under the previous terms and mature in June 2019. The other $2,425 million revolving credit facility matures in June 2020. The revolving credit facilities are extendible annually at the mutual agreement of the Company and the lenders. If the facilities are not extended, the full amount of the outstanding principal would be repayable on the maturity date. Borrowings under these facilities may be made by way of pricing referenced to Canadian dollar or US dollar bankers’ acceptances, or LIBOR, US base rate or Canadian prime loans.
During the second quarter of 2017, the $1,500 million non-revolving term credit facility was increased to $2,200 million and the maturity date was extended to October 2019 from April 2018. Borrowings under the $2,200 million non-revolving credit facility may be made by way of pricing referenced to Canadian dollar or US dollar bankers’ acceptances, or LIBOR, US base rate or Canadian prime loans. As at June 30, 2017, the $2,200 million facility was fully drawn.
Borrowings under the $750 million and $125 million non-revolving credit facilities may be made by way of pricing referenced to Canadian dollar bankers’ acceptances or Canadian prime loans. As at June 30, 2017, the $750 million and $125 million facilities were each fully drawn.
 
Canadian Natural Resources Limited
 10
Six Months Ended June 30, 2017
In addition to the credit facilities described above, during the second quarter of 2017, the Company entered into a $3,000 million non-revolving term loan facility to finance the acquisition of AOSP and other assets. This facility matures in May 2020 and is subject to annual amortization of 5% of the original balance. Borrowings under the term loan facility may be made by way of pricing referenced to Canadian dollar or US dollar bankers’ acceptances, or LIBOR, US base rate or Canadian prime loans. The facility also supports a US$375 million letter of credit relating to the deferred purchase consideration payable to Marathon in March 2018. As at June 30, 2017, the $3,000 million facility was fully drawn.
The Company’s borrowings under its US commercial paper program are authorized up to a maximum US$2,500 million. The Company reserves capacity under its bank credit facilities for amounts outstanding under this program.
The Company’s weighted average interest rate on bank credit facilities and commercial paper outstanding as at June 30, 2017 was 1.9% (June 30, 2016 – 2.0%), and on total long-term debt outstanding for the six months ended June 30, 2017 was 3.9% (June 30, 2016 – 3.9%).
At June 30, 2017, letters of credit and guarantees aggregating $924 million were outstanding, including letters of credit of $669 million related to AOSP (including the deferred purchase consideration payable to Marathon in March 2018), a $39 million financial guarantee related to Horizon and $111 million of letters of credit related to North Sea operations.
Medium-Term Notes
During the second quarter of 2017, the Company issued $900 million of 2.05% medium-term notes due June 2020, $600 million of 3.42% medium-term notes due December 2026 and $300 million of 4.85% medium-term notes due May 2047. Proceeds from the securities were used to finance the acquisition of AOSP and other assets. Subsequent to June 30, 2017, the Company filed a base shelf prospectus that allows for the offer for sale from time to time of up to $3,000 million of medium-term notes in Canada, which expires in August 2019, replacing the Company's previous base shelf prospectus, which would have expired in November 2017. If issued, these securities may be offered in amounts and at prices, including interest rates, to be determined based on market condition at the time of issuance.
US Dollar Debt Securities
During the second quarter of 2017, the Company repaid US$1,100 million of 5.70% notes. In addition, the Company issued US$1,000 million of 2.95% notes due January 2023, US$1,250 million of 3.85% notes due June 2027 and US$750 million of 4.95% notes due June 2047. Proceeds from the debt securities were used to finance the acquisition of AOSP and other assets. Subsequent to June 30, 2017, the Company filed a base shelf prospectus that allows for the offer for sale from time to time of up to US$3,000 million of debt securities in the United States, which expires in August 2019, replacing the Company's previous base shelf prospectus, which would have expired in November 2017. If issued, these securities may be offered in amounts and at prices, including interest rates, to be determined based on market condition at the time of issuance.
9. OTHER LONG-TERM LIABILITIES
   
Jun 30
2017
    
Dec 31
2016
  
Asset retirement obligations
  
$
4,025
    
$
3,243
  
Share-based compensation
    
271
      
426
  
Risk management (note 15)
    
10
      
—
  
Other (1)
    
575
      
17
  
     
4,881
      
3,686
  
Less: current portion
    
793
      
463
  
   
$
4,088
    
$
3,223
  
(1)       Included in Other at June 30, 2017 is $487 million (US$375 million) of deferred purchase consideration payable to Marathon in March 2018.
 
