ARC Resources Ltd.

Good morning, ladies and gentlemen, and welcome to the ARC Resources first quarter 2025 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, May 2, 2025. I would now like to turn the conference over to Dale Lucco, Manager, Capital Markets. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us on our first 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, and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to Terry and Chris to take you through our first quarter 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. I'm pleased to discuss AHRQ's first quarter results and provide an update on our outlook for 2025 and beyond. First quarter production averaged 372,000 BOE per day, which was in line with our Q1 guidance of 370,000 to 375,000 BOE per day. Production included approximately 95,000 barrels per day of condensate, which was a significant contributor to the $400 million of free cash flow we generated in the quarter. In addition, our transportation portfolio allowed us to send more than 50% of our natural gas to higher-priced markets in the U.S., resulting in an average realized natural gas price that was more than double the local ACO benchmark. Operationally, the asset base continues to deliver strong results. We invested $460 million, about a quarter of our 2025 budget, and focused our drilling and completion activities at Atachi, Capua, and Greater Dawson. This will contribute to strong condensate growth in the second half of the year and achieve annual production guidance of 380,000 to 395,000 BOE per day, which was unchanged in the quarters. In terms of the assets, I'll begin with Attachee. First quarter production averaged just over 31,000 BOE per day, which was in line with expectations. The production mix was approximately 60% liquids, including about 15,000 barrels per day of condensate. The reservoir deliverability is meeting our expectations, which is critical to achieve long-term returns and provide confidence as we advance Phase 2 of Attachee. As mentioned in the press release, the ramp up in production at Hitachi was delayed to address some early stage emulsion at the facility. We operated at a reduced facility capacity beginning in late March to optimize our chemical program there. So Q2 production is expected to average between 30 and 35,000 BOE per day. These types of events are not uncommon in new areas of this scale, and I'm pleased how our team was able to resolve them and limit the impact to operations. With that, we remain on track to grow production and average between 35,000 to 40,000 BOE per day at Hitachi in the second half of the year. At CAQA, we continue to build on operating momentum from last year. Production averaged 162,000 BOE per day in the quarter, which was slightly above our interim forecast. We have an active program upcoming that will support volume and free cash flow growth over the balance of the year. Our strategy at CAQA is to produce the asset at an average of 170,000 to 175,000 BOE per day on a full year basis and continue to look for efficiencies to grow margins and free cash flow. One method we are exploring at CAQA is the use of a dual FRAC system. This is expected to drive further efficiencies by reducing cycle time without compromising safety. Moving on to our Sunrise asset, in late March, with Station 2 pricing near zero, we shut in 75 million cubic feet per day of natural gas production. This eliminated our natural gas exposure at Station 2 and preserved resource for when prices are higher. This decision underscores our commitment to maintaining financial discipline and optimizing returns in response to market conditions. We continue to operate the asset with profitability in mind. In March, we also advanced our natural gas marketing strategy by announcing a long-term LNG sale and purchase agreement with Exxon. Commencing with the Cedar LNG project expected in late 2028, Exxon will purchase all of ARC's LNG offtake from the project, And in return, we'll receive international LNG pricing. With this contract and our previously announced Chenier LNG contracts, we will achieve our long-term market diversification strategy of linking approximately 25% of our future natural gas production to international pricing. Finally, I want to reaffirm that our long-term plan remains on track, aiming to triple free cash flow per share by 2028 from 2024 levels. Attachee is a key part of this strategy, and our observations from Phase 1 have reinforced our conviction on the next phase of the project. With that in mind, I want to reiterate that we remain flexible to adjust our course should economic conditions materially weaken. ARC will continue to operate under our guiding principles of profitability, capital discipline, and financial strength. Thank you, and I'll now turn it over to our CFO, Chris Dibby, to provide further insights into our financial performance.

