Earnings call transcript: ARC Resources’ Q1 2025 results show strong cash flow

ARC Resources Ltd. (TSX:ARX) reported its first-quarter 2025 earnings, revealing a mixed financial performance. The company posted an earnings per share (EPS) of $0.69, falling short of the forecasted $0.7886. However, ARC Resources exceeded revenue expectations, generating 1.61 billion dollars against a forecast of 1.47 billion dollars. Following the earnings release, ARC Resources’ stock rose by 2.27% in after-hours trading, reflecting investor confidence in the company’s strong cash flow and operational strategies. According to InvestingPro data, the company maintains an impressive financial health score of 2.97 (rated as GOOD), supported by strong operational metrics and a 30-year track record of consistent dividend payments.

Key Takeaways

• ARC Resources’ Q1 2025 EPS missed expectations, but revenue surpassed forecasts.
• The company achieved a 10% increase in funds from operations compared to the previous quarter.
• ARC Resources’ stock price rose by 2.27% in after-hours trading post-earnings release.
• The company maintains a strong balance sheet with a net debt-to-cash flow ratio of 0.5x.
• ARC Resources is targeting to triple free cash flow per share by 2028.

Company Performance

ARC Resources demonstrated robust operational performance in Q1 2025, with a focus on enhancing cash flow and shareholder returns. The company increased its funds from operations by 10% from the previous quarter, reaching 857 million dollars. ARC’s strategic investments in key assets like Kakwa and Greater Dawson contributed to its production efficiency and financial stability.

Financial Highlights

• Revenue: 1.61 billion dollars, exceeding the forecast of 1.47 billion dollars.
• Earnings per share: $0.69, below the expected $0.7886.
• Free cash flow: 400 million dollars, 70% above estimates.
• Long-term debt: 1.1 billion dollars.
• Net debt-to-cash flow ratio: 0.5x.

Earnings vs. Forecast

ARC Resources reported an EPS of $0.69, missing the forecast of $0.7886 by approximately 12.5%. Despite the EPS shortfall, the company’s revenue of 1.61 billion dollars exceeded expectations by 9.5%, showcasing its ability to generate substantial sales.

Market Reaction

Following the earnings announcement, ARC Resources’ stock price increased by 2.27%, closing at $25.68 in after-hours trading. This positive movement reflects investor optimism driven by the company’s strong revenue performance and efficient cash flow management. The stock remains within its 52-week range, with a high of $29.9 and a low of $21.44. InvestingPro analysis indicates the stock is currently undervalued, with analysts maintaining a strong buy consensus (1.4 rating). The company’s low beta of 0.49 suggests lower volatility compared to the broader market. For deeper insights into ARC Resources’ valuation and 12+ additional ProTips, explore the comprehensive Pro Research Report available on InvestingPro.

Outlook & Guidance

ARC Resources has provided guidance for 2025, expecting annual production between 380,000 and 395,000 barrels of oil equivalent (BOE) per day. The company anticipates Q2 production to reach 380,000 BOE per day, with second-half production expected to increase to 390,000-400,000 BOE per day. ARC aims to more than double its funds flow per share to $2.50. The company’s strong financial position is evidenced by its exceptional current ratio of 8.53 and healthy Altman Z-Score of 11.37, indicating robust financial stability. Revenue growth remains solid at 15.87% over the last twelve months, supporting the company’s ambitious production targets.

Executive Commentary

CEO Terry Anderson emphasized the company’s financial goals, stating, "Under strip prices, we are on track to generate 10% of our market cap in free cash flow this year." CFO Chris Bibby highlighted the strategic focus, saying, "Our priority this year is to demonstrate the profitability of ARC incorporating a full year of Itachi."

Risks and Challenges

• Volatility in natural gas prices could impact revenue.
• Operational challenges, such as emulsion issues at the Hitachi facility, may affect production efficiency.
• Market competition and regulatory changes in the energy sector could pose risks.
• Global economic uncertainties might influence commodity demand and pricing.

Q&A

During the earnings call, analysts inquired about the emulsion challenges at the Hitachi facility and the company’s strategy for managing natural gas shut-ins at the Sunrise asset. ARC Resources reaffirmed its commitment to returning 100% of free cash flow to shareholders and outlined its capital spending plans for 2025.