Canadian Natural Resources Limited
 11
Six Months Ended June 30, 2017
Asset Retirement Obligations
The Company’s asset retirement obligations are expected to be settled on an ongoing basis over a period of approximately 60 years and have been discounted using a weighted average discount rate of 5.0% (December 31, 2016 – 5.2%). Reconciliations of the discounted asset retirement obligations were as follows:
   
Jun 30
2017
    
Dec 31
2016
  
Balance – beginning of period
  
$
3,243
    
$
2,950
  
Liabilities incurred
    
5
      
3
  
Liabilities acquired, net
    
751
      
30
  
Liabilities settled
    
(146
)
    
(267
)
Asset retirement obligation accretion
    
75
      
142
  
Revision of cost, inflation rates and timing estimates
    
—
      
(68
)
Change in discount rate
    
131
      
493
  
Foreign exchange adjustments
    
(34
)
    
(40
)
Balance – end of period
    
4,025
      
3,243
  
Less: current portion
    
87
      
95
  
   
$
3,938
    
$
3,148
  
Share-Based Compensation
As the Company’s Option Plan provides current employees with the right to elect to receive common shares or a cash payment in exchange for stock options surrendered, a liability for potential cash settlements is recognized. The current portion represents the maximum amount of the liability payable within the next twelve month period if all vested stock options are surrendered for cash settlement.
   
Jun 30
2017
    
Dec 31
2016
  
Balance – beginning of period
  
$
426
    
$
128
  
Share-based compensation (recovery) expense
    
(77
)
    
355
  
Cash payment for stock options surrendered
    
(2
)
    
(7
)
Transferred to common shares
    
(58
)
    
(117
)
  (Recovered from) capitalized to Oil Sands Mining and Upgrading
    
(18
)
    
67
  
Balance – end of period
    
271
      
426
  
Less: current portion
    
209
      
368
  
   
$
62
    
$
58
  
10. INCOME TAXES
The provision for income tax was as follows:
   
Three Months Ended
    
Six Months Ended
  
Expense (recovery)
  
Jun 30
2017
    
Jun 30
2016
    
Jun 30
2017
    
Jun 30
2016
  
Current corporate income tax – North America
  
$
(47
)
  
$
(68
)
  
$
(9
)
  
$
(187
)
Current corporate income tax – North Sea
    
30
      
(8
)
    
36
      
(31
)
Current corporate income tax – Offshore Africa
    
7
      
8
      
14
      
12
  
Current PRT (1) – North Sea
    
(72
)
    
(31
)
    
(73
)
    
(86
)
Other taxes
    
3
      
3
      
6
      
4
  
Current income tax
    
(79
)
    
(96
)
    
(26
)
    
(288
)
Deferred corporate income tax
    
110
      
(52
)
    
138
      
(19
)
Deferred PRT (1) – North Sea
    
52
      
10
      
60
      
(194
)
Deferred income tax
    
162
      
(42
)
    
198
      
(213
)
Income tax
  
$
83
    
$
(138
)
  
$
172
    
$
(501
)
(1)       Petroleum Revenue Tax.
 
Canadian Natural Resources Limited
 12
Six Months Ended June 30, 2017
11. SHARE CAPITAL
Authorized
Preferred shares issuable in a series.
Unlimited number of common shares without par value.
   
Six Months Ended Jun 30, 2017
  
Issued common shares
  
Number of shares
(thousands)
    
Amount
  
Balance – beginning of period
    
1,110,952
    
$
4,671
  
Issued for the acquisition of AOSP and other assets (note 5)
    
97,561
      
3,818
  
Issued upon exercise of stock options
    
6,545
      
224
  
Previously recognized liability on stock options exercised for
common shares
    
—
      
58
  
Balance – end of period
    
1,215,058
    
$
8,771
  
Dividend Policy
The Company has paid regular quarterly dividends in each year since 2001. The dividend policy undergoes periodic review by the Board of Directors and is subject to change.
On March 1, 2017, the Board of Directors declared a quarterly dividend of $0.275 per common share ($0.25 per common share on November 2, 2016), beginning with the dividend payable on April 1, 2017.
Normal Course Issuer Bid
On May 16, 2017, the Company’s application was approved for a Normal Course Issuer Bid to purchase through the facilities of the Toronto Stock Exchange, alternative Canadian trading platforms, and the New York Stock Exchange, up to 27,931,135 common shares, over a 12 month period commencing May 23, 2017 and ending May 22, 2018. For the six months ended June 30, 2017, the Company did not purchase any common shares for cancellation.
Stock Options
The following table summarizes information relating to stock options outstanding at June 30, 2017:
   
Six Months Ended Jun 30, 2017
  
   
Stock options (thousands)
    
Weighted
average
exercise price
  
Outstanding – beginning of period
    
58,299
    
$
34.22
  
Granted
    
8,714
    
$
40.32
  
Surrendered for cash settlement
    
(260
)
  
$
34.72
  
Exercised for common shares
    
(6,545
)
  
$
34.17
  
Forfeited
    
(2,346
)
  
$
37.75
  
Outstanding – end of period
    
57,862
    
$
35.00
  
Exercisable – end of period
    
15,740
    
$
33.58
  
The Option Plan is a “rolling 9%” plan, whereby the aggregate number of common shares that may be reserved for issuance under the plan shall not exceed 9% of the common shares outstanding from time to time.
 
