ARC Resources Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 9, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources 4th Quarter 2023 Earnings Conference Call. Thank you. Mr.

Operator

Lukow, you may begin your conference.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q4 and year end results conference call. Joining me on the call today are Terry Anderson, President and Chief Executive Officer Chris Bibby, Chief Financial Officer Armanjayhangiri, Chief Operating Officer and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to our executive team to take you through our operational and financial highlights, 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 and A. All dollar amounts discussed today are in Canadian dollars unless otherwise stated.

Speaker 1

The press release, financial statements and MD and A are also available on our website 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. Before I get into some of the achievements and milestones from the quarter, I'd like to start by acknowledging our people for their continued commitment to safety and operational excellence. Over the past month, we saw temperatures below minus 40 degrees causing interruptions and threatening blackouts here in Alberta and across the continent. These extreme temperatures introduced challenging operating conditions, which our team handled safely with very little impact on our business, a testament to the dedication and preparedness. I'm proud that we were able to execute a record $1,800,000,000 capital program and delivered our best safety performance ever.

Speaker 2

Thank you to the team for ensuring safety remains our number one priority. There is nothing more important. About a year ago, I told you that 2023 would go down as a major step forward for our organization. Today, I'm pleased to say this is certainly the case. Over the course of the year, we resumed full operations in BC And in Alberta, we leaned into our world class asset at CACWA with confidence.

Speaker 2

The outcome was a record year in terms of production, reserves and safety performance. In addition, we sanctioned a major growth project in Hitachi and executed another LNG supply agreement. In short, we overcame some obstacles, made excellent progress on our strategic initiatives, and we are now in a position to execute and deliver tremendous value in the future. We also introduced a 5 year outlook that outlines what we planning to achieve and provides the associated financial outcomes from successful execution. Our approach is simple in concept, balance investment in our assets with a meaningful return of capital to shareholders, guided by our principles of discipline and financial strength.

Speaker 2

Underpinning this is staged development of our Montney assets, complemented by our owned and operated infrastructure and a diversified transportation portfolio that enables access to both North American Gas and Global LNG Markets. Now turning over to the quarter itself. Production was a 28 year record, both in the Q4 and on a full year basis. 4th quarter production of 365,000 BOE per day represented 6% growth on a per share basis compared to Q4 of 2022 and was 10,000 BOE per day above 4th quarter guidance. The increase above guidance was mainly due to strong performance across our asset base.

Speaker 2

Once again, our competitive strengths played an important role this quarter. Our infrastructure contributed to high margins and a low cost structure. Operating and transportation costs combined were below $9 per BOE, the lowest in 2 years. We were able to leverage our transportation portfolio put in place years ago to deliver our natural gas to key markets at a low cost. And for the 11th straight year, we realized a natural gas price that was greater than 20% premium to AECO.

Speaker 2

And we executed another LNG supply agreement in the 4th quarter, A second agreement with Cheniere. This agreement will utilize our existing U. S. Gulf Coast capacity to physically deliver our natural gas to Cheniere for a period of 15 years beginning around 2029 with the Stage V of its Sabine Pass facility. In exchange, Arc will receive exposure to TTF pricing.

Speaker 2

With our 2 executed Cheniere agreements, approximately 300,000,000 cubic feet per day or or 23% of our current natural gas production will be delivered to global markets in exchange for international pricing. At Sunrise specifically Bassett is now direct connected to Coastal GasLink. We expect it will begin supplying gas to Shell for LNG Canada around the first half of twenty twenty five. Continuous improvement has always been core to Arc. One of the benefits of having a 25 year history with a large and contiguous asset base is the tremendous amount of data in our possession.

Speaker 2

This helps inform how we test and evaluate new technologies, capture learnings and adapt to drive better performance. We continue to do so in our operations. We are drilling longer wells, testing various completion designs and applying technology to drive environmental improvements. Switching gears to reserves. Here are some of the more notable takeaways from this year's report.

Speaker 2

First, it was a record year in terms of reserve adds. This resulted in 12% to 13% growth in reserves per share on a PDP, 1P and 2P basis. The record reserve adds of 310,000,000 BOEs was driven by a combination of new bookings at Hitachi Phase 1 and positive revisions across the asset base. 2nd, ARP's before tax NPV-ten of 2P reserves increased 13% to $38 per share based on GLJ's price deck. For perspective, That number at strip is CAD29 per share.

