Q2 2025 ARC Resources Ltd Earnings Call
Good morning, ladies and gentlemen, and welcome to the ark resources. Limited second quarter, 2025 earnings conference call at this time. All lines are. Now listen, only mode following the presentation. We will conduct a question and answer session. If at any time during this call, you need assistance. Please press star zero for the operator. This call is being recorded on Friday, August 1st 2025. I would now like to turn the conference over to Deluco manage our Capital markets. Please go ahead.
Thank you, operator. Good morning, everyone. And thank you for joining us. For our second quarter earnings conference call joining me today are Terry Anderson, president, and chief executive officer
Chris dibby Chief Financial Officer.
Department, Jeff and giri. Chief, Operating Officer and Ryan, Barrett, senior vice, president marketing.
Before I turn it over to Terry and Chris to take you through our second quarter results. I'll remind everyone that this conference conference call includes forward-looking statements and non-gaap and other Financial measures with the associated. Risks outlined in earnings release and our mdna.
all dollar amounts discussed today are in Canadian dollars unless otherwise stated
finally, the press release financial statements and mdna are available on our website, as well as see. Our
Following or prepared remarks, we'll open the line to questions.
With that, I'll turn it over to our president and CEO Terry Anderson Terry, please go ahead.
Thanks Dale, and good morning everyone. Today. I'd like to walk you through our Q2 results, provide an operational update on some of our key assets and share a little more insight into our most recent announcements, including the kakwa acquisition and a new land acquisition. Had a Tachi
After that, I'll hand it over to Chris, who will go through our financial results and revised guidance.
Beginning with the quarter.
Production averaged approximately 357,000 Boe per day, which represents an 8% increase year-over-year and 11% increase on a per share basis.
Production was about 40% liquids and 60% natural gas and included 100,000 barrels per day of light oil and condensate. This represents a more condensate weighted production mix with addition of attaching
This quarter, we continue to realize the benefits of a diversified commodity mix and long-term transportation to the us for our Natural Gas.
We generated a 186 million dollars of free funds flow and with a strong balance sheet, we returned all of it to our shareholders, through the base dividend and share BuyBacks.
We Believe buying back our shares represents an increase of use of capital. So we we plan to return, essentially, all free cash flow to shareholders in this manner, for the foreseeable future.
Turning now to Coppa second quarter production average to approximately 170,000 Boe per day, including about 66,000 barrels per day of condensate.
in early July, we closed our agreement to acquire a Kappa assets from strap Kona, which adds approximately 40,000, Boe per day of production, including 11,000 barrels per day of Kay,
The assets are directly adjacent to our existing development, extending the inventory duration of caca to 15 years.
In addition, the Monty lands are 100% working interest and include owned and operated infrastructure that supports our low-cost structure and provides additional operational flexibility.
Since closing the integration has gone. Well,
I'm pleased with how our staff have integrated this asset into our portfolio in a short time.
The team is engaged and we are seeing some positive preliminary results out of the new asset.
Right now, we are focused on optimizing the area infrastructure and the go forward development plan.
The strategy moving forward at caca is to maintain production at approximately, 205 to 210,000 Boe per day, and optimize free cash flow.
Moving over to The Itachi production during the second quarter average, approximately 27,000 Boe per day including 16,000 barrels per day of connait and liquids.
Both of which were were resolved late in the quarter.
Today the plant is operating as expected. Attache production reached 39,000 HBU per day at a point in June including strong cone production of approximately 21,000 barrels per day.
Our last 3 paths have been successfully drilled and completed as planned and are being placed on production as I speak.
This will provide momentum into the second half of the year, where we expect attach production to average between 35,000 and 40,000 Boe per day.
We continue to evaluate ways to optimize Capital efficiencies and returns that attache.
1 example is we have trials in the ground at wider interwell, spacing and higher, intensity fracks that are generating results above our type curve.
Through the initial, 6 months, the average, well from this trial pad, produced, approximately, 170,000, 107 thousand, barrels of condensate, or around 600 barrels per day.
We remain confident in the long-term profitability at Attache.
Reservoir deliverability a strong and performing in line with our expectations. And we are advancing Phase 2 in alignment with our long-term strategy.
We are investing million dollars towards Phase 2 this year into site preparation and the purchase of long lead items for the facility.
