Q4 2022 ARC Resources Ltd Earnings Call
<unk> averaged $14 42 per Mcf.
Over the course of the year. We also reached some significant milestones that have important implications when I think about asset quality and future LNG potential first at Dawson, we achieved one tcf Tcf of natural gas produced proof of the quality and scale of our asset base to put this into perspective.
Dawson has 23 Tcf of gas in place. This really shows how we are at the very early stage of development in Dawson and.
In Archs northeast BC assets, we have 100 tcf of gas in place alone, which bodes well for our future LNG aspirations.
Second we strengthened our business in 2022 by entering into a natural gas supply agreement with Cheniere that will commence with the startup of their corpus Christi Phase III expansion. We're excited about this agreement with a high quality counterparty and the diversified exposure it provides to global natural gas prices.
Moving forward, we will continue to evaluate additional commercial opportunities that leverage our investment grade credit rating scale and ESG leadership, all competitive strengths that make these types of transactions possible.
At the end of the year, we also advanced our status as an ESG leader in December we achieved <unk> origins EEO 100 certification on 100% of our assets and in doing so now have the largest production base certified under the global standard in Canada.
Operational excellence is a guiding principle and it showed through in our operational performance in reserves.
This past year, we executed our largest capital program on record and most importantly, we did it safely.
I would like to thank our staff for their continued focus on safety. During this period of tremendous activity safety will always be our number one priority.
As it relates to our capital program. We made the decision early in 2022 to divert activity from BC to our <unk> asset in Alberta, and target condensate rich areas and this decision paid off in a big Big way, we increased production to about 190000 Boe per day.
And it generated $2 1 billion of free cash flow at the operating level in 2022 alone.
Since we acquired this world class asset in 2021, we have reduced well costs by approximately 1 million per well inflation has offset that in 2022, but these savings are permanent.
While well performance is exceeding expectations with <unk> delivering some of the strongest condensate wells in Canada and finally, we have confirmed that wider spacing implemented last year is improving long term well performance pairing this with well cost reductions we achieved we achieved will lower.
Sustaining capital and further improved capital efficiencies at the largest condensate producing asset in Canada.
The improved well performance at <unk> resulted in an excellent year for reserves, which really highlights the depth and quality of our montney inventory.
First we grew reserves across all categories by 14% to 22% per share as a result of strong well performance PDP reserves at CAC with specifically increased by 17%.
For the 15th consecutive year, we replace greater than a 140% of production with <unk> Reserve addition.
And third the pretax NPV of <unk> reserves of $34 per share is based upon development of just 17% of our interim estimate of drilling inventory.
Attached specifically comprised just 4% of total <unk> locations, we look forward to booking the reserves associated with Hitachi as the project is developed these are all important to us as we think about inventory duration and our long term strategy.
Now turning to BC I am pleased to report that we have regained operational momentum in the province today, we have two rigs actively drilling and the level of activity will increase over the course of the year.
In Q4 of 2022, we started receiving permits on freehold lands, which sets us up to efficiently execute our 2023 program.
As it relates to the regulatory environment the agreements executed between the BC government and the Treaty eight first nations are a positive step forward.
As an industry, we produce some of the lowest emissions lowest cost natural gas in the world, establishing a new framework to sustainably develop that resource is critical.
For <unk>, specifically, we continue to engage with indigenous communities neighboring our operation and work alongside the BC government and energy regulator to ensure we have clarity in all aspects of the process.
I know many are wondering about attach and when we will move forward on this landmark development opportunity. Let me be clear attach is the best development project in our portfolio and sanctioning yet is a priority for us we anticipate to be in a position to sanction the project this year.
A couple of additional observations worth mentioning and reminding our listeners first the agreements executed between the BC government and the Treaty eight first nations pertain strictly to crown lands.
All our existing production in BC is on private are freehold land and we continue to receive permits. There. Therefore, we have a clear line of sight to fully execute the 2023 program as planned.
There are a high value areas identified in the agreement with the Blueberry River first nation that are of critical importance to the nation and puts limits on future development.
These are identified in the map on the screen as you can see all of <unk> assets are outside of these areas.
