Quarterly / Earnings Reports | First Quarter (1Q) Update

Arc Resources Talks Q1 2019 Results

Share Print Bookmark    |    Tuesday,April 30,2019

ARC Resources Ltd. reported its first quarter 2019 financial and operational results. 

"ARC advanced several key projects in the first quarter of 2019, including obtaining regulatory approval for multiple phases of development at Attachie West, an area that will provide our company with liquids-rich opportunities for many years to come," explained Myron Stadnyk, ARC's President and Chief Executive Officer. "We are executing on a strategy that is founded on full-cycle returns and overall profitability of the business. With a compelling asset base, coupled with a clean balance sheet and a current attractive yield, ARC is positioned to create shareholder value."

ARC delivered excellent operational results in the first quarter of 2019, achieving record quarterly production of 139,054 barrels of oil equivalent ("boe") per day, managing the Company's operating expense of $5.24 per boe, and recording zero lost-time incidents for employees and contractors. ARC's 2019 capital program of $775 millionis focused on investing in multi-year development projects to grow the Company's liquids production at Attachie West and Dawson in northeast British Columbia, and at Ante Creek in northern Alberta. Approximately $295 million of the planned $775 million capital budget will be invested in facilities, pipelines, and water infrastructure, with the majority of the production associated with these infrastructure projects expected to be added in 2020 and 2021. ARC has made significant progress in its 2019 plan to-date. Capital expenditures totaled $213.7 millionin the first quarter of 2019, approximately $53 million of which was invested in major infrastructure projects. An active drilling and completions program in the first quarter will deliver oil and liquids-rich production through the remainder of the year, and ARC's plan to redirect 60 MMcf per day of natural gas currently flowing through a third-party facility to ARC's Sunrise Phase II facility in the second quarter of 2019 will eliminate third-party processing fees and improve the Company's operating expense.

In 2019, ARC expects to generate funds from operations in excess of its anticipated 2019 dividends of approximately $210 million and sustaining capital ⁽¹⁾ requirements of approximately $400 million. Discretionary funds from operations in excess of dividend and sustaining capital requirements, and the redeployment of cash proceeds from previously completed non-core dispositions, are being invested in key multi-year development projects that will grow the Company's liquids production.

Looking ahead to the second quarter of 2019, ARC's operations will be affected by third-party pipeline maintenance, significant turnarounds, and anticipated spring break-up impacts to production and field operations. As such, production is expected to be approximately five per cent lower and ARC's operating expense per boe is expected to be approximately 10 per cent higher than the first quarter of 2019. ARC expects that production will ramp up through the second half of 2019 as final transportation arrangements come into effect at Sunrise and initial production from a multi-well pad currently being drilled at the liquids-rich Attachie West area is brought on-stream in the fourth quarter of 2019. ARC's full-year 2019 operating expense is expected to be within the guidance range of $5.30 to $5.70 per boe, and full-year 2019 average daily production is expected to be within the guidance range of 135,000 to 142,000 boe per day.

Key takeaways from ARC's financial and operational results for the first quarter of 2019 include:

Financial & Ops Results

Commodity Price Environment

ARC employs an integrated approach to its physical marketing and financial risk management programs, which is underpinned by a strong understanding of market fundamentals. ARC uses market fundamental analysis to set a view on the outlook for commodity prices to drive decisions across the business. This detailed analysis provides the basis for ARC's financial hedging and physical marketing strategies, which help to reduce cash flow volatility, diversify price risk, and also supports ARC's strategic planning and budgeting processes. ARC regularly monitors commodity prices and market conditions and has the flexibility to adjust the investment levels and pace of development of its capital plans accordingly.

Crude Oil and Liquids

The outlook on global crude oil prices improved considerably in the first quarter of 2019, reflecting the impact that OPEC members' compliance with output cuts and US-imposed sanctions on Iran have had on the global supply-demand balance. Locally, the Alberta Government's mandatory oil production curtailment, which came into effect in January 2019, had a significant tightening effect on Canadian oil differentials. While ARC's physical oil production was not impacted by the mandated production curtailment in the first quarter of 2019, its corporate crude oil and condensate realizations did benefit from the tighter differentials, with average crude oil realizations increasing 47 per cent and average condensate realizations increasing 13 per cent relative to the fourth quarter of 2018. The majority of ARC's crude oil production is made up of conventional light oil and condensate, which continue to realize premium pricing relative to heavier crude oil grades.