In addition, we're excited to have acquired more land, atachi through a unique development agreement, with sad, danisa and energy, a limited partnership owned by halfway River First Nation.
That agreement will allow for development of up to 36 new contiguous sections of land located, immediately Northwest of Itachi.
This is the in this is in the constate rich area of the montney offering the potential to develop some of the highest quality acreage in western Canada.
This agreement increases our Itachi position by more than 10% to greater than 360 sections.
Extending our long development, Runway at 1 of the largest constate Rich Assets in Canada.
We look forward to integrating this opportunity in into our long-term development strategy and atachi and working alongside side. Danny s energy.
Finally, I'll speak to Sunrise, which is our low-cost dry gas asset.
During the second quarter, we maintained our commitment to profitability by electing to curtail between 75 million to 200 million cubic feet per day of natural gas production due to low natural gas prices.
This effectively eliminated ARC's cash exposure to Western Canadian natural gas pricing, thereby preserving capital and resources for periods when prices are higher and meet our threshold for profitability.
Currently we have shut in all dry, gas production, approximately 360 million, cubic feet per day or 60,000, Boe, a day, which will be fully restored, when natural gas prices recover.
We expect that will be later this year as the ramp up in LNG, Canada, coincides with the conclusion of seasonal pipeline maintenance that is underway today.
With that, I'll hand it over to Chris.
Thanks Terry. Good morning everyone.
We'll discuss our quarterly Financial results followed by an overview or a guidance as it relates to the quarter. We delivered average production of 357,000 bees per day which was in line with analysts expectations.
Cash flow of $17 per share was 5% above analysts' estimates on average, while free cash flow of $186 million was approximately 90% above analysts' estimates.
As capital spending came in below expectations.
Light oil and condensate production was roughly 100,000 barrels per day in the quarter. A 34% increase from the same quarter last year.
Despite the volatility in WTI condensate fundamentals, remain constructive.
Demand is strong, inventories are low. And Supply is simply difficult to grow.
Typically differentials for condensate are seasonally wide and in Q2 however, this quarter condensate traded in line with WTI, the narrow spread for the second quarter in 4 years.
Turning to Natural Gas, we continue to realize natural. Gas prices, is above the local benchmarks, by utilizing our transportation portfolio. To reach more attractive and markets in the US.
In the second quarter, our free lies, an average natural gas, price of $3.19 per mcf.
A12, which was $12 higher than the Eco average price of $2.07 per Mcf.
Western Canadian natural gas. Prices are low in our view and will remain low until recovery later this year.
Prices are well below the cost of supply and western Canada is in the early days of a material increase in demand as LNG. Canada ramps up.
This project will ultimately direct greater than 10% of local Supply off the west coast of Canada, which should support narrow basis and strong natural gas prices locally.
Moving to Capital returns.
The 186 million of free cash flow. We generated in the quarter was returned to shareholders through our base dividend and share BuyBacks.
for the third straight year, we plan to distribute, essentially, all free cash flow to shareholders as the balance sheet remains strong
to that end is Terry mentioned we closed the capital acquisition on July 2nd.
The acquisition was funded entirely with debt and consistent with our guiding principles. We retain significant financial strength and flexibility.
We raised 1 billion dollars of unsecured notes. In June a new 500 million 2-year Term Loan and increased. The boring capacity under our existing credit facilities to 2 billion dollars.
Moving on to our outlook, we updated our 2025 guidance to incorporate the Capo acquisition, natural gas shutdowns at Sunrise, and the first half actual. Is that a Tachi?
Full year. Production, guidance is expected to be between be between 385 and 395,000 boies per day.
This increase in full year guidance, incorporates a caco acquisition and is offset by the Natural Gas. Shut in that occurred during the second quarter and extended into the third quarter and also reflects the slower ramp experience at attache in the first half of the year.
Production during the second half of the year is forecast to be greater than 410,000 bees per day, including approximately 120,000 barrels of light oil and condensate.
This reflects production from our required assets at taqwa restored production at Sunrise late in the year and attaching volumes between 35 to 40,000 bees per day.
In terms of capital, we expect to invest between $1.85 billion and $1.95 billion in 2025.
An increase from the previous guidance of 1.6 to 1.7 billion.
