May 17, 2011
CALGARY, May 17 /CNW/ - (ARX - TSX) ARC Resources Ltd. ("ARC") is pleased to report its first quarter operating and financial results. First quarter production was 73,880 boe per day, funds from operations were $194.1 million ($0.68 per share) and net income was $65.2 million ($0.23 per share). The related unaudited Condensed Consolidated Financial Statements and Notes, as well as Management's Discussion and Analysis ("MD&A"), are available on ARC's website at www.arcresources.com and on SEDAR at www.sedar.com.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
High oil prices positively impacted first quarter operating income, net income and funds from operations. ARC exited the quarter with a strong financial position with debt levels reduced from year-end 2010 levels. To capitalize on the near-term strength of oil prices, ARC accelerated certain crude oil and liquids projects in its 2011 capital program and continued to develop its natural gas prospects in the Montney play in northern British Columbia.
FINANCIAL REVIEW
ARC had a solid first quarter with higher production and higher sales on the strength of crude oil prices, which partially mitigated the effect of low natural gas prices. ARC exited the quarter with lower debt levels relative to year-end 2010 due to strong funds from operations and the receipt of $170 million of proceeds from the sale of properties in the first quarter. ARC maintained a dividend of $0.30 per share in the first quarter, unchanged from distribution levels prior to the conversion to a corporation.
Funds from operations
ARC's first quarter funds from operations of $194.1 million ($0.68 per share) were up 16 per cent compared to the first quarter of 2010 funds from operations of $167.9 million ($0.67 per share). First quarter sales increased three per cent due to a 10 per cent increase in first quarter production and an eight per cent increase in crude oil pricing, partially offset by a 25 per cent decrease in natural gas prices. Higher total royalties, operating costs and transportation costs attributed to higher first quarter volumes reduced the impact of the gains in volume. Cash gains on risk management contracts of $25.7 million increased first quarter 2011 funds from operations relative to 2010, when cash gains were just $1.3 million.
Following is a reconciliation of net income to funds from operations for the first quarters of 2011 and 2010.
The following table details the items contributing to the change in funds from operations for the first quarter of 2011 relative to 2010.
Net Income
Net income decreased 56 per cent in the first quarter to $65.2 million ($0.23 per share) from $149.8 million ($0.59 per share) in 2010. First quarter net income was reduced by a $148.6 million unrealized MTM loss on risk management contracts, predominantly crude oil contracts, compared to an unrealized MTM gain of $83.8 million in the first quarter of 2010. First quarter net income included an $87.9 million gain on disposal of producing properties (nil 2010) and an unrealized foreign exchange gain of $9.6 million ($11.5 million unrealized gain in 2010) due to the strengthening of the Canadian dollar and associated revaluation of U.S. denominated debt balances.
Operating Income
Operating income increased marginally to $81.8 million from $79.2 million in the first quarter of 2010. Higher sales attributed to increased production and crude oil prices were offset by higher total royalties, operating costs and depletion expense on the increased first quarter volumes. Following is a summary of operating income for the first quarters of 2011 and 2010.
Debt Management
ARC's balance sheet remains strong with approximately 67 per cent of outstanding debt being fixed-rate with a weighted average remaining term of 5.9 years. At March 31, ARC had total credit facilities of $1.6 billion with $646.7 million of borrowings under the credit facilities, leaving $924.1 million of available credit capacity. Proceeds of $170 million from the sale of non-core properties in Central Alberta along with strong funds from operations in the first quarter resulted in a reduction of debt levels relative to year-end. ARC's net debt to annualized first quarter funds from operations was 0.9 times, well below ARC's targeted limit of two times. Net debt to capitalization of nine per cent was also well below ARC's targeted limit of 20 per cent.
ARC expects to finance its 2011 capital program with funds from operations, proceeds from the Dividend Re-investment Plan ("DRIP") and existing credit capacity.
