ARC RESOURCES LTD. REPORTS RECORD YEAR-END RESULTS AND RESERVES

·20 min read

CALGARY, AB, Feb. 9, 2023 /CNW/ - (TSX: ARX) ARC Resources Ltd. ("ARC" or the "Company") today reported its fourth quarter and year-end 2022 financial and operational results as well as its year-end 2022 reserves.

ARC Resources Ltd. Logo (CNW Group/ARC Resources Ltd.)
ARC Resources Ltd. Logo (CNW Group/ARC Resources Ltd.)

ARC generated record production and funds from operations per share in the fourth quarter of 2022. In 2022, annual average production, net income, funds from operations, and free funds flow were the highest of any year in ARC's 26-year history.

HIGHLIGHTS

Fourth Quarter 2022 Results

  • ARC delivered record average production of 359,730 boe(1)(2) per day (61 per cent natural gas and 39 per cent crude oil and liquids). Production per share(3) increased 16 per cent year-over-year and was in-line with Company guidance despite weather related downtime in December.

  • ARC generated free funds flow of $603 million(4) ($0.96 per share)(5), funds from operations of $986 million(6) ($1.56 per share)(7) and cash flow from operating activities of $878 million in the fourth quarter. ARC invested $383 million into capital expenditures(4), in-line with Company guidance.

  • ARC's market diversification strategy resulted in an average realized natural gas price of $8.31 per Mcf(7); $2.73 per Mcf, or 49 per cent, greater than the average AECO 7A Monthly Index price.

  • ARC distributed 68 per cent or $411 million ($0.65 per share) of free funds flow for the period to shareholders through base dividends and share repurchases, with the remainder used to reduce net debt to $1.3 billion(6) or 0.4 times funds from operations(6).

  • ARC repurchased 17 million shares during the fourth quarter. Since renewing its NCIB on August 30, 2022, ARC has repurchased 35 million common shares, representing 53 per cent of its allotment under the current NCIB.

  • ARC recognized net income of $741 million ($1.18 per share), compared to net income of $678 million ($0.96 per share) in the fourth quarter of 2021.

Year-end 2022 Results

  • ARC generated record free funds flow in 2022 of $2.3 billion ($3.42 per share), representing a 58 per cent increase compared to 2021 free funds flow per share. ARC distributed 71 per cent or $1.6 billion ($2.43 per share) of free funds flow to shareholders with the remainder used to further strengthen ARC's balance sheet by reducing debt by $0.7 billion and net debt by $0.5 billion.

  • In the second quarter of 2022, ARC entered into a long-term natural gas supply agreement with Cheniere Energy, Inc. ("Cheniere"). The agreement commences with the commercial operation of Train 7 of the Corpus Christi Stage III expansion which is expected in 2027. ARC will deliver natural gas to Cheniere through existing pipeline capacity and will receive a liquefied natural gas ("LNG") price based on Platts JKMTM (Japan Korea Marker), after deductions for fixed LNG shipping costs and a fixed liquefaction fee.

  • ARC recognized net income of $2.3 billion ($3.47 per share) compared to net income of $787 million ($1.25 per share) in 2021. Cash flow from operating activities was $3.8 billion and funds from operations were $3.7 billion ($5.60 per share).

  • ARC executed its 2022 capital program safely and efficiently. Cash flow used in investing activities totaled $1.4 billion, with capital expenditures of $1.4 billion delivering record average production of 345,613 boe per day (61 per cent natural gas and 39 per cent crude oil and liquids) in 2022.

  • Market diversification resulted in an average annual realized natural gas price of $8.15 per Mcf; $2.59 per Mcf, or 47 per cent greater than the average AECO 7A Monthly Index price for the period.

  • In January 2023, ARC received certification under Equitable Origin's EO100TM Standard for Responsible Development for its Ante Creek asset. With this certification and prior certifications received in 2022 for Kakwa and the Company's northeast BC assets, 100 per cent of the Company's assets are now certified under this global standard, representing the largest certified production base in Canada.

Year-end 2022 Reserves(1)(8)

  • ARC's before-tax net present value ("NPV") of proved plus probable ("2P") reserves, discounted at 10 per cent, increased 49 per cent to $34.00 per share(9) or $21.1 billion at December 31, 2022. The increase was driven by positive technical revisions and extensions and improved recovery, particularly at Kakwa, along with stronger commodity prices and reduced share count.

