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Arc Resources 2021 Plan; Fourth Quarter, Full Year 2020 Results

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   |    Monday,February 15,2021

ARC Resources Ltd. reported its fourth quarter and year-end 2020 financial and operational results as well as its year-end 2020 reserves results.

2021 Outlook

ARC’s capital budget for 2021 will range from $375 million to $425 million and focus on maximizing the generation of free funds flow. 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 its 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 small-scale 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 / 7Gen Merger

On February 10, 2021, ARC and Seven Generations Energy Ltd. (“Seven Generations”) jointly announced that they entered into a definitive agreement to combine the companies in an all-share transaction to create a new Canadian oil and natural gas company through a plan of arrangement. Upon completion of the transaction, which will require shareholder approval and regulatory approvals, the combined entity will operate as ARC. Refer to the joint February 10, 2021 news release entitled “ARC Resources and Seven Generations Announce Strategic Montney Combination” available on ARC’s website at www.arcresources.com and SEDAR at www.sedar.com.

2020 Review

ARC strengthened its business in 2020 through prudent capital allocation decisions and excellent operational execution, despite volatile and uncertain market conditions. The Company delivered record production by bringing a major facility on-stream, thus expanding ARC’s low-cost Montney business, and bolstered its strong financial position through significant debt reduction. During the year, ARC replaced over 200 per cent of 2020 production through development activities, prioritized the safety of its employees and contractors, and demonstrated the Company’s ongoing commitment to delivering leading ESG performance and reporting transparency.

ARC is entering 2021 with significant momentum and is focused on sustaining production at the Company’s core Montney properties to maximize the generation of free funds flow and to demonstrate how efficient ARC’s expanded business has become. ARC’s key priorities for 2021 are to:

• Protect the health, safety, and well-being of employees and contractors while safely executing the Company’s business plans;
• Continue to focus on delivering returns to shareholders, which includes paying a sustainable dividend;
• Further strengthen the Company’s balance sheet by exercising financial discipline and ensuring ample liquidity;
• Generate significant free funds flow by profitably sustaining production through efficient execution and manage a paced approach to development to control the Company’s decline rate;
• Manage a responsible growth strategy that ensures future development activities are profitable and sustainable, including making a potential sanctioning decision for the first phase of development at Attachie;
• Identify cost reduction opportunities across the business to lower the Company’s break-even economics and enhance profitability;
• Secure financial risk management opportunities and transportation arrangements to achieve optimal pricing and diversified access to markets for ARC’s production; and
• Remain committed to the Company’s industry-leading ESG performance, including prudently managing business risks and continue to reduce ARC’s greenhouse gas (“GHG”) emissions and freshwater usage through responsible development activities.

Commodity Price Environment

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

Crude & Condensate

The global crude oil markets started to stabilize during the second half of 2020 after experiencing extreme volatility during the first half of the year. Benchmark prices increased over the course of the fourth quarter of 2020, as COVID-19 vaccine approval and roll-out announcements were received with strong macroeconomic support. However, a rising number of COVID-19 cases across the globe has forced many governments to put additional restrictions in place, which has caused new concerns of a prolonged economic recovery. Near-term prices are expected to remain mostly range-bound but volatile.

Locally, Canadian crude oil differentials widened slightly during the fourth quarter of 2020, driven by oil sands producers bringing their production back online following summer maintenance and turnaround activities. Concurrently, Canadian condensate differentials tightened due to the increase in demand for diluent. Capital activity in the Western Canadian Sedimentary Basin is expected to remain muted in 2021, with most producers’ capital budgets focused on maintaining production at existing levels and continuing to deleverage their balance sheets.

Gas

US natural gas benchmark prices strengthened during the fourth quarter of 2020, as strong demand for liquefied natural gas exports and exports to Mexico more than offset the impacts from a warmer-than-expected winter. On the supply side, producers continued to moderate their spending and have provided no indications of near-term structural growth.

Natural gas prices were also higher in western Canada during the fourth quarter of 2020, relative to the third quarter of 2020. The demand from oil sands producers and the demand for power generation has returned to normal levels, while supply levels have remained relatively flat.

Despite mild winter weather to-date, which has put some downward pressure on near-term demand and pricing, the North American natural gas market is structurally improving. Demand is expected to outpace supply, thus providing pricing momentum in 2021. While near-term pricing volatility is still likely, improving natural gas fundamentals are expected for 2021 and beyond as the balance between supply and demand continues to normalize.

