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ARC Resources Third Quarter 2020 Results, 2021 Guidance

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   |    Thursday,November 05,2020

ARC Resources reported its Q3 2020 results.

2021 Budget Overview

The Board has approved a capital budget for 2021 that will range from $375 million to $425 million and focus on maximizing the generation of surplus funds from operations. The capital program centres around ARC’s principles of capital discipline, profitability, and financial strength, and will deliver sustainable returns to shareholders through the continuation of ARC’s quarterly dividend of $0.06 per share. Advancing the Company’s ESG leadership and performance, and upholding ARC’s strong safety culture, will continue to be top priorities in 2021.

ARC plans to sustain production at Dawson, Sunrise, Parkland/Tower, and Ante Creek, with approximately 80 per cent of the 2021 capital budget directed at profitable half-cycle investments. Additionally, ARC plans to complete two minor facility optimization projects at Sunrise and Parkland/Tower to enhance the assets’ overall deliverability and profitability. ARC expects to deliver average daily production of between 158,000 boe per day and 165,000 boe per day in 2021, of which approximately 80 per cent is natural gas and 20 per cent is crude oil and liquids.

ARC invested significant plant and facilities capital over the past four years to build major infrastructure at Dawson Phase III, Sunrise Phase II, and most recently at Dawson Phase IV, which was completed in the second quarter of 2020. With these significant investments complete, ARC’s 2021 capital budget will demonstrate how efficient ARC’s expanded business has become, by delivering significant surplus funds from operations throughout the year.

At forecasted commodity prices, funds from operations generated in 2021 are expected to fully fund ARC’s dividend obligations and capital program. Surplus funds from operations will continue to be directed at strengthening the Company’s balance sheet, with the objective to reduce ARC’s net debt to annualized funds from operations ratio to the low end of, or possibly below, the Company’s targeted range of 1.0 to 1.5 times.

ARC’s key priorities for the balance of 2020 and 2021 are to:

• Protect the health, safety, and well-being of employees and contractors while safely executing the Company’s business plans;
• Protect the balance sheet by exercising financial discipline and ensuring ample liquidity;
• Enhance profitability through lowering the Company’s break-even economics and identifying cost reduction opportunities across the business;
• Ensure maximum throughput of low-cost natural gas production during the upcoming winter to capitalize on anticipated strong natural gas pricing;
• Secure financial risk management opportunities and transportation arrangements to achieve optimal pricing and access to markets for ARC’s production;
• Remain committed to the Company’s industry-leading ESG performance, including prudently managing business risks and reducing its greenhouse gas (“GHG”) emissions and freshwater usage through responsible development activities; and
• Remain focused on delivering returns to shareholders through paying a sustainable dividend.

For details on ARC’s 2021 capital program and production, funding of the 2021 budget, and formal 2021 guidance, refer to the section entitled “2021 Budget” contained within this news release.

Q3 Summary

ARC delivered average daily production of 158,444 barrels of oil equivalent (“boe”) ⁽¹⁾ per day to generate funds from operations ⁽²⁾ of $144.6 million ($0.41 per share) during the three months ended September 30, 2020. With funds from operations generated during the period, ARC declared dividends of $21.2 million ($0.06 per share), invested $52.6 million in development activities, and strengthened its financial position by reducing net debt ⁽²⁾ by $93.3 million or 10 per cent.

This year has been marked with considerable market volatility. The novel coronavirus COVID-19 (“COVID-19”) pandemic has had a profound impact on commodity prices, with the overall magnitude of its effects on demand and the pace of global economic recovery still uncertain. Amid this challenging backdrop, the guiding principles upon which ARC conducts its business continue to provide a strong foundation for excellent business performance. ARC’s operational flexibility, robust risk management program, and strong balance sheet have positioned the Company to prudently manage these volatile market conditions. Capital discipline, a moderate pace of development, and excellent capital efficiencies all contribute to a corporate decline rate of approximately 30 per cent. A concentrated Montney asset base that includes a network of owned-and-operated infrastructure has allowed ARC to deliver excellent capital and operating efficiencies. ARC’s sustainable business is focused on a strong balance sheet, ample liquidity, environmental, social, and governance (“ESG”) excellence, long-term corporate profitability, and paying a sustainable dividend to shareholders. In combination with the Company’s premier land position in the Montney, these principles make ARC a differentiated investment opportunity.