  • ARC grew its reserves per share in all categories between 14 per cent and 22 per cent. Proved producing ("PDP") reserves increased 22 per cent per share to 549 MMboe, primarily due to out performance at Kakwa where PDP reserves increased by 17 per cent. PDP finding, development and acquisition ("FD&A") costs including future development costs ("FDC") of $8.31 per boe(10) equated to a 5.2 times(10) PDP recycle ratio.

  • 2P reserve replacement from development has been 140 per cent of production or greater for 15 consecutive years, and at year-end 2022 just 17 per cent of ARC's total drilling inventory was booked in the 2P category. ARC's Attachie asset, which will drive the next phase of production and reserve growth, comprised less than four per cent of total 2P locations with just 34 undeveloped drilling locations booked.

ARC's consolidated financial statements and notes (the "financial statements") and Management's Discussion and Analysis ("MD&A") as at and for the three months and year ended December 31, 2022, are available on ARC's website at www.arcresources.com and under ARC's SEDAR profile at www.sedar.com. The disclosures under the sections entitled "Netback" and "Non-GAAP and Other Financial Measures" in ARC's MD&A as at and for the three months and year ended December 31, 2022 (the "2022 Annual MD&A") are incorporated by reference in this news release.

___________________________________________

(1)

ARC has adopted the standard six thousand cubic feet ("Mcf") of natural gas to one barrel ("bbl") of crude oil ratio when converting natural gas to barrels of oil equivalent ("boe"). Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different than the energy equivalency of the 6:1 conversion ratio, utilizing the 6:1 conversion ratio may be misleading as an indication of value.

(2)

Throughout this news release, crude oil ("crude oil") refers to light, medium, and heavy crude oil product types as defined by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Condensate is a natural gas liquid as defined by NI 51-101. Throughout this news release, natural gas liquids ("NGLs") comprise all natural gas liquids as defined by NI 51-101 other than condensate, which is disclosed separately. Throughout this news release, crude oil and liquids ("crude oil and liquids") refers to crude oil, condensate, and NGLs.         

(3)

Represents average daily production divided by the diluted weighted average common shares outstanding for the respective three months ended December 31.

(4)

Non-GAAP financial measure that is not a standardized financial measure under International Financial Reporting Standards ("IFRS") and may not be comparable to similar financial measures disclosed by other issuers. See "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for information relating to this non-GAAP financial measure, which information is incorporated by reference into this news release. See "Non-GAAP and Other Financial Measures" of this news release for the most directly comparable financial measure disclosed in ARC's current financial statements to which such non-GAAP financial measure relates and a reconciliation to such comparable financial measure.

(5)

Non-GAAP ratio that is not a standardized financial measure under IFRS and may not be comparable to similar ratios disclosed by other issuers. Free funds flow, a non-GAAP financial measure, is used as a component of the non-GAAP ratio. See "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for the non-GAAP ratio for the comparative period and other information relating to this non-GAAP ratio, which information is incorporated by reference into this news release.

(6)

See Note 16 "Capital Management" in the financial statements and "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for information relating to this capital management measure, which information is incorporated by reference into this news release.              

(7)

See "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for an explanation of the composition of this supplementary financial measure, which information is incorporated by reference into this news release.

(8)

GLJ Ltd. ("GLJ") conducted an Independent Qualified Reserves Evaluation ("Reserves Evaluation"), dated February 8, 2023 and effective December 31, 2022, which was prepared in accordance with definitions, standards, and procedures in the Canadian Oil and Gas Evaluation ("COGE") Handbook and NI 51-101. The Reserves Evaluation was based on GLJ forecast pricing and foreign exchange rates at January 1, 2023.

(9)

See "Non-GAAP and Other Financial Measures" of this news release for an explanation of the composition of this supplementary financial measure, which information is incorporated by reference into this news release.

(10)

Non-GAAP ratio that is not a standardized financial measure under IFRS and may not be comparable to similar financial measures disclosed by other issuers. Netback per boe, a non-GAAP ratio, and capital expenditures and adjusted net capital acquisitions, both non-GAAP financial measures, are used as components of the non-GAAP ratio. See "Non-GAAP and Other Financial Measures" of this news release for the non-GAAP ratio for the comparative period  and other information relating to this non-GAAP ratio.