Canadian Natural Resources Limited
 13
Six Months Ended June 30, 2017
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of taxes, were as follows:
   
Jun 30
2017
    
Jun 30
2016
  
Derivative financial instruments designated as cash flow hedges
  
$
44
    
$
66
  
Foreign currency translation adjustment
    
(32
)
    
(30
)
   
$
12
    
$
36
 
 
 
Canadian Natural Resources Limited
 14
Six Months Ended June 30, 2017
13. CAPITAL DISCLOSURES
The Company does not have any externally imposed regulatory capital requirements for managing capital. The Company has defined its capital to mean its long-term debt and consolidated shareholders’ equity, as determined at each reporting date.
The Company’s objectives when managing its capital structure are to maintain financial flexibility and balance to enable the Company to access capital markets to sustain its on-going operations and to support its growth strategies. The Company primarily monitors capital on the basis of an internally derived financial measure referred to as its “debt to book capitalization ratio”, which is the arithmetic ratio of current and long-term debt divided by the sum of the carrying value of shareholders’ equity plus current and long-term debt. The Company’s internal targeted range for its debt to book capitalization ratio is 25% to 45%. This range may be exceeded in periods when a combination of capital projects, acquisitions, or lower commodity prices occurs. The Company may be below the low end of the targeted range when cash flow from operating activities is greater than current investment activities. At June 30, 2017, the ratio was within the target range at 43%.
Readers are cautioned that the debt to book capitalization ratio is not defined by IFRS and this financial measure may not be comparable to similar measures presented by other companies. Further, there are no assurances that the Company will continue to use this measure to monitor capital or will not alter the method of calculation of this measure in the future.
   
Jun 30
2017
    
Dec 31
2016
  
Long-term debt (1)
  
$
23,276
    
$
16,805
  
Total shareholders’ equity
  
$
30,986
    
$
26,267
  
Debt to book capitalization
    
43%
 
    
39%
 
(1)
Includes the current portion of long-term debt.
14. NET EARNINGS (LOSS) PER COMMON SHARE
   
Three Months Ended
    
Six Months Ended
  
   
Jun 30
2017
    
Jun 30
2016
    
Jun 30
2017
    
Jun 30
2016
  
Weighted average common shares outstanding
– basic (thousands of shares)
    
1,150,335
      
1,097,579
      
1,131,740
      
1,096,247
  
Effect of dilutive stock options (thousands of shares)
    
7,845
      
—
      
8,077
      
—
  
Weighted average common shares outstanding
– diluted (thousands of shares)
    
1,158,180
      
1,097,579
      
1,139,817
      
1,096,247
  
Net earnings (loss)
  
$
1,072
    
$
(339
)
  
$
1,317
    
$
(444
)
Net earnings (loss) per common share
– basic
  
$
0.93
    
$
(0.31
)
  
$
1.16
    
$
(0.41
)
 
– diluted
  
$
0.93
    
$
(0.31
)
  
$
1.16
    
$
(0.41
)
 
Canadian Natural Resources Limited
 15
Six Months Ended June 30, 2017
15. FINANCIAL INSTRUMENTS
The carrying amounts of the Company’s financial instruments by category were as follows:
   
Jun 30, 2017
  
Asset (liability)
  
Financial
assets
at amortized
cost
    
Fair value
through
profit or loss
    
Derivatives
used for
hedging
    
Financial
liabilities at
amortized
cost
    
Total
  
Accounts receivable
  
$
1,627
    
$
—
    
$
—
    
$
—
    
$
1,627
  
Investments
    
—
      
832
      
—
      
—
      
832
  
Other long-term assets
    
425
      
—
      
247
      
—
      
672
  
Accounts payable
    
—
      
—
      
—
      
(656
)
    
(656
)
Accrued liabilities
    
—
      
—
      
—
      
(2,044
)
    
(2,044
)
Other long-term liabilities (1)
    
—
      
48
      
(58
)
    
(487
)
    
(497
)
Long-term debt (2)
    
—
      
—
      
—
      
(23,276
)
    
(23,276
)
   
$
2,052
    
$
880
    
$
189
    
$
(26,463
)
  
$
(23,342
)

   
Dec 31, 2016
  
Asset (liability)
  
