Title: Canadian Natural Resources Ltd. - CNQ/CNQ (T; N) C$31.80; US$30.79

Price: C$31.80;

StockRating: Outperform

TargetPrice: Cdn$40.00

August 8, 2013

Headline: All Systems a Go, Setting Up For A Strong Second Half of The

The NBF Daily Bulletin

Oil & Gas Exploration and Production

Canadian Natural Resources Ltd. C$31.80; US$30.79

CNQ/CNQ (T; N)

Outperform

Stock Rating:

Cdn$40.00

Target:

(Unchanged)

Average

Risk Rating:

27%

Stock Data - Q2a 2013: 52-week High-Low (Cdn$)

$26.88 - $34.63

Dividend Yield

1.6%

Shares Outstanding (mln)

1,087.0

Market Cap. (mln)

$34,566

Net Debt (mln) Enterprise Value (mln)

$10,981 $45,547

Production

2012a

2013e

2014e

Oil Sands (bbls/d)

86,077

100,247

109,250

Oil & NGL's (bbls/d)

365,301

395,921

435,560

Nat. Gas (mmcf/d)

1,220.2

1,125.2

1,104.3

Boe/d (6:1)

654,742

683,705

728,857

% Nat. Gas

31%

27%

25%

2012a

2013e

2014e

WTI (US$/bbl)

$94.10

$100.00

$96.75

Brent (US$/bbl)

$111.94

$108.00

$103.50

AECO (Cdn$/mcf)

$2.38

$3.20

$3.55

Estimates

2012a

2013e

2014e

CFPS

$5.48

$7.17

$7.57

EPS

$1.47

$2.39

$2.52

DPS

$0.40

$0.48

$0.56

Cash Flow (mln)

$6,013

$7,798

$8,186

Operating Earnings (mln)

$1,618

$2,604

$2,720

Capex (mln)

$6,308

$7,520

$7,200

$10,000

$11,081

$10,901

D/CF

1.7 x

1.4 x

1.3 x

D / Capital

29%

Net Debt (mln)

30%

31%

Basic Payout (%)

7%

7%

7%

Total Payout (%)

112%

103%

95%

NAV ($/sh)



Q2 Results In Line With All Projects Progressing As Planned CNQ delivered a solid Q2 result and appears largely on track to achieve most of its guidance targets. While the capital budget was increased slightly, most of this increase appears to be related to the Barrick acquisition, a pipeline extension and minor cost increases. All of the major projects are advancing as planned or ahead of plan, which is a positive sign.



All Signs Pointing to a Strong Second Half of The Year With the base operations performing well (including primary heavy, Pelican and Horizon) and the Kirby South SAGD project expected to start up any week now, CNQ is well positioned to realize significant production growth in the upcoming quarters. Combined with this positive operational momentum, we also note favourable heavy oil prices over the past few months (~15% 16% differential in July and August) which should contribute to strong cash flow growth in the next quarterly release.



Moving Beyond The Primrose Issues As previously reported, the company was forced to shut down steaming operations at Primrose by the Alberta Energy Board earlier than planned due to four emulsion seepages across the project area. The seepage has been controlled within a containment area and Primrose production recently achieved 120,000 bbl/d in July and is expected to average 108-116 mbbl/d in Q3/13 while also achieving FY13 guidance of 100-108 mbbl/d.



Outlook/Valuation Unchanged; Positive Bias Remains With the exception of the increased capital budget, we note very few changes to our forecasts and valuation for CNQ. The stock continues to trade at a favourable valuation (2014 EV/DACF of 5.3x compared with the group average of 5.6x and CNQ’s historical trading multiple of 7.3x). We reiterate our Outperform rating and $40 target, which is based on a 1.0x multiple to our CNAV estimate and reflects a 2014 EV/DACF multiple of 6.3x.

