ARC Resources Ltd.

Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the AHRQ Resources second quarter 2024 earnings conference call. Note that all participant 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 number one on your telephone keypad. And if you would like to withdraw from the question queue, please press star then number two. Thank you. Mr. Lucco, you may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer, Chris Bibby, Chief Financial Officer, Armin Jahangiri, Chief Operating Officer, Lara Conrad, Chief Development Officer, and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to Terry and Chris to take you through our Q2 results, I'll remind everyone that this conference call includes forward-looking statements and non-GAAP and other financial measures 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 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.

Thanks, Dale, and good morning, everyone. For the call today, I'm going to reflect on the quarter and speak to the outlook. We are laser focused on execution as the next few quarters will represent a significant positive change for the company with the TACHI phase one coming on stream later this year. I'll then pass it over to Chris to go through the financial results and open the line for questions. First, in terms of our operational performance, Q2 was another strong quarter of execution. Production of 330,000 BOE per day was at the top end of second quarter guidance over a very busy period in terms of planned maintenance activities. Executing these is no easy task in my mind. It's an underappreciated strength of our people. To that end, the team did an excellent job completing major turnarounds across our assets all in the second quarter. They were completed on schedule and on budget, and most importantly, safely. In total, roughly 140,000 hours were worked across the field this turnaround season with no recordable incidents. I'd like to thank our staff and contractors for their continued focus on safety, and operational excellence. This was critical in providing operational momentum into the second half of the year. In terms of production, the base assets performed in line with our expectations. Sunrise was the exception, having greatly outperformed. Late last year, we changed the well design in the upper Montney. We are now seeing the benefits, which has resulted in a positive revision to our tight curve. On a per-well basis, these changes are expected to yield a 40% increase in natural gas production over the initial 12-month period with only a 25% increase in cost. Effectively, we are reducing the total number of wells and total capital spent to recover the same amount of resource. The net effect is a 10% reduction in sustaining capital at sunrise annually and a lower break-even. It's also worth highlighting these type curve changes will reduce the full cycle break even in the upper Montney to approximately $1.10 per MCF. As many of you know, Sunrise has a long inventory runway and is direct connected to LNG Canada, making it a great option for us to supply natural gas to the project beginning early next year. Turning to our capital investments, We executed an efficient program that focused on advancing ATACHI while remaining active at our CONSATE rich assets at CAQA and Greater Dawson. This is expected to drive record CONSATE volumes for the organization by year end. At ATACHI, phase one is on schedule and on budget with a project sitting at approximately 75% complete. As of today, the plant is nearing completion with the final outstanding pieces of equipment now on site. We have drilled 30 of the 40 wells required to fill the 40,000 BUV per day capacity and have completed 20. Electrification of the project at startup is on track with construction and installation of critical infrastructure complete and ready to be energized. And the liquids gathering Lines and pipelines are on schedule and nearing completion. As one shareholder reminded me a while ago, the only percent complete staff that actually matters is the 100% one. Therefore, we will not be complacent and we will remain focused on executing on our key deliverables for phase one. I look forward to providing another update in October and showing firsthand the progress we have made at this exciting growth project at our first ever investor tour at Hitachi. Moving on, I'd like to highlight a couple of key developments that are of strategic importance to ARC. The first was an agreement that was recently announced by the government of BC and the Halfway River First Nation, which included a landscape planning pilot that further de-risked the long-term development plan at ARC's Hitachi assets. The agreement outlines a new framework that will exempt ARC from the disturbance cap for Hitachi that was previously implemented under the Blueberry Agreement. Under this landscape planning pilot, ARC will be the sole oil and gas producer exempt from the disturbance caps in this area. ARC's inclusion in this pilot is directly tied to our commitment to being a best-in-class responsible energy producer and the strong relationship we have established with the Halfway River First Nation over the past 20 years. I'd like to thank Chief Hunter and Council for their partnership. I'm truly proud of the collaborative efforts to advance responsible development in Northeast BC. Also last quarter, we witnessed the positive FID of Cedar LNG. In June, I had the opportunity to attend the celebration event and see firsthand the impact this project will have on Canada, BC, and the Haisla Nation. This is an important project and one we are excited to be part of. ARC will deliver approximately 200 million cubic feet per day of natural gas to the project, approximately half of the facility's capacity for a term of 20 years, which is anticipated to begin in late 2028. We continue to make excellent progress related to the sale and purchase agreement of the associated LNG offtake and are on track to have this completed by the end of this year. Together with the two other LNG agreements with Chenier that take effect later this decade, ARC will meet our target of having approximately 25% of future natural gas supplies physically delivered to and priced off of international prices. In the short term, we are operating in a cyclical bottom for natural gas, while condensate prices exceed $100 Canadian per barrel. With a balanced commodity mix and as the largest condensate producer in Canada, we have considerable flexibility to maximize the returns across our asset base. ARC is a very disciplined company focused on profitability over BOEs. With natural gas prices below $1, We have elected to shut in 250 million cubic feet per day at Sunrise, which is our only dry gas asset. This represents about 18% of our natural gas production, which will be easily restored when prices recover. And while Sunrise has a cash break-even of 65 cents per MCF and is one of the lowest-cost assets in North America, we are not meeting full-cycle returns below $1 per MCF. We have considerable operating momentum in our CONSATE rich assets at Greater Dawson, CAQA, and Atachi. Combined, these assets will drive record CONSATE volumes for ARC by year end and through 2025. As we look out to the second half of the year and into 2025, everything within our control is working in our favor. We are focused as an organization on efficient execution and are getting very close to delivering a meaningful increase in profitability with the commissioning of our first phase detachee. With that, I'll turn it to Chris.