Full transcript - ARC Resources Ltd. (ARX) Q1 2025:

Conference Operator: morning, ladies and gentlemen, and welcome to the ARC Resources First Quarter twenty twenty five Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, 05/02/2025. I would now like to turn the conference over to Dale Luco, Manager, Capital Markets.

Please go ahead.

Dale Luco, Manager, Capital Markets, ARC Resources: Thank you, operator. Good morning, everyone, and thank you for joining us on our first quarter earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer Chris Bibby, Chief Financial Officer Armen Jahangiri, Chief Operating Officer and Ryan Barrett, Senior Vice President, Marketing. Before I turn it over to Terri and Chris to take you through our first quarter results, I’ll remind everyone that this conference call includes forward looking statements and non GAAP and other financial measures with the associated risks outlined in the earnings release and our MD and A. All dollar amounts discussed today are in Canadian dollars unless otherwise stated.

Finally, the press release, financial statements and MD and A are available on our website as well as SEDAR. Following our prepared remarks, we’ll open the

Terry Anderson, President and Chief Executive Officer, ARC Resources: line to questions. With that, I’ll turn it over to our President and CEO, Terry Anderson. Terry, please go ahead. Thanks Dale and good morning everyone. I’m pleased to discuss ARC’s first quarter results and provide an update on our outlook for 2025 and beyond.

First quarter production averaged 372,000 BOE per day, which was in line with our Q1 guidance of three and seventy thousand to 375,000 BOE per day. Production included approximately 95,000 barrels per day of condensate, which was a significant contributor to the $400,000,000 of free cash flow we generated in the quarter. In addition, our transportation portfolio allowed us to send more than 50% of our natural gas to higher priced markets in The U. S, resulting in an average realized natural gas price that was more than double the local AECO benchmark. Operationally, the asset base continues to deliver strong results.

We invested $460,000,000 about a quarter of our 2025 budget and focused our drilling and completion activities at Itachi, Kakwa and Greater Dawson. This will contribute to strong condensate growth in the second half of the year and achieve annual production guidance of three and eighty thousand to 395,000 BOE per day, which was unchanged in the quarter. In terms of the assets, I’ll begin with Hitachi. First quarter production averaged just over 31,000 BOE per day, which was in line with expectations. The production mix was approximately 60% liquids, including about 15,000 barrels per day of condensate.

The reservoir deliverability is meeting our expectations, which is critical to achieve long term returns and provide confidence as we advance Phase two of Hitachi. As mentioned in the press release, the ramp up in production at Hitachi was delayed to address some early stage emulsion at the facility. We operated at a reduced facility capacity beginning in late March to optimize our chemical program there. So Q2 production is expected to average between 65,000 BOE per day. These types of events are not uncommon in new areas of this scale.

And I’m pleased how our team was able to resolve them and limit the impact to operations. With that, we remain on track to grow production and average between 35,000 to 40,000 BOE per day at Itachi in the second half of the year. At Cakwa, we continue to build on operating momentum from last year. Production averaged 162,000 BOE per day in the quarter, which was slightly above our internal forecast. We have an active program upcoming that will support volume and free cash flow growth over the balance of the year.

Our strategy at Cakwa is to produce the asset at an average of 170,000 to 175,000 BOE per day on a full year basis and continue to look for efficiencies to grow margins and free cash flow. One method we are exploring at CACW is the use of a dual frac system. This is expected to drive further efficiencies by reducing cycle time without compromising safety. Moving on to our Sunrise asset. In late March, with Station 2 pricing near zero, we shut in 75,000,000 cubic feet per day of natural gas production.

This eliminated our natural gas exposure at Station 2 and preserved resource for when prices are higher. This decision underscores our commitment to maintaining financial discipline and optimizing returns in response to market conditions. We continue to operate the asset with profitability in mind. In March, we also advanced our natural gas marketing strategy by announcing a long term LNG sale and purchase agreement with Exxon. Commencing with the Cedar LNG project expected in late twenty twenty eight, Exxon will purchase all of ARC’s LNG offtake from the project.

And in return we’ll receive international LNG pricing. With this contract and our previously announced Cheniere LNG contracts, we will achieve our long term market diversification strategy of linking approximately 25% of our future natural gas production to international pricing. Finally, I want to reaffirm that our long term plan remains on track aiming to triple free cash flow per share by 2028 from 2024 levels. Hitachi is a key part of this strategy and our observations from Phase one have reinforced our conviction on the next phase of the project. With that in mind, I want to reiterate that we remain flexible to adjust our core should economic conditions materially weaken.

