Q3 2025 ARC Resources Ltd Earnings Call
Speaker #3: Good morning , ladies and gentlemen , and welcome to Arc Resources Q3 2025 Earnings Conference Call . At this time , all lines are in a listen only mode .
Speaker #3: Following the presentation , we will conduct a question and answer session . If at any time during this call , you require immediate assistance , please press star zero .
Speaker #3: For the operator . This call is being recorded on Friday , November 7th , 2025 . I would now like to turn the conference over to Taryn Bolder .
Speaker #3: Please go ahead .
Speaker #4: 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 .
Speaker #4: Kristen Bibby . Chief Financial Officer Arman Jahangiri , chief operating officer . Ryan Barrett , senior vice president , marketing . Before I turn it over to Terry and Chris to take you through our third quarter results , 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 MDA .
Speaker #4: All dollar amounts discussed today are in Canadian dollars , unless otherwise stated . Finally , the press release financial statements and MDA are available on our website , as well as Sedar following our prepared remarks , we'll open the line to questions .
Speaker #4: With that , I'll turn it over to our president and CEO , Terry Anderson . Terry , please go ahead .
Speaker #5: Good morning , everyone , and thank you for joining us today . This morning we'll discuss our third quarter results and the 2026 budget .
Speaker #5: After that I'll hand it over to Chris to review our financial results and provide a little more color on our plans for next year .
Speaker #5: Beginning with the quarter overall , we executed a safe , efficient capital program and remain focused on profitability over both delivering solid operational and financial results .
Speaker #5: Third quarter production averaged approximately 360,000 boe per day , which represents a 10% increase year over year and a 13% increase on a per share basis .
Speaker #5: This included a record high 114,000 barrels per day of Canadian oil , driven primarily from Karkwa and Itachi . In the quarter . We generated $283 million of free cash flow and returned it all to shareholders .
Speaker #5: This is a result of our low-cost structure and a balanced commodity mix that includes a high proportion of cottonseed at Capua, which is our largest concert asset.
Speaker #5: Production averaged 206,000 boe per day . This was above expectations due to better than anticipated performance from the assets we acquired in July .
Speaker #5: With the integration complete . We have now identified and advanced optimization opportunities to further enhance profitability on those assets and the overall property .
Speaker #5: Moving on to Itachi , third quarter production averaged approximately 27,000 boe per day , which was below our expectations . However , condensate production was 13,000 barrels per day , which is a relatively strong number that drives the returns on this asset .
Speaker #5: Our recent focus has been on optimizing our well design based on what we have learned to date to improve predictability and performance . We are seeing evidence of our optimization initiatives on the most recent paths that were successfully drilled and completed as planned , and will be on production in Q4 for 2026 .
Speaker #5: We expect condensate production to increase to 15,000 barrels per day , which is in line with our original plan and total production between 30 and 35,000 boe per day at sunrise .
Speaker #5: Our low cost natural gas asset , we curtailed approximately 360,000,000 cubic feet per day , or 60,000 boe per day , during the quarter when Western Canadian natural gas prices were weak .
Speaker #5: This allowed us to preserve resource and defer capital in the backdrop of strengthening fundamentals and higher natural gas prices . We resumed production in late October .
Speaker #5: A core part of our natural gas business is our transportation portfolio . Having long term , low cost access to key demand markets in the US has been instrumental in allowing us to maintain high natural gas margins .
Speaker #5: When prices are low . During the third quarter , we realized natural gas price of $2.75 per MCF , and compared to the monthly index of $1 per MCF as an extension to our natural gas marketing , our long term LNG agreements will take effect in late 2026 or 2027 .
Speaker #5: Arc will deliver approximately 140,000,000 cubic feet per day of natural gas to Cheniere's Corpus Christi . Stage three project , and in return received Jkm pricing less about $5.50 per MCF .
Speaker #5: Our strategy is to diversify our natural gas sales over the long term by accessing global natural gas prices. Moving on to next year's budget and our strategic priorities.
Speaker #5: The 2026 budget will deliver a higher production , lower capital and higher free cash flow compared to 2025 , and aligns with our long term strategy to grow free funds flow per share .
