Aug 1, 2012
CALGARY, Aug. 1, 2012 /CNW/ - (TSX: ARX) ARC Resources Ltd. ("ARC") is pleased to report its second quarter operating and financial results. Second quarter production was 93,997 boe per day and funds from operations were $165.8 million ($0.57 per share). ARC's second quarter 2012 Unaudited Condensed Consolidated Financial Statements and Notes, as well as ARC's Management's Discussion and Analysis ("MD&A") for the three and six months ended June 30, 2012, are available on ARC's website at www.arcresources.com and on SEDAR at www.sedar.com.
Three Months Ended
June 30
Six Months Ended
June 30
2012
2011
2012
2011
FINANCIAL
(Cdn$ millions, except per share and per boe amounts)
Funds from operations (1)
165.8
210.1
346.5
404.2
Per share (2)
0.57
0.73
1.19
1.42
Net income
38.1
150.1
79.0
215.3
Per share (2)
0.13
0.52
0.27
0.75
Operating income (3)
30.5
76.4
77.4
149.2
Per share (2)
0.10
0.27
0.27
0.52
Dividends
87.3
85.8
174.2
171.4
Per share (2)
0.30
0.30
0.60
0.60
Capital expenditures
97.9
144.5
284.8
301.7
Net debt outstanding (4)
996.0
744.8
996.0
744.8
Shares outstanding, weighted average
290.8
286.0
290.2
285.4
Shares outstanding, end of period
291.5
286.5
291.5
286.5
OPERATING
Production
Crude oil (bbl/d)
30,831
26,038
31,068
27,067
Condensate (bbl/d)
2,381
2,105
2,390
1,989
Natural gas (mmcf/d)
347.2
311.8
350.1
279.3
Natural gas liquids (bbl/d)
2,913
2,250
2,673
2,540
Total (boe/d) (5)
93,997
82,367
94,484
78,147
Average prices
Crude oil ($/bbl)
78.98
97.11
83.14
89.45
Condensate ($/bbl)
94.60
100.57
97.29
94.85
Natural gas ($/mcf)
2.03
4.05
2.36
4.05
Natural gas liquids ($/bbl)
41.17
48.40
42.67
45.86
Oil equivalent ($/boe)
37.09
49.94
39.73
49.38
Operating netback ($/boe)
Commodity and other sales
37.15
50.02
39.78
49.46
Transportation costs
(1.23)
(1.25)
(1.20)
(1.18)
Royalties
(5.58)
(7.40)
(6.12)
(7.13)
Operating costs
(9.48)
(9.22)
(9.11)
(9.64)
Netback before hedging
20.86
32.15
23.35
31.51
Realized Hedging gain (loss)
3.54
0.44
1.75
1.06
Netback after hedging
24.40
32.59
25.10
32.57
TRADING STATISTICS (6)
High price
23.28
27.00
25.72
28.67
Low price
18.36
23.41
18.36
23.41
Close price
22.90
25.01
22.90
25.01
Average daily volume (thousands)
1,704
998
1,529
1,314
(1)
Funds from operations is not a recognized performance measure under Canadian Generally Accepted Accounting Principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. See "Non-GAAP Measures" section in the MD&A for the three and six months ended June 30, 2012 and 2011.
(2)
Per share amounts (with the exception of dividends) are based on weighted average shares.
(3)
Operating income is a non-GAAP measure. See "Operating Income" section in this news release.
(4)
Net debt is not a recognized performance measure under GAAP and does not have a standardized meaning prescribed by GAAP. Net debt is defined as long-term debt plus working capital deficit plus unrealized losses on risk management contracts related to prior production periods. Working capital deficit is calculated as current liabilities less the current assets as they appear on the Consolidated Balance Sheets, and excludes current unrealized amounts pertaining to risk management contracts, assets held for sale, asset retirement obligations contained within liabilities associated with assets held for sale and liabilities associated with exchangeable shares.
(5)
In accordance with NI 51-101, a 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.
(6)
Trading prices are stated in Canadian dollars and based on intra-day trading.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
On July 27th, ARC confirmed commitments and pricing for the issuance of US$360 million and CDN$40 million of long-term fixed rate notes through a private placement to secure additional credit capacity and capitalize on low long-term interest rates. The note issuance is expected to close prior to August 31st. The note proceeds will be used to pay down indebtedness under ARC's credit facility. At the end of the second quarter, ARC had $1.6 billion of total credit capacity with borrowings of $892 million and a working capital deficit of $104 million, leaving approximately $558 million of total available credit capacity. Net debt to annualized first half funds from operations ratio was 1.4 times and net debt was approximately 13 per cent of ARC's total capitalization at the end of the second quarter; both within ARC's target levels. The note issuance will increase ARC's total credit capacity to approximately $2 billion and will result in approximately 82 per cent of total outstanding debt being fixed at an average rate of 4.8 per cent and an average life of 7.5 years.