ARC will continue to operate under our guiding principles of profitability, capital discipline and financial strength. Thank you. And I’ll now turn it over to our CFO, Chris Dibby to provide further insights into our financial performance.

Chris Bibby, Chief Financial Officer, ARC Resources: Thanks, Terry. Good morning, everyone. Our operating and financial performance surpassed analyst estimates. Production was slightly ahead, cash flow per share was 9% above. Finally, free cash flow is $400,000,000 with 70% above estimates, in part due to lower capital expenditures during the quarter.

We delivered average quarterly production of 372,000 BOEs per day, with a production mix of 63% natural gas, 37% condensate and liquids. This generated funds from operations of $857,000,000 an increase of 10% from the previous quarter. We continue to realize natural gas prices well above local benchmarks by utilizing our transportation portfolio to reach more attractive end markets in The US. In the quarter, ARC realized an average natural gas price of $4.19 per Mcf, which compared to the AECO benchmark of $2 and the NYMEX Henry Hub price of $3.65 per Mcf US. Of the $400,000,000 in free cash flow in the quarter, ARC distributed approximately 60% or roughly $245,000,000 to shareholders.

We remain steadfast in our plan to distribute essentially all free cash flow to shareholders over the course of the year. So with the debt pay down in Q1, we’re in excellent position to repurchase our shares in what we view as a very opportune time. At Strip, we estimate annual free cash flow in the range of $1,300,000,000 to $1,500,000,000 or roughly 10% of our market cap. That would imply approximately $1,100,000,000 return to shareholders through the share buybacks and after our dividends of $400,000,000 As many of you know, our balance sheet remains strong and in a great place. We allocated roughly $300,000,000 to debt reduction in the quarter, and as a result, long term debt was $1,100,000,000 with net debt equating to approximately 0.5 times cash flow.

Moving on to our outlook. Our 2025 annual guidance remains unchanged. ARC plans to invest roughly $1,700,000,000 for the year, with annual production expected to average between 380,000 to 395,000 BOEs per day. Second quarter production is expected to average approximately 380,000 BOEs per day, inclusive of planned turnaround activities at Kakwa and Andy Creek. For the second half of the year, we expect production to grow to an average of 390 to 400,000 BOEs per day.

Production at Hitachi is expected to average roughly 30 to 35,000 BOEs per day in the second quarter, then increasing to between 35,000 to 40,000 BOEs per day in the second half of the year. Our priority this year is to demonstrate the profitability of ARC incorporating a full year of attaching. Under current strip, we expect funds flow per share to more than double to approximately 2.5 per share, driven mainly by Itachi and capital growth in the second half of the year. Our focus this year is also return of capital, where we intend to once again distribute essentially all free cash flow to shareholders through a combination of our growing base dividend and share buybacks. As I mentioned, under the current forward curve, we will return approximately $1,500,000,000 of free funds flow this year to shareholders.

With that, I’ll pass it back to Terry for closing remarks.

Terry Anderson, President and Chief Executive Officer, ARC Resources: Thanks, Chris. Over the past twenty nine years, we’ve built a company that is focused on profitability and stability through the cycles. Under strip prices, we are on track to generate 10% of our market cap and free cash flow this year. And with our balance sheet where we want it, we plan to return all of that to our shareholders. Equally important in times of economic uncertainty is the resilience of ARC.

We have accumulated an enviable asset base that is both low cost and long duration. Our balance sheet is strong and we built a culture of discipline across the organization. At roughly $40 WTI and two dollars Henry Hub, ARC is able to sustain production and fund the dividend within cash flow. So as we look forward, we’ll continue to conduct our business in a disciplined manner focused on risk managed value creation as we execute our long term plan. We’ll measure our success by continuing to improve our per share metrics and generate a strong return on capital.

Thank you for your continued support and we look forward to delivering on our commitments. With that, we can open the line up for questions.

Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by number one on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two.

Your first question comes from Kalei Ahamini of Bank of America. Please go ahead.

Kalei Ahamini, Analyst, Bank of America: Hey. Good morning, guys. Thanks for taking my questions. My first question is on the shape of the Atanti ramp. It it kinda has us thinking about the lower half of oil guidance here for the year.

