ARC Resources Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 5 speakers on the call.

Operator

Good morning, Marie, and I will be your conference operator today. I would now like to turn the Arc Resources Second 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 Thank you. Mr.

Operator

Luco, you may begin your conference.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q2 earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer Chris Bibby, Chief Financial Officer Armanjahanghiri, Chief Operating Officer Lara Conrad, Chief Development Officer and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to Terry and Chris to take you through our Q2 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 and A are available on our website as well as SEDAR.

Speaker 1

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.

Speaker 2

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: 1st, 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 Hitachi, will yield 5% annual production growth over the next 5 years in Clinch Natural Gas. 2nd, 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.

Speaker 2

3rd, the Montney is a world class and ARC is the largest Montney producer. We have more than 1,000,000 acres of high quality Montney lands to develop With the capability to grow to 500,000 BOE per day and remain 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.

Speaker 2

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 2 plan And overcame a challenging operating environment due to the Alberta wildfires. While we were fortunate that wildfires did not impact any of our infrastructure, We experienced minor disruptions due to downtime on 3rd party pipelines.

Speaker 2

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 Thank you, Dan. We have successfully completed our strategic initiatives and we have successfully completed our Q4 earnings call. And within budget, production averaged approximately 345,000 BOE per day in the quarter.

Speaker 2

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 Looking ahead, we're focused on the efficient execution of our base capital program and the advancement of Hitachi Phase 1. Year to date, we invested roughly $25,000,000 at Hitachi 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 $740,000,000 We also completed 2 additional projects I'd like to highlight.

Speaker 2

The first is the expansion at Sunrise, which adds an additional 80,000,000 cubic feet a day of processing capacity, brings the total capacity at Sunrise to 360,000,000 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 decades to come. 2nd, the electrification of our Dawson 34 facilities.

Speaker 2

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 Chris to go through our financial results for the quarter.

Speaker 3

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% on a per share basis. And we maintain our full year production guidance of 350,000 BOEs per day.

Speaker 3

Funds from operations in the Q2 was $560,000,000 and although AECO was down significantly quarter over quarter, ARC as the largest condensate producer Benefits from strong condensate pricing, which registered at CAD93 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 expenditures of $417,000,000 we generated $144,000,000 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.

Speaker 3

We also continue to actively manage Price risk and volatility as we invest in Hitachi. Our natural gas is about 25% hedged throughout the balance of this year and just 20% of our natural gas Is exposed to floating acre in the summers of 2023 2024. 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 shareholders, since September of 2021 when we initiated our share buybacks, Arc has repurchased 119,000,000 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.

Speaker 3

Our financial position remains in excellent shape and is core to our strategy. Net debt was unchanged at $1,300,000,000 in the quarter, representing 0.4 times funds from operations. Net debt is within ARC's long term target range of $1,000,000,000 to $1,500,000,000 and equates to less than one times cash flow at US50 dollars WTI and CAD2.50. As a result, we intend to return all free cash flow to shareholders. Finally, circling back to 2023 guidance.

Speaker 3

Capital and production were Roughly 360,000 BOEs per day in the second half of twenty twenty three. Capital budget of $1,800,000,000 to $1,900,000,000 Is also unchanged and is inclusive of $250,000,000 to $300,000,000 of investments at Attach. We expect to Disclosed formal 2024 guidance in November with our Q3 results. The focus will be on an efficient base capital program And on completing Hitachi 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.

Speaker 2

Thanks, Chris. In June, We laid out a 5 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.

Operator

Thank And your first question will be from Jamie Kubik at CIBC. Please go ahead.

Speaker 4

Yes. Good morning and thanks for taking my question here. I got a 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? Thanks.

Speaker 1

Hi, 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 That really helps us with managing risks like this.

Speaker 4

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

Speaker 3

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

Speaker 4

Okay. And then maybe a last one from me just on Cedar LNG, just what are the next steps for that project from our standpoint?

Speaker 3

Hey, Jaeme, 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.

Speaker 4

Okay. Thanks. I'll turn it back.

Operator

Thank And at this time, it appears we have no further questions. Please proceed with closing remarks.

Speaker 1

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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Key Takeaways

  • Long-term strategy: ARC will reinvest about 50% of cash flow to achieve 5% annual production growth and aims to triple free cash flow per share by 2028, leveraging over 1 million acres of Montney lands and dedicating 25% of future gas production to international LNG markets.
  • Q2 production and cash flow: Production averaged 345,000 BOE/day (up 13% per share), generating $560 million of funds from operations and $144 million of free cash flow, driven by low costs and condensate prices of CAD 93/barrel.
  • Hitachi Phase 1 on track: With $25 million invested year-to-date, site preparation and equipment procurement are complete for the $740 million project, with construction set to ramp up in H2 and no change to budget or timeline.
  • Infrastructure and emissions: The Sunrise expansion added 80 MMcf/day of capacity (total 360 MMcf/day) within budget, and full electrification of Northeast BC plants will avoid 420,000 tonnes of CO₂e annually.
  • Capital returns: ARC returned 110% of Q2 free cash flow through dividends and share buybacks, has repurchased 16% of shares since 2021, and plans to renew its NCIB for an additional 10% buyback capacity.
A.I. generated. May contain errors.
Earnings Conference Call
ARC Resources Q2 2023
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