$39.92

Valuation

2012a

2013e

2014e

P/E

21.4 x

13.3 x

12.6 x

7.0 x

5.6 x

5.3 x

$68,314

$66,485

$62,118

EV/BOE/D

HIGHLIGHTS

$32.01

CNAV ($/sh)

EV/DACF

All Systems a Go, Setting Up For A Strong Second Half of The Year

(Unchanged)

Est. Total Return

Pricing

Q2/13 Results

(Unchanged)

P/CNAVPS

0.8 x

Source: Company reports, NBF estimates Note: Debt figures include convertible debentures All figures in Cdn$ unless otherwise noted

Industry Rating: Overweight (Oil & Gas Exploration and Production) (NBF Economics & Strategy Group)

Associate: Amy Chang - (403) 290-5627 [email protected] Associate: Marc Corbeil, CFA - (403) 441-0955 [email protected]

For required disclosures, please see end of document.

$35.00

45,000

$34.00

40,000

$33.00

35,000

$32.00 Price ($/sh)

Kyle Preston, CFA, CMA - (403) 290-5102 [email protected]

Stock Performance

30,000

$31.00

25,000

$30.00

20,000

$29.00

15,000

$28.00 $27.00

10,000

$26.00

5,000

$25.00 Aug-12 Source: Bloomberg

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

0 Aug-13

Volume (000's)

Company Profile: Canadian Natural Resources is a diversified senior oil and gas producer with upstream operations in Western Canada, the North Sea and offshore West Africa. The company was established over 20 years ago and has grown to be one of the largest oil & gas companies in Canada today and holds claim to being the largest heavy oil producer in Canada. Canadian Natural trades on the TSX (CNQ) and NYSE (CNQ).

Page 2

Q2/13 Results Summary QUARTERLY SUMMARY Production Crude Oil & NGLs North America (bbls/d) Horizon Oil sands (bbls/d) North Sea (bbls/d) Offshore Africa (bbls/d) Total Crude & NGLs (bbls/d) Natural Gas North America (mcf/d) North Sea (mcf/d) Offshore Africa (mcf/d) Total Natural Gas (mcf/d) BOE/d (@6:1) Production per 000 Shares Financial Revenue ($mm) Cash Flow ($mm) CFPS (diluted) Adjusted Net Income ($mm) EPS (diluted) Development capital ($mm) Net Debt (including Convertibles) Debt to Cash Flow (annualized) Dividend ($mm) Dividend per Share Div. Payout % Total Payout % (incl capex) Realized Prices By Product Oil Sands ($/bbl) Oil & NGLs ($/bbl) Gas ($/mcf) Upstream Netbacks ($/BOE) Revenue Royalties Operating costs Transportation & Blending costs Operating netback (pre hedging) Hedging gain/(loss) Operating netback (incl hedging) Other Cash Items G&A ($mm) Finance Charges ($mm) Current Taxes ($mm)

% Chg

Q2/13E

Var. from est.

316,483 115,823 17,619 20,598 470,523

5% (41%) 7% (12%) (7%)

334,194 75,000 18,399 15,951 443,543

(1%) (9%) 3% 13% (2%)

(3%) 300% 8% (2%)

1,230,000 2,000 23,000 1,255,000

(11%) 100% 13% (11%)

1,080,000 980 23,760 1,104,740

1% 308% 9% 2%

680,844 56.0

(8%) (7%)

679,607 56.2

(8%) (7%)

627,667 52.4

(1%) (1%)

$4,230 $1,670 $1.53 $462 $0.42

$4,101 $1,571 $1.44 $401 $0.37

3% 6% 7% 15% 16%

$4,187 $1,754 $1.59 $606 $0.55

1% (5%) (4%) (24% ) (23%)

$4,054 $1,568 $1.44 $466 $0.43

4% 7% 6% (1%) (1%)

