Feb 10, 2016
CALGARY, Feb. 10, 2016 /CNW/ - (ARX - TSX) ARC Resources Ltd. ("ARC") is pleased to report its fourth quarter 2015 operating and financial results. Fourth quarter production averaged 119,243 boe per day and funds from operations were $200.7 million ($0.58 per share). ARC's audited Consolidated Financial Statements and Notes, as well as ARC's Management's Discussion and Analysis ("MD&A") for the years ended December 31, 2015 and 2014, are available on ARC's website at www.arcresources.com and on SEDAR at www.sedar.com.
Three Months Ended December 31
Twelve Months Ended December 31
2015
2014
2015
2014
FINANCIAL
(Cdn$ millions, except per share and boe amounts)
Funds from operations (1)
200.7
251.7
773.4
1,124.0
Per share (2)
0.58
0.79
2.27
3.54
Net income (loss)
(55.0)
113.7
(342.7)
380.8
Per share (2)
(0.16)
0.36
(1.01)
1.20
Dividends
103.8
95.7
410.5
380.2
Per share (2)
0.30
0.30
1.20
1.20
Capital expenditures, before land and net property acquisitions (dispositions)
149.5
249.3
541.6
945.5
Total capital expenditures, including land and net property acquisitions (dispositions)
112.2
264.9
473.9
1,042.0
Net debt outstanding (3)
985.1
1,255.9
985.1
1,255.9
Shares outstanding, weighted average diluted
345.6
319.1
340.5
317.2
Shares outstanding, end of period
347.1
319.4
347.1
319.4
OPERATING
Production
Crude oil (bbl/d)
33,899
37,442
32,762
36,525
Condensate (bbl/d)
3,631
3,448
3,430
3,667
Natural gas (MMcf/d)
469.1
432.1
444.9
406.1
NGLs (bbl/d)
3,523
5,075
3,819
4,518
Total (boe/d) (4)
119,243
117,986
114,167
112,387
Average realized prices, prior to hedging
Crude oil ($/bbl)
49.24
72.49
53.53
90.64
Condensate ($/bbl)
49.80
74.04
53.84
93.81
Natural gas ($/Mcf)
2.59
4.15
2.88
4.76
NGLs ($/bbl)
10.73
32.69
10.70
39.45
Oil equivalent ($/boe) (4)
26.01
41.78
28.57
51.31
Operating netback ($/boe) (5)
Commodity and other sales
26.06
41.83
28.65
51.38
Royalties
(2.03)
(5.77)
(2.48)
(7.26)
Transportation expenses
(2.19)
(2.51)
(2.33)
(2.23)
Operating expenses
(6.21)
(8.55)
(7.15)
(8.88)
Netback before hedging
15.63
25.00
16.69
33.01
Realized hedging gain (loss) (6)
4.73
2.29
4.46
(0.65)
Netback after hedging
20.36
27.29
21.15
32.36
TRADING STATISTICS (7)
High price
22.49
29.85
25.87
33.68
Low price
15.39
22.70
15.39
22.70
Close price
16.70
25.16
16.70
25.16
Average daily volume (thousands)
2,224
1,886
1,832
1,344
(1)
Funds from operations does not have a standardized meaning under Canadian Generally Accepted Accounting Principles ("GAAP"). See "Additional GAAP Measures" in the MD&A for the years ended December 31, 2015 and 2014.
(2)
Per share amounts (with the exception of dividends) are based on weighted average diluted shares.
(3)
Net debt does not have a standardized meaning under GAAP. See "Additional GAAP Measures" in the MD&A for the years ended December 31, 2015 and 2014.
(4)
In this document, the commonly accepted boe conversion ratio of 6 Mcf : 1 bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip. 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 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 GAAP. See "Non-GAAP Measures" in the MD&A for the years ended December 31, 2015 and 2014.
(6)
Includes realized cash gains and losses on risk management contracts.