Financial
assets
at amortized
cost
    
Fair value
through
profit or loss
    
Derivatives
used for
hedging
    
Financial
liabilities at
amortized
cost
    
Total
  
Accounts receivable
  
$
1,434
    
$
—
    
$
—
    
$
—
    
$
1,434
  
Investments
    
—
      
913
      
—
      
—
      
913
  
Other long-term assets
    
385
      
4
      
485
      
—
      
874
  
Accounts payable
    
—
      
—
      
—
      
(595
)
    
(595
)
Accrued liabilities
    
—
      
—
      
—
      
(2,222
)
    
(2,222
)
Long-term debt (2)
    
—
      
—
      
—
      
(16,805
)
    
(16,805
)
   
$
1,819
    
$
917
    
$
485
    
$
(19,622
)
  
$
(16,401
)
(1)
Includes $487 million (US$375 million) of deferred purchase consideration payable to Marathon in March 2018.
(2)
Includes the current portion of long-term debt.
 
The carrying amounts of the Company’s financial instruments approximated their fair value, except for fixed rate long-term debt. The fair values of the Company’s investments, recurring other long-term assets (liabilities) and fixed rate long-term debt are outlined below:
     
Jun 30, 2017
 
 
Carrying amount
  
Fair value
  
Asset (liability) (1) (2)
    
Level 1
  
Level 2
  
Level 3
  
Investments (3)
  
$
832
    
$
832
    
$
—
    
$
—
  
Other long-term assets (4)
  
$
672
    
$
—
    
$
247
    
$
425
  
Other long-term liabilities
  
$
(10
)
  
$
—
    
$
(10
)
  
$
—
  
Fixed rate long-term debt (5) (6)
  
$
(16,383
)
  
$
(17,290
)
  
$
—
    
$
—
  

     
Dec 31, 2016
 
 
Carrying amount
  
Fair value
  
Asset (liability) (1) (2)
    
Level 1
  
Level 2
  
Level 3
  
Investments (3)
  
$
913
    
$
913
    
$
—
    
$
—
  
Other long-term assets (4)
  
$
874
    
$
—
    
$
489
    
$
385
  
Fixed rate long-term debt (5) (6)
  
$
(12,498
)
  
$
(13,217
)
  
$
—
    
$
—
  
(1)
Excludes financial assets and liabilities where the carrying amount approximates fair value due to the liquid nature of the asset or liability (cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and deferred purchase consideration payable to Marathon in March 2018).
(2)
There were no transfers between Level 1, 2 and 3 financial instruments.
(3)
The fair value of the investments are based on quoted market prices.
(4)
The fair value of North West Redwater Partnership subordinated debt is based on the present value of future cash receipts.
(5)
The fair value of fixed rate long-term debt has been determined based on quoted market prices.
(6)
Includes the current portion of fixed rate long-term debt.
 
Canadian Natural Resources Limited
 16
Six Months Ended June 30, 2017
The following provides a summary of the carrying amounts of derivative financial instruments held and a reconciliation to the Company’s consolidated balance sheets.
Asset (liability)
  
Jun 30
2017
    
Dec 31
2016
  
Derivatives held for trading
            
Foreign currency forward contracts
  
$
(28
)
  
$
10
  
Crude oil price collars
    
73
      
—
  
Natural gas AECO swaps
    
3
      
(6
)
Cash flow hedges
                
Foreign currency forward contracts
    
(65
)
    
16
  
Cross currency swaps
    
254
      
469
  
   
$
237
    
$
489
  
                 
Included within:
                
Current portion of other long-term (liabilities) assets
  
$
(10
)
  
$
222
  
Other long-term assets
    
247
      
267
  
   
$
237
    
$
489
  

For the six months ended June 30, 2017, the Company recognized a gain of $2 million (year ended December 31, 2016 – gain of $7 million) related to ineffectiveness arising from cash flow hedges.
The estimated fair value of derivative financial instruments in Level 2 at each measurement date have been determined based on appropriate internal valuation methodologies and/or third party indications. Level 2 fair values determined using valuation models require the use of assumptions concerning the amount and timing of future cash flows and discount rates. In determining these assumptions, the Company primarily relied on external, readily-observable quoted market inputs as applicable, including crude oil and natural gas forward benchmark commodity prices and volatility, Canadian and United States forward interest rate yield curves, and Canadian and United States foreign exchange rates, discounted to present value as appropriate. The resulting fair value estimates may not necessarily be indicative of the amounts that could be realized or settled in a current market transaction and these differences may be material.
 