$1,792 $10,981 1.6x $136 $0.125 8% 115%

$1,736 $10,500 1.7x $115 $0.105 7% 118%

3% 5% (2%) 18% 19%

$1,324 $9,254 1.3x $115 $0.105 7% 82%

35% 19% 25% 18% 19%

$1,830 $11,066 1.8x $136 $0.125 9% 125%

(2%) (1%) (7%) (0%) 0%

$96.88 $72.94 $3.97

$94.61 $58.66 $3.30

2% 24% 20%

$88.11 $69.63 $2.18

10% 5% 82%

$97.21 $72.44 $3.66

(0%) 1% 8%

63.64 (7.86) (19.32) (2.08) $34.38 0.33 $34.71

54.64 (5.65) (18.52) (1.66) $28.80 1.35 $30.16

16% 39% 4% 25% 19% (75%) 15%

58.24 (5.84) (17.27) (1.71) $33.42 0.99 $34.41

9% 35% 12% 21% 3% (176%) 1%

$60.74 ($6.66) ($18.61) ($1.81) $33.66 $0.01 $33.67

5% 18% 4% 15% 2% 2718% 3%

$81 $72 $145

$79 $77 $141

3% (6%) 3%

$77 $93 $213

5% (23%) (32%)

$75 $108 $172

8% (34%) (16%)

% Chg

Q 2/13A

Q 1/13A

331,452 67,954 18,901 18,055 436,362

345,489 108,782 18,774 16,112 489,157

(4%) (38%) 1% 12% (11%)

1,092,000 4,000 26,000 1,122,000

1,125,000 1,000 24,000 1,150,000

623,315 52.0

Q 2/12A

Source: Company reports, NBF

Cash Flow of $1,670 million or $1.53/share (+7% q/q) came in above our estimate of $1.44/share and consensus of $1.49/share. The beat was largely due to higher realized pricing and lower interest and taxes, partially offset by higher opex and royalties. Operating Earnings of $462 million or $0.42/share was slightly lower than our forecast of $0.43/share and consensus of $0.46/share. Production averaged 623.3 mboe/d (-8% q/q), which was essentially in line with our estimate of 627.7 mboe/d and consensus of 633.1 mboe/d. Production from the primary heavy oil segment achieved record levels for the 10th consecutive quarter, averaging 136,000 bbl/d (+2% q/q). Horizon production averaged 67,954 bbl/d, which is down 38% q/q as a result of the major turnaround in May, which ended up taking a few days longer than planned (30 days vs. 24 days planned). Production ramped up shortly after completion, reaching 101 mbbl/d in June and 110 mbbl/d in July, and is expected to be in the 110 – 115 mbbl/d range for Q3/13, which is effectively at design capacity. Capital expenditures totalled $1,792 million during the quarter, which was in line with our estimate of $1,830 million, and included $924 million (~52%) spent on exploration and production activities, and $815 million (~45%) on the Horizon Oil Sands Project and Phase 2/3 expansion.

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Production guidance remains unchanged at 663 - 704 mboe/d, but the capital budget was increased by 8%, or $575 million, to $7.52 billion largely due to the Barrick Energy acquisition, a Cold Lake pipeline expansion and slight cost increases across the board. The balance sheet remains healthy with Q2/13 net debt of ~$11.0 billion reflecting an annualized D/CF of 1.6x. At the end of the quarter, the company had $2.4 billion available (58% undrawn) on its $4.7 billion bank line which was recently extended to June 2017. CNQ initiated its 2014 hedging program with approximately 100,000 bbl/d of Brent and WTI contracts set at an average floor price of US$75/bbl, which represents ~18% of 2014e oil production. In addition, the company currently has ~50% of its 2H13 oil production hedged at an average floor of US$80/bbl.

Operational Highlights The following is a brief summary of some key operating highlights from each of the core business units. 

Horizon Mining / Upgrading – Normal operations resumed following the first major turnaround that began on April 30th and lasted 30 days (vs. 24 days planned). Production averaged ~101,000 bbl/d in June and 110,000 bbl/d in July, and is expected to average 110,000 – 115,000 mbbl/d for the full quarter. FY13 annual SCO production guidance remains unchanged at 100,000 -108,000 bbl/d while the phase 2/3 expansion remains on track at ~24% complete and below budget.



