ARC Resources Q3 2024 Earnings Report

ARC Resources EPS Results

• Actual EPS: C$0.55
• Consensus EPS: C$0.34
• Beat/Miss: Beat by +C$0.21
• One Year Ago EPS: C$0.39

ARC Resources Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

ARC Resources Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: After Market Closes
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 10:00AM ET

ARC Resources (TSE:ARX) is an independent energy company engaged in the acquisition, exploration, development, and production of conventional oil and natural gas in Western Canada. The company produces light, medium, and heavy crude, condensate, natural gas liquids, and natural gas. Production averaged 163.6 thousand barrels of oil equivalent per day in 2020, and the company estimates that it holds approximately 879 million boe of proven and probable crude oil and natural gas reserves.

ARC Resources Q3 2024 Earnings Call Transcript

Key Takeaways

• ARC commissioned Hitachi Phase 1 on time, on budget and safely, achieving ~20,000 BOE/d (11,000 bbl/d condensate) and is on track to ramp to 40,000 BOE/d by year-end.
• Q3 production averaged 327,000 BOE/d with 89,000 bbl/d of light oil and condensate (a 20% QoQ increase), driving high margins and strong free cash flow despite weak natural gas prices.
• Disciplined curtailment of ~250 MMcf/d at Sunrise boosted realized gas prices to CAD 1.78/Mcf (double AECO), preserved resource for higher prices and deferred CAD 20–30 million of 2025 sustaining capital.
• The 2025 capital budget of CAD 1.6–1.7 billion targets 10% production growth to 380,000–395,000 BOE/d, 20% condensate growth, a 10% CapEx reduction and ~CAD 1.5 billion of free cash flow to fund dividends and buybacks.
• Hitachi Phase 2, a mirror 40,000 BOE/d development with ~60% liquids, is set for sanction in 2026 and on-stream in 2028, leveraging existing infrastructure for an estimated CAD 70 million cost saving.

Presentation

[Operator]

Good morning. My name is Ivo, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Thank you. Mr. Lewko, you may begin your conference.

[Dale Lewko, Manager of Capital Markets at ARC Resources]

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, 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 Kris and Terry to talk you through our Third Quarter results and 2025 budget, I'll remind everyone that this conference call includes forward-looking statements and non-GAAP and other financial measures, with the associated risks outlined in the earnings release and our MD&A. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. Finally, the press release, financial statements, and MD&A are all 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.

[Terry Anderson, President and CEO at ARC Resources]

Thanks, Dale, and good morning, everyone. I want to begin by stating that ARC's longstanding principles of safety, capital discipline, and operational excellence are embedded in our culture and were once again evident in the quarter. We delivered strong operational results, and in October, we successfully commissioned the first phase at Attachie, which is our eighth major Montney development project. In addition, we continue to deliver on our commitment to shareholder returns, announcing a 12% dividend increase while continuing to buy back shares, both proof points that reaffirm our conviction in our business. Looking ahead, our asset base is performing very well with Attachie on stream. ARC is positioned to deliver a significant step change in free cash flow per share growth in 2025. To expand on the quarter, we delivered average production of 327,000 boe/d.

[Terry Anderson, President and CEO at ARC Resources]

This included 89,000 bbl/d of light oil and condensate, representing 20% growth quarter over quarter. This increase in condensate contributed to high margins and strong free cash flow generation, offsetting weak Western Canadian natural gas prices. We also maintained 2024 guidance as high deliverability at Kakwa helped offset voluntary natural gas curtailments at our Sunrise asset. The strong Kakwa performance was partly the result of frac design changes the team implemented earlier this year. Production at Kakwa averaged 180,000 boe/d and at times was producing in excess of 200,000 boe/d. This is a great example of the technical strengths of our people and our commitment to continuous improvement. While Sunrise is one of the lowest cost dry gas assets in North America, the decision to curtail production showed our disciplined approach to profitability.

[Terry Anderson, President and CEO at ARC Resources]

As Western Canadian natural gas prices stayed low, we elected to shut in approximately 250 million cubic feet per day to preserve resource for a period of higher pricing. And currently, we're able to leverage our dual connected infrastructure and redirect gas to more attractively priced markets in the U.S. This resulted in higher realized pricing and better margins. An additional benefit of curtailing Sunrise production is we can defer CAD 20-CAD 30 million of capital next year that we would have spent maintaining production. In mid-October, we restored some volumes at Sunrise when natural gas prices recovered above levels required to exceed our hurdle rates. We have said this before, but it's worth mentioning again, ARC will always operate with a profitability over BOE mindset, and our operational decisions at Sunrise are a proof point of this. Moving on to Attachie.

