Q3 2023 ARC Resources Ltd Earnings Call
Good morning, My name is Cynthia and I'll be your conference operator today at this time I would like to welcome everyone to the.
Third quarter 2023 earnings conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please.
And the number two thank you Mr. Luca you may begin your conference.
Thank you operator, good morning, everyone and thank you for joining us for our third quarter earnings Conference call. Joining me today are Terry Anderson, President and Chief Executive Officer, Kris Bibby, Chief Financial Officer, Lara Conrad Chief Development Officer, Aman Jain, Gary Chief operating Officer, and Ryan Berrett.
Vice President marketing.
Before I turn it over to the executive team to take you through our third quarter results and 2020 for budget I'll remind everyone that this conference call includes forward looking statements and non-GAAP measures with the associated risks outlined in the earnings release and our MD&A.
<unk> amounts discussed today are in Canadian dollars, unless otherwise stated.
Finally, our press release financial statements and MD&A are available on our website as well as SEDAR.
Following our prepared remarks, we will open the line to questions.
I'll turn it over to our President and CEO Terry Anderson Terry. Please go ahead.
Thanks, Dale and good morning, everyone I'm going to spend a little time discussing three important items. This morning.
Our Q3 results and update on attach in our 2020 for budget.
Then hand, it over to Chris who will provide some additional color on our financial performance.
Beginning with the quarter.
Q3 was a lot like the quarters that preceded it we executed to plan and delivered solid performance across all aspects of the business.
Certainly not easy, but delivering this type of consistent execution is a defining characteristic for arc that has served us well over our 28 year history.
Today, we are realizing the benefits of our balanced capital allocation framework that includes not only our base dividend, but also share buybacks at what we deem to be great value.
<unk> per share this quarter is over 25% higher than the second quarter of 2021, the first full quarter following the seven generations acquisition.
This investment in our assets and our shares to compound per share growth is a strategy. We intend to continue based on where our shares trade today.
Quarter, we executed a $400 million capital program and delivered average production of just over 360000 BOE per day. This represents 5% growth year over year and 13% on a per share basis.
Highlighting the impact of share repurchases.
We had great operational momentum this quarter Takla volumes approach 200000 Boe per day, driving corporate condensate volumes to 78000 barrels per day at a time when condensate prices topped $100 Canadian per barrel.
As the largest condensate producer in Canada. This has meaningful impact on profitability as operating margins exceeded 60% Corporately.
In addition, the team safely and efficiently completed the rest of our planned turnarounds for this year.
Before I go on to attach.
Want to quickly highlight an example of our commitment to safety. We recently elected to shut in a few thousand Boe per day of production at Ante Creek to complete some pipeline maintenance on one of our lines. This was identified by our team as a proactive measure to maintain the safety of our operations.
The volume shut in are mostly natural gas and are expected to be fully restored in Q1 2024, so while it's not material to our overall business I've said numerous times before safety is our number one priority and this is just a great example of that commitment in action.
Now turning to attach.
I am extremely pleased with the progress the team has made to date capital costs and timing are both tracking to expectations and what we outlined at our investor update in June.
Total cost per phase one startup remains at $740 million of which one third will be spent in 2023 and the balance invested in 2024, we expect to be producing between 35000 40000 Boe per day in 2025 with commissioning volumes coming on.
By the end of 2024.
Recently, we took the time to tour the site and have a look at the progress firsthand.
Many different projects at multiple stages, but overall, we are about 20% complete on the facilities and infrastructure.
On this slide you can see some of the milestones that have been achieved to date.
Gas sales line is installed the liquids line is well underway at the plant site. The tank farm is completed 75% of the pilings for all the equipment and buildings have been installed and some of the equipment has arrived on site.
The plant construction gathering system and all the other infrastructure is progressing as planned and over the next few weeks, we'll begin drilling.
We are also on track to fully electrify this facility at startup further lowering our emissions intensity per Boe, while delivering low cost energy to market.
In summary, we secured all the long lead items services and critical permits to execute this project attach.
Attach you will be our eighth Montney infrastructure project and I'm confident it will be the most efficient project to date.