Natural Gas

Cold weather conditions and strong winter demand in western Canada resulted in relatively strong local natural gas prices in the first quarter of 2019. Despite withdrawal season ending with storage levels below the five-year average, local egress is expected to be constrained through the summer months as third-party maintenance and planned outages get underway, which may lead to pricing volatility. In the US, natural gas prices moderated after a strong fourth quarter of 2018, when higher prices were driven by cold weather and declining inventories. The near-term outlook for US natural gas prices is expected to be range bound given that growing production is expected to be largely met with strong domestic and export demand.

ARC maintains a strategy to physically and financially diversify its realized natural gas price to multiple North American downstream sales points in order to mitigate the impact of pricing volatility and to increase exposure to more attractive markets. Approximately 48 per cent of ARC's corporate natural gas volumes are exposed to a combination of US Midwest, Henry Hub, Malin, and Dawn pricing hubs in 2019, and 23 per cent of corporate natural gas volumes are exposed to AECO and Station 2 prices. The remaining 29 per cent is financially hedged. As a result of this diversification strategy, less than 10 per cent of ARC's expected commodity sales revenue is exposed to the AECO and Station 2 markets in 2019.

2019 Capex & Plan

ARC's 2019 capital budget was designed to create value through the development of a compelling suite of multi-year projects to increase ARC's productive capacity and pay a meaningful dividend to shareholders. ARC's near-term plan to 2021 includes the development of five infrastructure projects, with a continued commitment to maintain ARC's monthly dividend of $0.05 per share and the overall profitability of the business. The plan's pace of development supports ARC's enduring principle of strong balance sheet performance and controlling ARC's corporate decline rate to achieve leading capital efficiencies and grow ARC's liquids production. The development plan for 2019 to 2021 includes the following projects, which to varying degrees, are all currently underway:

Sunrise Phase II: Bringing the newly constructed 180 MMcf per day Sunrise gas processing facility to full capacity in 2019. The initial 60 MMcf per day of processing and sales capacity is currently in use, and the remaining balance will be available in June 2019 once final transportation arrangements are in place. The exact timing and pace at which the production is brought on-stream will be commodity price-dependent.

Dawson Phase I & II: Upgrading the Dawson Phase I & II gas processing facility with liquids-handling capabilities by year-end 2019.

Dawson Phase IV: Constructing and bringing the liquids-rich Dawson Phase IV gas processing and liquids-handling facility on production in the second quarter of 2020.

Ante Creek 10-36: Expanding the Ante Creek 10-36 facility to grow the area's light oil production, scheduled for completion in the second quarter of 2020.

Attachie West Phase I: Advancing infrastructure development at Attachie West to commission and bring to capacity the first phase of gas processing and liquids-handling in 2021. ARC obtained regulatory approval for the first phase of development, along with approval for multiple future phases of expansion, in the first quarter of 2019.

ARC's disciplined capital plan was designed to deliver profitable growth through investing funds from operations generated from existing businesses and the remaining proceeds from previously completed non-core asset dispositions. ARC regularly monitors commodity prices and market conditions to ensure that, first and foremost, its balance sheet and dividend are protected.

ARC's plan is expected to generate strong economic returns and deliver meaningful production and cash flow per share growth with balanced cash inflows and outflows over the long term. ARC will continue to manage conservative debt levels as a priority, targeting a net debt to annualized funds from operations ratio of between 1.0 and 1.5 times, and will continue to monitor prevailing commodity prices and market conditions. Should conditions change such that they adversely impact ARC's ability to effectively and profitably deliver on its strategic plans, ARC will adjust its investment levels and pace of development accordingly.

Financial Review

Balance Sheet and Capital Allocation

ARC maintains financial flexibility through its strong balance sheet, with $796.3 million of net debt outstanding at March 31, 2019, and a net debt to annualized funds from operations ratio of 1.1 times. ARC had an additional $1.4 billion of cash and credit capacity available at the end of the first quarter of 2019, taking into account the Company's working capital surplus. ARC's credit facility is currently undrawn.

