ARC Resources Ltd.

Good morning, ladies and gentlemen, and welcome to the ARC Resources Limited Year-End 2021 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, February 11, 2022. I would now like to turn the conference over to Dale Lucco. Please go ahead.

thank you operator good morning everyone and thank you for joining us on our fourth quarter earnings conference call joining me on the call today are terry anderson president and chief executive officer chris bibby chief financial officer armin jahangiri chief operating officer and laura conrad chief development officer before i before i turn it over to our executive team to take you through our fourth quarter and year-end results i'll remind everyone that this conference call includes forward-looking statements and non-gap 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. The press release, financial statements, and MD&A are also available on our website as well as CDAR. 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.

Hey, thanks, Dale, and good morning, everyone. Let me start by congratulating Armin and Laura on their appointments to our C-suite. They are proven leaders within our industry and have played an important role in our company over the past 10 years. People and assets are differentiators in our business, and I firmly believe ARC has the best of both. I'll keep my remarks relatively brief, touching on three key items before I pass it over to Chris. First, highlights from a record year. Second, an operational update that focuses on our learnings at CAQA. And third, our outlook and priorities for 2022 and beyond. Let's begin with a brief look back at last year. Our fourth quarter results capped off in an exceptional and transformational year for us. With acquisition and integration of seven generations, we strengthened our competitive position and delivered a record year for our shareholders. The business combination was our first major acquisition in over a decade, and our 2021 results are proven that our patients paid off. We added high-quality assets and a team of great people at the right time in the cycle, and our company is more profitable as a result. 2021 was also a demonstration of how ARC operates, discipline allocators of capital with a continuous focus on operational efficiency. The result was record performance across several key measures. First, ARC generated $1.4 billion in free cash flow, the highest in our 25-year history, driven by our low cost structure and strong commodity prices. Second, our field operations team delivered the lowest operating cost in our history of $3.86 per BOE, reinforcing that owning and operating our infrastructure is a competitive advantage. Finally, we delivered record average annual production of 302,000 BOE a day, This comes after a strong Q4 of 345,000 DOE a day. Other noteworthy achievements include the progress we've made deleveraging the business following the transaction. With the strong commodity price environment, we were able to aggressively pay down debt to well below one times debt to cash flow, allowing us to return more of our profits to shareholders faster than we anticipated. ARC has now completed the integration We captured $190 million of synergies, which was well above the initial 110 million target due to lower financing costs and more recently operational and marketing efficiencies that far exceeded our expectations. And finally, we leveraged our scale to secure a transaction with an LNG Canada participant to supply gas for the project. An example of our market diversification strategy, an important first step into LNG supply. As many of you know, this project is very material for Western Canada Fundamentals, gas fundamentals, adding two BCF a day demand at startup. Turning to operations, we were able to continue the momentum we achieved in the third quarter, and most importantly, we did it safely. Our team has now surpassed eight years without an employee lost time incident, an achievement that we are very proud of. Safety is our number one priority. I'd also like to take a few moments to just discuss the progress we've made at CAPA. This is a world-class asset, and we are realizing the benefits of integrating it into our portfolio. Simply put, we have made this high-quality asset even more profitable. In particular, I'm really pleased with how our people have come together and shared and applied what they have learned. Well costs have decreased by over 10% from drilling and completing the wells differently. and early indications show better deliverability by changing where and how we land the wells. Ultimately, this is encouraging and we expect that we'll be able to reduce sustaining capital at CAFLA by approximately 10% over time. Finally, our priorities for 2022 have not changed. We put forth a budget in November that balances reinvestment in our highest return assets, reduces emissions, and prioritizes a meaningful return of capital to shareholders through the base dividend and share repurchases. We believe this generates the optimal risk-adjusted returns for our shareholders. Our near-term priorities are to safely and efficiently sustain production at our base assets and invest in our highest-return projects like Sunrise and Hitachi once the regulatory environment in BC supports it. To that end, we remain confident there will be resolution between the Blueberry River First Nation and the BC government in a timely manner. With that, I'll turn it over to Chris to go through some of our financial highlights.