ARC’s current capital allocation priorities are to protect the Company’s strong financial position, support the dividend, and invest in development activities that prioritize profitability and value over volumes. Based on forecasted commodity prices, funds from operations generated in 2020 and 2021 are anticipated to exceed the Company’s dividend obligations, budgeted capital expenditures, and reclamation activities. Surplus funds from operations are being used to further strengthen the Company’s balance sheet by substantially reducing net debt.

With a strategy that is premised on strong business fundamentals, the outlook for ARC is compelling. ARC’s operational performance has been excellent and the Company’s capital programs for 2020 and 2021 focus on sustaining production at ARC’s core Montney properties to maximize the generation of surplus funds from operations. The Company’s production mix comprises over 75 per cent natural gas, the market for which is structurally improving. This, coupled with ARC’s efficient execution and low cost structure, will allow the Company to maximize profitability and strengthen an already-strong balance sheet, all while paying a sustainable dividend.

2020 Budget Update

In March 2020, when ARC reduced its original 2020 capital budget of $500 million to $300 million, the Company articulated that while the reduced capital budget would modestly lower production expectations for 2020, the deferred drilling and completions activities would have a larger impact on 2021 production levels. Since that time, the macroeconomic backdrop has improved and commodity prices have strengthened.

ARC’s board of directors (the “Board”) has approved an increased 2020 capital budget of $350 million from the previously guided capital budget of $300 million. The capital increase will allow ARC to accelerate two multi-well pads at Dawson and one multi-well pad at Sunrise, optimizing the Company’s rigline utilization through the fourth quarter of 2020. By accelerating these capital projects that would otherwise be part of ARC’s 2021 development plan, ARC will be able to maximize throughput of low-cost natural gas during the winter months to capture the anticipated strength in natural gas pricing. The $50 million of accelerated capital is not additive to the development plans for 2020 and 2021, which, when combined, total between $725 million and $775 million over the two-year period.

ARC is modestly increasing its production expectations for 2020 to an updated guidance range of 157,000 boe per day to 160,000 boe per day, and has executed additional hedges for the balance of 2020 and for 2021 to provide greater certainty of ARC’s funds from operations and to protect ARC’s future capital programs.

The acceleration of capital is expected to collectively generate higher funds from operations for 2020 and 2021, which will allow the Company to reduce its net debt levels and strengthen its leverage metrics in less time than was previously forecasted.

Board Update

Director Appointment

Mr. Michael McAllister has been appointed to the Board, effective immediately. Mr. McAllister has over 30 years of industry experience, including approximately 20 years at Ovintiv Inc. (formerly Encana Corporation), where he most recently served in the roles of President and Chief Operating Officer before his retirement from the company in 2020. Prior to that, Mr. McAllister worked in various technical and leadership roles for Texaco Canada and Imperial Oil Resources. ARC is pleased to welcome Mr. McAllister to the Board.

Director Retirement

Mr. Herb Pinder Jr. will be retiring from the Board after approximately 14 years of service and will not stand for re-election at ARC’s next annual meeting of shareholders. ARC would like to extend its sincere gratitude to Mr. Pinder for his guidance to the Board and ARC’s management team during his years of service.

Pricing

Near-term pricing risk and continued volatility are expected for all commodities. While the gradual economic recovery from the demand destruction caused by the COVID-19 pandemic is taking place, significant uncertainty remains. ARC’s risk management program serves to protect corporate cash flows, and ARC will focus on maximizing throughput of its low-cost Montney natural gas production during periods of relative pricing strength.

Crude Oil and Condensate

After experiencing extreme volatility during the first half of 2020, the global crude oil markets started to stabilize during the three months ended September 30, 2020. Average benchmark prices were mostly range-bound. The combination of the Organization of Petroleum Exporting Countries and certain other oil-producing countries continuing to comply with agreed-upon production cuts, and North American energy producers demonstrating capital discipline and restraint, led to global inventory levels trending towards more normalized levels. Although prices have shown recent signs of stability, a second wave of the COVID-19 pandemic is underway, causing growing uncertainty around the global demand recovery and the likelihood of a sustained crude oil price recovery.

Locally, Canadian crude oil and condensate differentials narrowed as supply remained relatively low given limited capital activity in the Western Canadian Sedimentary Basin (“WCSB”) and increased maintenance and turnaround activities. Narrower differentials were further supported by pipeline throughput recovering from previous constraints.

Natural Gas

Improving supply and demand dynamics helped support higher US natural gas benchmark prices during the three months ended September 30, 2020, relative to the three months ended June 30, 2020. On the supply side, dry natural gas activity and the associated natural gas supply from liquids basins moderated. On the demand side, liquefied natural gas exports and exports to Mexico increased.