Can you give us some confidence on the path forward for your other condensate asset at Kakwa? What does that ramp look like? And where do you think it could top out?

Chris Bibby, Chief Financial Officer, ARC Resources: You bet. Good morning. It’s Chris here. Yeah, so again, in ’25, kind of similar to ’24 as well. First half of the year is certainly a lower production half for us.

And then sequentially each quarter we would expect production to ramp, specifically at Capua where Q4 last year, we were over 190,000 BOEs a day. As we just mentioned in the call, during the quarter we were 162,000 and that will ramp to above 180,000 by the end of the year. And that’s really going to drive a lot of the condensate growth the corporation overall. That combined with the second half Hitachi volumes is where we’ll get into the guidance range for condensate and crude oil. So this is, you know, it’s typical in terms of just the activity levels we have in the first half and then production coming on in the second half, so pretty high confidence factor at this point in time.

Kalei Ahamini, Analyst, Bank of America: Got it, Chris, I appreciate that. It sounds like you guys are still in really good shape for the year. My next question is on Sunrise. I think the shut in here makes a lot of sense given where prices are at Station 2. My question is why rate until March?

We kind of thought those volumes looked a touch high in the first quarter. So the question is, why not reroute a little bit more to other markets given your strong commercial model?

Chris Bibby, Chief Financial Officer, ARC Resources: Yeah. Thanks, Clay. You know, as as if you think about kind of where we’re sending our volumes, you know, pricing at Western Canadian hubs, both Aiken and Station two, was actually it was okay in the first quarter. Only late in the quarter did Station two weaken. Relative to downstream markets, so all the other markets where we sell, we do, we satisfy those volumes first, they flow completely full every day during the quarter when obviously they’re in the money as much as they are.

So the priority would be downstream volumes and then making sure we sell volumes into the local market if the pricing makes sense. So in this scenario, that’s when we pull volumes off the market late in the quarter to reduce station two down to zero.

Kalei Ahamini, Analyst, Bank of America: Got it. That makes sense. Thanks, Chris.

Jamie Cubic, Analyst, CIBC: You bet.

Conference Operator: As a reminder, if you wish to ask a question, please press followed by the number one. Your next question comes from Jamie Cubic of CIBC. Please go ahead.

Jamie Cubic, Analyst, CIBC: Yeah. Good morning, and thanks for taking my question. I’m just curious if you can talk a little bit more on the emulsion that you’re seeing at Hitachi and how that compares to, I guess, original expectations and then perhaps how you might adjust Phase two to accommodate for something similar? Thanks.

Armen Jahangiri, Chief Operating Officer, ARC Resources: Hey, Jamie, this is Armin. So the emulsion issue is nothing abnormal, I guess, far as the liquid rich or condensate rich facilities go. As you know, the first phase of every plant is to separate the products from each other. So, water and condensate and sometimes due to the chemistry of these products, especially the water and condensate, the separation becomes a bit more difficult and that causes a layer of emulsion between these two phases. What we need to do is just to basically figure out the right chemical program to be able to effectively break the emulsion and that’s effectively the right chemical type, right level of concentration, right retention time.

So, that’s what we are working on effectively to get to an optimized operating process, I guess when it comes to the Hitachi plant. This is not any different for phase two, we have to deal with the same exact process as we bring new production on and requires the same level of diligence.

Terry Anderson, President and Chief Executive Officer, ARC Resources: Jamie, it’s Terry. Yep. It’s Terry here. I might add to that. Like every new facility that maybe we start up, there’s always going to be these subtle little challenges that you have to address.

And this is another one that we’ve always have to, we’ve had to address at other ones from Dawson to Parkland to anything new in Capla too. So, and these things when you, it’s not flipping on the switch, and then everything works perfectly. We are always adjusting things definitely throughout the first year. So you’re going to have these little bumps in the road along the way in the first year of this production. But this is something that it will be resolved.

There’s no question about it. We’ve seen it before in all of our other areas. So it’s just a matter of time before we resolve it here. And we’re on the path to that right now. And production is strong, like for the first quarter here, was still 31,000 BOE a day.

So, people have to realize that it’s still strong production 15,000 barrels per day of condensate coming out of here. So, everything is working well, especially for a new facility that’s being brought online.

