CA - ARC Resources Ltd. (AETUF) Q2 2023 Earnings Call Transcript

2023-08-06 10:07:03 ET

ARC Resources Ltd. (AETUF)

Q3 2023 Earnings Conference Call

August 03, 2023, 10:00 AM ET

Company Participants

Dale Lewko - Investor Relations

Terry Anderson - President & Chief Executive Officer

Kristen Bibby - Chief Financial Officer

Armin Jahangiri - Chief Operating Officer

Ryan Berrett - Senior Vice President, Marketing.

Conference Call Participants

Jamie Kubik - CIBC

Presentation

Operator

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources Second Quarter 2023 Earnings Conference Call.[Operator Instructions]

Mr. Lewko, you may begin your conference.

Dale Lewko

Great. 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; Kris Bibby, Chief Financial Officer; Armin Jahangiri, Chief Operating Officer; Lara Conrad, Chief Development Officer; and Ryan Berrett, Senior Vice President, Marketing.

Before I turn it over to Terry and Kris to take you through our second quarter results, I'll remind everyone that this conference call includes forward-looking statements and non-GAAP and other financial measures. The press release, financial statements and MD&A are available on our website as well as SEDAR. Finally, following our 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.

Terry Anderson

Thanks, Dale, and good morning, everyone. Before I get into the quarter, I want to quickly summarize our long-term strategy that we laid out at our Investor Day in June. The main takeaways are: First, we'll continue to pursue a balanced approach to capital allocation to achieve the best overall return for our shareholders. Reinvesting about 50% of our cash flow into our assets, including Attachie, will yield 5% annual production growth over the next 5 years in condensate-rich natural gas.

Second, we'll dedicate free cash flow to shareholder returns through dividends and share repurchases. When you combine this with organic growth, we forecast free cash flow per share to triple by 2028. Third, the Montney is a world-class, and ARC is the largest Montney producer. We have more than 1 million acres of high-quality Montney lands to develop, with the capability to grow to 500,000 BOE per day and remained flat for decades.

Finally is the extension of our gas marketing strategy to include LNG. Our goal is to dedicate 25% of ARC's future natural gas production to international markets, which we believe is a key differentiator for ARC. To date, we've made excellent progress through our agreement with Cheniere off the U.S. Gulf Coast and an MOU with Cedar LNG, and we continue to pursue other opportunities to achieve this goal.

Now let's move on to the quarter. If I were to summarize, we executed to plan and overcame a challenging operating environment due to the Alberta wildfires. While we are fortunate that the wildfires did not impact any of our infrastructure, we experienced minor disruptions due to downtime on third-party pipelines. Our owned and operated infrastructure and dual connectivity played a key role in limiting this production impact to 4,000 BOE per day. I'm extremely proud of how our people responded and demonstrated the safety-first mentality that is so critical to our success.

In addition, the team executed an efficient capital program that included several significant turnarounds at our Kakwa field, all of which were completed both on time and within budget. Production averaged approximately 345,000 BOE per day in the quarter. This is up 13% year-over-year on a per share basis. Our annual production guidance is unchanged, and we have strong operational momentum heading into the back half of the year, where we are forecasting average production of approximately 360,000 BOE per day.

Looking ahead, we are focused on the efficient execution of our base capital program and the advancement of Attachie Phase 1. Year-to-date, we invested roughly $25 million at Attachie on purchasing major equipment and construction activities. We are progressing as planned by preparing the sites and right of way for the plant and the gas sales installation. Construction will ramp up in the second half of the year with no change to the previously announced $740 million project cost.

We also completed two additional projects I'd like to highlight. The first is the expansion at Sunrise, which adds an additional 80 million cubic feet a day of processing capacity, brings the total capacity at Sunrise to 360 million cubic feet a day. The project was completed within budget and will support volume growth in 2024 as planned. Sunrise is direct connected to Coastal GasLink, which allows us to supply natural gas to Shell at the start-up of LNG Canada. This supports our strategy of delivering low-cost, low-emission natural gas to international markets for the decades to come.

Second, the electrification of our Dawson III and IV facilities. With this project complete, all our gas plants in Northeast BC are fully electrified and powered by renewable hydroelectricity from the BC grid. This is a critical component of our emissions reduction strategy. In total, electrification of our facilities in Northeast BC avoids 420,000 tons of CO2 equivalent in greenhouse gas emissions every year, the equivalent of taking more than 91,000 cars off the road.

With that, I'll turn it over to Kris to go through our financial results for the quarter.

