ARC Resources Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 3, 2023

There are 12 speakers on the call.

Operator

Good morning. My name is Cynthia, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources 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.

Operator

Thank you. Mr. Luca, you may begin your conference. Call.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q3 earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer Chris Bibby, Chief Financial Officer Lara Conrad, Chief Development Officer Armanja Hangiri, Chief Operating Officer and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to the executive team take you through our Q3 results and 2024 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 and A.

Speaker 1

All dollar amounts discussed today are in Canadian dollars unless otherwise stated. Finally, the press release, financial statements and MD and A are available on our website as well as SEDAR. 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.

Speaker 2

Thanks, Dale, and good morning, everyone. I'm going to spend a little time discussing 3 important items this morning: Q3 results, an update on Hitachi and our 2024 budget. I'll 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.

Speaker 2

We executed to plan and delivered solid performance across all aspects of the business. It's 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 a balanced capital allocation framework that includes not only a base dividend, but also share buybacks at what we deem to be great value. Production per share this quarter is over 25% higher than the Q2 of 2021, the 1st full quarter following the 7 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.

Speaker 2

This quarter, we executed a $400,000,000 capital program and delivered average production of just over 360,000 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. Capua volumes approached 200,000 BOE per day, driving corporate condensate volumes 78,000 barrels per day at a time when condensate prices topped CAD100 per barrel. As the largest condensate producer in Canada.

Speaker 2

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 move on to Hitachi, I want to quickly highlight an example of our commitment to safety. We recently elected to shut in a few 1,000 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.

Speaker 2

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 Hitachi. I'm extremely pleased with the progress the team has made to date. Capital costs and timing are both tracking to expectation and what we outlined at our investor update in June.

Speaker 2

Total cost for Phase 1 start up remains at $740,000,000 of which 1 third will be spent in 2023 and the balance invested in 2024. We expect to be producing between 35,040,000 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. There are 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.

Speaker 2

The 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.

Speaker 2

And over the next few weeks, we'll begin drilling. We are also on track to fully electrify this facility at start up, 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. Hitachi will be our 8 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.

Speaker 2

Finally, I'd like to move on to the 2024 budget. The priorities are clear: deliver a safe and capital efficient program while focusing on completing Hitachi. 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 $1,750,000,000 and $1,850,000,000 and this includes $500,000,000 for the Hitachi Phase 1 startup. The capital program is balanced geographically with a fifty-fifty split between Alberta and British Columbia, and we'll deliver average annual production between 350,000,360,000 BOE per day.

Speaker 2

This budget is approximately $200,000,000 lower than communicated previously at the Investor Day in June and 25% lower than the 2023 capital budget once you adjust for the Hitachi capital in each year. The primary contributors to lower capital, our first operational decisions to minimize nonproductive capital second, realized cost savings on certain items and third, a lower decline rate in 2024. At Kakwa, which is our flagship condensate producing asset, we are investing less capital and holding condensate volumes flat year over year. The primary drivers of this are twofold, a lower decline rate and a shift back to the condensate rich areas of the asset. Segment.

Speaker 2

This follows our planned activity in 2023 that focused in areas with slightly lower condensate gas ratios. Longer term, our overall condensate growth will be driven by Hitachi, which is 60% liquids, Incorporated, of which 75% is condensate. Arc reached an important milestone at Capa this quarter. We achieved payout for the asset that we acquired in the Q2 of 2021. So in less than 3 years, CACWA has generated cumulative free cash flow at the asset level of $4,200,000,000 which is equal to the purchase price.

Speaker 2

And we still have approximately 15 years of high quality inventory ahead of us. I'm extremely proud of how we've made a world class asset even better by leveraging the strengths embedded in our company. Moving on to Northeast 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 360,000,000 cubic feet per day, which is direct connected to Coastal GasLink and will supply LNG projects off the West Coast of Canada. Segment.

Speaker 2

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.

Speaker 3

Thanks, Terry, and good morning, everyone. Segment. First, I'll touch on the quarter itself. Arc delivered average production of 360,000 BOEs per day and generated funds from operations of 6 $162,000,000 both were directly in line with analyst forecast, while free cash flow of $261,000,000 exceeded expectations by about 45%, segment, primarily due to lower capital expenditures during the quarter. In terms of capital, we invested $400,000,000 in the quarter, split between Kakwa and in Northeast BC, including approximately $60,000,000 at Hitachi.

