Q3 2021 ARC Resources Ltd Earnings Call
Fire them all out there because they are in an interconnected and.
Then maybe you can answer them as you see fit I'm just wondering here in terms of the permitting issue and things that are going forward, obviously, the blueberry and the BC government have the preliminary.
Agreement in place, which allows for pre existing permits to move forward here excluding 20.
Is sort of the delay here or or stepping back and waiting for this to resolve itself is this more about prudence I know in the past you said you had mostly all the permits in place for Hitachi.
Or are you caught up in those 20 permits that we're sort of excluded from the agreement I guess, the second thing would be timing wise you guys have been very consistent in terms of your sanctioning of projects. They typically come out with the Q3 budgeting process and we're wondering if this could be sort of a special case here. This year were.
If you do see a full resolution to this issue could we see a change to the budget and mid cycle here and sanctioning.
Essentially effectively when the issue is resolved and then the third and final question on it is in terms of cost and procurement.
Are there any risks on the cost drift or up cost drift on the 600 million here I know you guys, probably you've done all the engineering you've done all the procurement, but are there any time sensitive items in that procurement process, there and then.
Is there any seasonality involved with how you could get going on the construction for the for the project.
Perfect Patrick it's Terry here.
So the question around attached.
So let's start with the permitting side than it is about prudence.
So if I give a little background I've been spending a lot of time talking to first nations BC government oil and gas Commission.
Everybody is trying to come up to the same.
Green It isn't that we want to progress our activities insistent about how do we do it in a responsible manner. So I have confidence that where this is going and that's why you see us the $75 million in long lead time items, but we want to have a 100% guarantee that we know the regulatory framework going forward.
And so it is about just stepping back and waiting for to make sure that we can drill all the wells that we need to drill to continue producing into this facility and you're right. We do have most of the permits.
For building the facilities and the pipelines so for US, it's just just being a little.
Yes.
Our cautious approach to making sure that everything we know all the rules of the game before we step into the full 600 million, so that's where but I have confidence.
Since where we were and everything.
Everything is going on the negotiations and it's just a matter of time before this is going to be resolved here because everybody wants it to be resolved. So that's on the permitting side on the timing side, yes, we could see a change in the budget and we called this our preliminary 2022 budget.
With that in mind.
If we get this approval by the end of the year, then we will look at changing our budget in the new year and get going on attach we have everything.
In place from our plans are in place with the ordering of equipment is already happening and so we're set up to get going as quickly as possible as soon as we get that ruling figured out from the BC government and the blueberry so mid year whatever time in the year as soon as that.
We get that comfort, we will actually sanction in 2022, we don't have to wait for Q3, I guess is the point and maybe I'll turn it over to arm and more on the cost.
And the risk on inflation in the $600 million, but I think what we're seeing from the efficiency gains that we are seeing in cap with some of those relate back to attach it to and so I think also ordering some of our equipment ahead of time is helping mitigate some of those inflationary pressures but.
I mean, maybe you have a more flavor on that side. Thanks.
Thanks.
In terms of the debt.
At the time sensitive items that you talked about Patrick.
$75 million effectively just to address that specific question. It really allows us to have all of the long lead items already for a project like that and so that gives us flexibility in order to be able to advance when the time is right.
Cost pressures I guess.
Specifically to attach here I don't think there is anything unique about that project that are differentiated from the other other projects that we are executing we've seen in English inflation impact across the board.
Rice of steel labor costs, all the other factors.
We have estimated that to be about 5% to 7% impact on our overall capital expenditure.
But as Terry said, our goal and expectation is to be able to actually offset all of that.
Using efficiency execution and continuous improvement initiatives that we see across the board in the company. So attach it will be just like any other project as far as we can tell them.
Okay.
Okay.
Okay, great. Thank you.
Yeah.
Yeah.
Your next question comes from Travis Wood from the National Bank Financial. Please go ahead.
Yeah. Thanks, Thanks for taking the question and good work on hosting the conference call hopefully you keep these up going forward.
I want to stay on Apache and maybe two parts to this question if I if I can.
First what do you guys need from these negotiations what are you expecting out of these negotiations.
To provide some more certainty and clarity.
And then what is that critical path look like for you guys to start to commit incremental capital to attach it.
And then.
The last part would be if we see delays in to 2022.
