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ARC Resources Ltd. Reports Record Annual Production and Record Increase to Oil and Gas Reserves


CALGARYFeb. 8, 2018 /CNW/ – (ARX – TSX) ARC Resources Ltd. (“ARC”) is pleased to report its fourth quarter 2017 financial and operating results. Fourth quarter production averaged 133,409 boe per day, net income was $73.9 million ($0.21 per share), and funds from operations totaled $221.1 million ($0.63per share). ARC’s consolidated financial statements and notes (“financial statements”), as well as ARC’s Management’s Discussion and Analysis (“MD&A”) for the years ended December 31, 2017 and 2016, are available on ARC’s website at www.arcresources.com and on SEDAR at www.sedar.com.

Three Months Ended

Year Ended

September 30,

2017

December 31,
2017

December 31,
2016

December 31,
2017

December 31,
2016

FINANCIAL

(Cdn$ millions, except per share and boe amounts and shares outstanding)

Net income

48.5

73.9

167.0

388.9

201.3

Per share (1)

0.14

0.21

0.47

1.10

0.57

Funds from operations (2)

163.8

221.1

188.5

731.9

633.3

Per share (1)

0.46

0.63

0.53

2.07

1.80

Dividends

53.0

53.1

52.9

212.3

228.2

Per share (1)

0.15

0.15

0.15

0.60

0.65

Capital expenditures, before land and net property acquisitions
(dispositions)

178.4

245.1

159.2

829.7

453.4

Total capital expenditures, including land and net property acquisitions
(dispositions)

255.7

247.7

(525.6)

929.8

(76.4)

Net debt outstanding (3)

645.1

728.0

356.5

728.0

356.5

Shares outstanding, weighted average diluted

353.9

353.8

353.5

353.9

351.3

Shares outstanding, end of period

353.5

353.5

353.3

353.5

353.3

OPERATING

Production

Crude oil (bbl/day)

25,020

24,641

29,885

24,380

31,510

Condensate (bbl/day)

6,815

6,989

3,767

5,650

3,626

Natural gas (MMcf/day)

549.6

572.4

478.4

525.8

475.6

NGLs (bbl/day)

6,091

6,380

4,220

5,273

4,274

Total (boe/day) (4)

129,526

133,409

117,611

122,937

118,671

Average realized prices, prior to risk management contracts

Crude oil ($/bbl)

54.82

67.67

59.20

60.95

50.34

Condensate ($/bbl)

54.28

69.27

58.97

62.04

50.98

Natural gas ($/Mcf)

2.01

2.28

3.10

2.56

2.23

NGLs ($/bbl)

28.37

35.31

20.77

29.57

13.85

Oil equivalent ($/boe) (4)

23.29

27.58

30.29

27.16

24.35

Operating netback ($/boe) (4)(5)

Commodity sales

23.29

27.58

30.29

27.16

24.35

Royalties

(1.85)

(2.15)

(2.47)

(2.29)

(2.05)

Transportation expenses

(2.47)

(2.44)

(2.32)

(2.52)

(2.20)

Operating expenses

(6.33)

(6.01)

(6.77)

(6.41)

(6.65)

Netback prior to gain on risk management contracts

12.64

16.98

18.73

15.94

13.45

Realized gain on risk management contracts

3.81

3.58

3.08

3.23

4.98

Netback including gain on risk management contracts

16.45

20.56

21.81

19.17

18.43

TRADING STATISTICS (6)

High price

18.31

18.34

24.94

23.70

24.94

Low price

15.61

13.64

21.55

13.64

14.43

Close price

17.19

14.75

23.11

14.75

23.11

Average daily volume (thousands)

1,008

1,114

837

1,124

986

(1)

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

(2)

Refer to Note 16 “Capital Management” in ARC’s financial statements and to the sections entitled, “Funds from Operations” and“Capitalization, Financial Resources and Liquidity” contained within ARC’s MD&A.

(3)

Refer to Note 16 “Capital Management” in ARC’s financial statements and to the section entitled, “Capitalization, Financial Resources and Liquidity” contained within ARC’s MD&A.

(4)

ARC has adopted the standard 6 Mcf:1 barrel when converting natural gas to boe. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 barrel 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.

(5)

Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. See “Non-GAAP Measures” contained within ARC’s MD&A.

(6)

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

 

 

“It was another excellent year for ARC as we delivered record production, had our largest development reserves additions in corporate history with 320 per cent of produced reserves replaced through development activities, and grew our 2017 cash flow per share by 15 per cent relative to 2016,” explained Myron Stadnyk, President and CEO. “We are delivering strong financial and operating results while managing a responsible growth strategy that ensures future development activities are profitable and sustainable. In 2017, we completed a major infrastructure project at Dawson, advanced our understanding of the liquids-rich Lower Montney, and took the next steps in progressing our liquids-rich Attachie West play towards commercialization. We are replacing the liquids production that we divested a year ago, while executing an effective natural gas sales diversification program and preserving our strong balance sheet. Looking to 2018 and beyond, we remain confident in our ability to create long-term value in all aspects of our business.”

STRATEGY UPDATE

ARC’s strategy of risk-managed value creation and its enduring focus on profitability and sustainability have been paramount since inception, and those traits have become increasingly important to investors in the face of volatile commodities markets and competitive pressures. In 2016, ARC’s decision to reduce the dividend, divest of non-core assets, and eliminate the Dividend Reinvestment Plan and Stock Dividend Program, further advanced our deliberate shift to investing in our Montneyassets, which we believe are both continentally and globally competitive. ARC has a strategy of building businesses that can sustain themselves with less than 100 per cent of their cash flows and in turn, support the growth of new businesses, thus enabling ARC to deliver strong corporate-level returns on capital employed. ARC’s strategic plan will profitably grow production by approximately 40,000 to 50,000 boe per day between 2017 and 2020 through the execution of multi-year development projects at Dawson Phase III, Sunrise Phase II and Dawson Phase IV, and will increase our overall liquids exposure with development activities at Attachie West. The 2016 divestments have given ARC the ability to fund the transformation and outspend its cash flows over this three-year period, while maintaining our balance sheet within our target ratio of 1.0 to 1.5 times net debt to annualized funds from operations.

Building upon ARC’s strong performance in 2017, we are confident that this plan will improve capital and operating efficiencies, advance our excellent safety and environmental performance, and enhance the long-term optionality of our business plan. ARC’s Lower Montney appraisal program in 2017 was a success, having created significantly more liquids development potential and proven multi-horizon development opportunities.

ARC has coupled its asset development strategy with a deliberate physical marketing and financial diversification strategy, which proactively secures market access for future development projects and takes a portfolio management approach to downstream market diversification. When combined with ARC’s financial risk management activities, ARC is able to effectively execute on its long-term plans.

ARC’s Management’s compensation structure and strategy is aligned with shareholder interests, with our long-term restricted share awards vesting over a 10-year period, and is distinctly differentiated versus our North American peers. This model incentivizes Management to ensure that capital allocation is optimized for long-term value creation.

ARC reaffirms its 2018 capital spending plans of $690 million. The capital program will sustain ARC’s base businesses, invest in the large-scale infrastructure project at Sunrise Phase II, continue the appraisal of Attachie West, and deliver strong rates of return in the current commodity price environment. ARC expects to deliver annual average daily production of 130,000 to 134,000 boe per day. See ARC’s November 9, 2017 news release entitled, “ARC Resources Ltd. Announces $690 MillionCapital Program for 2018″ available on ARC’s website at www.arcresources.com and on SEDAR at www.sedar.com for additional details.

FINANCIAL AND OPERATING HIGHLIGHTS

Financial Results

ARC delivered strong financial performance in the fourth quarter of 2017, recording net income of $73.9 million ($0.21 per share) and funds from operations of $221.1 million ($0.63 per share). Net income and funds from operations for the year ended December 31, 2017 were $388.9 million ($1.10 per share) and $731.9 million ($2.07 per share), respectively. Supported by improved commodity prices and increased production levels, fourth quarter 2017 funds from operations per share increased 37 per cent relative to the third quarter of 2017 and full-year 2017 funds from operations per share increased 15 per cent relative to 2016. ARC is committed to the long-term profitability of our business plan and achieved a return on average capital employed of 14 per cent in 2017 and a five-year average of seven per cent, demonstrating ARC’s ability to invest its capital both efficiently and responsibly (1).