[Terry Anderson, President and CEO at ARC Resources]

Back in May of 2023, when we announced we were proceeding with Phase I, we committed to an 18-month construction timeframe. Today, 18 months later, I'm pleased to announce we delivered on this promise and have commissioned Phase I on time, on budget, and most importantly, safely. The achievement is the culmination of years of development planning, stakeholder and indigenous engagement, and detailed technical work. Project management is what we do well. In total, this project involved more than 3 million combined work hours for construction and commissioning with our service providers, and I am proud of the way our team has executed this project, demonstrating once again that operational excellence and safety are core to how ARC operates. Today, Attachie is producing about 20,000 BOE a day, of which 11,000 bbl/d is condensate.

[Terry Anderson, President and CEO at ARC Resources]

With our startup drilling and completion activities nearing completion, we are right on track to ramp up to our productive capacity of 40,000 boe/d by year-end. Attachie is a critical part of achieving the profitable growth embedded in our long-term plan, so to see it come together is very exciting. Thank you to the whole team at ARC for successfully executing this project and for your continued focus on safe and efficient operations across our company. Moving on to the budget. Next year, we have all the pieces in place to deliver a meaningful increase in free cash flow per share. Our capital budget of CAD 1.6 billion-CAD 1.7 billion is expected to deliver record average production of 380,000 boe/d-395,000 boe/d, representing 10% production growth, 20% growth in condensate production, and a concurrent 10% reduction in capital expenditures compared to 2024.

[Terry Anderson, President and CEO at ARC Resources]

We expect this program to more than double free cash flow to about CAD 1.5 billion at strip pricing, which we plan to return to shareholders through a growing base dividend and share repurchases. Attachie is set to deliver approximately CAD 500 million in asset-level cash flow on an annual basis. It will also increase margins by adding high-value condensate while cash costs per BOE remain flat. The result is a combination of production growth and margin expansion as we grow Attachie. The improvement in the implied capital efficiencies compared to 2024 is driven by three main factors. First, we get the benefits of a full year of production from Attachie Phase I. Second, with the infrastructure investments at Attachie complete, 90% of the capital is directed towards well-related activities, which drive a strong return on invested capital.

[Terry Anderson, President and CEO at ARC Resources]

Lastly, we are benefiting from better capital efficiencies at some of our core Montney assets like Kakwa and Sunrise. Before I turn it over to Kris, I'd like to touch on Attachie Phase II. As a reminder, Phase II is a near replica of Phase I, a 40,000 boe/d facility that is comprised of approximately 60% of liquids, of which the majority is condensate. We are ready to advance Phase II as part of our long-term plan. We expect to include the capital investments with the 2026 budget with an on-stream date of 2028. To date, we have taken steps to gain further confidence in the regulatory environment. We maintain positive relationships with the First Nations with whom we operate, and the returns are well above our hurdle rates under low commodity price scenarios. Phase II lies in the heart of the condensate-rich areas of the Montney.

[Terry Anderson, President and CEO at ARC Resources]

As a result, we expect growth and margin expansion to continue as we introduce higher margin Attachie barrels into our base production. In summary, our conviction in Phase II remains strong, and we look forward to sharing more as we continue to advance this project. With that, I'll turn it over to Kris.

[Kris Bibby, CFO at ARC Resources]

Thanks, Terry. And good morning, everyone. First, I'll touch on the quarter. We delivered average production of 327,000 boe/d, generated funds from operations of CAD 592 million. Production was 2% above analyst expectations, while cash flow was 12% higher than analyst forecasts. Third quarter production was at the upper end of our previously guided range of 315,000 boe/d-330,000 boe/d. The increase relative to our expectation was driven by strong well productivity at Kakwa. This contributed to light oil and condensate production, which averaged 89,000 bbl/d in the quarter, representing a 20% growth on a quarter-over-quarter basis and 4% year-over-year. Over the past several months, ARC has consistently been recognized in several top well reports across a few of our assets. The most recent is scoring with nine of the top 10 oil and liquids wells in Alberta in September.