Speaker 2

It is important to highlight that these values are based on the development of just 20% of ARP's internally identified inventory and includes only partial development of the first phase of Hitachi, meaning we have a long runway of future reserves growth. 3rd, reserves increased across the board at CACWA. PDP reserves increased 5% primarily due to positive technical revisions and as a result the RLI at increased in all categories. We have spent a lot of time and effort and continue to learn how to maximize value from this asset. So to see it come through in the reserves is notable.

Speaker 2

Finally, I'll speak briefly to the contingent resource study. This is the first time we updated this report since 2018 and it has both quantified and validated our inventory depth and asset quality. The resource study estimates a total unrisked contingent resource of 15 Tcf of natural gas and 920,000,000 barrels of liquids. That's in addition to ARC's 2P reserves of 8 Tcf and 670,000,000 barrels of liquids. The study estimates roughly 5,000 wells of Montney inventory over and above the 1,000 well inventory that forms our 2P reserves and the 2P NPV of $38 per share.

Speaker 2

For perspective, this compares to the 165 wells that Arc will need to drill to sustain production at roughly 390,000 BOE per day once Phase 1 of Hitachi is complete. A few takeaways from the report. It aligns with our internal view of the resource, providing confidence and credibility to our long term strategy to create value. We believe this will serve to only strengthen our relationship with existing and future counterparties as it relates to LNG supply. And it reaffirms our corporate A and D strategy.

Speaker 2

With conviction in our resource, we can be patient and countercyclical as it relates to future opportunities to consolidate assets. Finally, I'll provide an update on Hitachi. As many of you know, in May, we announced that we are moving ahead with Hitachi, a flagship development opportunity for Arc. We are now nearly halfway through the 18 month construction schedule and approximately 50% complete. And I could not be more pleased with the progress achieved to date.

Speaker 2

Drilling commenced in November with 1 rig and a second one arrived in January. Our first pad has finished completion operations and the next pads are scheduled for frac in Q2. Construction of the transmission and distribution lines is set to begin this quarter, so we will be fully electrified upon startup. This will make Hitachi one of the lowest emissions liquids rich Montney developments to date and puts us on track to achieve our 2025 emissions intensity targets. All aspects of the project are tracking to schedule and budget, And we look forward to commissioning and first volumes late this year.

Speaker 2

Hitachi Phase 1 is our 8th major development project in the Montney and is set to be one of Arc's most efficient and profitable projects executed to date. At a capital cost of $740,000,000 We'll drill 40 wells and produce 40,000 BOE per day, which is expected to generate $500,000,000 of funds flow annually under a 70 WTI and 3.50 AECO price environment. I look forward to providing more updates as we progress towards commissioning, Maybe even a site tour at some point, if they'll let me. And with that, I'll turn it over to Chris to go through some of our financial highlights.

Speaker 3

Thanks, Terry, and good morning, everyone. I'll provide a few comments on the financial results before turning it back to Terry for some closing remarks. After that, we'll open it up for Q and A. First, we closed the 2023 year with positive fundamental momentum that has carried into the Q1. 4th quarter production registered at 365,000 BOEs per day.

Speaker 3

For the 2nd straight year, this was a record and we plan to continue that trend in 2024 and 25 as we invest in and drive efficiencies across our asset base while continuing to retire shares and enhance per share numbers. ARC generated cash flow of $700,000,000 in the quarter, while operating margins registering between 63% and 73%. That's a fairly narrow range, which directly reflects the quality and competitiveness across the asset base. Combination of a low cost structure, balanced commodity mix and takeaway optionality all contributed to these strong margins. Switching over to the capital side.

Speaker 3

We invested $1,850,000,000 in 2023, included $250,000,000 at Hitachi. In the 4th quarter specifically, we invested $545,000,000 putting us directly in line with guidance. This resulted in $155,000,000 of free cash flow in the quarter, all of which was returned to shareholders. In 2023, ARC committed to returning all free cash flow to shareholders, which we achieved. And this is something we expect to repeat in 2024 and beyond.

Speaker 3

Including on the annual results, we earned a 23% return on capital in 2023. This is one of the primary measures of profitability for ARC. And for the past 3 years, this number has ranged between 18% 35%. We anticipate these strong levels will continue as we focus on free cash flow generation from our base assets, while we continue to invest and profitably grow our business in the future. Looking ahead to 2024, our guidance and outlook remain unchanged from our budget announced in November of 2023.

