Morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and-a nswer session. If you would like to ask a question during this time, simply press star then one on your telephone keypad. If you'd like to withdraw your question, please press star, then the number two. Thank you. Mr. Lewko, you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer and Kris Bibby, Chief Financial Officer. Before I turn it over to Terry and Kris to take you through our second 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&A. All dollar amounts discussed today are in Canadian dollars unless otherwise stated. Finally, the press release, financial statements and MD&A are available on our website as well as SEDAR. Following our prepared remarks, we'll open the 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. We'll try to keep this conference call short, sweet, and to the point, as we know many people are on vacation and the rest of us want to go on vacation. I'll touch on a few noteworthy items before I turn the call over to Kris to discuss the financial highlights. First the quarter itself was record-setting. Free funds flow and funds from operations per share were the highest in our 26 years, and this allowed us to further strengthen our balance sheet and accelerate returns to shareholders. We reinvested 1/3 of our cash flow into our assets to maintain production and generated CAD 677 million of free funds flow or CAD 1 per share, which is equivalent to 7% of our market cap.
60% of that was returned to shareholders through the dividend and share repurchases, and the remainder was used to further strengthen our balance sheet. Reducing debt and the share count when your shares are dislocated from fair value are an excellent way to create value and represent permanent changes to our capital structure. We have now returned 11% of our market cap to shareholders over the past year through the growing base dividend and 10 months of share repurchases. Second our operational momentum remains strong. Our scale and track record of operational excellence is helping to mitigate the tightness in supply chain and inflationary pressure on our business. Second quarter production was directly in line with expectations, and all of our planned maintenance was completed safely, on time, and within budget.
As a result, we are set up for a strong growth over the back half of the year at Kakwa, which continues to perform very well. Before I move on, I want to briefly reflect on Kakwa and the significant progress we've made. We've been able to take a world-class asset and implement ARC's operational excellence to make it even more profitable. That culture of continuous improvement and focus on capital efficiency has been a part of ARC for 26 years and is more evident today than ever. As an example, we are observing the benefits of wider well spacing. We are using less water in frack operations, which lowers cost and our environmental footprint without degradation of our well performance.
Since acquiring the asset last April, we've maintained production in that 180,000 BOE a day range and generated a whopping CAD 2.3 billion of asset level free cash flow, around 40% of the acquisition price. A tremendous achievement by the team in only 18 months. As it relates to the supply chain, we have all the critical pieces in place to redeploy capital in BC once the regulatory framework is in place to do so. This will represent a step change for ARC, given the quality and scale of opportunities at assets like Sunrise and Attachie. As most of you know Attachie is very similar to Kakwa, about 60% liquids, 40% gas, and the first phase of Attachie is a 40,000 BOE a day project, and we have four to five similar phases to develop.
This will enable Attachie to reach a similar production level in the future as Kakwa is today. Sunrise, which is among the cleanest and most profitable dry gas asset in North America, sits adjacent to the Coastal GasLink which will supply natural gas to LNG Canada upon startup in 2025. We are often asked how inflation is impacting our business. Well, first, we estimate a 10%-15% inflation this year, both realized and anticipated. We have increased our capital spending guidance to reflect that. The majority of the increase is related to diesel and chemical price increases which are related to the higher oil prices. Second, long-term planning and scale have been critical in ensuring we have access to material and high-quality services to execute our plan safely and efficiently.
These types of challenges during periods of high prices is not new, but years of underinvestment and lack of skilled workers are compounding the challenges today. For the time being these and other factors are acting as governors on supply growth that we have not experienced in prior cycles. As mentioned, we increased our capital budget from CAD 1.2 billion-CAD 1.4 billion. The majority of that is inflationary. However, it also includes water infrastructure investments and funds to manage long lead items to support 2023 activity. Production guidance was also revised up with a higher liquids weighting due to our confidence at Kakwa and implies a 4% growth over the balance of the year. With that, I'll turn it over to Kris to walk us through the financial results.
Thanks, Terry, and good morning, everyone. As Terry mentioned, we delivered on all aspects of our business during the quarter. Production capital spending were in line with expectations, and cash flow and free cash flow were the highest in our 26-year history. Our market diversification drove strong price realizations. ARC realized a natural gas price of CAD 9/ Mcf or CAD 2 above the AECO benchmark. Our transportation agreements allow us to market more than half of our natural gas to the United States and enhance our margin by capitalizing on periods of volatility. ARC's reach will expand into the international markets in 2026 or 2027 when our contract with Cheniere takes effect. As a reminder, we will receive a price based on JKM with our all-in landing costs to that market roughly CAD 5-CAD 6/ Mcf.
With additional capacity remaining on the Gulf Coast, we continue to explore additional opportunities to diversify to other markets where we are competitive. We are also the largest condensate producer in Canada, which made up approximately half of our revenue during the quarter. Condensate fundamentals remain strong. Supply is highly concentrated, and we consume roughly 250,000 bbls a day more than we produce here in Western Canada. During the second quarter, we realized nearly $140/bbl which is roughly equivalent to WTI once adjusted for the exchange rate. Altogether, ARC generated an operating netback of $50 a BOE and free cash flow that exceeded $20 a BOE in the quarter. Since inception, ARC has always been a balance sheet-first company.