Consistent with previous years, 60 per cent of ARC’s 2017 sales revenue came from its crude oil and liquids production. ARC’s physical natural gas diversification and financial risk management activities have helped to significantly reduce our exposure to ongoing weakness in western Canadian natural gas prices and enhance our commodity price realizations. Through ARC’s physical diversification activities, an incremental $0.69 per Mcf and $0.39 per Mcf were realized in ARC’s natural gas price for the three months and year ended December 31, 2017, respectively. ARC’s financial risk management program provided additional cash flow protection; realized cash gains recognized on ARC’s natural gas risk management contracts amounted to $0.91 per Mcf and $0.78 per Mcf for the three months and year ended December 31, 2017, respectively. ARC also continues to execute on its risk management strategy for crude oil. The majority of ARC’s crude oil production is made up of conventional light oil and condensate, which has been largely isolated from the increasingly discounted pricing currently being experienced by Canadian heavy oil producers. Total realized gains on risk management contracts for the three months and year ended December 31, 2017 were $43.8 million and $145.0 million, respectively. The fair value of ARC’s risk management contracts at December 31, 2017 was $294.8 million, with risk management contracts positions in place for natural gas through to 2022 and risk management contracts positions in place for crude oil through to 2019.

In 2018, ARC’s natural gas sales portfolio is physically and financially diversified to multiple downstream markets including US Midwest, Henry Hub, and US Pacific Northwest markets. Less than five per cent of ARC’s expected overall sales revenue is exposed to the AECO and Station 2 markets in 2018.

ARC preserves its financial flexibility by maintaining a strong balance sheet. At December 31, 2017, ARC had $728.0 million of net debt outstanding and an additional $1.2 billion of cash and credit capacity available after taking into account ARC’s working capital surplus. The net debt to funds from operations ratio was 1.0 times at the end of the fourth quarter of 2017, at the low end of ARC’s targeted net debt levels of 1.0 to 1.5 times annualized funds from operations, and net debt was approximately 12 per cent of ARC’s total capitalization. ARC has the flexibility to fund its 2018 sustaining capital requirements and the dividend with cash flow generated from ARC’s existing businesses, and growth capital with the redeployment of proceeds from ARC’s fourth quarter 2016 divestments and additional debt if necessary. ARC will continue to manage conservative debt levels as a priority.

Operating Results

ARC achieved record production of 133,409 boe per day in the fourth quarter of 2017 with an excellent safety record. Production was comprised of crude oil and liquids production of 38,010 barrels per day and natural gas production of 572 MMcf per day. Fourth quarter 2017 average daily production increased three per cent relative to the third quarter of 2017 with incremental production flowing through ARC’s Dawson Phase III gas processing and liquids-handling facility. Full-year 2017 average daily production of 122,937 boe per day was made up of 35,303 barrels per day of crude oil and liquids and 526 MMcf per day of natural gas and was within the high end of ARC’s 2017 production guidance range of 120,000 to 124,000 boe per day. 2017 full-year production increased four per cent relative to 2016 with new production at Dawson Phase III more than offsetting the 8,800 boe per day of non-core production that was divested in 2016. ARC continued to proactively secure alternative marketing arrangements throughout 2017 and was able to mitigate potential impacts to its production from broad-scale third-party pipeline interruptions in the year.

Capital investment in 2017 was directed primarily at development activities across ARC’s Montneyasset base and included significant investment in appraising the long-term development potential of the Lower Montney horizon. Investment in key infrastructure projects at Dawson and Sunrise continues to lay the foundation for ARC’s robust, low-cost natural gas business, and is expected to create long-term value and deliver superior returns. Fourth quarter 2017 capital expenditures, before land and net property acquisitions and dispositions, of $245.1 million included the drilling of 28 operated wells (20 natural gas and liquids-rich natural gas wells and eight crude oil wells). Full-year 2017 capital expenditures, before land and net property acquisitions and dispositions, totaled $829.7 million and included the drilling of 122 wells (62 crude oil wells, 59 natural gas and liquids-rich natural gas wells, and one disposal well). 2017 capital investment levels, before land, were in line with ARC’s guidance of $830 million.

ARC actively manages its low cost structure by identifying opportunities to reduce operating expenses where appropriate. Fourth quarter 2017 operating expenses of $6.01 per boe were five per cent lower than the third quarter of 2017, and full-year 2017 operating expenses of $6.41 per boe were four per cent lower than the prior year. As ARC continues to divest of non-core assets and bring on new Montney production with lower relative costs to operate, it is expected that operating expenses will be further reduced. ARC has reduced operating expenses on a per boe basis by approximately 40 per cent since 2009.

2017 Reserves

ARC’s 2017 year-end reserves and resources evaluation reaffirmed the significant resource potential of ARC’s Montney assets. ARC replaced approximately 320 per cent of produced reserves through development activities in 2017, adding approximately 145 MMboe of proved plus probable reserves (“2P”) at low finding and development costs of $6.41 per boe. This is ARC’s tenth consecutive year of replacing greater than 200 per cent of produced reserves, and is the largest annual development reserves addition in corporate history. ARC’s 2P reserves at year-end 2017 were 836 MMboe and proved developed producing reserves were 230 MMboe. An updated Independent Resources Evaluation for ARC’s lands in the northeast British Columbia Montney region, including lands at Pouce Coupe in Alberta, validated shale gas Total Petroleum Initially-in-Place (“TPIIP”) of 106.0 Tcf and tight oil TPIIP of 10.5 billion barrels identified across ARC’s Montney lands (2). See ARC’s February 8, 2018 news release entitled, “ARC Resources Ltd. Announces Record 320 Per Cent Replacement of Produced Reserves Through Development Activities in 2017” available on ARC’s website at www.arcresources.com and on SEDAR at www.sedar.com for additional details.

The following economic, financial, and operational reviews provide further details to the above highlights. For additional commentary on ARC’s fourth quarter and year-end 2017 financial and operating results, as well as ARC’s 2017 reserves and resources, please view the following videos:

“Myron’s Minute”“ARC Resources Finance and Marketing Update” and “ARC Resources Operations and Reserves & Resources Update” available on ARC’s website at www.arcresources.com.

(1)

Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. See “Non-GAAP Measures” contained within ARC’s MD&A.

(2)

Year-end 2017 results comply with current Canadian Oil and Gas Evaluation Handbook guidelines. Resources Evaluation volumes provided are the “Best Estimate” case. Year-end 2017 TPIIP estimates utilize a one per cent porosity cut-off based upon “Best Estimate” case.

 

 

ECONOMIC ENVIRONMENT

ARC’s financial and operating results for the three months and year ended December 31, 2017 were impacted by commodity prices and foreign exchange rates which are outlined in the following table.

Three Months Ended

Year Ended

Selected Benchmark Prices
and Exchange Rates
 (1)

December 31,
2017

September 30,

2017

% Change

December 31,
2017

December 31,

2016

% Change

WTI crude oil (US$/bbl)

55.30

48.20

15

50.85

43.47

17

Mixed sweet crude stream price

at Edmonton (Cdn$/bbl)

68.85

56.77

21

62.85

53.34

18

Condensate stream price at

Edmonton (Cdn$/bbl)

73.73

59.56

24

66.87

56.24

19

NYMEX Henry Hub Last Day

Settlement (US$/MMBtu)

2.93

3.00

(2)

3.11

2.46

26

Chicago Citygate Monthly Index

(US$/MMBtu)

2.93

2.84

3

3.04

2.49

22

AECO 7A Monthly Index

(Cdn$/Mcf)

1.96

2.04

(4)

2.43

2.09

16

Cdn$/US$ exchange rate

1.27

1.25

2

1.30

1.32

(2)

(1)

The benchmark prices do not reflect ARC’s realized sales prices. For average realized sales prices, refer to the section entitled, “Sales of Crude Oil, Natural Gas, Condensate, NGLs and Other Income” contained within ARC’s MD&A. Prices and exchange rates presented above represent averages for the respective periods.