Canadian Natural Resources Limited
 17
Six Months Ended June 30, 2017
Risk Management
The Company periodically uses derivative financial instruments to manage its commodity price, interest rate and foreign currency exposures. These financial instruments are entered into solely for hedging purposes and are not used for speculative purposes.
The changes in estimated fair values of derivative financial instruments included in the risk management asset were recognized in the financial statements as follows:
Asset (liability)
  
Jun 30
2017
    
Dec 31
2016
  
Balance – beginning of period
  
$
489
    
$
854
  
Net change in fair value of outstanding derivative financial instruments
recognized in:
                
Risk management activities
    
46
      
(25
)
Foreign exchange
    
(318
)
    
(304
)
Other comprehensive loss
    
20
      
(36
)
Balance – end of period
    
237
      
489
  
Less: current portion
    
(10
)
    
222
  
   
$
247
    
$
267
  
Net (gains) losses from risk management activities were as follows:
 
Three Months Ended
  
Six Months Ended
  
 
Jun 30
2017
  
Jun 30
2016
  
Jun 30
2017
  
Jun 30
2016
  
Net realized risk management (gain) loss
  
$
(13
)
  
$
49
    
$
(25
)
  
$
45
  
Net unrealized risk management (gain) loss
    
(6
)
    
(52
)
    
(46
)
    
22
  
   
$
(19
)
  
$
(3
)
  
$
(71
)
  
$
67
  
Financial Risk Factors
a) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company’s market risk is comprised of commodity price risk, interest rate risk, and foreign currency exchange risk.
Commodity price risk management
The Company periodically uses commodity derivative financial instruments to manage its exposure to commodity price risk associated with the sale of its future crude oil and natural gas production and with natural gas purchases. At June 30, 2017, the Company had the following derivative financial instruments outstanding to manage its commodity price risk:
 
Sales contracts
 
Remaining term
Volume
Weighted average price
Index
Crude Oil
                
Price collars
Jul 2017
—
Dec 2017
67,500 bbl/d
US$50.00
-
US$60.10
WTI
                 
Natural Gas
                
AECO swaps
Jul 2017
—
Oct 2017
50,000 GJ/d
    
$2.80
AECO

The Company’s outstanding commodity derivative financial instruments are expected to be settled monthly based on the applicable index pricing for the respective contract month.
 
Canadian Natural Resources Limited
 18
Six Months Ended June 30, 2017
Interest rate risk management
The Company is exposed to interest rate price risk on its fixed rate long-term debt and to interest rate cash flow risk on its floating rate long-term debt. The Company periodically enters into interest rate swap contracts to manage its fixed to floating interest rate mix on long-term debt. Interest rate swap contracts require the periodic exchange of payments without the exchange of the notional principal amounts on which the payments are based. At June 30, 2017, the Company had no interest rate swap contracts outstanding.
Foreign currency exchange rate risk management
The Company is exposed to foreign currency exchange rate risk in Canada primarily related to its US dollar denominated long-term debt, commercial paper and working capital. The Company is also exposed to foreign currency exchange rate risk on transactions conducted in other currencies and in the carrying value of its foreign subsidiaries. The Company periodically enters into cross currency swap contracts and foreign currency forward contracts to manage known currency exposure on US dollar denominated long-term debt, commercial paper and working capital. The cross currency swap contracts require the periodic exchange of payments with the exchange at maturity of notional principal amounts on which the payments are based. At June 30, 2017, the Company had the following cross currency swap contracts outstanding:
 
Remaining term
Amount
Exchange rate
(US$/C$)
Interest rate
(US$)
Interest rate
(C$)
Cross currency
              
Swaps
Jul 2017
—
Nov 2021
US$500
1.022
  
3.45
%
3.96
%
 
Jul 2017
—
Mar 2038
US$550
1.170
  
6.25
%
5.76
%
All cross currency swap derivative financial instruments were designated as hedges at June 30, 2017 and were classified as cash flow hedges.
In addition to the cross currency swap contracts noted above, at June 30, 2017, the Company had US$3,029 million of foreign currency forward contracts outstanding, with terms of approximately 30 days or less, including US$1,720 million designated as cash flow hedges.
b)  Credit Risk
Credit risk is the risk that a party to a financial instrument will cause a financial loss to the Company by failing to discharge an obligation.
Counterparty credit risk management
The Company’s accounts receivable are mainly with customers in the crude oil and natural gas industry and are subject to normal industry credit risks. The Company manages these risks by reviewing its exposure to individual companies on a regular basis and where appropriate, ensures that parental guarantees or letters of credit are in place to minimize the impact in the event of default. At June 30, 2017, substantially all of the Company’s accounts receivable were due within normal trade terms.
The Company is also exposed to possible losses in the event of nonperformance by counterparties to derivative financial instruments; however, the Company manages this credit risk by entering into agreements with counterparties that are substantially all investment grade financial institutions. At June 30, 2017, the Company had net risk management assets of $293 million with specific counterparties related to derivative financial instruments (December 31, 2016 – $489 million).
The carrying amount of financial assets approximates the maximum credit exposure.
c)  Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Management of liquidity risk requires the Company to maintain sufficient cash and cash equivalents, along with other sources of capital, consisting primarily of cash flow from operating activities, available credit facilities, commercial paper and access to debt capital markets, to meet obligations as they become due. The Company believes it has adequate bank credit facilities to provide liquidity to manage fluctuations in the timing of the receipt and/or disbursement of operating cash flows.
 
