ARC Resources Ltd. Announces $775 Million Capital Program for 2019 That Will Advance Multi-year Infrastructure Development Projects at Attachie West, Dawson, and Ante Creek

CALGARY, Nov. 8, 2018 /CNW/ – (ARX – TSX) ARC Resources Ltd. (“ARC” or “the Company”) announced today that its Board of Directors has approved a $775 million capital program for 2019 that focuses on profitable organic liquids growth to deliver a meaningful cash flow per share increase over the long term. The 2019 budget focuses on maintaining ARC’s strong financial position, improving ARC’s competitive capital and operating efficiencies, and profitably developing ARC’s Montney assets to drive free cash flow generation, while supporting sustainable future growth and ARC’s monthly dividend. The 2019 budget invests in multi-year development projects that will add facility capacity at Attachie West and Dawson in northeast British Columbia, and Ante Creek in northern Alberta. The majority of the production associated with these infrastructure projects will be added in 2020 and 2021. Annual average production is expected to be in the range of 135,000 to 142,000 boe per day in 2019, which will set the stage for an anticipated average production compound annual growth rate (“CAGR”) of greater than 10 per cent from 2019 to 2021.

“We are pleased to announce our 2019 capital investment plan of $775 million,” stated Myron Stadnyk, ARC’s President and Chief Executive Officer. “This marks the beginning of a three-year program that will result in meaningful liquids growth across our Montney asset base, including the first major phase of development at our highly prospective Attachie West asset and growing our liquids volumes at our Dawson and Ante Creek properties. The development of these organic growth opportunities has largely been pre-funded through the sale of our non-coreSaskatchewan and Redwater assets, and is made possible due to our strong financial position, excellent capital and operating efficiencies, moderate corporate decline rates, and low sustaining capital requirements.”

Strategic Objectives of the 2019 Capital Budget

The strategic objectives of ARC’s 2019 capital budget are aligned with ARC’s long-term strategy of risk-managed value creation. The objectives are as follows:

2019 Capital Budget Highlights

ARC’s $775 million capital program for 2019 is focused on organic liquids growth to deliver a meaningful cash flow per share increase over the long term. Highlights from the 2019 budget include:

