Good 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 fourth quarter and year-end 2022 earnings conference call. All lines are being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star then the number 2. Thank you. Mr. Lewko, you may begin your conference.
Thank you, operator. Good morning, everyone. Thank you for joining us for our 4th quarter and year-end results conference call. Joining me on the call today are Terry Anderson, President and Chief Executive Officer, Kris Bibby, Chief Financial Officer, Armin Jahangiri, Chief Operating Officer, Lara Conrad, Chief Development Officer, and Ryan Berrett, Senior Vice President, Marketing. Before I turn it over to our executive team to take you through our operational and financial highlights, 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. The press release, financial statements, and MD&A are also available on our website as well as SEDAR. Following our prepared remarks, we'll open the line to questions.
I'll turn it over to our President and CEO, Terry Anderson. Terry, please go ahead.
Thanks, Dale. Good morning, everyone. I'll keep my prepared remarks relatively brief before I pass it over to Kris to touch on the financial results. As I reflect back on the past year and look ahead at what's to come, there are three key items that stand out. First is a look back on 2022. It was a record year for our company on several operational and financial measures. Second is an operational update focused primarily on Kakwa and year-end reserves, which are both positive stories. Finally, I'd like to share my perspective on the agreements reached between the BC government and several Treaty 8 First Nations and what this means for our development activities in Northeast BC. Looking back at 2022, what I am most pleased about is that we stuck to our guiding principles and remained disciplined.
Asset diversification was critical, allowing us to shift capital from BC to Alberta and surpass 26-year records in production and free cash flow, both on an aggregate and per share basis. From a production standpoint, we delivered a record annual production of nearly 346,000 BOE per day and record fourth quarter production of around 360,000 BOE per day, an increase of 16% per share year-over-year. Paired with strong commodity prices, ARC generated record free cash flow of CAD 2.3 billion, which is equivalent to 25% of our market cap today. ARC's market diversification and balanced commodity mix were pivotal in managing risk and maximizing free cash flow. ARC realized CAD 8.31 per Mcf, roughly 50% above the AECO benchmark in the fourth quarter.
This was mostly driven by our 170 million cubic feet per day exposure to Malin, where the daily price averaged CAD 14.42 per Mcf. Over the course of the year, we also reached some significant milestones that have important implications when I think about asset quality and future LNG potential. At Dawson, we achieved 1 TCF of natural gas produced, proof of the quality and scale of our asset base. To put this into perspective, Dawson has 23 TCF of gas in place. This really shows how we are at the very early stage of development in Dawson. In ARC's Northeast BC assets, we have 100 TCF of gas in place alone, which bodes well for our future LNG aspirations.
Second, we strengthened our business in 2022 by entering into a natural gas supply agreement with Cheniere that will commence with the startup of their Corpus Kristi phase 3 expansion. We are excited about this agreement with a high-quality counterparty and the diversified exposure it provides to global natural gas prices. Moving forward, we'll continue to evaluate additional commercial opportunities that leverage our investment-grade credit rating, scale, and ESG leadership, all competitive strengths that make these types of transactions possible. Third, at the end of the year, we also advanced our status as an ESG leader. In December, we achieved Equitable Origin's EO 100 certification on 100% of our assets, and in doing so, now have the largest production base certified under this global standard in Canada. Operational excellence is a guiding principle, and it showed through in our operational performance and reserves.
This past year, we executed our largest capital program on record, and most importantly, we did it safely. I would like to thank our staff for their continued focus on safety during this period of tremendous activity. Safety will always be our number one priority. As it relates to our capital program, we made the decision early in 2022 to divert activity from BC to our Kakwa asset in Alberta and target condensate-rich areas. This decision paid off in a big, big way. We increased production to about 190,000 BOE per day, and it generated CAD 2.1 billion of free cash flow at the operating level in 2022 alone. Since we acquired this world-class asset in 2021, we have reduced well cost by approximately CAD 1 million per well. Inflation has offset that in 2022, but these savings are permanent.
Meanwhile, well performance is exceeding expectations with Kakwa delivering some of the strongest condensate wells in Canada. Finally, we have confirmed that wider spacing implemented last year is improving long-term well performance. Pairing this with well cost reductions we achieved will lower sustaining capital and further improve capital efficiencies at the largest condensate producing asset in Canada. The improved well performance at Kakwa resulted in an excellent year for reserves, which really highlights the depth and quality of our Montney inventory. First, we grew reserves across all categories by 14%-22% per share as a result of strong well performance. PDP reserves at Kakwa specifically increased by 17%. Second, for the 15th consecutive year, we replaced greater than 140% of production with 2P reserve additions.
The pre-tax NPV of 2P reserves of CAD 34 per share is based upon development of just 17% of our internal estimate of drilling inventory. Attachie specifically comprised just 4% of total 2P locations. We look forward to booking the reserves associated with Attachie as the project is developed. These are all important to us as we think about inventory duration and our long-term strategy. Now turning to BC. I'm pleased to report that we have regained operational momentum in the province. Today we have two rigs actively drilling, and the level of activity will increase over the course of the year. In Q4 of 2022, we started receiving permits on freehold lands, which sets us up to efficiently execute our 2023 program.