To close we are excited to be back in DC and the establishment of a new framework is constructive given the strength of our relationships and the merits of a project like attached we are well positioned to build on this momentum and capitalize on the investment opportunity in front of us.
With that I'll turn it over to Chris.
Thanks, Terry and good morning, everyone.
But as Jerry mentioned, we closed the year with a record quarter production funds flow in free funds flow per share registered 2% to 7% above consensus.
<unk> invested $383 million into our assets and generated approximately $600 million or <unk> 96 per share of free funds flow on.
On a full year basis, our invested $1 4 billion, which was within guidance and generated $2 3 billion of free funds flow our results yielded a 35% return on capital employed.
Strong commodity prices certainly contributed to our record results. However, competitive strengths were also evident.
First market diversification as Terry mentioned was critical.
In periods of regional price dislocation arc has historically captured strong margin and this quarter was no different.
This was due to physical transportation agreements put in place years ago that are frankly impossible to replace today.
The benefits of our market diversification, a low cost structure and the diversified commodity mix in which revenue is split approximately 50 50 between natural gas and liquids contributed to a 67% margin in the quarter.
This can be easily overlooked and a strong pricing environment like in 2022, but is paramount and generating profits throughout the cycle.
On that note arc realized $107 per barrel for its condensate in the quarter with light oil and condensate production of 86000 barrels per day.
Condensate fundamentals remain constructive in both the near and long term in Western Canada consumption is roughly 700000 barrels a day demand is growing and production is approximately 400000 barrels per day. There is little if any substitutes and important pipelines are nearly full and while the economic incentive is there to grow supply today.
Our limiting factors to the pace of growth.
We look ahead to 2023 production and capital spending guidance remain unchanged.
We intend to invest $1 $8 billion to deliver average production of 345 to 350000 Boe per day.
First quarter production is expected to be lower than fourth quarter of 2022 due to unplanned third party pipeline outages impacting our production in BC.
Anticipated to be fully restored this month.
Offsetting the third party outages is stronger than forecast based production, which will support consistent production growth over the balance of 2023.
Included in the 2023 budget, we have invested $140 million in water infrastructure capital. This will expand margins by reducing corporate operating costs by approximately $60 million per year or 50.
Bowie once fully commissioned in the second half of 2024.
In 2024, we would expect capital spending to decrease by roughly 15% excluding attaching while production is expected to be flat or higher than in 2023.
The decrease in capital spending is due to several factors the completion of the sunrise expansion and water infrastructure investment and Capa.
The absence of onetime investment.
To restore production in BC, and lower and lower anticipated base declines at capita.
Our continued to strengthen its balance sheet in the fourth quarter by reducing debt by an additional $240 million at year end net debt was $1 3 billion or four times funds flow inclusive of the $1 billion of investment grade senior notes outstanding.
In 2022, we initially put forth a free funds flow allocation framework to returned 50% to 80% of free funds flow to shareholders and executed to that plan.
Through growing base dividends and repurchasing our shares arc returned 71% of free funds flow to its shareholders with the remaining 30% used to further strengthen the balance sheet.
As that was reduced we increased the range of returns to shareholders to 50% to 100% of free funds flow and anticipate that we'll be at the middle or top end of that range in 2023.
We will continue to execute on our strategy of per share growth through disciplined investment in our asset base and a meaningful return of capital to optimize total return.
With that I'll pass it back over to Terry for some closing remarks.
Thanks, Chris.
Last year once again, we did what we said we would do we executed to plan on budget and delivered record results.
I'm excited about where we are headed first we have identified ways to make our largest condensate asset even more profitable and second the operational momentum in BC is going to enable scalable investment opportunities like Hitachi that will significantly enhance our free cash flow.
Third our best attributes scale asset quality operating track record ESG leadership and financial strength continue to open up commercial opportunities like LNG.
To close we are focused on delivering on our strategic priorities.
First and foremost retain a strong balance sheet. This is critical in our business to capitalize on opportunities through the cycle.
Grow free cash flow per share, we will do that through disciplined investments in our assets by executing on margin expansion opportunities like LNG and by reducing the share count when it's accretive to do so like it is today.