• Deliver annual average production in the range of 135,000 to 142,000 boe per day in 2019.
  • Deliver annual average oil and liquids production in the range of 31,500 to 37,000 barrels per day, of which approximately 80 per cent is light oil and condensate.
  • Deliver annual average natural gas production in the range of 620 to 630 MMcf per day.
• Invest in infrastructure to advance multi-year development projects to support future liquids growth. Production through the new facilities noted below is expected to ramp up over a two-year period.
  • Dawson Phase I & II gas processing facility upgrade to add 3,000 barrels per day of liquids-handling capabilities, expected to be completed by the fourth quarter of 2019.
  • Dawson Phase IV gas processing and liquids-handling facility expansion to add 90 MMcf per day of natural gas processing, 7,500 barrels per day of condensate, and 3,000 barrels per day of natural gas liquids (“NGLs”)-handling capacity, expected to be on-stream in the second quarter of 2020.
  • Ante Creek 10-36 gas processing facility expansion to add approximately 15 MMcf per day of natural gas processing and 2,500 barrels per day of liquids-handling capacity, expected to be on-stream by the second quarter of 2020.
  • Attachie West Phase I gas processing and liquids-handling facility will have 60 MMcf per day of natural gas processing, 10,000 barrels per day of condensate, and 4,000 barrels per day of NGLs-handling capacity, expected to be on-stream in the second quarter of 2021.
• In the current commodity price environment, ARC’s outlook on production growth is an annualized average production increase of approximately 10 per cent from 2019 to 2021.
  • ARC’s liquids-focused investments are set to deliver an anticipated average production CAGR of greater than 40 per cent for condensate, 25 per cent for NGLs, and 10 per cent for natural gas from 2019 to 2021. Oil production is expected to decline slightly over the same time period.
• Manage sustaining capital ⁽¹⁾ requirements of approximately $400 million and current corporate decline rates, while investing approximately $375 million in growth capital ⁽²⁾.
• Drill 77 operated wells, including 49 liquids-rich natural gas wells at Dawson, Attachie West, and Parkland, 27 light oil wells at Ante Creek, Tower, and Pembina, and one water disposal well at Attachie.
• Keep gas plants in core Montney areas at or near capacity through 2019 to drive free cash flow generation, and continue to exploit the liquids-rich Lower Montney through development activities at Dawson and Parkland.
• Maintain ARC’s position as a leading low-cost operator through infrastructure ownership and operatorship. Following the disposition of non-core assets in 2018, which had higher relative costs to operate, target 2019 operating expenses to be in the range of $5.30 to $5.70 per boe.
• Continue to execute ARC’s physical marketing strategy to ensure long-term market access for natural gas, oil, and liquids production. Manage natural gas price risk exposure by executing physical natural gas diversification and financial risk management activities to help increase ARC’s exposure to more attractive North American markets and enhance commodity price realizations. ARC will continue to execute on its risk management program for oil and natural gas to reduce volatility of funds from operations and to support its dividend and capital programs.
• Fund the 2019 capital budget with a combination of cash on-hand from disposition proceeds from ARC’s non-core Saskatchewan and Redwater asset sales, cash flow generated from ARC’s existing businesses, and additional debt if necessary, while continuing to protect ARC’s strong balance sheet.
  • ARC’s outlook is such that in 2021, the Company will be able to satisfy its dividend obligations and sustain and grow its business entirely out of cash flow, while maintaining a net debt to annualized funds from operations ratio of between 1.0 and 1.5 times.
• Maintain ARC’s monthly dividend of $0.05 per share based on, among other things, the current outlook for crude oil and natural gas prices and ARC’s risk management contract positions. The dividend is primarily dependent upon commodity prices and prevailing economic conditions and is reviewed regularly by the Board of Directors.

2019 Capital Program and Production

The following table details ARC’s 2019 capital program by area, including capital expenditures, number of wells planned, and expected production.

A major component of ARC’s 2019 budget is investing in infrastructure to help set the stage for meaningful liquids growth over the long term. ARC has plans to invest approximately $420 million of facility capital over the course of the next two years, which includes investment in facilities, pipelines, and water infrastructure at Attachie West, Dawson, and Ante Creek. Approximately $295 million of the $420 million of investment is planned for 2019 and the remaining $125 million is planned for 2020. The following table details processing capacities and expected on-stream dates for ARC’s upcoming infrastructure projects; production through each facility will grow over a two-year period.

The 2019 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.

Attachie

With its condensate-rich production profile, significantly over-pressured reservoir, and a large contiguous land position that is suited for multi-layered development, Attachie West is a leading development opportunity within ARC’s portfolio. As such, ARC’s Board of Directors has formally sanctioned the first phase of major development for the area. The Attachie West Phase I gas processing and liquids-handling facility will have 60 MMcf per day of natural gas processing, 10,000 barrels per day of condensate, and 4,000 barrels per day of NGLs-handling capacity. Following commissioning of the facility, ARC will integrate the infrastructure that is currently being used for piloting activities into the development plans at Attachie West. ARC is in the process of submitting the application for regulatory approval, and expects that the facility will be on-stream in the second quarter of 2021, subject to TransCanada Corporation’s completion of the North Montney Mainline project which is currently expected to be on-stream in late 2019. Long-term takeaway capacity for production associated with the facility has been secured. ARC plans to obtain regulatory approval for multiple phases to expedite future development activities in the area.

The primary objective at Attachie West is to provide meaningful growth in the near term while preparing for future growth phases over the longer term. ARC plans to invest $184 million at Attachie in 2019, of which $129 million is planned for facility and infrastructure spending, including surrounding sales lines, water infrastructure, and access road upgrades. ARC also has plans to drill and complete five liquids-rich natural gas wells and one water disposal well in 2019.

