ARX ARC Resources Ltd

CALGARY, AB, Nov. 3, 2022 /CNW/ - (TSX: ARX) ARC Resources Ltd. ("ARC" or the "Company") today reported its third quarter 2022 financial and operational results and announced its 2023 budget.

HIGHLIGHTS

Q3 2022 Results - ARC delivered quarterly production of 342,034 boe⁽¹⁾⁽²⁾ per day (60 per cent natural gas and 40 per cent crude oil and liquids), cash flow from operating activities of $1,104 million, and generated funds from operations of $953 million⁽³⁾ ($1.45 per share)⁽⁴⁾.

• ARC generated free funds flow of $580 million⁽⁵⁾ ($0.89 per share)⁽⁶⁾ based on $373 million invested into capital expenditures⁽⁵⁾.
• ARC distributed 94 per cent or $544 million ($0.83 per share) of free funds flow to shareholders during the third quarter of 2022 through a combination of dividends and share repurchases under its normal course issuer bid ("NCIB").
• ARC's market diversification resulted in an average realized natural gas price of $9.29 per Mcf⁽⁴⁾; $3.48 per Mcf, or 60 per cent, greater than the average AECO 7A Monthly Index price.
• As of September 30, 2022, ARC's long-term debt balance was $1.1 billion and its net debt balance was $1.5 billion⁽³⁾ or 0.4 times funds from operations.
• Capital spending and production guidance for 2022 remain unchanged.

Funds Flow Allocation - ARC has increased its targeted return to 50 to 100 per cent of free funds flow to shareholders, from its previous target of 50 to 80 per cent.

• Repurchasing shares below intrinsic value and growing the base dividend through growth in the business with a reduced share count is the optimal mechanism to return capital to shareholders.
• Since renewing its NCIB on August 30, 2022, ARC has repurchased 20.9 million common shares, representing 32 per cent of its allotment under the current NCIB.
• ARC has now repurchased 93.1 million common shares, or 13 per cent of its issued and outstanding shares, since instituting the NCIB in September 2021, at an average price of $15.12 per share.

Dividend Increase - ARC's Board of Directors ("the Board") has approved has approved a 25 per cent increase to ARC's quarterly dividend, from $0.12 to $0.15 per share. The dividend increase is effective for ARC's fourth quarter 2022 dividend, payable on January 16, 2023 to shareholders of record on December 30, 2022.

2023 Capital Budget - The Board has approved a preliminary 2023 capital budget of $1.8 billion. The capital program balances profitable growth with the flexibility to increase capital returns to shareholders as net debt is reduced.

• Capital expenditures are expected to deliver average production of approximately 350,000 boe per day (60 per cent natural gas and 40 per cent crude oil and liquids), representing two per cent growth year over year, and includes infrastructure investment to lower operating costs at Kakwa.
• The capital program is expected to generate approximately $1.7 billion of free funds flow⁽⁷⁾ based on the forward curve⁽⁸⁾.

ARC's unaudited condensed interim consolidated financial statements and notes (the "financial statements") and Management's Discussion and Analysis ("MD&A") as at and for the three and nine months ended September 30, 2022, are available on ARC's website at www.arcresources.com and under ARC's SEDAR profile at www.sedar.com. The disclosure under the section entitled "Non-GAAP and Other Financial Measures" in ARC's MD&A as at and for the three and nine months ended September 30, 2022 (the "Q3 2022 MD&A") is incorporated by reference in this news release.

FINANCIAL AND OPERATIONAL RESULTS

2023 CAPITAL BUDGET

The Board has approved a preliminary capital budget of $1.8 billion. The budget was designed with profitable growth and capital discipline in mind, and includes an updated framework that allows capital returns to increase as net debt approaches ARC's long-term target. The capital program adheres to ARC's long-standing principles of prudent capital allocation, balance sheet strength, and long-term profitability.

Strategic Priorities

• Execute the capital program in a safe, efficient, and responsible manner.
• Increase Kakwa profitability through modest production growth and investments in infrastructure that lowers operating costs.
• Resume drilling activity in British Columbia ("BC") to restore production to previous levels and maximize unit economics.
• Evaluate and execute additional downstream diversification initiatives.
• Remain sanction-ready at Attachie West Phase I.
• Execute initiatives to reduce emissions and retain ESG leadership status.