Speaker 3

ARC maintained full year guidance for production, capital spending and costs with 4th quarter production forecast to be approximately 355,000 BOEs per day. When I look back at our financial performance over this quarter, what stood out was 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 in the quarter, which registered as a 32% premium relative to the local AECO benchmark. This was mainly driven by our transportation portfolio to the U.

Speaker 3

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 and Q3 was a great example of this.

Speaker 3

2nd, Arc's 360,000 BOEs per day of production included 87,000 barrels per day of crude oil and condensate, which as Terry already mentioned, averaged greater than CAD100 per barrel in the quarter. As a reminder, we are Canada's largest condensate producer, which is structurally short market. Western Canada consumes about 700,000 barrels

Speaker 4

a day

Speaker 3

in the segment and altogether the market produces roughly 450,000 barrels a day locally. The 250,000 barrel a day shortfall is imported via 2 pipelines from the U. S, which are operating at or near capacity. So it's structurally 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.

Speaker 3

As we have stated in the past, we plan to return essentially all free funds to shareholders this year and in 2024, implying an increase in the percentage returned over the remainder of the year. To this end, net debt at quarter end was $1,200,000,000 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 2024 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.

Speaker 3

This is the optimal way to generate an attractive and competitive total return. Production guidance for 2024 of 350,000 to 360,000 BOEs per day Incorporates the anticipated expiry of an ethane sales contract in the Q2, which will reduce reported NGL production by approximately 5,000 barrels Per Day on an annualized basis. We plan to reinject ethane into the natural gas stream resulting in higher revenue from sales of higher heat content gas offsetting the impact to funds from operation. In terms of capital, We are investing $1,800,000,000 in 2024. As mentioned, this is about $200,000,000 less than 2023 once you adjust for the Hitachi growth capital, and we are generating the same or slightly higher production levels.

Speaker 3

This is driven by 2 things. 1st, a lower corporate decline in 2024, therefore we need to drill and complete fewer wells to offset production declines. And second, a concerted effort to further reduce non productive capital in our business. This is particularly true at Capla. Next year, we are investing less capital, both Capital in facilities and in wells and expect to maintain flat condensate volumes in 2024.

Speaker 3

As planned, total production at Kakua is expected to average 180,000 BOEs per day or 175,000 BOEs per day once we adjust for the ethane contract expiry in the Q2 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 350,000 to 360,000 BOE per day range and fund the current dividend with organic cash flow below US45 dollars a barrel WTI and Canadian CAD2 dollars a co per Mcf.

Speaker 3

This is based on our cost structure today, 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. At strip pricing, the 2024 program is expected to generate $3,000,000,000 to $3,200,000,000 of cash flow and roughly $1,400,000,000 of free cash flow. 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 5 year outlook is essentially unchanged from what we first introduced Investor Update in June.

Speaker 3

We intend to deliver a balanced program that invests 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 Hitachi, we anticipate 10% growth on a production basis and $600,000,000 increase in pre fund flow. This is equivalent to more than $1 per share relative to our 2024 on an change commodity price deck of US70 dollars WTI and US3.50 dollars Nymex. With that, I'll pass it back to Terry for closing remarks.

Speaker 2

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 5 year plan that adds significant value through investing in our business to grow free cash flow, increase the dividend and buyback our shares. This plan will nearly triple free cash flow to approximately $5 per share. As I look forward out towards 2,030, ARC will be a larger, more profitable company with expanded reach to global markets through our LNG agreements.

Speaker 2

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.

Operator

Our first question comes from Michael Harvey from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 5

Sure. Thanks. Good morning, guys. I just had a couple of questions. The first one is on your natural gas price hub exposure.

Speaker 5

Looks like your AECO percentage is increasing quite a bit in 2025, then 26% and 27%. I assume that's by design, but Maybe you could just confirm that or if we'll see that be adjusted kind of as we move forward over the next couple of years. And then the second one was Just on the drilling plan at Hitachi when you start moving rigs there, I think later this year. So it's been a few years since you've drilled Well there, is there anything different you're going to be doing just well design wise you may have learned from CACO or otherwise that you think may impact the recovery profile in that area. And that's it for me.