ARC will continue to optimize existing production, improve capital efficiencies, and optimize completion designs in Attachie in 2019. With drilling and completion activities planned for the second half of 2019, ARC expects current production levels to decline slightly through the year as existing wells decline. ARC expects 2019 annual production to average approximately 3,000 boe per day (approximately 50 per cent condensate and NGLs and 50 per cent natural gas).

Dawson

ARC plans to invest $299 million at Dawson in 2019, setting the stage to deliver meaningful production growth over the near term through enhancements to ARC’s existing Dawson Phase I and II gas processing facility and through the Dawson Phase IV gas processing and liquids-handling facility expansion. Approximately $137 million of the 2019 budget is earmarked for facility and infrastructure capital at Dawson.

Excellent production results from ARC’s Lower Montney appraisal activities in 2017 and subsequent investments in 2018 unlocked significant liquids growth opportunities in the Lower Montney. As such, ARC commenced initial work on enhancements to ARC’s existing Dawson Phase I and II gas processing facility during the third quarter of 2018, which will allow for increased liquids-handling capabilities. The addition of refrigeration and dehydration capabilities will allow ARC to accelerate the exploitation of the Lower Montney horizon in the core of ARC’s Dawson lands and enhance the area’s liquids growth profile, adding approximately 3,000 barrels per day of liquids (of which approximately 2,000 barrels per day is condensate), over time, as production in the Dawson core becomes more heavily-weighted towards the Lower Montney. ARC expects to have the facility enhancements completed by the fourth quarter of 2019.

The Dawson Phase IV gas processing and liquids-handling facility expansion is ARC’s next major growth driver. The facility expansion has received regulatory approval and will add natural gas sales capacity of approximately 90 MMcf per day and have the ability to handle up to 7,500 barrels per day of condensate and 3,000 barrels per day of NGLs. Earthwork for the facility expansion commenced in the third quarter of 2018 and ARC expects to have the facility on-stream in the second quarter of 2020. Long-term takeaway capacity for production associated with the facility expansion has been secured.

To optimize cash flow generation through existing infrastructure, ARC plans to make a broad shift to the Lower Montney in 2019 by investing $151 million to drill 39 liquids-rich natural gas wells, 36 of which target the Lower Montney horizon. ARC also has plans to invest $9 million in 3D seismic to assist in the efficient development of the Dawson play.

ARC expects 2019 annual production to average approximately 42,000 boe per day (approximately 90 per cent natural gas and 10 per cent condensate and NGLs).

Parkland/Tower

ARC plans to invest $128 million at Parkland/Tower in 2019 to maximize high-value liquids production to drive free cash flow generation. ARC plans to drill eight oil wells at Tower; and five liquids-rich natural gas wells at Parkland, focused on growing liquids production from the Lower Montney horizon. All five of the Parkland wells will be produced through the Dawson Phase III gas processing and liquids-handling facility via the Parkland-Dawson pipeline interconnect. ARC expects 2019 annual production to average approximately 32,000 boe per day (approximately 60 per cent natural gas and 40 per cent light oil and liquids).

Sunrise

The key objective for the Sunrise area is to maximize free cash flow following the startup of the Sunrise Phase II gas processing facility expansion. ARC plans to invest $24 million in 2019 to complete and tie-in nine natural gas wells that were drilled in the third quarter of 2018.

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

• With plant commissioning activities complete, an initial 60 MMcf per day of processing capacity is available to be used in the fourth quarter of 2018.
• In the first half of 2019, an additional 60 MMcf per day of incremental processing capacity is available once final transportation arrangements have come into effect. The exact timing of the production being brought on-stream will be commodity price-dependent.
• By June 2019, 60 MMcf per day of existing natural gas production that is currently being processed through a third-party facility will be redirected to ARC’s operated Sunrise Phase II facility. With increased control of ARC’s Sunrise production volumes, operating expenses will be significantly reduced with the elimination of third-party processing fees.