Risk Management
ARC maintains a risk management program to reduce the volatility of sales, increase the certainty of cash flow and to protect acquisition and development economics. ARC currently limits the amount of total forecast production that can be hedged to a maximum 55 per cent over the next two years with the remaining 45 per cent of production being sold at market prices.
During the first quarter of 2011, ARC realized a cash gain of $25.7 million primarily attributed to natural gas swap contracts on approximately 52 per cent of first quarter natural gas production hedged at Cdn$5.85 per mcf.
An unrealized MTM loss of $148.6 million loss was recorded in the first quarter due to the increase in the loss position on liquids hedge contracts. At March 31, 2010, ARC's liquids hedge contracts were in a loss position of $199 million, based on average 2011 and 2012 WTI crude oil forward pricing estimated at US$107 per barrel relative to the hedged (ceiling) price of approximately US$91 per barrel on contracted volumes. While the unrealized MTM loss had a negative impact on net income in the quarter, the average floor price of approximately US$88 per barrel on hedged volumes for 2011 through 2013 provides a level of certainty for ARC to execute on its business plans over the next two years. Partially offsetting the loss position on crude oil hedge contracts, ARC's natural gas hedge contracts were in a gain position of $69 million at March 31, 2011 based on average 2011 and 2012 natural gas forward pricing estimated at Cdn$4.14 per mcf.
The actual future cash settlements under the commodity hedge contracts will differ from the current unrealized MTM value with changes in commodity prices in future periods. Subsequent to quarter end, average crude oil forward prices decreased to approximately US$100 per barrel for 2011 and 2012 and average natural gas forward prices decreased to approximately Cdn$4.11 per mcf for 2011 and 2012 relative to forward prices at March 31, 2011. Due to the reduction in forward commodity prices subsequent to quarter end, ARC's unrealized MTM position on oil and natural gas contracts decreased from a loss of $130 million at March 31, 2011 to a loss of approximately $60 million at May 16, 2011.
ARC has partially mitigated the weak outlook for natural gas prices by protecting the selling price on 163 mmcf per day of natural gas at Cdn$5.44 per mcf for the remainder of 2011. On the liquids side, ARC has protected 20,000 barrels of crude oil per day at an average floor price of US$84.61 per barrel and an average ceiling price of US$89.61 per barrel for the remainder of 2011. Additional volumes are hedged for 2012 and 2013 as summarized in the following table. For a complete listing of ARC's hedging contracts, see Note 11 "Risk Management Contracts" in the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2011.
OPERATIONAL REVIEW
During the first quarter of 2011 ARC spent $157.2 million of capital on drilling, facilities, optimization and exploration activities. ARC drilled 43 gross (39 net) operated wells comprising 33 gross (30 net) oil wells and 10 gross (9 net) natural gas with a 100 per cent success rate. Of the nine net natural gas wells, five of the wells were liquids rich. Oil and liquids-rich natural gas wells represented 90 per cent of total wells drilled - a reflection of ARC's strategy to capitalize on the strength of oil prices through acceleration of oil and liquids projects in 2011.
First quarter production averaged 73,880 boe per day consisting of 56 per cent natural gas and 44 per cent crude oil and liquids. The start-up of the 60 mmcf per day Phase 1 Dawson gas plant in the second quarter of 2010, the acquisition of Storm Exploration Inc. on August 17, 2010 and a successful drilling program all contributed to higher production in the first quarter of 2011 relative to 2010.
First quarter production was down 13 per cent relative to the fourth quarter of 2010 due to the disposition of properties, adverse winter weather conditions impacting certain properties, and downtime at Dawson of 5,000 boe per day to tie-in the Phase 2 Dawson gas plant. The Phase 1 gas plant was down for four weeks longer than planned during the quarter due to complex electrical issues and severe winter weather. The Dawson Phase 1 gas plant was running above design capacity in the fourth quarter, contributing an additional 2,700 boe per day through the fourth quarter. The Dawson Phase 1 gas plant throughput was reduced to design capacity in the first quarter to ensure long-term optimal equipment reliability and performance.