In the second quarter, we reduced debt by more than CAD 300 million or roughly CAD 0.50 per share. At quarter end, we had CAD 1.5 billion of net debt, of which CAD 1 billion is through our investment grade long-term senior notes. Record profitability has allowed us to strengthen our financial position much faster than we anticipated. In this price environment, we will quickly pay down our remaining bank line, leaving only the CAD 1 billion of senior notes outstanding. All else equal, we would expect returns to shareholders to accelerate as we approach the CAD 1 billion amount of net debt outstanding. Finally, ARC's capital allocation priorities have not changed.
As we look ahead, we will remain disciplined and invest in our most profitable assets, which will result in roughly a 5%-7% compound annual growth rate and allocate 50%-80% of our free cash flow to shareholders through a growing base dividend and share repurchases. Roughly 10 months ago, in September, we initiated our first NCIB. Since then we have bought back 9% of our shares and returned CAD 1.1 billion to our shareholders, including the dividend. That's CAD 1.65 per share in roughly a 10-month period.
As Terry mentioned, this is an excellent use of our capital, and we intend to continue down this path and renew the NCIB in about a month's time. Should cash flow and profitability remain high and our share price remain disconnected from fair value, if we exhaust the next 10% NCIB, we will evaluate other measures such as significant issuer bids as a potential tool to add value. With that I'll turn it back to Terry for our closing remarks.
Thanks, Kris. I'm excited where ARC is heading. The company has never been in a stronger position, and we're at an inflection point in our free cash flow growth. To help put things into perspective it was 2008 when cash flow per share was last at a similar level to today. Oil averaged $125/ bbl AECO was through CAD 10, and our stock was CAD 30 back then. Today our company is much larger and stronger.
Cash flow per share is 17% higher, production per share is 65% higher and underpinned by a superior asset base and infrastructure network. It was a different environment back then, but I believe the pendulum swung too far a year or two ago, and it's starting to make its way back at a time when our company is performing at its best. With that, I'll turn it back over to the operator and we can open the line up for questions.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your question will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. Your first question comes from Patrick O'Rourke of ATB Capital Markets. Please go ahead.
Hey, good morning, guys. Happy to be on the ARC Resources call here this morning. Just a quick question with respect to Attachie and the potential for moving forward with this project. Obviously, we're watching in terms of the regulatory environment and framework here, but just wondering if, you know, if you do happen to come to the right regulatory framework, what the sort of cadence and timing of capital deployment and on stream for production would look like? Is there any seasonality that would slow that down or impact that in terms of the timing of those things? And then in terms of the capital for that particular project do you think of it as drawing away from other initiatives, or do you think of that capital as completely incremental to the current outlook for the company?
Thanks, Patrick, for the question. So as it relates to Attachie, as soon as we understand that resolution timing and we get that clarity, we're prepared to move on Attachie quickly. We're gonna do it in our disciplined manner, though. We're not just gonna drop everything we're doing in Kakwa and move the rigs over. We'll make sure it's in an efficient manner. Once we move those rigs over and get that activity going, we believe it's gonna take 18 months to still construct that facility and get it on stream. As for timin we do not like to actually turn facilities on and commission them in the winter.
That would be the only thing from a timing perspective in that 18 months that might push out a few months from that perspective. We like what we're seeing in Kakwa. We have the financial capability to continue progressing in Kakwa along with Sunrise and with Attachie. We look at it as just prudently adding on to our capital program and pursuing all the opportunities that we have already talked about, being the Sunrise expansion, increasing Kakwa in that 180,000 BOE-200,000 BOE a day range, and also be able to progress on Attachie. This still allows us to continue on with our share buybacks and our planned dividend increases, so we can actually do it all in the financial capabilities that we have today.
Okay, great. That's probably a great segue in terms of the return of capital framework here. Just, you know, wondering, you're gonna probably exhaust the NCIB here in August. There was mention of an SIB in the release here. Of course, we have, you know, the avenue of measured dividend growth. How do you think about timing in terms of dividend growth? How do you think about scale and scoping of that so that it's sustainable going forward? How does a sort of SIB potentially fit into all that framework if, you know, if you are able to buy back more than 10% or you're able to fully exhaust the 10% of the NCIB on an annual basis?
You bet. Thanks, Patrick. It's Kris here. Obviously, I think, and we alluded to this, we'll complete our existing NCIB here in the coming weeks. We'll apply to get a renewal of that NCIB in roughly a month's time. And really that gives us quite a bit of flexibility on how we wanna move forward over the coming months, you know, coming September 1st . In the event that we do exhaust the NCIB, or choose to take a dual pronged approach, we can investigate an SIB and make sure that we understand, you know, it is an effective tool to retire a large number of shares at a single point in time. You know, that is a tool that we'll look at and see if it makes sense at the time.