Financials

Capital Allocation

ARC regularly 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 the basis for ARC’s current capital allocation. As ARC’s net debt to funds from operations ratio reaches the low end of the Company’s targeted range of 1.0 to 1.5 times, ARC is evaluating several capital allocation options, including growth through either long-term development investments or mergers and acquisitions; share repurchases; and sustainable dividend increases.

ARC generated funds from operations of $667.6 million and free funds flow of $324.4 million during 2020, respectively. Free funds flow was used to pay the Company’s dividend obligations of $106.3 million and to strengthen the Company’s balance sheet. ARC reduced its net debt balance by $197.5 million or 21 per cent in 2020.

Balance Sheet and Liquidity

ARC is committed to protecting its strong financial position by maintaining significant financial flexibility with its balance sheet. At December 31, 2020, ARC had $742.7 million of net debt outstanding, and the net debt to funds from operations ratio was 1.1 times, which was at the low end of the Company’s targeted range of 1.0 to 1.5 times. At December 31, 2020, ARC complied with all of its debt covenants.

ARC’s $1.2 billion of undrawn credit capacity further enhances the Company’s total 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 free funds flow or 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 focus on 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 Income (Loss)

ARC recognized net income of $120.8 million ($0.34 per share) during the fourth quarter of 2020, compared to a net loss of $66.1 million ($0.19 per share) during the third quarter of 2020. The increase in earnings was primarily due to an increased gain on ARC’s risk management contracts and increased commodity sales from production, which were partially offset by an increased income tax expense.

ARC recognized a net loss of $547.2 million ($1.55 per share) in 2020, compared to a net loss of $27.6 million ($0.08 per share) in 2019. An impairment charge recognized on ARC’s property, plant, and equipment during the first quarter of 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. Further contributing to ARC’s net loss were lower commodity sales due to lower average realized crude oil and condensate prices, which were partially offset by increased production, a reduced loss on ARC’s risk management contracts, and an increased income tax recovery.

Funds from Operations

ARC generated funds from operations of $212.0 million ($0.60 per share) during the fourth quarter of 2020, an increase of $67.4 million ($0.19 per share) or 47 per cent compared to funds from operations generated during the third quarter of 2020. Increased commodity sales from production and a lower general and administrative (“G&A”) expense were partially offset by an increased current income tax expense, reduced cash hedging gains, and increased royalties.

ARC generated funds from operations of $667.6 million ($1.89 per share) in 2020, representing a decrease of $29.8 million ($0.08 per share) compared to funds from operations generated in 2019. Reduced commodity sales due to lower average realized crude oil and condensate prices, despite increased total production year-over-year, was the largest driver in lower funds from operations. Increased transportation expense also served to reduce funds from operations in 2020, relative to 2019. These decreases to funds from operations were partially offset by lower royalties, lower operating expense, and an increase in current income tax recovery.

Physical Marketing and Financial Risk Management

ARC’s assets and network of owned-and-operated infrastructure provide significant optionality to manage the Company’s commodity exposures. Depending on prevailing commodity pricing, ARC can selectively target natural gas, liquids-rich natural gas, or crude oil production and can optimize the liquids recoveries at its processing facilities.

ARC manages its natural gas price risk exposure through physical diversification and financial risk management activities to reduce volatility in funds from operations. Summarized in Table 2 are the impacts that ARC’s physical natural gas diversification and financial risk management activities had on the Company’s realized natural gas price for the fourth quarter of 2020, relative to the third quarter of 2020, and for 2020, relative to 2019.

ARC’s average realized crude oil and condensate prices were $48.14 per barrel and $53.55 per barrel, respectively, for the fourth quarter of 2020, increasing six per cent and 10 per cent, from the third quarter of 2020. ARC’s average realized crude oil and condensate prices were $42.62 per barrel and $47.62 per barrel, respectively, for 2020, decreasing 35 per cent and 30 per cent from 2019.

ARC’s risk management program increased the Company’s funds from operations during the fourth quarter and full-year 2020, with ARC recording a realized gain of $8.8 million and $74.2 million, respectively. In 2021, approximately 50 per cent of ARC’s anticipated crude oil and condensate production and approximately 40 per cent of ARC’s anticipated natural gas production is currently hedged. ARC continuously monitors commodity prices and executes its risk management program to reduce the volatility of its funds from operations and support its dividend and capital programs. ARC will continue to take positions in natural gas, crude oil, NGLs, and foreign exchange rates, as appropriate, to provide greater certainty over future funds from operations. For details pertaining to ARC’s risk management program and for a summary of the average crude oil and natural gas volumes associated with ARC’s risk management contracts as at December 31, 2020, refer to Note 17 “Financial Instruments and Market Risk Management” in ARC’s financial statements.