ARC expects 2019 annual production to average in excess of 200 MMcf per day of natural gas.

Ante Creek

ARC plans to invest $95 million at Ante Creek in 2019. Building on the success of ARC’s 2018 drilling program, ARC plans to drill 12 oil wells, focusing on continued capital efficiency improvements and maintaining liquids production to grow the area’s free cash flow. ARC is also initiating an expansion project at the Ante Creek 10-36 facility that will increase gas processing capacity, thereby increasing the area’s high-value liquids volumes. The expansion will increase gas processing capacity by approximately 15 MMcf per day in 2020, allowing light oil volumes to increase by approximately 1,500 barrels per day in 2020 and by approximately 2,500 barrels per day in 2021. ARC expects 2019 annual production to average approximately 16,000 boe per day (approximately 50 per cent light oil and liquids and 50 per cent natural gas).

Pembina

ARC plans to invest $31 million at Pembina in 2019 to grow the area’s free cash flow. Given the area’s favourable half-cycle economics and ability to bring on high-value, light oil production within a short payout period, ARC plans to drill seven oil wells at Pembina in 2019. Decreases in capital costs due to new well designs, as proven by ARC’s 2018 drilling program, will allow ARC to drive free cash flow generation, while managing production declines through maintenance and optimization activities and waterflood management. ARC expects 2019 annual production to average approximately 10,000 boe per day (approximately 85 per cent light oil and liquids and 15 per cent natural gas).

Summary Tables

The amount and allocation of capital expenditures for exploration and development activities by area and the number and types of wells to be drilled is dependent upon results achieved and is subject to review and modifications by Management on an ongoing basis throughout the year. This budget was set based on October 2018 commodity prices and the forward strip available at that time. The Board of Directors regularly reviews the capital program during the year to incorporate prevailing market conditions, commodity prices and changing industry regulation and conditions, and will modify the 2019 capital budget during the year, if required.

Royalties, Operating Expenses, and Transportation Expenses

Royalties

ARC’s total corporate royalty rate includes all Crown, freehold, and gross overriding royalties on production volumes in the Alberta and British Columbia operating jurisdictions. ARC expects that its corporate royalty rate for 2019 will be in line with ARC’s 2018 corporate royalty rate.

Operating Expenses

ARC’s focused Montney asset base is characterized by a high average working interest, high operating percentage, and owned-and-operated facilities. This strategy allows ARC to not only control run-times and preserve operating netbacks with prudent and safe operations, but also allows ARC to manage a competitive cost structure through the elimination of third-party processing fees. ARC’s ongoing portfolio rationalization efforts and the high-grading of its asset base has resulted in meaningful reductions to ARC’s operating cost structure, notably the disposition of ARC’s non-core Redwaterassets in the third quarter of 2018. Full-year 2019 operating expenses are estimated to be in the range of $5.30 to $5.70per boe.

The 2019 budget reflects the anticipated impact that IFRS 16 Leases (“IFRS 16”) will have on ARC’s operating expenses, the most significant item of note being the treatment of payments related to ARC’s field vehicle leases, which will be excluded from operating expenses beginning in 2019. For further discussion on the anticipated impact that IFRS 16 will have on ARC’s financial statements, refer to Note 3 “Changes in Accounting Policies” in ARC’s financial statements and to the section entitled, “Future Accounting Policies” contained within ARC’s Management’s Discussion and Analysis (“MD&A”).

Transportation Expenses

ARC’s marketing strategy for natural gas focuses on both takeaway in western Canada and managing a diversification strategy that physically delivers ARC’s production to multiple sales points in downstream markets. The effectiveness of this strategy is evidenced by minimal impacts to production from pipeline restrictions and strong price realizations due to a diversified sales portfolio. ARC expects full-year 2019 transportation expenses to be in line with ARC’s 2018 transportation expenses as ARC continues to execute on its strategy of ensuring long-term market access for natural gas, oil, and liquids production. ARC expects full-year 2019 transportation expenses to be approximately $2.60 to $2.90 per boe. While ARC’s diversification activities increase transportation expenses, the expectation is that it will be offset by higher revenue in consuming regions.