Speaker #5: Our budget of 1.8 to $1.9 billion will generate annual production between 405,000 and 420,000 boe per day , and condensate production of approximately 110,000 barrels per day .
Speaker #5: Operationally , the focus will be first to continue to deliver consistent results and capture cost reduction opportunities to achieve a best in class cost structure and second , to apply the learnings we've gained from our first full year of production at Itachi to improve capital efficiencies and profitability .
Speaker #5: These results will inform the optimal development plan to maximize profits for Itachi . Phase two . At the current forward forward prices , Arc expects to generate approximately $1.5 billion in free cash flow , with the balance sheet strong , we once again intend to return essentially all free cash flow to shareholders as evidence of this , we are pleased to announce an 11% increase in our base dividend this quarter , alongside a significant step up in share repurchases .
Speaker #5: We continue to believe that the combination of growing base , dividend and share buybacks is the optimal way to return capital to shareholders .
Speaker #5: With that , I'll hand it over to Chris .
Speaker #6: Thanks , Terry . Good morning everyone . First , I'll discuss our quarterly results , followed by an overview of our 2026 budget and resulting guidance .
Speaker #6: Quarter itself was ahead of expectations relative to analyst estimates . Production was in line while funds from operations was 10% above , and free cash flow of $283 million was 80% above expectations .
Speaker #6: As mentioned , we returned all of that free cash flow to shareholders during the quarter . We were particularly active and opportunistic on our share buyback , investing $170 million to purchase 6.5 million shares .
Speaker #6: Since we introduced the NCIB in 2021 . We've repurchased and retired a total of 155 million common shares , reducing the share count by roughly 21% .
Speaker #6: Moving on to production , Arc delivered average production of 360,000 views per day , which represents a 10% increase year over year . 13% increase on a per share basis .
Speaker #6: Record condensate and oil production of 114,000 barrels per day represents a 30% increase from the prior year , driven by Itachi and the Caco acquisition that closed in July .
Speaker #6: Production from our newly acquired Chalco assets delivered at the higher end of our internal expectations , averaging around 40,000 per day in the quarter , which included roughly 13,000 barrels a day of condensate .
Speaker #6: We invested approximately $500 million this quarter , drilling 50 wells and completing 36 activity focused primarily on our condensate rich assets at Karkwa , Greater Dawson and Itachi .
Speaker #6: With the closing of the acquisition from Strathcona in July, we ended the quarter with net debt of approximately $3.1 billion, implying a debt to cash flow ratio of approximately one time.
Speaker #6: We view this as an appropriate amount of leverage for our business , given our low cost structure and deep drilling inventory . The 2026 budget we plan to invest 1.8 to $1.9 billion , which represents approximately $100 million , decrease from 2025 .
Speaker #6: Capital program is expected to generate 11% production growth , with average production between 405 and 420,000 per day , of which 40% is liquids .
Speaker #6: In 2026 , year over year growth will be driven by our two biggest condensate assets . First at Itachi , where we expect stronger organic volumes , and second at Karkwa , where we will have a full year with the recently acquired assets we plan to allocate 80% of the capital towards well related activities .
Speaker #6: The remainder is earmarked for facilities and maintenance, along with a nominal amount towards phase two at Hitachi and certain margin expansion initiatives. As one example, we are investing about $40 million towards water infrastructure and disposal at Karkwa.
Speaker #6: This investment will pay out in less than a year by lowering operating costs while improving safety by reducing our reliance on trucking . As mentioned at current strip pricing , we will generate approximately $1.5 billion of free cash flow , or roughly 10% of our market cap , for the fourth consecutive year .
Speaker #6: Essentially , all free cash flow will be returned to shareholders through our growing base dividend and continued share repurchases . With that , I'll pass it back to Terry for closing remarks .
Speaker #5: Thanks , Chris . In 2026 , Arc will celebrate 30 years of being a proud , responsible Canadian energy producer . We created a budget that supports our long term strategy of investing in our assets to grow free cash flow while returning a meaningful amount of capital to our shareholders , providing an attractive and sustainable return .
Speaker #5: Our outlook is strong for fortunate to have amassed long duration , top tier montney assets . We've built a large network of company owned infrastructure , and we have the best people to execute on our plan to deliver sustainable value to our shareholders .