This increase reflects $150 million to sustain production on the acquired Kappa assets and approximately $50 million of investment towards attaching Phase 2.
Finally, operating cost guidance increased by $0.50 per Boe to between $5.00 and $5.50 per Boe.
Increase on a per view. Basis is driven by higher water, handling costs at kakwa lower Sunrise, volumes from shut ins and the cap acquisition.
The sunrise asset has a very low operating cost as a dry gas asset. So curtailing production naturally increases operating costs corporately on a per Boe basis.
At strip pricing and based on our updated guidance, we expect to generate approximately 1.4 billion dollars of free cash flow.
Once again, we plan to return, essentially all of it to shareholders through a growing base dividend and additional share repurchases.
With that, I'll pass it back to Terry for some closing remarks.
Thanks Chris.
To close. We remain committed to executing our strategy to grow free cash flow per share through profitable investment in the montney and share BuyBacks.
With our recent acquisition at caca and the land consolidation at attache, we have further extended our top. Tier Monty inventory, reinforcing our position, as the largest Monty producer with Decades of development ahead of us,
Over the near-term. We are focused on operational execution that Itachi optimizing. Our recently acquired asset at a caca and capturing Capital efficiencies across our asset base.
We are on track to drive record production and condensate volumes in the back half of the year. And at current strip, prices generate, approximately 1.4 billion of free cash flow this year, all of which we intend to return to shareholders.
Thank you for your continued support.
Operator, you can open the line to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question please? Press the star followed by the 1 on your touchtone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star, followed by the 2.
And if you are using a speaker-phone, please lift the handset, before pressing any keys.
The first question comes from Sam Burwell at Jeffries. Please go ahead.
You called out the, the solid, uh, early results from the, uh, pad that was, uh, trialing a wider spacing in the, uh, more intense, uh, completion. So, just curious, like, what sort of incremental Capital if any is, is required for that? Like, how much wider is the spacing and how much more intensely are the, um, completion designs?
Uh hey Sam, this is Armen. Um it's uh
It's hard to answer that question, because obviously, as you increase the interval spacing, you require less well boards or fewer. Well, but at the same time you increase or spend some of that Capital that you save from drilling the wall into fracking. So I would say, probably you can assume that it's your remaining effectively neutral by moving capital from 1 bucket to the other.
Okay, great. That that's helpful. Um, and then a, a peer review of yours, uh, called out that there's heavy August um, pipeline maintenance, which is a restricting, gas eras and and helping Drive Echo. So it's currently low levels. Um, but you, I mean, first of all, share that for you. Do you think it can be resolved? Once that maintenance is complete? And then I guess, sort of related to that. I mean, what's your view of the LNG? Canada ramp thus far, is it in line with your expectations or a little bit slower than you anticipated?
Yeah. Hey Sam. Um, this is Ryan. Um, yeah, just in terms of the pipeline maintenance. Obviously, I think that that is correct. Uh, we're seeing extremely low prices here in western Canada right now. Um, some of it was projected, some of it is obviously a result of continued Supply uh, being maintained when we look at LG Canada, I think when you know what, or when we look at the the projects that happen on the Gulf Coast, we actually thought LG Canada's uh quite in line and actually maybe slightly ahead of where some of those projects startups have been. So you know, we were fully expecting volatility and um obviously we're seeing that today uh moving it moving throughout um you know, September October. I think we expect to see price recover back to our uh normalized level.
Okay, understood. Thank you.
Thank you. The next question comes from Patrick or work at HB Capital markets. Please go ahead.
Hey guys. Good morning. And thank you for taking my question. Um, you started off in the prepared remarks talking about the attractiveness of uh share BuyBacks right now, uh and directing 100% of free cash flow towards. Um, I just wonder from a philosophical perspective and, you know, certainly we would agree with the accretion there based on our modeling, but from a philosophical perspective, there's probably some benefit to consistent and readable dividend growth as, as well, uh, to the cost of equity here. So wondering, uh, what your view.
Is on the the right level, um and how you sort of uh triangulate on that.