ARC's second quarter production was 93,997 boe per day, 14 per cent higher than the second quarter of 2011. Production for the first half of 2012 of 94,484 boe per day was 21 per cent higher than the same period of 2011. ARC's successful drilling program throughout the second half of 2011 and first half of 2012, the commissioning of the new 30 mmcf per day Ante Creek gas plant in February of 2012 and smooth operations at ARC's Dawson facilities contributed to the higher production in the second quarter and first half of 2012. ARC expects full year 2012 production to be in the range of 91,000 to 94,000 boe per day for 2012.
ARC's second quarter liquids production of 36,125 barrels per day increased 19 per cent relative to the second quarter of 2011. ARC's focus has been to capitalize on the relative strength of crude oil prices by exploiting oil and liquids opportunities, which generate the highest rates of return and cash flows. Strong production results from new wells at Pembina and Goodlands and expanded processing capacity at Ante Creek have contributed to the significant increase in crude oil, condensate and natural gas liquids production in 2012.
Second quarter 2012 commodity sales revenues of $317.2 million were down 15 per cent relative to the second quarter of 2011. Crude oil and liquids production contributed approximately 80 per cent and 78 per cent of second quarter and first half sales revenue, respectively, due to the strength of crude prices relative to natural gas prices. ARC's diversified production portfolio and an active hedging program helped to mitigate the impact of the low natural gas price environment.
Second quarter funds from operations were $165.8 million ($0.57 per share) down 21 per cent from $210.1 million ($0.73 per share) in the second quarter of 2011. First half funds from operations of $346.5 million ($1.19 per share) were down 14 per cent relative to 2011. Higher production volumes were offset by lower crude oil and natural gas prices, and current income taxes of $9.5 million and $19.8 million, respectively, for the second quarter and first half of 2012.
Operating incomewas $30.5 million ($0.10 per share) in the second quarter of 2012, a 62 per cent decrease from $76.4 million ($0.27 per share) in the second quarter of 2011. First half operating income of $77.4 million ($0.27 per share) was down 48 per cent relative to $149.2 million ($0.52 per share) in 2011. Lower natural gas sales revenue in 2012 was the primary driver of lower operating income in 2012.
ARC's second quarter funds from operations included a total hedging gain of $30.3 million attributed to realized gains of $30 million on natural gas, a loss of $0.1 million on crude oil hedges and a gain of $0.4 million on power hedges. ARC's realized cash gain of $30 million on natural gas hedges was attributed to approximately 63 per cent of second quarter natural gas production being hedged at an average floor price of Cdn$3.27 per mcf, well above the average second quarter average price of Cdn$1.83 per mcf. ARC's first half funds from operations included hedging gains of $31 million comprised of a $44.2 million gain on gas hedges, a loss of $15.6 million on crude oil hedges and gains of $0.7 million and $1.6 million on foreign currency and power hedges, respectively.
ARC has protected the price on approximately 205 mmcf per day (60 per cent) of natural gas production for the second half of 2012 at an average price of US$3.71 per mmbtu. Approximately 18,000 barrels per day (55 per cent) of crude oil production is currently hedged at an average floor/ceiling price of US$90/US$91 per barrel for the remainder of 2012. Approximately 40 per cent of natural gas volumes and 40 per cent of crude oil volumes are hedged in 2013 at floor prices of US$3.34 per mmbtu and US$95.00 per barrel. ARC entered into a four year natural gas hedge to protect the price on 30 mmcf per day at a floor/ceiling price of US$4/US$5 per mmbtu for 2014 through 2017.
Capital expenditures for the second quarter totaled $97.9 million as ARC drilled 18 gross operated wells comprised of 14 oil wells and four liquids-rich gas wells during the second quarter. Through the first half of 2012, ARC has spent $284.8 million of capital and drilled 77 gross operated wells comprised of 67 oil wells, nine liquids-rich gas wells and one natural gas well. ARC will continue to focus on oil and liquids-rich opportunities at Tower, Ante Creek, Pembina, Goodlands and southeast Saskatchewan in 2012. ARC continues to focus on capital discipline with a planned 2012 capital program of $600 million, before land and net acquisitions, to drill approximately 150 gross operated wells. The 2012 capital program will prioritize the highest return projects, primarily focused on oil and liquids projects.