(7)
Trading prices are stated in Canadian dollars and based on intra-day trading.
ARC operates a highly efficient business model. As a conventional oil and gas producer, we continue to generate significant cash flow through a deliberate strategy of operating high working interest properties, controlling our company-owned infrastructure and judiciously managing our cost structure. ARC had exceptional operating results in 2015, especially when considering the headwinds posed by lower commodity prices. Operating costs and general and administrative costs were reduced. Non-core assets continued to be divested, while ARC continued to add materially to Montney holdings in 2015. Our capital programs are very efficient with drilling and completions costs dropping significantly. Our focus on creating value, while preserving our strong financial position is a hallmark of ARC.
Based on commodity prices and our objective of maintaining a strong balance sheet, ARC's Board of Directors has approved actions to right-size the 2016 capital budget and ARC's monthly dividend. The 2016 capital budget will be reduced from $550 million to $390 million, and ARC will pay a monthly dividend of $0.05 per share. These changes are consistent with our long-term strategy of delivering a sustainable dividend to our shareholders. We believe that with these changes ARC can continue to create value for shareholders, and emerge from this cycle in a position of financial strength.
Myron Stadnyk, President and CEO remarked, "With these decisive actions, ARC will remain well-positioned to deliver on our principle of risk-managed value creation, which has served our shareholders well throughout our over 19-year history. We will continue on our path to invest in key profitable projects, such as the Dawson Phase III gas processing and liquids-handling facility, and delineating the resources identified on our Attachie property. Despite challenging economic conditions in 2015, ARC achieved excellent operational results as we executed our capital program in-step with our long-term strategic plan. Strong results from all areas of our business, and in particular, exceptionally low finding and development costs and reserves replacement of approximately 200 per cent, have further positioned ARC to capitalize on its exceptional Montney oil and gas resource. Our balance sheet remains strong, as we manage debt levels and plan capital activities with a long-term view. ARC is committed to paying a dividend as a key component of long-term value creation for our shareholders. In 2016, our team will continue to focus on balance sheet strength, operational excellence and maximizing value through all commodity cycles."
FINANCIAL AND OPERATING HIGHLIGHTS
ARC achieved fourth quarter 2015 production of 119,243 boe per day, which was within the fourth quarter guidance range of 118,000 to 122,000 boe per day. Fourth quarter 2015 natural gas production of 469 MMcf per day was nine per cent higher compared to the fourth quarter of 2014, and is the result of the first full quarter of production from new wells flowing through the Sunrise gas plant, which was brought on-stream mid-way through the third quarter of 2015. Crude oil and liquids production of 41,053 barrels per day was down 11 per cent compared to the fourth quarter of 2014 due to significantly lower capital activity in response to declining crude oil prices, and was partially offset by new production brought on to coincide with the completion of the oil battery expansion at Tower in the fourth quarter of 2015. Full-year 2015 production of 114,167 boe per day was two per cent higher than full-year 2014 production of 112,387 boe per day, with natural gas production increasing 10 per cent to 445 MMcf per day and crude oil and liquids production decreasing 11 per cent to 40,011 barrels per day. ARC's 2015 annual average production was within the guidance range of 113,000 to 115,000 boe per day, a significant achievement given the divestment of approximately 4,900 boe per day of non-core production volumes throughout the year, which resulted in an annual volume impact of approximately 3,000 boe per day of production.
Fourth quarter and full-year 2015 commodity sales revenue of $285.9 million and $1,193.7 million were down 37 per cent and 43 per cent, respectively, relative to comparable periods in 2014. Higher full-year production was offset by considerably lower crude oil and natural gas prices in 2015. Crude oil and natural gas prices were down 30 per cent (Edmonton Par) and 34 per cent (AECO), respectively, relative to the fourth quarter of 2014, and down 39 per cent (Edmonton Par) and 37 per cent (AECO), respectively, relative to full-year 2014.
