Q3 2022 ARC Resources Ltd Earnings Call

November 4, 2022

Corridor, our operations team completed several significant turnaround projects across our fields safely and efficiently with the majority of planned seasonal maintenance behind us we anticipate production volumes will increase in the fourth quarter to over 350000 Boe per day, driven by growth at <unk>.

As a result, we anticipate that operating and transportation cost per BOE will decrease over the balance of the year.

Turning now to our 2023 budget the capital program, we put together balances profitable growth with a flexibility to increase shareholder returns as net debt has reduced underpinning. This budget is our commitment to a strong balance sheet, which is a critical part of our business that allows us to capitalize on.

Owner cyclical opportunities.

Next year, the preliminary budget of $1 8 billion is expected to deliver production of approximately 350000 Boe per day, representing a 2% year over year growth and generating approximately $1 $7 billion of free cash flow at the current forward curve.

Approximately $1 4 billion, which incorporates inflation was allocated to sustaining production across our asset base split, 70% in Alberta, and 30% to British Columbia.

The incremental $400 million above sustaining capital includes important production growth and margin expansion projects that further enhances the long term profitability of the business.

The first is the expansion at Sunrise that will add 80 million cubic feet per day of production for approximately $100 million Sunrise is a very strategic asset for our company. It is one of our most profitable assets and has nearly zero emission facilities.

Addition, sunrise will be direct connected to coast coastal gas link the pipeline that will supply natural gas to LNG off the west coast.

At <unk>, we plan to invest approximately $200 million in production growth and margin expansion of the $200 million $130 million is in water infrastructure that will lower operating costs by $60 million per year, or <unk> 50 per Boe at the corporate level.

Similarly, paying out in less than two years.

The remainder will be used to increase production by 5% to 10% to approximately 190.

To 200000 Boe per day.

<unk> continues to deliver exceptional results with arcweld dominating the top wells in Alberta months after months.

The final $100 million earmarked to restore production in BC to previous levels. Following a year of relatively little activity on this note. The budget. We've outlined today is predicated on the timely and continued receipt of drilling permits on freehold lands in northeast BC, we have one rig drilling in BC.

Right now and we remain confident we will be able to execute the capital program put forth to restore production and regain the operational momentum there next year.

As it relates to attach we remain prepared to sanction attach a phase one once the BC regulatory environment on Crown land becomes more certain phase one is expected to cost approximately $700 million <unk>.

Including the facilities capital and initial wells to fill it in with payout in about two years at the current strip.

Like others inflation is impacting our business, but we are managing it both today and in the future long term planning and our scale are proving critical in ensuring we have access to services and materials to execute our program and to that end I'd really like to thank our people and service providers for their hard work and really.

<unk> focus on safety and efficiency in our operations.

With that I'll turn it over to Chris to walk through the financial results.

Thanks, Terry and good morning, everyone.

Michael Harvey: Some of those well level development strategies, just, given that as you mentioned, the results there are still pretty good. Just kind of remind us of the inventory figures you've got, that would be helpful as well. Thanks.

Could you just.

Given that as you mentioned the results there is still pretty good and then just kind of remind us of the inventory figures you've got.

That'd be helpful as well thanks.

Lara Conrad: You bet. Michael, this is Laura Conrad. Thanks for the question. Yeah, I think we've spoken quite a few times about our strategy with Kakwa as far as widening out the wells. We enacted that immediately upon completing the business combination. Here we are a year and a half later, able to see the results of that. Effectively, all of the wells that we're drilling have that wider spacing, and we're seeing really strong results from those. We are indeed accessing the resource still at that wider spacing, so we're getting that productivity while putting less capital in the ground. We've also optimized our fracs by putting less water. Same sort of tonnage but less water pumped, which reduces the overall cost. Again, we're seeing very similar productivity.

You bet Michael This is Lara Conrad thanks for the question.

So yes, I think we've spoken quite a few times about our strategy with <unk> as far as widening out the wells, we enact that.

Immediately upon completing the business combination and now here, we are a year year and a half later.

Able to see the results of that so effectively all of the wells that we're drilling have that wider spacing and we're seeing really strong results from those we are indeed accessing the resource still at wider spacing. So we're getting that.

