ARC Resources Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 10, 2024

There are 10 speakers on the call.

Operator

morning. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources First Quarter 2024 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. Luko, you may begin your conference.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us for our Q1 earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer Chris Bibby, Chief Financial Officer Armanjahangiri, 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 Q1 results, 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

Finally, the press release, financial statements and MD and 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.

Speaker 2

Thanks, Dale, and good morning, everyone. Q1 was another quarter of steady execution, which resulted in strong operational and financial performance. Average production of 352,000 BOE per day was 2% above consensus and increased 8% on a per share basis compared to the Q1 of 2023. This now marks the 11th consecutive quarter where production per share has increased. This aligns with our strategy to grow free cash flow per share by investing in our assets in a disciplined manner and buying back our shares when it's good value for investors like it is today.

Speaker 2

If I look back on the quarter and were to summarize, we executed a capital efficient program, advanced our marketing strategy with another long term LNG agreement and completed several critical milestones for Hitachi Phase 1. Discipline, efficiency and execution, these are themes that have long underpinned our operational excellence. At the asset level, we achieved better than expected operating performance, which drove the production outperformance relative to our forecast. This was largely due to revisions we've made in terms of how we developed the Sunrise asset. We recently modified the well layout at Sunrise further improve capital efficiencies and lower the supply cost at what is already one of the most economic natural gas plays in North America.

Speaker 2

As a reminder, Sunrise is a tremendous resource with long development runway and it is now direct connected to Coastal GasLink, which supplies natural gas to the LNG Canada project. Moving to Capua. In the quarter, we saw production average 175,000 BOE per day, which included 65,000 barrels per day of condensate. This is directly in line with our expectations as we plan to maintain Cakwa production near this level going forward to optimize free cash flow. For perspective, Capua generated over $300,000,000 of asset level cash flow in the quarter.

Speaker 2

And since acquiring it in 2021, it has accumulated approximately $5,000,000,000 of asset level free cash flow, well above what we paid for the asset. Looking ahead, following the turnaround activity we have planned in Q2 at CACWA, we anticipate growth in the second half of the year as we return to developing a higher condensate gas ratio region of the field. We have also implemented some frac design modifications here and while it's still early preliminary results are looking positive. Turning to a few financial highlights. ARP generated $100,000,000 of free cash flow in the quarter and returned all of that to our shareholders as planned.

Speaker 2

Of note, we achieved this free cash flow in a lower natural gas price environment and a more capital intensive quarter as we complete Hitachi Phase 1. This validates the sustainability and resilience of our business enabled by the competitive strengths established over the past 28 years, which include having a low cost structure underpinned by our owned and operated infrastructure, having a balanced commodity mix that includes being the largest condensate producer in Canada and having a diversified transportation portfolio that allows us to sell our natural gas to key demand markets across North America and capture higher margins. Arc's diversified transportation portfolio stood out this quarter with a realized natural gas price of $3.19 per Mcf, which is greater than 150 percent of the AECO benchmark. We have discussed at length the benefits of market diversification. Our long term takeaway agreements to access U.

Speaker 2

S. Markets have been a major contributor to corporate profitability. In fact, over the past 10 years, Arc has realized greater than 125% of the AECO benchmark on average. As an extension of this strategy, ARC has entered into long term agreements to supply natural gas to LNG projects on the U. S.

Speaker 2

Gulf Coast and the Canadian West Coast. Most recently, we announced a 20 year agreement with Cedar LNG, whereby Arc will supply 200,000,000 cubic feet a day of natural gas commencing in the second half of twenty twenty eight when the project enters commercial operations. And currently, ARC has entered into a nonbinding heads of agreement with a global investment grade counterparty to the purchase and sale of these LNG volumes for which we will receive international pricing. We are now in the process of working towards definitive agreements and we are pleased with the progress made to date. With this announcement, ARC has entered into 3 LNG supply agreements that will connect our physical gas to global markets and return for international or LNG based pricing.

Speaker 2

This will take effect in 2026 with our first Cheniere contract. And by the end of the decade, we'll achieve our target of marketing 25% of our natural gas production to global markets. Finally, I'll close with an update on Hitachi. I am very pleased with the progress our team has achieved to date. This is a pivotal year for our company as Hitachi will add significant value over the next decade and it begins with Phase 1 coming on stream later this year.

Speaker 2

As a reminder, Arc has 300 secondtions of contiguous Montney acreage at Itachi and this asset has the scale to replicate Kakwa, which is the largest condensate producing asset in Canada. This initial phase will add approximately 40,000 BOE per day in 2025, representing 10% production growth year over year. And the project is tracking on schedule and on budget with 0 safety incidents. This past quarter, we've achieved a few important milestones worth highlighting. We recently completed a pipeline bridge that is key to our takeaway strategy.