[Kris Bibby, CFO at ARC Resources]

Despite the recent volatility in WTI, condensate demand remains robust and is notable by the tight differentials, with condensate currently trading at a premium to WTI. We continue to manage risk and exercise discipline across our business. This quarter, we elected to curtail a portion of our natural gas production at Sunrise to limit our exposure to weak Western Canadian-based natural gas pricing, where prices were especially weak. As a result, we realized a natural gas price of CAD 1.78 per Mcf in the quarter, which was effectively double the local AECO market. Looking back, the decision to shut in gas resulted in a realized natural gas price that was $0.20 greater at a corporate level than if we elected to produce the gas.

[Kris Bibby, CFO at ARC Resources]

By doing this, we preserved the resource for a period when prices are higher, realized higher margins, and are able to defer CAD 20 million-CAD 30 million of capital expenditures previously earmarked to sustain production in 2025. In our view, this was a simple decision and something we will continue to consider as we think about optimizing our assets to create value. To this end, while natural gas prices are at low levels today, demand in North America from LNG and power generation is set to grow at an accelerated pace in 2025, which we believe will drive a positive fundamental shift in supply demand. For ARC, we have amassed a deep inventory in the Montney, which sits well below the marginal cost needed to supply this demand growth.

[Kris Bibby, CFO at ARC Resources]

We have a transportation portfolio underpinning that resource that allows us to deliver our natural gas to key demand markets in North America. Our natural gas diversification will extend internationally beginning in 2026 when our first LNG contract with Cheniere takes effect. Moving on to capital, we invested approximately CAD 460 million in the quarter, including roughly CAD 200 million to complete our first phase at Attachie. After investment, our business yielded CAD 135 million of free cash flow in the quarter. In terms of capital returns, we distributed CAD 220 million to our shareholders this quarter through a combination of dividends and share buybacks. This included the CAD 135 million of free cash flow in the quarter, as well as CAD 80 million of proceeds from a non-core asset disposition.

[Kris Bibby, CFO at ARC Resources]

Looking ahead, with Attachie Phase I on stream and production at Sunrise partially restored, we are anticipating a record quarter production in the fourth quarter, with average production between 380,000 boe/d and 385,000 boe/d. This will result in the full year production at the low end of our 2024 production guidance range, despite the natural gas curtailments, which reduced our full year average production by approximately 10,000 boe/d. Put differently, if we did not curtail any natural gas production, we would have expected to reach the top end of our production guidance for 2024. Finally, to round out the quarter, we exited with CAD 1.6 billion of net debt and CAD 1.4 billion of long-term debt. This is a comfortable level of debt given the asset quality and inventory depth that underpins our business and implies a net debt to cash flow ratio of roughly 0.6 times.

[Kris Bibby, CFO at ARC Resources]

Turning to the 2025 budget, we put forth a capital program that emphasizes profitability and balances organic growth with a meaningful capital return. The CAD 1.6billion-CAD 1.7 billion budget results in 10% production growth or reinvesting approximately 50% of cash flow at strip pricing of $60 WTI and CAD 2.40 AECO. We estimate our program to generate about CAD 3.2 billion of cash flow and approximately CAD 1.5 billion of free cash flow. For the third straight year, we intend to return essentially all free cash flow to shareholders. Based on our guidance, the budget represents a record year in terms of natural gas and condensate production, with average production of 380,000 boe/d-395,000 boe/d, including approximately 105,000 bbl/d of light oil and condensate.

[Kris Bibby, CFO at ARC Resources]

This reflects stable production at ARC's base assets of 350,000 boe/d and a full year of production at Attachie of between 35,000 boe/d and 40,000 boe/d. Capital expenditures represent a roughly CAD 200 million decrease year-over-year as we conclude the infrastructure investments in Attachie Phase I and incorporate some of the capital efficiency gains we have observed at Kakwa and Sunrise. Margin expansion in 2025 reflects a higher condensate-weighted production mix, along with all-in cash costs on a dollars-per-BOE basis that are expected to be flat to slightly down year-over-year. Based on dividends of approximately CAD 400 million or a 3% yield, the budget implies CAD 1.1 billion of free funds flow after dividends, which could be used to repurchase roughly 8% of our shares outstanding based on the share price yesterday.