Productivity, while putting less capital in the ground. We've also optimized our fracs by putting less water, so same sort of tonnage, but less water pumps, which reduces the overall cost and again, we're seeing very similar productivity, we're not really seeing any negative from lowering the water volume and so both of those.

Lara Conrad: We're not really seeing any negative from lowering the water volume in. Both of those would be sort of the two major drivers as far as Kakwa pad and well design, and both are occurring or creating the results as predicted. Very happy with that. As far as inventory at Kakwa, I think, you know, as always, we have a fairly conservative booking strategy. When we look forward, you know, we have an inventory well over 1,000 wells at Kakwa, so a long life to that asset.

So those would be the two major drivers as far as our CAC.

And well designed and both are.

Occurring are creating the results as predicted so very happy with that as far as inventory at Capa I think.

As always we have a fairly conservative booking strategy, but when we look forward, we have an inventory well over 1000 wells that cockler.

So a long life to that asset.

Michael Harvey: Gotcha. Thanks for that.

Got you thanks for that.

Operator: Your next question comes from the line of Patrick O'Rourke from ATB Capital Markets. Your line is open.

Your next question comes from the line of Patrick O'rourke from ATB capital markets. Your line is open.

Patrick O'Rourke: Hey, good morning, guys. I think they'll leave the standard return on capital question for others here this morning. I will say, I think you guys have drawn a very definitive line in the sand with respect to how compelling you see the value in your equity today through your action. I just wanna kinda build upon Michael's question there. At Kakwa, you know, the results are very intriguing. I know that, you know, he touched on the technical changes that you referred to in the release. Just wondering with respect to inventory and development of the lower Montney, what you've seen on the asset since you've acquired it.

Hey, good morning, guys.

We have the standard return of capital question.

For others here this morning, but I will say.

I think you guys have driven.

Drawing a very definitive line in the sand with respect to how compelling you see the value in your equity today.

Through your action I, just wanted to kind of build upon mikes question there Ana.

<unk>.

The results are very intriguing and I know that he touched on.

The technical changes that you referred to in the release, just wondering with respect to inventory and development of the lower Montney, what you've seen on the assets since you've acquired it.

Lara Conrad: Thanks, Patrick. As far as the lower inventory, the lower Montney, we're looking at it as far as what the overall development strategy should be for the full 3D volume. I think, you know, the way we all talk in industry, it's really easy to simplify these things and talk about interwell spacing. It is a simplification compared to what our technical teams look at. We still like the lower, but we do think it needs to be co-developed with the upper, and that opportunity does not exist across the entire Kakwa inventory. When I talked about that broad inventory, that does include what we have confidence and conviction in regarding that lower inventory.

Yeah, so thanks, Patrick as far as the lower inventory.

Laura Montney. So we're looking at as far as what the overall development strategy, but should be for the full three D volume I think the way we all talk in the industry, it's really easy to simplify these things and talk about inter well spacing.

But it is a simplification compared to what our technical teams look at so we still like the lower but we do think it needs to be co developed with the upper and that opportunity does not exist across the entire chocolate inventory. So when I talked about that broad inventory that does include what we have confidence and conviction in regard.

That lower inventory.

Patrick O'Rourke: Okay. Just a quick question with respect to Attachie. You referred to it as sanction ready. I'm just wondering, is sanction ready synonymous with shovel ready as well, or drill, you know, shovel ready, construction ready, drill ready? Once you see kind of a resolution in terms of the surface level issues, and permitting there. Is this a situation you have the budget out there, the capital budget for 2023, where if you do get that resolution on the regulatory front, we can see an augmentation of that budget and effectively an immediate start to the project?

Okay, and then just a quick question with respect to attach as you referred to it a sanction ready.

I'm, just wondering is sanctioned ready synonymous with shovel ready as well or drill shelf.

Shovel ready construction ready drill ready once you see kind of a resolution in terms of the service level issues and permitting there.

Then is this a situation you have the budget out there in the capital budget for 2023, where if you do get that.

Resolution on the regulatory front, we can see an augmentation of that budget and effectively an immediate start to the project.