Fourth quarter funds from operations were $200.7 million ($0.58 per share), up 15 per cent from the third quarter of 2015 as a result of higher production volumes, partially offset by lower realized quarter-over-quarter crude oil and natural gas prices. Fourth quarter funds from operations were down 20 per cent relative to the fourth quarter of 2014 and full-year 2015 funds from operations of $773.4 million ($2.27 per share) were down 31 per cent relative to full-year 2014. Higher production in 2015 was more than offset by significantly lower crude oil and natural gas prices relative to 2014. The decline in full-year 2015 crude oil and natural gas prices was partially offset by realized gains on crude oil and natural gas hedging contracts of $197 million. With approximately 173,400 MMbtu per day of natural gas and 10,000 barrels per day of oil hedged with collars and swaps in 2016, ARC's hedges provide significant protection for ARC's cash flow in the year. See the Risk Management section for additional details.
ARC recorded a net loss of $55 million ($0.16 per share) in the fourth quarter of 2015 compared to net income of $113.7 million ($0.36 per share) in the fourth quarter of 2014, and a net loss of $342.7 million ($1.01 per share) for the full-year 2015 compared to net income of $380.8 million ($1.20 per share) for the full-year 2014. In addition to the factors decreasing funds from operations in 2015, the loss recorded in the year was also the result of an aggregate impairment of $469.6 million recorded to ARC's PP&E account, and unrealized foreign exchange losses of $178.5 million on the revaluation of ARC's US dollar-denominated debt. Partially offsetting these items were unrealized gains of $152 million on ARC's risk management contracts, a deferred tax recovery of $6.8 million relating to the impairment recorded in the period, as well as a gain of $31.6 million recorded on the disposal of petroleum and natural gas properties in 2015.
Fourth quarter and full-year 2015 capital expenditures, before land and net property acquisitions and dispositions, totalled $149.5 million and $541.6 million, respectively, and were focused primarily on ARC's Montney assets in northeast British Columbia. ARC drilled five gross operated natural gas wells in the fourth quarter of 2015 and 60 gross operated wells for the full-year 2015 (33 oil wells, 21 natural gas wells, five liquids-rich wells, and one service well). Leveraging cost savings and capital efficiencies realized throughout 2015, ARC accelerated certain key projects in the fourth quarter, further strengthening ARC's position as it entered into the first quarter of 2016.
ARC's 2015 year-end reserves and resources evaluation reflected growth in reserves and reaffirmed the significant resource potential in the northeast British Columbia Montney region. See the February 10, 2016 news release entitled, "ARC Resources Ltd. Announces the 8th Consecutive Year of ~200% Reserves Replacement, 2015 Finding and Development Costs for 2P Reserves of $6.97 and a Significant Increase in Montney Resource Estimates in 2015" for additional information.
Replaced approximately 190 per cent of 2015 total production, adding 78.7 MMboe of proved plus probable ("2P") reserves in 2015 through development capital activities. Over the last eight years, ARC has delivered an average of approximately 200 per cent in produced reserves replacement through the drill bit.
Proved developed producing ("PDP") reserves increased from 210 MMboe to 222 MMboe. The increase in PDP reserves was driven by northeast British Columbia Montney, which increased to 115 MMboe at year-end 2015 from 84 MMboe at year-end 2014.
Finding and Development ("F&D") costs of $6.97 per boe for 2P reserves and $8.20 per boe for proved reserves, excluding Future Development Capital ("FDC"). For details on ARC's F&D costs for 2P reserves and proved reserves, including changes in FDC, please see the February 10, 2016 news release as mentioned above.
Significant FDC reduction, from $3.6 billion at year-end 2014 to $2.7 billion at year-end 2015, which was mainly attributed to a decrease in drilling, completions and facility capital costs, as well as the removal of capital associated with various dispositions.