And finally grow the base dividend as we execute on these priorities to provide an attractive total return that is sustainable for our shareholders. These are our priorities and I look forward to sharing our progress on them in the quarters to come.
With that I'll turn it back over to the operator for questions. Thank you.
Thank you ladies and gentlemen, we will now begin the question and answer session did.
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One moment. Please for your first question.
First question comes from Michael <unk> of RBC capital markets. Please go ahead.
Yes sure. Good morning, So just couple of questions about <unk>.
<unk>. So the first one I guess, if you did sanction of this year.
Would it be a situation where everything's incremental to the current budget. So for instance, contracted new rigs et cetera, or could you move some of that equipment from.
From Alberta.
Where most of your fleets working now as things kind of quiet down there just trying to get a sense for some of the logistics on flows of equipment and then also just on the capital for the project.
Kind of unchanged at 700 million I guess, we would've expected that to go up a bit just on inflation, but is that a case, where you had sufficient cushion baked in or would you need to refresh that when you go to a board approval for for the project later this year if it goes that way.
Thanks, Thanks, Michael for the question, it's terrie here so.
Good questions on unattached, so from a logistics perspective, we have 11 rigs active today.
We will move some of our rigs we are moving rigs into BC, and we will allocate a rig.
From their current activity into there we potentially would look for another rig depending on timing, but I think we can manage it within the portfolio of rigs that we have today. So that's kind of.
And the other services, though within our portfolio of right now, we can actually manage that and pulse under that over from the Alberta into BC. So that's well laid out our men has been now working on that plan in anticipation of that so we're set up to do that as for the capital amount.
And just as a reminder, we increase the capital from $600 million last year for attach you up to 700 million to incorporate the inflationary pressures we knew that we seen last year.
So we're comfortable with that number today once we get to sanctioning we'll look at that again and make sure that we're clear on that number but as of right now we feel comfortable with the $700 million. There are savings that we haven't baked into the project here from the learnings in a catchy.
Or sorry from the <unk> into attached on the completion side of it. So that's where we're trying to figure out those finer details, but thats kind of where we sit.
Got you thanks very much Sir.
Youre welcome.
Thank you.
The next question comes from Erin.
<unk> of TD Securities. Please go ahead.
Hey, good morning, it looks like you built up a sizable backlog of drilled uncompleted wells and <unk> in Q4, how should I think about the cadence of bringing these on stream in 2023.
Hi, Aaron Ed Zeiler Conrad Thanks for the question.
We don't really intend to have a backlog of drilled uncompleted wells. So youll see those get completed and brought on stream here right away. It's really just about timing keeping our rigs active in making sure. We're managing our overall services in an effective way and so I look forward to bringing all of those wells on production in the near term.
So to follow up on that should we expect a production tailwind in the first half of the year as you tie those wells in.
So when you think about carefully managing a gas field versus managing a liquids rich shale, there's a little bit different and so when we put our forecast out for <unk> in particular, we look at the overall annualized but you back month to month, we're going to see some fairly big swings in production as is typical in liquids rich fields.
So I think we will see some seven figure volumes out of <unk> in parts of <unk>, which will offset other.
Other moments in time, when we maybe have lower production as we have wells shut in for Frac offset that overall, we're very confident with our annual forecast for that property.
Perfect. Thanks, if I could ask a follow up question I guess, it's probably for you Terry.
You are often asked about acquisitions, but is there anything non core left in the portfolio that you'd look to divest.
No.
That's the beauty of our asset base everything that we have is core and.
It makes it simple because we've done a lot.
<unk> is a cleaning up over the years.
But.
That's where we sit today, we're good with our asset base, we like everything that's in there. So no is the answer.
Okay and one final question from me you mentioned in the press release, you are evaluating the details of the agreement signed between the BC government and Treaty eight first nations could you maybe shed some light on.
What some of those specific details are that youre looking at.
Is there anything beyond what was released at that public Press conference.
Aaron This is armen here.
So so we're getting bits and pieces of information as we go through this from government.
<unk> has been engaged I guess with that with the Ministry of mines energy in low carbon innovation in BC as well as <unk>.