Terry Anderson: Yes, Patrick, it's Terry Anderson here. When we say shovel ready, sanction ready, we are ready to roll. As soon as we get that clarity from the BC government on the regulatory framework, we'll approach our board and we will decide to move forward at that time. In 2023, if that, we expect that to be hopefully coming here soon, we will make sure that we go talk to the board and we'll be adjusting our capital budget go forward to start moving forward on Attachie.

Yes, Patrick it's Terry Anderson here, when we say shovel ready sanction ready we are ready to roll as soon as.

We get that clarity from the BC government on the regulatory framework will approach our board and.

We will decide to move forward at that time. So in 2023 that we expect that to be coming here. Soon we will make sure that we go talk to the board and.

We will be adjusting our capital budget go forward to start moving forward on attaching.

Patrick O'Rourke: Okay, thank you.

Okay. Thank you.

Yeah.

Operator: Your next question comes from the line of Travis Wood from National Bank Financial. Your line is open.

Your next question comes from the line of Travis Wood from National Bank Financial Your line is open.

Travis Wood: Yeah, thanks. Patrick kinda asked the question I was going to ask, but if maybe you could expand on kind of the cadence and timelines upon kinda dirt and shovels in the ground in terms of how we should think about the CAD 700 portion of it, the kinda wells to drill to fill in terms of the capital portion. Then kind of the chunkiness of the volumes, you know, probably into potentially late 2024. Could we see first gas and volume late 2024? How can we think about that cadence over the next couple of years and that capital incremental capital portion as well?

Yes, Thanks Patrick.

And I was I was going to ask but if maybe you could expand on.

Kind of a cadence timeline.

Upon kind of driving and shovels in the ground in terms of how we should think about the.

700 portion of it.

Kind of wells to drill to fill in terms of the capital portion and then kind of the chunky most of the volumes.

Boy into potentially late 'twenty for currency first Scott.

Late 'twenty four how can we think about that cadence over the next couple of years.

Capital incremental capital portion as well.

Terry Anderson: Yeah, Travis, it's Terry here again. So we've talked about it's a CAD 700 million project for all the facilities, capital, and drilling. Once we have that clarity and start moving forward. Like we've already should remind everybody that we've already did a lot of pre-spending on this on long lead time equipment. The lease has already been constructed. Some of the water handling ponds and stuff have been constructed, so we are ready. It'll be 18 months from the time we get going is the plan. It depends on when we start within the year, but 18 months. I'm pushing our team that it's 18 months. We talk about 18 months to 2 years.

Yes, Travis it's terrie here again.

So we've talked about it's a 700 million dollar project for that.

The facilities capital and drilling and once we are we have that clarity and start moving forward like we've already I should remind everybody that we've already did a lot of pre spending on this on long lead time equipment for leases already been constructed some of the water handling.

<unk> and stuff that's been constructed so we are ready it'll be 18 months from the time, we get going.

Is the plan and and.

And so it depends on when we start within the year, but 18 months to I'm pushing our team that it's 18 months could you talk about 18 months to two years, but from when we get going to 18 months to two years is when that first production will come on and then we will.

Terry Anderson: from when we get going to 18 months to 2 years is when that first production will come on, and then we will take a couple of months to ramp that production up to the 40,000 BOE a day. The actual cadence and how much we would spend in 2023 all depends on when we actually start.

Take a couple of months to ramp that production up to the 40000 BOE a day, but the actual cadence and how much we would spend in 2023 all depends on when we actually start.

Travis Wood: Okay, fair enough. That's all for me.

Okay fair enough.

All for me.

Operator: Again, if you'd like to ask a question, please press star followed by one on your touch-tone phone. Your next question comes from the line of Jamie Kubik from CIBC. Your line is open.

Again, if you'd like to ask a question. Please press star followed by one on your Touchtone phone.

Your next question comes from the line of Jamie Kubrick from CIBC. Your line is open.

Jamie Kubik: Yeah, good morning, and thanks for taking my question. Just a question on how ARC is looking at gas pricing in Western Canada. I mean, we did see considerable weakness on AECO and Station 2 diffs through Q3 relative to NYMEX. Just curious about how you're thinking about summer gas prices moving forward, and if you think we see a repeat of Q3 differentials over the next couple of years until LNG Canada comes online. Thanks.

Yes, good morning, and thanks for taking my question just a question on arc as looking at gas pricing in Western Canada, We did see.