ARC updated an Independent Resources Evaluation for its lands in the northeast British Columbia Montney region, including lands at Pouce Coupe in Alberta. The updated evaluation realized a significant increase in the identified resource base on ARC's northeast British Columbia Montney lands. The shale gas Total Petroleum Initially in Place ("TPIIP") increased 33 per cent from 67.4 Tcf in 2014 to 90 Tcf in 2015 and tight oil TPIIP increased 315 per cent from 2.3 billion barrels of oil in 2014 to 9.7 billion barrels in 2015 (1).
Throughout 2015, ARC continued its transition to a greater focus on its low-cost, high-value Montney assets, growing its Montney land position and divesting of non-core assets. During the year, ARC added approximately 210 net Montney sections through Crown land sales and tuck-in acquisitions. Concurrently, ARC divested non-core assets with associated production of approximately 4,900 boe per day, and reduced its well count by approximately 3,800 gross wells; including the divestment of its position in Manitoba in the fourth quarter of 2015. Since 2013, approximately 9,400 boe per day of non-core production has been divested, reducing the total corporate well count by approximately 6,300 gross wells. During this time, ARC has grown its position in the Montney by approximately 520 net sections and has increased production in the area by 75 per cent. Today, the Montney region makes up greater than 70 per cent of total corporate production. The transition towards the Montney is resulting in greater operational efficiencies and a more competitive cost structure. ARC will continue to actively manage its asset portfolio to ensure that all projects maintain competitive rates of return and that profitability metrics target those of ARC's world-class Montney assets.
ARC continues to actively manage its cost structure by identifying opportunities to reduce capital, general and administrative ("G&A"), and operating costs where appropriate. Asset sales and reduced capital activity throughout the year resulted in the streamlining of ARC's operations and a reduction in staff count. In response to the lower commodity price environment, bonuses were significantly reduced in 2015, and base salaries were frozen for the second year in a row. ARC's decade-low fourth quarter and full-year 2015 operating costs of $6.21 per boe and $7.15 per boe, were 27 per cent and 19 per cent lower than comparable periods in 2014, respectively. Lower operating costs were attributed to the addition of new Montney production at lower relative costs to operate and certain realized cost savings. ARC has reduced operating costs on a per boe basis by 30 per cent since 2009.
ARC's strategy of risk-managed value creation was demonstrated in 2015 with our integrated approach to physical and financial risk mitigation. By holding 100 per cent firm transportation commitments, proactively securing alternative marketing arrangements when necessary, and maintaining a diversified sales portfolio, ARC was able to actively mitigate its exposure to pipeline interruptions and pricing volatility throughout 2015. ARC's risk mitigation was further demonstrated through its financial risk management program, which continues to provide greater certainty of cash flows and support ARC's long-term business plan. The fair value of ARC's risk management contracts at December 31, 2015 was a net asset of $409.9 million, with hedge positions on crude oil through to 2017 and hedge positions on natural gas through to 2020.
ARC closed the quarter with a strong balance sheet including $985.1 million of net debt outstanding. At December 31, 2015, ARC had available cash and credit of approximately $1.4 billion, taking into account ARC's working capital surplus. The net debt to 2015 funds from operations ratio was 1.3 times and net debt was approximately 15 per cent of ARC's total capitalization at the end of the fourth quarter; both metrics are within ARC's target levels.
The Government of Alberta and the Royalty Review Panel released key guidelines for a Modernized Royalty Framework ("MRF") on January 29, 2016. Details on the MRF are to be finalized and released by March 31, 2016. Changes under this modernized framework will take effect on January 1, 2017, however wells drilled prior to December 31, 2016 will remain on the existing royalty framework for 10 years. As such, there will be no change to the royalty structure on ARC's existing wells in the province at present time. While the new framework appears constructive, the impact on future investment decisions will not be fully understood until the details are released. In 2015, production in Alberta contributed approximately 30 per cent to ARC's total corporate production.