ARC declared and paid a dividend of $0.30 per share to shareholders for the second quarter of 2012 and has confirmed a dividend of $0.10 per share to shareholders for July 2012 to be paid on August 15, 2012. ARC has conditionally declared a dividend of $0.10 per share, payable monthly for August 2012, September 2012 and October 2012, subject to confirmation by monthly news release and subject to any further resolution of the Board of Directors. ARC has maintained the current monthly dividend level of $0.10 per share for a period of 38 months, including payments through July 16, 2012.
In February 2012, ARC announced that we had retained an advisor to market certain less strategic assets, representing approximately 10 percent of the Company's NE B.C. Montney land base. At the time of the announcement, ARC noted that a sale would occur only if an offer was received that represented superior value relative to the Company's view of value attainable from its own development plan. The process concluded in the second quarter and ARC has decided to retain the properties. ARC is committed to paced, long-term development of its entire Montney portfolio including the subject properties.
COMMODITY PRICE ENVIRONMENT
Canadian crude oil differentials experienced significant volatility in the first half of 2012 with the differential for Edmonton Par relative to West Texas Intermediate ("WTI") ranging from a discount of $4 per barrel to $20 per barrel. The recent weakness in Canadian crude grades is primarily due to refinery outages and upgrades, oil production growth in both Canada and the United States and pipeline infrastructure bottlenecks in the mid-western region of the United States. If these issues are resolved and additional pipeline capacity becomes available, differentials should return to more normal historical levels; however the risk of volatile differentials remains a concern for the remainder of 2012 and into 2013.
The benchmark WTI crude oil price decreased to a low daily close price of US$77.69 per barrel during the quarter, averaging US$93.51 per barrel for the second quarter, nine per cent lower than the first quarter of 2012. ARC's second quarter 2012 realized crude oil price of $78.98 per barrel was down nine per cent relative to the first quarter of 2012. The drop in crude oil prices was the result of increased global supply resulting from higher North American and Saudi Arabian production, as well as heightened macroeconomic concerns stemming from the European sovereign debt crisis and weaker economic activity in emerging markets, in particular China.
Natural gas prices reached their lowest level in 10 years during the second quarter of 2012 due to excess inventory of natural gas, attributed to both increased supply and lower first quarter demand for natural gas. Canadian natural gas prices hit a low daily spot price of Cdn$1.51 per mcf during the quarter, increasing slightly to average Cdn$1.83 per mcf for the second quarter and $2.18 for the first half of 2012. In response to the low natural gas price, activity levels did show signs of decline during the second quarter with significantly lower natural gas drilling rig activity in the United States, however, high productivity horizontal wells in shale gas plays resulted in natural gas production being sustained at high levels. As a result, significant and sustained demand growth is necessary in order to alleviate natural gas storage congestion in the fall of 2012.
FINANCIAL REVIEW
Funds from Operations
ARC's second quarter funds from operations of $165.8 million ($0.57 per share) was down 21 per cent compared to the second quarter of 2011 funds from operations of $210.1 million ($0.73 per share). First half funds from operations of $346.5 million ($1.19 per share) was down 14 per cent compared to the first half of 2011 funds from operations of $404.2 million ($1.42 per share). Higher production and higher crude oil and liquids prices during the second quarter and first half of 2012 were offset by significantly lower natural gas prices and current income tax expense in the second quarter and first half of 2012.
Following is a reconciliation of funds from operations to net income and cash flow from operating activities for the second quarter and first half of 2012.
Three months ended
June 30
Six months ended
June 30
($ millions)
2012
2011
2012
2011
Net income
38.1
150.1
79.0
215.3
Adjusted for the following non-cash items:
Depletion, depreciation, amortization and impairment (recovery)
182.1
106.2
311.5
172.2
Accretion of asset retirement obligation
3.1
3.3
6.2
6.8
Deferred tax expense
5.9
48.8
5.6
67.9
Unrealized loss (gain) on risk management contracts
(68.6)
(73.9)
(46.9)
74.7
Unrealized losses on risk management contracts related to prior production periods (1)
(2.7)
(21.3)
(10.4)
(33.3)
Foreign exchange loss (gain) on revaluation of debt
7.5
(2.6)
0.2
(12.2)
Gain on disposal of petroleum and natural gas properties
-
-
-
(87.9)
Other
0.4
(0.5)
1.3
0.7
Funds from operations
165.8
210.1
346.5
404.2
Unrealized losses on risk management contracts related to prior production periods (1)
2.7
21.3
10.4
33.3
Net change in other liabilities
0.5
5.3
(3.4)
(8.7)
Change in non-cash working capital
19.3
17.1
(7.4)
28.8
Cash Flow from Operating Activities
188.3
253.8
346.1
457.6
(1)
ARC has entered into certain commodity price risk management contracts that pertain to production periods spanning the entire calendar year but that are settled at the end of the year on an annual average benchmark commodity price. The portion of losses associated on these contracts that relates to production periods for the three and six months ended June 30, 2012 and 2011 have been applied to reduce funds from operations in order to more appropriately reflect the funds from operations generated during the period after any effect of contracts used for economic hedging.
