Q1 2024 ARC Resources Ltd Earnings Call

Yeah.

Good morning.

And I will be your conference operator today at this time I would like to welcome everyone to the arc resources first quarter 2024 earnings conference call.

Lines have been placed on mute to prevent any background noise.

The speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time shipped your press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then the number two.

Mr. Luca you May begin your conference.

Thank you operator, good morning, everyone and thank you for joining us for our first quarter earnings Conference call.

Luca: Joining me today are Terry Anderson, President and Chief Executive Officer, Kris Bibby, Chief Financial Officer arm, and Jeff and Gary Chief Operating Officer, Lara Conrad Chief Development Officer, and Ryan Berrett Senior Vice President marketing.

Luca: Before I turn it over to Gerry and Chris to take you through our first quarter results I'll remind everyone that this conference call includes forward looking statements and non-GAAP and other financial measures with the associated risks outlined in the earnings release and our MD&A.

All dollar amounts discussed today are in Canadian dollars, unless otherwise stated.

Finally, the press release financial statements and MD&A are all available on our website as well as SEDAR. Following our prepared remarks, we'll open the line to questions.

Luca: I'll turn it over to our President and CEO Terry Anderson Terry. Please go ahead.

Terry Anderson: Thanks, Dale and good morning, everyone.

Q1 was another quarter of steady execution, which resulted in strong operational and financial performance.

Average production of 352000 BOE per day was 2% above consensus and increased 8% on a per share basis compared to the first quarter of 2023.

Now marks the 11th consecutive quarter, where production per share has increased there.

This aligns with our strategy to grow free cash flow per share by investing in our assets in a disciplined manner and buying back our shares when it's good value for investors like it is today.

If I look back on the quarter and were to summarize we executed a capital efficient program advanced our marketing strategy with another long term LNG agreement and completed several critical milestones for Hitachi phase one.

Disciplined efficiency and execution. These are themes that have long underpinned our operational excellence.

At the asset level, we achieved better than expected operating performance, which drove that production outperformance relative to our forecast. This was largely due to revisions. We've made in terms of how we develop the sunrise asset. We recently modified the well lay out at Sunrise to further improved capital efficiencies and low.

The supply cost at what is already one of the most economic natural gas plays in North America.

As a reminder, sunrise is a tremendous resource with long development runway and it is now direct connected to coastal gas link, which supplies natural gas to LNG, Canada project.

Moving to cash flow in the quarter. We saw production averaged 175000 Boe per day, which included 65000 barrels per day of condensate. This is directly in line with our expectations as we plan to maintain chocolate production near this level going forward to optimize free cash flow.

For perspective capital generated over $300 million of asset level cash flow in the quarter.

Terry Anderson: And since acquiring it in 2020 one it has accumulated approximately $5 billion of asset level free cash flow well above what we paid for the asset.

Looking ahead following the turnaround activity, we have planned in Q2, our calculus, we anticipate growth in the second half of the year as we returned to developing a higher condensate gas ratio region of the field.

We have also implemented some frac design modifications here and while it's still early preliminary results are looking positive.

Terry Anderson: Turning to a few financial highlights arc generated $100 million of free cash flow in the quarter and returned all of that to our shareholders as planned.

We achieved this free cash flow in a lower natural gas price environment, and a more capital intensive quarter as we complete attach he phase one this validates the sustainability and resilience of our business enabled by the competitive strengths established over the past 28 years.

Include.

Having a low cost structure underpinned by our owned and operated infrastructure.

Having a balanced commodity mix that includes being the largest condensate producer in Canada, and having a diversified transportation portfolio.

Terry Anderson: It allows us to sell our natural gas to key demand markets across North America and capture higher margins ARX.

<unk> diversified transportation portfolio stood out this quarter with our realized natural gas price of $3 19 per Mcf, which is greater than 150% of the <unk> benchmark.

We have discussed at length, the benefits of market diversification, our long term takeaway agreements to access U S markets have been a major contributor to corporate profitability in fact over the past 10 years arc has realized greater than 125% of the acre benchmark on average.

As an extension of this strategy arc has entered into a long term agreement to supply natural gas to LNG projects on the U S Gulf Coast and the Canadian West Coast.

Most recently, we announced a 20 year agreement with Cedar LNG, whereby arc will supply 200 million cubic feet a day of natural gas commencing in the second half of 2028, when the project entered enters commercial operations.

Concurrently arc has entered into a non binding heads of agreement with a global investment grade counter party to the purchase and sale of these LNG volumes for which we will receive international pricing. We are now in the process of working towards definitive agreements and we are pleased with the progress made to date.