We are in great shape, and I'd like to thank our staff and service providers for their excellent work, thus far in keeping the project on time on budget and ensuring safety is our number one priority.
Finally, I'd like to move on to the 2020 for budget.
The priorities are clear deliver a safe and capital efficient program, while focusing on completing attached.
The outcome of this will be a step change in our free cash flow per share growth in 2025 and beyond.
Next year, we plan to invest between $1 75, and $185 billion and this includes 500 million for that Tashi phase one startup.
Our capital program is balanced geographically with a 50 50 split between Alberta, and British Columbia and will deliver average annual production between 350000 and 360000 Boe per day.
This budget is approximately $200 million lower than communicated previously at the Investor Day in June.
25% lower than the 2023 capital budget once you adjust for the attach a capital in each year. The primary contributors to lower capital our first operational decisions to minimize nonproductive capital.
Realized cost savings on certain items and third a lower decline rate in 2024.
At <unk>, which is our flagship condensate producing asset.
We are investing less capital and Holden condensate volumes flat year over year.
The primary drivers of this are twofold.
A lower decline rates and a shift back to the condensate rich areas of the asset.
This follows our planned activity in 2023 that focused in areas with slightly lower condensate gas ratios.
Longer term, our overcall condensate growth will be driven by attaching.
Which is 60% liquids of which 75% is condensate.
Arc reached an important milestone at cap with this quarter, we achieved payout for the asset that we acquired in the second quarter of 2021.
So in less than three years <unk> has generated cumulative free cash flow at the asset level, a $4 $2 billion, which is equal to the purchase price.
And we still have approximately 15 years of high quality inventory ahead of us.
I am extremely proud of how we've made our world class asset even better by leveraging the strengths embedded in our company.
Moving on to North East BC, we expect to produce near our capacity with modest growth at Sunrise. Following the facility expansion project completed in 2023.
This will increase capacity at Sunrise to 360 million cubic feet per day, which is direct connected to coastal gas link and will supply LNG projects off the west coast of Canada.
To summarize 2024 will serve as a banner year and set the stage for a step change in our free cash flow per share growth in 2025.
With that I'll turn it over to Chris.
Thanks, Terry and good morning, everyone.
First I'll touch on the quarter itself.
Arc delivered average production of 360000 Boe's per day and generated funds from operations of $662 million. Both were directly in line with analysts' forecast, while free cash flow of $261 million exceeded expectations by about 45%, primarily due to lower capital expenditures during the quarter.
In terms of capital, we invested $400 million in the quarter slip between capa and in northeast BC, including approximately $60 million out attaching.
Arc maintained full year guidance for production capital spending and cost with fourth quarter production forecast to be approximately 355000 Boe per day.
When I look back at our financial performance over this quarter, which stood out with profitability and margins and how market diversification and a balanced commodity mix played a key role.
First as it relates to natural gas.
Arc realized $3 16 per Mcf for the quarter, which registered as a 32% premium relative to the local April benchmark. This was mainly driven by our transportation portfolio to the U S demand markets in California, Chicago and in the U S Gulf Coast.
In periods of volatility we are typically able to capture better margins for our gas in Q3 was a great example of this.
Second <unk> 360000 BOE per day of production included 87000 barrels per day of crude oil and condensate, which is Terry already mentioned average greater than $100 Canadian per barrel in the quarter.
As a reminder, we are Canada's largest condensate producer, which is structurally short market.
Western Canada consumes about 700000 barrels a day in the oil sands and altogether the market produces roughly 450000 barrels a day locally.
250000 barrel a day shortfall is imported via two pipelines from the U S, which are operating at or near capacity. So it's structured a strong market for us long term.
We returned 71% of free cash flow to shareholders in the quarter through a combination of dividends and share repurchases and the balance was used to reduce debt.
As we have stated in the past we plan to return essentially all free funds flow to shareholders. This year ended 24, implying an increase in the percentage returned over the remainder of the year.
To this end net debt at quarter end was $1 2 billion.
Which is the right level for our business factoring in our asset quality and duration low cost structure and our low emissions intensity.