Speaker 6

Hey, Michael, it's Ryan. Shannon, I'll tackle the first question on your AECO pricing hub. Yes, no, you're 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.

Speaker 6

So by design, but as you know, we always have a balanced portfolio and we'll continue to do so.

Speaker 4

Michael, this is Armin. In regards to your question about drilling, we are quite excited to go back to Hitachi. Obviously, there's been A lot of learning from all the other operations that we are doing in rest of Northeast BC and Kakwa and all those learnings are going to be transferable. We are expecting to be able to hit the ground running in Hitachi and incorporate a lot of those efficiencies that we've realized over the last couple of years.

Speaker 5

Right on. And would there be changes to things like well length, frac design, that kind of stuff? Or Maybe you're just kind of getting started in that process.

Speaker 4

Well, initially, I think it's going to be fairly consistent with where we ended at Hitachi a couple of years ago, but there's obviously always opportunity for improvement. We look at our well placement. If there's an opportunity to and the lateral length, for example, to improve capital efficiency. We always do that. So nothing out of ordinary.

Speaker 5

Got you. Great. Thanks for that, guys. Segment.

Operator

Thank you. Our next question comes from Patrick O'Rourke from ATB Capital Markets. Please go ahead. Your line is open. Metric.

Operator

Your line is open. Please ask your question.

Speaker 7

Yes. Can you guys hear me?

Speaker 3

Yes, we can.

Speaker 8

Hello?

Speaker 3

Yes, we can hear you, Patrick.

Speaker 8

Okay. Sorry, the operator was talking over me there, so I wasn't sure You could, but I apologize for any miscommunication there. Just kind of wondering and wanted to unpack here with respect to the $200,000,000 improvement in the capital budget. And you guys are talking about non productive 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 Hitachi where we could see the capital efficiency profile improve and incremental free cash flow from sort of similar type improvements.

Speaker 3

You bet. Patrick, it's Chris here. I'll take a stab at it. The $200,000,000 does apply across the entire asset base. So it's not really an asset specific number.

Speaker 3

And really, what we've done is we've just optimized basically the delivery time of the wells so that we aren't investing as much capital prior to needing some of that production or even facilities. So If you think about it, we would have less invested in basically DUCs than we would have otherwise had. And part of the reason we're comfortable doing that, We spent a lot of time working on predictability of results and deliverability of results. So it gives us the comfort that we can to tighten up some of the white space perhaps that we would have otherwise had in some of our safety margin just because we have spent so much time on the predictability and have a very Hi, confidence factor in what the outcomes are going to be. And so could that lead into further improvements down the road?

Speaker 3

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.

Speaker 8

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 theater in particular, but also your Corpus Christi exposure and when we'll start to see the benefit of that.

Speaker 6

Yes. Hey, Patrick, it's Ryan. I'll just Dig into both those questions. Obviously, as you know, we signed the Cheniere contract with Corpus Christi about a year and a half ago. Shneur came out yesterday and or 2 days ago and talked about the start up of construction on those on the Phase 3 of the expansion.

Speaker 6

We're Train 7 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. Pembina came out this morning and has talked about potentially a slippage into Q1 of their FID. We are working through definitive agreements on both off take and on the towing and would hopefully be in line with Pembina's timing on that.

Speaker 8

Okay, great. Thank you very

Operator

much. Thank you. The next question comes from Jamie Kubik from CIBC. Please go ahead. Your line is open.

Speaker 9

Yes. Good morning. Thanks for taking my questions. I have 2 here. So First, capital spending for ARC has come in lower than I'd say budgeted for the 1st 3 quarters of the year.

Speaker 9

Can you just outline what's driven the savings this year? And how should we think about the full year budget for 2023 based on where you're at today?

Speaker 3

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 $1,800,000 to $1,900,000 here by the end of the year, which does imply quite a very active Q4 spend.

Speaker 3

So I think we are comfortable with it, but We're ramping up activities and Q4 should be in line to get to our full year guidance.

Speaker 9

Okay. Thanks. And then second question in the 2024 budget, you do have oil and condensate volumes growing relative to the 2023 guidance and you indicate condensate volumes at CAC were expected to stay flat. Can you just talk about where you expect the growth is going to come from next year?