Considerable weakness on eco and station to <unk> through Q3 relative to Nymex, just curious about about how youre thinking about summer gas prices moving forward and if you think we see a repeat of two through three differentials over the next couple of years until LNG, Canada that comes online right.

[Company Representative] (ARC Resources Ltd.): Jamie, it's Chris here. You know, obviously, yeah. We are excited for the immediate near term in the winter. We would anticipate very healthy pricing heading through winter, just given the demand construct that we're seeing and how strong it is. As we move into the summer, one of the key things is there will be some expansions on the NGTL system that should alleviate some of the pressure that we saw this last summer. There's 2 key things that will obviously need to happen, which are, one of them is the cadence of production growth from the basin overall, and then the other is weather.

Chris Marks: Jamie, it's Chris here. You know, obviously, yeah. We are excited for the immediate near term in the winter. We would anticipate very healthy pricing heading through winter, just given the demand construct that we're seeing and how strong it is. As we move into the summer, one of the key things is there will be some expansions on the NGTL system that should alleviate some of the pressure that we saw this last summer. There's 2 key things that will obviously need to happen, which are, one of them is the cadence of production growth from the basin overall, and then the other is weather.

Hey, Jamie it's Chris here.

Obviously, so we are excited for the immediate near term in the winter we would anticipate.

Healthy pricing heading through winter.

Just given the demand construct that we're seeing and how strong it is as you move into the summer.

The key thing is there will be some expansions on the NGL system.

That should alleviate some of the pressure that we saw this last summer.

The key there is two key things that will obviously need to happen which are.

One of them is the cadence of production growth from the basin overall.

[Company Representative] (ARC Resources Ltd.): You know, it's a possibility, but with the expansion of the system, we're optimistic that we won't have a repeat of, again, very limited periods of weakness in the summer. We don't wanna paint it as it was broken all summer. It was a matter of, you know, a couple of weeks that there was a bit of weakness. Again, our plan around that is just to make sure that we're selling as much gas as we can into the US when there's periods of congestion at AECO.

And then the other is weather so it's a possibility, but with the expansion of the system.

Chris Marks: You know, it's a possibility, but with the expansion of the system, we're optimistic that we won't have a repeat of, again, very limited periods of weakness in the summer. We don't wanna paint it as it was broken all summer. It was a matter of, you know, a couple of weeks that there was a bit of weakness. Again, our plan around that is just to make sure that we're selling as much gas as we can into the US when there's periods of congestion at AECO.

Optimistic that we won't have a repeat of again very limited periods of weakness in the summer. So we don't want to paint it as it was broken all summer. It was a matter of a couple of weeks that there was a bit of weakness and again our plan around that is just to make sure that we're selling as.

As much gas as we can into the U S. When there's periods of congestion that vehicle.

Jamie Kubik: Got it. Thanks. Maybe just to expand on that perhaps a little bit. You do have a line in your press release on ARC continuing to evaluate and execute additional downstream diversification initiatives. Can you expand on maybe what you're looking at on that front a bit further?

Got it thanks and.

Maybe just to expand on that perhaps a little bit and you do have a line in your press release on arc continuing to evaluate.

Execute additional downstream diversification initiatives can you expand on maybe what you're looking at on that front are a bit further.

[Company Representative] (ARC Resources Ltd.): Yeah, you bet. Obviously, not gonna give you any details or any of the secret sauce, but generally speaking, we're always open to evaluating, is there other places we can sell our product where we can get premium pricing. That would also include things like LNG, which are clearly a longer term type of contract. We will evaluate all types in the near term and in the medium and long term. I think we've spoke publicly about in the longer term, we would like up to 25% of our gas receiving international pricing, and it's gonna be a measured approach and a you know, a lot of contracts to get to that. It'll take some time, but we are still committed to it and putting contracts in place.

Chris Marks: Yeah, you bet. Obviously, not gonna give you any details or any of the secret sauce, but generally speaking, we're always open to evaluating, is there other places we can sell our product where we can get premium pricing. That would also include things like LNG, which are clearly a longer term type of contract. We will evaluate all types in the near term and in the medium and long term. I think we've spoke publicly about in the longer term, we would like up to 25% of our gas receiving international pricing, and it's gonna be a measured approach and a you know, a lot of contracts to get to that. It'll take some time, but we are still committed to it and putting contracts in place.