You. Hey, Patrick. It's it's Chris here. Um, you know, obviously we have favored share Buybacks in terms of a gross amount over the last couple years. Uh, but the dividend is core shareholder returns. I think we've, we've communicated pretty clearly what we're attempting to do is have an annual dividend increase. Um, and so we have not had a dividend increase yet this year, but, uh, it's certainly still something we review, uh, every quarter. And if you recall kind of, in our our balance Capital allocation approach, what we would like to see is is a dividend payout ratio of cash flow of roughly. 15%. I think in the quarter we were uh, right around 16% and for the year we're forecast around 14. So that certainly you know, gives us a bit of room to play but in the fullness of time, you know, Dividends are going to be a material portion of shareholder returns. Uh so we want to make sure that we've got a balance between both uh dividends and cash in in people's hands as well as
As retiring the share count in addition to profitably growing in the money. So you know, if you think of 50% of the cash flow going back into the ground growing, the the asset base in production Levels by roughly 3% on a kegger basis. Uh, roughly 15% going out the door uh, in dividends and that really remains about 35% for share BuyBacks as well.
We think that's the optimal level right now. Given we don't have to deleverage the balance sheet.
Yeah, great. That's, uh, very helpful there. And then, um, just going over to the op costs and the change in the guidance here, you sort of had three sources driving that.
And just on the water handling, is that something that's transitory or is that a little bit more structural going forward?
uh, Patrick Armand here so uh,
Some of it, uh, is going to go away. Uh, and some is obviously because of I guess the, the new portfolio. So the sunrise shedding obviously has a Boe impact so that impacts the dollar per Boe, uh the other part is associated with a new asset. Um, so obviously, as we learn more about the asset, we will find ways to optimize the operating costs there. And the other component of that is related to operational things in caca field as we move uh, produce water. So, um, as we look at maybe those buckets, maybe you can look at 1/3 1/3 1/3. Um, in terms of the impact in terms of the increase um and obviously some of those are stuffed with with planning and spending a bit more Capital over the next few years we can start to to curtail our impact.
Okay, thank you very much.
Thank you. The next question comes from
Aaron bulkowski at TD Cowen, please go ahead.
Thanks, good morning. Um, would you guys be able to talk a bit about how you intend to spread Apache, Phase 2 capex, across 2026 and 2027.
Aaron it's it's Chris here. Um it's a little early to say it with any confidence, we're just going through, you know, the costing and and timing of it. If you use Phase 1 as an example, uh you know, total cost of of roughly 750 uh million dollars roughly. We spent 350 in the first year and 450 in the second year. So it's going to be we would expect pretty even but as you recall once we uh, you know, sanction a project, um, really that that just shifts over to arm and it's, and it's his team and it's up to them to deploy the capital uh, as efficiently as they can. We, we don't worry about it too much from a quarter to quarter basis, just to get the project done as efficiently and safely as possible.
Okay, thanks. Maybe I can ask a follow-up question on capex. This is more on the corporate level. It looks like you plan to only spend marginally more capex in 2026 than in 2025, despite wrapping up capital at a taxi. What areas are you planning on spending less on next year?
You know, as as we're just getting into the planning phase for for 26, as I mentioned, you know, the the big moving Parts uh you're going to have Phase 1, attache Capital coming down as as we are over our uh you know, initial High Decline and into more of a, a stabilized rate. Uh you obviously heard us mention a little bit less Capital at Sunrise from from the shutdowns that we're currently experiencing, uh, and then, we will be obviously bumping it up a bit, uh, annualized for the new caca assets, which in 2015 happened to be a bit back half weighted. So, uh, we wouldn't expect it to be double what we're spending this year, in terms of the 150. Uh, and then, as you mentioned, we will be adding in, we would expect a subject to sanction. Uh, some capital for for Phase 2 of attaching. So several, moving parts and and we'll finalize that in the coming months here.
Thanks 1. Final question for me on the dry gas shutdowns. Is there a price? You'd look to restore those. Um, volumes.
I can grab on that 1 as well. I mean, historically, what we've talked about is is you know, full Cycle Supply cost at Sunrise, you know, in the $1.50 to $1.25 range. Um, so something, you know, consistently above that especially given that, that we do expect to be in a more constructive pricing environment in the not too distant future. We just, we refuse to waste the resource what we don't have to wait, uh, that long uh, to to make a
Better rate of return, uh, on those assets and and make sure that we're off operating profitably.
Perfect. Thanks. I appreciate the answers.