Thanks, Terry, and good morning, everyone. First on the quarter itself, second quarter production of 330,000 BOEs per day and cash flow per share of 84 cents were both directly in line with our internal forecast and analyst expectations. Production was at the top end of the production range of 325,000 to 330,000 BOEs per day that was previously guided to for the second quarter, while capital spending of $530 million registered slightly below consensus and included $180 million of investment at Attachee as we advance phase one. We expect that second quarter production will be the low print this year, reflecting all the scheduled maintenance that was concentrated in the quarter. We expect fourth quarter production to be about 17% higher at approximately 385,000 BOEs per day as we restore Sunrise production and get some contribution from Hitachi late in the year. Funds from operation in the second quarter was $503 million. Natural gas prices were low in both the US and Canada, averaging $1.40 at AECO in Canada and $1.90 at Henry Hub in the US. However, condensate averaged $104 Canadian per barrel, contributing to an operating net back of $18.50 per BOE. This highlights both the low-cost nature of our assets and the benefits of a diversified commodity mix that include a high proportion of condensate. The near-term outlook for ACO remains challenged. However, we were fortunate enough to have the foresight to limit our exposure to ACO. With the production curtailment at sunrise, we are able to use the optionality in our transportation portfolio to reduce our station two volumes in BC to zero and sell minimum volumes into ACO spot market throughout the rest of the summer. Extending our natural gas view out a few months, the fundamental outlook will be structurally different. Current prices will or certainly should, if people are acting rational, force shut-ins or to minimum slow activity. Later this year, Western Canada will experience a material increase in natural gas demand as LNG Canada ramps up, directing more than 10% of our current supply off the West Coast. As a result, we expect significant price volatility that will, at times, need to be high enough to incent additional supply growth to backfill this incremental demand. Beyond the next few years, we would anticipate an incremental 2.5 to 3 BCF per day of demand growth from LNG capacity over the subsequent four to seven years from LNG Canada phase two, wood fiber, and Cedar LNG, all of which allocated capacity on existing pipelines. Moving on to capital returns, through the first six months of the year, ARC has returned 115% of free cash flow to shareholders through share repurchases and dividends. On a quarter-to-quarter basis, this will fluctuate, but on a full-year basis, we expect to return essentially all free funds flowed to shareholders, similar to what we did in 2023. The amount of capital that we will return will materially increase beginning in the fourth quarter of this year with the completion of Attachee Phase 1. Since September of 2021, when we initiated share buybacks, ARC has repurchased 132 million shares at an average price of approximately $16 per share, representing 18% of the shares outstanding at that time. It was a good investment then, and we believe it remains a profitable investment today. We intend to once again renew our NCIB in September for an additional 10% of the public float. At quarter end, net debt increased slightly to $1.5 billion as capital investment plus dividends slightly exceeded our cash flow. This is in part due to the $180 million invested at Tatchy combined with low gas prices and a heavy turnaround quarter. ARC always has been and will remain a balance sheet first organization. We exited the quarter with debt to cash flow of approximately 0.6 times trailing cash flow, and approximately $1.3 billion of undrawn credit capacity. Finally, I'll wrap up with guidance and then turn it back to Terry. Production, cost, and capital spending guidance in 2024 were all unchanged, inclusive of the natural gas shut-ins at Sunrise. We anticipate full-year production to average between 350,000 to 360,000 DOEs per day, on an unchanged capital program between $1.75 and $1.85 billion. Where average production falls in the range will be influenced by the duration of the natural gas shut-ins at sunrise, with our current expectation to be at the lower end of the range. Fourth quarter production, as Terry mentioned, is expected to average between 380,000 and 385,000 BOEs per day. Under this scenario, that would incorporate the restored gas production at sunrise condensate-rich growth at Greater Dawson and Kakwa, and some contribution from Hitachi. As we look ahead to 2025 and beyond, ARCA-ME is on track to achieving its goals of the long-term plan introduced last year. In 2025, our trailers will benefit from the first full year of Hitachi production, representing a 10% increase in our production, with a commensurate decrease in capital spending. As a result, would expect free funds flow to be approaching three dollars per share at current strip pricing which is planned to be returned to shareholders in terms of how we return that free cash flow to shareholders our view has not changed we return all free cash flow to shareholders in the form of share repurchases and a growing base dividend balance sheet remains strong so the need for debt repayment is low our business is bulletproof at the bottom of the cycle and we return a deep inventory drilling deep drilling inventory in some of the most profitable assets in North America. So there's no requirement for M&A to backfill that inventory. We plan to disclose formal 2025 guidance in November with our Q3 results. With that, I'll turn it back to Terry for closing comments.