In western Canada, natural gas prices were higher during the three months ended September 30, 2020, relative to the three months ended June 30, 2020. Like the US, declining supply in the WCSB has helped the AECO market move towards an improved supply/demand balance. As the AECO market continues to experience relative strength compared to other North American sales points, the basis differential to NYMEX Henry Hub has narrowed significantly.

The North American natural gas market is structurally improving, with demand expected to outpace supply, thus providing significant momentum into 2021. While near-term pricing volatility is still expected, improving natural gas fundamentals are expected for 2021 and beyond as the supply/demand balance normalizes.

Q3 Financials

Capital Allocation

ARC periodically evaluates its capital allocation priorities and decisions and believes that taking a portfolio approach to capital allocation creates significant long-term shareholder value. Managing reasonable debt levels, paying a sustainable dividend, and delivering modest production growth through profitable development activities are part of ARC’s current capital allocation mix. Once ARC’s net debt to annualized funds from operations ratio has been reduced to the low end of the Company’s targeted range of 1.0 to 1.5 times, ARC will evaluate and consider the following capital allocation priorities: growth through either long-term development investments or mergers and acquisitions; share repurchases; and sustainable dividend increases.

At current and forecasted commodity prices, funds from operations generated in 2020 are expected to exceed ARC’s dividend obligations of approximately $106 million and ARC’s revised capital budget of $350 million. Surplus funds from operations will be directed at strengthening the Company’s balance sheet. During the three months ended September 30, 2020, ARC reduced its net debt balance by $93.3 million or 10 per cent, and has reduced its net debt balance by $211.9 million or 20 per cent since March 31, 2020.

Balance Sheet and Liquidity

ARC is committed to protecting its strong financial position by maintaining significant financial flexibility with its balance sheet. At September 30, 2020, ARC had $867.8 million of net debt outstanding and the net debt to annualized funds from operations ratio was 1.4 times, which was within the Company’s targeted range of 1.0 to 1.5 times. At September 30, 2020, ARC was in compliance with all of its debt covenants.

ARC’s $1.1 billion of undrawn credit capacity bolsters the Company’s overall liquidity. The Company’s long-term debt is structured to mature over several years, and repayment of maturities due in 2021 will be settled with existing committed credit facilities. Debt maturities due in 2021 total US$109.0 million of US dollar-denominated debt and $8.0 million of Canadian dollar-denominated debt.

ARC’s ample financial liquidity has historically allowed the Company to sustain its operations through prolonged periods of commodity price volatility, and is expected to enable the Company to remain in a position of financial strength during future periods of economic uncertainty. ARC will continue to manage conservative debt levels as a priority.

Net Loss

ARC recognized a net loss of $66.1 million ($0.19 per share) during the three months ended September 30, 2020, compared to a net loss of $43.5 million ($0.12 per share) during the three months ended June 30, 2020. Increased commodity sales due to higher average commodity price realizations were more than offset by a lower income tax recovery and a higher operating expense. Reduced gains on ARC’s risk management contracts and ARC’s foreign exchange, relating to the revaluation of ARC’s US dollar-denominated debt, also contributed to the reduction in earnings.

ARC recognized a net loss of $668.0 million ($1.89 per share) during the nine months ended September 30, 2020, compared to a net loss of $17.4 million ($0.05 per share) during the nine months ended September 30, 2019. An impairment charge recognized on ARC’s property, plant, and equipment during the three months ended March 31, 2020, resulting from the decrease in forecasted commodity pricing for crude oil and natural gas, was the most significant contributor to the net loss in 2020 to-date. Further contributing to ARC’s net loss were lower commodity sales due to lower average commodity price realizations, which were partially offset by increased income tax recoveries and a reduced loss on ARC’s risk management contracts.

Funds from Operations

ARC generated funds from operations of $144.6 million ($0.41 per share) during the three months ended September 30, 2020, a decrease of $5.6 million ($0.01 per share) compared to funds from operations generated during the three months ended June 30, 2020. Increased commodity sales due to higher average commodity price realizations were offset by a lower current income tax recovery, a lower realized gain on risk management contracts, and increased operating expense and general and administrative (“G&A”) expense.

ARC generated funds from operations of $455.6 million ($1.29 per share) during the nine months ended September 30, 2020, representing a decrease of $69.0 million ($0.19 per share) compared to funds from operations generated during the nine months ended September 30, 2019. Reduced commodity sales due to lower average commodity price realizations, despite increased production year-over-year, was the largest driver in lower funds from operations. Increased transportation expense and G&A expense also served to reduce funds from operations for the nine months ended September 30, 2020, relative to the nine months ended September 30, 2019. These decreases to funds from operations were partially offset by an increase in current income tax recovery, a lower operating expense, and lower royalties.