Yeah, you bet.

I'm not going to give you any details or any of the secret sauce, but generally speaking we're always open to evaluating is there. Other places we can sell our product where we can get premium pricing and that would also include things like LNG, which are clearly a longer term.

Type of contract, but we will evaluate all types in the near term and in the medium and long term.

We spoke publicly about in the longer term, we would like up to 25% of our gas receiving international pricing.

Gonna be a measured approach and a lot of contracts to get to that so it will take some time, but we are still committed to it and putting contracts in place.

Jamie Kubik: Great. Thanks. That's it for me. I'll turn it back.

Great. Thanks, that's it for me I'll turn it back.

Operator: Your next question comes from the line of Travis Wood from National Bank Financial. Please go ahead.

Your next question comes from the line of Travis Wood from National Bank Financial. Please go ahead.

Travis Wood: Hey, thanks guys. I had a follow-up question just with respect to the facilities across the land base. Could you help us kinda get a sense of where you have incremental capacity at any of the plants in terms of kinda easy, low-hanging growth potential, and where we see some of those plants being at capacity? Kinda specifically, I'm thinking of Gold Creek mostly, I think.

Conference.

Follow up question with respect to.

The facilities across the land base could you help us kind of get a sense of where you have incremental capacity at <unk>.

Any other plans in terms of kind of easy low hanging growth potential.

Uh huh.

We see some of those plants being at capacity.

Specifically I'm thinking of Gold Creek.

Jamie Kubik: Yeah.

Mostly I think yes.

Terry Anderson: Travis, it's Terry here again. Typically, for our BC facilities, they like to run them at max capacity, and they are there. Yes, you're right. In Kakwa, in Gold Creek, we do have some spare capacity. Some of that spare capacity comes in very handy for when we bring on some of these pads. They're very torquey wells, and so it's not unusual for us to bring on an eight-well pad and increase production by over 20,000 BOE a day. The nice thing of having a little bit of that spare capacity is we're able to capture that early flush production. Obviously it helps to pay the wells out quicker. We are looking at other

Travis it's terrie here again, so typically for RPC facilities, they like to do.

Run them that Max capacity and there are there.

For sure.

Youre right in calculating gold Creek, we do have some spare capacity.

Some of that spare capacity comes in very handy for when we bring on some of these pads are very Turkey wells and so it's not unusual for us to bring on an eight well pad and increased production by over 20000 BOE a day and so the nice thing of having a little bit of that spare capacity as we're able.

To capture that early flush production and so obviously it helps pay the wells quicker, but we are looking at other obviously, we have the montney, but we have the Cretaceous the deep basin that runs through CAC. We're also and there's opportunities for us to look at maybe drilling wells, there and filling up.

Terry Anderson: Obviously we have the Montney, but we have the Cretaceous, the Deep Basin that runs through Kakwa also. There's opportunities for us to look at maybe drilling wells there and filling up more of that spare capacity. As of right now, Kakwa is the place where we have the spare capacity to move anything of significance on volume.

More of that spare capacity, but as of right now cap was the place where we have the spare capacity to move any kind of anything of significance on volume.

Travis Wood: Okay. Would it be fair to say that at Gold Creek, there's about 200 a day of capacity ±?

Okay and would it be fair to say that <unk>.

<unk> crude was about 200, a day of capacity plus or minus.

Terry Anderson: Oh, now you're getting to details that I have to talk to the operations team about.

So now youre getting into details is that to have to talk to the operation team about.

Travis Wood: Okay. No, no worry. I can follow up with you. Thank you so much, Terry.

Okay No I.

I can follow up with you. Thank you so much.

Operator: Again, as a reminder to ask a question, please press star followed by one.There are no further questions at this time. Please proceed.

Again as a reminder to ask a question. Please press star followed by one.

There are no further questions at this time. Please proceed.

Terry Anderson: Excellent. Thank you everyone for joining, and that concludes the call today.

Excellent. Thank you everyone for joining and that concludes the call today.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.

Okay.

[music].

Okay.

Q3 2022 ARC Resources Ltd Earnings Call

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