Speaker 3

Our top priority is to execute. This will be measured by completing Hitachi Phase 1 on time and on budget, reducing capital intensity and increasing the free cash flow generation from our base assets. In 2024, we plan to invest approximately $1,800,000,000 including $500,000,000 complete Hitachi. This is expected to generate average production for the year of about 355,000 BOEs a day, Relatively flat to 2023. 1st quarter production is anticipated in the 340 to 350 day 50,000 BOE per day range, With growth anticipated in the second half that includes Hitachi volumes by year end, which happens to align with expected start up of LNG Canada.

Speaker 3

In 2025, we will see the tangible benefits of our 5 year plan. We will get a full year of production uplift from Hitachi and a simultaneous reduction in capital as the upfront investment for Hitachi Phase 1 is complete. This clean year, as I describe it, accomplishes a few goals. First, we achieved a material increase in profits, which will flow directly to our shareholders in the form of dividend growth and additional share repurchases. 2nd, it allows us to observe Hitachi and apply these learnings to future phases of Hitachi and across our asset base.

Speaker 3

And finally, A year of sustaining the business will allow decline rates to moderate, thereby reducing capital intensity and increasing the free cash flow of the business. Return on capital over the 5 year plan is approximately 20% on our estimates based on US70 dollars WTI and CAD 3.50 AECO, which is not that far off where the forward curve would be today. Close, I'm very pleased with our 2023 performance. We delivered a record year, established a clear strategy to deliver value over the next number of years. And while it is early, we've demonstrated we are on track to achieve that.

Speaker 3

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

Speaker 2

In 2023, we accomplished what we said we would. We executed to plan, on budget and delivered record results. As I look ahead, our strategic priorities are clear and unchanged. We put forth a strategy that results in tripling of free cash flow per share over the next 5 years achieved by balancing investing in our best assets like Hitachi to generate moderate growth with a substantial return of capital that includes share repurchases and a growing dividend. Today, we are in the early stages of execution of this plan.

Speaker 2

Everything is progressing as expected and I'm confident in our ability to deliver. Once again, I want to sincerely thank our staff for their contributions and for their role in safely providing low cost, low emission and reliable energy to our customers across North America. With that, I'll turn the call back over to the operator for questions.

Operator

Your first question comes from Michael Harvey from RBC Capital Markets. Please go ahead.

Speaker 3

Yes. Sure. Good morning, guys. Just a couple of things. First one is water use through what might be A pending drought later this year in BC, how do you see Arc managing through that type of situation?

Speaker 3

Or maybe just help us understand if that's a risk to Arc and or the industry? And then second one is your condensate. You mentioned in the MD and A, The new Kakwa wells were a little gassier than the prior ones. Your condensate guide is up a little bit in 2024. Just wondering if any of that is from Itachi late year commissioning or just primarily from the Kakwa property?

Speaker 3

That's it for me.

Speaker 4

Michael, this is Armin. I answered your water question. So I guess, as you know, we've already invested significant amount of money in developing infrastructure related to water. So we have access to water storage ponds in Kakwa and in Northeast BC and we have water recycling facility in Northeast BC. So we think we also have the necessary licenses in place to be able to access the water that we need for our program.

Speaker 4

So as far as water risk is concerned, I don't think that's a huge risk to ARC for what is in front of us.

Speaker 3

And Mike, it's Chris here. I'll tackle the second question. So your comment on condensate year over year. So if you recall in 2023, some of the areas we were drilling specifically in Kakwa, we knew had some lower CGR ratios. So That was just kind of driving what happened in 2023.

Speaker 3

As we get into 2024, there's 2 things happening. 1, we're moving back into some higher CGR areas in the Kakwa field. And then you're correct, very late in the year, we will get a small contribution from Itachi when it comes on stream late Q4 this year. Great. Thanks guys for that.

Operator

Your next question comes from Travis Wood from National Bank Financial. Please go ahead.

Speaker 5

Yes, good morning. I wanted to ask a question around the return of capital and with the cadence and spending and kind of growth at the back end and volatility here in pricing, How should we think about the cadence of returns? I know you've kind of guided to most of free cash to returns, but should we think of that as back end weighted once more transparency and comfort around timing of Hitachi is set up rather than use the balance sheet or in another way should we think of kind of more asset sales potentially helping to fund some of that return as well in the short term?