Thank you, ladies and gentlemen, as a reminder, should you have any questions please, press star 1?
The next question comes from Jamie cubic at CIBC, please. Go ahead.
Yeah, good morning. Just, um, expanding maybe a little bit on Erin's question regarding the capital spending changes for the second half, that you outlined in the capital spending increase this year.
Increase as well.
Thanks.
Yes Jamie this is Armen so uh so Itachi. Um um the extra Capital. We are spending their is primarily to advance some Field construction. Uh in preparation for Phase 2. We're taking advantage of the I guess seasonal, uh, weather conditions to, um, to advance that phase. It just basically allows us to, um, maintain project timelines by spending that Capital, um, and be more efficient, uh, from a capital deployment perspective. Uh, other than that in a Tachi, it's only DNC Drilling and completions activity. And there's no other Capital that goes in the ground.
Um, in terms of caca, the obviously the incremental the big bucket, the 150 million dollar is the capital that is, uh, is for that is strapped corner.
Caca East asset. Um, that's effectively what was planned for the remainder of the year and that's been carried forward to Arc. And so we are going to execute exactly the plan that was laid out there, um, and the other 50 million dollar bucket, um, you know, this time of the year, it's um, it it gives us the flexibility to be able to optimize the schedule as we approach the end of the year. You know, there are some white space, there are things we can do to optimize the production for next year. So it gives us some flexibility to deploy that capsule to to manage production and capital for 2026.
Okay. Sorry could I could I maybe just ask you to expand a little bit on a Tachi like outside of the 50 million because I guess slide 8 has a taxi spending going from 360 to 425 to 475 this year. So that would be um, you know, over and above the 50 million that, that is going there. Is there are the completions more expensive, just anything else on that side arm and if you don't mind
Yeah, no. So so Jamie, we talked about some of the design optimization in in attaches that um, you know, Terry alluded to earlier on like higher intensity, fracks. Uh, um, obviously we have we have to spend a bit more money on on some of that stuff and in, in addition to that, um, um, some mitigation measures, uh, for casing deformation, uh, that, we experience at the beginning of the year, if we put some of that in the ground, to be able to manage that the last few paths that we have, uh, completed, we have not seen any case in deformation, so so some of that is associated with that. We can go through more details if if required um 1-on-1.
Okay, that's great. I appreciate it. I'll hand it back.
Thank you. The next question comes from Kelly akamine at Bank of America. Please go ahead.
Good morning, guys. Um, I want to follow up on the Catholic capex. So the 150 million dollar increase that we're seeing the second half of the year. I suppose, that's the cost of you guys taking over, trust conus plan, but you guys have better best practices than they do and that's going to bring this cost down. So, on a full year basis, what's your best? Guess on that the incremental capital from that new asset? And where do you guys think you can take it?
Okay, clay, it's it's Chris here. Um, you know it's really the 150 you're seeing in the second half of the year. Uh, we we took over this asset, you know, mid drilling of pads and stuff like that. So it's really that's kind of what activities they had planned for 26. It's a little bit early to get 2 carried away on details, but high level the way you can, kind of, think about it, or at least the way that we've been thinking about it. If you think of roughly 40,000 views a day plus, or minus at a, at a capital efficiency of roughly 15,000 dollars a flowing Barrel. You're going to be in that 200 million. So whether that's 200 225 is kind of high level, what you can, what you can think of, obviously what the teams right now are doing, integrating the asset incorporating, it into our development plans, uh, and you'll get some more details on that, uh, you know, later this year, when we release the 26 budget.
Good. I I appreciate that detailed Chris. Um, second question, goes to LNG Supply agreements. There's a lot of new LNG projects. They're taking FID or about to take. FID your peers are announcing new Supply agreements. I imagine it is with them. When you look at, when you look at the contracts that are out there, do you think that these new Agreements are attractive as what you had signed in the past? And are you interested in adding more to your marketing book?
Got the the call structure uh that we have uh in in our agreements. Uh again we're very happy with those. Um we were early entrance into these agreements and um we feel that's been beneficial for us.
Got it. Thank you.
Thank you, ladies and gentlemen. Again, if you have any questions please press star 1 now
This does conclude today's Q&A session, I will turn the call back over to do for closing comments.
All right, that concludes the call. Thanks everyone. Have a good day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your line