In 2019, ARC expects to generate funds from operations in excess of its anticipated 2019 dividends of approximately $210 million and sustaining capital ⁽¹⁾ requirements of approximately $400 million. Discretionary funds from operations in excess of dividend and sustaining capital requirements, and the redeployment of cash proceeds from previously completed non-core dispositions, are being invested in key development projects.

ARC's outlook is that once the productive capacity at Dawson Phase IV is brought on-line in 2020, the Company will be able to fund its dividends and sustain and grow its business entirely out of funds from operations at moderate commodity price levels. At that time, ARC will have the option to pursue one, or a combination, of the following with the Company's unallocated funds from operations: debt reduction, future development opportunities, initiating a share buyback program, and increasing its dividend.

Net Income (Loss)

ARC recognized a net loss of $54.6 million ($0.15 per share) in the first quarter of 2019 compared to net income of $159.7 million ($0.45 per share) in the fourth quarter of 2018 and net income of $54.9 million ($0.16 per share) in the first quarter of 2018. The decrease in earnings is primarily attributed to an unrealized loss recorded on the mark-to-market of ARC's risk management contracts and no gain recognized from the disposal of non-core assets in the first quarter of 2019 compared to a gain recorded in the first quarter of 2018. The impact of these items was partially offset by reduced deferred income taxes and an increase in unrealized gain on foreign exchange resulting from the revaluation of ARC's US dollar-denominated debt.

Funds from Operations

ARC's first quarter 2019 funds from operations of $186.2 million ($0.53 per share) decreased by $22.4 million($0.06 per share) relative to fourth quarter 2018 funds from operations of $208.6 million ($0.59 per share). Commodity sales revenue from crude oil and liquids increased $24.5 million ($0.07 per share) relative to the prior quarter, however, a reduced realized gain on risk management contracts of $25.1 million ($0.07 per share) and a reduced realized gain on foreign exchange of $13.1 million ($0.04 per share) were the most significant contributors to the lower funds from operations in the period. Also serving to decrease funds from operations was increased G&A expense of $11.8 million ($0.03 per share), reflecting the increase in the fair value of ARC's share-based compensation plans due to the appreciation in ARC's common share price during the first quarter of 2019.

Funds from operations for the first quarter of 2019 decreased $14.8 million ($0.04 per share) from first quarter 2018 funds from operations of $201.0 million ($0.57 per share). Lower commodity sales from crude oil and liquids due to both a decrease in volumes and pricing, reduced realized gain on risk management contracts, and increased transportation expense were the primary drivers in lower funds from operations year-over-year. Partially offsetting these items were higher commodity sales from natural gas due to higher volumes and improved pricing, and lower royalties and operating expense.

The following table details the change in funds from operations for the first quarter of 2019 relative to the fourth quarter of 2018 and the first quarter of 2018.

Physical Marketing and Financial Risk Management

ARC's crude oil and liquids production comprised 52 per cent of total commodity sales revenue in the first quarter of 2019. The majority of ARC's liquids production is made up of conventional light oil and condensate, which had average realized prices of $63.72 per barrel and $64.81 per barrel, respectively, in the first quarter of 2019.

In managing its natural gas price risk exposure, ARC's physical diversification and financial risk management activities have helped to increase ARC's exposure to more attractive North American markets and enhance corporate natural gas realizations. ARC's financial risk management program provides additional cash flow protection. Summarized in the following table are the positive impacts that ARC's physical natural gas diversification and financial risk management activities had on the Company's realized natural gas price in the first quarter of 2019.

Total realized gain on risk management contracts for the first quarter of 2019 was $20.3 million, and the fair value of ARC's risk management contracts at March 31, 2019 was $119.7 million. ARC will continue to monitor commodity prices and execute on its risk management program to reduce the volatility of its funds from operations and to support its dividend and capital program. For details pertaining to ARC's risk management program and for a summary of the average oil and natural gas volumes associated with ARC's risk management contracts as at March 31, 2019, refer to Note 12 "Financial Instruments and Market Risk Management" in ARC's financial statements.

Operating Netback

Summarized in the following table are the components of ARC's operating netback for the first quarter of 2019 relative to the fourth quarter of 2018 and the first quarter of 2018.

