CALGARY, July 28, 2016 /CNW/ - (ARX - TSX) ARC
Resources Ltd. ("ARC") is pleased to report its second quarter 2016
operating and financial results. Second quarter production averaged
117,695 boe per day and funds from operations were $141.7 million ($0.40 per share). ARC's unaudited Condensed
Interim Consolidated Financial Statements and Notes ("financial
statements"), as well as ARC's Management's Discussion and Analysis
("MD&A") for the three and six months ended June 30, 2016 and 2015, are available on ARC's
website at www.arcresources.com and on SEDAR at
www.sedar.com.
|
|
|
|
Three Months
Ended
|
Six Months
Ended
|
|
March 31,
2016
|
June 30,
2016
|
June 30,
2015
|
June 30,
2016
|
June 30,
2015
|
FINANCIAL
|
|
|
|
|
|
(Cdn$ millions, except per
share and boe amounts and shares
outstanding)
|
|
|
|
|
|
Funds from operations
(1)
|
150.1
|
141.7
|
206.3
|
291.8
|
397.8
|
|
Per share
(2)
|
0.43
|
0.40
|
0.61
|
0.83
|
1.18
|
Net income
(loss)
|
64.1
|
(58.1)
|
(51.0)
|
6.0
|
(52.7)
|
|
Per share
(2)
|
0.18
|
(0.17)
|
(0.15)
|
0.02
|
(0.16)
|
Dividends
|
69.9
|
52.5
|
102.1
|
122.4
|
203.7
|
|
Per share
(2)
|
0.20
|
0.15
|
0.30
|
0.35
|
0.60
|
Capital expenditures,
before land and net property acquisitions
(dispositions)
|
59.1
|
112.6
|
98.4
|
171.7
|
227.9
|
Total capital expenditures,
including land and net property acquisitions
(dispositions)
|
74.2
|
221.2
|
97.7
|
295.4
|
217.6
|
Net debt outstanding
(3)
|
868.4
|
969.3
|
878.1
|
969.3
|
878.1
|
Shares outstanding,
weighted average diluted
|
348.9
|
350.5
|
340.4
|
349.8
|
336.9
|
Shares outstanding, end of
period
|
349.8
|
351.1
|
341.5
|
351.1
|
341.5
|
OPERATING
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
Crude oil
(bbl/d)
|
34,852
|
31,702
|
31,958
|
33,277
|
33,894
|
|
Condensate
(bbl/d)
|
3,442
|
3,733
|
3,139
|
3,587
|
3,363
|
|
Natural gas
(MMcf/d)
|
489.7
|
467.5
|
426.0
|
478.6
|
442.7
|
|
NGLs
(bbl/d)
|
4,319
|
4,336
|
3,795
|
4,327
|
4,053
|
|
Total (boe/d)
(4)
|
124,224
|
117,695
|
109,900
|
120,959
|
115,098
|
Average realized prices,
prior to hedging
|
|
|
|
|
|
|
Crude oil
($/bbl)
|
38.64
|
52.80
|
64.49
|
45.39
|
56.20
|
|
Condensate
($/bbl)
|
42.07
|
51.20
|
64.84
|
46.82
|
56.49
|
|
Natural gas
($/Mcf)
|
2.05
|
1.39
|
2.88
|
1.73
|
2.97
|
|
NGLs
($/bbl)
|
8.42
|
13.60
|
9.53
|
11.01
|
12.99
|
|
Oil equivalent ($/boe)
(4)
|
20.39
|
21.87
|
32.10
|
21.11
|
30.07
|
Operating netback ($/boe)
(4)(5)
|
|
|
|
|
|
|
Commodity and other
sales
|
20.45
|
21.94
|
32.17
|
21.17
|
30.16
|
|
Royalties
|
(1.62)
|
(1.97)
|
(2.50)
|
(1.79)
|
(2.66)
|
|
Transportation
expenses
|
(2.20)
|
(2.19)
|
(2.33)
|
(2.19)
|
(2.35)
|
|
Operating
expenses
|
(6.10)
|
(6.41)
|
(8.05)
|
(6.25)
|
(7.63)
|
|
Netback before
hedging
|
10.53
|
11.37
|
19.29
|
10.94
|
17.52
|
|
Realized hedging
gain
|
6.04
|
6.10
|
5.08
|
6.07
|
4.58
|
|
Netback after
hedging
|
16.57
|
17.47
|
24.37
|
17.01
|
22.10
|
TRADING STATISTICS
(6)
|
|
|
|
|
|
High
price
|
20.16
|
23.35
|
25.60
|
23.35
|
25.87
|
Low
price
|
14.43
|
17.43
|
21.01
|
14.43
|
20.75
|
Close
price
|
18.89
|
22.11
|
21.40
|
22.11
|
21.40
|
Average daily volume
(thousands)
|
2,394
|
1,869
|
1,424
|
2,127
|
1,682
|
|
|
|
|
|
|
(1)
|
Refer to the "Capital
Management" note 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 (with the
exception of dividends) are based on weighted average diluted
shares.
|
(3)
|
Refer to the "Capital
Management" note in ARC's financial statements and to the
section entitled, "Capitalization, Financial Resources and
Liquidity" contained within ARC's
MD&A.
|
(4)
|
We have 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)
|
Operating netback does not
have a standardized meaning under Canadian GAAP or IFRS. See
"Non-GAAP Measures" contained within ARC's
MD&A.
|
(6)
|
Trading prices are stated
in Canadian dollars and based on intra-day
trading.
|
"ARC achieved excellent operating results in the second
quarter of 2016 and we strategically added to our working interest
position in the Cardium by acquiring approximately 2,200 boe per
day of light, high-netback oil production," noted Myron Stadnyk, President and CEO. "ARC's
Pembina Cardium assets remain as integral to our portfolio today as
they did 20 years ago, and we are excited about the increased
control and value generation opportunity of this accretive
acquisition. During the second quarter, we also continued to
develop our large land base in northeast British Columbia and invest in key
infrastructure at Dawson with the
progression of our Phase III gas processing and liquids-handling
facility. ARC maintained its strong financial position through the
quarter and continued to sustain the business with a long-term
view. On July 11, 2016, we celebrated
our 20-year anniversary, and have taken a moment to reflect on our
past 20 years and how well our ability to consistently deliver on
our strategy of risk-managed value creation has positioned us for
the future."
FINANCIAL AND OPERATING HIGHLIGHTS
- ARC achieved second quarter 2016 production of 117,695 boe per
day, a decrease of five per cent from the first quarter of 2016,
which reflects ARC's moderated pace of capital development in the
first quarter of 2016 in response to depressed commodity prices, as
well as a decrease of approximately 1,700 boe per day due to
pipeline restrictions experienced during the second quarter. Second
quarter 2016 natural gas production of 468 MMcf per day was five
per cent lower and crude oil and liquids production of 39,771
barrels per day was seven per cent lower compared to the first
quarter of 2016. First half 2016 production of 120,959 boe per day
was five per cent higher than the first half of 2015. First half
2016 natural gas production of 479 MMcf per day was up eight per
cent from the first half of 2015, and is largely the result of
production from new wells flowing through the Sunrise gas plant,
which came on-stream mid-way through the third quarter of 2015.