 

Global crude oil prices improved in the fourth quarter of 2017, with the WTI benchmark price averaging 15 per cent higher than the third quarter of 2017. Rising crude oil prices were driven by strong global demand as well as OPEC and non-OPEC members’ compliance with previously agreed upon production cuts and the decision to further extend the cuts to the end of 2018. ARC’s crude oil price is primarily referenced to the mixed sweet crude stream price at Edmonton, which increased 21 per cent in the fourth quarter of 2017 relative to the third quarter of 2017. The differential between WTI and the mixed sweet crude stream price at Edmonton tightened in the fourth quarter of 2017 to average a discount of US$1.15 per barrel, representing a 60 per cent decrease from the third quarter of 2017. Subsequent to December 31, 2017, the differential has widened with unplanned pipeline outages, pipeline apportionments and strong oil sands production all increasing concerns regarding takeaway options for western Canadian crude oil production.

US natural gas prices, referenced by the average NYMEX Henry Hub Last Day Settlement price, were largely unchanged in the fourth quarter of 2017, decreasing two per cent from the third quarter of 2017. While US natural gas supply reached record levels in the fourth quarter of 2017, the increase was largely absorbed by continued strength in baseload demand. ARC’s realized natural gas price is diversified physically and financially to multiple sales points including US Midwest, Dawn, AECO, and Station 2 hubs. Western Canadian natural gas prices continued to experience weakness in the fourth quarter of 2017, and were further exacerbated by new production coming online in the period. The AECO hub price decreased four per cent in the fourth quarter of 2017 relative to the third quarter of 2017. Forward AECO differentials remain wide due to concerns of oversupply, ongoing third-party maintenance, and infrastructure constraints in the Western Canadian Sedimentary Basin. The NYMEX Henry Hub Last Day Settlement price to AECO basis was US$1.40 per MMBtu in the fourth quarter of 2017, unchanged relative to the third quarter of 2017. Less than five per cent of ARC’s expected overall sales revenue is exposed to the AECO and Station 2 markets in 2018.

The Canadian dollar weakened relative to the US dollar in the fourth quarter of 2017, as the US dollar was aided by strong economic data and the approval of a new tax reform bill. The Canadian dollar averaged Cdn$/US$1.27 (US$/Cdn$0.79) in the fourth quarter of 2017. Subsequent to December 31, 2017, strong Canadian economic data supported the Bank of Canada’s decision to increase interest rates earlier than market expectations, which has resulted in the strengthening of the Canadian dollar relative to the US dollar.

FINANCIAL REVIEW

Net Income

ARC recorded net income of $73.9 million ($0.21 per share) in the fourth quarter of 2017 compared to net income of $48.5 million ($0.14 per share) in the third quarter of 2017. Increased sales revenue net of royalties of $56.8 million resulting from improved commodity prices and increased natural gas production, and increased gains of $49.8 million on ARC’s risk management contracts served to increase earnings in the fourth quarter of 2017 relative to the third quarter of 2017. Partially offsetting these increases to net income were increased income taxes of $40.2 million, reduced foreign exchange gains of $27.2 million, and a $9.7 million charge to ARC’s exploration and evaluation properties in the fourth quarter of 2017.

Net income of $388.9 million ($1.10 per share) for the year ended December 31, 2017 was $187.6 millionhigher than net income for the year ended December 31, 2016. Increased gains of $319.5 million on ARC’s risk management contracts and improved sales revenue net of royalties of $148.4 million were the most significant drivers in the year-over-year increase to net income. The reversal of a previously-recognized impairment charge of $75.0 million and reduced general and administrative (“G&A”) expenses of $30.2 million, driven by decreased expenses recorded on ARC’s share-based compensation plans, also contributed to the increase. These increases to earnings were partially offset by reduced gains of $191.2 million on the disposition of non-core assets, increased income taxes of $94.5 million resulting primarily from improved commodity prices and reduced tax pools associated with the disposition of certain non-core assets in 2016, and the recognition of a $53.9 million gain on business combinations in the prior year.

Funds from Operations

ARC’s fourth quarter 2017 funds from operations of $221.1 million ($0.63 per share) increased 37 per cent, on a per share basis, from third quarter 2017 funds from operations of $163.8 million ($0.46 per share). The most significant drivers in the quarter-over-quarter increase in funds from operations were higher realized crude oil and liquids prices, reduced realized losses on foreign exchange, and increased natural gas production. These factors were partially offset by higher current taxes and increased royalty expenses in the fourth quarter of 2017 relative to the third quarter of 2017.

Funds from operations of $731.9 million ($2.07 per share) for the year ended December 31, 2017 were 15 per cent higher, on a per share basis, than funds from operations for the year ended December 31, 2016. Improved commodity prices, reduced G&A expenses driven primarily by lower expenses recorded on ARC’s share-based compensation plans, and higher natural gas production increased funds from operations relative to the prior year. These items were partially offset by lower realized gains on ARC’s risk management contracts, reduced crude oil production, and higher transportation and royalty expenses. Increased realized losses on foreign exchange also served to partially offset the increase in funds from operations year-over-year.

The following table details the change in funds from operations for the fourth quarter of 2017 relative to the third quarter of 2017 and for the year ended December 31, 2017 relative to the year ended December 31, 2016.

Q3 2017 to Q4 2017

2016 to 2017

$ millions

$/Share (2)

$ millions

$/Share (2)

Funds from operations for the three months ended September 30, 2017 (1)

163.8

0.46

Funds from operations for the year ended December 31, 2016 (1)

633.3

1.80

Volume variance

Crude oil and liquids

(0.2)

(0.01)

(90.2)

(0.26)

Natural gas

4.1

0.02

40.2

0.11

Price variance

Crude oil and liquids                                                          

42.8

0.13

147.5

0.42

Natural gas

14.2

0.04

63.3

0.18

Other income

0.2

1.4

Realized gain on risk management contracts   

(1.7)

(71.5)

(0.20)

Royalties

(4.3)

(0.01)

(13.8)

(0.04)

Expenses

Transportation

(0.5)

(17.7)

(0.05)

Operating

1.6

1.3

G&A

0.5

31.0

0.09

Interest

0.1

5.2

0.01

Current tax

(6.7)

(0.02)

8.9

0.03

Realized gain (loss) on foreign exchange

7.2

0.02

(7.0)

(0.02)

Funds from operations for the three months ended December 31, 2017 (1)

221.1

0.63

Funds from operations for the year ended December 31, 2017 (1)

731.9

2.07

(1)

Refer to Note 16 “Capital Management” in ARC’s financial statements and to the sections entitled, “Funds from Operations” and“Capitalization, Financial Resources and Liquidity” contained within ARC’s MD&A.

(2)

Per share amounts are based on diluted weighted average common shares.

 

Operating Netbacks

ARC’s fourth quarter 2017 operating netback, prior to gains on risk management contracts, of $16.98per boe increased 34 per cent relative to the third quarter of 2017, and ARC’s fourth quarter 2017 operating netback, including gains on risk management contracts, of $20.56 per boe increased 25 per cent relative to the third quarter of 2017. Improved operating netbacks were predominantly due to strengthened commodity prices.

ARC’s full-year 2017 operating netback, prior to gains on risk management contracts, of $15.94 per boe increased 19 per cent from the prior year, and ARC’s full-year 2017 operating netback, including gains on risk management contracts, of $19.17 per boe increased four per cent relative to the prior year. Higher operating netbacks were largely due to strengthened commodity prices.