Speaker 3

You bet. It's Chris here. I'll stab at take a stab at this one as well. So you're correct in the sense that a lot of the growth And the production side comes quite late this year and first half as is the normal cadence is a bit lower than second half on the production side for us as well as capital spending, generally speaking, is roughly weighted 60% to the first half and closer to 40% for the back. All that meaning that free cash flow is lower in the first half than it is in the second half.

Speaker 3

You saw us dip into the balance sheet and use A little bit of balance sheet over Q4 of 2023, but that was really as a result of in Q3, we were lower on our distributions relative to free cash flow. So again, we're targeting full year distributions approximating 100% of our free cash flow. The timing during the year will be skewed to the back half a little bit, but we would anticipate distributing throughout the year. And also there's certainly no asset sales planned in this year and we don't budget for that either.

Speaker 5

Okay, perfect. So fair to say, Chris, you'll be kind of building up an accrual of the free cash and use that to guide kind of the future tail end return profile of that return of capital wedge rather than forecasted potential free cash on assumptions of commodity price, etcetera?

Speaker 3

Yes. I think that's fair. I mean, we're trying to make sure that we have a stable distribution profile, but we don't want to use the balance sheet permanently retire shares is the other way you can think about it.

Speaker 1

Yes. Okay, perfect. Thanks for all that color.

Operator

Your next question comes from Jamie Kubik from CIBC. Please go ahead.

Speaker 6

Yes, good morning and thanks for taking my question. I've got 2 here. So first off, can you just outline a little bit The production drop in Q1 expected from Q4 given Q4 was so strong, just maybe provide a little bit of additional color around what's happening there. And then you do outline in your press release that the permitting process is progressing well in BC. Can you just outline if there's much left to be permitted for Phase 1 at Hitachi and how that's going?

Speaker 6

Thanks.

Speaker 3

Sure, Jamie. It's Chris here. I can tackle the first one. So the drop into Q1, Really, you saw Q4 2023 with a fairly significant production beat. That was largely a result of

Speaker 4

a

Speaker 3

couple of major things. 1, Our Sunrise expansion we had quite full in the Q4, and those wells are scheduled to kind of decline into Q1, bringing down the BOEs a decent amount until we get it full for the second half and then we'll keep it at capacity from second half going on is the plan. And then the other thing is we brought on some fairly significant pads late in the year in the CACWA asset. And again, these are high rate wells that do decline relatively quickly. So those kind of roll over in Q1 until we bring on some pads to stabilize production basically for the second half of the year.

Speaker 4

And Jaime, Armin here. On the permitting front, things are progressing really well. We have all the necessary permits to start up our facility as per the schedule. And as you know, the permitting is a continuous process, so we continue to get permits that is needed to sustain and maintain our production in Hitachi. So I don't see that being a risk to us at all.

Speaker 6

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

Operator

And there are no further questions at this time. I will turn the call back over to Mr. Luca for closing remarks.

Speaker 1

Great. Thanks. That concludes the call. Thanks everyone for joining and have a good day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may disconnect your lines. Thank

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Key Takeaways

  • ARC delivered record production in Q4 2023 and full-year with 365,000 BOE/d (6% per share growth) and sub-$9/BOE operating costs, while achieving natural gas pricing >20% above AECO for the 11th consecutive year.
  • In 2023, the company executed a C$1.8 billion capital program safely, achieved its best safety performance ever, and introduced a 5-year plan to balance disciplined asset investment with meaningful capital returns.
  • ARC added a record 310 million BOE of reserves, driving 12–13% growth per share on PDP, 1P and 2P bases, and increased its 2P NPV10 by 13% to C$38/share while validating 15 Tcf of contingent resources.
  • Hitachi Phase 1 is ~50% complete, on schedule and budget, and will drill 40 wells to produce 40,000 BOE/d with full electrification, lowest emissions intensity, C$740 million capex and expected C$500 million annual funds flow.
  • ARC generated C$700 million of cash flow in Q4 2023, achieved 63–73% operating margins, produced C$155 million of free cash flow which was fully returned to shareholders, and plans to distribute 100% of free cash flow in 2024.
A.I. generated. May contain errors.
Earnings Conference Call
ARC Resources Q4 2023
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