FINANCIAL AND OPERATIONAL RESULTS

(Cdn$ millions, except per share amounts(1), boe amounts,

Three Months Ended

Year  Ended(2)

     and common shares outstanding)

September 30,
2022

December 31,
2022

December 31,
2021

December 31,
2022

December 31,
2021

FINANCIAL RESULTS






Net income

867.8

741.0

678.0

2,302.3

786.6

Per share

1.32

1.18

0.96

3.47

1.25

Cash flow from operating activities

1,103.6

878.3

668.7

3,833.3

2,006.5

Per share(3)

1.68

1.39

0.95

5.78

3.20

Funds from operations

953.0

986.2

833.6

3,712.5

2,415.4

Per share

1.45

1.56

1.19

5.60

3.85

Free funds flow

580.1

602.9

458.7

2,270.6

1,353.6

Per share

0.89

0.96

0.65

3.42

2.16

Dividends declared

76.7

93.4

69.5

318.2

181.4

Per share

0.12

0.15

0.10

0.49

0.286

Cash flow used in investing activities

351.9

350.7

268.7

1,413.2

808.1

Capital expenditures

372.9

383.3

374.9

1,441.9

1,061.8

Long-term debt

1,126.6

990.0

1,705.3

990.0

1,705.3

Net debt

1,541.3

1,301.5

1,828.7

1,301.5

1,828.7

Common shares outstanding, weighted average diluted

(millions)

655.4

630.3

703.0

663.1

627.3

Common shares outstanding, end of period (millions)

637.6

620.9

693.5

620.9

693.5

OPERATIONAL RESULTS






Production






Crude oil (bbl/day)

8,149

7,280

7,857

7,904

10,435

Condensate (bbl/day)

82,203

82,855

74,220

78,489

59,958

Crude oil and condensate (bbl/day)

90,352

90,135

82,077

86,393

70,393

Natural gas (MMcf/day)

1,227

1,310

1,293

1,259

1,149

NGLs (bbl/day)

47,108

51,311

48,299

49,385

40,084

Total (boe/day)

342,034

359,730

345,831

345,613

302,003

Average realized price






Crude oil ($/bbl)(3)

111.41

103.58

92.11

115.66

75.08

Condensate ($/bbl)(3)

110.35

107.24

96.90

118.17

86.04

Natural gas ($/Mcf)(3)

9.29

8.31

6.45

8.15

4.82

NGLs ($/bbl)(3)

20.72

28.86

27.65

27.98

26.16

Average realized price ($/boe)(3)

65.37

61.17

50.87

63.18

41.48

Netback






Commodity sales from production ($/boe)(3)

65.37

61.17

50.87

63.18

41.48

Royalties ($/boe)(3)

(9.23)

(10.18)

(5.44)

(9.59)

(3.64)

Operating expense ($/boe)(3)

(4.69)

(4.37)

(3.50)

(4.44)

(3.86)

Transportation expense ($/boe)(3)

(6.08)

(5.70)

(5.47)

(5.90)

(4.79)

Netback ($/boe)(4)

45.37

40.92

36.46

43.25

29.19

TRADING STATISTICS(5)






High price

19.51

20.49

13.34

22.88

13.34

Low price

13.12

17.05

10.20

11.66

5.88

Close price

16.59

18.25

11.50

18.25

11.50

Average daily volume (thousands of shares)

5,315

4,259

3,173

6,563

3,160

(1)

Per share amounts, with the exception of dividends, are based on weighted average diluted common shares.

(2)

Comparative figures represent ARC's results prior to the closing of the business combination with Seven Generations on April 6, 2021, and therefore do not reflect historical data from Seven Generations.

(3)

See "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for an explanation of the composition of this supplementary financial measure, which information is incorporated by reference into this news release.

(4)

Non-GAAP ratio that is not a standardized financial measure under IFRS and may not be comparable to similar ratios disclosed by other issuers. Netback, a non-GAAP financial measure, is used as a component of the non-GAAP ratio. See "Netback" and "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for the non-GAAP ratio for the comparative period and other information relating to this non-GAAP ratio, which information is incorporated by reference into this news release.