The 2023 budget is expected to generate average production of approximately 350,000 boe per day (60 per cent natural gas and 40 per cent crude oil and liquids) representing two per cent production growth. The program is expected to generate approximately $1.7 billion of free funds flow, at the current forward curve. The 2023 capital budget incorporates an approximately 20 per cent increase due to cost inflation realized over the course of 2022.

Capital Budget Highlights

• Total capital expenditures of $1.8 billion⁽¹⁾, with approximately 70 per cent allocated to Alberta and 30 per cent to BC.
• Capital expenditures are expected to decrease in 2024 to between $1.5 billion and $1.6 billion with production forecast to average approximately 350,000 boe per day (60 per cent natural gas and 40 per cent crude oil and liquids).
• The capital program is predicated upon the continued receipt of drilling permits on freehold land in NEBC.
• Invest $1.1 billion to increase free funds flow at Kakwa.
• • Kakwa production is expected to increase and average between 190,000 and 200,000 boe per day in 2023.
  • Invest $170 million over the next two years ($130 million in 2023) into water infrastructure to reduce annual operating expenses, primarily trucking, by approximately $60 million, or $0.50 per boe based on corporate production.
• Invest $100 million to expand natural gas production at Sunrise by 80 MMcf per day.
• • Production volumes from the expansion are expected to be fully on-stream in 2024, bringing the area's processing capacity to 360 MMcf per day.
  • Sunrise is one of ARC's most profitable assets and will be direct-connected to the Coastal Gas Link that will supply natural gas to liquefied natural gas ("LNG") off of the west coast of Canada.
• ARC remains prepared to sanction Attachie West Phase I once the BC regulatory environment on Crown lands in NEBC becomes more certain. The total project costs for Phase I are estimated at approximately $700 million, which includes all facility capital and the initial wells required to fill the facility. Phase I is estimated to pay out in less than two years based on the current forward curve.

Free Funds Flow Allocation

ARC's goal is to provide shareholders with an attractive total return through profitable investments and sustainable return of capital measures. Balance sheet strength is foundational to ARC and critical to capitalize on counter-cyclical opportunities; however, as net debt meets or falls below ARC's long-term targets, ARC intends to increase the proportion of free funds flow that is returned to shareholders.

• ARC intends to return 50 to 100 per cent of free funds flow to shareholders, an increase from 50 to 80 per cent of free funds flow outlined previously:
• • Base dividend growth compounded by share repurchases below intrinsic value are the optimal mechanism to return capital.
  • ARC intends to continue to grow the base dividend with the business, and on a per share basis as shares are retired through the NCIB.
• ARC has reduced its long-term debt by $1.1 billion or $1.73 per share since acquiring Seven Generations in 2021.
• Over the past year, ARC has returned 72 per cent of free funds flow to shareholders through a growing base dividend and share repurchases. In the third quarter of 2022, ARC returned 94 per cent of free funds flow to shareholders.
• Since renewing the NCIB on August 30, 2022, ARC has repurchased 32 per cent of its allotment under the NCIB and has retired 13 per cent of its issued and outstanding shares since commencing the NCIB in September 2021.

2023 Guidance

ARC's 2023 preliminary corporate guidance is based on various commodity price scenarios and economic conditions; certain guidance estimates may fluctuate with commodity price changes and regulatory changes. ARC's guidance provides readers with the information relevant to Management's expectations for financial and operational results for 2023. Readers are cautioned that the guidance estimates may not be appropriate for any other purpose.

2022 Guidance

Full-year 2022 guidance for production, expenses, and capital expenditures remains unchanged. Refer to the section entitled "Annual Guidance" in ARC's MD&A for the three and nine months ended September 30, 2022, available on ARC's website at www.arcresources.com and under ARC's SEDAR profile at www.sedar.com.

THIRD QUARTER RESULTS

Cash Flow Used in Investing Activities and Capital Expenditures

• Cash flow used in investing activities was $352 million during the third quarter of 2022, with the Company drilling 32 wells and completing 27 wells. Cash flow used in investing activities was $1,063 million during the nine months ended September 30, 2022, of which $1,049 million was invested in capital expenditures to drill 92 wells and complete 106 wells.

The following table details ARC's capital activity by area during the first nine months of 2022.

Production and Operating Expense

Production

• ARC's production averaged 342,034 boe per day during the third quarter of 2022 (60 per cent natural gas and 40 per cent crude oil and liquids). Production was within the guidance range and slightly higher compared to the second quarter of 2022 driven by production growth at Kakwa.
• Kakwa production was 179,424 boe per day (60 per cent crude oil and liquids and 40 per cent natural gas), including approximately 70,000 barrels per day of condensate.
• • Capital efficiencies have improved at Kakwa through wider well spacing along with a revised frac design that lowers water intensity and overall costs after adjusting for inflation.