Primrose Thermal / In Situ – Thermal production was down 17% q/q to 90,051 bbl/d due to the planned steam cycle, and came in slightly below the company’s guidance of 92 - 100 mbbl/d. As previously reported, the company was forced to shut down steaming operations by the Alberta Energy Board early than planned due to four emulsion seepages across its Primrose projects (mostly East Primrose). The seepage has been controlled within a containment area of 13.5 hectares, and has been reduced to less than 20 bbl/d. Despite the early conclusion of steaming, production from Primrose reached 120,000 bbl/d in July with 20,000 bbl/d restricted due to limited plant capacity, and is expected to average 108-116 mbbl/d in Q3/13. CNQ maintained its thermal production guidance for 2013 (100 – 107 mbbl/d), but as a result of the steaming restrictions, production for 2014 is expected to be in the range of 100 – 110 mbbl/d, which is ~10 mbbl/d lower than originally planned. Management believes the issues are related to mechanical failures on various wellbores and expects this can be repaired; otherwise they will modify the steaming cycles. No compromise to the reservoir or recovery is anticipated.



Kirby Thermal / In Situ – The Kirby South Phase 1 (40,000 bbl/d) SAGD project is in the final stages of commissioning and remains on schedule for first steam in late August or early September 2013 with first production by December 2013. Progress on the Kirby North Phase 1 (40,000 bbl/d) project continues, with detailed engineering ~64% complete and site preparation work planned into Q3/13.



Pelican Lake – Following the completion of the new Pelican Lake oil battery in mid-May, production increased to a quarterly record of 42,000 bbl/d (+10% q/q), and subsequently increased to 45,000 - 46,000 bbl/d in June/July. Production is expected to continue increasing through 2H13 and exit 2013 at ~50,000 bbl/d.



Primary Heavy Oil – Production volumes averaged 136,071 bbl/d in Q2 (+2% q/q), leading to record production for the 10th consecutive quarter. CNQ drilled 121 net primary heavy oil wells in the second quarter and plans to drill another 255 net wells in Q3/13. Volumes at Woodenhouse ramped up soon after the Pelican Lake facility was commissioned, with production averaging 13,500 bbl/d in Q2 and current production at approximately 15,000 bbl/d.



Montney (Septimus) – The facility expansions were completed at Septimus in July with production reaching 90 mmcf/d + 8,600 bbl/d of liquids by the end of July and is on track to reach plant capacity of 125 mmcf/d + 12,200 bbl/d of liquids by early September 2013.

Page 4



Offshore Africa – Crude oil production averaged 18,055 bbl/d, which is up 12% q/q largely due to the stabilization of the midwater arch and reinstatement of production at the Olowi Field in Gabon late in Q1/13. Progress on the infill drilling program at Espoir continues to experience delays from ongoing operational and safety issues with the drilling contractor, which the company has released, and is demobilizing the drilling rig. The program was originally targeted to begin late Q2/13, but CNQ is re-assessing its drilling options.

Outlook and Forecast revisions CNQ delivered a solid Q2 result and appears largely on track to achieve most of its guidance targets. While the capital budget was increased slightly, most of this increase appears to be related to the Barrick acquisition, a pipeline extension and minor cost increases. All of the major projects are advancing as planned or ahead of plan which is a positive sign. With the base operations performing well (including primary heavy, Pelican and Horizon) and the Kirby South SAGD project expected to start up any week now, CNQ is well positioned to realize significant production growth in the upcoming quarters. Combined with this positive operational momentum, we also note favourable heavy oil prices over the past few months (~15% differential in July and August) which should contribute to strong cash flow growth in the next quarterly release. With the exception of the increased capital budget, we note very few changes to our forecasts and valuation for CNQ. The stock continues to trade at a favourable valuation (2014 EV/DACF of 5.3x compared with the group average of 5.6x and CNQ’s historical trading multiple of 7.3x). We reiterate our Outperform rating and $40 target which is based on a 1.0x multiple to our CNAV estimate and reflects a 2014 EV/DACF multiple of 6.3x. The following table provides a summary of our forecast and valuation changes. FINANCIAL AND OPERATING FORECASTS NBF Estimates 2013e

2014e

New

Old

% Chg

New

Old

% Chg

Oil Sands (bbls/d) - Horizon

100,247

101,721

-1%

109,250

109,250

0%

Oil/NGLs (bbls/d)

395,921

393,776

1%

435,560

430,952

1%

Gas (mmcf/d)

1,125.2

1,122.1

0%

1,104.3

1,109.1

0%

BOE/d (@6:1)