Canadian Natural Resources Limited
 19
Six Months Ended June 30, 2017
The maturity dates for financial liabilities were as follows:
   
Less than
1 year
    
1 to less than
2 years
    
2 to less than
5 years
    
Thereafter
  
Accounts payable
  
$
656
    
$
—
    
$
—
    
$
—
  
Accrued liabilities
  
$
2,044
    
$
—
    
$
—
    
$
—
  
Other long-term liabilities (1)
  
$
497
    
$
—
    
$
—
    
$
—
  
Long-term debt (2)
  
$
2,096
    
$
1,524
    
$
9,120
    
$
10,683
  
(1)
Includes $487 million (US$375 million) of deferred purchase consideration payable to Marathon in March 2018.
(2)
Long-term debt represents principal repayments only and does not reflect interest, original issue discounts and premiums or transaction costs.
16. COMMITMENTS AND CONTINGENCIES
The Company has committed to certain payments as follows:
 
   
Remaining 2017
    
2018
    
2019
    
2020
    
2021
    
Thereafter
  
Product transportation and pipeline
  
$
291
    
$
569
    
$
422
    
$
401
    
$
345
    
$
3,710
  
Offshore equipment operating leases and offshore drilling
  
$
112
    
$
187
    
$
96
    
$
72
    
$
71
    
$
8
  
Office leases
  
$
24
    
$
46
    
$
44
    
$
43
    
$
40
    
$
152
  
Other
  
$
56
    
$
46
    
$
42
    
$
41
    
$
40
    
$
384
  
 
In addition to the commitments disclosed above, the Company has entered into various agreements related to the engineering, procurement and construction of Horizon. These contracts can be canceled by the Company upon notice without penalty, subject to the costs incurred up to and in respect of the cancellation.
The Company is defendant and plaintiff in a number of legal actions arising in the normal course of business. In addition, the Company is subject to certain contractor construction claims. The Company believes that any liabilities that might arise pertaining to any such matters would not have a material effect on its consolidated financial position.
 
Canadian Natural Resources Limited
 20
Six Months Ended June 30, 2017
 
17. SEGMENTED INFORMATION
   
North America
    
North Sea
    
Offshore Africa
    
Total Exploration and Production
  
                                                                   
(millions of Canadian dollars, unaudited)
  
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
  
   
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
  
   
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
Segmented product sales
    
2,107
      
1,677
      
4,473
      
3,189
      
165
      
110
      
384
      
231
      
112
      
206
      
252
      
306
      
2,384
      
1,993
      
5,109
      
3,726
  
Less: royalties
    
(176
)
    
(121
)
    
(380
)
    
(200
)
    
(1
)
    
(1
)
    
(1
)
    
(1
)
    
(6
)
    
(7
)
    
(13
)
    
(12
)
    
(183
)
    
(129
)
    
(394
)
    
(213
)
Segmented revenue
    
1,931
      
1,556
      
4,093
      
2,989
      
164
      
109
      
383
      
230
      
106
      
199
      
239
      
294
      
2,201
      
1,864
      
4,715
      
3,513
  
Segmented expenses
                                                                                                                                
Production
    
590
      
545
      
1,161
      
1,112
      
76
      
72
      
186
      
192
      
52
      
75
      
98
      
109
      
718
      
692
      
1,445
      
1,413
  
Transportation, blending and feedstock
    
522
      
480
      
1,154
      
973
      
7
      
12
      
18
      
22
      
1
      
—
      
1
      
1
      
530
      
492
      
1,173
      
996
  
Depletion, depreciation and
amortization
    
773
      
855
      
1,572
      
1,752
      
156
      
87
      
401
      
198
      
42
      
94
      
100
      
155
      
971
      
1,036
      
2,073
      
2,105
  
Asset retirement obligation
accretion
    
20
      
16
      
39
      
33
      
7
      
9
      
14
      
18
      
2
      
3
      
4
      
6
      
29
      
28
      
57
      
57
  
Realized risk management activities
    
(13
)
    
49
      
(25
)
    
45
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(13
)
    
49
      
(25
)
    
45
  
Gain on acquisition and disposition of properties
    
(35
)
    
—
      
(35
)
    
(32
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(35
)
    
—
      
(35
)
    