With this announcement arc has entered into three LNG supply agreements that will connect our physical gas to global markets and returned for international or LNG based pricing. This will take effect in 2026 with our first generic contract and by the end of the decade, we will achieve our target of.

Marketing, 25% of our natural gas production to global markets.

Finally, I'll close with an update on attach E. I am very pleased with the progress. Our team has achieved to date. This is a pivotal year for our company as attach you will add significant value over the next decade and it begins with phase one coming on stream later this year.

As a reminder, arc has 300 sections of contiguous montney acreage at attaching and this asset has the scale to replicate capa, which is the largest condensate producing asset in Canada.

This initial phase will add approximately 40000 Boe per day in 2025, representing 10% production growth year over year and the project is tracking on schedule and on budget with zero safety incidents.

Terry Anderson: This past quarter, we've achieved a few important milestones worth highlighting.

We recently completed a pipeline bridge that is key to our takeaway strategy. This was the single biggest critical path item to achieve our planned timeline. So we are pleased to complete this.

We are on track with our drilling program, having now drilled 22 of 40 wells needed to initially sell the 40000 Boe per day facility.

Finally, we are making excellent progress towards electrifying attaching through BC hydro, which will establish the attach he is one of the lowest emissions condensate rich natural gas development in North America.

This will also lower our corporate emissions intensity and maintain our status as one of the lowest emissions producers in North America took.

To conclude we are on track and focused on achieving our long term plan, we put forth a year ago.

With that I'll pass it over to Chris.

Thank you Terry and good morning, everyone.

I'll provide some additional context on the quarter and financial results before turning it back to Terry for closing remarks, and then we'll get into some questions.

In terms of operational performance, we delivered quarterly production of 352000, Boe's per day weighted 63% to natural gas and 37% of condensate and liquids.

Terry Anderson: This was ahead of our first quarter guidance. Despite the extreme cold in January it provides good momentum to start the year.

We generated first quarter cash flow of $607 million in free funds flow of $102 million, which were 3% and 8% above analyst forecast respectively.

Lower operating costs and lower capital spending contributed to the outperformance relative relative to analyst estimates.

Operating and transportation expenses were both below the bottom end of company guidance with operating costs, specifically benefiting from lower power pricing in Alberta.

G&A came in above guidance, primarily due to higher than budgeted share based compensation expense related to recent share price performance.

Starting with liquid side of our business, we continue to see strong pricing realization with condensate averaging over $94 in the quarter, and then turn condensate and crude oil represented roughly 60% of our revenue in the quarter.

Terry already stole the Thunder on price realizations on natural gas, but it is worth repeating.

Arc realized an unhedged natural gas price of $3 19 per cent per Mcf, Canadian which compared to the benchmark of $2.05 and the Nymex Henry hub of around U S $2 25, or roughly $3 on a Canadian basis.

Terry Anderson: In total our invested $505 million in the quarter right in line with our expectations, which included approximately $180 million of spending at Apache phase one.

About 75% of the capital is invested in drilling and completions with.

With the balance directed mainly to facilities, including attach your phase one and the Super pad, we are constructing a catwalk.

As planned net debt stayed flat quarter over quarter at $1 3 billion or approximately 0.5 times cash flow on a trailing basis four quarter basis.

We continue to demonstrate our commitment to a total balanced return.

Which includes returning essentially all free funds flow to shareholders this quarter dividends and share repurchases equated to 114% of free cash flow quarter to quarter. This will fluctuate, but on a full year basis, we expect to return essentially all free funds to shareholders very similar to what we did in 2023.

There's no change in our thinking of the optimal way to return capital in.

In our view it is a growing base dividend in combination with share repurchases.

Not only is this a fundamentally sound and accretive use of capital. We have received overwhelming support for this strategy from our shareholders.

Since initiating our initial in CIB in September of 2021.

We've invested over $2 $1 billion to buy back 18% of the shares outstanding and based on our current assumptions. This trend will accelerate in 2025, given the expected increase in free cash flow with the addition of attach your phase one to our producing assets.

Looking ahead production and capital spending guidance in 2024 remains unchanged arc anticipates investing approximately $1 $8 billion in full year production is expected to average between 350 and 360000 Boe's per day.

Second quarter production is expected to average between 325 to 330000 Boe's per day before growing to an average of roughly 370000 Boe's per day in the second half of the year.

The decrease in Q2 reflects planned turnaround activity at Caf, one greater Dawson.

These are planned to coincide with significant third party turnarounds to minimize overall downtime.

Operating momentum in the second half of the year will be driven by capital and greater Dawson with some contributions from attach as we look to begin commissioning this asset before year end.