683,705

682,517

0%

728,857

725,044

1%

73%

73%

75%

75%

Revenue ($mln)

$18,992

$18,519

3%

$20,192

$19,863

2%

Cash Flow ($mln)

$7,798

$7,547

3%

$8,186

$8,187

0%

CFPS diluted

$7.17

$6.93

3%

$7.57

$7.56

0%

Operating Earnings ($mln)

$2,604

$2,676

-3%

$2,720

$2,954

-8%

EPS diluted

$2.39

$2.46

-3%

$2.52

$2.73

-8%

Dev CapEx ($mln)

$7,520

$6,985

8%

$7,200

$6,945

4%

$175

$175

0%

$0

$0

NA

Total CapEx ($mln)

$7,695

$7,160

7%

$7,200

$6,945

4%

Net Debt (LT+Converts) ($mln)

$11,081

$10,859

2%

$10,901

$10,524

4%

1.4x

1.4x

-1%

1.3x

1.3x

4%

$0.48

$0.48

0%

$0.56

$0.56

0%

7%

7%

7%

7%

Total Payout %

103%

99%

95%

92%

NAV

$32.01

$32.12

0%

CNAV

$39.92

$40.04

0%

WTI (US$/bbl)

$100.00

$100.00

$96.75

$96.75

Brent (US$/bbl)

$108.00

$108.00

$103.50

$103.50

$3.20

$3.20

$3.55

$3.55

Production

% oil

Net Acquisitions ($mln)

Debt/CF Dividend per share Basic Payout (%)

NBF Commodity Forecast

AECO (Cdn$/mcf)

Source: NBF

Page 5

FINANCIAL & OPERATING SUMMARY - CANADIAN NATURAL RESOURCES (CNQ) STOCK RATING TARGET PRICE TOTAL RETURN RISK RATING

Horizon Oil Sands Project Crude Oil & NGLs Natural Gas Total (boe/d) (6:1) % Natural Gas

Revenue Royalties Op. Costs Transportation Operating Netback Hedging G&A Interest & Tax/Other Cash Flow Netback

Revenue Cash Flow from Operations CFPS (basic) CFPS (diluted) Earnings EPS (basic) EPS (diluted) Capital Expenditures Acquisitions / (Dispositions) Total Dividends DPS Basic Payout Total Payout Net Debt Bank Debt - net of cash Long Term Notes Convertible Debentures D/CF Credit Facility

Shares Outstanding Basic - year-end Fully diluted - year-end Wtd Avg - diluted

OP $40.00 27% A

PRODUCTION MIX 2011a bbls/d 40,434 bbls/d 348,619 mmcf/d 1,256.8 boe/d 598,526 35%

CURRENT SHARE PRICE 52 WK HIGH / LOW MARKET CAP ($mln) ENTERPRISE VALUE ($mln)

$31.80 $34.63 / $26.88 $34,566 $45,547

CORE PROPERTIES 2012a 86,077 365,301 1,220.2 654,742 31%

NETBACKS 2011a 2012a $/boe $61.88 $57.92 -$7.85 -$6.70 -$16.80 -$17.73 -$1.55 -$1.82 $/boe $35.68 $31.67 -$0.46 -$0.68 -$1.08 -$1.13 -$4.17 -$4.77 $/boe $29.97 $25.10 FINANCIAL SUMMARY 2011a 2012a $mln $15,507 $16,195 $mln $6,547 $6,013 $5.98 $5.48 $5.94 $5.48 $mln $2,540 $1,618 $2.32 $1.47 $2.30 $1.47 $mln $6,414 $6,308 $0 $0 $6,414 $6,308 $mln $378 $444 $0.35 $0.40 6% 7% 104% 112% $mln $9,465 $10,000 $796 $971 $7,775 $7,765 NA NA 1.4x 1.7x $4,724 $4,724 SHARES OUTSTANDING 2011a 2012a mln 1096 1092 mln 1123 1121 mln 1103 1097