First half 2016 crude oil and liquids production of 41,191 barrels
per day was relatively unchanged from the first half of 2015, with
production from new wells flowing through the expanded Tower oil
battery, which was commissioned mid-way through the fourth quarter
of 2015, mostly offset by production declines in Alberta and Saskatchewan as a result of significantly
reduced capital activity throughout 2015 and the first half of
2016. ARC expects production to decline further in the third
quarter as a result of scheduled maintenance activities and
anticipated third-party infrastructure restrictions, before
modestly rebounding in the fourth quarter. We have increased our
full-year average production guidance to a range of 118,000 to
122,000 boe per day, resulting in modest year-over-year growth.
See the Operational Review section of this release for
additional details.
- Second quarter 2016 commodity sales revenue of $234.9 million was up two per cent relative to
first quarter 2016 commodity sales revenue of $231.2 million. Higher crude oil prices offset
significantly lower natural gas prices and lower second quarter
production. Crude oil prices were up 34 per cent (Edmonton Par) and
natural gas prices were down 41 per cent (AECO) relative to the
first quarter of 2016. First half 2016 commodity sales revenue of
$466.1 million was down 26 per cent
relative to the first half of 2015, with higher natural gas
production offset by significantly lower crude oil and natural gas
prices. Crude oil and natural gas prices were down 20 per cent
(Edmonton Par) and 40 per cent (AECO), respectively, relative to
the first half of 2015.
- Second quarter 2016 funds from operations of $141.7 million ($0.40 per share) were down six per cent from
first quarter 2016 funds from operations of $150.1 million ($0.43 per share). Decreased production, lower
natural gas prices, higher current income taxes, increased royalty
expenses and reduced realized gains on hedging contracts decreased
ARC's funds from operations in the period. Partially offsetting
these factors were higher crude oil prices, lower general and
administrative ("G&A") expenses, lower transportation expenses,
and modestly lower interest expense. First half 2016 funds from
operations of $291.8 million
($0.83 per share) decreased 27 per
cent from first half 2015 funds from operations largely as a result
of lower realized crude oil and natural gas prices, partially
offset by higher natural gas production volumes. See the Funds
from Operations section of this release for additional
details.
- The impact of depressed crude oil and natural gas prices in
2016 has been partially offset by realized gains on hedging
contracts of $65.4 million and
$133.7 million in the second quarter
and first half of 2016, respectively. ARC's risk management program
continues to provide significant protection of cash flows and
supports ARC's long-term business plans. ARC currently has
approximately 182,900 MMBtu per day of natural gas hedged with
collars and swaps and 15,000 barrels per day of oil hedged with
collars and swaps for the remainder of 2016. The fair value of
ARC's risk management contracts at June 30,
2016 was a net asset of $249.9
million, with hedge positions on crude oil through to 2017
and hedge positions on natural gas through to 2020. See the Risk
Management section of this release for additional details.
- ARC recorded a net loss of $58.1
million ($0.17 per share) in
the second quarter of 2016 compared to net income of $64.1 million ($0.18 per share) in the first quarter of 2016.
The decrease in earnings was primarily due to increased unrealized
losses recognized on ARC's risk management contracts and a decrease
in foreign exchange gains recorded in the period. A higher income
tax recovery and a gain on business combination served to partially
offset the decrease. ARC recorded net income of $6 million ($0.02
per share) in the first half of 2016 compared to a net loss of
$52.7 million ($0.16 per share) in the first half of 2015.
Increased gains on foreign exchange, higher income tax recovery,
lower depletion, depreciation, amortization ("DD&A") and
impairment charges, lower exploration and evaluation ("E&E")
expenses, lower operating expenses, and a gain on business
combination increased earnings over the prior year. Lower revenue
net of royalties, reduced gains on risk management contracts, and
increased G&A expenses served to partially offset these
factors. See the Net Income (Loss) section of this release for
additional details.
- Second quarter 2016 capital expenditures, before land and net
property acquisitions and dispositions, totaled $112.6 million, an increase of approximately 90
per cent from first quarter 2016 spending. Capital investment was
focused primarily on ARC's Montney
assets in northeast British
Columbia, where ARC drilled 10 operated wells (six oil wells
and four natural gas wells). Capital spending in the quarter was
also directed at progressing construction of the Dawson Phase III
gas processing and liquids-handling facility and conducting
completions activities throughout northeast British Columbia. First half 2016 capital
expenditures, before land and net property acquisitions and
dispositions, totaled $171.7 million
and included 18 operated wells drilled (nine natural gas wells, six
oil wells, two liquids-rich wells, and one service well). See
the Operational Review section of this release for additional
details.
- ARC successfully added to its working interest ownership in the
Pembina Cardium area late in the second quarter of 2016, and in
addition to the 2,200 boe per day transaction, we have entered into
a separate binding sales agreement to acquire an additional 800 boe
per day of Pembina assets expected to close mid-third quarter of
2016. The combined acquisitions will add approximately 3,000 boe
per day of light, high-netback production (approximately 85 per
cent liquids), which will result in an annual volume impact in 2016
of approximately 1,400 boe per day of production. ARC's deep
understanding of the Cardium was a key advantage in enabling
successful negotiations of these transactions. The combined
acquisitions totaled $148 million for
a flowing boe metric of $48,000 per
boe per day and a proved developed producing ("PDP") reserve metric
of $10.50 per boe, based on internal
estimates. By increasing our average working interest, and hence
control over the acquired assets, ARC significantly increased its
ability to efficiently develop Pembina's considerable drilling
inventory. Concurrently, ARC continued with its non-core asset
divestment program during the second quarter of 2016, divesting the
remainder of our low-netback, operated shallow gas assets in
southern Alberta.
- Given the significant drilling results at Parkland/Tower and
the proven liquids and natural gas potential in the area, ARC plans
to proceed with the second phase of the 3-9 gas processing and
liquids-handling facility. The facility expansion, which has
already received regulatory approval, will add natural gas sales of
approximately 60 MMcf per day and approximately 7,500 barrels per
day of oil sales. The timing of the expanded Parkland/Tower
facility is expected to be late 2018 or early 2019 depending on
approval of future capital budgets that provide appropriate
funding.
- ARC continues to actively manage its cost structure by
identifying opportunities to reduce operating expenses where
appropriate. ARC's second quarter 2016 operating expenses of
$6.41 per boe increased five per cent
compared to the first quarter of 2016, and was largely due to the
decrease in volumes in the quarter as absolute operating expenses
were effectively unchanged at $68.6
million. First half 2016 operating expenses of $6.25 per boe were 18 per cent lower relative to
the first half of 2015 and were attributed to lower power prices
throughout the period, diligent cost control efforts across ARC's
field operations, and the disposition of properties with higher
relative costs to operate. First half 2016 operating expenses on an
absolute basis were $137.6 million.