[Kris Bibby, CFO at ARC Resources]

This aligns directly with our long-term plan to profitably grow on a per-share basis while continuing to return capital to shareholders. Maintaining a strong balance sheet and resilient business, our core to ARC's net debt to cash flow is approximately 0.6 times and less than one times at $50 U.S. WTI and $2.50 U.S. Henry Hub. Capital program and dividend are fully funded by cash flow at below $50 U.S. WTI and $2.50 U.S. Henry Hub, a result of ARC's low-cost structure, balanced commodity mix, and owned and operated infrastructure. With that, I'll give it back to Terry for some closing remarks.

[Terry Anderson, President and CEO at ARC Resources]

Thanks, Kris. To close, we are on track to achieve the goals introduced with our long-term plan a year and a half ago. We have achieved the first milestone in bringing Attachie on stream, and this sets the stage to triple free cash flow per share to greater than CAD 4.00 by 2028. Finally, I want to again thank all of our staff for their continued focus, discipline, and hard work in delivering exceptional results across all aspects of our business. I also want to thank our investors that joined us on the Attachie tour. It was a great opportunity to showcase what we have collectively worked so hard to achieve over the past few years. We appreciate your continued support. Thank you. With that, we can open the line up for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Michael Harvey of RBC Capital Markets. Your line is now open. Please ask your question.

[Michael Harvey, Analyst at RBC Capital Markets]

Yeah, sure. Good morning, everybody. Just a couple for me. I guess the first one maybe for Lara or Armin. I mean, just wondering if you could give us some early color on the well performance at Attachie. I know we're kind of early days here, but just anything like number of wells currently producing to hit that 20,000 initial IPs, condensate ratios, that kind of stuff would be helpful to the extent you can throw out any high-level detail. And then the second one maybe for Ryan or others. Has LNG Canada given you any indication of when they might start taking your Sunrise gas into Phase I? And maybe just remind us what kind of effect that'll have on your pricing realizations at the point that that does happen. That's it for me.

[Lara Conrad, Chief Development Officer at ARC Resources]

Thanks, Mike. Lara here. Yeah, thanks for the question. As far as initial rates, everything we see out of Attachie is coming on as we expected. Just like you don't see us release rates when we first bring on a well, I don't want to get into specifics because we've got a lot of water coming back. The wells are still cleaning up. But really happy to see gas and strong condensate volumes from these early wells and look forward to talking about it more as we get into more stabilized production from Attachie.

[Ryan Berrett, SVP of Marketing at ARC Resources]

Yeah, hey, Mike. It's Ryan. Just on your question on LNG Canada, we are expecting our volumes to start flowing sometime in the first half of 2025. We haven't been given any further notification than that. As you know, the pricing on that deal with Shell is a modest premium to AECO, so we wouldn't expect material changes to our gas price realizations.

[Michael Harvey, Analyst at RBC Capital Markets]

Gotcha. Thanks for the comments, guys.

[Operator]

Your next question comes from the line of Kalei Akamine from Bank of America. Your line is now open. Please ask your question.

[Kalei Akamine, Analyst at Bank of America]

Hey, good morning, guys. Thanks for getting me on. For my first question, I want to address the soft gas market in AECO. Can you talk a little bit more about your plan to manage this winter? Why not just keep Sunrise off for an extended period, perhaps until LNG Canada helps shift the market into a new balance?

[Kris Bibby, CFO at ARC Resources]

You bet. Good morning, Kalei. It's Kris here. What we outlined with our second quarter release when we initially guided the market that we were going to bring some production off at Sunrise, we talked about a couple of different price points. The most important one price point for us, and Terry's mentioned it quite a few times, is our full cycle break-even. We don't want to produce the resource below what is required to achieve our targeted return rates, and for an asset like Sunrise, that number is somewhere in the CAD 1.00-CAD 1.30 range. So as we saw AECO coming back above those amounts and we can make our hurdle rates, it makes sense to bring that asset back on. We are not constrained by inventory in any way, shape, or form at our asset.

[Kris Bibby, CFO at ARC Resources]

So if we can make our hurdle rates and run a profitable asset, we think it makes sense to do so. If somebody was short a little inventory, that decision might get changed and you might want to save all of it for a different day. But given our inventory length, it makes sense and it increases the profitability of the overall organization to continue to run it. You have seen us, we've used the word partially restored production at Sunrise. And really what we are doing there is limiting our exposure to Station 2, which is another local market here in Western Canada, as pricing has not yet achieved our hurdle rate. So we'll wait until that does happen before we bring that production back on.