(32
)
(Gain) loss from investments
    
(23
)
    
(10
)
    
68
      
(143
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(23
)
    
(10
)
    
68
      
(143
)
Total segmented expenses
    
1,834
      
1,935
      
3,934
      
3,740
      
246
      
180
      
619
      
430
      
97
      
172
      
203
      
271
      
2,177
      
2,287
      
4,756
      
4,441
  
Segmented earnings (loss) before the following
    
97
      
(379
)
    
159
      
(751
)
    
(82
)
    
(71
)
    
(236
)
    
(200
)
    
9
      
27
      
36
      
23
      
24
      
(423
)
    
(41
)
    
(928
)
Non–segmented expenses
                                                                                                                                
Administration
                                                                                                                                
Share-based compensation
                                                                                                                                
Interest and other financing
expense
                                                                                                                                
Unrealized risk management
activities
                                                                                                                                
Foreign exchange (gain) loss
                                                                                                                                
Total non–segmented expenses
                                                                                                                                
Earnings (loss) before taxes
                                                                                                                                
Current income tax recovery
                                                                                                                                
Deferred income tax expense (recovery)
                                                                                                                                
Net earnings (loss)
                                                                                                                                
 
Canadian Natural Resources Limited
 21
Six Months Ended June 30, 2017
 

   
Oil Sands Mining and Upgrading
    
Midstream
    
Inter–segment
elimination and other
    
Total
  
                                                                   
(millions of Canadian dollars, unaudited)
  
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
    
Three Months Ended
    
Six Months Ended
  
   
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
    
Jun 30
  
   
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
    
2017
    
2016
  
Segmented product sales
    
1,537
      
674
      
2,682
      
1,198
      
23
      
31
      
48
      
57
      
(17
)
    
(12
)
    
(40
)
    
(32
)
    
3,927
      
2,686
      
7,799
      
4,949
  
Less: royalties
    
(33
)
    
(5
)
    
(52
)
    
(6
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(216
)
    
(134
)
    
(446
)
    
(219
)
Segmented revenue
    
1,504
      
669
      
2,630
      
1,192
      
23
      
31
      
48
      
57
      
(17
)
    
(12
)
    
(40
)
    
(32
)
    
3,711
      
2,552
      
7,353
      
4,730
  
Segmented expenses
                                                                                                                                
Production
    
553
      
293
      
925
      
590
      
4
      
7
      
8
      
13
      
(3
)
    
(1
)
    
(4
)
    
(3
)
    
1,272
      
991
      
2,374
      
2,013
  
Transportation, blending and feedstock
    
74
      
15
      
94
      
38
      
—
      
—
      
—
      
—
      
(21
)
    
(16
)
    
(42
)
    
(33
)
    
583
      
491
      
1,225
      
1,001
  
Depletion, depreciation and
amortization
    
237
      
135
      
432
      
282
      
2
      
3
      
4
      
6
      
—
      
—
      
—
      
—
      
1,210
      
1,174
      
2,509
      
2,393
  
Asset retirement obligation
accretion
    
10
      
7
      
18
      
14
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
39
      
35
      
75
      
71
  
Realized risk management activities
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(13
)
    
49
      
(25
)
    
45
  
Gain on acquisition and disposition of properties
    
(230
)
    
—
      
(230
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(265
)
    
—
      
(265
)
    
(32
)
(Gain) loss from investments
    
—
      
—
      
—
      
—
      
(10
)
    
3
      
(12
)
    
(23
)
    
—
      
—
      
—
      
—
      
(33
)
    
(7
)
    
56
      
(166
)
Total segmented expenses
    
644
      
450
      
1,239
      
924
      
(4
)
    
13
      
—
      
(4
)
    
(24
)
    
(17
)
    
(46
)
    
(36
)
    
2,793
      
2,733
      
5,949
      
5,325
  
Segmented earnings (loss) before the following
    
860
      
219
      
1,391
      
268
      
27
      
18
      
48
      
61
      
7
      
5
      
6
      
4
      
918
      
(181
)
    
1,404
      
(595
)
Non–segmented expenses
                                                                                                                                
Administration
                                                                                                    
75
      
91
      
162
      
177
  
Share-based compensation
                                                                                                    
(104
)
    
122
      
(77
)
    
239
  
Interest and other financing
expense
                                                                                                    
145
      
86
      
279
      
178
  
Unrealized risk management
activities
                                                                                                    
(6
)
    
(52
)
    
(46
)
    
22
  
Foreign exchange (gain) loss
                                                                                                    
(347
)
    
49
      
(403
)
    
(266
)
Total non–segmented expenses
                                                                                                    
(237
)
    
296
      
(85
)
    
350
  
Earnings (loss) before taxes
                                                                                                    
1,155
      
(477
)
    