ARC’s fourth quarter 2017 royalty expenses of $2.15 per boe (7.8 per cent total corporate royalty rate) increased 16 per cent from third quarter 2017 royalty expenses of $1.85 per boe (8.0 per cent total corporate royalty rate), and ARC’s full-year 2017 royalty expenses of $2.29 per boe (8.4 per cent total corporate royalty rate) increased 12 per cent relative to the prior year. The increase reflects the sliding scale effect of higher commodity prices on royalties. Royalty expenses for the three months and year ended December 31, 2017 were $26.4 million and $102.8 million, respectively.

Fourth quarter 2017 transportation expenses of $2.44 per boe were relatively unchanged from third quarter 2017 transportation expenses of $2.47 per boe. ARC’s full-year 2017 transportation expenses of $2.52 per boe increased 15 per cent relative to the prior year primarily as a result of an aggregate increase in tolls for natural gas on third-party pipelines as well as ARC’s ongoing strategy to secure additional transportation to ensure ARC’s production moves to market. Transportation expenses for the three months and year ended December 31, 2017 were $30.0 million and $113.1 million, respectively.

Fourth quarter 2017 operating expenses of $6.01 per boe decreased five per cent from third quarter 2017 operating expenses of $6.33 per boe, and was largely due to new volumes being brought on production at Dawson with lower relative costs to operate. Full-year 2017 operating expenses of $6.41per boe decreased four per cent relative to the prior year and was the result of reduced labour costs, partially offset by increased maintenance and workover activities, in 2017 compared to 2016. ARC has reduced operating expenses on a per boe basis by approximately 40 per cent since 2009. Operating expenses for the three months and year ended December 31, 2017 were $73.8 million and $287.7 million, respectively.

Risk Management

ARC recorded total cash gains of $43.8 million and $145.0 million on its risk management contracts for the three months and year ended December 31, 2017, respectively.

ARC realized cash gains of $47.9 million and $148.8 million on natural gas risk management contracts for the three months and year ended December 31, 2017, respectively. Approximately 31 per cent of ARC’s natural gas production was hedged at NYMEX Henry Hub with an average floor price of US$3.88per MMBtu in 2017, while market prices averaged US$3.11 per MMBtu. Approximately 13 per cent of natural gas production was hedged at AECO with an average swap price of Cdn$2.72 per GJ in 2017, while market prices averaged Cdn$2.30 per GJ. ARC has hedged approximately 213,000 MMBtu per day of natural gas production for 2018 and a portion of natural gas production is hedged for the period 2019 through 2022. ARC’s natural gas risk management portfolio also includes AECO basis swap contracts which fix the AECO price received relative to the NYMEX Henry Hub price on a portion of its natural gas volumes for 2018 through 2021, and basis swap contracts which fix other regional sales prices received relative to the NYMEX Henry Hub price on a portion of its natural gas volumes for 2019 through 2022. Details pertaining to ARC’s natural gas hedged volumes and prices for the period 2018 through 2022 are outlined in the table below.

ARC realized cash losses of $4.1 million and $2.8 million on crude oil risk management contracts for the three months and year ended December 31, 2017, respectively. ARC currently has 20,000 barrels per day of crude oil production hedged with collars and swaps for 2018 and has an additional 12,000 barrels per day of crude oil hedged for 2019. ARC’s crude oil risk management portfolio also includes MSW basis swap contracts for 2018, fixing the discount between WTI and the mixed sweet crude stream price at Edmonton. Details pertaining to ARC’s crude oil hedged volumes and prices for the period 2018 through 2019 are outlined in the table below.

ARC has risk management contracts that are at price levels that support ARC’s long-term business plans, on a portion of natural gas and crude oil volumes. The fair value of ARC’s risk management contracts at December 31, 2017 was $294.8 million. ARC will continue to take positions in natural gas, crude oil, foreign exchange rates, power and interest rates, as appropriate, to provide greater certainty over future cash flows. For a summary of the average crude oil and natural gas volumes associated with ARC’s risk management contracts as at December 31, 2017, see Note 17 “Financial Instruments and Market Risk Management” in ARC’s financial statements for the three months and year ended December 31, 2017.

Risk Management Contracts Positions Summary (1)

As at February 8, 2018

H1 2018

H2 2018

2019

2020

2021

2022

Crude Oil – WTI (2)

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

Ceiling

65.39

4,000

65.39

4,000

65.63

2,000

Floor

50.00

4,000

50.00

4,000

50.00

2,000

Sold Floor

40.00

4,000

40.00

4,000

40.00

2,000

Swap

54.00

2,000

54.00

2,000

57.20

4,000

Crude Oil – Cdn$ WTI (3)

Cdn$/bbl

bbl/day

Cdn$/bbl

bbl/day

Cdn$/bbl

bbl/day

Cdn$/bbl

bbl/day

Cdn$/bbl

bbl/day

Cdn$/bbl

bbl/day

Ceiling

76.25

2,000

76.25

2,000

Floor

65.00

2,000

65.00

2,000

Swap

72.10

12,000

72.10

12,000

70.51

6,000

Total Crude Oil Volumes

(bbl/day)

20,000

20,000

12,000

Crude Oil – MSW

(Differential to WTI) (4)

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

US$/bbl

bbl/day

Swap

(3.38)

7,000

(3.38)

7,000

Natural Gas – NYMEX

Henry Hub (5)

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

Ceiling

3.64

80,000

3.64

80,000

3.35

80,000

3.32

50,000

3.32

50,000

3.43

25,000

Floor

3.00

80,000

3.00

80,000

2.75

80,000

2.75

50,000

2.75

50,000

2.50

25,000

Sold Floor

2.50

80,000

2.50

80,000

2.25

80,000

2.25

50,000

2.25

50,000

Swap

4.00

90,000

4.00

90,000

4.00

40,000

Natural Gas – AECO (6)

Cdn$/GJ

GJ/day

Cdn$/GJ

GJ/day

Cdn$/GJ

GJ/day

Cdn$/GJ

GJ/day

Cdn$/GJ

GJ/day

Cdn$/GJ

GJ/day

Ceiling

3.30

10,000

3.60

30,000

Floor

3.00

10,000

3.08

30,000

Swap

3.01

49,945

2.96

40,000

3.16

20,000

3.35

30,000

Total Natural Gas Volumes

(MMBtu/day)

217,338

207,913

148,435

106,869

50,000

25,000

Natural Gas – AECO Basis

(Percentage of NYMEX)

AECO/NY
MEX

MMBtu/day

AECO/NY
MEX

MMBtu/day

AECO/NY
MEX

MMBtu/day

AECO/NY
MEX

MMBtu/day

AECO/NY
MEX

MMBtu/day

AECO/NY
MEX

MMBtu/day

Sold Swap

85.4

90,000

84.4

90,000

83.7

40,000

Natural Gas – AECO Basis

(Differential to NYMEX)

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

US$/MMBtu

MMBtu/day

Sold Swap

(0.81)

83,315

(0.89)

93,370

(0.88)

120,959

(0.82)

98,361

(0.97)

34,192

Total AECO Basis Volumes

(MMBtu/day)

173,315

183,370

160,959

98,361

34,192

Natural Gas – Other Basis

(Differential to NYMEX) (MMBtu/day) (7)

MMBtu/day

MMBtu/day

MMBtu/day

MMBtu/day

MMBtu/day

MMBtu/day

Sold Swap

40,000

40,000

40,000

30,000

(1)

The prices and volumes in this table represent averages for several contracts representing different periods. The average price for the portfolio of options listed above does not have the same payoff profile as the individual option contracts. Viewing the average price of a group of options is purely for indicative purposes. All positions are financially settled against the benchmark prices.

(2)

Crude oil prices referenced to WTI.

(3)

Crude oil prices referenced to WTI, multiplied by the WM/Reuters Intra-day Cdn$/US$ Foreign Exchange Spot Rate as of Noon EST.

(4)

MSW differential refers to the discount between WTI and the mixed sweet crude grade at Edmonton, calculated on a monthly weighted average basis in US$.

(5)

Natural gas prices referenced to NYMEX Henry Hub Last Day Settlement.

