* Q3 adj shr C$1.21 vs year-earlier C$1.78
* Horizon oil sands plant suffers operational problems
* 2010 spending set at C$3.9 bln, up 26 pct (Adds executive, analyst quotes)
By Jeffrey Jones
CALGARY, Alberta, Nov 5 (Reuters) - Canadian Natural Resources Ltd’s CNQ.TO third-quarter profit fell 77 percent as oil and gas prices tumbled and its oil sands plant was hit by operational problems, Canada’s No. 2 independent oil explorer said on Thursday.
Still, Canadian Natural said it will boost capital spending by 26 percent to C$3.9 billion ($3.4 billion) in 2010, showing some optimism for industry fundamentals, especially crude oil.
The company plans to increase Canadian oil spending by 50 percent, taking advantage of strong markets for heavy crude by bolstering enhanced recovery at a few of its major plays.
But next year’s budget still restricts spending in its natural gas business. The company said it expects gas output to fall by 12 percent as it cuts drilling by 18 percent due to lingering low prices and higher Alberta royalties.
“There’s lots of supply out there, and our concern is that if we do get some increased prices there will be a very strong supply response and drive prices back down,” President Steve Laut told Reuters. “We don’t know for sure if that’s going to happen, but it’s a realistic expectation.”
The company’s gas production will likely bottom out around the end of next year, and start recovering in 2011, when deeper, expensive wells start producing, Laut said.
Canadian Natural, the largest of several energy, industrial and sports concerns in which Calgary financier Murray Edwards is a major shareholder, has made some of its biggest acquisitions in weak markets for the commodity it targeted.
But Laut said gas-focused deals still look too pricey. “You might think there’s going to be value, but there’s still a lot of optimism that prices are going to go up,” he said.
In the quarter, net income fell to C$658 million, or C$1.21 a share, from a year-earlier C$2.8 billion, or C$5.25 a share. The 2008 figure included C$1.9 billion in one-time gains.
Analysts on average were expecting profit of C$1.25 per share, according to Thomson Reuters I/B/E/S.
Most oil companies have posted lower quarterly earnings as the recession cut prices and demand for oil and natural gas.
During the third quarter, benchmark oil prices averaged $68.24 a barrel, down 42 percent from a year earlier. Natural gas averaged $3.44 per million British thermal units on the New York Mercantile Exchange, down 62 percent.
Cash flow, a measure of the company’s ability to pay for new projects and drilling, fell 17 percent to C$1.5 billion, or C$2.78 a share.
Canadian Natural shares were off C$1.40, or 2 percent, at C$67.22 on the Toronto Stock Exchange on Thursday. They had risen 8.7 percent over the past 12 months.
The company, which is trying to boost output at its C$9.7 billion Horizon oil sands project in northern Alberta, said overall production was 574,755 barrels of oil equivalent a day, up 3.5 percent.
However, Horizon output, at 66,907 barrels of synthetic crude a day, was under target due to equipment failure at the ore preparation plant and higher clay content in the raw oil sands in September, the company said.
The company said it believes it has fixed the problems, but warned that the plant may face other struggles as it enters its first full winter of operations.
Such bugs are expected for a new oil sands project, said Chris Feltin, analyst at Macquarie Capital Markets.
“This really does seem to be just minor, surface-related start-up issues. It’s nothing where there’s a design issue with the process equipment or the mine and its ability to deliver at design rates,” Feltin said.
In 2010, Canadian Natural expects overall natural gas production to average 1.12 billion to 1.19 billion cubic feet a day and oil output to average 400,000-445,000 barrels a day.
Laut said the company’s 2010 budget could yield free cash flow of C$2 billion to C$2.6 billion.
$1=$1.06 Canadian Additional reporting by Ajay Kamalakaran; editing by Peter Galloway