Thanks, Terry, and good morning, everyone. I'll briefly touch on a few additional highlights so that we can leave a lot of time for questions. We closed 2021 with a strong fourth quarter. Cash flow is about 7% above consensus estimates, and we generated nearly half a billion dollars of free cash flow for the second quarter in a row. Of that, we returned over 60% to our shareholders through dividends and share repurchases. and allocated the balance towards debt reduction in line with our capital allocation framework we outlined late last year. We were able to right-size the Legacy Seven Generations Alliance Agreement, which will see us reducing our commitment at the end of 2022 to better align with our development plans. Our market diversification strategy resulted in average realized natural gas prices in the quarter of $6.50, $1.50 above the ACO benchmark. As volatility increases, we believe we have a competitive advantage and how and where we're able to market our products. We have exposure across five different natural gas markets in North America, have significant interprovincial flexibility given our infrastructure ownership, and we will continue to evaluate additional opportunities to reach markets outside North America. On the liquid side, our average realized condensate price was nearly $100 a barrel in the quarter, which further supported our strong cash flow in the quarter. Profitability measures continue to improve, In 2021, ARK generated $2.16 per share of free cash flow, a record in our 25-year history, and realized an 18% return on capital employed. These results were not solely commodity price-driven, but were due to structural improvement in the capital intensity of our business. ARK invested long-cycle growth capital in our early days, accumulating a large asset position, consolidating inventory, and building a massive infrastructure network to support a multi-decade development plan. We are now executing on that plan in a capital-efficient manner. With capital allocation top of mind, we have committed to return 50% to 80% of our free cash flow to shareholders with the balance used for further debt reduction. The base dividend is our core mechanism to return capital and always has been, and we will continue to grow our base dividend with our business while ensuring it is sustainable through the cycle. In addition, we will continue to return capital by reinvesting in our shares as they remain dislocated from the intrinsic value of our business, even under mid-cycle prices and double-digit discount rates. We have purchased approximately 5% of our shares since September, and we believe this is a very attractive return for our shareholders. Commodity prices are strong, but we are mindful that we operate in a volatile and unpredictable cyclical business. With that in mind, we will continue to be a balance sheet-first company. Our capital program, including the dividend, can be funded with cash flow below $40 US WTI and $2 natural gas, a reflection of our low-cost, high-quality assets. With that, I'll turn it back to Terry for some closing remarks and questions.

Thanks, Chris. So 2021 was a record year, and I'm excited for what is to come for ARC. We are observing in real time the need for responsible resource development as part of the global energy mix and the transition to a lower carbon economy. ARC has spent 25 years positioning itself to thrive in this environment with world-class assets and emissions performance, exceptional people and leading cost structure, Today, we have the scale and proven operating track record that affords us numerous opportunities to reinvest in our business and provide a very competitive and sustainable return for our shareholders. With that, I'll turn it back to the operator for questions.

Thank you. Ladies and gentlemen, will we now begin the question and answer session? Should you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone brand acknowledging your request and your question will be pulled in the order that they're received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Travis Wood with National Bank. Please go ahead.

Yeah, thanks. Good morning, everybody. I have a couple questions here. First, Terry, in your opening remarks, you mentioned, I think, an attractive risk profile and how you're thinking about the NCIB. with, I think, 50 to 80% of that free cash allocated to some sort of return of capital profile. How should we start thinking about dividend growth, especially as we start to appreciate the magnitude of the free cash that ARC's spitting out right now?

Yeah, thanks, Travis, for the question. So, yeah, the dividend growth, how we look at it is obviously we're trying to take a balanced portfolio to our capital allocation being a dividend growth in share repurchases, obviously along with investing in our business. So the way we look at it is we want to have an annual dividend increase, and that kind of goes along with growing our business. So we talk about that. We've talked about 5% compound annual growth in our business, and that's kind of what we think our annual dividend increase should be. So we're trying to tie those two together. That's kind of how we are viewing the dividend growth for the future here.

Okay and then just I mean trying to appreciating that maybe we're at a top end of a cycle uncertain how long it we drive along but how can we think about stressing that or how are you guys thinking about stressing it through the low cycles in terms of kind of what kind of commodity price assumptions you're running or Where do you like to see the payout or leverage or how are you thinking about that on a lower cycle basis just to ensure that sustainability of the base dividend?

Hey Travis, it's Chris here. You know, I think the way we're trying to design the dividend policy is really so that just because prices are high, we wouldn't be increasing our dividend. What we are doing is targeting, you know, mid-cycle pricing, which we would currently define in that kind of $55 WTI and $2.50 natural gas range, so that the payout's really kind of reasonable in there. What that will allow us to do is in times of higher pricing, you know, we'll have some more strength on the balance sheet, but if when prices did dip below that, it doesn't cause you to have to readjust your dividend. And then the other factor is obviously with, you know, very active NCIB in place, the absolute level of the dividend, you know, will grow at that 5%, but the per share metrics have the opportunity to grow a bit quicker than that, obviously.

Okay, that makes sense. Thanks for that comment. And just kind of one final one around this. You've been really active on the NCIB, given kind of the plan for base dividend growth nearing kind of 10% on the NCIB, probably by mid-year. Do you see the potential to run an SIB as well?

It's something we'll look at, Travis. I mean, We're halfway through the dividend NCIB program right now at 5%. We've got until September to finish off that program. At this pace, I think we're comfortable that we'll continue to monitor how the share price performs. Obviously, it is an on-off switch, and as we get closer and closer to an ultimate intrinsic value, we would have to reevaluate how we're returning our capital to shareholders.