COMMODITY PRICE ASSUMPTIONS Commodity prices 2011a 2012a WTI Crude oil (US$/bbl) $95.05 $94.10 Brent Crude oil (US$/bbl) $111.07 $111.94 Canadian Par (C$/bbl) $95.36 $86.29 NYMEX gas (US$/mcf) $3.99 $2.75 AECO gas (C$/mcf) $3.62 $2.38 Exchange Rate (US$/C$) $1.01 $1.00 Source: Company reports, NBF estimates

2013e 100,247 395,921 1,125.2 683,705 27%

2014e 109,250 435,560 1,104.3 728,857 25%

2013e $64.40 -$7.80 -$18.76 -$1.94 $35.90 $0.71 -$1.29 -$4.07 $31.25

2014e $64.75 -$8.27 -$18.38 -$2.03 $36.08 $0.00 -$1.25 -$4.06 $30.77

2013e $18,992 $7,798 $7.17 $7.17 $2,604 $2.39 $2.39 $7,520 $175 $7,695 $522 $0.48 7% 103% $11,081 $2,046 $8,070 NA 1.4x $4,724

2014e $20,192 $8,186 $7.57 $7.57 $2,720 $2.52 $2.52 $7,200 $0 $7,200 $605 $0.56 7% 95% $10,901 $2,230 $7,706 NA 1.3x $4,724

2013e 1081 1102 1087

2013e $100.00 $108.00 $97.50 $3.65 $3.20 $0.98

2014e 1081 1102 1081

2014e $96.75 $103.50 $98.00 $3.80 $3.55 $0.96

North Sea

North America

Offshore Africa

NET ASSET VALUE (8%, after tax)* Present Value of Reserves (P+P) Other Assets Other Long-term Liabilities (ARO) Cash / (Net Debt) NET ASSET VALUE (NAV) Contingent Resource Value (risked) CONTINGENT NET ASSET VALUE (CNAV)

$mln $46,961 $3,054 ($4,562) ($10,500) $34,953

$/share $43.00 $2.80 ($4.18) ($9.61) $32.01

$8,640

$7.91

$43,593

$39.92

* debt and share count adjusted for subsequent financings

PDP Other

2012 RESERVES SUMMARY Reserves mmboe % 3,090 39% 1,928 24%

Proved Probable 2P

5,018 2,868 7,886

EV/DACF P/CF P/E EV/BOE/D EV/2P P/NAV P/CNAV

CNQ 5.6x 4.4x 13.3x $66,485 $5.56 1.0x 0.8x

64% 36% 100%

Total

2P RLI years

35.8

VALUATION 2013e 2014e Group Avg. CNQ Group Avg. 6.1x 5.3x 5.6x 5.5x 4.2x 4.9x 15.6x 12.6x 13.6x $74,062 $62,118 $68,350 $6.76 1.0x 0.8x

DISCLOSURES: Ratings And What They Mean: PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a brief description of each: Outperform – The stock is expected to outperform the analyst’s coverage universe over the next 12 months; Sector Perform – The stock is projected to perform in line with the sector over the next 12 months; Underperform – The stock is expected to underperform the sector over the next 12 months. SECONDARY STOCK RATING: Under Review − Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender − Our analyst is recommending that investors tender to a specific offering for the company’s stock; Restricted − Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or laws or regulations preclude our analyst from rating a company’s stock. INDUSTRY RATING: NBF has an Industry Weighting system that reflects the view of our Economics & Strategy Group, using its sector rotation strategy. The three tiered system rates industries as Overweight, Market Weight and

Page 6

Underweight, depending on the sector’s projected performance against broader market averages over the next 12 months. RISK RATING: NBF utilizes a four-tiered risk rating system, Low, Average, Above Average and Speculative. The system attempts to evaluate risk against the overall market. In addition to sector-specific criteria, analysts also utilize quantitative and qualitative criteria in choosing a rating. The criteria include predictability of financial results, share price volatility, credit ratings, share liquidity and balance sheet quality. General – National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on Canadian stock exchanges. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. Research Analysts – The Research Analyst(s) who prepare these reports certify that their respective report accurately reflects his or her personal opinion and that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views as to the securities or companies. NBF compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of NBF including, Institutional Equity Sales and Trading, Retail Sales, the correspondent clearing business, and Corporate and Investment Banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one-business line has a greater influence than any other for Research Analyst compensation. 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