ARC's Board of Directors has approved a monthly dividend of $0.05 per share, down from the current monthly level of $0.10 per share, commencing with the February dividend, payable on March 15, 2016. Right-sizing of the dividend will reduce ARC's funding requirements by approximately $200 million in 2016, preserve balance sheet strength and better align dividends declared to expected funds from operations at current commodity prices. While ARC fully recognizes the importance of the dividend to our shareholders and remains a committed dividend-payer, the balance sheet is our top priority in the current environment. We believe that with this change we can continue to provide a dividend to our shareholders, while enabling ARC to emerge from this cycle in a position of financial strength.
In response to the continued deterioration of commodity prices in late 2015 and early 2016, ARC is reducing its 2016 capital program to $390 million, down from the $550 million previously announced. The reduced budget will remain focused on balance sheet preservation and long-term value creation through continued development of ARC's low-cost, high-value northeast British Columbia Montney assets. The budget will allow ARC to hold northeast British Columbia facilities at capacity, progress the key infrastructure project at Dawson Phase III, and continue to delineate ARC's highly prospective Attachie asset. Capital allocation to ARC's assets in Ante Creek, Pembina and Southeast Saskatchewan has been deferred while ARC concentrates investment in larger-scale projects that deliver superior rates of return in the current commodity price environment; ARC also awaits final details on the Modernized Royalty Framework from the Alberta Government for its Alberta assets.
Full-year 2016 annual average production is expected to be in the range of 116,000 to 120,000 boe per day.
(1)
Year-end 2015 results comply with current Canadian Oil and Gas Evaluation Handbook guidelines. Resources Evaluation volumes provided are the "Best Estimate" case. Year-end 2015 and 2014 TPIIP estimates utilize a one per cent porosity cut-off for shale gas based upon the "Best Estimate" case. Estimates for both 2015 and 2014 were determined using a three per cent porosity cut-off for tight oil based upon the "Best Estimate" case.
LIVE CONFERENCE CALL
A conference call will be hosted by Mr. Myron Stadnyk, President and CEO, at 7:00 AM MT (9:00 AM EST) on Thursday, February 11, 2016 to discuss ARC's fourth quarter and full-year 2015 results. Details of the conference call are as follows:
Date: Thursday February 11, 2016
Time: 7:00 AM MT (9:00 AM EST)
Toll-free: 1-888-231-8191
International: 1-647-427-7450
Conference ID: 50155873
To ensure timely participation in the conference call, callers are encouraged to dial in 15 minutes prior to the start time to register for the event. A telephone replay will be available for 30 days following the conference call and can be accessed at www.arcresources.com.
ORGANIZATIONAL UPDATE
ARC is pleased to announce the following appointments:
Director Appointment
Ms. Nancy Smith has been appointed to the Board of Directors. Ms. Smith is currently a Managing Director of ARC Financial Corp., and has held executive positions in finance and upstream marketing at a Canadian integrated energy company and has experience in the banking sector. Ms. Smith holds a Master of Business Administration and a Bachelor of Arts (Economics) from the University of Alberta, and has an ICD.D designation from the Institute of Corporate Directors. ARC is very pleased to welcome Ms. Smith to the Board.
Senior Vice President, Business Development Appointment
Mr. Bevin Wirzba has been appointed to the position of Senior Vice President, Business Development, overseeing ARC's acquisition, disposition and business development activities. Mr. Wirzba comes to ARC with over 20 years of upstream and midstream technical and commercial experience, including strategic advisory, investment analysis, project development, and merger, acquisition and divestiture evaluation and execution. Prior to joining ARC, Mr. Wirzba held roles in the energy advisory and capital markets business of a global investment bank, as well as a major multi-national corporation working both in North America and internationally. Mr. Wirzba holds a Bachelor of Science in Civil Engineering from the University of Alberta, has a Master in Business Administration from the Edinburgh Business School, and is a member of the Association of Professional Engineers and Geoscientists of Alberta. ARC is very pleased to welcome Mr. Wirzba to the team.