As we look ahead the outlook through 2028 is largely unchanged from the five year plan, we provided a year ago and.

In 2025, we would expect a meaningful increase in production in free funds flow per share. This is largely driven by a 10% increase in production, reflecting a full year contribution from Hitachi and lower capital spending as we transition from growth to sustaining capital attached to your phase one.

At strip at strip pricing, we forecast free funds flow per share to more than double to roughly $3 per share in 2025.

With that I will turn it back to Terry for closing comments.

Thank you Chris.

Our strategic priorities are to deliver sustainable free cash flow per share growth adhering to our long standing principles of capital discipline profitability and financial strength.

And we plan to deliver this by investing in our most profitable assets and balancing that with a meaningful return of capital that includes a growing base dividend and buying back our shares.

I'm confident in our ability to achieve this in many ways the momentum and enthusiasm I've observed across the organization reminds me of our initial Montney development at Dawson.

14 years ago, we embarked on Dawson phase, one which had a facility capacity of 10000 per day, we learned a lot that year and while we knew the Dawson asset had tremendous potential we did not fully appreciate that the Dawson area would grow to its current level of approximately 100000 Boe per day.

Now we're on the verge of commissioning attaching a much more significant development opportunity with the first 40000 Boe per day phase coming on stream later this year, while similarities exists relative to Dawson one of the biggest differences is we have a far better understanding of the development potential.

The asset.

Today, we have more experience better technology and depths of Montney knowledge, all working together in our favor. This gives me confidence in our ability to efficiently execute and develop attach and I'm truly proud to be part of this next chapter in our company's history.

Terry Anderson: So thank you to all of our staff for your continued focus on profitably growing our business in a safe manner with your support in executing our five year plan. We are set to deliver significant shareholder value nearly tripling free cash flow per share by 2028.

With that thank you and we can open the lineup for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by Don on your telephone keypad.

Speaker Change: Hey, John Paul Technology request questions will be taken into order received should you wish to cancel your request. Please press star followed with you if you're using a speaker phone. Please lift the handset before pressing any Keith one moment. Please for your first question.

Your first question comes from the line of Michael Harvey from RBC Capital markets. Please go ahead.

Yes sure. Good morning, guys. So just a couple of questions I guess as it relates to phase two attached.

2020 anything is there anything that would cause you guys to accelerate that.

Little bit earlier.

Whether it's commodity prices performance et cetera, or is 2028 kind of set in stone and then.

Just on the Sunrise performance.

Nice to see that I guess, when you start shipping gas to LNG, Canada. Just wanted to confirm that was the gas you are in fact can be.

Going to be sending there to satisfy their commitment and then.

Maybe for Ryan maybe if you could just walk us through some of the.

Pricing dynamics, if there is what kind of benefit youll see above and beyond station too and then kind of how you backfill that on the on the West Coast system.

Hey, Mike It's Terry Anderson I'll I'll take your first question here and then turn it over to Ryan for the second one so phase two it's still planned for 2028, we're trying to really be disciplined here and make sure. We're balancing our capital allocation and really focused on that reinvestment ratio around that 50% across the five.

Year plan, so if commodity prices are extremely robust.

Well, obviously take that into consideration.

But where we're planning for the three year cadence and that's what it is.

Brian Awesome, Hey, Michael Yeah. So just in regards to your question on Sunrise. So the gas that we will they will be feeding the LNG, Canada is a deal that we completed a couple of years ago with shell. We are the only non equity participant in LNG, Canada have a direct tie in into C. G. L pipeline. So this gas today is.

Currently hitting eco and it'll be redirect redirected into coastal gas link likely sometime in early 2025.

And the pricing for that will be some modest premium to the <unk> benchmark.

Great. Thanks, guys.

Thank you and your next question comes from the line of Patrick O'rourke from ABB capital markets. Please go ahead.

Good morning, guys and thanks for taking my question here.

I'm just kind of curious your 'twenty two of 40 wells into the program here at Hitachi potentially hundreds maybe thousands of wells that you're going to drill.

Obviously, you guys have been pretty thoughtful over the years in terms of.

Sort of augmenting and improving your processes, we saw that sort.

Sort of widening of inner well spacing.

It sounds like you have changed a bit of the wine racking the horizontals at Sunrise here as well just kind of curious as youre getting your hands in your arms around this project, how youre thinking about sort of well configuration design.

And completion design.

What could potentially come next as you sort of rollout what the opportunities are.

So Patrick it's terrie here. So obviously, we're early into this project and we're always going to be optimizing.

