Q1 2023 ARC Resources Ltd Earnings Call

Sure the community's needs and priorities are met.

Moving forward, we will continue to collaborate with the communities neighboring our projects to ensure our development practices demonstrate our commitment to responsible development balance economic prosperity and honor Treaty rights.

Now I'd like to touch on some notable items related to our strong Q1 performance.

First the combination of higher production with less capital is having positive implications on free cash flow.

Capital spending is trending below expectations and production was ahead of our forecast. Despite some third party downtime in the quarter. This was due to better performance from our base assets, resulting in an upward revision to annual production guidance.

Above all else, we delivered strong results safely.

<unk> here's this at length safety is truly our number one priority.

An industry, where capital preservation and discipline is under the microscope of investors. It is critical that we never waiver on our commitment to safety.

Not only does it ensure our employees go home safely, but it forms our culture allows us to attract top talent and strengthen relationships with our suppliers and counterparties.

Thank you very much to our team for consistently delivering on this safety commitment.

Continuing on our strategy to sustainably increase our dividend, we also announced a 13% dividend increase our fifth increase over the past two years.

Combination of better profitability and lower share count are the primary factors. This will continue and only accelerate with the commencement of attaching.

We also advanced our goal to further diversify our end markets with the announcement of our third natural gas supply agreement to Cedar LNG.

We announced a nonbinding Mou to supply 200 million cubic feet, a day of natural gas to the project for 20 years commencing around 2027.

We are very pleased with our relationship with Cedar and the progress we've made to date as we work towards definitive agreements.

With that I'll turn it over to Chris to walk through the details on the quarter and positive changes to our go forward plan.

Thanks, Sara good morning, everyone I'll provide some additional context on the quarter and 2023 guidance and then send it back to Terry for closing remarks, before we get into the Q&A.

To summarize the quarter, we leveraged our competitive strengths come with stronger production and lower cost resulted in positive revisions to 2023 guidance.

Specifically production guidance was increased averaged 350000 to 355000 BOE a day after averaging 338000 Boe per day in the first quarter of 2023 and.

And second capital budget was essentially unchanged at approximately $1 8 billion.

Despite an additional incremental $250 million to $300 million of capital for Apache.

The benefits of infrastructure ownership, and takeaway optionality, where particularly relevant this quarter.

Production of 338000 BOE per day included a 7000 BOE a day loss from third party pipeline outage and the team limited downtime by warming up our facilities and leveraging our transportation optionality to maximize margins and minimize volume loss.

Cash flow registered 5% above analyst forecast and we generated $230 million of free cash flow, which was nearly double the median analyst forecast.

Quarterly free cash flow can certainly be timing related on the capital but in this case there is a positive carry through to our go forward outlook.

Once again this.

This quarter realized pricing was a meaningful contributor to our profitability.

<unk> realized natural gas price of around $5 90, an mcf, which was 36% above <unk> average <unk>.

Costs also registered at the bottom end of guidance with resulting in $230 million of free cash from the quarter and a 25% free cash flow margin adjusting for hedging costs.

Now shifting to shareholder returns in 2022, we returned 71% of our free cash flow to shareholders through dividends and share repurchases.

In 2023, we will return essentially all free cash flow to shareholders now with the balance sheet is where we want it from a leverage perspective.

In the first quarter, we followed through on this commitment and returned a 100% of our free cash flow to shareholders and also dedicated $74 million of proceeds from noncore asset sales to buy back additional shares.

Our preferred method to return capital remain a <unk>.

Growing base dividend and share repurchases we've.

We view these auctions is fundamentally sound when the expected return on our shares as attractive like it is today.

Now shifting to 2023 guidance.

It is a theme to the quarter I would summarize it is finding ways to do more with less without sacrificing safety efficiency or the long term needs of the business.

As I mentioned previously we increased production guidance by 5000 BOE a day to 350 to 355000 barrels a day and capital was essentially unchanged at one eight to $1 9 billion.