ARC's operating netback, prior to gain on risk management contracts, for the first quarter of 2019 increased 12 per cent from the fourth quarter of 2018. This was primarily due to strengthened crude oil and condensate pricing. ARC's operating netback, including gain on risk management contracts, decreased one per cent in the first quarter of 2019 with a reduced realized gain on risk management contracts offsetting the positive impact that stronger crude oil and condensate pricing had on ARC's operating netback.

ARC's first quarter 2019 royalties decreased nine per cent from the fourth quarter of 2018, and decreased 38 per cent from the first quarter of 2018. Lower royalties reflect the sliding scale effect that commodity prices have on royalty rates, as well as the increase in ARC's natural gas production, which is subject to lower relative royalty rates compared to crude oil and liquids. Royalties for the three months ended March 31, 2019 were $19.0 million.

ARC's operating expense for the first quarter of 2019 increased four per cent from the fourth quarter of 2018 and was largely driven by higher electrical expenses and increased labour expenses related to ARC's share-based compensation plans. ARC's first quarter 2019 operating expense decreased 17 per cent relative to the first quarter of 2018 and is the combination of bringing on new Montney production with lower relative costs to operate and disposing of non-core assets with higher relative costs to operate throughout 2018. Operating expense for the three months ended March 31, 2019 was $65.6 million.

ARC expects that its operating expense per boe in the second quarter of 2019 will be higher than the first quarter by approximately 10 per cent due to third-party pipeline maintenance, significant turnarounds, and anticipated spring break-up impacts to production and field operations. ARC's full-year 2019 operating expense is expected to be within the guidance range of $5.30 to $5.70 per boe.

ARC's transportation expense for the first quarter of 2019 increased 11 per cent relative to the fourth quarter of 2018 and increased 13 per cent relative to the first quarter of 2018. The increase in transportation expense is primarily due to additional transportation agreements which have been assigned temporarily to a third party as part of ARC's physical marketing diversification efforts, and is directly offset by an increase to revenue. There is no impact to ARC's operating netback or funds from operations as a result of these agreements. Transportation expense for the three months ended March 31, 2019 was $37.0 million.

Ops Review

ARC's position in the Montney resource play is made up of approximately 1,100 net sections of land (approximately 714,000 net acres), with production from these assets representing greater than 90 per cent of total corporate production. ARC's history of disciplined execution in the Montney has positioned the Company to deliver excellent capital and operating efficiencies and generate strong rates of return on its projects. Owned-and-operated infrastructure affords ARC greater control over costs and the production mix of its liquids recovery, strong safety and environmental performance, and the ability to manage a flexible pace of development. ARC looks to optimize well designs and maximize well value, pursue technological advancements, and work with service providers to preserve its competitively low cost structure. ARC is a leader in sustainability practices and is committed to reducing its greenhouse gas emissions intensity and freshwater usage through responsible development activities. ARC actively monitors market conditions and executes a strategy that proactively secures takeaway capacity for future development projects, mitigates the impact of third-party infrastructure outages, and diversifies ARC's sales portfolio to ensure that production gets to market at optimal pricing.

Capital Expenditures

ARC's first quarter 2019 capital expenditures, before land and net property acquisitions and dispositions, totaled $213.7 million. Capital investment was focused on ARC's Montney assets, with 21 wells drilled (12 oil wells and nine liquids-rich wells) and 28 wells completed, and the advancement of several infrastructure projects including, the Dawson Phase I and II liquids-handling facility upgrade, the Dawson Phase IV facility, the Ante Creek 10-36 facility expansion project, and initial investments for the first phase of development at Attachie West. ARC's 2019 capital program of $775 million is focused on drilling to maintain production at existing infrastructure at or near capacity while investing in building out future processing capacity.

The following table outlines the number of wells drilled and completed in each of ARC's core operating areas.

Production

Average daily production of 139,054 boe per day in the first quarter of 2019 was comprised of 26,461 barrels per day of light oil and condensate, 7,183 barrels per day of NGLs, and 633 MMcf per day of natural gas. ARC's first quarter 2019 average daily production was two per cent higher than the fourth quarter of 2018, with increased natural gas production at the Sunrise Phase II facility partially offset by lower production in Alberta due to cold weather.