Was there cushion on the on stream date kind of the back end of 'twenty three like do you expect that that on stream for 2023 changes.
Even though there potentially is some upfront delays on Apache.
Okay. Thanks, Tom Travis for the questions.
It's terrie here again, so as for clarity, we need to see clarity on the permitting authorizations.
That's the biggest.
Staying in the negotiations with the BC government and the Blueberry River first nations is what's the mechanism for these permit authorizations, which take into account cumulative accumulative effects and so that's the biggest thing that they are talking about and theres other finer details, but thats the biggest.
The concern so we need to make sure we know.
What the rules are for us when we're permitting activities, what we have to do and to.
To make sure that makes sense for our business. So from that perspective, that's what we're looking for is that clarity and that's what this is really all about is the key.
Clarity on the permitting authorization. So that is basically the critical path to everything that we're doing for attaching everything else is ready to go we were ready to sanction attached.
Well right now.
It wasn't for the blueberry.
And then government.
Negotiation issues that we're seeing right now otherwise everything is ready to go arm is ready to pull the trigger on this thing tomorrow. So.
If it is delayed further into 2022, yes that will impact the 2023 start time, we still need whenever we start army needs at least 18 months.
To complete the facilities and drill the wells to have everything on stream. So it's basically whenever we sanction. It's 18 months out from them is kind of how you would look at that.
So I would just add it's Chris here.
The way we would see this playing out is when we get that regulatory certainty, we'll circle back with <unk> and his team and say okay. What's your what's your Onstream, Dave What's the capital you can efficiently deploy in whatever time is left in that year and the following year and then we'll update the market accordingly.
Okay, that's great color on both of those thanks, so much guys.
Thank you.
Okay.
Your next question comes from Jeremy Mccrea from Raymond James. Please go ahead.
Yes.
Two questions here one in can you give us a little bit more detail with LNG LNG agreement that you guys signed here is there more to come after that wasn't just a little.
View of what's possible here.
Any other additional clarity on that and then if you could also provide a little bit more context in terms of the breakdown between the distribution between buybacks versus potentially special dividend variable dividends in terms of the 50% to 80% payout to shareholders.
So Jeremy.
Terry here I'll take the first one and then throw the second one too.
Chris So on the.
LNG deal.
Can't give much more detail on it but we can say that it's an advantageous to north American based pricing is what we got so.
From that perspective.
We're net positive on this it's a strategic deal it's about building long term relationships.
And to your point then yes, we do believe there's other opportunities out there.
And I think for our just with our.
Sunrise.
Asset in particular, it is probably that greenest.
<unk> facility in North America, and it's actually the proximity to the coastal gas link and it's the reliability of our operations that people are looking for to partner with so when you are and our investment grade, where we have an enough size to us and the resource when you add all of them.
It was up we're a good partner for long term LNG agreements like this.
So I guess that's.
But all I can add to flavor to that and then maybe Chris maybe you want to touch on second question you bet. So in terms of buybacks versus dividends.
I touched on in an opening but we do want to lean on our base dividend.
The primary long term mechanism, but it will be supplemented by the share buybacks just to make sure that we do get into that range of that 50% to 80% I mean, the market is giving us an opportunity or we view as an opportunity with.
The discounted valuation we see in the market. Currently so we will be spending heavily on that and getting up to our full allotment of our 10% in CIB is what we would anticipate over the remaining eight months that we have left on it. So it's going to be a portfolio approach, where it's got a little bit of everything and Thats, where were going to start and we'll keep moving forward with that as we see.
Throughout the year.
Okay.
Perfect. Thanks, guys.
Your next question comes from Aaron Bukovsky from TD Securities. Please go ahead.
Good morning, guys, just a follow up on Jeremy's question.
We are seeing the regulatory answered NBC settled in more capital spent Apache in 2020 to them.
The preliminary budget.
Does this slow the pace of buybacks in future dividend increases or is the capex come out of the remaining 20% to 50% of the free cash flow that's allocated to the balance sheet.
Yes. Good question Yaron, it's Chris here, obviously, so when we were designing the framework for our capital allocation. We were certainly mindful of where we were in this process. So it's the latter approach that we know that we have the flexibility with that remaining.
20% to 50% that will allow us to continue on the buybacks continue on our dividend journey and execute the business and profitably invest in our underlying assets to grow the business and the free cash flow for the long term. So it's the latter of those two Eric.