Okay, and just one final one here. Now you just sparked a thought. That intrinsic value, you kind of highlight the NAV from the reserve report in the note. How do you guys think about intrinsic value internally? And do you put some goalposts of commodity prices around that intrinsic value as well?

Yeah, you bet. So we definitely do have some goalposts on the commodity prices. When we look at our intrinsic value, we try again to match up with our dividend policy. At mid-cycle pricing, what would we look at? An intrinsic value-based approach. And then when we look at buying back shares, ultimately it's competing for capital. So are we better off buying shares and returning funds to shareholders that way, or is it better giving cash out? Currently we have a strong preference for share buybacks, in addition to the base dividend, which again, over the long term, the base dividend is really going to be the primary return of capital mechanism.

Okay, that's fantastic. Thanks for the time. Thanks for taking the questions.

Thanks, Travis. Thank you. Your next question comes from Jamie Kubik with CIBC. Please go ahead.

Yeah, good morning and thank you for taking my question here. I have a couple. Maybe just with respect to operating costs, we saw OPEX trend lower through 2021 and Q4 end of the year at around 350 of BOE. Your guidance for 2022 implies this increases a bit. Can you just talk a bit about where the inflation this year might happen versus last year and how you sort of expect OPEX to trend through 2022?

Yeah, thanks, Jamie, for the question on operating costs. Yeah, we had obviously amazing year last year on operating costs, so record low. The teams have done such a great job of integrating the capital assets into our portfolio and with a real focus on cost, whether it's capital costs or operating costs, we want to be that low-cost producer. And I think, once again, as I mentioned, owning and operating our infrastructure is helping us manage that cost. So that's why it's so low. The difference between this year and going into next year In our CAQA field, we have a number of turnarounds on a lot of our compressors out there that we need to do. Unfortunately, they are all bunched up at the same time. This year is that time to actually be doing the maintenance on them. It's kind of a one-time extra cost this year. Then we're going to try to smooth that out over in the future so that all those costs aren't hitting in one year. So that's really the difference. Otherwise, we're continuing to focus on driving those costs lower.

Okay, great. That's helpful. And then maybe sticking with CAQA here, you did indicate sustaining capital in that asset could be reduced by 10% over time. And you also highlighted the reduction in drilling completion costs in the asset year-on-year of about 16%. Is the forward reduction of 10 percent, is that primarily the result of the reduced drilling and completion costs, or is there an additional step down that you see possibly coming as a result of something else at CAQA?

Yes, Jamie, this is Armin. Yes, definitely I guess that we continue to see efficiency improvements in CAQA from an executional standpoint. There's obviously the inflationary pressure and supply chain challenges that we are also trying to offset as we see operational efficiencies. I think CAQA is also benefiting hugely from a lot of optimization that the team has done in that asset. And those optimizations play a huge role in terms of reducing the sustaining capital over time. So I pass it over to Laura here because she has a lot more context on the optimization that the team has done.

Thanks, Armin. Yeah, so, you know, the drilling and completions teams under Armin have done a fantastic job of reducing costs very quickly upon integration. Looking forward on the development team, you know, we've been working on the well spacing. I think that's something we've been talking about quite a lot over the past few months since we closed the deal, that we see the opportunity widen out the spacing. And so that extra 10% look forward on sustaining capital that Terry referred to is really as we implement that wider development plan. We think we can capture similar reserves and productivity, but with fewer wells.

Okay, that's great. And then maybe last one, just dovetailing a bit off of what Travis was asking, but ARC really aggressive at repurchasing stock through 2021. We did see that taper a bit in January. Should we think of the slowdown in repurchases as some level of price sensitivity on where the stock is trading or Was it a bit more of a mechanical decision given the Blackout period?

Most of it is really probably it's more mechanical in nature. When we go into Blackout, we do put in an automatic share purchase program. And so that was kind of more of the function. If you recall, when we put it in place, we did try to message that we're going to hit it pretty hard out of the gate for the first few months, which we did. We got a whole bunch of shares retired, we think are very attractive prices. And then now with the release out today, we can get back into a bit more of a managed approach for the next couple months.

Okay, that's great. That's it for me. Thank you.

Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1. There are no further questions at this time. You may proceed.

Okay. Well, thank you, operator, and thank you to everyone who joined us today. Last year, the pillars that have defined ARC as an industry leader, world-class assets and people, operational excellence, leading ESG performance, and a long-term focus on profitability resulted in a record year for shareholders. This is the type of consistency and discipline that our shareholders have come to expect of us, and will continue to guide us for the next 25 years. Thank you very much. Have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.