Speaker 2

This was the single biggest critical path item to achieve our planned timeline, so we are pleased to complete this. We are on track with our drilling program, having now drilled 22 of 40 wells needed to initially fill the 40,000 BOE per day facility. Finally, we are making excellent progress towards electrifying Hitachi through BC Hydro, which will establish Itachi as one of the lowest emissions condensate rich natural gas developments in North America. This will also lower our corporate emissions intensity and maintain our status as one of the lowest emissions producers in North America. To conclude, we are on track and focused on achieving the long term plan we put forth a year ago.

Speaker 2

With that, I'll pass it over to Chris.

Speaker 3

Thank you, Terry, and good morning, everyone. I'll provide some additional context on the quarter and financial results before turning it back to Terry for closing remarks, and then we'll get into some questions. In terms of operational performance, we delivered quarterly production of 352,000 BOEs per day, weighted 63% to natural gas and 37% to condensate and liquids. This was ahead of our Q1 guidance despite the extreme cold in January and provides good momentum to start the year. We generated 1st quarter cash flow of $607,000,000 and free funds flow of $102,000,000 which were 3% 8% above analyst forecast respectively.

Speaker 3

Lower operating costs and lower capital spending contributed to the outperformance relative to analyst estimates. Operating and transportation expenses were both below the bottom end of company guidance with operating costs specifically benefiting from lower power pricing in Alberta. G and A came in above guidance primarily due to higher than budgeted share based compensation expense related to recent share price performance. Starting with liquid side of our business, we continue to see strong pricing realizations with condensate averaging over $94 in the quarter And in turn, condensate and crude oil represented roughly 60% of our revenue in the quarter. Terry already stole the thunder on price realizations on natural gas, but it is worth repeating.

Speaker 3

Park realized an unhedged natural gas price of $3.19 per MCF, which compared to the AECO benchmark of $2.05 and the NYMEX Henry Hub of around US2.25 dollars or roughly CAD3 on a Canadian basis. In total, AARC invested CAD505,000,000 in the quarter, right in line with our expectations, which included approximately $180,000,000 of spending at Hitachi Phase 1. About 75% of the capital was invested in drilling and completions, with the balance directed mainly to facilities, including Hitachi Phase 1 and a super pad we are constructing at Kakwa. As planned, net debt stayed flat quarter over quarter at $1,300,000,000 or approximately 0.5 times cash flow on a trailing basis 4 quarter basis. We continue to demonstrate our commitment to a total balance return, which includes returning essentially all free funds flow to shareholders.

Speaker 3

This quarter dividends and share repurchases equated to 114% of free cash flow. Quarter to quarter this will fluctuate, but on a full year basis, we expect to return essentially all free funds to shareholders very similar to what we did in 2023. There's no change in our thinking of the optimal way to return capital. In our view, it is a growing base dividend in combination with share repurchases. Not only is this a fundamentally sound and accretive use of capital, we have received overwhelming support for this strategy from our shareholders.

Speaker 3

Since initiating our initial NCIB in September of 2021, we've invested over $2,100,000,000 to buyback 18% of the shares outstanding. And based on our current assumption, this trend will accelerate in 2025 given the expected increase in free cash flow with the addition of Hitachi Phase 1 to our producing assets. Now looking ahead, production and capital spending guidance in 2024 remains unchanged. ARC anticipates investing approximately $1,800,000,000 and full year production is expected to average between 350,000 to The decrease in Q2 reflects planned turnaround activity at Capla and Greater Dawson. These are planned to coincide with significant third party turnarounds to minimize overall downtime.

Speaker 3

Operating momentum in the second half of the year will be driven by Kakwa and Greater Dawson with some contributions from Hitachi as we look to begin commissioning this asset before year end. As we look ahead, the outlook through 2028 is largely unchanged from the 5 year plan we provided a year ago. In 2025, we would expect a meaningful increase in production and free funds flow per share. This is largely driven by a 10% increase in production, reflecting a full year contribution from Hitachi and lower capital spending as we transition from growth to sustaining capital at Hitachi Phase 1. At strip pricing, we forecast free funds flow per share to more than double to roughly $3 per share in 2025.

Speaker 3

With With that, I'll turn it back to Terry for closing comments.

Speaker 2

Thank you, Chris. Our strategic priorities are to deliver sustainable free cash flow per share growth adhering to our long standing principles of capital discipline, profitability and financial strength. And we plan to deliver this by investing in our most profitable assets and balancing that with a meaningful return of capital that includes a growing base dividend and buying back our shares. I'm confident in our ability to achieve this. In many ways, the momentum and enthusiasm I've observed across the organization reminds me of our initial Montney development at Dawson.