The intention is for us to understand that process more so than anything else. We understand some of the basic details that is involving the agreement, but logistically we want to understand how the payments will be issued and how the process. What is the process in terms of getting the projects moving on so that's really what we are waiting for.
Perfect. Thank you very much guys.
Okay.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Mike Dunn of Stifel. Please go ahead.
Thanks, Good morning, everyone just have a couple of questions on <unk>.
You mentioned the strong performance revisions talk on your in your year end reserves can you.
And I know you were I believe on the whole targeting more.
Higher <unk> wells in 2022 can you.
Just comment on the revisions on the candy versus gas were there any sort of.
Or is it more of a positive provision on the quality versus the gas for KEPCO in 2022.
Just have another follow up on the inventory at <unk>.
So specific to capitalize fires that performance.
So we did see some strong technical revisions.
From the base performance of <unk>, and that's really a result of us widening our inter well spacing.
And so that's what was driving those increases as far as the Condi versus gas we saw positive technical revisions in both categories for Cath lab, and so again really just talking to that stronger performance lower decline.
The result of widening that inter well spacing. So overall very pleased the properties are performing as predicted which is why as you can see we came in on our on our guidance.
And very very pleased.
Okay. Thanks, and then on the.
Well inventory it looks like in your and your updated slides maybe about 1000.
<unk> left.
Just wanted to hold things flat there how much how many wells do you think you guys would need to drill every year.
And as far as drilling at <unk> I want to say the sustaining well count it sort of in that 60 to 80, well count dependent on which area of the field that the state of <unk>. They are different so if we talk about holding flat on a BOE basis I'd say, it's in that range. So as you can tell we have a very strong inventory to keep cash.
Claude sustained at that 180 to 200000 run rate that we're running it at right now for many years to come.
Okay, Great. That's all the questions from me.
Thank you.
Okay.
Thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Erin Bukowski of TD Securities. Please go ahead.
Erin. Please go ahead your line is open.
Oh, sorry about that.
You said, if you were to sanction Apache later this year when could we expect it to come on stream.
Well, so if we have depends exactly when we sanction it because theres. Some winter construction that has to happen, but we believe 18 months is our timing. So 18 months from the sanction and we need a couple of months to I.
I guess, the commissioning and ramp up the production on that but that's kind of our time and we've been consistent on that.
Okay. Thank you again.
Youre welcome.
Thank you. The next question comes from Patrick O'rourke.
ADB.
Im sorry, ATB capital markets. Please go ahead.
Oh, Hey, guys good morning.
Solid reserve report and driven by cap, where there maybe just to build upon what Mike was asking on the inventory 1000 locations that you have there, including sort of whats booked in month on book there what does that consider currently in the lower Montney and is there any potential upside to that number going forward here.
So when we talk about CAC over very much focused on the middle Montney that is our proven layer. So when you think about what's in our.
Reserves report that will be entirely focused on the middle Montney, the lower Montney really isn't.
<unk>, playing a big component in those reserves are in those well counts.
So you are correct that if that if we see value in that and our way of developing that as a separate layer.
See those inventory counts come up.
And I know going back to the days when southern generations was operating the asset. They did have a few lower montney pilots at the time able to provide any sort of update on the learnings that you've had since acquiring those.
Yeah.
So we have drilled some lower montney wells, our view is that they need to be co developed that if you come in.
After having drilled up the middle Montney those theyre not actually fully separate layer. So if you think about our sunrise asset.
From very early days, we had enough vertical separation and frac barriers within that reservoir that we could come in and develop the lower montney and it was completely isolated from the upper and middle Montney at CAC, where the layers are a little bit closer together and we don't see that same segregation. So our view is you either have to co develop it.
Or.
Once you've developed the middle Montney, you really are already impacting that.
Reserves out of that lower Montney. So we think about our overall development plan is a three D development plan.
Okay perfect. Thank you.
Thank you.
There are no further questions at this time I will turn the conference back to Mr. Luca for closing remarks.
Alright, thanks, everyone for joining the call we look forward to connecting with you on any further questions you might have in the future. Thank you.
Ladies and gentlemen.