Dawson
Production from the Dawson property in the Montney region of northeast British Columbia averaged 73 mmcf per day of natural gas during the first quarter of 2011, accounting for approximately 16 per cent of total first quarter production. First quarter volumes were impacted by the complete shut-down of the Phase 1 Dawson gas plant for six weeks to tie-in the new Phase 2 gas plant. During the quarter, ARC drilled three horizontal wells at Dawson.
The Phase 2 gas plant commenced full operations at its 60 mmcf per day design capacity in mid-April. With the completion of the Phase 2 gas plant, ARC's Dawson operated gas plant processing capacity increased to 120 mmcf per day, complementing the 45 mmcf per day of third-party processing capacity. ARC expects Dawson production to increase to 165 mmcf per day by the end of the second quarter after throughput is increased at both plants and behind-pipe production is brought on-stream.
During 2011, ARC plans to spend $98 million at Dawson to drill 14 operated wells. ARC forecasts 2011 full year Dawson production to average approximately 145 mmcf per day with a 2011 exit production rate of approximately 165 mmcf per day.
West Montney
ARC's West Montney region includes the Sunrise, Septimus and Sundown properties. First quarter production averaged 6.8 mmcf per day from the Sunrise non-operated property. ARC plans on bringing 15 mmcf per day of operated production on stream through a third party facility by the start of the fourth quarter. ARC currently has five horizontal wells cased and completed at Sunrise waiting on the facility tie-in. During the first quarter, ARC drilled one horizontal well at Sundown.
ARC received approval from the British Columbia Oil and Gas Commission to construct two 60 mmcf per day gas plants at Sunrise. Current plans target the first 60 mmcf per day of capacity to be on stream in 2013. In anticipation of the Sunrise gas plant, a vertical well is being drilled, which will be evaluated for acid gas disposal potential.
During 2011, ARC plans to spend $25 million on the West Montney assets to drill two horizontal wells and one acid gas disposal well. In addition, ARC will complete the tie-in of existing Sunrise wells during the second quarter of 2011.
Parkland
Parkland is a liquids rich property located just ten kilometers east of the Dawson field. First quarter 2011 production averaged 40.5 mmcf per day of natural gas and 1,125 boe per day of natural gas liquids. Production from new wells and added compression in early March increased average volumes at the Parkland field in the first quarter by 300 boe per day relative to fourth quarter 2010 volumes.
ARC drilled four horizontal wells at Parkland during the first quarter. One of the four horizontal wells targeted the Upper Montney in the liquids-rich Tower area (north of the main producing pool) and will be completed in the third quarter. Two more horizontal wells will be drilled in this area by year-end to further delineate the opportunity.
During 2011, ARC plans to spend $67 million on the drilling of 11 horizontal wells. ARC also plans to test a lower interval in the upper Montney A zone as well as complete three horizontal wells to determine the oil and liquids potential of the Tower area.
Attachie
ARC holds a prospective land base of 104 sections in the Attachie property located west of Dawson. Currently there are no booked reserves or production at Attachie. Assessment of the block commenced in the first quarter with two wells being drilled in Attachie during the first quarter. Completion operations will commence in the second half of 2011.
During 2011, ARC intends to continue drilling at Attachie to assess the potential for commercial production.
Ante Creek
Ante Creek production is facility constrained, with first quarter averaging 7,900 boe per day (43 per cent light crude oil and natural gas liquids, 57 per cent natural gas). Successful horizontal multi-stage completions at Ante Creek average 30 day production rates of 360 boe per day compared to average rates of 100 boe per day for vertical wells. Given the favorable results from horizontal drilling, ARC believes that the Ante Creek property will provide a significant near-term growth opportunity once facility capacity is expanded.