Thanks, Terry. Good morning, everyone. We're operating in financial performance surpassed analyst estimates. Production was slightly ahead. Cash flow per share was 9% above. Finally, free cash flow is $400 million, with 70% above estimates, in part due to lower capital expenditures during the quarter. We delivered average quarterly production of 372,000 BOEs per day, with a production mix of 63% natural gas, 37% condensate and liquids. This generated funds from operations of $857 million, an increase of 10% from the previous quarter. We continue to realize natural gas prices well above local benchmarks by utilizing our transportation portfolio to reach more attractive end markets in the U.S., In the quarter, ARC realized an average natural gas price of $4.19 per MCF, which compared to the ACO benchmark of $2, and the NYMEX Henry Hub price of $3.65 per MCF US. Of the $400 million in free cash flow in the quarter, ARC distributed approximately 60% or roughly $245 million to shareholders. We remain steadfast in our plan to distribute essentially all free cash flow to shareholders over the course of the year, so with the debt paid out in Q1, we are in an excellent position to repurchase our shares in what we view as a very opportune time. At Strip, we estimate annual free cash flow in the range of $1.3 to $1.5 billion, or roughly 10% of our market cap. That would imply approximately $1.1 billion returned to shareholders through the share buybacks and after our dividends of $400 million. As many of you know, our balance sheet remains strong and in a great place. We allocated roughly $300 million to debt reduction in the quarter, and as a result, long-term debt was $1.1 billion, with net debt equating to approximately 0.5 times cash flow. Moving on to our outlook, our 2025 annual guidance remains unchanged. Our plan is to invest roughly $1.7 billion for the year, with annual production expected to average between 380,000 to 395,000 BOEs per day. Second quarter production is expected to average approximately 380,000 BOEs per day, inclusive of planned turnaround activities at CACWA and Andy Creek. For the second half of the year, we expect production to grow to an average of 390,000 to 400,000 BOEs per day. Production at Itachi is expected to average roughly 30,000 to 35,000 BOEs per day in the second quarter, then increasing to between 35,000 to 40,000 BOEs per day in the second half of the year. Our priority this year is to demonstrate the profitability of ARC, incorporating a full year of Attachee. Under current strip, we expect funds flow per share to more than double to approximately $2.50 per share, driven mainly by Attachee and capital growth in the second half of the year. Our focus this year is also return of capital, where we intend to once again distribute essentially all free cash flow to shareholders through a combination of our growing base dividend and share buybacks. As I mentioned, under the current forward curve, we will return approximately $1.5 billion of free fund flow this year to shareholders. With that, I'll pass it back to Terry for closing remarks.

Thanks, Chris. Over the past 29 years, we've built a company that is focused on profitability and stability through the cycles. Under strict prices, we are on track to generate 10% of our market cap in free cash flow this year. And with our balance sheet where we want it, We plan to return all of that to our shareholders. Equally important in times of economic uncertainty is the resilience of ARC. We have accumulated an enviable asset base that is both low cost and long duration. Our balance sheet is strong, and we've built a culture of discipline across the organization. At roughly $40 WTI and $2 Henry Hub, ARC is able... to sustain production and fund the dividend within cash flow. So as we look forward, we'll continue to conduct our business in a disciplined manner, focused on risk-managed value creation as we execute our long-term plan. We'll measure our success by continuing to improve our per-share metrics and generate a strong return on capital. Thank you for your continued support, and we look forward to delivering on our commitments. With that, we can open the line up for questions.

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 touchtone 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 the number two. If you are using a speakerphone, please leave the handset before pressing any keys. Your first question comes from Kalei Akamine of Bank of America. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. My first question is on the shape of the attention ramp. It kind of has us thinking about the lower half of oil guidance here for the year. Can you give us some confidence on the path forward for your other condensate asset, Akakua? What does that ramp look like, and where do you think it could top out?

You bet. Good morning. It's Chris here. Yeah, so again, in 25, kind of similar to 24 as well, first half of the year is certainly a lower production half for us, and then sequentially each quarter we would expect production to ramp, specifically at CAFWA, where Q4 last year We were, you know, over 190,000 BUEs a day. As we just mentioned in the call, you know, during the quarter, we were 162,000. And that will wrap to above 180,000 by the end of the year. And that's really going to drive a lot of the condensate growth for the corporation overall. That combined with the second half of Tachy volumes is where we'll get into the guidance range for condensate and crude oil. So, This is, you know, it's typical in terms of just the activity levels we have in the first half and then production coming on in the second half. So pretty high confidence factor at this point in time.

Got it, Chris. I appreciate that. It sounds like you guys are still in really good shape for the year. My next question is on Sunrise. I think the shut-in here makes a lot of sense given where prices are at Station 2. My question is, why wait until March? We kind of thought those volumes looked a touch high in the first quarter. So the question is, why not reroute a little bit more to other markets, given your strong commercial model?

Yeah, thanks, Clay. You know, if you think about kind of where we're sending our volumes, you know, pricing at Western Canadian hubs, both Aiken and Station 2, it was okay in the first quarter. Only late in the quarter did Station 2 weaken. Relative to downstream markets, all the other markets where we sell, we satisfied those volumes first. They flow completely full every day during the quarter when obviously they're in the money as much as they are. So the priority would be downstream volumes and then making sure we sell volumes into the local market if the pricing makes sense. So in this scenario, that's when we pull volumes off the market late in the quarter to reduce Station 2 down to zero.

Got it. That makes sense. Thanks, Chris. You bet.

As a reminder, if you wish to ask a question, please press star followed by the number one. Your next question comes from Jamie Kubik of CIBC. Please go ahead.

Yep. Good morning and thanks for taking my question. I'm just curious if you can talk a little bit more on the emulsion that you're seeing at Hitachi and how that compares to, I guess, original expectations and then perhaps how you might adjust phase two to accommodate for something similar.

