ARC Resources Ltd. ("ARC" or the "Company") reported its second quarter 2024 financial and operational results.
HIGHLIGHTS
ARC delivered second quarter 2024 production of 330,046 boe(1) per day (65 per cent natural gas and 35 per cent crude oil and liquids(2)), in line with the top end of the second quarter production guidance range of 325,000 to 330,000 boe per day. Second quarter production decreased four per cent year-over-year reflecting planned turnaround activity completed at Greater Dawson and Kakwa.
ARC generated funds from operations of $503 million(3) ($0.84 per share(4)) and capital expenditures totalled $532 million(5), therefore free funds flow registered at ($29) million(5) or ($0.05) per share(6). ARC recognized cash flow from operating activities of $543 million(4) ($0.91 per share) and net income of $240 million ($0.40 per share).
Company guidance in 2024 remains unchanged. Capital expenditures are planned between $1.75 to $1.85 billion(7), and production is forecast to average between 350,000 and 360,000 boe per day (63 per cent natural gas and 37 per cent crude oil and liquids).
In response to weak natural gas prices, ARC has elected to curtail approximately 250 MMcf per day of natural gas production at Sunrise to preserve value for periods when prices are higher. Despite the curtailment at Sunrise, 2024 production guidance is unchanged with current expectations to be at the low end of the guidance range.
The inclusion of the natural gas curtailment at Sunrise is expected to result in average third quarter production between 330,000 and 335,000 boe per day, with a higher percentage of crude oil and liquids relative to the second quarter of 2024.
Fourth quarter production is expected to average between 380,000 and 385,000 boe per day. This includes restored volumes at Sunrise, increased condensate-rich production from Kakwa and Greater Dawson relative to the first half of 2024, and initial production contribution from Attachie.
Attachie Phase I remains on schedule and budget. Initial commissioning volumes are planned for the fourth quarter of 2024, and full productive capacity of 40,000 boe per day (40 per cent natural gas, 60 per cent crude oil and liquids) is anticipated for the first quarter of 2025.
In July, the Government of B.C. and Halfway River First Nation announced an agreement which includes a Landscape Planning Pilot for an area that encompasses ARC's Attachie development. As a result, ARC's Attachie development is no longer limited by the disturbance cap for petroleum and natural gas development outlined in the Blueberry River First Nations Implementation Agreement.
ARC distributed $118 million to shareholders during the second quarter, and intends to return essentially all free funds flow to shareholders in 2024 through the base dividend and share repurchases.
ARC declared dividends of $102 million or $0.17 per share and repurchased 0.7 million common shares for $16 million under its normal course issuer bid ("NCIB").
As of June 30, 2024, ARC's long-term debt balance was $1.4 billion and its net debt balance was $1.5 billion(3) or 0.6 times funds from operations(3).
ARC's unaudited condensed interim consolidated financial statements and notes (the "financial statements") and Management's Discussion and Analysis ("MD&A") as at and for the three months and six months ended June 30, 2024, are available on ARC's website at www.arcresources.com and under ARC's SEDAR+ profile at www.sedarplus.ca. The disclosure under the section entitled "Non-GAAP and Other Financial Measures" in ARC's MD&A as at and for the three and six months ended June 30, 2024 (the "Q2 2024 MD&A") is incorporated by reference into this news release.
OUTLOOK
ARC's strategic priorities center on growing free funds flow per share while upholding its principles of capital discipline, profitability, and financial strength.
With these principles in mind, ARC introduced a long-term plan to attain its objectives in 2023. The strategy is focused on delivering a competitive total return by balancing profitable investment in the Montney with margin expansion initiatives and a substantial return of capital.
One year later, ARC remains on-track to achieve its targets established in its long-term plan. Attachie – ARC's single largest growth asset – is advancing as planned with commissioning scheduled for later this year and operational efficiencies are being realized across the base assets that will contribute to higher profitability over the next five years.
Attachie Phase I Update
Attachie Phase I remains on schedule and on-budget. First volumes are expected late in the fourth quarter, with full productive capacity of 40,000 boe per day anticipated for the first quarter of 2025. ARC invested $182 million at Attachie in the second quarter of 2024, and $362 million through the first six months of 2024.
Attachie Phase I is approximately 75 per cent complete:
ARC has drilled 30 of the approximately 40 wells required to fill the 40,000 boe per day facility capacity, and stimulated 20 wells.
Plant construction is approximately 75 per cent complete.
The transmission line, natural gas sales line, and water ponds are all complete.
The liquids and gathering pipelines are on schedule and nearing completion.