On the attached specifically, we're confident in the progress we've made to date, we have cleared the site in preparation for construction and through supply chain management, we have reduced or mitigated some inflation risk.

Phase one capital of $740 million includes the investments to complete the facility infrastructure and liquids handling and drill and complete the approximately 39 wells it takes to fill that facility.

It does also include approximately $65 million of infrastructure investments for subsequent phases of Apache.

This year, we anticipate spending $250 million to $300 million at Apache with the remainder to be deployed in 2024.

First production is anticipated by the end of 2024, and we expect to achieve the approximately 40000 Boe's per day early in 2025.

Capital stay in the facility, where average roughly $150 million per year over the initial five years with the initial year skewing much higher as it is in normal course with any new development. When production is flush and decline rates are at their highest.

In terms of where capital is being removed in the 2023 budget to accommodate the Apache spend there are two main areas.

First we simply need to drill fewer wells than previously forecasted. This is due to a stronger production performance across all of our base assets.

Second we executed a third party agreement with an existing infrastructure network.

Water cattle, sorry, with a third party with an existing infrastructure network of water handling capability in the area. This is expected to reduce operating cost by 30% to $60 million beginning in 2024 and at the same time allows us to remove $120 million of capital previously earmarked for water infrastructure in the capital area.

In terms of our financial forecast at strip pricing, which is near our mid cycle pricing levels art can fund attaching the revised higher dividend and buyback substantial amounts of our stock with forecast cash flow.

Apache will add approximately $300 million of free cash flow annually or greater than 50 per share.

Equally important in a low price environment the business is fully funded.

At $50 USW Ti and $2 50 April we can fund attached and sustain the business and dividend with funds flow.

And a more constructive price environment, all else equal, we will direct excess free funds flow to increasing shareholder returns.

Looking ahead to 2024 objectives are simple sustain our base business in a capital efficient manner and complete attach a phase one setting us up to deliver a material increase in free cash flow growth in 2025, which does happen to coincide with well in LNG, Canada is expected to come on stream.

While LNG is not a prerequisite for this project or for arc. It certainly represents a structural change in western Canadian gas demand that our market is not yet experienced and with that I'll pass it back to Terry for some closing remarks.

Thanks, Chris.

I am very excited about our strong performance and where we are heading our basement business has momentum and we're delivering on strategic priorities, which are to maintain a strong balance sheet improve our per share metrics and grow the dividend as we execute on these priorities and instrumental and deliver.

During on these strategic priorities, we sanctioned attached.

It's been a long time coming and I recall, a few quarters ago mentioning an upcoming inflection point in our business.

Path was less clear at the time, but we've made significant progress. Since then with today's announcement, we have reached a major milestone in advancing our business.

So to summarize we are ready to execute and while there is a lot of hard work between now and commissioning attach this is where we shine as an organization operational excellence has been the backbone of our success over the past 26 years and I'm extremely confident in our team's ability to execute and deliver strong.

Our results once again.

Thanks, operator, let's open the lines up for questions.

Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone filing again Thats star followed by the number one on your Touchtone phone.

Good luck with all your request. Please press star followed by the number please.

Please standby, while we compile the Q&A roster.

Your first question comes from the line of Michael Hardy from RBC. Please go ahead.

Yes sure. Good morning, just a couple of questions on attach here I guess first you mentioned you do have the takeaway for the gas just wondering if you have a range the same on the liquids front and any material infrastructure investments which might be required.

To move both the gas and the liquids and then I guess just a longer term question on Apache I know you still have to build phase one here, but as you think about the next.

10, or 20 years, just wondering any broad thoughts on how many phases do you think the lands can support.

Without over capitalizing and just thoughts on kind of broad volumes I know you've brought peak volumes I know you compared it to grow a little bit there.

Great question, Michael Thanks, It's terrie here so on Hitachi, Yes, we have the takeaway on the liquid side, we have the takeaway on the gas side, we are prepared to execute on this project with everything in hand here. So it's good from that perspective, so as for bigger picture yet.