ARC has reduced operating expenses on a per boe basis by 40 per
cent since 2009.
- ARC's G&A expenses were $2.60
per boe in the second quarter of 2016, a seven per cent decrease
from the first quarter of 2016, and was largely due to lower cash
compensation expenses partially offset by an increase in
share-based compensation due to an increase in ARC's share price.
First half 2016 G&A expenses of $2.71 per boe increased 66 per cent from the
first half of 2015 as a result of higher costs associated with
ARC's share-based compensation plans due to the increase in ARC's
share price and improved total returns relative to our peers, and a
decrease in capitalized G&A and overhead recoveries. Second
quarter and first half 2016 G&A expenses on an absolute basis
were $27.9 million and $59.7 million, respectively.
- ARC closed the quarter with a strong balance sheet including
$969.3 million of net debt
outstanding, $15.8 million lower than
at December 31, 2015. At June 30, 2016, ARC had available cash and credit
of approximately $1.3 billion, taking
into account ARC's working capital surplus. With the first Pembina
acquisition closing late in the second quarter of 2016, the net
debt to 2016 annualized funds from operations ratio was 1.7 times
and net debt was approximately 11 per cent of ARC's total
capitalization at the end of the second quarter. ARC chooses to
maintain prudent debt levels, targeting a maximum net debt to
annualized funds from operations ratio of less than two times for
temporary periods, and expects the ratio to return to target levels
of approximately 1.5 times by year-end as cash flows associated
with the Pembina acquisitions are realized throughout the second
half of 2016. For the second quarter and first half of 2016, ARC's
dividends and capital expenditures, before land and net property
acquisitions and dispositions, were fully funded out of funds from
operations and proceeds from ARC's Dividend Reinvestment Program
("DRIP") and Stock Dividend Program ("SDP").
- ARC's Board of Directors has approved an increase to ARC's
capital program to $450 million,
before land and net property acquisitions and dispositions, up from
the $390 million previously
announced. The increased budget will remain focused on balance
sheet strength and long-term value creation, with additional funds
being directed at increased investment at Parkland/Tower, increased
investment at Ante Creek and Pembina as drilling in Alberta is resumed, and strategic piloting of
the Lower Montney in Dawson.
- For additional commentary on ARC's second quarter 2016
financial and operating results, please view the following videos:
"Myron's Minute", "Q2 2016 Financial Review" and
"Q2 2016 Operations Review" at
www.arcresources.com/investors.
ECONOMIC ENVIRONMENT
ARC's second quarter and first half 2016 financial and operating
results were impacted by commodity prices and foreign exchange
rates which are outlined in the following table.
|
|
Selected Benchmark
Prices and Exchange Rates
(1)
|
Three Months
Ended
|
Six Months
Ended
|
|
June
30,
2016
|
March
31,
2016
|
%
Change
|
June
30,
2016
|
June
30,
2015
|
%
Change
|
Brent crude oil
(US$/bbl)
|
47.03
|
35.21
|
34
|
41.21
|
59.35
|
(31)
|
WTI crude oil
(US$/bbl)
|
45.64
|
33.63
|
36
|
39.78
|
53.34
|
(25)
|
Edmonton Par
(Cdn$/bbl)
|
54.78
|
40.90
|
34
|
47.84
|
59.83
|
(20)
|
NYMEX Henry Hub Last Day
Settlement (US$/MMBtu)
|
1.95
|
2.09
|
(7)
|
2.02
|
2.81
|
(28)
|
AECO natural gas
(Cdn$/Mcf)
|
1.25
|
2.11
|
(41)
|
1.68
|
2.81
|
(40)
|
Cdn$/US$ exchange
rate
|
1.29
|
1.37
|
(6)
|
1.33
|
1.24
|
7
|
|
|
|
|
|
|
|
(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 over the course of the second
quarter of 2016 as US crude oil production volumes continued their
decline and unexpected disruptions, caused primarily by Canadian
wildfires and unrest in Nigeria,
improved the global supply/demand imbalance; however, global crude
oil and product inventories still remain elevated. In the second
quarter of 2016, the WTI benchmark price averaged 36 per cent
higher than the first quarter of 2016. ARC's crude oil price is
primarily referenced to the Edmonton Par benchmark price, which
increased 34 per cent compared to the first quarter of 2016. The
differential between WTI and Edmonton Par narrowed in the second
quarter of 2016 to average a discount of US$3.13, 18 per cent less than the first quarter
of 2016.
US natural gas prices, referenced by the average NYMEX Henry Hub
last day price, decreased seven per cent relative to the first
quarter of 2016. ARC's realized natural gas price is primarily
referenced to the AECO hub, which decreased 41 per cent relative to
the first quarter of 2016. While Henry
Hub prices were relatively stable over the quarter, AECO
natural gas prices fell dramatically due to strong regional
production, low weather-related demand, and extremely elevated
inventory levels. Henry Hub prices rebounded late in the second
quarter of 2016 due to declining US production in the face of
record seasonal demand. Near-term AECO prices also increased
significantly at quarter-end, as falling supply and rising local
and downstream demand helped to alleviate earlier concerns of
inventories reaching maximum capacity during the summer of
2016.
The Canadian dollar remained range-bound relative to the US
dollar during the second quarter of 2016, averaging US$0.78 (Cdn$/US$1.29).
FINANCIAL REVIEW
Funds from Operations
ARC's second quarter 2016 funds from operations of $141.7 million ($0.40 per share) were down six per cent from
first quarter 2016 funds from operations of $150.1 million ($0.43 per share). Lower natural gas prices,
decreased production, and higher current income taxes were the most
significant drivers in the quarter-over-quarter change, with higher
royalty expenses and reduced realized gains on hedging contracts
also serving to decrease ARC's funds from operations. These factors
were partially offset by higher crude oil prices, lower G&A
expenses, lower transportation expenses, and modestly lower
interest expense in the period.
First half 2016 funds from operations of $291.8 million ($0.83 per share) decreased 27 per cent as
compared to first half 2015 funds from operations of $397.8 million ($1.18 per share). While first half 2016
production increased relative to the first half of 2015,
significantly lower crude oil and natural gas prices more than
offset the gains realized from higher production. Increased first
half 2016 G&A expenses also reduced funds from operations,
primarily as a result of higher costs associated with ARC's
share-based compensation plans due to the increase in ARC's share
price and improved total return relative to its peers during the
period, as well as lower capitalized G&A and overhead
recoveries due to lower capital spending. The impact of lower
commodity prices on revenue was partially offset by higher realized
gains on ARC's risk management program, lower operating expenses,
and lower royalties.