During the first quarter ARC drilled three oil wells into the Montney formation at Ante Creek.
In response to current capacity constraints, ARC has committed $30 million of 2011 capital to build a new, 30 mmcf per day gas plant to process solution gas, enabling an increase in liquids production. ARC has completed the engineering and design for the gas plant and has recently received ERCB approval to construct the plan. The sales pipeline to TCPL has been installed, major equipment has been ordered and pipeline debottlenecking within the field is progressing. The new plant is expected to come on-stream late in the first quarter of 2012. The total cost of the gas plant is expected to be $40 million.
During 2011, ARC plans to spend $55 million to drill 14 horizontal and two vertical wells at Ante Creek. ARC expects liquids production to grow to approximately 5,000 barrels per day and total production at Ante Creek to increase to approximately 11,000 boe per day over the course of 2012.
Pembina
ARC is the second largest operator in the Pembina area, operating approximately 25 per cent of the Pembina oil field with an average 65 per cent working interest in 166 gross sections (126 net sections). Pembina first quarter production averaged 10,440 boe per day of light crude oil, an increase of 16 per cent from 9,000 boe per day in the comparable period of 2010. During the first quarter, ARC drilled nine net horizontal wells into the Cardium formation. ARC is encouraged by results that indicate an initial 30-day production average of 150 barrels of oil per day for the six horizontal wells put on production in the first quarter of 2011.
ARC is optimistic about the opportunity for increased recovery at Pembina from the application of horizontal drilling and completion technology. Pembina is an extensive area with geological variability, which adds complexity to ARC's efforts to access additional resources using horizontal drilling and completion techniques. ARC will continue to evaluate this field in order to gain a better understanding of where the horizontal completion technology can be most effectively applied.
During 2011, ARC plans to spend $90 million to drill 42 horizontal Cardium locations in order to further develop this reservoir. In addition, extensive work is also planned on waterflood management in order to optimize reservoir recoveries.
Goodlands
The Goodlands property in Manitoba provides some of the best drilling economics in ARC's portfolio due to the high netback, light crude oil. First quarter production averaged 1,400 boe per day of light crude oil, significantly higher than first quarter 2010 average production of 879 boe per day, as a result of ARC's robust 2010 drilling program. The Goodlands battery is running at full capacity and plans are being executed to expand oil capacity. During the first quarter, ARC drilled seven net horizontal wells.
During 2011, ARC plans to spend $58 million in southeast Saskatchewan and Manitoba to drill 48 wells and explore for additional opportunities.
DIVIDENDS
ARC paid dividends totaling $0.30 per share for the first quarter of 2011, consistent with distributions levels prior to the conversion to a corporation. A dividend of $0.10 per share was declared and paid for the month of April 2011. The Board of Directors has confirmed a dividend of $0.10 per share for May and has conditionally declared a monthly dividend of $0.10 per share for June and July 2011, targeting a total dividend of $0.30 per share for the second quarter of 2011. The dividends have been designated as eligible dividends under the Income Tax Act (Canada) and are payable as follows:
The declaration of the dividends is conditional upon confirmation by news release and 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 costs, 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 pillar of ARC's business strategy is "risk-managed value creation". ARC's goal is to transform this value into shareholder returns through regular dividends and, when appropriate, growth in 2011 and beyond. During 2011, ARC will continue to execute its $625 million capital program targeting growth in 2011. Defined projects such as Dawson and Sunrise in the Montney region of British Columbia and Ante Creek in northern Alberta will provide near-term growth. ARC's 2011 capital program includes the drilling of 166 wells on operated properties with horizontal wells accounting for 86 per cent.
ARC has a balanced portfolio of high-quality assets with current production of approximately 60 per cent natural gas and 40 per cent crude oil and natural gas liquids. The mix of liquids and natural gas in ARC's portfolio has enabled ARC to respond to the prolonged, low natural gas price environment effectively by redirecting a portion of capital to oil and liquids projects that generate significant returns and cash flow relative to near-term natural gas projects.