Combined these attributes shield, our business and ensure we are profitable and sustainable through commodity cycles.
Now looking ahead to the 2020 for budget our top priority is a capital efficient program that will provide long term per share growth. We will achieve this by continuing to invest in our assets and balance that with a meaningful return of capital to our shareholders.
This is the optimal way to generate an attractive and competitive total return.
Production guidance for 'twenty four of 350 to 360000 BOE per day incorporates the anticipated expiry of an ethane sales contract in the second quarter, which will reduce reported NGL production by approximately 5000 barrels per day on an annualized basis.
We plan to re inject ethane into the natural gas stream, resulting in high or higher revenue from sales of higher heat content gas offsetting the impact to funds from operations.
In terms of capital we are investing $1 8 billion in 2024.
As mentioned this is about $200 million less than 2023 once you adjust for the attach of growth capital and we're generating the same or slightly higher production levels.
This is driven by two things first a lower corporate decline in 2024, therefore, we need to drill and complete fewer wells to offset production declines.
Second a concerted effort to further reduce nonproductive capital in our business.
This is particularly true of Capex next year, we are investing less capital, both capital and facilities and in wells and expect to maintain flat condensate volumes in 2024.
As planned total production at <unk> is expected to average 180000 Boe's per day or 175000 Boe's per day once you adjust for the ethane contract expiring in the second quarter of next year.
Over the long term, we think this is the optimal production level to maximize free cash flow and asset level returns.
In terms of our cost structure, we forecast little change in 2024.
Operating and transportation costs are forecast to be relatively unchanged year over year at approximately $10 per Boe combined.
To provide some additional context on our cost structure and resiliency of our business. We can sustain production in the 350 to 360000 BOE per day range and fund the current dividend with organic cash flow below U S $45, a barrel WTS and Canadian $2 <unk> per Mcf. This is.
Based on our cost structure today. So it does not include any deflation that would be expected in a very low commodity price environment.
Beyond our low cost structure, our competitive strengths also include our infrastructure footprint asset quality and market and commodity diversification.
Yes.
At strip pricing. The 2024 program is expected to generate 3.0 to $3 $2 billion of cash flow and roughly $1 4 billion of free cash flow free.
Free cash flow will once again be returned to shareholders through a combination of a growing dividend and share repurchases given the value of our shares today.
Finally, as we look out further the five year outlook is essentially unchanged from what we first introduced at our Investor update in June we need to deliver we intend to deliver a balanced program that invest in our best projects like Hitachi, while reducing the share count to compound that per share growth.
The step change in our per share metrics will first occur in 2025, incorporating attaching we anticipate 10% growth on a production basis and $600 million increase in free funds flow.
This is equivalent to more than one dollar per share relative to our 2024 alright.
Change commodity price deck of U S $70, <unk> and $3 50, Diame ex U S.
With that I'll pass it back to Terry for closing remarks.
Yeah.
Thanks, Chris.
Looking ahead as the largest montney producer I have never had more conviction in our business and where we are headed.
We've communicated a five year plan that add significant value through investing in our business to grow free cash flow.
Increase the dividend and buyback our shares this plan will nearly triple our free cash flow to approximately $5 per share.
As I look forward out towards 2030 arc will be a larger more profitable company with expanded reach to global markets through our LNG agreement at.
At the same time, the build out of LNG in Western Canada will fundamentally improve the dynamics of our market, providing additional optionality for value creation, along the way.
With that I want to again, thank all of our staff for their commitment and contribution towards our success. Thank you.
Operator, you can open the line to questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question. Please press Star then the number one on your telephone.
Pat.
If you would like today's call. Your question. Please press Star then the number two.
There will be a brief pulse last questions have been thank you again.
Our first question comes from Michael <unk> from RBC Capital markets. Please go ahead. Your line is open.
Sure. Thanks, Good morning, guys I just had a couple of questions. The first one is on your your natural gas price hub exposure. It looks like your <unk> percentage is increasing quite a bit in 'twenty five 'twenty six 'twenty seven I assume thats by design, but.