(5)

Trading prices are stated in Canadian dollars on a per share basis and are based on intra-day trading on the Toronto Stock Exchange.

OUTLOOK

ARC is well positioned to build on its 2022 record performance over the next several years. Kakwa continues to exhibit strong performance and ARC has regained operational momentum in British Columbia ("BC") following the receipt of permits on freehold lands in late 2022.

  • ARC has resumed activity in BC. With more than 95 per cent of its existing BC production base on freehold land, the Company is well positioned as it continues to receive freehold permits required to fully execute its 2023 capital program. This includes the 80 MMcf/day natural gas expansion at Sunrise, one of ARC's most profitable assets with near zero emissions.

  • In January 2023, the BC government and several of the Treaty 8 First Nations reached agreements regarding future resource development in the province. ARC is evaluating the details of the agreements while engaging and collaborating with its neighbouring Indigenous communities in BC. After understanding the new regulatory process, the Company will be in a position to make a decision as it relates to sanctioning of Attachie West Phase I.

2023 Guidance

ARC's 2023 preliminary corporate guidance is unchanged since its announcement in November 2022. ARC continues to monitor inflation and work proactively with its partners across the supply chain to ensure it has sufficient access to services to safely and efficiently execute its program.

  • In 2023, ARC intends to invest $1.8 billion(1) in capital expenditures and deliver average production of approximately 345,000 to 350,000 boe per day (60 per cent natural gas and 40 per cent crude oil and liquids).

  • In 2024, capital expenditures are expected to decrease to between $1.5 billion and $1.6 billion with average production forecasted to average approximately 350,000 boe per day (60 per cent natural gas and 40 per cent crude oil and liquids).

(1)

Refer to the section entitled "About ARC Resources Ltd." contained within the 2022 Annual MD&A for historical capital expenditures, which  information is incorporated by reference into this news release.

ARC's 2022 and 2023 annual guidance and a review of 2022 actual results are outlined below:


2022 Guidance

2022 Actuals

% Variance from
2022 Guidance

2023 Guidance

Crude oil (bbl/day)

8,000 - 9,000

7,904

(1)

8,500 - 9,000

Condensate (bbl/day)

77,000 - 81,000

78,489

79,000 - 81,000

Crude oil and condensate (bbl/day)

85,000 - 90,000

86,393

87,500 - 90,000

Natural gas (MMcf/day)

1,240 - 1,260

1,259

1,260 - 1,270

NGLs (bbl/day)

48,000 - 50,000

49,385

47,000 - 49,000

Total (boe/day)

340,000 - 350,000

345,613

345,000 - 350,000

Expenses ($/boe)(1)





Operating

4.00 - 4.50

4.44

4.60 - 5.00

Transportation

5.35 - 5.75

5.90

3

5.50 - 6.00

General and administrative ("G&A") expense
   before share-based compensation expense

0.80 - 0.90

1.00

11

0.85 - 0.95

G&A - share-based compensation expense(2)

0.60 - 0.70

0.69

0.25 - 0.35

Interest and financing(3)

0.55 - 0.65

0.68

5

0.65 - 0.75

Current income tax expense as a per cent of
   funds from operations(1)

3 - 8

8

10 - 15

Capital expenditures ($ billions)

1.35 - 1.45

1.4

1.8

(1)

See "Non-GAAP and Other Financial Measures" in the 2022 Annual MD&A for an explanation of the composition of these supplementary  financial measures, which information is incorporated by reference into this news release.

(2)

Comprises expense recognized under all share-based compensation plans.

(3)

Excludes accretion of ARC's asset retirement obligation.

  • ARC's 2022 financial and operational results were largely within guidance. ARC's G&A expense before share-based compensation expense per boe was above guidance as a result of increased employee compensation and corporate costs. Transportation expense per boe was three per cent above guidance reflecting higher fuel gas expense from stronger commodity prices. Interest and financing was slightly above the guidance range as short-term borrowing rates increased throughout 2022.

Free Funds Flow Allocation

ARC's goal is to provide shareholders with an attractive total return while adhering to the Company's guiding principles of balance sheet strength, capital discipline, and a focus on profitability. This is achieved through profitable investments in its assets, complemented by a meaningful return of capital that grows over time.