The following table details the change in funds from operations
for the second quarter of 2016 relative to the first quarter of
2016, and for the first half of 2016 relative to the first half of
2015.
|
|
|
|
Three
Months
|
Six
Months
|
|
$
millions
|
$/Share
(2)
|
$
millions
|
$/Share
(2)
|
Funds from operations for
the three months ended March 31, 2016
(1)
|
150.1
|
0.43
|
|
|
Funds from operations for
the six months ended June 30, 2015
(1)
|
|
|
397.8
|
1.18
|
Volume
variance
|
|
|
|
|
|
Crude oil and
liquids
|
(10.0)
|
(0.03)
|
(1.2)
|
—
|
|
Natural
gas
|
(4.1)
|
(0.01)
|
20.7
|
0.06
|
Price
variance
|
|
|
|
|
|
Crude oil and
liquids
|
45.9
|
0.14
|
(73.3)
|
(0.22)
|
|
Natural
gas
|
(28.1)
|
(0.08)
|
(108.0)
|
(0.33)
|
Other
revenue
|
—
|
—
|
(0.4)
|
—
|
Realized gain on risk
management contracts
|
(2.9)
|
(0.01)
|
38.3
|
0.11
|
Royalties
|
(2.8)
|
(0.01)
|
16.0
|
0.05
|
Expenses
|
|
|
|
|
|
Transportation
|
1.4
|
—
|
0.7
|
—
|
|
Operating
|
0.4
|
—
|
21.3
|
0.06
|
|
G&A
|
4.0
|
0.01
|
(25.1)
|
(0.07)
|
|
Interest
|
0.8
|
—
|
(0.4)
|
—
|
|
Current
tax
|
(13.0)
|
(0.04)
|
5.1
|
0.02
|
|
Realized gain on foreign
exchange
|
—
|
—
|
0.3
|
—
|
Diluted
shares
|
—
|
—
|
—
|
(0.03)
|
Funds from operations for
the three months ended June 30, 2016
(1)
|
141.7
|
0.40
|
|
|
Funds from operations for
the six months ended June 30, 2016
(1)
|
|
|
291.8
|
0.83
|
(1)
|
Refer to the "Capital
Management" note 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 weighted average diluted shares.
|
Net Income (Loss)
ARC recorded a net loss of $58.1
million ($0.17 per share) in
the second quarter of 2016 compared to net income of $64.1 million ($0.18 per share) in the first quarter of 2016.
The decrease in earnings was primarily due to an increase in
unrealized losses recognized on ARC's risk management contracts of
$142.3 million and a decrease in
foreign exchange gains of $69.5
million. An increase of $34.3
million in income tax recovery and a $40.2 million gain on business combination served
to partially offset the decrease.
ARC recorded net income of $6
million ($0.02 per share) in
the first half of 2016 compared to a net loss of $52.7 million ($0.16 per share) in the first half of 2015. An
increase of $137 million in gains on
foreign exchange, a $77.5 million
increase in income tax recovery, reduced DD&A and impairment
charges of $69.3 million, a decrease
in E&E expenses of $42.7 million,
a $21.3 million reduction in
operating expenses, and a $40.2
million gain on business combination, increased earnings
over the prior year. Lower revenue net of royalties of $146.2 million, a reduction in gains on risk
management contracts of $134.9
million, and an increase of $25.8
million in G&A expenses served to partially offset these
factors. See the "Net Income (Loss)" section of ARC's MD&A
for additional details.
Operating Netbacks
ARC's second quarter 2016 operating netbacks, before hedging, of
$11.37 per boe increased eight per
cent relative to the first quarter of 2016, while second quarter
2016 operating netbacks, after hedging, of $17.47 per boe increased five per cent relative
to the first quarter of 2016. Higher operating netbacks were
predominantly due to strengthening crude oil pricing.
ARC's first half 2016 operating netbacks, before hedging, of
$10.94 per boe decreased 38 per cent
relative to the first half of 2015, while first half 2016 operating
netbacks, after hedging, of $17.01
per boe decreased 23 per cent relative to the first half of 2015.
Lower operating netbacks were predominantly due to lower crude oil
and natural gas prices.
ARC's second quarter 2016 total corporate royalty rate of nine
per cent ($1.97 per boe) increased
from 7.9 per cent ($1.62 per boe) in
the first quarter of 2016, and reflects the sliding scale effect of
improved crude oil pricing on ARC's total corporate royalty rate.
ARC's first half 2016 total corporate royalty rate of 8.5 per cent
($1.79 per boe) was down from 8.8 per
cent ($2.66 per boe) in the prior
year. The decrease reflects the sliding scale effect of decreased
commodity prices on royalty rates, as well as the increase in ARC's
natural gas production volume levels, which have lower royalty
rates as compared to the rates applied to crude oil and liquids
production volumes. Second quarter and first half 2016 royalty
expenses on an absolute basis were $21.1
million and $39.4 million,
respectively.
Second quarter 2016 transportation expenses of $2.19 per boe were unchanged from the first
quarter of 2016. ARC's first half 2016 transportation expenses of
$2.19 per boe decreased seven per
cent relative to first half 2015 transportation expenses, and were
the result of reduced trucking costs at the Parkland/Tower area,
which became pipeline-connected for crude oil volumes in the second
quarter of 2015 and pipeline-connected for NGLs volumes mid-way
through the first quarter of 2016. Second quarter and first half
2016 transportation expenses on an absolute basis were $23.4 million and $48.2
million, respectively.
Second quarter 2016 operating expenses of $6.41 per boe were five per cent higher than the
first quarter of 2016 and was largely due to the decrease in
volumes in the quarter as absolute operating expenses were
effectively unchanged at $68.6
million. ARC's first half 2016 operating expenses of
$6.25 per boe decreased 18 per cent
relative to the first half of 2015 as a result of lower power
prices in the period, diligent cost control efforts across ARC's
field operations, and the disposition of properties with higher
relative costs to operate. First half 2016 operating expenses on an
absolute basis were $137.6
million.
Risk Management
ARC has hedge contracts in place, at levels that support ARC's
business plan, to protect prices on a portion of crude oil volumes
for 2016 through 2017 and natural gas volumes for 2016 through
2020.
ARC realized cash gains on crude oil hedging contracts of
$14 million and $40 million during the second quarter and first
half of 2016, respectively. ARC currently has 15,000 barrels per
day of crude oil production hedged with collars and swaps for the
second half of 2016. Additional crude oil production is hedged for
2017. ARC's crude oil hedging portfolio also includes MSW basis
swap contracts for 2016 through 2017, fixing the discount between
WTI and the mixed sweet crude grade price at Edmonton. Details relating to ARC's crude oil
hedged volumes and prices for the period 2016 through 2017 are
outlined in the table below.