Speaker 10

You bet. Jamie, it's Lara. As far as where the condensate comes from, I mean, really it's going to be our 2 key properties that are condensate rich, so Cacqua and Hitachi. So effectively, as we bring Itachi on in Q4, you're going to see that condensate add coming up. And then the nice part of that, of course, is into 2025.

Speaker 10

Hitachi will be at capacity and that condensate volume will be consistent for us go forward.

Speaker 9

Okay. That's all for me. Thank you.

Operator

Thank you. Our next question comes from Travis Wood from National Bank Financial. Please go ahead. Your line is open.

Speaker 7

Facility, and then through next year. So kind of the key items Apologies.

Operator

Sorry to interrupt, Travis. Please do ask your question again. Thank you.

Speaker 7

Okay. My question is wanting to understand The critical path around Hitachi, 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 at Hitachi. So for example, 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 and timeline that can keep us comfortable that everything remains on schedule.

Speaker 4

Yes, Travis, this is Armin. So we have multiple obviously activity or projects underway in Hitachi. As Terry alluded to, it's fairly active and it's going to be over the next 12 months until we get the facility to the commissioning phase. Obviously, there is the liquid sales line is a major project for us that we've already started working on it expected to finish around Q1 of next year. The construction of the plant itself is a major task.

Speaker 4

The plant includes also water recycling hub that is going to be included in it. So that is going to be an activity that going to continue over the next 12 months or so. Terry also spoke about the electrification. So we've received all our necessary permits to start building the transmission line and substation. So there's quite a lot happening over the next 12 months.

Speaker 4

In terms of what is on critical path, I mean, obviously, the big project is the plant and that's the one we need to have up and running. And I see absolutely no reason to be concerned about the time line. I think the project is going as per the plan on schedule on budget.

Speaker 7

Okay. Thanks very much, Armin. That's all for me.

Operator

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. Our next question comes from Mike Dunn from Stifel. Please go ahead. Your line is open.

Speaker 11

Thanks. Good morning, everyone. Can you hear me okay?

Speaker 4

Yes, we can.

Speaker 11

Great. A couple of questions from me, if I may. Just on the electrification at Hitachi, Is that the timing of that, is it reliant on Site C completion or is it sort of connected to the grid independent of Site C?

Speaker 4

Mike, Armin here. No, it has nothing to do with Site C. That's the power for that facility has already been secured through BC Hydro.

Speaker 11

Okay. Thanks. And then secondly, just maybe a follow-up from, I think it was Chris' response to Patrick earlier. The 2024 production guidance, are we to infer that there's less margin of safety to meeting the targets than maybe There was in

Speaker 2

the past.

Speaker 3

Hey, it's Chris. No, 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, It's not a higher risk program from a production standpoint.

Speaker 11

Okay. Thanks, Chris. That's all for me. I'll turn it back.

Operator

Conference call. Thank you. There are no further questions at this time. I will return the conference back to the speakers.

Speaker 1

All right. Thanks everyone for joining. That concludes the call. Have a good day.

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Key Takeaways

  • Q3 2023 results: ARC delivered average production of ~360,000 BOE/d (5% YoY growth; 13% per share), executed C$400 M in capex, and generated free cash flow of C$261 M, exceeding expectations by ~45%.
  • Hitachi Phase 1 on track: Total cost remains C$740 M, ~20% complete, with gas and liquids pipelines installed and full electrification planned; commissioning volumes by end of 2024 target 35–40 k BOE/d in 2025.
  • 2024 capital program: Budget set at C$1.75–1.85 B (including C$500 M for Hitachi) with guidance for 350–360,000 BOE/d production, C$200 M lower than prior plan, and focus on improved capital efficiency to drive a free cash flow step change in 2025.
  • Condensate leadership: As Canada’s largest condensate producer, ARC achieved ~78,000 bbl/d at >C$100/bbl in Q3, driving >60% operating margins and realizing C$4.2 B cumulative free cash flow at Kakwa since acquisition.
  • Return of capital & resilience: Dividend and buybacks returned 71% of free cash flow, net debt at C$1.2 B, and the business can sustain dividends with WTI below US$45/bbl and gas at C$2/Mcf, underscoring its low‐cost structure.
A.I. generated. May contain errors.
Earnings Conference Call
ARC Resources Q3 2023
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