Operating Expense

• ARC's third quarter 2022 operating expense per boe of $4.69 remained relatively unchanged from the second quarter of 2022.
• ARC's operating expense is expected to decrease in the fourth quarter due to lower planned maintenance activity.

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

Free Funds Flow

• ARC generated free funds flow of $580 million ($0.89 per share) during the third quarter of 2022, of which 94 per cent or $544 million ($0.83 per share) was returned to shareholders.

Funds from Operations and Cash Flow from Operating Activities

• ARC generated funds from operations of $953 million ($1.45 per share) during the third quarter of 2022.
• Cash flow from operating activities was $1,104 million ($1.68 per share) during the third quarter of 2022, increasing by $11 million ($0.07 per share) from the second quarter of 2022.
• • During the third quarter of 2022, ARC recognized lower realized losses on its risk management contracts compared to the second quarter of 2022.
  • Royalties of $291 million decreased by $49 million from the second quarter of 2022, reflecting lower commodity prices.
  • Partially offsetting these increases to funds from operations were reduced commodity sales due to lower average crude oil and NGLs price realizations.

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

Returns to Shareholders

Dividends

• The Board has approved an increase of 25 per cent to ARC's quarterly dividend, from $0.12 per share to $0.15 per share, beginning with its dividend payable on January 16, 2023 to shareholders of record on December 30, 2022.
• • ARC declared dividends of $77 million or $0.12 per share during the third quarter of 2022.
  • The dividend serves as the primary mechanism to return capital to shareholders over the long term. ARC's dividend is designed to grow with the underlying profitability of the business, as the number of shares are reduced through the NCIB, and be sustainable through the commodity cycle.

Share Repurchases

• Since commencing the NCIB in September 2021, ARC has repurchased approximately 13 per cent of total outstanding shares, or 93.1 million common shares, at a weighted average price of $15.12 per share.
• • ARC repurchased 26.2 million common shares under its NCIB during the third quarter of 2022 at a weighted average price of $17.50 per share.
  • Since renewing its NCIB on August 30, 2022, ARC has repurchased 20.9 million common shares, representing 32 per cent of its current NCIB allotment.
• ARC will continue to repurchase common shares when the intrinsic value of the Company's common shares exceeds the current market trading price. ARC determines intrinsic value using a discounted cash flow framework under lower commodity price assumptions and a range of discount rates.

Physical Marketing

• ARC's infrastructure ownership and takeaway capacity allowed the Company to mitigate AECO basis risk and capture higher margins in the third quarter.
• • ARC's average realized natural gas price during the third quarter was $9.29 per Mcf, 60 per cent higher than the average AECO 7A Monthly Index price.

Transportation Expense

• ARC's third quarter 2022 transportation expense per boe of $6.08 remained relatively unchanged from the second quarter of 2022. The increase from the third quarter of 2021 reflects higher fuel gas expense with a corresponding increase to commodity sales from production.

Net Debt

• As of September 30, 2022, ARC's long-term debt balance was $1.1 billion, and its net debt balance was $1.5 billion, or 0.4 times funds from operations.
• • ARC targets its net debt to be in the range of 1.0 to 1.5 times funds from operations at mid-cycle commodity prices.
  • Long-term debt is comprised of $1.0 billion of senior notes outstanding and $0.1 billion in borrowings under the Company's credit facility.
  • During the quarter, ARC reduced its long-term debt by $121 million.
• Subsequent to September 30, 2022, ARC renewed its credit facility, extending the maturity date by one year to October 2026, and elected to reduce the credit facility capacity to $1.8 billion, from $2.0 billion.

Net Income

• ARC recognized net income of $868 million ($1.32 per share) during the third quarter of 2022, an increase of $105 million ($0.19 per share) from the second quarter of 2022.
• • The increase in net income relative to the second quarter of 2022 was primarily attributable to a decreased loss on risk management contracts.

ESG INITIATIVES

ARC continues to progress various emission reduction technologies at different stages in the life cycle to retain its industry leading ESG position.