Thanks, Chris. I want to close by highlighting the excitement in the organization about the positive momentum as we approach the back half of the year and think about 2025. We are realizing operational efficiencies across our assets, and Attachee is progressing as planned with first volumes later this year. Together, these milestones will drive a significant change in our business, beginning later this year and extending well through the decade. Thank you to all our shareholders for your trust as we execute the plan. With that, thank you, and we can open the line up for questions.

Thank you, sir. Ladies and gentlemen, as mentioned earlier, if you would like to ask a question, please press star followed by 1 on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, you will need to press star followed by 2. And if you're using a speakerphone, please lift the handset before pressing any keys. Please go ahead and press star 1 now if you do have a question. Your first question will be from Josh Silverstein at UBS. Please go ahead.

Yeah, thanks. Good morning, guys. Now that we're getting closer to the startup of Hitachi, I just wanted to see if you can walk through a little bit more details as to how the ramp looks. Does condensate start before gas or vice versa, or does everything kind of come online together through kind of right through the first quarter? Thanks.

I can grab it. Thanks, Josh, for the question. Chris here. So as we've kind of been hinting at here, we would expect, you know, the ramp period to actually occur late 2024 so that we will effectively be running attaching phase one in Q1 of 2025 effectively full. So late 24 will ramp it and then keep it flat throughout Q1 of 2025.

Gotcha. And then. Chris, you mentioned some comments there as far as the balance sheet and then the return of capital profile. I imagine maybe there is some debt reduction you want to do in the back half of this year. But as you get that pre-cash flow inflection, do you think about 100% of pre-cash flow going towards shoulder returns? Or do you actually want to build some cash for the next investment phase of Attachee?

So what we do is we look at it on an annual basis, so effectively kind of like a 12-month payout period. And we say essentially all free cash flow going back to shareholders on an annual basis. So we've accumulated a little bit of debt here in the first half of the year. So the intention would be by the end of the year or shortly thereafter, we'll balance that out so that on an annual basis, payout will be very close to 100%. And then as we roll forward in the next couple of years, we're more than comfortable to use our balance sheet to develop these assets. So we will maintain that effectively, essentially all free cash flow going back to shareholders going forward.

Great. Thanks, Chris. Thank you.

Again, please, a reminder to press star one if you have any questions. And your next question will be from Patrick O'Rourke at ATB Capital. Please go ahead.