Perfect. Thanks, guys.
Thanks.
Your next question comes from Elias Fast Colas from Industrial Alliance capital markets. Please go ahead.
Thanks, very much for taking my call.
Want to focus a bit on the <unk>.
The new dividend and the sustainability.
You kind of peg the dividend to be or the new dividend to be comfortably fund.
<unk> hundred 40 <unk>.
Just call it $2 <unk>.
But I kind of see a third leg to that which is the LPG.
LPG or butane and propane specifically.
Are you pricing in what I see as a.
Structural improvement in those prices relative to <unk>.
W Ti.
Slash condensate.
Just without getting too granular I think it's important so any color on that would be appreciated.
Thanks.
Chris here again, so I'll try to answer that one.
Changing any material assumptions audits I mean clearly propane.
His experience quite a bit of strength right now butane is pricing very strong relative to WTS, but we're not forecasting any material change to those relationships. So really it is it is about a stable relationship you have seen us.
Work hard over the last several years to to make sure. We do have some exposure to the spot consistency of spark spot market on the NGL streams, but we're not changing the assumption on the relationship of those values going forward. So.
We think of as long as it stays relatively steady.
It is that's the relationship we're counting on I mean, it is a relatively small component of our revenue overall, but it is an important component.
Okay.
Just maybe sort of another macro question with the potential for ethane cracking or another ethane cracker in Alberta.
Is there some capital projects that might be directed towards feeding a plant like that.
Or not.
I think at the end of the day, we will evaluate there is some some vague wording in there how we will evaluate all the opportunities ahead of us.
We do like to evaluate things before we commit to anything so we will look and make sure like when we evaluate these things. It's about are we more profitable after the fact or before the fact and what is the risk that we're absorbing in it. So I don't have a crisp answer for you, we will or won't do it but what I will assure you is we will evaluate we've got a lot of NGL.
Stream that we have available as well as natural gas that we can put into these types of projects.
Fortunately, we have the scale, where we do get.
Our approach to at least evaluate these opportunities.
We'll continue to do so.
Great I'll leave it at that thank you very much for the color.
Thank you.
Your next question comes from Michael Harvey from RBC Capital markets. Please go ahead.
Okay.
Yes sure. Good morning, everybody. So I just had a question about the use of free cash. So you kind of mentioned that it's unlikely to be used for M&A.
Just wondering if you could provide us some details on that is just pure efficiencies that are driving that some years are better than others or.
Are the assets just not available that would be complementary.
Is it pricing or is or are you just kind of full up with <unk> and your own stuff right now.
Just any thoughts from the team and the board on kind of how you guys are thinking about that obviously some mixed.
Mixed views from your peers on that point.
Yes, Thanks, Michael it's terrie here so.
The answer is yes to all of those.
But like.
I guess, when we're looking at M&A opportunities.
We're not looking for large.
Significant M&A opportunities, we've we've done the best one that we've seen out there and and now we are seeing the benefits of that and you see that the extensive free cash flow that we're delivering and the efficiency gains that we're seeing that we thought we could.
<unk> realized by our operating the way <unk> operated.
It does not mean that there arent opportunities smaller in scale that are more bolt on opportunities that we are looking at that Thats always something that we do day in and day out within our teams, but we have such a big resource and.
I think it's in my opinion some of the best resource out there. So thats why we are focused on optimizing our.
<unk> in particular asset and it's a huge resource at 180000 BOE a day of production and so that's our first step is making sure that as efficient as it possibly can be and then.
We never ever say, we're not looking at opportunities, but the bid ask spread with stronger commodity prices is more challenging right now and so we don't see.
The suite opportunities that.
There are six to 12 months ago, and so probably that's more of how we look at it and our view on it. So we are fine with the continuing to optimize taking that free cash flow and given the majority of that back to our.
Shareholders and our stock price is undervalued significantly and so I would rather.
Invest in not that gives us more return for the true value of our asset than it is going outside and looking at other opportunities.
Yeah.
Okay.
Yes.
Okay, operator, I'm not sure if there's any further questions on that okay.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
There are no further questions at this time. Please proceed.
Yeah.
Well I'd like to thank everyone for joining us. This morning really appreciate it and appreciate the support as.
As investors and if you have any further follow up questions. Please don't hesitate to reach out to the.
To the team here and we will be happy to have a chat hope everyone has a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.