ARC Resources Ltd

TSX:ARX

Earnings Call Transcript 2021-Q2

[Kristen J. Bibby, Senior VP & CFO]

Hello, and welcome to ARC's Second Quarter 2021 review. I'm Kris Bibby, Senior Vice President and Chief Financial Officer, and today are with me; Terry Anderson, our Chief Executive Officer and President. Welcome, Terry.

[Terry Michael Anderson, President, CEO & Director]

Thanks, Kris.

[Kristen J. Bibby, Senior VP & CFO]

Today, we're going to look at the second quarter highlights as well as talk about some operational items, highlights financially, as well as a historical highlight that we reached during the quarter. We provide a little bit of context. Last quarter, during these videos, we were talking about legacy Seven Generations operations plus legacy ARC operations to get a pro forma combined entity view. Now that we have a quarter behind us after the business combination closing on April 6th. We'll just be able to talk about our combined operations in once, which should be a little bit more straightforward. As always, our Investor Relations team is available to take any questions that come up from the video or even in a normal course of business. And on that, now I'd like to welcome a new member to the Investor Relations team. Dale Lewko has joined us as Manager of Capital Markets. So we'd like to welcome Dale to the team and look forward to working with him going forward. So Terry, it is another active quarter for us. A great deal of capital and operations activity across the asset base, business combinations with Seven Generation closed on April 6 successfully, as well as we're going through a period of very strong commodity pricing, which is certainly putting some wind in our sales. And then finally, ARC celebrated its 25th anniversary or birthday, depending on how you want to look at it, on July 11, and we started trading on the TSX back on July 11, 1996, so quite a positive achievement. So when you're looking at the quarter, what are the key takeaways?

[Terry Michael Anderson, President, CEO & Director]

Well, first, thank you, Kris, and thanks to everybody that's tuning in. And yes, it has been a very busy quarter. And as you mentioned, we're very proud of our 25-year history of being a Canadian energy producer. We'll touch on 3 key takeaways from the quarter; so first was our demonstration of our free cash flow generation capability within the organization. We generated $250 million of free cash flow, we continue to execute our disciplined approach to capital allocation. So firstly, we've reduced debt by $270 million in the quarter, and we increased our dividend by 10%. Second was showing our commitment to operational excellence. We had numerous turnarounds and maintenance activities across our operations, and all of them came in ahead of schedule and on budget. And then third is our integration of Seven Generations asset and people within the organization. And this is going very well. And we're approximately halfway to capturing our $160 million of synergies to date. And so we'll realize the remainder of that into 2022.

[Kristen J. Bibby, Senior VP & CFO]

Excellent, as you said, very busy quarter. I do want to dive in a little bit, and I know we're going to be talking about a lot of those key themes here over the next several minutes. But on the dividend increase, do you want to just spend a little bit of time given it's been an area of focus and a lot of discussion recently. So -- in terms of our approach, we're now 4 months into the business combination running together. And we're continuing to see strong free funds flow generation as well as the normalized earnings increases. So really, that is what set us up to be able to do this. And in alignment with our risk-managed approach, we're increasing the dividend, as you mentioned, 10% at this time. And really, when we were looking at that we considered will we be able to sustain this dividend throughout all commodity price cycles. And that was obviously the key analysis we were doing and we're very comfortable we will be able to -- So very happy with that outcome. The dividend at ARC is a core principle and component of our shareholder returns. And we're increasing it modestly at this time, and we have the flexibility to enhance these returns going forward. This is the start of our journey on increased returns to shareholders and hopefully, later this year, we were able to put in a -- an NCIB when we are coming up with our third quarter results.

[Terry Michael Anderson, President, CEO & Director]

Yes, returning capital to shareholders and improving that total shareholder value, our top priorities for the company. Obviously, we've been paying a dividend since the inception of the company. So it's kind of a hallmark of our return of capital to our shareholders. And this is only possible when you're running a strong business and have a strong financial position, and we continue to make these prudent decisions of having a long-term focus on long-term profitability, but also managing risk throughout our organization.

[Kristen J. Bibby, Senior VP & CFO]

So Terry, now I'd like to pivot and talk about the operational results from the quarter. With last quarter's results, we had signaled that we would be about 7% lower in production quarter-over-quarter in the second quarter relative to the first quarter due to some operational planned maintenance. We ended up with production of just over 335,000 BOEs a day. So that was down only about 4%, so certainly a strong start and ahead of our expectations. What was driving these production results and what can we expect for the remainder of the year?

[Terry Michael Anderson, President, CEO & Director]

Yes. So as you mentioned, the production was slightly down to 335,000 BOE a day, and that's largely due to the planned maintenance and turnaround activities that we have spoke of across all of our operations. Also, production was impacted due to the significant heat wave that we had in late June that affected a lot of our operations. And then also, we divested our Pembina Cardium asset. In terms of looking at the remainder of the year, we have adjusted our annual production guidance to 287,000 to 302,000 BOE a day, and this just reflects the divestiture of the Pembina asset, when I look to the second half of the year, we expect production to average 340,000 BOE a day.

[Kristen J. Bibby, Senior VP & CFO]

Great. That makes sense. And obviously, when we're adjusting the guidance on a go-forward basis, we've adjusted our operating cost per BOE as well. And so now we're expecting operating cost per BOE in the $3.90 to $4.40 range. So it goes hand-in-hand with that reduction.

[Terry Michael Anderson, President, CEO & Director]

And that actually, once again, is related to -- mainly due to the divestiture of Pembina. So our operations is becoming more efficient with being in that pure play Montney producer.