As far as the dividend, you know, we had a large increase to it last quarter, so we didn't think it was time to touch it this quarter. Ideally, we'd like to get to a scenario where we're looking at the dividend and reviewing it once per year. I think one of the more logical times to do that is when you're, you know, setting your guidance for the year, setting your capital plans for the year, when you're in a normal course environment. As you know, we'll test that dividend down to very low levels because clearly to be sustainable, it has to be sustainable in all pricing environments. We'll just run our stress testing and make sure that we're comfortable we would not have to adjust it again.
Is there a certain sort of base case scenario in terms of commodity pricing that you're stress testing down to now, and has that changed with the inflationary environment?
Realistically, you know, there's no one downside scenario that we test to. We still stress test our business down to $45 WTI and $2 gas, and our, you know, the business is resilient at those levels. You know, it's an extreme scenario but it does just show the strength of the underlying business that we have.
Okay. Thank you very much.
Thanks, Patrick.
Thank you. The next question comes from Michael Harvey of RBC Capital Markets. Please go ahead.
Yeah, sure. Thanks. Good morning. Just kinda building on the prior question. On the 2023 program, I guess at what point would you need a green light from the B.C. government to start or preserve any kind of winter or full year 2023 drilling program there? Just trying to get a sense for kind of the decision points and the milestones on the calendar of when you kinda would have to make the call on the 2023 program and where you're putting the capital.
Yeah, good question, Michael. It's Terry here. At the start of this year we planned for the B.C. government and that resolution to come late in the year. With that, we were able to execute our business efficiently by just making the decision back then to say, "Okay, let's plan for it for the end of the year." If we know by the end of, like, the November timeframe coming into December, then we're already thinking about it and planning accordingly, then we'll be able to go back into BC and start executing our business for start of January in 2023. That's kinda how we think that we.
'Cause we're already thinking about it we're already planning about it, so it doesn't take us long to actually switch gears and be able to execute on that.
Do you think it would take a period of time just to get the new or updated licenses and then, you know, train the people, move the rigs, all that kind of stuff? What do you think is kind of the timeline on that, recognizing there's a whole bunch of things we just don't know?
You know, I think I'm done speculating on timing. I still believe in a lot of things that the all parties at stake know how insignificant this is, and so I think it's going to happen. That means that they're already thinking about the process and how the OGC is going to be able to implement this in a timely manner to start approving permits. I really can't say for sure Michael on that. I know in conversations with OGC, this is on their minds too that, yeah, once the resolution is reached, then they're not just sitting there going, "Oh, now we have to figure out how to actually implement it." They're already thinking about that. I think it should actually be quite efficient, I guess, once the resolution comes to fruition.
Gotcha. Thanks for the color.
Perfect. Thank you.
Thank you. Once again, ladies and gentlemen if you do have a question, please press star one at this time. The next question comes from Eric Nuttall of Ninepoint Partners. Please go ahead.
Hey, guys. I'm happy to hear more and more talk of SIBs. I just wanted to circle back and get a little more specific. What would it take for you not to implement an SIB? You know, we've got you hitting your debt target by Q4 of this year. We all agree valuation is profoundly dislocated from fair value. You know, investing in SIB, I think Imperial proves that it's highly effective. So I'm just curious, you know, the talk of investigating and whatnot. You know, the template is there, the playbook is there, the profound dislocation is there. So why, what would it take for you not to do it, assuming strip pricing holds out?
Yep. Thanks, Eric. Fair question. You know, I agree with everything you said. Realistically, you know, if pricing hangs in there and free cash flow stays where it is, it's likely that we would. The one caveat we've said this about the NCIB as well all along, like we are value investors, it has to be the best use of capital at the time. Given current valuations, you know, that certainly would be the case. If the valuation metrics change substantially, you know, we would just make sure that we still think that is the best use of capital at the time. If everything plays out, you know, under your scenario or even under our scenario, it's certainly a real possibility.
When we say investigating as you know, we're a planning organization, just like Terry was talking about on the execution of our capital program. We don't like to leave things to chance. We just wanna make sure that we understand exactly how we would execute it, the pros and the cons, and some strategies around to make sure it's the most effective execution possible.
Just to clarify, what I'm hearing is if strip pricing holds out, if your share price doesn't reflect more, you know, closer to what we all think fair value is, and if I'm right that you hit your leverage metrics in Q4 of this year, then we could be looking at SIB, you know, Q4 of this year. Is that what I'm hearing?
Q4 this year in 2022 is probably not an issue. You know, as we get the new NCIB in September, we expect we will go into that one pretty hard, and go from there. What I am saying is it is highly of interest, obviously subject to board approval, subject to TSX approval those types of normal course things. If the business plays out as expected, the balance sheet's taken care of, and if that's a good use of capital, that's certainly what we'll intend to do.
Perfect. Thank you.
Thanks, Eric.
Thank you. There are no further questions at this time. Please continue.
Great. Thanks everyone for attending the call. Have a good weekend.
Thank you. Ladies and gentlemen, this does conclude your conference call for today. We ask that you please disconnect your lines and have a great day.