• Dawson Electrification - ARC's emissions intensity in BC is among the lowest in North America. In 2023, ARC will invest approximately $16 million to continue the electrification of its Dawson facilities. Once complete, Dawson electrification will result in an emissions reduction of approximately 140,000 tonnes, which is equivalent to removing 28,000 cars or one per cent of passenger vehicles in BC off the road per year.
• Carbon Sequestration Hub - ARC was recently awarded an evaluation permit from the Government of Alberta that allows ARC to evaluate the feasibility of a carbon sequestration hub near Kakwa. The evaluation permit preserves ARC's access to pore space in the region while providing the opportunity to evaluate the economic and technical feasibility of a CCS hub.

CONFERENCE CALL

ARC's senior leadership team will be hosting a conference call to discuss the Company's third quarter 2022 results on Friday, November 4, 2022, at 8:00 a.m. Mountain Time ("MT").

Callers are encouraged to dial in 15 minutes before the start time to register for the event. A replay will be available on ARC's website at www.arcresources.com following the conference call.

NON-GAAP AND OTHER FINANCIAL MEASURES

Throughout this news release and in other materials disclosed by the Company, ARC employs certain measures to analyze its financial performance, financial position, and cash flow. These non-GAAP and other financial measures are not standardized financial measures under IFRS and may not be comparable to similar financial measures disclosed by other issuers. The non-GAAP and other financial measures should not be considered to be more meaningful than generally accepted accounting principles ("GAAP") measures which are determined in accordance with IFRS, such as net income, cash flow from operating activities, and cash flow used in investing activities, as indicators of ARC's performance.

Non-GAAP Financial Measures

Capital Expenditures

ARC uses capital expenditures to monitor its capital investments relative to those budgeted by the Company on an annual basis. ARC's capital budget excludes acquisition or disposition activities as well as the accounting impact of any accrual changes and payments under certain lease arrangements. The most directly comparable GAAP measure to capital expenditures is cash flow used in investing activities. The following table details the composition of capital expenditures and its reconciliation to cash flow used in investing activities.

Free Funds Flow

ARC uses free funds flow as an indicator of the efficiency and liquidity of ARC's business, measuring its funds after capital investment available to manage debt levels, pay dividends, and return capital to shareholders through share repurchases. ARC computes free funds flow as funds from operations generated during the period less capital expenditures. Capital expenditures is a non-GAAP financial measure. By removing the impact of current period capital expenditures from funds from operations, Management monitors its free funds flow to inform its capital allocation decisions. The most directly comparable GAAP measure to free funds flow is cash flow from operating activities. The following table details the calculation of free funds flow and its reconciliation to cash flow from operating activities.

FORWARD-LOOKING INFORMATION AND STATEMENTS

This news release contains certain forward-looking statements and forward-looking information (collectively referred to as "forward-looking information") within the meaning of applicable securities legislation about current expectations regarding the future based on certain assumptions made by ARC. Although ARC believes that the expectations represented by such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct. Forward-looking information in this news release is identified by words such as "anticipate", "believe", "ongoing", "may", "expect", "estimate", "plan", "will", "project", "continue", "target", "strategy", "upholding", or similar expressions, and includes suggestions of future outcomes. In particular, but without limiting the foregoing, this news release contains forward-looking information with respect to: ARC's 2022 guidance, including planned capital expenditures (and the commodity prices at which such capital expenditures are fully funded by funds from operations), production guidance, and expenses; the expectation that transportation costs will decrease over the balance of the year on a per unit basis; statements with respect to the 2023 capital budget including the planned investment and allocation of the 2023 capital budget; the anticipated investments in an expansion at Sunrise and sanctioning Attachie West Phase I, should the regulatory environment in BC support such investment; the expectation that ARC's operating expense per boe will decrease due to higher production volumes; plans to allocate surplus funds from operations to returns to shareholders; the continued assessment of dividends and payment thereof; ARC's plans with respect to growing its dividend and share repurchases under its NCIB; ARC's target net debt to funds from operations ratio at mid-cycle commodity prices; ARC's 2022 and 2023 guidance estimates; and other statements. Further, statements relating to reserves are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. In addition, forward-looking information may include statements attributable to third-party industry sources. There can be no assurance that the plans, intentions, or expectations upon which these forward-looking statements are based will occur.