1,489
      
(945
)
Current income tax recovery
                                                                                                    
(79
)
    
(96
)
    
(26
)
    
(288
)
Deferred income tax expense (recovery)
                                                                                                    
162
      
(42
)
    
198
      
(213
)
Net earnings (loss)
                                                                                                    
1,072
      
(339
)
    
1,317
      
(444
)
 
Canadian Natural Resources Limited
 22
Six Months Ended June 30, 2017
 
Capital Expenditures (1)
   
Six Months Ended
  
   
Jun 30, 2017
    
Jun 30, 2016
  
   
Net (2)
expenditures
    
Non-cash
and fair value changes (2)(3)
    
Capitalized
costs
    
Net
expenditures
    
Non-cash
and fair value changes (3)
    
Capitalized
costs
  
                                     
Exploration and
evaluation assets
                                    
Exploration and
   Production
                                    
North America (4)
  
$
89
    
$
(99
)
  
$
(10
)
  
$
16
    
$
(100
)
  
$
(84
)
North Sea
    
—
      
—
      
—
      
—
      
—
      
—
  
Offshore Africa
    
4
      
—
      
4
      
6
      
(18
)
    
(12
)
Oil Sands Mining and Upgrading
    
142
      
117
      
259
      
—
      
—
      
—
  
   
$
235
    
$
18
    
$
253
    
$
22
    
$
(118
)
  
$
(96
)
                                                 
Property, plant and
   equipment
                                                
Exploration and
   Production
                                                
North America
  
$
1,115
    
$
241
    
$
1,356
    
$
584
    
$
(90
)
  
$
494
  
North Sea
    
76
      
20
      
96
      
26
      
—
      
26
  
Offshore Africa
    
33
      
3
      
36
      
117
      
—
      
117
  
     
1,224
      
264
      
1,488
      
727
      
(90
)
    
637
  
Oil Sands Mining and
   Upgrading (5)
    
8,480
      
5,777
      
14,257
      
1,359
      
(18
)
    
1,341
  
Midstream
    
2
      
—
      
2
      
2
      
—
      
2
  
Head office
    
22
      
—
      
22
      
10
      
—
      
10
  
   
$
9,728
    
$
6,041
    
$
15,769
    
$
2,098
    
$
(108
)
  
$
1,990
  
 
(1)
This table provides a reconciliation of capitalized costs including derecognitions and does not include the impact of foreign exchange adjustments.
(2)
Net expenditures on exploration and evaluation assets and property, plant and equipment for the six months ended June 30, 2017 exclude non-cash share consideration of $3,818 million issued on the acquisition of AOSP and other assets. This non-cash consideration is included in non-cash and other fair value changes.
(3)
Asset retirement obligations, deferred income tax adjustments related to differences between carrying amounts and tax values, transfers of exploration and evaluation assets, transfers of property, plant and equipment to inventory due to change in use, and other fair value adjustments.
(4)
The above noted figures for 2017 do not include the impact of a pre-tax cash gain of $35 million (2016 - $32 million pre-tax cash gain) on the disposition of certain exploration and evaluation assets.
(5)
Net expenditures for Oil Sands Mining and Upgrading include capitalized interest and share-based compensation.
Segmented Assets
   
Jun 30
2017
    
Dec 31
2016
  
Exploration and Production
            
North America
  
$
28,219
    
$
28,892
  
North Sea
    
1,896
      
2,269
  
Offshore Africa
    
1,419
      
1,580
  
Other
    
34
      
29
  
Oil Sands Mining and Upgrading
    
39,749
      
24,852
  
Midstream
    
948
      
912
  
Head office
    
125
      
114
  
   
$
72,390
    
$
58,648
  
 
 
Canadian Natural Resources Limited
 23
Six Months Ended June 30, 2017
SUPPLEMENTARY INFORMATION
INTEREST COVERAGE RATIOS
The following financial ratios are provided in connection with the Company’s continuous offering of medium-term notes pursuant to the short form prospectus dated July 2017. These ratios are based on the Company’s interim consolidated financial statements that are prepared in accordance with accounting principles generally accepted in Canada.
Interest coverage ratios for the twelve month period ended June 30, 2017:
  
Interest coverage (times)
  
   Net earnings (1)
3.0x
   Funds flow from operations (2)
10.1x
(1)
Net earnings plus income taxes and interest expense excluding current and deferred PRT expense and other taxes; divided by the sum of interest expense and capitalized interest.
(2)
Funds flow from operations plus current income taxes and interest expense excluding current PRT expense and other taxes; divided by the sum of interest expense and capitalized interest.

 
 
 
Canadian Natural Resources Limited
 24
Six Months Ended June 30, 2017