(6)

Natural gas prices referenced to AECO 7A Monthly Index.

(7)

ARC has entered into basis swaps at locations other than AECO.

 

 

OPERATIONAL REVIEW

ARC invested $245.1 million of capital, before land and net property acquisitions and dispositions, in the fourth quarter of 2017, which included drilling 28 operated wells (20 natural gas and liquids-rich natural gas wells and eight crude oil wells). Capital expenditures in the period continued to focus on drilling and completion activities across ARC’s Montney asset base, and included initial construction costs for the Sunrise Phase II facility expansion. Capital expenditures for 2017, before land and net property acquisitions and dispositions, totaled $829.7 million, in line with ARC’s 2017 capital budget of $830 million. ARC’s 2017 capital program included drilling 122 operated wells (62 crude oil wells, 59 natural gas and liquids-rich natural gas wells, and one disposal well), as well as the completion of the Dawson Phase III gas processing and liquids-handling facility and initial investments in the Sunrise Phase II gas processing facility expansion. Approximately 90 per cent of capital invested in 2017 was directed at ARC’s Montney assets.

Year Ended December 31, 2017

Area

Wells Drilled

Wells Completed

Dawson

37

25

Sunrise

5

5

Parkland/Tower

35

34

Attachie

9

2

Pouce Coupe

1

3

Ante Creek

19

17

Pembina

15

20

Other

1

Total

122

106

 

ARC achieved record production of 133,409 boe per day in the fourth quarter of 2017, comprised of 38,010 barrels per day of crude oil and liquids and 572 MMcf per day of natural gas. Fourth quarter 2017 average daily production was three per cent higher than the third quarter of 2017, as production levels continued to ramp up at the new Dawson Phase III facility, which was started up in June 2017.

Full-year 2017 average daily production of 122,937 boe per day was made up of 35,303 barrels per day of crude oil and liquids and 526 MMcf per day of natural gas. Full-year 2017 average daily production was within the guidance range of 120,000 to 124,000 boe per day, and was four per cent higher than 2016 production levels. The year-over-year increase in production largely came from the Dawson Phase III facility, and effectively replaced the 8,800 boe per day of non-core production that was divested in 2016 as part of ARC’s ongoing portfolio rationalization efforts. By executing on its strategy to proactively secure alternative marketing arrangements when necessary, ARC did not experience any volume impact as a result of broad-scale third-party infrastructure maintenance and outages throughout 2017.

ARC’s enviable position in the Montney is currently made up of approximately 1,200 net sections, with production from ARC’s Montney assets representing approximately 90 per cent of total corporate production in the fourth quarter of 2017. Excellent operating and capital efficiencies are supported by ARC owning and operating its own facilities, allowing for greater control over costs, safety performance, and pace of development. ARC continues to optimize well designs and maximize well value, pursue new technologies, and work with service providers to preserve its low and competitive cost structure. ARC actively monitors market conditions and maintains a marketing strategy that proactively secures takeaway capacity for future development projects, diversifies ARC’s sales portfolio, mitigates the impact of third-party infrastructure maintenance and outages, and ensures that production gets to market at optimal pricing.

Lower Montney

ARC’s lands within the Montney fairway have significant development potential in the liquids-rich Lower Montney horizon. The Lower Montney is currently being appraised across all of ARC’s Montneylands as ARC progresses its technical understanding of the zone and works to better understand the economics associated with development.

ARC’s 2017 capital program included the drilling of 21 Lower Montney wells across ARC’s acreage. Appraisal activities have resulted in the delineation of a significant portion of ARC’s Montney lands, moving inventory into the development stage. The long-term growth opportunities from the Lower Montney horizon will allow ARC to enhance its profitable development activities in the Montney and increase the overall depth of ARC’s portfolio.

At Dawson, the Lower Montney horizon has shown high liquids yields that are driving strong economics and proving significant upside at the Dawson Phase III facility. In 2017, 12 wells targeting the Lower Montney horizon were drilled at Dawson, and four wells were completed. A significant highlight of 2017 are the Dawson Lower Montney wells that ARC brought on production in the year, which are producing at strong liquids and natural gas rates. One well has averaged approximately 6.8 MMcf per day of natural gas and 220 barrels per day of free condensate over the first 150 days of production, and another well brought on production in the fourth quarter of 2017 has averaged approximately 6.5 MMcf per day of natural gas and 270 barrels per day of free condensate over the first 110 days of production. At Pouce Coupe, two Lower Montney wells have been on production for over eight months and have an average production rate of 3.9 MMcf per day of natural gas and 110 barrels per day of free condensate.

Parkland/Tower was a focus of ARC’s Lower Montney appraisal program in 2017, with two Parkland wells completed in the third quarter of 2017, both yielding significant success. One well brought on production in the third quarter of 2017 has averaged approximately 4.2 MMcf per day of natural gas and approximately 475 barrels per day of free condensate over 160 days. The well is stabilizing at a condensate-to-gas ratio of 80 barrels per MMcf. A second well was brought on production in the fourth quarter of 2017 and has averaged approximately 3.9 MMcf per day of natural gas and approximately 245 barrels per day of free condensate over 60 days. The well is stabilizing at a condensate-to-gas ratio of 50 barrels per MMcf. ARC is encouraged by these results and intends to develop the opportunity further in 2018.

At Sunrise, a five-well pad that is piloting dual-layer development in the Lower Montney horizon was completed in the fourth quarter of 2017. Significant Lower Montney development potential has also been identified at Attachie West, where ARC drilled an appraisal well on a multi-well pad in the fourth quarter of 2017. The Lower Montney wells at Sunrise and Attachie West will be brought on production in 2018.

Dawson

The Dawson Montney play is the foundation of ARC’s low-cost natural gas business where ARC has a land position of 137 net sections. The Dawson play delivers strong economics and cash flow at current natural gas prices due to excellent capital efficiencies and low operating expenses. Dawson production averaged 248 MMcf per day of natural gas and 3,700 barrels per day of condensate and NGLs during the fourth quarter of 2017, resulting in a total production increase of six per cent relative to the third quarter of 2017. While the Dawson Phase III facility has reached its gas processing capacity, ARC plans to grow the area’s liquids production with the continued development of the liquids-rich Lower Montney horizon. ARC will continue to examine opportunities to optimize liquids production in the area.

ARC invested $272 million at Dawson in 2017. Capital investment was directed at completing construction of the Dawson Phase III facility, as well as the drilling of 37 natural gas wells and completion of 25 wells. The majority of these wells targeted the liquids-rich areas outside of the core of Dawson. Dawson Phase III has been designed to process 90 MMcf per day of natural gas and handle up to 7,500 barrels per day of liquids (approximately 50 per cent condensate-handling), and has dual-connectivity to third-party pipeline infrastructure in order to provide increased takeaway optionality. Since start-up, operational performance of the facility has been excellent.

ARC is currently evaluating the Phase IV expansion of the Dawson gas processing and liquids-handling facility. The facility expansion has received regulatory approval. By taking advantage of Phase III investments and the success of ARC’s recent Lower Montney development activities, Dawson Phase IV is one of ARC’s most attractive infrastructure investment opportunities. Similar to Phase III, the facility has been designed to handle free liquids and richer gas production from the Lower Montney.

Sunrise

ARC has a land position of 32 net sections at Sunrise, a dry natural gas Montney play in northeast British Columbia with potential for up to six layers of development. With a significant natural gas resource base, high well deliverability, low capital requirements, and low operating expenses, Sunrise continues to create significant value and superior full-cycle economics. 2017 operating and royalty expenses of a combined $0.58 per Mcf and finding and development costs of $0.45 per Mcf have allowed Sunrise to deliver strong rates of return in the current commodity price environment, and make it ARC’s most profitable asset. Fourth quarter 2017 Sunrise production was approximately 132 MMcf per day of natural gas, an increase of four per cent from the third quarter of 2017 and represents the recovery from a five-day planned turnaround at ARC’s Sunrise facility in the prior period.