Readers are cautioned not to place undue reliance on forward-looking information as ARC's actual results may differ materially from those expressed or implied. ARC undertakes no obligation to update or revise any forward-looking information except as required by law. Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to ARC and others that apply to the industry generally. The material assumptions on which the forward-looking information in this news release are based, and the material risks and uncertainties underlying such forward-looking information, include: ARC's ability to successfully integrate and realize the anticipated benefits of completed or future acquisitions and divestitures; access to sufficient capital to pursue any development plans; ARC's ability to issue securities and to repurchase its securities under the NCIB; ARC's ability to meet and maintain certain targets, including with respect to emissions-related reductions and ESG performance; expectations and projections made in light of ARC's historical experience; data contained in key modeling statistics; the potential implementation of new technologies and the cost thereof; forecast commodity prices and other pricing assumptions with respect to ARC's 2023 capital expenditure budget; continuing uncertainty of the impact of the June 29, 2021 BC Supreme Court ruling in Blueberry River First Nations (Yahey) v. Province of British Columbia on BC and/or federal laws or policies affecting resource development in northeast BC and potential outcomes of the ongoing negotiations between Blueberry River First Nations and the Government of BC; assumptions with respect to global economic conditions and the accuracy of ARC's market outlook expectations for 2022, 2023 and in the future; suspension of or changes to guidance, and the associated impact to production; the assumption that the regulatory environment will be able to support ARC's investment in the execution of Attachie West Phase I and the Sunrise expansion, including that regulatory authorities in BC will resume granting approvals for oil and gas activities relating to drilling, completions, testing, processing facilities, and production and transportation infrastructure in 2022 on time frames, and terms and conditions, consistent with past practice; forecast production volumes based on business and market conditions; the accuracy of outlooks and projections contained herein; that future business, regulatory, and industry conditions will be within the parameters expected by ARC, including with respect to prices, margins, demand, supply, product availability, supplier agreements, availability, and cost of labour and interest, exchange, and effective tax rates; projected capital investment levels, the flexibility of capital spending plans, and associated sources of funding; the ability of ARC to complete capital programs and the flexibility of ARC's capital structure; applicable royalty regimes, including expected royalty rates; future improvements in availability of product transportation capacity; opportunity for ARC to pay dividends and the approval and declaration of such dividends by the Board; the existence of alternative uses for ARC's cash resources which may be superior to payment of dividends or effecting repurchases of outstanding common shares; cash flows, cash balances on hand, and access to ARC's credit facility being sufficient to fund capital investments; foreign exchange rates; near-term pricing and continued volatility of the market; the ability of ARC's existing pipeline commitments and financial risk management transactions to partially mitigate a portion of ARC's risks against wider price differentials; business interruption, property and casualty losses, or unexpected technical difficulties; estimates of quantities of crude oil, natural gas, and liquids from properties and other sources not currently classified as proved; accounting estimates and judgments; future use and development of technology and associated expected future results; ARC's ability to obtain necessary regulatory approvals generally; potential regulatory and industry changes stemming from the results of court actions affecting regions in which ARC holds assets; risks and uncertainties related to oil and gas interests and operations on Indigenous lands; the successful and timely implementation of capital projects or stages thereof; the ability to generate sufficient cash flow to meet current and future obligations; estimated abandonment and reclamation costs, including associated levies and regulations applicable thereto; ARC's ability to obtain and retain qualified staff and equipment in a timely and cost-efficient manner; ARC's ability to carry out transactions on the desired terms and within the expected timelines; forecast inflation and other assumptions inherent in the guidance of ARC; the retention of key assets; the continuance of existing tax, royalty, and regulatory regimes; GLJ Ltd.'s estimates with respect to commodity pricing; ARC's ability to access and implement all technology necessary to efficiently and effectively operate its assets; the ongoing impact of the COVID-19 pandemic on commodity prices and the global economy; and other assumptions, risks, and uncertainties described from time to time in the filings made by ARC with securities regulatory authorities.

The forward-looking information contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking information included in this news release are made as of the date of this news release and, except as required by applicable securities laws, ARC undertakes no obligation to publicly update such forward-looking information to reflect new information, subsequent events or otherwise.

About ARC

ARC Resources Ltd. is a pure-play Montney producer and one of Canada's largest dividend-paying energy companies, featuring low-cost operations and leading ESG performance. ARC's investment-grade credit profile is supported by commodity and geographic diversity and robust risk management practices around all aspects of the business. ARC's common shares trade on the Toronto Stock Exchange under the symbol ARX.

ARC RESOURCES LTD.

Please visit ARC's website at www.arcresources.com or contact Investor Relations:
E-mail: IR@arcresources.com
Telephone: (403) 503-8600
Fax: (403) 509-6427
Toll Free: 1-888-272-4900
ARC Resources Ltd.
Suite 1200, 308 - 4 Avenue SW
Calgary, AB  T2P 0H7

SOURCE ARC Resources Ltd.