Thanks. Hey Jamie, this is Armin. So the emulsion issue is nothing abnormal, I guess, as far as the liquid-rich or condensate-rich facilities go. As you know, the first phase of every plant is to separate the products from each other, so gas. water and condensate, and sometimes due to the chemistry of these products, especially the water and condensate, the separation becomes a bit more difficult, and that causes a layer of emulsion between these two phases. What we need to do is just to basically figure out the right chemical program to be able to effectively break the emulsion, and that's effectively the right chemical type, right level of concentration, right retention time, So that's what we are working on effectively to get to an optimized operating process, I guess, when it comes to the Apache plant. This is not any different for phase two. We have to deal with the same exact process as we bring new production on and require the same level of diligence.

Shane, it's Terry.

Terry here. I might add to that. Like every new facility that we start up, there's always going to be these subtle little challenges that you have to address. And this is another one that we've always had to address at other ones from Dawson to Parkland to anything new in CAFLA too. And these things, it's not flipping on the switch and then everything works perfectly. We are always adjusting things definitely throughout the first year. So you're going to have these little bumps in the road along the way in the first year of this production. But this is something that it will be resolved. There's no question about it. We've seen it before in all of our other areas. So it's just a matter of time before we resolve it here. And we're on the path to that right now. And production is strong in Canada. like for the first quarter here, it was still 31,000 BOE a day. So people have to realize that it's still strong production, 15,000 barrels per day of condensate coming out of here. So everything is working well, especially for a new facility that's being brought online.

Okay. I appreciate the color there, guys. And a follow-on question, a little bit of a different area, but Capital spending for ARK in the quarter well below where we expect it in consensus estimates. Can you talk a little bit about the shape of spending in 2025 quarter by quarter? And then could you also talk a little bit about any inflation impacts you're seeing in your AFEs? I know that there's been some puts and takes in steel and sand. Anything that you can talk about there? Thank you.

Hey, Jamie, it's Chris. I'll tackle the first part of that question just in terms of the shape of the spending profile. So, yes, Q1 was $450-ish, so a little less than we would have anticipated. Really, that's just a shift into Q2. When we set out the capital program, the teams have the flexibility to shift capital to meet their operational needs. So, really, Q2, we're probably going to be somewhere in the range of $550-ish. As you know, we don't guide quarter-to-quarter capital. We just let the teams execute the program as best as they see fit. And then the back half of the year is a little bit lower, but not materially going forward, to get to our guide of 1.6 to 1.7. I'll let Armin speak to the inflationary impacts that he's seeing.

Yeah, I guess, Jamie, on the subject of the sand, we have realized some – associated with the tariffs that the Canadian government has implemented, I guess, on imported sand. That has been passed on to operators. The dollar amount is insignificant, I guess, in terms of the total sand consumption. So it's not really material in terms of impact on our capital program.

Okay, thank you. That's all from me. I'll hand it back.

Your next question comes from Patrick Orber of ATV Capital Markets. Please go ahead.

Hey, guys. Sorry about that. I was just curious. I wanted to ask a little bit further on the Station 2 exposure here. Sunrise assets are going to support the gas that you're going to ship through your LNG Canada agreement. These being sort of the last marginal molecules in the portfolio that you sell at Station 2, Once that agreement's on, does that sort of eliminate that exposure and the need to shut in gaps at the asset going forward in the second half of the year?

Yeah. Hey, Patrick. Thanks for the question on that. Yeah. No, we would anticipate, you know, we will have zero Station 2 for the rest of the year. And that $75 million that we have shut in today is the only exposure that we would have to Station 2. So, the shell contract that we have starting up at the commencement of LNG Canada has no bearing on any further gas shut-ins.

Okay. And then in the quarter, you pay down a little bit of debt here. Obviously, we're in a pretty choppy commodity environment. How do you see the NCIB, the pacing of return of capital throughout the balance of the year? Are you a little more cautious and how you deploy that with the environment that we've been in, given the second half of the year looks like a bigger production ramp for the company?

Hey, Patrick, it's Chris here. I mean, yeah, Q1 obviously had a lot of things going on in terms of quite a long blackout for us, where we're always pretty conservative, and then a lot of noise on tariffs and general economic concern. But we did, in March, get going pretty aggressively on it. We're pretty comfortable with how much free cash we're going to be able to generate. Obviously, it does fluctuate a little bit with commodity prices, but we're not programmatic on the NCIB, so we'll take a look at the relative value. We do want to deploy all of the free cash flow, and we have flexibility quarter to quarter, so we're confident in 100% free cash flow deployment by the end of the year, plus or minus, but there's no set rules, I would say, on when we have to do it, so You'll see us get back in the market here next week and take it day to day.

Okay, terrific. Thank you very much.

As a reminder, if you wish to ask a question, please press star followed by the number one. Thank you, ladies and gentlemen. That concludes our question and answer session. I will now turn the conference back over to Dale Lugo.

All right. Thanks, everyone. That concludes the call. Have a good day.

This concludes today's conference. Thank you for your attendance. You may now disconnect your lines.