ARC invested $77 million on capital activities at Sunrise in 2017, including the drilling and completing of five Lower Montney natural gas wells. The five-well pad includes a dual-layer pilot in the Lower Montney zone. ARC has plans to tie-in the five wells in 2018 as facility capacity becomes available, and will evaluate the viability of dual-layer development within the Lower Montney horizon based on the wells’ production results.

Construction continued on the second phase of the existing Sunrise gas processing facility through the fourth quarter of 2017. Sunrise Phase II will add incremental natural gas sales of 120 MMcf per day in addition to 60 MMcf per day of repatriated production that is currently flowing through a third-party facility. The Sunrise facility expansion of 180 MMcf per day will be electrified and is expected to come on-stream by mid-year 2019, at which point ARC’s total owned and operated processing and sales capacity in the area will be 240 MMcf per day of natural gas. With increased control of ARC’s Sunrise production volumes and the elimination of third-party processing fees, operating costs in the area will be significantly reduced once the facility comes on-stream. Long-term takeaway capacity for production associated with the facility expansion has been secured.

Parkland/Tower

ARC’s Parkland/Tower property, located in the Montney play in northeast British Columbia, consists of 57 net sections at Tower, which produce predominantly light crude oil and condensate with liquids-rich associated gas; and 37 net sections at Parkland, which produce liquids-rich natural gas and dry gas. With contiguous lands, these areas share ARC-operated infrastructure and processing capacity. Fourth quarter 2017 production at Parkland/Tower averaged 29,200 boe per day (approximately 40 per cent crude oil and liquids and 60 per cent natural gas), unchanged from the third quarter of 2017. ARC expects 2018 production levels at Parkland/Tower to remain at similar levels to 2017, with crude oil and liquids production expected to be maintained at sales of over 10,000 barrels per day.

Capital investment at Parkland/Tower was $214 million in 2017 and included the drilling of 29 crude oil wells, six liquids-rich natural gas and natural gas wells, and completion of 34 wells. Capital investment was also directed at infrastructure development activities, including progressing the electrification of ARC’s owned-and-operated Parkland/Tower gas processing and liquids-handling facility. The facility is expected to be fully connected to the grid in the second quarter of 2018, at which point the facility’s emissions will be reduced by 98 per cent. Development of ARC’s water recycling infrastructure for the Parkland/Tower area was also commenced in the fourth quarter of 2017 with the construction of a water storage facility in Tower. The facility is expected to be in service by the end of 2018 and will give ARC the ability to reduce its fresh water usage, and will reduce frac water costs by approximately 75 per cent.

ARC continues to evaluate and progress its development strategy for the Parkland/Tower area, with an ongoing focus on improving capital efficiencies, refining well designs for optimized operational efficiency, and sustaining production. Application of refined designs and the integration of learnings to the most recent development activities within the Tower core are improving capital efficiencies and delivering strong production results.

Attachie

ARC’s Attachie property is a highly prospective, Montney crude oil and liquids-rich natural gas exploration play located in northeast British Columbia, where ARC has a land position of 306 net sections (approximately 200,000 acres). ARC invested $42 million on pilot activities on the west side of Attachie in 2017, including the drilling and completion of two liquids-rich natural gas wells. The two wells were brought on production in the second quarter of 2017 and have produced a combined 220,000 barrels of condensate in the first 225 days, for cumulative production of 370,000 boe.

Encouraged by the recent production results in the area, ARC drilled a seven-well demonstration pad at Attachie West in the fourth quarter of 2017. Development of these wells will focus on capital efficiency improvements, and allows ARC to appraise Attachie West’s multi-layer development potential with one of the seven wells targeting the Lower Montney horizon. ARC has plans to complete the wells in the first quarter of 2018, and will tie-in and bring the wells on production through the second half of 2018.

ARC currently has six pilot wells on production at Attachie West, all of which have demonstrated strong wellhead condensate rates. The six wells continue to see high reservoir pressures and are currently able to produce without artificial lift. The wells are producing through third-party infrastructure while long-term infrastructure requirements are being assessed. ARC has initiated a front-end engineering evaluation of commercial development of Attachie West. ARC will continue to optimize and monitor production results in the area, including upcoming results from the seven-well demonstration pad, and will incorporate the learnings into future development plans at Attachie.

Ante Creek

ARC has a land position of 377 net sections at Ante Creek, a Montney crude oil play in northern Albertathat generates strong cash flow and has significant future development potential. Fourth quarter 2017 production at Ante Creek averaged 15,900 boe per day (approximately 50 per cent crude oil and liquids), unchanged from the third quarter of 2017. ARC invested $103 million in 2017 to drill 18 crude oil wells and one vertical disposal well, and to complete 17 wells.

ARC continues to see strong performance out of its base production at Ante Creek, demonstrating the effectiveness of ongoing optimization activities in the area and the overall strength of the asset base. Recent optimization of well designs has resulted in improved capital efficiencies, and new wells brought on production over the past year have confirmed ARC’s improved type curve expectations, thereby extending the overall development area at Ante Creek. ARC has initiated studies for the next phase of development at Ante Creek.

Pembina

ARC’s Pembina Cardium assets deliver high-quality, light oil production, generating strong operating netbacks and favourable half-cycle economics with major infrastructure already in place. ARC has a land position of 219 net sections in Pembina, where fourth quarter 2017 production averaged approximately 10,900 boe per day (approximately 85 per cent light oil and liquids). Production increased five per cent relative to the third quarter of 2017 and was the result of new wells being brought on-stream during the period.

ARC invested $73 million in capital activities in 2017, including drilling 15 crude oil wells and completing 20 wells, as well as upgrading aging infrastructure in the area. ARC focused on capital and operating efficiencies with its 2017 drilling and completion activities in the Pembina area, driving an increase in overall profitability and free cash flow generation. Optimizing production and waterflood management continue to be core components of ARC’s operations at Pembina.

Redwater

ARC’s Redwater region in Alberta produces high-quality, light crude oil. Production averaged approximately 3,200 boe per day in the fourth quarter of 2017, representing a six per cent increase from the third quarter of 2017. 2017 capital investment at Redwater of $3 million was focused on maintenance and optimization activities.

DIVIDENDS

As a dividend-paying corporation, ARC declares monthly dividends to its shareholders. ARC continually assesses dividend levels in light of commodity prices and economic conditions, capital expenditure programs, and production volumes to ensure that dividends are in line with ARC’s long-term strategy and objectives.

ARC declared dividends totaling $53.1 million ($0.15 per share) in the fourth quarter of 2017, and $212.3 million ($0.60 per share) for the year ended December 31, 2017. The Board of Directors previously confirmed a dividend of $0.05 per share for January 2018, payable on February 15, 2018, and has conditionally declared a monthly dividend of $0.05 per share for February 2018 through April 2018, payable as follows:

Ex-dividend Date

Record Date

Payment Date

Per Share Amount

January 30, 2018

January 31, 2018

February 15, 2018

$0.05 (1)

February 27, 2018

February 28, 2018

March 15, 2018

$0.05 (2)

March 28, 2018

March 29, 2018

April 16, 2018

$0.05 (2)

April 27, 2018

April 30, 2018

May 15, 2018

$0.05 (2)

(1)

Confirmed on January 15, 2018.

(2)

Conditionally declared, subject to confirmation by news release and further resolution by the Board of Directors.

 

The dividends have been designated as eligible dividends under the Income Tax Act (Canada). The declaration of the dividends is conditional upon confirmation by news release and is subject to any further resolution by the Board of Directors. Dividends are subject to change in accordance with ARC’s dividend policy depending on a variety of factors and conditions existing from time-to-time, including fluctuations in commodity prices, production levels, capital expenditure requirements, debt service requirements, operating expenses, royalty burdens, foreign exchange rates and the satisfaction of solvency tests imposed by the Business Corporations Act (Alberta) for the declaration and payment of dividends. Shareholders, wherever resident, are encouraged to consult their own tax advisors regarding the tax consequences to them of receiving cash dividends.