This 40000 BOE a day as the first phase we see another four phases on top of that we think that attach he has the potential to be replicate capitalized so that 180000 BOE a day roughly both properties are very similar 60% liquids. So it's it's a great.

Analog for us <unk> and attach so thats kind of what were thinking down longer term for the size of attached.

Great Thanks for that.

Welcome.

Thank you.

And then just remind us if you have a question. Please press star followed by the number one on your Touchtone. Following your next question comes from the line of Mike <unk> from Stifel. Please go ahead.

Well thanks.

Mike Harvey.

The main part of my question, but.

Maybe I know in your disclosures you talked about $65 million of the 740 being for future phases.

Is that how we should think about I guess.

<unk>.

We wanted to think about that.

Scope of work.

Reduced scope of work for a future phase would that be sort of proportionate or would there be other other synergies there with the phase two that wouldn't be captured with that number.

A follow up question.

Hey, Michael this is armen, so the $65 million at the team refer to as primarily.

The capital that we're spending in in building the infrastructure in a manner that is suitable for multiple phases of development.

So obviously the phase one will take the burden of all these infrastructure costs.

But when we come back to do phase two we don't have to spend as much money, obviously, because we have some of these pipeline infrastructure already available.

Thanks, Arvind and I guess my second question is separate topic, but.

I think for the last maybe few weeks, we've seen a dip in the condensate.

Relative to <unk>.

Anything else other than like seasonal spring maintenance downtime in the oil sands or is there anything else going on there. Thanks.

Hey, Mike It's Chris here. So, yes, we would attribute that just to seasonality at this point in time, certainly nothing structural happening.

And as you recall the outlook for condensate going forward is extremely strong.

The only product we are short in western Canada. So.

Longer term, we structurally still see a huge benefit to being the largest producer of condensate.

Yes, I agree.

That's all from me, Chris Thanks folks.

Yes.

Thank you.

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

Yes. Thanks. Good morning, guys. My question I, just wanted to understand the flow or kind of the waterfall chart. I think you guys have done a good job.

Explain in the shifts in and capital allocation across the program here to effectively fund the tacky.

Can you walk through those chunks again, and how they kind of triangulate back to the $2 5300, and then is there any change.

Two.

On the rise as well from a capital program or expansion.

On top of the drilling program there.

For LNG. Thank you.

You bet drivers, it's Chris here I'll take a stab I mean.

Realistically there is two main areas, where we're pulling capital from the business.

The $120 million related to the capital water.

<unk> is pretty pretty straightforward, we're just pulling that capital with the third party service agreement, we have that will that will handle the water for us.

And then the other area is just.

Base outperformance and this is across all of the <unk>.

All of the asset base and what that really does it allows us to drill less and still maintain the production at levels, where we want.

And that really results in the remaining quantum when you add those two together it is a roughly $250 million.

Capital that we can pull.

That gives us allows us the luxury of being able to sanction attached and not having to change.

Production or sorry capital guidance very much and then because of that base production outperformance. That's what allowed us to to also at the same time actually increase our production guidance range.

Okay, and any and that 130 as there.

Is it kind of across each each of the assets or is there any any additional infrastructure there specifically at Sunrise I guess as we're thinking about the facility expansion.

Great sorry, I forgot to address your Sunrise component. So it is across the asset base.

We were able to pull some of that capital from some of it is that <unk> will be pushed out.

Some some activity into 2024, and then sort of some other drilling at Dawson and places like that where we're able just to pull some capital and as far as Sunrise no change to the plans there where we would expect to have that expansion full in early in 2004.

Thank you.

Just a reminder, shall do you have a question. Please press star followed by the number one on a touchtone phone.

Okay.

There are no further questions at this time I'd now like to turn the call back over to Mr. Luca for any closing remarks.

Alright, thanks, everyone that concludes the call. Thank you.

Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.

Sure.