General and Administrative Expenses and Share-based Compensation

G&A expenses before share-based compensation plans are expected to be within a guided range of $1.10 to $1.30 per boe in 2019, relatively unchanged from 2018.

ARC’s 2019 budgeted G&A includes an estimated expense under its share-based compensation plans, a portion of which is dependent on ARC’s share price and three-year total return relative to its peers, and therefore is subject to a high degree of volatility. G&A expenses relating to share-based compensation plans are expected to be within a guided range of $0.35 to $0.50 per boe in 2019.

The 2019 budget reflects the anticipated impact that IFRS 16 will have on ARC’s G&A expenses, the most significant item of note being payments related to ARC’s office space leases, which will be excluded from G&A expenses beginning in 2019. For further discussion on the anticipated impact that IFRS 16 will have on ARC’s financial statements, refer to Note 3 “Changes in Accounting Policies” in ARC’s financial statements and to the section entitled, “Future Accounting Policies” contained within ARC’s MD&A.

Corporate Income Taxes

ARC expects to pay current income taxes of approximately two to seven per cent of funds from operations, before tax, in 2019. Current income taxes are dependent on capital spending and commodity price levels and given the sensitivity of income taxes to fluctuations in commodity prices, income taxes could exceed the guidance range if crude oil and/or natural gas prices change significantly.

Abandonment and Reclamation Activities

ARC has an active abandonment and reclamation program for inactive wells, pipelines, and leases. ARC expects abandonment and reclamation spending to be approximately $20 million in 2019 for activities throughout ARC’s asset base, as ARC maintains its leadership position in environmental responsibility and manages its strong corporate liability ratios in both Alberta and British Columbia.

Dividends

ARC is focused on long-term value creation, with the monthly dividend being a key component of ARC’s returns to shareholders. ARC continually assesses dividend levels in light of commodity prices and economic conditions, capital investment programs, and production volumes to ensure that dividends are in line with ARC’s long-term strategy and objectives. With its strong financial position, ARC can sustain current dividend levels while targeting a payout ratio of 20 to 25 per cent. The monthly dividend of $0.05 per share is primarily dependent upon commodity prices and prevailing economic conditions and is reviewed regularly by ARC’s Board of Directors.

Funding of the 2019 Capital Budget

The $775 million capital budget for 2019 was determined based on a variety of commodity price scenarios and assumes the continuation of the monthly $0.05 dividend per share through 2019. All of the approved 2019 capital expenditures are expected to provide attractive rates of return at current prevailing commodity prices.

Balance sheet strength and long-term financial flexibility continue to be top priorities for ARC, targeting a net debt to annualized funds from operations ratio of between 1.0 and 1.5 times. ARC expects to internally fund its dividend obligations and its 2019 sustaining capital requirements with a combination of cash on-hand and funds from operations generated from ARC’s existing businesses, and growth capital in the 2019 budget with funds from operations, the redeployment of proceeds from ARC’s non-core Saskatchewan and Redwater assets, and additional debt if necessary. ARC’s risk management program will also provide a layer of protection over funds from operations and project economics, and ARC expects to continue to add risk management contract positions for future years.

2019 Guidance and Outlook

The corporate guidance for 2019 and beyond was determined based on a variety of commodity price scenarios; certain guidance estimates may fluctuate with changes in commodity prices. ARC’s guidance for 2019 and beyond provides shareholders with relevant information on Management’s expectations for results of operations, excluding any potential acquisitions or dispositions, for 2019 and beyond. Readers are cautioned that the guidance may not be appropriate for other purposes.

The following table details potential outcomes over the next three years, including forecasted capital outflows, forecasted net debt to annualized funds from operations ratio, and anticipated average production CAGRs, subject to market conditions and commodity pricing.