Ops Review

ARC’s position in the Montney resource play comprises approximately 1,000 net sections of land (approximately 636,000 net acres), with production from these assets representing approximately 95 per cent of total corporate production. Nearly all of ARC’s production is processed through owned-and-operated infrastructure. This affords ARC greater control over its cost structure and liquids recoveries, supports strong safety and environmental performance, and enables a flexible pace of development, all of which are especially critical in a volatile commodity price environment.

ARC’s assets provide significant optionality to manage the Company’s commodity exposures. Depending on prevailing commodity prices, ARC can selectively target natural gas, liquids-rich natural gas, or crude oil production by focusing its development in the areas that generate the most robust half-cycle economics.

ARC is a leader in ESG and sustainability practices. Employee and contractor safety is the Company’s top priority, and ARC is committed to strong environmental performance by reducing its GHG emissions and freshwater usage. ARC released its 2020 ESG Report during the third quarter of 2020, providing details on ARC’s ESG strategies and the Company’s leading performance. Notably, ARC ranks as the lowest GHG emissions intensity producer amongst its Canadian peers. The 2020 ESG Report is available on ARC’s website at a href="https://c212.net/c/link/?t=0&l=en&o=2972030-1&h=2079266984&u=http://www.arcresources.com/&a=www.arcresources.com" rel="nofollow noopener noreferrer" target="_blank">www.arcresources.com.

Capital Expenditures

ARC invested $52.6 million during the three months ended September 30, 2020, as development activities continued to focus on the Company’s natural gas properties. During the period, ARC drilled 10 wells at Dawson and four wells at Sunrise and completed five wells at Parkland/Tower. ARC invested $266.5 million during the nine months ended September 30, 2020, which included drilling 40 wells, completing 57 wells, and bringing the Dawson Phase IV gas processing and liquids-handling facility and the Ante Creek facility expansion projects on-stream early in the second quarter of 2020.

Production

ARC’s production for the three months ended September 30, 2020 averaged 158,444 boe per day, comprising 708 MMcf per day of natural gas, 15,373 barrels per day of crude oil, 14,831 barrels per day of condensate, and 10,208 barrels per day of NGLs.

Average daily production for the three months ended September 30, 2020 decreased five per cent relative to the three months ended June 30, 2020. Planned maintenance activities at Parkland/Tower contributed to the decrease in production in the period; however, ARC mitigated the magnitude of the impact by completing the maintenance in less time than forecast. Additionally, ARC managed its natural gas production at Dawson and Sunrise during the three months ended September 30, 2020, to ensure maximum throughput of low-cost natural gas production during the winter months to capture the anticipated strength in natural gas pricing. To de-risk the economics of this decision, ARC entered into additional hedges for November 2020 to March 2021. Increased production at Ante Creek, Attachie West, and Parkland, due to new wells being brought on-stream during the three months ended September 30, 2020, partially offset the production decreases in the period.

ARC’s production for the nine months ended September 30, 2020 averaged 158,911 boe per day, comprising 725 MMcf per day of natural gas, 15,784 barrels per day of crude oil, 13,117 barrels per day of condensate, and 9,258 barrels per day of NGLs. Average daily production for the nine months ended September 30, 2020 represented a 17 per cent increase from average daily production for the nine months ended September 30, 2019, driven primarily by increased natural gas production at Dawson and Sunrise.

Full-year average daily production for 2020 is expected to be within the guidance range of 157,000 boe per day to 160,000 boe per day.

Outlook

2020 Guidance

ARC increased its 2020 planned capital investments to $350 million from $300 million, with a continued focus on balance sheet strength and investment in profitable projects with efficient execution. Capital activity for the remainder of 2020 will be focused on natural gas development at Dawson and Sunrise, allowing ARC to maximize throughput of low-cost natural gas production during the winter months to capture the anticipated strength in natural gas pricing. At current commodity price levels, funds from operations generated in 2020 are anticipated to fund the Company’s dividend payments and capital program as well as reduce the Company’s net debt balance.

To better reflect ARC’s 2020 year-to-date actual results and the corresponding full-year 2020 expectations, ARC is modestly increasing its 2020 production guidance ranges for all commodities, and lowering its 2020 guidance ranges for operating, transportation, and interest expenses, as well as current income tax.