In 2023, ARC anticipates that the proportion of free funds flow allocated to shareholders will increase towards the upper half of its free funds allocation range of between 50 to 100 per cent. Greater operating momentum in BC along with further strengthening of the balance sheet supports an increasing proportion of free funds flow returned to shareholders.

  • Base dividend and base dividend growth compounded by share repurchases below intrinsic value remain the optimal mechanism to return capital.

  • In 2022, ARC repurchased 10 per cent of its issued and outstanding shares through the NCIB and increased the base dividend by 50 per cent. ARC intends to continue to grow the base dividend with the underlying profitability of the business, and increase it on a per share basis as shares are retired through the NCIB or other means.

  • The current dividend level remains sustainable through the current commodity cycle.

FINANCIAL AND OPERATIONAL RESULTS

Production and Operating Expense

Production

  • ARC's production averaged 359,730 boe per day during the fourth quarter of 2022 (61 per cent natural gas and 39 per cent crude oil and liquids). Production per share increased 16 per cent compared to the fourth quarter of 2021 and was in-line with Company guidance despite cold weather and unplanned downtime that impacted volumes in December.

  • Production increased by five per cent in the fourth quarter compared to the third quarter of 2022. This increase was driven by growth at Kakwa, which averaged 188,183 boe per day (59 per cent crude oil and liquids and 41 per cent natural gas).

  • Full-year production averaged a record 345,613 boe per day (61 per cent natural gas and 39 per cent crude oil and liquids). Production was in-line with guidance and represented a 14 per cent increase from average daily production in 2021.

  • First quarter production in 2023 is expected be lower than the fourth quarter of 2022 due to unplanned third-party outages. Production is expected to be fully restored in February 2023 and full-year production guidance is unchanged due to stronger than forecast base production offsetting the impact from these outages.

Operating Expense

  • ARC's fourth quarter 2022 operating expense of $4.37 per boe decreased seven per cent from the third quarter of 2022, due to lower planned maintenance activity and higher production. In 2022, ARC's operating expense of $4.44 per boe was in-line with the Company's guidance range of $4.00 to $4.50.

  • Operating expense per boe in 2023 is anticipated to average between $4.60 and $5.00 per boe. In 2024, the water infrastructure investment at Kakwa is expected to reduce corporate operating expense by $0.50 per boe once it is commissioned by reducing trucking and third-party disposal costs, while lowering emissions.

Free Funds Flow, Funds from Operations, and Cash Flow from Operating Activities

Free Funds Flow

  • ARC generated free funds flow of $603 million ($0.96 per share) during the fourth quarter of 2022. ARC distributed 68 per cent or $411 million ($0.65 per share) of free funds flow to shareholders through a combination of dividends and share repurchases under its NCIB.

  • In 2022, ARC generated record free funds flow of $2.3 billion ($3.42 per share), of which 71 per cent or $1.6 billion ($2.43 per share) was distributed to shareholders.

Funds from Operations and Cash Flow from Operating Activities

  • ARC generated funds from operations of $986 million ($1.56 per share) during the fourth quarter of 2022, increasing by $33 million ($0.11 per share) from the third quarter of 2022. Lower realized losses on ARC's risk management contracts were partially offset by increased royalties.

  • Fourth quarter and full-year 2022 cash flow from operating activities was $878 million and $3.8 billion, respectively.

The following table details the change in funds from operations for the fourth quarter of 2022 relative to the third quarter of 2022.

Funds from Operations Reconciliation

$ millions

$/share(1)

Funds from operations for the three months ended September 30, 2022

953.0

1.45

Production volumes



Crude oil and liquids

5.7

0.01

Natural gas

70.3

0.11

Commodity prices



Crude oil and liquids

9.5

0.01

Natural gas

(118.0)

(0.18)

Sales of commodities purchased from third parties

92.1

0.14

Interest and other income

1.7

Realized loss on risk management contracts

74.4

0.11

Royalties

(46.3)

(0.07)

Expenses



Commodities purchased from third parties

(90.5)

(0.14)

Operating

2.8

Transportation

2.7

G&A

(6.6)

(0.01)

Interest and financing

(0.7)

Current income tax

6.5

0.01

Realized gain on foreign exchange

29.4

0.05

Other

0.2

Weighted average shares, diluted

0.07

Funds from operations for the three months ended December 31, 2022

986.2