Speaker #5: With that , we can open the line to questions .
Speaker #3: Thank you . And ladies and gentlemen , we will now begin the question and answer session . To ask a question , you may press star , followed by the number one on your telephone keypad .
Speaker #3: If you're using a speakerphone , please pick up your handset before pressing the keys . To withdraw your question , please press star , followed by the number two .
Speaker #3: With that , our first question comes from the line of Michael Harvey with RBC Capital Markets . Please go ahead .
Speaker #7: Yeah . Thanks . Good morning guys . So just a couple a couple of questions . I guess the first one maybe just walk us through some of the key learnings you've taken from phase one and kind of how those would be applied to phase two .
Speaker #7: What changes would be applied just given the passage of time and kind of how would that affect cost , productivity , etc. ? And then the second one is just a little broader .
Speaker #7: How do you compare the two options ? The first being going ahead with phase two , the second being just deferring for a longer period and just kind of buying back a billion or so in stock per year and staying flat .
Speaker #7: Lots of moving parts , I suspect that's a hot topic in the in the boardroom . I'd just love to get a bit of color on how you folks would kind of think through that .
Speaker #7: That complex topic .
Speaker #5: Hey , Michael , it's Terry . Why don't I start with you with your second question ? So we've always stated that we are focused on improving our per share metrics .
Speaker #5: And so obviously and Armin will touch on some of the the learnings here for phase two , because we want to make sure that we are going to be the most capital efficient when we move into that second phase .
Speaker #5: So we're focused on profitability side , but for us , where our shares are trading today , it's a good use of capital to be buying back our shares .
Speaker #5: And there are going to be times when it makes more sense to buy back our shares, and there are going to be times when we're going to invest more.
Speaker #5: And that's exactly what we had laid out in our long term plan . When we're not investing in our assets , we're going to be buying back the shares .
Speaker #5: So it all ends up at the same spot of improving our per share metrics . And in particular , the free cash flow per share .
Speaker #5: Yeah . Mike ,
Speaker #8: On your first question , most of our focus in terms of learnings are going to be on subsurface optimization of our well and frack design .
Speaker #8: Some of the activities already started , as Terry mentioned in his remarks , that we are going to see the result of them in the next few , few months .
Speaker #8: That is going to really help us better understand the capital efficiency , what we are trying to do is to find that balance between recovery factor and capital efficiency , and make sure not only phase two , but also the remainder of phase one development activities set up for success .
Speaker #8: So in terms of cost , obviously with improvement in capital efficiency , we have to look at exactly what the cost numbers are going to be .
Speaker #8: But what we are trying to achieve, as Terry mentioned, is profitability.
Speaker #7: Gotcha . And just to close it out , do you have an updated breakeven WTI number of where you think the the phase two project would give you your your your specified hurdle rate has that kind of changed .
Speaker #7: And maybe just just so folks can kind of benchmark where where it looks good and where it looks kind of less good or I'm not sure if you've updated that number or not .
Speaker #6: Hey Mike , it's Chris here . I mean , I'm not sure we've given a specific number previously , but you know , based on what Armin and Terry are saying , like , we don't see the future go forward , costs changing .
Speaker #6: So , you know , like we've previously talked about , you know , in the 60s range , we'd be comfortable driving ahead .
Speaker #6: The reality is , you know , oil macro backdrop right now is is quite weak . We do want to take the time , get the learnings in-house .
Speaker #6: You know . And in the meantime buy back the shares . But the reality is you know even absent the learnings there's no growth capital really being deployed into our , our sector right now .
Speaker #6: So I'm not sure now would be the right time to , to really be deploying a lot of growth capital . So we'll take that into account .
Speaker #6: I mean , if it's well above 60 , obviously we'd be very comfortable . If it's below 60 , it's still probably economic .
Speaker #6: I'm just it's going to depend on where the shares are trading at the time . Trying to make sure we are achieving the best rate of return on the capital .
Speaker #6: We are deploying .
Speaker #7: Got I appreciate the detail , guys .
Speaker #3: And the next question comes from Carly Akamine with Bank of America . Please go ahead .