Vice President, Human Resources Appointment
Ms. Lisa Olsen has been promoted to the position of Vice President, Human Resources, overseeing ARC's human resources, office services and records information management functions. Ms. Olsen joined ARC in 2008 as Manager, Human Resources, and is a passionate champion of ARC's culture and people strategy. Prior to joining ARC, Ms. Olsen spent over 10 years in human resources functions in both Canadian oil and gas and for a major international consumer brand. Ms. Olsen has a Bachelor of Communications from Simon Fraser University and an HR Management Certificate from the BC Institute of Technology. ARC congratulates Ms. Olsen as she takes on this new challenge.
ECONOMIC ENVIRONMENT
ARC's 2015 financial and operational 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
Twelve Months Ended
December 31
December 31
2015
2014
% Change
2015
2014
% Change
Brent (US$/bbl)
44.69
77.07
(42)
53.60
99.45
(46)
WTI oil (US$/bbl)
42.16
73.20
(42)
48.76
92.91
(48)
Edmonton Par (Cdn$/bbl)
52.93
75.65
(30)
57.20
94.46
(39)
Henry Hub NYMEX (US$/MMbtu)
2.27
4.00
(43)
2.66
4.41
(40)
AECO natural gas (Cdn$/Mcf)
2.65
4.01
(34)
2.77
4.42
(37)
Cdn$/US$ exchange rate
1.34
1.14
18
1.28
1.10
16
(1)
The benchmark prices do not reflect ARC's realized sales prices. For average realized sales prices, refer to Table 13 in the MD&A for the three and twelve months ended December 31, 2015 and 2014. Prices and exchange rates presented above represent averages for the respective periods.
Global crude oil prices continued their decline throughout the fourth quarter of 2015, as persistent oversupply in the market was compounded by OPEC's decision to not reduce production quotas, as well as the anticipation of new Iranian production hitting the market and fears of economic slowdown in China and other emerging economies. The WTI benchmark price averaged 42 per cent lower than the fourth quarter of 2014 and nine per cent lower than the third quarter of 2015. ARC's crude oil price is primarily referenced to the Edmonton Par benchmark price, which fared moderately better than WTI owing to the decline in the Canadian dollar during 2015. The Edmonton Par price decreased 30 per cent compared to the fourth quarter of 2014 and six per cent from the third quarter of 2015. The differential between WTI and Edmonton Par in the fourth quarter of 2015 narrowed to an average discount of US$2.52, 62 per cent less than the fourth quarter of 2014 and 28 per cent less than the third quarter of 2015. The narrowing of the differential was largely driven by increased local demand for Canadian crude with the initiation of the reversal of Enbridge's Line 9.
Subsequent to December 31, 2015, global crude oil prices have continued to deteriorate, with the WTI crude oil price dropping by approximately 25 per cent from the average realized price in the fourth quarter of 2015. Oversupply continues to be a concern as inventories remain high, delaying the effect of any supply/demand rebalancing.
North American natural gas prices, referenced by the average Henry Hub NYMEX price, experienced a pullback of 18 per cent in the fourth quarter of 2015 compared to the third quarter, and were markedly lower in the fourth quarter of 2015 relative to the same period in 2014, decreasing 43 per cent. ARC's realized natural gas price is primarily referenced to the AECO hub, which was 34 per cent lower in the fourth quarter of 2015 compared to the fourth quarter of 2014 and five per cent lower compared to the third quarter of 2015. The lower prices were impacted by continued oversupply throughout the quarter, resulting in record storage levels at the close of injection season and warmer continental weather reducing normal seasonal demand. The oversupply was slightly alleviated by strong demand for Mexican exports and increased natural gas-fired power generation. Looking ahead to 2016, natural gas pricing is expected to experience continued weakness as a result of a relatively mild winter in the eastern half of North America to-date, and continued strong supply.
The Canadian dollar continued to weaken relative to the US dollar during the fourth quarter of 2015, averaging US$0.75 (Cdn$/US$1.34), as crude oil prices moved lower and the US Federal Res