ARC realized cash gains on natural gas hedging contracts of
$51.9 million and $94.8 million during the second quarter and first
half of 2016, respectively. Approximately 30 per cent of natural
gas production was hedged at NYMEX Henry Hub with an average floor
price of US$4.00 per MMBtu during the
first half of 2016, while market prices averaged US$2.02 per MMBtu. Approximately six per cent of
natural gas production was hedged at AECO with an average swap
price of Cdn$2.99 per GJ during the
first half of 2016, while market prices averaged Cdn$1.59 per GJ. ARC has hedged approximately
182,900 MMBtu per day of natural gas production for the remainder
of 2016 and a portion of natural gas production is hedged for the
period 2017 through 2020. ARC's natural gas hedging portfolio
includes AECO basis swap contracts which fix the AECO price
received relative to the NYMEX Henry Hub price on a portion of its
natural gas volumes for 2016 through 2020. ARC's natural gas hedges
support long-term development economics for ARC's significant
natural gas resource base. Details relating to ARC's natural gas
hedged volumes and prices for the period 2016 through 2020 are
outlined in the table below.
ARC will continue to take positions in natural gas, crude oil,
foreign exchange rates, power and interest rates, as appropriate,
to provide greater certainty over future cash flows. For a complete
listing and terms of ARC's hedging contracts as at June 30, 2016, see the "Financial Instruments
and Market Risk Management" note in ARC's financial statements
as at and for the three and six months ended June 30, 2016.
|
Hedge Positions
Summary (1)
|
As at July 28,
2016
|
H2
2016
|
2017
|
2018
|
2019
|
2020
|
Crude Oil – WTI
(2)
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
Ceiling
|
50.00
|
3,000
|
53.78
|
7,000
|
—
|
—
|
—
|
—
|
—
|
—
|
Floor
|
40.00
|
3,000
|
41.43
|
7,000
|
—
|
—
|
—
|
—
|
—
|
—
|
Sold
Floor
|
—
|
—
|
30.00
|
4,000
|
—
|
—
|
—
|
—
|
—
|
—
|
Swap
|
42.10
|
2,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Crude Oil – Cdn$ WTI
(3)
|
Cdn$/bbl
|
bbl/day
|
Cdn$/bbl
|
bbl/day
|
Cdn$/bbl
|
bbl/day
|
Cdn$/bbl
|
bbl/day
|
Cdn$/bbl
|
bbl/day
|
Ceiling
|
83.38
|
3,000
|
83.38
|
1,488
|
—
|
—
|
—
|
—
|
—
|
—
|
Floor
|
70.00
|
3,000
|
70.00
|
1,488
|
—
|
—
|
—
|
—
|
—
|
—
|
Swap
|
77.20
|
7,000
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Total Crude Oil Volumes
Hedged (bbl/day)
|
|
15,000
|
|
8,488
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil – MSW
(Differential to WTI) (4)
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
US$/bbl
|
bbl/day
|
Swap
|
(3.72)
|
10,000
|
(3.66)
|
5,000
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas – NYMEX
Henry Hub (5)
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
Ceiling
|
4.79
|
105,000
|
3.36
|
15,000
|
4.92
|
90,000
|
5.00
|
40,000
|
—
|
—
|
Floor
|
4.00
|
105,000
|
3.00
|
15,000
|
4.00
|
90,000
|
4.00
|
40,000
|
—
|
—
|
Swap
|
4.00
|
40,000
|
4.00
|
145,000
|
—
|
—
|
—
|
—
|
—
|
—
|
Natural Gas – AECO
(6)
|
Cdn$/GJ
|
GJ/day
|
Cdn$/GJ
|
GJ/day
|
Cdn$/GJ
|
GJ/day
|
Cdn$/GJ
|
GJ/day
|
Cdn$/GJ
|
GJ/day
|
Ceiling
|
2.93
|
9,946
|
—
|
—
|
—
|
—
|
3.30
|
10,000
|
3.60
|
30,000
|
Floor
|
2.50
|
9,946
|
—
|
—
|
—
|
—
|
3.00
|
10,000
|
3.08
|
30,000
|
Swap
|
2.99
|
30,000
|
2.64
|
60,000
|
2.96
|
40,000
|
3.16
|
20,000
|
3.35
|
30,000
|
Total Natural Gas
Volumes Hedged (MMBtu/day)
|
|
182,861
|
|
216,869
|
|
127,913
|
|
68,435
|
|
56,869
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas – AECO
Basis
|
AECO/NYMEX
|
MMBtu/day
|
AECO/NYMEX
|
MMBtu/day
|
AECO/NYMEX
|
MMBtu/day
|
AECO/NYMEX
|
MMBtu/day
|
AECO/NYMEX
|
MMBtu/day
|
Swap (percentage of
NYMEX)
|
90.3
|
140,000
|
89.7
|
145,000
|
84.9
|
90,000
|
83.7
|
40,000
|
—
|
—
|
Natural Gas – AECO
Basis
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
US$/MMBtu
|
MMBtu/day
|
Swap (differential to
NYMEX)
|
—
|
—
|
(0.81)
|
70,000
|
(0.69)
|
45,000
|
(0.60)
|
35,000
|
(0.57)
|
35,000
|
Total AECO Basis Volumes
Hedged (MMBtu/day)
|
|
140,000
|
|
215,000
|
|
135,000
|
|
75,000
|
|
35,000
|
(1)
|
The prices and volumes in
this table represent averages for several contracts representing
different periods. The average price for the portfolio of options
listed above does not have the same payoff profile as the
individual option contracts. Viewing the average price of a group
of options is purely for indicative purposes. All positions are
financially settled against the benchmark prices disclosed in the
"Financial Instruments and Market Risk Management" note in
the financial statements as at and for the three and six months
ended June 30, 2016.
|
(2)
|
Crude oil prices referenced
to WTI.
|
(3)
|
Crude oil prices referenced
to WTI, multiplied by the Bank of Canada monthly average noon day
rate.
|
(4)
|
MSW differential refers to
the discount between WTI and the mixed sweet crude grade at
Edmonton, calculated on a monthly weighted average basis in
US$.
|
(5)
|
Natural gas prices
referenced to NYMEX Henry Hub last day
settlement.
|
(6)
|
Natural gas prices
referenced to AECO 7(a) index.
|
OPERATIONAL REVIEW
During the second quarter of 2016, ARC invested $112.6 million on capital development, before
land and net property acquisitions and dispositions, including
drilling 10 operated wells (six oil wells and four natural gas
wells), infrastructure spending at the Dawson Phase III gas
processing and liquids-handling facility, and completions
activities at Attachie,
Dawson, Sunrise and Tower.
Approximately 85 per cent of capital investment in the second
quarter was focused on ARC's low-cost, high-value northeast British
Columbia Montney region. This includes spending directed at
progressing construction of the Dawson Phase III gas processing and
liquids-handling facility and continuing to delineate ARC's large
land base at Attachie. ARC's
second quarter 2016 capital program was fully funded out of funds
from operations. First half 2016 capital expenditures, before land
and net property acquisitions and dispositions, totaled
$171.7 million and included 18
operated wells drilled (nine natural gas wells, six oil wells, two
liquids-rich wells, and one service well).