OUTLOOK

The foundation of ARC’s business strategy is risk-managed value creation. High-quality assets, health, safety and environmental and operational excellence, financial flexibility and strength, and top talent are the key principles underpinning ARC’s business strategy. ARC’s goal is to create shareholder value in the form of regular dividends and anticipated capital appreciation relating to profitable future growth.

ARC’s Board of Directors approved a $690 million capital program for 2018 that focuses on long-term profitability and balance sheet strength through the continued development of ARC’s Montney crude oil, liquids-rich natural gas, and natural gas assets. The 2018 capital program will sustain ARC’s base Montney businesses and will fund strategic infrastructure at the Sunrise Phase II gas processing facility, ARC’s next major phase of growth, expected to be at full capacity by mid-year 2019. The capital program will allow ARC to continue to develop the Lower Montney and advance the liquids-rich Attachie asset towards commercialization with the completion and tie-in of a seven-well demonstration pad at Attachie West. ARC expects 2018 annual average production to be in the range of 130,000 to 134,000 boe per day. Additional details on ARC’s 2018 capital program and 2018 guidance can be found in the November 9, 2017 news release entitled, “ARC Resources Ltd. Announces $690 Million Capital Program for 2018″ available on ARC’s website at www.arcresources.com and on SEDAR at www.sedar.com.

Ongoing commodity price volatility may affect ARC’s funds from operations and over the long term, profitability and return on investment of capital programs. As continued volatility is expected, ARC will continue to take steps to mitigate these risks, including executing active risk management and physical marketing diversification programs, focusing on capital and operating efficiencies, and protecting its strong financial position, with a targeted net debt to annualized funds from operations ratio of between 1.0 and 1.5 times. ARC will continue to screen projects for profitability in a disciplined manner and will adjust investment levels and the pace of development, if required, to ensure balance sheet strength is protected. The 2018 capital budget excludes land purchases and property acquisitions or dispositions. ARC will continue to pursue opportunities to consolidate its land position and grow its presence in key areas through land purchases and property acquisitions, and evaluate its asset portfolio on a continuous basis with a view to selling assets that do not meet ARC’s investment guidelines. Through the normal course of business, acquisitions and dispositions may occur that could impact the expected production for the year.

ARC’s full-year 2018 and 2017 guidance estimates and a review of 2017 actual results are outlined in the following table.

2018 Guidance

2017 Guidance

2017 Actuals

% Variance from
Guidance

Production

Crude oil (bbl/day)

25,000 – 27,000

25,000 – 27,000

24,380

(2)

Condensate (bbl/day)

6,500 – 7,000

5,000 – 5,500

5,650

3

Natural gas (MMcf/day)

555 – 565

510 – 520

525.8

1

NGLs (bbl/day)

6,000 – 6,500

4,500 – 5,000

5,273

5

Total (boe/day)

130,000 – 134,000

120,000 – 124,000

122,937

Expenses ($/boe)

Operating

6.50 – 6.90

6.30 – 6.70

6.41

Transportation

2.80 – 3.00

2.45 – 2.65

2.52

G&A expenses before share-based compensation plans

1.25 – 1.45

1.25 – 1.45

1.31

G&A – share-based compensation plans (1)

0.40 – 0.55

0.10 – 0.40

0.23

Interest

0.80 – 1.00

1.00 – 1.10

1.01

Current income tax (per cent of funds from operations) (2)

0 – 5

0 – 5

2

Capital expenditures before land purchases

and net property acquisitions (dispositions)

($ millions)

690

830

829.7

Land purchases and net property acquisitions

(dispositions) ($ millions)

N/A

N/A

100.1

N/A

Weighted average shares (millions)

353

353

353

(1)

Comprises expenses recognized under the Restricted Share Unit and Performance Share Unit Plan, Share Option Plan and Long-term Restricted Share Award Plan, and excludes compensation charges under the Deferred Share Unit Plan. In periods where substantial share price fluctuation occurs, ARC’s G&A expenses are subject to greater volatility.

(2)

The current income tax estimates vary depending on the level of commodity prices.

 

ARC RESOURCES LTD.

CONSOLIDATED BALANCE SHEETS

As at

(Cdn$ millions)

December 31, 2017

December 31, 2016

ASSETS

Current assets

Cash and cash equivalents

220.2

222.2

Short-term investments

450.0

Accounts receivable

132.7

164.7

Prepaid expenses

18.1

12.1

Risk management contracts

146.6

59.0

Assets held for sale

301.1

242.3

818.7

1,150.3

Reclamation fund

36.7

36.5

Risk management contracts

148.4

123.4

Exploration and evaluation assets

418.9

313.2

Property, plant and equipment

4,553.1

4,118.9

Goodwill

248.2

248.2

Total assets

6,224.0

5,990.5

LIABILITIES

Current liabilities

Accounts payable and accrued liabilities

170.0

161.8

Current portion of long-term debt

73.9

51.5

Current portion of asset retirement obligations

16.0

15.5

Dividends payable

17.7

17.7

Risk management contracts

28.9

Liabilities associated with assets held for sale

219.7

171.1

497.3

446.5

Risk management contracts

0.2

Long-term debt

837.4

974.5

Long-term incentive compensation liability

17.5

24.6

Other deferred liabilities

12.3

12.4

Asset retirement obligations

386.8

363.4

Deferred taxes

803.6

684.3

Total liabilities

2,555.1

2,505.7

SHAREHOLDERS’ EQUITY

Shareholders’ capital

4,658.5

4,654.9

Contributed surplus

21.9

17.6

Deficit

(1,011.4)

(1,188.0)

Accumulated other comprehensive income (loss)

(0.1)

0.3

Total shareholders’ equity

3,668.9

3,484.8

Total liabilities and shareholders’ equity

6,224.0

5,990.5

See accompanying notes to ARC’s consolidated financial statements.

 

 

ARC RESOURCES LTD.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the three months and year ended December 31

Three Months Ended

Year Ended

December 31

December 31

(Cdn$ millions, except per share amounts)

2017

2016

2017

2016

Sales of crude oil, natural gas, condensate,

natural gas liquids and other income

340.3

331.8

1,225.7

1,063.5

Royalties

(26.4)

(26.7)

(102.8)

(89.0)

Revenue

313.9

305.1

1,122.9

974.5

Gain (loss) on risk management contracts

79.8

(66.5)

282.8

(36.7)

Revenue and gain (loss) on risk management contracts

393.7

238.6

1,405.7

937.8

Transportation

30.0

25.1

113.1

95.4

Operating

73.8

73.3

287.7

289.0

Exploration and evaluation expenses

9.7

9.7

1.7

General and administrative

17.2

15.2

69.1

99.3

Interest and financing charges

10.9

12.6

45.3

50.5

Accretion of asset retirement obligations

3.6

3.0

13.1

12.1

Depletion, depreciation, amortization

and impairment

130.1

47.3

405.1

431.5

Loss (gain) on foreign exchange

(0.7)

23.3

(57.0)

(33.3)

Gain on short-term investments

(0.4)

(0.1)

(0.4)

(1.2)

Gain on business combinations

(53.9)

Loss (gain) on disposal of petroleum and natural gas

properties

0.1

(196.0)

(4.8)

(196.0)

Total expenses

274.3

3.7

880.9

695.1

Net income before income taxes

119.4

234.9

524.8

242.7

Provision for income taxes

Current

6.1

24.4

16.5

25.4

Deferred

39.4

43.5

119.4

16.0

Total income taxes

45.5

67.9

135.9

41.4

Net income

73.9

167.0

388.9

201.3

Net income per share

Basic

0.21

0.47

1.10

0.57

Diluted

0.21

0.47

1.10

0.57

See accompanying notes to ARC’s consolidated financial statements.