Investor Tour
ARC plans to host an Investor Field Tour at Attachie for institutional investors and research coverage analysts on Wednesday, October 2, 2024.
Operational Update
Sunrise
Subsequent to quarter-end, in response to record low natural gas prices in Western Canada, ARC has elected to curtail approximately 250 MMcf per day of natural gas production at its sole dry gas asset, Sunrise. ARC will resume full production when natural gas prices recover to levels that support ARC's return requirements.
Sunrise is a low-cost natural gas asset, with a full cycle break-even of approximately C$1.10 per Mcf, inclusive of both cash costs of approximately $0.65 per Mcf (operating, transportation, and royalties) and finding and development cost.
Recent well design changes at Sunrise are yielding stronger productivity and returns.
On a per well basis, the well design change in the Upper Montney is expected to yield a 40 per cent increase in natural gas production over the initial twelve months, with only a 25 per cent increase in well costs due to higher intensity completions.
As a result, annual sustaining capital at Sunrise in developing both the Upper and Lower Montney is expected to decrease by 10 per cent relative to the previous development plan.
Kakwa
Production growth at Kakwa in the second half of 2024 will focus on higher condensate-rich regions of the asset compared to development in 2023.
Subsequent to the quarter, ARC completed the construction of the 10-10 superpad expansion, supporting long-term investment in ARC's condensate-rich asset. A key component of this expansion is increased takeaway optionality which provides additional flexibility moving product to market.
2024 Guidance
Capital expenditures and production guidance for 2024 remain unchanged. ARC plans to invest between $1.75 and $1.85 billion and generate average production of between 350,000 and 360,000 boe per day (63 per cent natural gas, 37 per cent crude oil and liquids). Full-year average production will be influenced by the duration of the natural gas curtailment at Sunrise and to a lesser extent, downtime related to extreme temperatures in the third quarter, with current expectations to be at the low end of the guidance range.
The inclusion of the natural gas curtailment at Sunrise is expected to result in average third quarter production between 330,000 and 335,000 boe per day, with a higher percentage of crude oil and liquids relative to the second quarter of 2024.
The effect on funds from operations is anticipated to be negligible at prevailing forward prices, attributable to a higher operating netback resulting from a greater proportion of condensate-weighted production.
Fourth quarter production is estimated to average between 380,000 and 385,000 boe per day. This includes the restored production at Sunrise and the growth in production relative to the first half of 2024 from ARC's condensate-rich assets such as Greater Dawson and Kakwa, as well as some contribution from Attachie Phase I coming on-stream.
ARC's 2024 corporate guidance is based on various commodity price scenarios and economic conditions; certain guidance estimates may fluctuate with commodity price changes and regulatory changes. ARC's guidance provides readers with the information relevant to Management's expectations for financial and operational results for 2024. Readers are cautioned that the guidance estimates may not be appropriate for any other purpose. Refer to the section entitled "Annual Guidance" in the Q2 2024 MD&A, available on ARC's website at www.arcresources.com and under ARC's SEDAR+ profile at www.sedarplus.ca.
2025 Outlook
The 2025 outlook incorporates lower anticipated capital spending relative to 2024 and approximately 10 per cent production growth reflecting a full-year contribution from Attachie Phase I. This is expected to drive a meaningful increase in free funds flow, which is planned to be returned to shareholders through a combination of a growing base dividend and share repurchases.
FINANCIAL AND OPERATIONAL RESULTS
Production
ARC's production averaged 330,046 boe per day during the second quarter of 2024 (65 per cent natural gas and 35 per cent crude oil and liquids), in line with the top-end of the previously announced second quarter production guidance range of 325,000 to 330,000 boe per day.
Higher than forecast well productivity at Sunrise drove the slightly higher production and natural gas weighting.
Combined production from Kakwa and Greater Dawson decreased by approximately 20,000 boe per day compared to the first quarter of 2024 due to planned turnaround activity, which was completed on schedule and within budget.
Funds from Operations, Cash Flow from Operating Activities, and Free Funds Flow
Second quarter 2024 funds from operations was $503 million ($0.84 per share), representing a decrease of nine per cent on a per share basis ($0.08 per share) from the same quarter of 2023. This decrease was primarily driven by lower production and lower average realized commodity prices. Partially offsetting these items were increased realized gains on risk management contracts.
Realized gains on risk management contracts increased by $73 million in the second quarter of 2024, compared to the same period in the prior year.
ARC has approximately 20 per cent of its natural gas hedged at AECO for the remainder of 2024, through a combination of collars and swaps, at an average floor price of C$3.15 per GJ.