The following table details the items contributing to the change in funds from operations for the second quarter and first half of 2012 relative to 2011.
Three months ended June 30
Six months ended June 30
$ millions
$/Share
$ millions
$/Share
Funds from operations - 2011 (1)
210.1
0.73
404.2
1.42
Volume variance
Crude oil and liquids
49.0
0.17
74.0
0.25
Natural gas
13.0
0.05
53.4
0.18
Price variance
Crude oil and liquids
(55.4)
(0.20)
(34.7)
(0.12)
Natural gas
(63.7)
(0.22)
(108.2)
(0.38)
Realized gains on risk management contracts
7.5
0.02
(9.9)
(0.03)
Unrealized losses on risk management contracts related to 2012 production (2)
18.6
0.07
22.9
0.08
Royalties
7.7
0.03
(4.4)
(0.02)
Expenses:
Transportation
(1.1)
-
(4.0)
(0.01)
Operating
(12.0)
(0.04)
(20.3)
(0.07)
General and administrative
3.3
0.01
(4.0)
(0.01)
Interest
(1.8)
(0.01)
(2.4)
(0.01)
Current tax
(9.5)
(0.03)
(19.8)
(0.07)
Realized foreign exchange losses
0.1
-
(0.3)
-
Diluted shares
-
(0.01)
-
(0.02)
Funds from operations - 2012 (1)
165.8
0.57
346.5
1.19
(1)
This is a non-GAAP measure which may not be comparable with similar non-GAAP measures used by other entities. Refer to "Non-GAAP Measures" contained within the MD&A for the three and six months ended June 30, 2012.
(2)
ARC has entered into certain commodity price risk management contracts that pertain to production periods spanning the entire calendar year but that are settled at the end of the year on an annual average benchmark commodity price. The portion of losses associated on these contracts that relates to production periods for the three and six months ended June 30, 2012 and 2011 have been applied to reduce funds from operations in order to more appropriately reflect the funds from operations generated during the period after any effect of contracts used for economic hedging.
Operating Netbacks
ARC's second quarter operating netback, before hedging, decreased 35 per cent to $20.86 per boe compared to $32.15 per boe in the second quarter of 2011. After hedging, ARC's second quarter netback was $24.40 per boe, a 25 per cent decrease relative to 2011. ARC's pre-hedging netback for the first half of 2012 was $23.35 per boe, 26 per cent lower than 2011. The decrease in netbacks both before and after hedging is primarily due to the decrease in realized commodity prices.
ARC's total corporate royalty rate increased marginally to 15 per cent ($5.59 per boe) in the second quarter of 2012 from 14.8 per cent ($7.40 per boe) in 2011. ARC's first half 2012 total corporate royalty rate increased to 15.4 per cent (14.4 per cent for first half 2011). Despite lower realized oil prices in 2012 relative to 2011, the reference price on which Alberta oil crown royalties are determined was higher relative to ARC's realized oil price, resulting in higher royalty rates in the first half of 2012. There is typically a two to three month time lag in royalty reference pricing relative to current posted prices.
ARC's second quarter and first half operating costs were $9.48 per boe and $9.11 per boe, respectively in 2012. Higher operating costs in the second quarter of 2012 relative to 2011 were attributed to maintenance activity at several properties and well reactivations in southeast Saskatchewan and Manitoba for wells that had been inaccessible since the flooding in the spring of 2011. Significantly lower power costs were the primary driver for lower operating costs in the first half of 2012 with Alberta Power Pool prices averaging 30 per cent and 36 per cent lower than second quarter and first half 2011 prices, respectively. ARC hedges a portion of electricity costs; however the gains or losses on the contracts have not been recorded directly against the operating costs. Including the impact of gains on ARC's electricity hedge contracts, operating costs would decrease by $0.05 per boe for the second quarter and $0.10 per boe for the first half of 2012, respectively.
The following table details components of operating netbacks for the second quarter and first half of 2012 relative to 2011.