Jamie Cubic, Analyst, CIBC: Okay, appreciate the color there guys. And a follow on question, a little bit of a different area, but capital spending for ARC in the quarter well below where we expected in consensus estimates. Can you talk a little bit about the shape of spending in 2025 quarter by quarter? And then could you also talk a little bit about any inflation impacts you’re seeing in your AFEs? I know that there’s been some puts and takes in steel and sand.

Anything that you can talk about there? Thank you.

Chris Bibby, Chief Financial Officer, ARC Resources: Hey, Jamie, it’s Chris. I’ll tackle the first part of that question just in terms of the shape of the spending profile. So yes, Q1 was four fifty ish, so a little less than we would have anticipated. Really, that’s just a shift into Q2. When we set out the capital program, the teams have the flexibility to shift capital to meet their operational needs.

Really Q2, we’re probably going to be somewhere in the range of five fifty. As you know, we don’t guide quarter to quarter capital, we just let the teams execute the program as best as they see fit, and then the back half of the year is a little bit lower, but not materially going forward to get to our guide of 1.6 to 1.7. I’ll let Armen speak to the inflationary impacts that he’s seeing.

Armen Jahangiri, Chief Operating Officer, ARC Resources: Yeah, I guess Jamie on the subject of the sand, we have realized some costs associated with the tariffs that the Canadian government has implemented, I guess on imported sand that has been passed on to operators. The dollar amount is insignificant, I guess in terms of the total sand consumption. So, it’s not really material in terms of impact on our capital program.

Jamie Cubic, Analyst, CIBC: Okay. Thank you. That’s all for me. I’ll hand it back. Your

Conference Operator: next question comes from Patrick Orwerk of ATV Capital Markets. Please go ahead.

Dale Luco, Manager, Capital Markets, ARC Resources: Baby now.

Conference Operator: Your next question comes from Patrick O’Rourke of ATV Capital Markets. Please go ahead.

Dale Luco, Manager, Capital Markets, ARC Resources: Hey, guys. Sorry about that. I just I I was just curious. I wanted to ask a little bit further on the station to exposure here. Sunrise asset is gonna support the gas that you’re going to ship through your LNG Canada agreement.

These being sort of the last marginal molecules in the portfolio that you sell at Station 2, once that agreement is on, does that sort of eliminate that exposure and the need to shut in gas at the asset going forward in the second half of the year? Yeah, hey Patrick, thanks for the question on that. Yeah, no, we would anticipate this, know, we will have zero Station two for the rest of the year and that $75,000,000 that we have shut in today is the only exposure that we would have to Station two. So the Shell contract that we have starting up at commencement of LNG Canada has no bearing on any further cash shut ins. Okay.

And then in the quarter, you sort of paid down a little bit of debt here. Obviously, we’re in a pretty choppy commodity environment. Can you how do you see the NCIB, the pacing of return of capital throughout the balance of the year? Are you a little more cautious in how you deploy that with the environment that we’ve been in, given the second half of the year looks like a bigger production ramp for the company?

Chris Bibby, Chief Financial Officer, ARC Resources: Hey, Patrick, it’s Chris here. I mean, yeah, like Q1 obviously was had a lot of things going on in terms of quite a long blackout for us where we’re always pretty conservative, and then a lot of noise on tariffs and general economic concern, but we did in March get going pretty aggressively on it. We’re pretty comfortable with how much free cash flow we’re going to be able to generate. Obviously it does fluctuate a little bit with commodity prices, but we’re not programmatic on the NCIB, so we’ll take a look at the relative value, we do want to deploy all of the free cash flow, and we have flexibility quarter to quarter, so confident in the 100% free cash flow deployment by the end of the year, plus or minus, but there’s no set rules I would say on when we have to do it. So you’ll see us get back in the market here next week and take a day to day.

Dale Luco, Manager, Capital Markets, ARC Resources: Okay. Terrific. Thanks very much.

Conference Operator: Thank you, ladies and gentlemen. That concludes our question and answer session. I will now turn the conference back over to Dale Lugo.

Dale Luco, Manager, Capital Markets, ARC Resources: Great. Thanks, everyone. That concludes the call. Have a good day.

Conference Operator: This concludes today’s conference. Thank you for your attendance. You may now disconnect your lines.

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