Kristen Bibby

Thanks, Terry. Good morning, everyone. Q2 production was in line with our expectations and analyst estimates, while funds from operations per share registered roughly 5% ahead of consensus. Production of 344,000 BOE per day increased 2% year-over-year and 13% per share on a per share basis. And we maintained our full year production guidance of 350,000 to 355,000 BOEs per day.

Funds from operations in the second quarter was $560 million. And although AECO was down significantly quarter-over-quarter, ARC as the largest condensate producer benefits from strong condensate pricing, which registered at CAD 93 per barrel in the quarter. To that end, our business remains resilient and profitable in the current price environment, a reflection of our low cost structure, asset quality and balanced commodity mix.

After capital expenditure of $417 million, we generated $144 million of free cash flow in the quarter or $0.24 per share. ARC's realized natural gas price of $2.83 per Mcf was about a 20% premium to the AECO benchmark, again capitalizing on our marketing and transportation portfolio, which is an asset in and of itself.

We also continue to actively manage price risk and volatility as we invest in Attachie. Our natural gas is about 25% hedged throughout the balance of this year, and just 20% of our natural gas is exposed to floating AECO in the summers of '23 and '24.

In terms of capital returns, ARC returned 110% of our free cash flow to shareholders through the dividend and share repurchases in the quarter. And through 6 months, we've returned 90% net of proceeds from divestitures of free cash flow to shareholders. Since September of 2021 when we initiated our share buybacks, ARC has repurchased 119 million shares, representing roughly 16% of the shares outstanding at the beginning of the purchases. We intend to once again renew the NCIB in September for an additional 10% as we believe it's an attractive return opportunity for our shareholders.

Our financial position remains in excellent shape and is core to our strategy. Net debt was unchanged at $1.3 billion in the quarter, representing 0.4x funds from operations. Net debt is within ARC's long-term target range of $1 billion to $1.5 billion and equates less -- to less than 1x cash flow at USD 50 WTI and CAD 2.50 AECO. As a result, we intend to return all free cash flow to shareholders.

Finally, circling back to 2023 guidance. Capital and production were unchanged, along with all other cost guidance. We forecast average production of 350,000 to 355,000 BOE per day, which implies roughly 360,000 BOEs per day in the second half of 2023. Capital budget of $1.8 billion to $1.9 billion is also unchanged and is inclusive of $250 million to $300 million of investments at Attachie.

We expect to disclose formal 2024 guidance in November with our Q3 results. The focus will be on an efficient base capital program and on completing Attachie Phase 1, which will set us up for a step change in our business in 2025, as we recently outlined in our Investor Day.

With that, I'll pass it back to Terry for some closing remarks.

Terry Anderson

Thanks, Kris. In June, we laid out a five-year plan at our Investor Day that we are executing on: disciplined investment in our world-class assets, reduce the share count, increase the dividend and execute on margin expansion opportunities to deliver significant value to our shareholders. Now commodity prices will fluctuate between now and then, and other factors could shape or change our course. But that is nothing new to ARC and is why our track record of being both disciplined and nimble are so critical in delivering strong results. With that, I'll open the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will be from Jamie Kubik at CIBC.

Jamie Kubik

I have a couple, but I've just been seeing a bunch of headlines on water restrictions in Northeast BC. Just curious if this is impacting ARC. And if you can talk about how it might impact you in the second half, if at all?

Armin Jahangiri

Jamie, this is Armin. It is not going to impact us. We have pretty much all the water we need in our water storage ponds. We also have access to a fairly dedicated water recycling facility that really helps us with managing risks like this.

Jamie Kubik

Okay. That's great. And then on the quarter, just curious if you can talk about how you think NGL price realizations evolve in the second half of '23, just given the weakness in Q2?

Ryan Berrett

Jamie, it's Ryan. Yes, we would expect some modest price increases versus Q2, but generally for the year, relatively flat.

Jamie Kubik

Okay. And then maybe last one from me just on Cedar LNG. Just what are the next steps for that project from ARC's standpoint?

Ryan Berrett

Jamie, it's Ryan again. Yes, we are working through the long-term tolling agreement with Cedar LNG, and we've commenced discussions with off-takers and continue to proceed throughout the rest of the year.

Operator

[Operator Instructions] And at this time, it appears we have no further questions. Please proceed with closing remarks.

Dale Lewko

All right. Thanks, operator, and thanks, everyone, for joining the call. That concludes the call for the day. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.

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