Hey, guys. Good morning, and thank you for taking my question here. Just a couple of quick things. So, Q220 for production looks to be sort of the lowest level that we've seen since the acquisition of 7Gen back in 2021, obviously due to planned turnaround activity. If you guys could maybe sort of elaborate on the turnaround that took place and then maybe, you know, sort of from a cycle perspective when we can expect turnaround activity in the same order and magnitude going forward, or how often you expect these level of turnarounds to happen going forward.

Patrick, Armin here. So the turnaround is really a maintenance activity that we do, let's say, every three to four years. It's really subject to the facility and what we discover in the previous turnaround activities. For large facilities, expectation is to see turnaround to this level of magnitude every three to four years. So to really say the impact on production is, I guess, subject to the year because you have to look at what level of activity you have happening at that year and how do they overlap with each other. I think it is important to note that these are important activities to make sure that we maintain our production from the integrity of the asset.

Yeah, thanks for that. Obviously, turnarounds are very important. Second question, you spoke to sort of the ramp on Hitachi, but in the press release, you talked about being about 75% complete. from an operational perspective of the build out of the facility and everything that needs to go on there. Can you maybe walk us through sort of what the remaining steps and milestones are before commissioning?

Yeah, Patrick, Armin here again. So most of the mechanical work is done. So 75% is really a judgment number that we are using currently for the state of the project. Most of the mechanical work is done. like maybe 90%, 95%. As Terry said, all the critical equipment is on location. So the bulk of activity at this point is focused on electrical and instrumentation work to really get the plant to the level that we can start commissioning in Q4. Okay, thank you.

Thank you. Next question will be from Jamie Kubik at CIBC. Please go ahead.

Yeah, good morning and thank you for taking my question. With respect to the shut-ins at Sunrise, a couple of questions on that. Can you just talk about maybe the price sensitivity of when you would maybe look to bring those volumes back online? And then also with respect to the 250 million cubic feet of DA that is shut in, ARC produced 360 million cubic feet of DA there in Q2. Can you just talk about the remaining volumes and how you're thinking about price sensitivity on those? Thank you.

You bet, Jamie. It's Chris here. I'll take a stab and see if anybody has anything to add. But, you know, in terms of pricing, and that's why in the release we did highlight, and Terry mentioned as well, you know, $0.65 roughly cash operating costs. And then the other metric we wanted to have out there was the roughly you know, $1.10-ish break even on it. So it kind of gives you an idea of where we're thinking. We've said repeatedly that we don't care about BOEs and we want to add value. So if we're not adding value, we're not going to give away the molecules. You know, it does have a small added benefit of, you know, being able to defer some capital going forward if we're not producing the molecules now. So what's going to happen is as we go forward, we would expect, you know, ACO and the Western Canadian market to normalize to more reasonable price levels. There's no one specific dollar amount that, you know, we've decided we're going to bring this production back. It'll be about the context of the market at the time. So, you know, what's happening on the supply, demand, and where inventories as we make that decision. I mean, it wouldn't help our pricing if, you know, as soon as we bring Sunrise back on, pricing goes way back down again. So, That's one of the factions. And then the other one on how was 250 the right number? Realistically, what we're trying to do is limit our exposure to the Western Canadian market and focus on the downstream markets. So you heard me mention, you know, we've got no exposure to Station 2, which is even weaker than ACO, and we're limiting our cash exposure. We've got less than $100 million a day exposed to ACO cash at this time, and You know, we always need a little bit of flexibility and have some gas flowing, but that's kind of what we're doing is trying to limit the Western Canadian exposure and focus on the downstream. And the reason we've kind of also chose to leave gas flowing through the facility, things change very quickly. It was a relatively small market in terms of a few hundred million a day can really move the needle on the supply demand. So we want to be able to wrap this facility back up. relatively quickly when we see the right price signals that it makes sense to do so.

Okay, that's a good color. That's the only question I had. Thank you. Thanks, Jamie.

A reminder, ladies and gentlemen, to press star followed by one if you do have any questions. And at this time, Mr. Lucco, we have no other questions registered. Please proceed.

Great. Thank you, everyone, for joining the call. That concludes the call. Have a good weekend.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.