As it relates to the regulatory environment, the agreements executed between the BC government and the Treaty 8 First Nations are a positive step forward. As an industry, we produce some of the lowest emissions, lowest cost natural gas in the world. Establishing a new framework to sustainably develop that resource is critical. For ARC specifically, we continue to engage with the indigenous communities neighboring our operations and work alongside the BC government and the energy regulator to ensure we have clarity in all aspects of the process. I know many are wondering about Attachie and when we will move forward on this landmark development opportunity. Let me be clear, Attachie is the best development project in our portfolio, and sanctioning it is a priority for us. We anticipate to be in a position to sanction the project this year. A couple additional observations worth mentioning and reminding our listeners.
First, the agreements executed between the BC government and the Treaty 8 First Nations pertain strictly to Crown lands. All our existing production in BC is on private or freehold land, and we continue to receive permits there. Therefore, we have a clear line of sight to fully execute the 2023 program as planned. Second, there are high value areas identified in the agreement with the Blueberry River First Nation that are of critical importance to the nation and puts limits on future development. These are identified in the map on the screen. As you can see, all of ARC's assets are outside of these areas. To close, we are excited to be back in BC and the establishment of a new framework is constructive.
Given the strengths of our relationships and the merits of a project like Attachie, we are well-positioned to build on this momentum and capitalize on the investment opportunity in front of us. With that, I'll turn it over to Kris.
Thanks, Terry. Good morning, everyone. As Terry mentioned, we closed the year with a record quarter. Production, funds flow, and free funds flow per share registered 2%-7% above consensus. ARC invested CAD 383 million into our assets and generated approximately CAD 600 million or CAD 0.96 per share of free funds flow. On a full year basis, ARC invested CAD 1.4 billion, which was within guidance and generated CAD 2.3 billion of free funds flow. Our results yielded a 35% return on capital employed. Strong commodity prices certainly contributed to our record results. However, our competitive strengths were also evident. First, market diversification, as Terry mentioned, was critical. In periods of regional price dislocation, ARC has historically captured strong margins, and this quarter was no different.
This was due to physical transportation agreements put in place years ago that are frankly impossible to replace today. The benefits of our market diversification, a low cost structure, and a diversified commodity mix in which revenue is split approximately 50/50 between natural gas and liquids, contributed to a 67% margin in the quarter. This can be easily overlooked in a strong pricing environment like in 2022, but is paramount in generating profits throughout the cycle. On that note, ARC realized CAD 107 per barrel for its condensate in the quarter with light oil and condensate production of 86,000 barrels per day. Condensate fundamentals remain constructive in both the near and long term. In Western Canada, consumption is roughly 700,000 barrels a day. Demand is growing production is approximately 400,000 barrels per day.
There's little, if any, substitutes and import pipelines are nearly full. While the economic incentive is there to grow supply today, there are limiting factors to the pace of growth. We look ahead to 2023. Production and capital spending guidance remain unchanged. We intend to invest CAD 1.8 billion to deliver average production of 345,000-350,000 BOE per day. First quarter production is expected to be lower than fourth quarter of 2022 due to unplanned third-party pipeline outages impacting our production in BC. These are anticipated to be fully restored this month. Offsetting the third-party outages is stronger than forecast base production, which will support consistent production growth over the balance of 2023. Included in the 2023 budget, we invested CAD 140 million in water infrastructure at Kakwa.
This will expand margins by reducing corporate operating costs by approximately CAD 60 million per year or CAD 0.50 a BOE once fully commissioned in the second half of 2024. In 2024, we would expect capital spending to decrease by roughly 15%, excluding Attachie, while production is expected to be flat or higher than in 2023. The decrease in capital spending is due to several factors. The completion of the Sunrise expansion and water infrastructure investment at Kakwa, the absence of one-time investment to restore production in BC, and lower anticipated base declines at Kakwa. ARC continued to strengthen its balance sheet in the fourth quarter by reducing debt by an additional CAD 240 million. At year-end, net debt was CAD 1.3 billion or 0.4 times fund flow, inclusive of the CAD 1 billion of investment-grade senior notes outstanding.
In 2022, we initially put forth a free funds flow allocation framework to return 50% to 80% of free funds flow to shareholders and executed to that plan. Through growing base dividends and repurchasing our shares, ARC returned 71% of free funds flow to its shareholders, with the remaining 30% used to further strengthen the balance sheet. As debt was reduced, we increased the range of returns to shareholders to 50% to 100% of free funds flow and anticipate that we'll be at the middle or top end of that range in 2023. We will continue to execute on our strategy of per share growth through disciplined investment in our asset base and a meaningful return of capital to optimize total return. With that, I'll pass it back over to Terry for some closing remarks.