Average daily production in the first quarter of 2019 increased six per cent relative to the first quarter of 2018 and was predominantly the result of ARC's continued focus on the liquids-rich lower Montney at Dawson, and new natural gas production at the Sunrise Phase II facility. Partially offsetting these increases to production was the disposal of approximately 4,700 boe per day of non-core production throughout 2018.

ARC expects that production during the second quarter of 2019 will be lower than the first quarter by approximately five per cent due to third-party pipeline maintenance, significant turnarounds, and anticipated spring break-up impacts to production and field operations. ARC expects that production will ramp up through the second half of 2019 as final transportation arrangements come into effect at Sunrise and initial production from a multi-well pad currently being drilled at the liquids-rich Attachie West area is brought on-stream in the fourth quarter of 2019.

Full-year 2019 average daily production is expected to be within the guidance range of 135,000 to 142,000 boe per day.

Attachie

ARC's Attachie property is a highly prospective Montney condensate and liquids-rich natural gas play located in northeast British Columbia where ARC has a land position of 308 net sections (approximately 202,000 net acres).

With its condensate-rich production profile, significantly over-pressured reservoir, a large contiguous land position, and proven multi-layer development potential, Attachie West is a leading development opportunity within ARC's portfolio. Production at Attachie West averaged 3,300 boe per day in the first quarter of 2019, comprised of 1,800 barrels per day of condensate and 9 MMcf per day of natural gas. ARC expects current production levels to continue to decrease moderately through the second and third quarters of 2019 as existing wells on production naturally decline and are shut-in for offset frac operations. Production is expected to increase in the fourth quarter of 2019 when initial production from the multi-well pad that is currently being drilled is brought on-stream. The liquids processing capacity at Attachie West's battery is 3,500 barrels per day.

ARC invested $16 million at Attachie West during the first quarter of 2019, primarily directed at initial drilling and lease construction costs for a 10-well pad. The multi-well pad is focused on well design optimization to maximize well productivity and improve capital efficiencies, and will provide data to finalize the technical design for commercial development at Attachie West. There are currently two active rigs on site and completion activities are scheduled for the second half of the year, with initial production expected in the fourth quarter of 2019.

In the first quarter of 2019, ARC obtained regulatory approval for the construction of its Attachie West Phase I facility, along with the approval for multiple future phases of expansion. Attachie West Phase I is being designed to process 60 MMcf per day of natural gas, 10,000 barrels per day of condensate, and 4,000 barrels per day of NGLs. The facility is expected to be brought on-stream in 2021, and initial egress and long-term takeaway capacity for production has been secured on TransCanada Corporation's North Montney Mainline. As part of the first phase of development at Attachie West, ARC invested in the construction of a major access road for the area during the first quarter of 2019. The ARC owned-and-operated access road extends over 20 kilometres and will help reduce the area's operating expense and improve capital efficiencies.

Dawson

ARC's flagship Dawson property is a low-cost Montney natural gas and liquids-rich natural gas play where ARC has a land position of 137 net sections (approximately 89,000 net acres). The Dawson play delivers strong economics and cash flow at prevailing natural gas prices, and is further enhanced by the growing liquids-rich production being developed in the lower Montney horizon. Dawson production averaged 47,400 boe per day in the first quarter of 2019, comprised of 257 MMcf per day of natural gas, 2,800 barrels per day of condensate, and 1,800 barrels per day of NGLs.

ARC invested $64 million during the first quarter of 2019 to drill seven wells and complete five wells, and to advance work on two key infrastructure projects in the area. The Dawson Phase I & II liquids-handling upgrade is being developed to support ARC's broad shift to liquids-rich lower Montney development. All major equipment required for the upgrade was delivered to the Phase I & II site during the first quarter of 2019, and a 10-day outage is planned at the facility during the third quarter of 2019 to allow for the completion of the upgrade. The project is expected to be operational by year-end 2019. At Dawson Phase IV, shop fabrication of major equipment commenced in the first quarter of 2019, and the power-generation turbines required for the facility have been installed at the site. Dawson Phase IV remains on schedule to be brought on-stream in the second quarter of 2020.