Netback

Table 3 details the components of ARC’s fourth quarter 2020 netback, compared to its third quarter 2020 netback, and the components of ARC’s full-year 2020 netback, compared to its full-year 2019 netback.

For the fourth quarter of 2020, relative to the third quarter of 2020, ARC’s:

• Netback increased primarily due to higher average realized commodity prices, partially offset by a lower realized gain on risk management contracts.
• Royalties increased as a result of higher royalty rates associated with higher average realized commodity prices.
• Operating and transportation expense per boe decreased, reflecting increased natural gas production, which has lower relative costs to operate and transport.

For 2020, relative to 2019, ARC’s:

• Netback decreased primarily due to lower average realized commodity prices, partially offset by a year-over-year decrease in ARC’s royalties and operating expense.
• Royalties decreased as a result of lower royalty rates associated with lower average realized commodity prices.
• Operating expense decreased as ARC brought on additional Montney production at Dawson and Sunrise, which have lower relative costs.

Ops Review

ARC’s position in the Montney resource play comprises approximately 970 net sections or 632,000 net acres of land, with production from these assets representing 95 per cent of total corporate production. ARC processes nearly all of its production 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 pricing, 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 upholding its strong environmental performance by reducing its GHG emissions and freshwater usage. ARC currently ranks as the lowest GHG emissions intensity producer amongst its Canadian peers. The Company’s leading environmental performance and reporting transparency was recognized in 2020, with CDP awarding ARC a score of “A-” on Climate Change and a score of “B” on Water Security, both the highest scores within ARC’s peer group of Canadian exploration and production companies.

To progress towards meeting the Company’s target to reduce its GHG emissions intensity by 20 per cent by 2025, ARC plans to electrify its Dawson Phase III and IV facility. ARC expects to incur some initial costs for the project in 2021, which is expected be completed over the next three years.

Capital Expenditures

With development activities focused on profitable half-cycle investments and maximizing the generation of free funds flow, ARC invested $76.7 million during the fourth quarter of 2020, to drill 19 wells and complete nine wells.

ARC’s 2020 capital program was highlighted by strong operational execution and excellent safety performance, delivering record annual production, competitive 2P F&D costs, and the lowest operating expense per boe in the Company’s history. ARC invested $343.2 million in 2020, to execute a development program that included 59 wells drilled, 66 wells completed, and the completion of the Dawson Phase IV gas processing and liquids-handling facility and the Ante Creek facility expansion.

In 2020, ARC realized efficiencies across its operations, including reducing the capital cost per lateral length by 20 per cent relative to 2019. ARC also realized execution efficiencies in its development program by drilling more metres per day, pumping more sand per day, and sustainably reducing the average number of drilling days per well and the overall cycle times required for onsite well facilities.

Also of note in 2020 is the strong operational performance observed in the Dawson area since bringing the Dawson Phase IV gas processing and liquids-handling facility on-stream. Optimized well designs and the above-mentioned cost reductions and execution efficiencies have resulted in better-than-expected well productivity and capital efficiencies at Dawson.

Production

ARC’s production for the fourth quarter of 2020 averaged 169,468 boe per day, comprising 783 MMcf per day of natural gas, 15,554 barrels per day of crude oil, 14,715 barrels per day of condensate, and 8,678 barrels per day of NGLs.

Average daily production for the fourth quarter of 2020 increased seven per cent relative to the third quarter of 2020. ARC maximized the throughput of natural gas at its core Montney facilities during the fourth quarter of 2020, and increased production at Parkland/Tower following the planned maintenance activities that were conducted in the area during the prior quarter.

ARC’s production for 2020 averaged a record 161,564 boe per day, comprising 739 MMcf per day of natural gas, 15,726 barrels per day of crude oil, 13,519 barrels per day of condensate, and 9,112 barrels per day of NGLs. Average daily production for 2020 represented a 16 per cent increase from average daily production for 2019, driven primarily by increased natural gas production at Dawson and Sunrise. Full-year average daily production for 2020 exceeded the Company’s guidance range of 157,000 boe per day to 160,000 boe per day as a result of strong operational execution and performance across ARC’s Montney assets throughout the entire year.