ARC generated cash flow from operating activities of $543 million ($0.91 per share) and free funds flow of ($29) million or ($0.05) per share during the second quarter of 2024.
Shareholder Returns
During the second quarter, ARC distributed $118 million ($0.20 per share) to shareholders through a combination of dividends and share repurchases under its NCIB.
During the second quarter 2024, ARC declared dividends of $102 million ($0.17 per share).
ARC repurchased 0.7 million common shares under its NCIB at a weighted average price of $23.29 per share.
Since commencing its initial NCIB in September 2021, ARC has repurchased approximately 18 per cent of total outstanding shares or 132 million common shares, at a weighted average price of $16.17 per share.
ARC intends to renew its NCIB on or about September 1, 2024 for an additional 10 per cent of the public float, subject to review and approval by the TSX.
ARC plans to distribute essentially all of its free funds flow to shareholders in 2024.
Operating, Transportation, and General and Administrative Expense
Operating Expense
ARC's second quarter 2024 operating expense of $5.51 per boe was in line with Company expectations and $0.70 per boe above the second quarter of 2023.
The increase was due to lower production volumes and planned turnarounds that were concentrated in the second quarter 2024.
Operating expense per boe is expected to decrease over the balance of the year with all major turnarounds completed.
Transportation Expense
ARC's second quarter 2024 transportation expense per boe of $5.22 was lower than ARC's guidance range of $5.50 to $6.00 per boe primarily due to lower fuel gas expense related to lower natural gas prices.
General and Administrative Expense
ARC's second quarter 2024 G&A expense per boe of $1.85 decreased 27 per cent or by $0.69 per boe from the first quarter of 2024. G&A expense per boe for the quarter was within Company guidance.
Cash Flow Used in Investing Activities and Capital Expenditures
Cash flow used in investing activities was $643 million during the second quarter of 2024. Of this, ARC invested $532 million into capital expenditures to drill 39 wells and complete 41 wells. Drilling was focused primarily at Kakwa, Greater Dawson, and Attachie.
During the six months ended June 30, 2024, cash flow used in investing activities was $1.1 billion. Capital expenditures for the six month period registered at $1.0 billion. ARC drilled 77 wells and completed 65 wells across its asset base. The incremental investment has been focused on facilities and infrastructure associated with Attachie Phase I and the Kakwa 10-10 superpad.
Physical Natural Gas Marketing
ARC's infrastructure ownership and committed takeaway capacity to U.S. markets played a critical role in capturing higher natural gas price realizations relative to local benchmarks.
Subsequent to the quarter, ARC elected to shut-in a portion of its natural gas at Sunrise. ARC was able to leverage its dual-connected infrastructure and transport capacity to re-direct condensate-rich volumes away from Station 2, where natural gas prices were weakest, to AECO.
In June 2024, Cedar LNG Partners LP reached a positive final investment decision for the Cedar LNG Project (the "Project"). Cedar LNG has secured 20-year take-or-pay liquefaction tolling services agreements with ARC and Pembina Pipeline for 1.5 Mtpa each. ARC will deliver approximately 200 MMcf per day of natural gas for liquefaction by the Project for a term of 20 years commencing with commercial operations, anticipated in late 2028.
ARC remains on track to execute a sale and purchase agreement by year end 2024 with an investment-grade rated company for the entirety of ARC's LNG delivered from the Project.
With the anticipated execution of the sale and purchase agreement, ARC expects to achieve its long-term market diversification strategy, which includes linking approximately 25 per cent of its future natural gas production to international or LNG pricing.
Net Debt
As at June 30, 2024, ARC's long-term debt balance was $1.4 billion, and its net debt balance was $1.5 billion, or 0.6 times funds from operations.
ARC targets its net debt to be less than 1.5 times funds from operations and manages its capital structure to achieve that target over the long-term.
Long-term debt is comprised of $1.0 billion of senior notes outstanding and $385 million drawn on the syndicated credit facilities.
ARC holds an investment-grade credit rating, which allows the Company to have access to capital and to manage a low-cost capital structure. ARC is committed to protecting its strong financial position.
Net Income
ARC recognized net income of $240 million ($0.40 per share) during the second quarter of 2024, a 29 per cent increase compared to the first quarter of 2024. The increase in net income compared to the prior quarter was primarily due to an increase in realized gains on risk management contracts in the second quarter of 2024.
CONFERENCE CALL
ARC's senior leadership team will be hosting a conference call to discuss the Company's second quarter 2024 results on Friday, August 2, 2024, at 8:00 a.m. Mountain Time ("MT").