Parkland/Tower

ARC's Parkland/Tower property, a light oil and liquids-rich natural gas Montney play in northeast British Columbia, consists of 57 net sections at Tower (approximately 37,000 net acres), which produce predominantly light oil and condensate with liquids-rich associated gas; and 37 net sections at Parkland (approximately 24,000 net acres), which produce liquids-rich natural gas. With contiguous lands, these areas share ARC owned-and-operated infrastructure and processing capacity. Production at Parkland/Tower averaged 30,300 boe per day in the first quarter of 2019, comprised of 7,400 barrels per day of light oil and condensate, 3,500 barrels per day of NGLs, and 116 MMcf per day of natural gas. Of the 30,300 boe per day produced, 3,500 boe per day (approximately 40 per cent condensate and NGLs) was directed to the Dawson Phase III facility for processing and sales via the Parkland-Dawson interconnect pipeline. ARC will continue to focus investment on the high condensate-to-gas ratios these liquids-rich Parkland wells produce.

Capital investment at Parkland/Tower in 2019 is focused on driving strong cash flow generation. ARC invested $78 million during the first quarter of 2019 to drill six wells and complete seven wells at Tower, and to drill two lower Montney wells at Parkland.

Sunrise

ARC has a land position of 32 net sections at Sunrise (approximately 21,000 net acres), a highly prolific dry natural gas Montney play in northeast British Columbia. Production at Sunrise Phase II continued to grow during the first quarter of 2019, with production for the Sunrise area averaging 183 MMcf per day of natural gas, and representing a 20 per cent increase from the fourth quarter of 2018.

ARC invested $14 million at Sunrise during the first quarter of 2019 to complete nine natural gas wells that were drilled in the third quarter of 2018. ARC plans to tie these wells in to Sunrise Phase II in the second quarter of 2019.

The Sunrise Phase II facility was designed for 180 MMcf per day of gas processing and sales capacity, and brings ARC's total owned-and-operated processing and sales capacity for the entire Sunrise area to 240 MMcf per day of natural gas. Production is planned to be processed through Sunrise Phase II according to the following, approximate timeline:

• 60 MMcf per day of processing and sales capacity is currently in use.
• By June 2019, 60 MMcf per day of existing natural gas production that is currently being processed through a third-party facility is expected to be redirected to ARC's operated Sunrise Phase II facility. With complete control of ARC's Sunrise production volumes, the Company expects its operating expense to be significantly reduced with the elimination of third-party processing fees.
• In June 2019, an additional 60 MMcf per day of incremental processing capacity will be available once final transportation arrangements have come into effect. The exact timing and pace at which the production is brought on-stream will be commodity price-dependent.

Ante Creek

ARC has a land position of 325 net sections at Ante Creek (approximately 208,000 net acres), a Montney light oil play in northern Alberta that generates strong cash flows and profitable returns, and has significant future development potential. Cold weather impacted operations at Ante Creek in the first quarter of 2019, with production decreasing nine per cent from the fourth quarter of 2018 to average 14,800 boe per day (approximately 50 per cent light oil and liquids).

Capital investment of $32 million during first quarter of 2019 included drilling six oil wells, completing seven wells, and advancing fabrication of major equipment for the Ante Creek 10-36 facility expansion project. The facility expansion is expected to be on-stream in the second quarter of 2020.

Pembina

ARC's Cardium assets in Pembina deliver high-quality, light oil production, and generate an attractive operating netback and cash flows with major infrastructure already in place. ARC has a land position of 217 net Cardium sections in Pembina (approximately 139,000 net acres), where first quarter 2019 production averaged 10,600 boe per day, of which over 80 per cent was light oil and liquids production. Approximately $3 million of capital was invested during the first quarter of 2019. ARC's current focus at Pembina is to manage cash flow generation from the asset base with modest drilling programs being conducted to manage production declines.

Outlook

ARC's 2019 capital program of $775 million focuses on liquids growth to deliver a meaningful cash flow per share increase over the long term, while maintaining ARC's strong financial position and dividend. The 2019 budget includes investment in multi-year infrastructure development projects that will add facility capacity at Attachie West and Dawson in northeast British Columbia, and Ante Creek in northern Alberta. The majority of the production associated with these infrastructure projects is expected to be added in 2020 and 2021. Annual average production is expected to be in the range of 135,000 to 142,000 boe per day in 2019.