 

ARC RESOURCES LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

For the three months and year ended December 31

Three Months Ended

Year Ended

December 31

December 31

(Cdn$ millions)

2017

2016

2017

2016

Net income

73.9

167.0

388.9

201.3

Other comprehensive income (loss)

Items that may be reclassified into earnings, net of tax:

Net unrealized gain (loss) on reclamation fund assets

0.2

(0.1)

(0.4)

0.2

Other comprehensive income (loss)

0.2

(0.1)

(0.4)

0.2

Comprehensive income

74.1

166.9

388.5

201.5

See accompanying notes to ARC’s consolidated financial statements.

 

ARC RESOURCES LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the years ended December 31

(Cdn$ millions)

Shareholders’
Capital

Contributed
Surplus

Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders’
Equity

December 31, 2015

4,536.9

12.6

(1,161.1)

0.1

3,388.5

Net income

201.3

201.3

Other comprehensive income

0.2

0.2

Total comprehensive income

201.3

0.2

201.5

Shares issued for cash on exercise of
stock options

0.8

0.8

Shares issued pursuant to the Dividend

Reinvestment Plan and the Stock
Dividend Program

117.1

117.1

Share issuance costs

(0.2)

(0.2)

Recognized under share-based
compensation plans

5.3

5.3

Contributed surplus transferred on
exercise of share options

0.3

(0.3)

Dividends declared

(228.2)

(228.2)

December 31, 2016

4,654.9

17.6

(1,188.0)

0.3

3,484.8

Net income

388.9

388.9

Other comprehensive loss

(0.4)

(0.4)

Total comprehensive income (loss)

388.9

(0.4)

388.5

Shares issued pursuant to the Dividend

Reinvestment Plan and the Stock
Dividend Program

3.0

3.0

Recognized under share-based
compensation plans

0.6

4.3

4.9

Dividends declared

(212.3)

(212.3)

December 31, 2017

4,658.5

21.9

(1,011.4)

(0.1)

3,668.9

See accompanying notes to ARC’s consolidated financial statements.

 

 

ARC RESOURCES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the three months and year ended December 31

Three Months Ended

Year Ended

December 31

December 31

(Cdn$ millions)

2017

2016

2017

2016

CASH FLOW FROM OPERATING ACTIVITIES

Net income

73.9

167.0

388.9

201.3

Add items not involving cash:

Unrealized loss (gain) on risk management contracts

(36.0)

99.8

(137.8)

253.2

Accretion of asset retirement obligation

3.6

3.0

13.1

12.1

Depletion, depreciation, amortization and impairment

130.1

47.3

405.1

431.5

Exploration and evaluation expenses

9.7

9.7

1.7

Unrealized loss (gain) on foreign exchange

0.8

23.1

(65.2)

(34.5)

Gain on business combinations

(53.9)

Loss (gain) on disposal of petroleum and natural gas

properties

0.1

(196.0)

(4.8)

(196.0)

Deferred tax expense

39.4

43.5

119.4

16.0

Other

(0.5)

0.8

3.5

1.9

Net change in other liabilities

(2.5)

(7.5)

(30.4)

(4.7)

Change in non-cash working capital

(22.6)

(21.7)

(28.7)

2.1

Cash flow from operating activities

196.0

159.3

672.8

630.7

CASH FLOW USED IN FINANCING ACTIVITIES

Repayment of senior notes

(12.0)

(12.6)

(49.8)

(55.1)

Issuance of common shares

0.1

0.3

0.6

0.8

Share issuance costs

(0.2)

Cash dividends paid

(53.1)

(29.8)

(209.2)

(128.0)

Cash flow used in financing activities

(65.0)

(42.1)

(258.4)

(182.5)

CASH FLOW FROM (USED IN) INVESTING ACTIVITIES

Acquisition of petroleum and natural gas properties

(2.2)

(14.6)

(2.5)

(172.9)

Disposal of petroleum and natural gas properties

702.1

705.4

Property, plant and equipment development expenditures

(225.9)

(150.3)

(810.3)

(417.6)

Exploration and evaluation asset expenditures

(19.6)

(11.5)

(116.7)

(38.0)

Net reclamation fund contributions

(0.6)

(1.0)

(0.6)

(2.0)

Net withdrawal (purchase) of short-term investments

(445.6)

452.8

(445.6)

Change in non-cash working capital

4.7

(18.3)

60.9

(22.6)

Cash flow from (used in) investing activities

(243.6)

60.8

(416.4)

(393.3)

INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS

(112.6)

178.0

(2.0)

54.9

CASH AND CASH EQUIVALENTS, BEGINNING OF

PERIOD

332.8

44.2

222.2

167.3

CASH AND CASH EQUIVALENTS, END OF PERIOD

220.2

222.2

220.2

222.2

The following are included in cash flow from operating activities:

Income taxes paid in cash

5.2

19.4

17.1

14.7

Interest paid in cash

8.1

24.9

46.3

50.5

See accompanying notes to ARC’s consolidated financial statements.

 

 

FORWARD-LOOKING INFORMATION AND STATEMENTS

This news release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect,” “anticipate,” “continue,” “estimate,” “objective,” “ongoing,” “may,” “will,” “project,” “should,” “believe,” “plans,” “intends,” “strategy” and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this news release contains forward-looking information and statements pertaining to the following: guidance as to the capital expenditure plans of ARC in 2018 and beyond and its production in 2018 and beyond, and its compensation structure under the heading “Strategy Update”, guidance as to the capital expenditure plans of ARC in 2018 and beyond and its production in 2018 and beyond, as well as the recognition of significant additional reserves and resources, the volumes and estimated value of ARC’s oil and gas reserves and resources, its risk management plans for 2018 and beyond, and operating expenses under the heading “Financial and Operating Highlights”, as to its views on future commodity prices under the heading “Economic Environment”, as to its risk management plans for 2018 and beyond under the heading “Risk Management”, as to its production, exploration and development plans, and capital expenditures for 2018 and beyond under the heading “Operational Review”, as to its plans in relation to future dividend levels under the heading “Dividends”, and all matters in respect of 2018 guidance under the heading “Outlook”.

The forward-looking information and statements contained in this news release reflect several material factors, expectations and assumptions of ARC, including, without limitation: the production performance of ARC’s crude oil and natural gas assets; the cost and competition for services throughout the oil and gas industry in 2018; the results of exploration and development activities during 2018; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the accuracy of the estimates of ARC’s reserves and resource volumes; certain commodity price and other cost assumptions for 2018; the retention of ARC’s key properties; and the continued availability of adequate debt and equity financing and funds from operations to fund its planned expenditures. ARC believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable, but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this news release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of ARC’s products; changes to government regulations including royalty rates, taxes, and environmental and climate change regulation; market access constraints or transportation interruptions, unanticipated operating results, or production declines; changes in development plans of ARC or by third-party operators of ARC’s properties, increased debt levels or debt service requirements; inaccurate estimation of ARC’s oil and gas reserve and resource volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; and certain other risks detailed from time-to-time in ARC’s public disclosure documents (including, without limitation, those risks identified in this news release and in ARC’s Annual Information Form).

The internal projections, expectations or beliefs are based on the 2018 capital budget which is subject to change in light of ongoing results, prevailing economic circumstances, commodity prices and industry conditions and regulations. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted. The forward-looking information and statements contained in this news release speak only as of the date of this news release, and none of ARC or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

ARC has adopted the standard 6 Mcf:1 barrel when converting natural gas to boe. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 barrel 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.

ARC Resources Ltd. is one of Canada’s largest conventional oil and gas companies with an enterprise value (1) of approximately $5.2 billion. ARC’s common shares trade on the TSX under the symbol ARX.

ARC RESOURCES LTD.

Myron M. Stadnyk
President and Chief Executive Office

(1) Enterprise value is also referred to as total capitalization. Refer to Note 16 “Capital Management” in ARC’s financial statements for the three months and year ended December 31, 2017 and to the section entitled “Capitalization, Financial Resources and Liquidity” contained within ARC’s MD&A.

 

SOURCE ARC Resources Ltd.

CONTACT: about ARC Resources Ltd., please visit our website 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 – 4th Avenue SW, Calgary, AB T2P 0H7

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