[Kristen J. Bibby, Senior VP & CFO]

Excellent. Now if we shift gears and start talking about capital, I mean as we mentioned, it was another very busy quarter for capital. We spent just around $300 million, and that brings us to a year-to-date spend of around $420 million. Can you give us some color as to where the dollars were invested and what we've achieved so far?

[Terry Michael Anderson, President, CEO & Director]

Yes. We had a very busy quarter from a capital expenditures perspective. We had 8 drilling rigs active throughout the quarter. 2 to 3 frac crews that were steady throughout the whole quarter. So we drilled 38 wells. We completed 40 wells across the company, but mainly focused in Kakwa, the greater Dawson area and in Sunrise. We also brought on our Sunrise facility expansion back in May. It was a 40 million cubic feet a day, total capacity now at Sunrise is around that 280 million to 300 million cubic feet a day depending on winter and summer production time frame. Sunrise is an absolutely amazingly efficient property with outstanding economics, and we have 10 Tcf of gas in place, 5 layers of development. The operating costs are ridiculously low at $0.20 an Mcf. So it is by far the most efficient and profitable asset within our portfolio. And it competes with any dry gas play across North America.

[Kristen J. Bibby, Senior VP & CFO]

Now before we get into our [ integration ] of data, I'd like to go through some of the other financial highlights that we achieved during the quarter and a little bit more on our capital allocation plans going forward. As I mentioned, another very strong quarter in terms of cash flow generation and free cash flow generation, generated just over $540 million of cash flow or $0.75 a share. And you mentioned the $250 million of free cash flow or about $0.35 a share. So very, very strong. And we also, during the quarter, took that free cash flow and dedicated to the balance sheet, reducing debt by about $270 million. And that put us right in the middle of our targeted net debt to fund flow excluding lease liabilities of 1.3x at the end of the quarter. So plans certainly coming together and looking good. And now if we just fast forward a little bit if you think of pricing at strip and the environment that we're in, we'll continue to generate this free funds flow dedicated to the balance sheet where we'll end up at the low end of our range, likely by the end of Q3, so around 1x that net debt funds flow. So putting us in a very strong position to make some other capital allocation discussions and decisions. We've been pleased with the way that the overall base business, as you mentioned, has come together and is operating, and that's what's keeping us on track to generate $1 billion of refunds flow in 2021. So just an [indiscernible] of capital. What's allowing us to do that is obviously to focus on those operations and making sure that every day people realize the base business is what comes first. And it's been very successful. Do you have any color on kind of why you think that is?

[Terry Michael Anderson, President, CEO & Director]

Well, I think our focus, we've always talked about operational excellence and just being very disciplined in everything we do. We are focused on value. We are not focused on BOEs to deliver on that value. You have to be very well planned out and to be able to execute your business in the most efficient manner. And that's the 1 thing that I really pride our company on is the planning upfront, which actually makes us the most efficient that we can be.

[Kristen J. Bibby, Senior VP & CFO]

Sorry, just on that planning concept. During the quarter, we obviously have a lot of planned maintenance, which did cause operating costs to come up a little bit to 453 a BOE, but they will come back down in the second half within guidance. And then also during the quarter, given the high commodity price environment we're in, when we were completing the business combination with Seven Generations, we also put a lot of risk management or hedging contracts in place to ensure that we would have a deleveraging of the balance sheet. And with that strong commodity price environment that we are experiencing, we did realize $1.97 per BOE in realized losses on the risk management side.

[Terry Michael Anderson, President, CEO & Director]

To that point, Kris, that's exactly what ARC does is protects the business first. And as we always talk about risk management and that was a key piece of looking at this transaction and making sure we're managing the risk to make sure it's successful, no matter what happen to commodity prices.

[Kristen J. Bibby, Senior VP & CFO]

Another thing that is very topical. We spend a lot of time talking to investors and all stakeholders about is the business combination we closed on April 6, with Seven Generations. Can you tell us about the integration and how it's going?

[Terry Michael Anderson, President, CEO & Director]

Yes, I'm very pleased with how the integration activities have progressed. After 4 months of the integration activities, we're very happy that we're well on our way to realizing those synergies of $160 million in 2022. And I'm very pleased to see the transfer of knowledge across our operations and in all disciplines. And 1 small example of that is if you look at our inter-well spacing. So in Northeast BC, the last number of years, we've increased our inter-well spacing to improve our capital efficiency, and we've seen great results from that. Now I've already seen us take those learnings and apply that into the Kakwa field, and we've increased the inter-well spacing in Kakwa. In the most recent wells, we're seeing very strong results from that. So we expect that capital efficiency to improve significantly in Kakwa also. We're also starting to realize the benefits of our improved purchasing power as a larger organization, and we're seeing some reduction in our costs on our drilling and completions of our wells in the Kakwa field. And that is a direct link to having that more purchasing power, but a combination of that improved capital efficiency also. And we're fully integrating our sales portfolio, providing us greater flexibility in our transportation contracts and sales revenue. So that's another important piece of the puzzle for us. And finally, when I look at the team, we've set the team in place. We're very clear on our strategy. So for me, looking forward into the second half of the year and beyond that, I'm excited about what we're going to create as a company going forward here. So the future is very bright for ARC.

[Kristen J. Bibby, Senior VP & CFO]

Well, I certainly agree, it is a very exciting time for ARC, and obviously, these exciting times and great opportunities can't happen without a great team around us. So certain we're very appreciative about that. And so I would like to thank you for your time, Terry. And obviously, thank you, everyone, for tuning in. And as always, there's a lot more information available on our website. So with that, thank you very much.