[Kalei Akamine, Analyst at Bank of America]

Kris, I appreciate that. I guess the rub here is that condensate players like you don't need a high gas price to get your economics to work, but gas is still going for a pretty cheap price. So kind of thinking about your business commercially, what options do you have to get more gas out of basin? This quarter, one of your U.S. peers announced a new LNG agreement on an existing facility as somebody seemingly gave up their space. Wondering if you're seeing similar opportunities on the market, and if you were, would you lean into it?

[Ryan Berrett, SVP of Marketing at ARC Resources]

Yeah, it's a good question. As you know, we move about 50% of our gas already into the U.S. It's something that we're continuously watching for capacity, as you say, that comes up on export pipelines. The export pipelines in Canada are fully subscribed and fully flowing. So it's not opportunities that come up every day, but we're definitely watching it. As you know, we do have our LNG contract starting in 2026. So this is a bit of a longer-term view for us. And as you look at our exposures to Western Canadian gas prices next year, they're roughly 30% of our gas production. So it is very minimal for us, our exposure to Western Canada.

[Kalei Akamine, Analyst at Bank of America]

Thanks. I appreciate it.

[Ryan Berrett, SVP of Marketing at ARC Resources]

Yep.

[Operator]

Your next question comes from the line of Josh Silverstein of UBS. Your line is now open. Please ask your question.

[Josh Silverstein, Analyst at UBS]

Yeah, thanks. Good morning, guys. It's Josh Silverstein at UBS. Great to see the startup at Phase I at Attachie. On the site tour, in some of the comments today, you talked about the next focus, which would be on Phase II. What lessons learned from Phase I might you be able to apply to Phase II for either faster development or the ability to leverage the existing infrastructure that's there for lower costs?

[Armin Jahangiri, COO at ARC Resources]

Yeah, thanks for the question. This is Armin. So Phase II, as Terry mentioned, is going to be almost an exact replica as Phase I in terms of the facility design. It definitely benefits from some of the infrastructure we've already invested in building the area. So that is definitely a savings and opportunity for more efficient execution of the project as we move to Phase II. In terms of cost, the team has looked into the design of the facility to find and identify opportunities to make it more efficient and make the process a lot streamlined for the purpose of construction as well as the operation of the facility.

[Armin Jahangiri, COO at ARC Resources]

So in all likelihood, I guess the sheer fact that we are just basically repeating what we've done and all the investment we have done in the area already is going to make us a lot more efficient as it comes to Phase II.

[Josh Silverstein, Analyst at UBS]

Yeah, that's helpful. And then just on the Kakwa productivity uplift, this is a big asset. I'm curious if the uplift you're seeing or the improvements you're seeing are concentrated in one area. Is it across the basin and how you're thinking of maybe shifting your program this year relative to 2024 or, sorry, next year relative to 2024 to take advantage of some of that productivity? Thanks.

[Lara Conrad, Chief Development Officer at ARC Resources]

Thanks, Josh, for the question. Lara here. Yeah, so when you're designing your wells, you really want to make sure you maximize your connectivity to the reservoir. The completion design shift that we've done is really targeted at that. So it would apply across the entire field. It's not really limited to one area. When we're drilling at Kakwa, we're managing our super pad capacities as well. So as you mentioned, it's a big asset, 180,000 boe/d. So we do have activity throughout the asset, and we've made that same design shift across all of our operations.

[Josh Silverstein, Analyst at UBS]

Got it. Thanks, guys.

[Operator]

Once again, everyone to ask a question, please press star followed by number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by number two. If you're using a speakerphone, please lift the handset before pressing any keys. Your next question comes from the line of Travis Wood of National Bank Financial. Your line is now open. Please ask your question.

[Travis Wood, Analyst at National Bank Financial]

Yeah, my question was asked, but it sets up well with the last question just as a follow-up. Armin, you kind of talked about the infrastructure spend, the strategic planning around Phase I and Phase II. But can you help us quantify what that would mean on an efficiency capture? So obviously, the adds at Attachie are highly efficient on a capital efficiency measure for 2025. What kind of compression could that look like with the cost savings on the infrastructure spend from Phase I and Phase II for the future volumes as a percentage or if you think there's a better way to think about that, just trying to figure out the efficiency gain on that production add for the Phase II volumes?