Speaker #9: Hey . Morning , guys . I want started the on the well . So total spend in full year 26 is 2.75 . You're bringing on 14 wells .
Speaker #9: The simple divided by B math points to pretty costly wells . But this is not a normal year . Can you kind of talk to us about the path towards a maintenance capital number and remind us what that is ?
Speaker #9: The number that I have in my head is about $150 million .
Speaker #6: Yeah .
Speaker #8: So so some of the numbers you see in terms of the capital for next year includes additional capital beyond drilling and completions activity .
Speaker #8: We have some phase two pre spend included in in the in that number . In addition to that seismic in some water related infrastructure .
Speaker #8: So the the per well cost is is not exactly a straight calculation of the numbers . As you mentioned . As far as your overall capital cost estimate for a sustaining is concerned , your numbers are relatively accurate .
Speaker #8: But remember that this is the second year . So we still are dealing with higher declines in the assets . So as we get into the subsequent years , we have to see those numbers are going to come down .
Speaker #9: I appreciate that . My second question relates to phase number two . Now in 26 , you're doing work to finalize the development pattern before taking that , FID .
Speaker #9: Can you kind of talk about what a success case will look like ? How are you scoring things like per ? Well , productivity .
Speaker #9: Or maybe that's measured on a per pad level . Are you pushing productivity to the edge with your completion intensity ? Is there kind of an element in there of defining what the aero extent is to which these best practices are applicable ?
Speaker #9: Just trying to understand what the targets are that will allow you to move forward .
Speaker #8: Well , we definitely see an opportunity to improve the profitability and capital efficiency based on some of the early production results that we have seen from phase one .
Speaker #8: So the objective here , as I said earlier , is that we want to make sure we find that right balance between recovering resource and making sure that we we can recover it at a decent capital efficiency .
Speaker #8: So that's going to really inform our plan . Moving into phase two .
Speaker #9: Got it . I appreciate that . Thank you for taking my questions .
Speaker #3: And once again , if you would like to ask a question , simply press star One on your telephone keypad . Your next question comes from the line of Jamie Cubic with CIBC .
Speaker #3: Please go ahead .
Speaker #10: Yeah . Good morning and thanks for taking my question . Just wanted to ask a little bit more on Itachi . Can you talk a bit more on the underperformance seen in 2025 ?
Speaker #10: What led to the underperformance versus your second half guidance of 35 to 40,000 a day ? That was issued with , with with Q2 results and and I guess how much conservatism have you baked into the 2026 guide for Itachi ?
Speaker #10: Just things like that would be great to understand . Thank you .
Speaker #5: Hey , Jamie , it's Terry here . So the change in forecast is a result of the lower than expected production from one pad that came on on stream in July here , which has impacted Q3 and Q3 .
Speaker #5: Q4 production and the pad at the 71 is just showing higher water production . And it's taking longer time to clean up some wells take longer , some to clean up on the water , some are quicker .
Speaker #5: We still expect a stabilized water cut of around that 5050 to 60% , which is very similar to Capua and and our wells are coming down to this , this one , this well is just that closer to that 70 , 75% .
Speaker #5: So we just need a little more time for it to clean up here .
Speaker #6: And Jamie , I can handle the guidance . You know what we focused on is we want to make sure we're sending out realistic guidance that we know we have a good , good shot at achieving .
Speaker #6: Hence the a little bit wider range , both at the corporate and then specifically at Itachi where , you know , if we're at the high end of guidance , we're a rate where we should be .
Speaker #6: And if we're at the lower end , then we're going to have to do some explaining for that asset . But corporately , you know , at 405 to 420 , that should be right .
Speaker #6: Where everyone's kind of expecting us to be, so pretty happy with how the budget came together and the overall guidance levels.
Speaker #10: Okay , that's all for me . Thank you .
Speaker #6: Thanks , Jamie .
Speaker #3: And once again , if you would like to ask a question , simply press the one on your telephone keypad . And I'm showing no further questions at this time .
Speaker #3: I would like to turn it back to Taryn Boulder for closing remarks .
Speaker #4: Thanks everyone . Have a great day .
Speaker #3: Thank you . And ladies and gentlemen , this now concludes today's conference call . Thank you all for joining . Me . Now disconnect .