Given the strong outlook for crude oil prices, a significant portion of ARC's 2011 capital program has been allocated to oil and liquids projects with oil and liquids wells accounting for approximately 87 per cent of operated wells to be drilled in 2011 and representing approximately 45 per cent of the $625 million 2011 capital program. Ante Creek, Pembina and Goodlands will see significant oil drilling activity in 2011 as well as the construction of a new gas processing facility at Ante Creek to address current capacity constraints. ARC will continue to assess the liquids potential in the northern region of the Montney at Parkland.
ARC will direct considerable resources and capital on the Montney in northeast British Columbia in order to set the stage for long-term growth in this area over the next three to five years. Despite continued low natural gas prices, ARC's Montney natural gas economics still support development of this area at current natural gas prices. With the recent completion of the Phase 2 gas plant, ARC's processing capacity in Dawson has doubled to 120 mmcf per day.
Severe flooding in parts of Saskatchewan and Manitoba and devastating wildfires in northern Alberta are currently having an impact on ARC's operations in the affected areas. At the present time, approximately 5,000 boe per day, predominantly oil production, is shut-in. ARC is uncertain when electricity will be restored and when the fields will be accessible to resume normal operations and continue the execution of the capital program in the affected locations. ARC will continue to monitor these situations, assess the impact on its full year, budgeted production and will provide details in its mid-year review. ARC believes that full year 2011 volumes may average in the 80,000 - 85,000 boe per day range, a reduction from previous guidance of 84,000 - 87,000 boe per day. Exit 2011 production is expected to be in excess of 90,000 boe per day, a reduction from previous exit guidance of 93,000 boe per day, due to the timing of certain projects in 2011. Variances from full year guidance at the end of the first quarter are timing related and ARC expects that full year 2011 results will match guidance estimates as the year progresses. All other 2011 full year guidance estimates remain unchanged and are summarized in the following table.
On March 22, 2011 the Federal Government presented a budget, which included a proposal to eliminate the ability of a corporation to defer income as a result of timing differences in the year-end of the corporation and of any partnership of which it is a member. ARC Resources Ltd.'s oil and natural gas properties are directly owned and operated by ARC Resources General Partnership, which has a January 31 year-end. These proposals were not enacted but are expected to be reintroduced in the next federal budget. If these proposals are enacted, ARC currently expects that it would be taxable in 2012 instead of 2013 as a result of the loss of the deferral on partnership income.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Effective January 1, 2011 all Canadian publicly accountable enterprises are required to prepare their financial statements in accordance with International Financial Reporting Standards ("IFRS"). ARC has prepared its unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2011 under IFRS and has restated its unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2010 to comply with IFRS. For further information on ARC's transition to IFRS and a reconciliation of its affected financial information for the three months ended March 31, 2010, please refer to Note 16, "Explanation of Transition to International Financial Reporting Standards" in the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2011 and 2010 filed on SEDAR at www.sedar.com.
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: all of the matters under the heading "Outlook" which contains guidance for 2011, the expectations related to the transition from Canadian GAAP to IFRS under the heading "International Financial Reporting Standards", and a number of other matters, including future liquidity and financial capacity under the heading "Debt Management"; future results from operations and operating metrics; future costs, expenses and royalty rates; future interest costs; and future development, exploration, acquisition and development activities (including drilling plans) and related capital expenditures under the heading "Operational Review".
The forward-looking information and statements contained in this news release reflect several 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. ("ARC") is one of Canada's largest conventional oil and gas companies with an enterprise value of approximately $8 billion. ARC expects 2011 oil and gas production to average 80,000 to 85,000 barrels of oil equivalent per day from six core areas in western Canada. ARC's Common Shares trade on the TSX under the symbol ARX.
ARC RESOURCES LTD.