ARC achieved second quarter 2016 production of 117,695 boe per
day, with natural gas production of 468 MMcf per day (66 per cent
of total production) and crude oil and liquids production of 39,771
barrels per day (34 per cent of total production). Second quarter
2016 total production was five per cent lower relative to the first
quarter of 2016. The decreased production reflects ARC's moderated
pace of capital development in the first quarter of 2016 in
response to depressed commodity prices, as well as a decrease of
approximately 1,700 boe per day due to pipeline restrictions
experienced during the quarter. ARC's corporate base decline rate
remains at approximately 25 per cent. The combination of low
decline and efficient replacement costs has resulted in a
predictable and stable production base.
ARC currently has a land position of approximately 1,200 net
Montney sections. The continued
transition towards the Montney is
resulting in greater operating and capital efficiencies as ARC
enhances its low-cost Montney
production base, which today, makes up nearly 80 per cent of total
corporate production. Excellent operating and capital efficiencies
are further supported by operating our own facilities in the area,
allowing ARC greater control over costs and pace of development.
The success of ARC's ongoing transition is demonstrated by the
strong performance of our Montney
wells as we continue to optimize completion designs, apply new
technologies and work closely with our service providers to reduce
our costs. ARC continuously monitors market conditions and
maintains a diversified sales portfolio to ensure its production
gets to market at optimal pricing.
ARC's Board of Directors has approved an increase to its capital
program to $450 million, before land
purchases and net property acquisitions and dispositions, up from
the $390 million previously
announced. The increased budget will remain focused on balance
sheet strength and long-term value creation, with additional funds
being directed at increased drilling and completions activities in
Parkland/Tower in response to recent price recoveries, increased
investment at Ante Creek and Pembina as drilling in Alberta is resumed, and strategic piloting of
the Lower Montney in Dawson. ARC
expects to spend approximately 75 per cent of its 2016 capital
budget in northeast British
Columbia. Full-year 2016 annual average production is
expected to be in the range of 118,000 to 122,000 boe per day and
full-year 2016 per boe operating expenses have been lowered to a
range of $6.90 to $7.20 per boe. ARC
will continue to screen projects for profitability in a disciplined
manner and as such, capital plans and spending may be revised
throughout the remainder of 2016 in response to market
conditions.
Dawson
The Dawson Montney play is the foundation of ARC's low-cost
natural gas business. ARC has a land position of 135 net
Montney sections at Dawson. Dawson production averaged 167 MMcf per day of
natural gas and 1,100 barrels per day of condensate and liquids
during the second quarter of 2016. Second quarter 2016 production
was two per cent lower than the first quarter of 2016 as a result
of a minor, planned turnaround at one of ARC's compressor stations.
The Dawson play delivers strong
economics and significant cash flow at currently low natural gas
prices due to excellent capital efficiencies, exceptional well
results, and low operating expenses.
ARC's investment at Dawson was
$61 million during the first half of
2016, directed towards infrastructure spending, drilling of six
operated natural gas wells, and the completion of two natural gas
wells. ARC also drilled and completed one water disposal well that
will be utilized when the Dawson Phase III gas processing and
liquids-handling facility comes on-stream. Due to the ongoing
success of the completions and optimization program at Dawson, ARC currently has enough productive
capacity behind pipe to keep facilities full until 2017.
Completions of the remaining drilled-but-uncompleted wells from
2016 will coincide with facility capacity becoming available.
Engineering and procurement for the Dawson Phase III gas
processing and liquids-handling facility is nearing completion, and
physical construction of the facility is anticipated to begin in
the third quarter of 2016. The first stage of the Dawson Phase III
gas processing and liquids-handling facility is designed for
processing capacity of 90 MMcf per day and 7,500 barrels per day of
liquids-handling capacity (approximately 50 per cent
condensate-handling), and is expected to be on-stream in late 2017.
Dawson gas production is expected
to ramp up in the fourth quarter of 2017 in conjunction with the
start-up of the plant. Liquids production will initially be below
design capacity as ARC continues to delineate the Lower Montney and
until wells with higher liquids content are drilled.
Parkland/Tower
ARC's Parkland/Tower property, located in the Montney play in northeast British Columbia, consists of 43 net sections
at Tower, which produce predominantly light oil and condensate with
liquids-rich associated gas; and 37 net sections at Parkland, which
produce predominantly liquids-rich gas. With contiguous lands,
these areas share ARC-operated infrastructure.
Parkland/Tower second quarter 2016 production averaged 27,700
boe per day (40 per cent crude oil and liquids and 60 per cent
natural gas), a six per cent decrease from the first quarter of
2016. The decrease in production reflects ARC's moderated pace of
capital development in the first quarter of 2016 in response to
depressed crude oil prices. Liquids production in the area
decreased 11 per cent in the second quarter of 2016 relative to the
first quarter of 2016, averaging 11,150 barrels per day.
During the first half of 2016, ARC invested approximately
$28 million on capital activities at
Parkland/Tower. Second quarter 2016 spending included drilling of
six wells and completion of 12 wells. Wells from the 2016 drilling
program will be brought on-stream late in the third quarter of
2016.
A continued focus on execution efficiency in the Parkland/Tower
area has not only allowed ARC to capture cost savings, but to
advance learnings in the play and further improve well performance.
ARC is realizing additional efficiencies in our drilling operations
with the average Tower well currently being drilled in
approximately nine days. A completions monitoring project to
optimize ARC's completions activities is also currently underway,
the results of which will be studied to drive additional capital
efficiencies at Tower and the rest of ARC's Montney assets. Well performance at Tower
continues to be exceptional, ranking amongst the top oil wells in
the Western Canadian Sedimentary Basin.
Given the significant drilling results at Parkland/Tower and the
proven liquids and natural gas potential in the area, ARC plans to
proceed with the second phase of the 3-9 gas processing and
liquids-handling facility. The facility expansion, which has
already received regulatory approval, will add natural gas sales of
approximately 60 MMcf per day and approximately 7,500 barrels per
day of oil sales. The timing of the expanded Parkland/Tower
facility is expected to be late 2018 or early 2019 depending on
approval of future capital budgets that provide appropriate
funding.
Sunrise
ARC has a land position of 32 net sections at Sunrise, a dry
natural gas Montney play in
northeast British Columbia. With a
significant natural gas resource base, high well deliverability
combined with low capital requirements and operating expenses,
Sunrise continues to provide high rates of return despite
relatively low natural gas prices. Second quarter 2016 Sunrise
production was approximately 112 MMcf per day of natural gas, 12
per cent lower compared to the first quarter of 2016. The lower
production is the result of pipeline restrictions experienced
during the quarter; ARC chose to reduce its volumes flowing through
a third-party facility, as the netbacks realized on these volumes
had the lowest impact on ARC's cash flows.