Maybe you could just confirm that or if we will see that.
The adjusted kind of as we as we move forward over the next couple of years and then the second one was.
Just on the drilling plan at attached to you when you start moving rigs or I think later this year.
So it's been a few years since you've drilled a well there is there anything different youre going to be doing just well design wise that you may have learned.
CAC or otherwise.
Do you think may impact the recovery profile in that area and that's it for me.
Hey, Mike It's Ryan Thanks for the question on I'll tackle the first question on your eco pricing hub.
Yes, no you are correct. This is by design, we are increasing our exposure as the buildup of LNG, Canada comes on and we start to see those volumes flow in the middle of the decade. So by design, but as you know we always have a balanced portfolio.
We'll continue to do so.
Michael This is army in regards to your question about drilling.
We are quite excited to go back to Hitachi, obviously theres been a lot of learning from all the other operations that we are doing in the rest of <unk>.
All of those learnings are going to be transferable.
<unk> to be able to hit the ground running and attach and incorporate a lot of those oh.
<unk> that'd be realized over the last couple of years.
Great.
Would there be changes in things like well length.
Because I am that kind of stuff or.
Maybe you just kind of getting started in that process.
Well initially I think he is going to be fairly classes stand with where we ended attached.
Couple of years ago, but there's obviously always opportunity for improvement.
We look at our well placement and if there is an opportunity to extend the lateral lengths for example to improve capital efficiency, we always do that so nothing out of ordinary.
Got you great. Thanks for that guys.
Thank you. Our next question comes from Patrick <unk> from ATB Capital markets. Please go ahead. Your line is open.
Yeah.
Yeah.
One moment.
Hello.
Your line is open please ask your question.
Yes can you guys hear me.
Yes, we can.
Hello.
Yes, we can hear you Patrick.
Okay, sorry, the operator was talking over me there. So I wasn't sure if you could but I apologize for any miscommunication. There just kind of wondering and wanted to unpack here with respect to the $200 million improvement in the capital budget and you guys are talking about nonproductive capital sort of how durable those improvements are out through sort of the life of the asset.
And then just wondering are there any sort of analogous improvements that you can see at something like Apache, where we could see the capital efficiency profile improve in.
Incremental free cash flow from sort of similar.
Type improvements.
You bet, Patrick its Chris ill take a stab at it.
The $200 million does apply across the entire asset base. So it's not it's not really an asset specific number and really what we've done is we've just optimize basically the delivery time of the wells.
So that we aren't investing as much capital prior to needing some.
Some of that production or even facilities. So if you think about it we would have less invested in basically ducks than we would've otherwise had and part of the reason we're comfortable doing that.
Spent a lot of time working on predictability of results and deliverability results. So so it gives us the comfort that we can.
<unk> tightened up some of the white space, perhaps that we would've otherwise had in some of our our safety margin just because we have spent so much time on the predictability to have a very high confidence factor and what the outcomes are going to be.
And so could that lead into further improvements down the road.
It's hard to say right now we're comfortable with this.
Tightening and let us get through the next year or so and then we can see where we get to.
Okay, and then just kind of maybe shifting gears a little bit here, you talked a little bit about natural gas price exposures, but.
Can you maybe provide a little bit of an update in terms of the timeframes and key milestones for.
Cedar in particular, but also your corpus Christi exposure and when we'll start to see the benefit of that.
Yeah, Hey, Patrick it's Ryan I'll just.
Dig into both of those questions. Obviously as you know we signed the Cheniere contract with Corpus Christi about a year and a half ago.
Senior came out yesterday, and two days ago and talked about the startup of construction on those on the phase III of the expansion were trained seven of that expansion and we would expect our service to come into service roughly near the end of 2026, So no real change on that front.
On the Cedar front, we continue to work through all the various commercial arrangements permanent came out this morning and has talked about.
Q potentially of slippage into Q1 of there we are working through definitive agreements on both off peak and on the tolling and would.
Hopefully be in line with with permanent timing on that.
Okay, great. Thank you very much.
Thank you. The next question comes from Jamie Kubik from CIBC. Please go ahead. Your line is open.