We have the plan in place that in how we're drilling the wells right now, but we're going to it's going to be optimized as we move through it and we're going to incorporate so just as a reminder, 2019 was the last time, we drilled our two twenty-seven pad and that completion design and so there's other wells in the area up north and <unk>.

<unk> lands in around there that we're looking at and reevaluating and trying to optimize so without getting into details we're going to continue to optimize our where we're at and that's no different than any other field in any any development that we've started and we're taking learnings from CAC WAF and incorporating that into it so I know.

Not specific on anything, but it's too early for us to get specific on how we're going to be changing things up.

Okay, Great and then just.

Speaker Change: A quick one here maybe building on Mike Harvey's question.

With respect to Hitachi phase two before I I've got a return of capital question too but.

Do you guys are one of the things here is is the electrification of Hitachi phase one in the carbon footprint do you have power supply secured for the future.

Phases already or how does that market look for you.

Patrick This is armen, yes, we have power available for phase III, we are working through the details in terms of all the transmission lines and everything to get power to the site, but the plan would be for phase two to be also electrified.

Okay, Great and then just finally here in terms of the return of capital.

You spoke to this a little bit in the prepared remarks.

The dividend and share buybacks slightly outpaced the free cash flow in the first quarter. So just wondering if you could give a little bit of color with how you plan to manage that through the year or is it sort of a level load.

Or is it going to look more like.

Free cash flow sweep from quarter to quarter.

Speaker Change: Hey, Patrick it's Chris here.

Yeah. So in 'twenty two 'twenty three we were slightly above free cash flow in terms of distributions.

Q1 at 114% the way, we really look at it it's on an annual basis. So it will it will come up and down quarter over quarter Q2 pretty heavy capital.

Capital spend with with lower production as well so I wouldn't be terribly surprised if were marginally above our free cash flow in that quarter as well, but second half of the year with a significantly higher production and pricing.

Bring that back in line would be the plan. So theres no set formula on a quarter to quarter basis part of it is where.

Where the shares trading in.

In terms of our times of buyback and then balancing kind of on an annual basis as a player.

Okay, great. Thanks very much.

Thank you.

Thank you once again should you have a question. Please press star followed by the one on your telephone keypad and your next question comes from the line of Jamie Kubik from CIBC. Please go ahead.

Yes, good morning, and thanks for taking my question here, maybe just with respect to Sunrise production during the quarter.

Correct me, if I'm wrong. It was actually lower than Q4 2003 levels can can you just expand a little bit on the well performance that you're talking about in that asset.

Yeah, Thanks, Jamie Lara Conrad here.

So overall as far as the well performance our performance goes we've changed our design at Sunrise, we used to drill three layers in the upper Montney and one in the lower and what we found is we can access the resource with just two layers in the upper is still maintaining that one in the low Eric So we have to increase our tonnage per meter intensity.

But we're really finding that design as much are improving the capital efficiency of what is already an excellent asset.

Speaker Change: Okay, and then I know that you have stated gas processing capacity from that asset of 360 million cubic feet a day, but arch produced through that.

Previous quarters can you just talk about what the productive capacity is in the area from that region.

Yeah, Jamie this is armen, yes that plant's capacity is 360, obviously when you're operating the plan depending on the seasonal conditions, you could potentially put a bit more on through the plants, but.

As far as our plant capacity is 360 million cubic feet per day.

Okay, Great and then maybe just sticking on gas sure Heiko on station to pricing on Ford strip still pretty weak through the next.

For six months below a buck 50, a G. J is is there a chance that you delay, bringing production on and that type of price environment and just defer until.

Later in Q3 or Q4.

No Jamie it's Chris here the plan right now.

As you commented pricing is not great, but it's still.

Well in excess of what we need to make our rates of return.

Minder, the only dry gas asset we have a sunrise and you've heard us talk about the low cost structure of that that property. So it still makes sense to produce in that environment.

Heading into the second half of the year here, where would you anticipate some stronger pricing.

Okay, Great and then maybe last one for me is just with respect to attach Ian CAC or can you just talk about water availability for arc in these regions.

The remaining completion programs in 2020 for how you expect to phase that with water availability. Thanks.

Ah, yes as far as attach is concern Jamie we have water in our ponds and we also have access to a long term license. So we don't expect any issues or concerns and Hitachi and cash flow benefits from the same exact situation. We have extensive water infrastructure built in the field already that supports.

<unk>.

Drilling and completions activity for the year.

Okay. Thank you I'll turn it back thanks.

Thank you once again should you have a question. Please press Star then the number one on your telephone keypad.

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

Alright, thanks, everyone for joining have a good get good day that concludes the call.

Yes.

Thank you that concludes our conference for today. Thank you for participating you may all disconnect.