[Armin Jahangiri, COO at ARC Resources]

So just to be clear, in 2025, we are not spending any money on Phase II. So basically, our budget for Phase II is less than CAD 10 million. When it comes to actual execution of Phase II, that is currently scheduled for 2026 and is going to be spent over 2026 and 2027 for the 2028 on-stream timeline. I think we've quantified that in the past that we estimate about CAD 70 million of savings associated with the joint infrastructure. This is some of the stuff that we've already done to right-size the pipes and have the water infrastructure and some of the equipment already set up in a way that can handle the extra 40,000 BOE of production coming through the condensate terminal that we have at 7 of 17. So some of those stuff has already been put in place.

[Armin Jahangiri, COO at ARC Resources]

I think the way we have quantified that is about $70 million of savings associated with Phase II. Having said that, from Phase I to Phase II, we are realizing some inflationary pressure. I mean, the time that we sanctioned the project and purchased the equipment for Phase I, we were in a different environment. Our expectation for Phase II, despite all of that, is to be able to keep the cost flat at roughly $800 million to basically build the infrastructure and all the associated wells to fill up that facility. The other thing that I can add is that we have also realized some efficiency gains through the drilling and completions activity as we've resumed operation in Attachie. That is something that Phase I and Phase II are going to benefit from as we develop the new property, obviously, as well as continue to drill for phase I to keep the facility full.

[Travis Wood, Analyst at National Bank Financial]

That's perfect. Really appreciate that detail, Armin. That's all for me.

[Operator]

Your next question comes from the line of Patrick O'Rourke from ATB Capital Markets. Your line is now open. Please ask your question.

[Patrick O'Rourke, Analyst at ATB Capital Markets]

Good morning, guys. Thanks for the comprehensive rundown. I think you've touched on a lot of the operational and reservoir-related questions. I guess this would be a little bit more on the strategic side in terms of the return of capital plan. Obviously, you've raised the dividend here. I think you spoke to an estimation of about 8% of the flow being bought back in 2025 under the context of the current share price and free cash flow yield that you have there. But I'm just wondering if maybe you could give us some view into the, when you say balanced return of capital between a dividend and buybacks, how do you define the parameters in terms of that balance? What's the right amount to the dividend versus the share buybacks?

[Patrick O'Rourke, Analyst at ATB Capital Markets]

Is it based on break-even, which I think you alluded to being about 50 bucks to fund the CapEx and the dividend? Or is there some sort of other formula that helps you define that kind of divide between the two mechanisms?

[Kris Bibby, CFO at ARC Resources]

You bet, Patrick. Thanks for the questions. Kris here. I'll start, and Terry might jump in at the end as well. When we talked about a balanced capital allocation, really what we're talking about is our three main buckets. And that's where we talk about trying to have roughly 50% of our cash flow going back into the assets of the organization, both to fund sustaining capital as well as growth capital. And then that obviously leaves us the remaining 15% of that we believe is a very defensible and sustainable dividend policy. When you see us bump the dividend here this quarter, on strip will be a little lower than that next year. So we just want to make sure we're being very prudent on that. And then that leaves roughly 35% of that cash flow amount that we've currently allocated to share buybacks.

[Kris Bibby, CFO at ARC Resources]

And that results in the roughly 8% potential stock retirement here over the next 12 months. So when we talk about the balance, it's about those three main buckets. We don't have a specific rule in terms of dollar amounts that need to go into buybacks versus dividends. But if you look over the last 12 months, dividends is taking more of the free cash flow than buybacks has. But you would think in the next 12 months, it's going to reverse with probably some significant dollars going to the buyback side of the equation.

[Patrick O'Rourke, Analyst at ATB Capital Markets]

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

[Operator]

We do not have any further questions at this time. Presenters, please continue.

[Dale Lewko, Manager of Capital Markets at ARC Resources]

All right. Thanks, everyone, for joining today. That concludes the call. Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Participants

Executives

• Armin Jahangiri, COO
• Lara Conrad, Chief Development Officer
• Ryan Berrett, SVP of Marketing
• Dale Lewko, Manager of Capital Markets
• Kris Bibby, CFO
• Terry Anderson, President and CEO

Analysts

• Michael Harvey, Analyst at RBC Capital Markets
• Kalei Akamine, Analyst at Bank of America
• Travis Wood, Analyst at National Bank Financial
• Patrick O'Rourke, Analyst at ATB Capital Markets
• Josh Silverstein, Analyst at UBS