Yes. Good morning, Thanks for taking my questions I have two here, so first capital spending for arc.
Come in lower than.
I'd say budgeted for the first three quarters of the year can you just outline what's driven the savings this year.
How should we think about the full year budget for 2023 based on where you're at today.
You bet, Jamie it's Chris here again.
I wouldn't I would hesitate to call them savings really this is just a timing issue.
So we would expect to meet our capital guidance of 108 to one nine here by the end of the year, which does imply quite a very a very active Q4 spend so I think we are comfortable with it but we're ramping up activities in Q4 should be should be in line to.
Get to our full year guidance.
Okay. Thanks, and then second question.
2020 for budget do you have.
Oil and condensate volumes growing relative to the 2023 guidance and you indicate condensate volumes CAC, we're expected to stay flat.
Can you just talk about where you expect the growth is going to come from next year.
You bet, Hey, Jamie its Laura.
As far as where the condensate comes from I mean, really it's going to be our two key properties.
<unk> and Hitachi, so effectively as we bring attack Xi'an in Q4, youre going to see that condensate.
Coming up and then the nice part of that of course is into 2025 attach it will be at capacity in that condensate volume will be consistent for us go forward.
Okay. That's all for me thank you.
Thank you. Our next question comes from Harvest Wood from National Bank Financial. Please go ahead. Your line is open.
Facility.
And then through next year, so kind of the key ideology alrighty harvest piece to ask your question again.
Okay. My question is wanting to understand.
The critical path around attached.
Just getting kind of a timeline or.
The items that you see the most relevant that you want to check off the to do list as you get ready for.
Processing that attaches. So for example rig.
Rig mobility for this quarter starting to drill the wells you commented on the.
Natural gas line is complete kind of so what's the timeline for the liquids line and kind of any of the key factors in timeline.
Keep us comfortable that everything remains on schedule.
Yes, Travis this is armen.
So we have multiple obviously activity projects underway and Hitachi.
Terry alluded to it's fairly active.
And he is going to be over the next 12 months until they get the facility to the commissioning phase.
Obviously, there is the liquid sales line is a major major project for us and <unk> already started working on it expected to finish around Q1 of next year.
The construction of the plant itself.
Major task.
The plan includes also water recycling hub that is going to be included in it. So that is going to be an activity that are going to continue over the next 12 months or so.
Terry you also spoke about the electrification so we've received all or no.
SSA permits to start building the transition line transmission line and substation, so theres quite a lot happening over the next 12 months in terms of what is on critical path I mean, obviously the big project is the plant any dots. That's the one we need to have up and running and I see absolutely no reason to be concerned about the time.
I think the project is going as per the plan on schedule on budget.
Okay. Thanks, very much that's all for me.
Yes.
Thank you, ladies and gentlemen, as a reminder, if you do wish to register for a question. Please press. The Star then the number one on your telephone keypad.
Next question comes from Mike Dunn from Stifel. Please go ahead. Your line is open.
Thanks. Good morning, everyone can you hear me okay.
Yes, we can.
Great a couple questions for me if I may.
Just on the electrification at attached.
Is that.
The timing of that is reliant on site C completion or is it sort of connected to the grid independent of sites.
Mike <unk> here I know it has nothing to do with <unk>.
The power for that facility has already been secured through BC hydro.
Okay. Thanks, and then secondly, just maybe a follow up from I think it was Christmas.
Chris's response to Patrick earlier.
But 2024 production guidance are we to infer that there is less margin of safety to meeting the targets than maybe.
In the past.
Hey, it's Chris no I wouldn't I wouldn't interpret it that way because of the mitigation items that we talked about in terms of better predictability understanding.
White space in the schedule, so I would say no.
A higher risk program from a production standpoint.
Yeah.
Okay. Thanks, Chris that's all from me I'll turn it back.
Yes.
Thank you there are no further questions at this time I will return the conference back to the speakers.
Alright.
Everyone for joining that concludes the call have a good day.
Thank you ladies and gentlemen, this does conclude today's conference call. Thank you all for attending you may now disconnect your lines.
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