During the first half of 2016, ARC invested $23 million on capital activities at Sunrise. ARC
completed all eight wells on the 2-25 pad during the second quarter
of 2016. These wells are currently behind pipe and will be brought
on-stream through the remainder of 2016 to maintain facility
capacity. Efficiencies and cost savings continue to be realized in
drilling and completions operations as ARC advances its well and
fracture designs in the area. Strong well performance at Sunrise
continues to exceed expectations resulting in no additional wells
being required until late 2017.
Attachie
ARC's Attachie property is a
highly prospective, Montney oil
and liquids-rich natural gas exploration play located in northeast
British Columbia. ARC has a land
position in the area of 288 net Montney sections. ARC invested approximately
$24 million on pilot activities at
Attachie during the first half of
2016. This includes spending on infrastructure and the drilling and
completions of two operated liquids-rich wells at Attachie West,
building on the success of existing ARC pilots in the area. The two
wells came on-stream during the second quarter of 2016. The initial
combined 30-day production for the two wells is 5.0 MMcf per day of
natural gas and 940 barrels per day of liquids, for an average
gas-to-liquids ratio of 188 barrels per MMcf. ARC will continue to
optimize and monitor the production results from these pilots.
Ante Creek
ARC has a land position of 389 net sections at Ante Creek, a
Montney oil play in northern
Alberta with significant future
development potential. Second quarter 2016 Ante Creek production
averaged 15,400 boe per day (approximately 45 per cent crude oil
and liquids), down six per cent from the first quarter of 2016 as a
result of reduced capital activity in the area. ARC spent
approximately $8 million to carry out
maintenance and optimization activities during the first half of
2016, with plans to apply new drilling and completions technologies
on three new wells that will be drilled in the third quarter of
2016. Considering the reduced capital investment at Ante Creek in
2016 to-date, base production in the area has performed well,
demonstrating the effectiveness of optimization activities and the
strength of the asset base.
Pembina
ARC's Pembina Cardium assets continue to provide low-decline,
high-quality light oil production and generate competitive
operating netbacks. Pembina production averaged approximately 8,910
boe per day (approximately 80 per cent light oil and liquids) in
the second quarter of 2016, 11 per cent lower than the first
quarter of 2016. Lower second quarter production was due to reduced
capital activity levels starting in 2015, and the loss of
approximately 400 boe per day resulting from planned and unplanned
outages experienced during the quarter. ARC spent approximately
$5 million on capital activities at
Pembina in the first half of 2016, and is continuing to see strong
well performance as optimized completions and waterflood management
remain a key focus of operations in the area. Disciplined cost
management is also resulting in strong positive cash flow.
ARC successfully added to its working interest ownership in the
Pembina Cardium area late in the second quarter of 2016, and in
addition to the 2,200 boe per day transaction, we have entered into
a separate binding sales agreement to acquire an additional 800 boe
per day of Pembina assets expected to close mid-third quarter of
2016. The combined acquisitions will add approximately 3,000 boe
per day of light, high-netback production (approximately 85 per
cent liquids), which will result in an annual volume impact in 2016
of approximately 1,400 boe per day of production. ARC's deep
understanding of the Cardium was a key advantage in enabling
successful negotiations of these transactions. The combined
acquisitions totaled $148 million for
a flowing boe metric of $48,000 per
boe per day and a PDP reserve metric of $10.50 per boe, based on internal estimates. By
increasing our average working interest, and hence control over the
acquired assets, ARC significantly increased its ability to
efficiently develop Pembina's considerable drilling inventory. With
the successful consolidation of our position in the Cardium and
certainty regarding Alberta
royalties, ARC is currently planning to restart drilling in Pembina
in 2016. The drilling inventory at Pembina is attractive at current
commodity prices, and with operational synergies and increased
control over the assets resulting from the acquisition, the
transaction is accretive to our corporate performance.
Southeast
Saskatchewan
ARC's Southeast Saskatchewan
region produces high-quality crude oil. Second quarter 2016
production averaged approximately 7,780 boe per day of light oil,
down four per cent from the first quarter of 2016. Lower production
was due to reduced activity levels in the area, starting in late
2014. In the first half of 2016, ARC spent approximately
$6 million on maintenance and
optimization activities on operated and non-operated properties in
the region. Cost management remains a focus in the area and is
resulting in competitive operating netbacks.
DIVIDENDS
As a dividend-paying corporation, ARC declares monthly dividends
to its shareholders. ARC continually assesses dividend levels in
light of commodity prices, capital expenditure programs, and
production volumes to ensure that dividends are in line with ARC's
long-term strategy and objectives.
ARC paid dividends totaling $0.15
per share for the second quarter of 2016. The Board of Directors
previously confirmed a dividend of $0.05 per share for July
2016, payable on August 15,
2016, and has conditionally declared a monthly dividend of
$0.05 per share for August 2016 through October 2016 payable as follows:
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|
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Record
Date
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Ex-dividend
Date
|
Payment
Date
|
Per Share
Amount
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July 29,
2016
|
July 27,
2016
|
August 15,
2016
|
$0.05
(1)
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August 31,
2016
|
August 29,
2016
|
September 15,
2016
|
$0.05
(2)
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September 30,
2016
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September 28,
2016
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October 17,
2016
|
$0.05
(2)
|
October 31,
2016
|
October 27,
2016
|
November 15,
2016
|
$0.05
(2)
|
(1)
|
Confirmed on July 18,
2016.
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(2)
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Conditionally declared,
subject to confirmation by news release and further resolution by
the Board of Directors.
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ARC's shareholders may receive dividend payments in the form of
cash or may elect to receive dividend payments in the form of
common shares through ARC's SDP. Alternatively, shareholders may
reinvest cash dividends into additional common shares of ARC
through the DRIP. Participation in the SDP or DRIP is optional.
Shareholders will continue to receive dividend payments in cash
unless they choose to participate in the SDP or DRIP. Shareholders,
wherever resident, are encouraged to consult their own tax advisors
regarding the tax consequences to them of receiving cash or stock
dividends or participating in the DRIP.
During the second quarter of 2016, ARC declared dividends of
$52.5 million, of which $5.9 million was issued in the form of common
shares under the SDP and $19.6
million was reinvested into ARC shares through the DRIP. The
DRIP and SDP are a source of funding for ARC's capital program.
For additional details regarding the SDP and DRIP, including
terms, eligibility, and enrollment procedures, please see ARC's
website at www.arcresources.com.
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 of 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.
OUTLOOK
The foundation of ARC's business strategy is risk-managed value
creation. High-quality assets, operational excellence, financial
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 future profitable growth.