Speaker 2

14 years ago, we embarked on Dawson Phase 1, which had a facility capacity of 10,000 BOE per day. We learned a lot that year. And while we knew the Dawson asset had tremendous potential, we did not fully appreciate that the Dawson area would grow to its current level of approximately 100,000 BOE per day. Now we're on the verge of commissioning Hitachi a much more significant development opportunity with the first 40,000 BOE per day phase coming on stream later this year. While similarities exist relative to Dawson, one of the biggest differences is we have a far better understanding of the development potential of the asset.

Speaker 2

Today, we have more experience, better technology and depth of Montney knowledge, all working together in our favor. This gives me confidence in our ability to efficiently execute and develop Hitachi. And I'm truly proud to be part of this next chapter With your support in executing our 5 year plan, we are set to deliver significant shareholder value, nearly tripling free cash flow per share by 2028. With that, thank you, and we can open the line up for questions.

Operator

Thank Your first question comes from the line of Michael Harvey from RBC Capital Markets. Please go ahead.

Speaker 4

Yes, sure. Good morning, guys. So just a couple of questions. I guess as it relates to Phase 2, Hitachi, 2028, I think, is there anything that would cause you guys to accelerate that a little bit earlier, whether it's commodity prices, performance, etcetera? Or is 2028 kind of set in stone?

Speaker 4

And then just on the Sunrise outperformance, nice to see that. I guess when you start shipping gas to LNG Canada, just wanted to confirm that was the gas you were in fact going to be sending there to satisfy that commitment? And then maybe for Ryan, maybe if you can just walk us through some of the pricing dynamics, if there's what kind of benefit you'll see above and beyond Station 2? And then kind of how you backfill that on the West Coast system?

Speaker 2

Mike, it's Terry Anderson. I'll take your first question here and then turn it over to Ryan for the second one. So Phase 2, it's still planned for 2028. We're trying to really be disciplined here and make sure we're balancing our capital allocation and really focused on that reinvestment ratio around that 50% across the 5 year plan. So if commodity prices are extremely robust, we'll obviously take

Speaker 1

that into

Speaker 2

consideration. But we're planning for the 3 year cadence and that's what it is. Brian?

Speaker 5

Awesome. Hey, Michael. Yes, so just in regards to your question on Sunrise. So the gas that we'll be feeding LNG Canada is a deal that we completed a couple of years ago with Shell. We are the only non equity participant in LNG Canada to have a direct tie in into CGL pipeline.

Speaker 5

So this gas today is currently hitting AECO and will be redirected into Coastal GasLink likely sometime in early 2025. And the pricing for that will be some modest premium to the AECO benchmark.

Speaker 6

Great. Thanks guys.

Operator

Thank you. And your next question comes from the line of Patrick O'Rourke from AT and T Capital Markets. Please go ahead.

Speaker 6

Good morning, guys, and thanks for taking my question here. I'm just kind of curious, you're 22 of 40 wells into the program here at Hitachi of potentially 100, maybe 1,000 of wells that you're going to drill. Obviously, you guys have been pretty thoughtful over the years terms of sort of augmenting and improving your processes. We saw that CACWA sort of widening of inner well spacing. It sounds like you've changed a bit of the wine racking of the horizontals at Sunrise here as well.

Speaker 6

Just kind of curious as you're getting your hands and your arms around this project, how you're thinking about sort of well configuration design and completion design and what could potentially come next as you sort of roll out what the opportunities are?

Speaker 2

So Patrick, it's Terry here. So obviously, we're early into this project and we're always going to be optimizing. We have the plan in place as to how we're drilling the wells right now, but we're going to it's going to be optimized as we move through it and we're going to incorporate. So just as a reminder, 2019 was the last time we drilled our 227 pad in that completion design. And so there's other wells in the area up north into Conoco's lands and around there that we're looking at and reevaluating and trying to optimize.

Speaker 2

Without getting into details, we're going to continue to optimize where we're at. And that's no different than any other field in any development that we've started. And we've taken learnings from CACWA and incorporating that into it. So I know I'm not specific on anything, but it's too early for us to get specific on how we're going to be changing things up.

Speaker 6

Okay, great. And just a quick one here, maybe building on Mike Harvey's question with respect to Hitachi Phase 2 before I've got to return

Speaker 1

a capital question too. But

Speaker 6

do you guys one of the things here is the electrification of Hitachi Phase 1 in the carbon footprint. Do you have power supply secured for the future phases already? Or how does that market look for you?

Speaker 7

Patrick, this is Armin. Yes, we have power available for Phase 2. We are working through the details in terms of all the transmission lines and everything to get power to the site. But the plan would be for Phase 2 to be also electrified.