Netbacks
($ per boe)
Crude Oil
($/bbl)
Heavy Oil
($/bbl)
Condensate
($/bbl)
Natural
Gas
($/mcf)
NGL
($/bbl)
Q2 2012
Total
($/boe)
Q2 2011
Total
($/boe)
Average sales price
79.46
63.12
94.60
2.03
41.17
37.09
49.94
Other
-
-
-
-
-
0.06
0.08
Total sales
79.46
63.12
94.60
2.03
41.17
37.15
50.02
Royalties
(13.34)
(6.76)
(25.46)
(0.08)
(11.71)
(5.58)
(7.40)
Transportation
(0.92)
(1.25)
(1.07)
(0.25)
(0.48)
(1.23)
(1.25)
Operating costs (1)
(15.25)
(14.62)
(6.73)
(0.82)
(9.66)
(9.48)
(9.22)
Netback prior to hedging
49.95
40.49
61.34
0.88
19.32
20.86
32.15
Hedging gain (2)
0.11
-
-
0.95
-
3.54
0.44
Netback after hedging
50.06
40.49
61.34
1.83
19.32
24.40
32.59
% of Total
64%
2%
5%
27%
2%
100%
100%
(1)
Operating expenses are composed of direct costs incurred to operate oil and gas wells. A number of assumptions have been made in allocating these costs between crude oil, heavy oil, condensate, natural gas and natural gas liquids production.
(2)
Hedging gain includes realized cash gains on risk management contracts plus an unrealized loss on risk management contracts that relate to January through June production. Foreign exchange risk management contracts are excluded from the netback calculation.
Netbacks
($ per boe)
Crude Oil
($/bbl)
Heavy Oil
($/bbl)
Condensate
($/bbl)
Natural
Gas
($/mcf)
NGL
($/bbl)
YTD 2012
Total
($/boe)
YTD 2011
Total
($/boe)
Average sales price
83.54
69.27
97.29
2.36
42.67
39.73
49.38
Other
-
-
-
-
-
0.05
0.08
Total sales
83.54
69.27
97.29
2.36
42.67
39.78
49.46
Royalties
(14.40)
(8.14)
(26.40)
(0.12)
(11.90)
(6.12)
(7.13)
Transportation
(0.81)
(1.17)
(1.32)
(0.25)
(0.43)
(1.20)
(1.18)
Operating costs (1)
(14.69)
(16.08)
(5.31)
(0.81)
(9.13)
(9.11)
(9.64)
Netback prior to hedging
53.64
43.88
64.26
1.18
21.21
23.35
31.51
Hedging gain (2)
(2.46)
-
-
0.69
-
1.75
1.06
Netback after hedging
51.18
43.88
64.26
1.87
21.21
25.10
32.57
% of Total
64%
2%
5%
27%
2%
100%
100%
(1)
Operating expenses are composed of direct costs incurred to operate oil and gas wells. A number of assumptions have been made in allocating these costs between crude oil, heavy oil, condensate, natural gas and natural gas liquids production.
(2)
Hedging gain includes realized cash gains on risk management contracts plus an unrealized loss on risk management contracts that relate to January through June production. Foreign exchange risk management contracts are excluded from the netback calculation.
Net Income
ARC recorded net income of $38.1 million ($0.13 per share) for the second quarter of 2012 compared to net income of $150.1 million ($0.52 per share) in the second quarter of 2011. First half net income of $79.0 million ($0.27 per share) was down 63 per cent relative to net income of $215.3 million ($0.75 per share) in the first half of 2011. Higher production had a positive impact on netbacks and funds from operations in both the second quarter and first half of 2012, however these gains were eroded by significantly lower natural gas prices and higher crude oil differentials throughout the first half of 2012.
First half 2012 net income included a $46.9 million unrealized gain on risk management contracts, primarily attributed to a decrease in crude oil futures price at the end of the second quarter relative to year end 2011 ($74.7 million unrealized loss in the first half of 2011).
ARC recorded a property impairment of $53.0 in the second quarter and first half of 2012 due to the decline in both future commodity prices during the period ($28.4 million recovery in first half of 2011).
Operating Income
First quarter operating income was $30.5 million ($0.10 per share), down 60 per cent from $76.4 million ($0.27 per share) in the second quarter of 2011. First half 2012 operating income was $77.4 million ($0.27 per share), down 48 per cent from $149.2 million ($0.52 per share) in the first half of 2011. The decrease in operating income was primarily due to lower netbacks in 2012. The following table summarizes operating income for the second quarter and first six months of 2012 and 2011.
Three months ended
June 30
Six months ended
June 30
2012
2011
2012
2011
Net income
38.1
150.1
79.0
215.3
Add (deduct) non-operating items, net of tax:
Unrealized loss on risk management contracts
(51.5)
(55.5)
(35.2)
56.0
Unrealized loss on risk management contracts relating to prior production periods (1)
(2.0)
(16.0)
(7.8)
(25.0)
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