ARC's Board of Directors has approved an increase to its capital
program to $450 million, before land
purchases and net property acquisitions and dispositions, up from
the $390 million previously
announced. The increased budget will remain focused on balance
sheet strength and long-term value creation, with additional funds
being directed at increased investment at Parkland/Tower, increased
investment at Ante Creek and Pembina as drilling in Alberta is resumed, and strategic piloting of
the Lower Montney in Dawson. ARC
expects to spend approximately 75 per cent of its 2016 capital
budget in northeast British
Columbia. Full-year 2016 annual average production is
expected to be in the range of 118,000 to 122,000 boe per day,
resulting in modest year-over-year growth.
Ongoing commodity price volatility may affect ARC's funds from
operations and profitability on capital programs. As continued
volatility is expected, ARC will continue to take steps to mitigate
these risks, focus on capital and operating efficiencies, and
protect its strong financial position. ARC will continue to screen
projects for profitability in a disciplined manner and will adjust
spending and the pace of development, if required, to ensure
balance sheet strength is protected.
ARC's 2016 full-year guidance has been revised to incorporate
increased 2016 capital spending of approximately $450 million. Reflecting the 15 per cent increase
in capital spending, as well as the annual impact of approximately
1,400 boe per day of additional production from the Pembina Cardium
acquisitions, ARC's full-year average production guidance has been
revised upward to a range of 118,000 to 122,000 boe per day from
the previously guided range of 116,000 to 120,000 boe per day.
ARC's full-year guidance for per boe operating expenses was lowered
to a range of $6.90 to $7.20 per boe
to reflect the revised production guidance, as well as the deferral
of certain discretionary expenditures to future periods, and to
reflect the continued focus on ARC's northeast British Columbia
Montney assets, which have lower relative costs to operate. ARC's
full-year guidance for current income tax was lowered to a range of
zero to three per cent of funds from operations, and relates
primarily to decreased commodity prices.
ARC's full-year 2016 guidance estimates and a review of 2016
year-to-date actual results are outlined in the following
table.
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|
|
|
|
|
2016
Guidance
|
2016 Revised
Guidance
(1)
|
2016
YTD
|
% Variance from
Guidance
|
Production
|
|
|
|
|
|
Crude oil
(bbl/d)
|
32,000 -
34,000
|
32,000 -
34,000
|
33,277
|
—
|
|
Condensate
(bbl/d)
|
3,000 -
3,400
|
3,400 -
3,800
|
3,587
|
—
|
|
Natural gas
(MMcf/d)
|
460 -
470
|
470 -
480
|
478.6
|
—
|
|
NGLs
(bbl/d)
|
3,800 -
4,200
|
4,100 -
4,500
|
4,327
|
—
|
Total
(boe/d)
|
116,000 -
120,000
|
118,000 -
122,000
|
120,959
|
—
|
Expenses
($/boe)
|
|
|
|
|
|
Operating
|
7.40 -
7.80
|
6.90 -
7.20
|
6.25
|
(9)
|
|
Transportation
|
2.40 -
2.70
|
2.40 -
2.70
|
2.19
|
(9)
|
|
G&A expenses before
share-based compensation plans
|
1.55 -
1.65
|
1.55 -
1.65
|
1.73
|
5
|
|
G&A - share-based
compensation plans (2)
|
0.45 -
0.65
|
0.45 -
0.65
|
0.98
|
51
|
|
Interest
|
1.10 -
1.30
|
1.10 -
1.30
|
1.15
|
—
|
Current income tax (per
cent of funds from operations)
(3)
|
0 -
5
|
0 -
3
|
—
|
—
|
Capital expenditures before
land purchases and net property acquisitions (dispositions) ($
millions)
|
390
|
450
|
171.7
|
N/A
|
Land purchases and net
property acquisitions (dispositions) ($
millions)
|
N/A
|
N/A
|
123.7
|
N/A
|
Weighted average shares,
diluted (millions)
|
351
|
351
|
350
|
N/A
|
(1)
|
Incorporates the impact of
approximately 3,000 boe per day of light, high-netback crude oil
production in Pembina acquired in the second and third quarters of
2016 which will result in an annual volume increase of
approximately 1,400 boe per day of
production.
|
(2)
|
Comprises expenses
recognized under the Restricted Share Unit and Performance Share
Unit Plan, Share Option Plan and Long-term Restricted Share Award
Plan. In periods where substantial share price fluctuation occurs,
ARC's G&A expenses are subject to greater
volatility.
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(3)
|
The 2016 corporate tax
estimate varies depending on the level of commodity
prices.
|
ARC's 2016 guidance is based on full-year 2016 estimates;
certain variances between first half 2016 actual results and 2016
full-year guidance estimates were due to the cyclical and seasonal
nature of operations. ARC expects full-year 2016 actual results to
closely approximate the revised guidance as the year progresses.
First half 2016 production was within the 2016 guided production
range; ARC expects that full-year 2016 production will closely
approximate the revised guided range, with production trending
downwards during the third quarter due to planned maintenance
activities and anticipated third-party infrastructure restrictions
reducing volumes by approximately 5,000 boe per day, and then
modestly rebounding in the fourth quarter. On a per boe basis,
ARC's first half 2016 operating expenses were below the 2016
guidance range due to the addition of new Montney production at lower relative costs to
operate, lower power prices throughout the period, and diligent
cost control efforts. Third quarter per boe operating expenses are
expected to increase with the corresponding decrease in production,
with full-year 2016 operating expenses expected to closely
approximate guidance. On a per boe basis, ARC's first half 2016
transportation expenses were below the 2016 guidance range as a
result of minimal pipeline disruptions in the period; ARC expects
full-year 2016 actual transportation expenses to closely
approximate guidance as the year progresses. ARC's first half 2016
G&A expenses were above the 2016 guidance range due primarily
to increased costs associated with ARC's share-based compensation
plans due to the increase in ARC's share price and improved total
return relative to its peers, and lower capitalized G&A as a
result of lower capital expenditures; ARC expects full-year 2016
G&A expenses before share-based compensation to closely
approximate guidance as the year progresses.
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 2016 and its 2016 production, as well as operating
and general and administrative costs 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 2016 and beyond under the heading "Risk
Management," as to its production, exploration and development
plans, and capital expenditures for 2016 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 2016 guidance under the heading "Outlook."
The forward-looking information and statements contained in this
news release reflect material factors and expectations and
assumptions of ARC including, without limitation: that ARC will
continue to conduct its operations in a manner consistent with past
operations; 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; 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; unanticipated
operating results or production declines; changes in tax or
environmental laws, royalty rates or other regulatory matters;
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 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 Resources Ltd. is one of Canada's largest conventional oil and gas
companies with an enterprise value(1) of approximately
$9 billion. ARC's Common Shares trade
on the TSX under the symbol ARX.
ARC RESOURCES LTD.
Myron M. Stadnyk
President and Chief Executive Officer
(1) Enterprise value is
also referred to as total capitalization. Refer to the "Capital
Management" note in ARC's financial statements as at and for
the three and six months ended June 30, 2016 and to the section
entitled "Capitalization, Financial Resources and Liquidity"
contained within ARC's MD&A.
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SOURCE ARC Resources Ltd.