Speaker 6

Okay, great. And then just finally here in terms of return of capital, you spoke to this a little bit in the prepared remarks, but between the dividend and share buybacks slightly outpaced the free cash flow in the Q1. So just wondering if you could give a little bit of color with how you plan to manage that through the years. It's sort of a level load, or is it going to look more like a cash flow sweep from quarter to quarter?

Speaker 3

Patrick, it's Chris here. Yes, so in 2023, we were slightly above free cash flow in terms of distributions, Q1 at 114%. The way we really look at it, it's on an annual basis. So it will come up and down quarter over quarter. Q2 pretty heavy capital spend with lower production as well.

Speaker 3

So I wouldn't be terribly surprised if we're marginally above our free cash flow in that quarter as well. But second half of the year with the significantly higher production and pricing, we'll certainly bring that back in line would be the plan. So there's no set formula on a quarter to quarter basis. Part of it is where the share is trading in terms of our times of buyback and then balancing it out kind of on an annual basis is the plan.

Speaker 6

Okay, great. Thanks very much.

Speaker 3

Thank you.

Operator

Thank you. And your next question comes from the line of Jamie Kubik from CIBC. Please go ahead.

Speaker 8

Maybe just with respect to Sunrise production during the quarter, correct me if I'm wrong, it was actually lower than Q4 2023 levels. Can you just expand a little bit on the well outperformance that you're talking about in that asset?

Speaker 9

Yes. Thanks, Jamie. Laura Conrad here. So overall, as far as the well performance outperformance goes, we've changed our design at Sunrise. We used to drill 3 layers in the Upper Montney and 1 in the Lower.

Speaker 9

And what we found is we can access the resource with just 2 layers in the upper and still maintaining that 1 in the lower. So we have to increase our 10 inches per meter intensity, but we're really finding that design as much improving the capital efficiency of what is already an excellent asset.

Speaker 8

Okay. And then I know that you have stated gas processing capacity from that asset of 360,000,000 cubic feet a day, but Arc's produced through that in previous quarters. Can you just talk about what the productive capacity is in the area from that region?

Speaker 7

Yes, Jaime, this is Armin. Yes, that plant's capacity is 360. Obviously, when you're operating the plant, depending on the seasonal conditions, you potentially put a bit more on through the plants. But as far as plant capacity is, it's 360,000,000 cubic feet per day.

Speaker 8

Great. And then maybe just sticking on gas here, AECO and Station 2 pricing on Ford Strip still pretty weak through the next 4, 6 months below $1.50 a GJ. Is there a chance that you delay bringing production on in that type of price environment and just defer until later in Q3 or Q4?

Speaker 3

No, Jamie. It's Chris here. The plan right now is it's not as you commented, pricing is not great, but it's still well in excess of what we need to make our rates of return. A reminder, the only dry gas asset we have is Sunrise. And you've heard us talk about the low cost structure of that property.

Speaker 3

So it still makes sense to produce in that environment. Heading into the second half of the year here, we do anticipate some stronger pricing.

Speaker 8

Okay, great. And then maybe last one for me is just with respect to Itachi and Kakwa. Can you just talk about water availability for ARC in these regions and the remaining completion programs in 2024, how you expect to phase that with water availability? Thanks.

Speaker 7

Yes. As far as Hitachi is concerned, Jamie, we have water in our ponds and we also have access to a long term license. So we don't expect any issues or concerns in Hitachi. And CACCO benefits from the same exact situation. We have extensive water infrastructure built in the field already that supports all our drilling and completions activity for the year.

Speaker 8

Okay. Thank you. I'll turn it back. Thanks.

Operator

Thank you.

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Key Takeaways

  • ARC delivered Q1 production of 352,000 BOE per day, 2% above consensus and marking its 11th consecutive quarter of production-per-share growth, driven by capital-efficient programs and a revised well layout at Sunrise.
  • The company generated CAD 100 million of free cash flow in Q1 despite lower gas prices and heavy investment in Hitachi Phase 1, returning all proceeds to shareholders through dividends and share buybacks.
  • ARC signed its third long-term LNG supply deal—200 MMcf/d to Cedar LNG for 20 years starting in late 2028—advancing its goal to market 25% of gas to global markets at international pricing by decade’s end.
  • Hitachi Phase 1 remains on schedule and budget, with key milestones reached (pipeline bridge completion, 22 of 40 wells drilled and BC Hydro electrification), and is set to add ~40,000 BOE/d in 2025.
  • Kakwa (formerly Capua) averaged 175,000 BOE/d (65,000 bbl/d condensate) in Q1, generating over CAD 300 million of asset-level cash flow and accumulating ~CAD 5 billion in FCF since the 2021 acquisition.
A.I. generated. May contain errors.
Earnings Conference Call
ARC Resources Q1 2024
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