Thanks, Kris. Last year, once again, we did what we said we would do. We executed to plan on budget and delivered record results. I'm excited about where we are headed. First, we have identified ways to make our largest concept asset even more profitable. Second, the operational momentum in BC is going to enable scalable investment opportunities like Attachie that will significantly enhance our free cash flow. Third, our best attributes, scale, asset quality, operating track record, ESG leadership, and financial strength continue to open up commercial opportunities like LNG. To close, we are focused on delivering on our strategic priorities of, first and foremost, retain a strong balance sheet. This is critical in our business to capitalize on opportunities through the cycle. Second, grow free cash flow per share.
We will do that through disciplined investments in our assets by executing on margin expansion opportunities like LNG and by reducing the share count when it's accretive to do so like it is today. Finally, grow the base dividend as we execute on these priorities to provide an attractive total return that is sustainable for our shareholders. These are our priorities, and I look forward to sharing our progress on them in the quarters to come. With that, I'll turn it back over to the operator for questions. Thank you.
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 1 on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. First question comes from Michael Harvey of RBC Capital Markets. Please go ahead.
Yeah, sure. Good morning. Just a couple questions about Attachie. The first one, I guess, if you did sanction it this year, would it be a situation where everything's incremental to the current budget? For instance, contracting new rigs, et cetera, or could you move some of that equipment from Alberta? Where most of your fleet's working now as things kinda quiet down there. Just trying to get a sense for some of the logistics on flows of equipment. Also just on the capital for the project, kinda unchanged at CAD 700 million. I guess we would have expected that to go up a bit just on inflation.
Is that a case where you had sufficient cushion baked in, or would you need to refresh that when you go to board approval for that project later this year if it goes that way?
Thanks Michael for the question. It's Terry here. Good questions on Attachie. From a logistics perspective, we have 11 rigs active today. We will move some of our rigs. We are moving rigs into BC, and we will allocate a rig from their current activity into there. We potentially would look for another rig depending on timing, but I think we can manage it within the portfolio of rigs that we have today. That's kind of. The other services within our portfolio right now, we can actually manage that and pull some of that over from Alberta into BC. That's well laid out. Armin has been working on that plan in anticipation of this, so we're set up to do that.
As for the capital amount, just as a reminder, we increased the capital from CAD 600 million last year for Attachie up to CAD 700 million to incorporate the inflationary pressures we knew that we've seen last year. We're comfortable with that number today. Once we get to sanction, we'll look at that again and make sure that we're clear on that number. As of right now, we feel comfortable with the CAD 700 million. There are savings that we haven't baked into the project here from the learnings in Attachie, or sorry, from Kakwa into Attachie on the completion side of it. That's kind of where we sit.
Gotcha. Thanks very much, Terry.
You're welcome.
Thank you. The next question comes from Aaron Bilkoski of TD Securities. Please go ahead.
Good morning. It looks like you built up a sizable backlog of drilled uncompleted wells at Kakwa in Q4. How should I think about the cadence of bringing these on stream in 2023?
Hi, Aaron, it's Lara Conrad. Thanks for the question. You know, we don't really intend to have a backlog of drilled uncompleted wells, so you'll see those get completed and brought on stream here right away. It's really just about timing, keeping our rigs active, and making sure we're managing our overall services in an effective way. Look forward to bringing all of those wells on production in the near term.
To follow up on that, should we expect a production tailwind in the first half of the year as you tie those wells in?
When you think about, Kakwa, you know, managing a gas field versus managing a liquids-rich field is a little bit different. When we put our forecasts out for Kakwa in particular, we look at the overall annualized, but you bet month-to-month, we're gonna see some fairly big swings in production as is typical in liquids-rich fields. I think we'll see some bigger volumes out of Kakwa in parts of H2, which will offset other moments in time when we maybe have lower production as we have wells shut in for frac offsets. Overall, we're very confident with our annual forecast for that property.
Perfect. Thanks. If I could ask a follow-up question, I guess this is probably for you, Terry. You're often asked about acquisitions. Is there anything non-core left in the portfolio that you'd look to divest?
No. That's the beauty of our asset base. Everything that we have is core and makes it simple 'cause we've done a lot of the cleaning up over the years of this. That's where we sit today. We're good with our asset base. We like everything that's in there. No is the answer.
Okay. One final question from me. You mentioned in the press release you're evaluating the details of the agreement signed between the BC government and the Treaty 8 First Nations. Could you maybe shed some light on what some of those specific details are that you're looking at? Is there anything beyond what was released at that public press conference?
Aaron, this is Armin here. We are getting bits and pieces of information as we go through this from government. ARC has been engaged, I guess, with the Ministry of Energy, Mines and Low Carbon Innovation in BC as well as BCOGC. The intention is for us to understand the process more so than anything else. We understand some of the basic details that is involved in the agreement, but logistically, we wanna understand how the permits will be issued and how the process, what is the process in terms of getting the projects moving on. That's really what we are waiting for.
Perfect. Thank you very much, guys.
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 Mike Dunn of Stifel. Please go ahead.
Thanks. Good morning, everyone. I just have a couple questions on Kakwa. You mentioned the strong performance revisions at Kakwa in your year-end reserves. I know you were, I believe on the whole, targeting more higher CGR wells in 2022. Can you just comment on the revisions on the condensate versus gas? Were they sort of, you know, was it more of a positive revision on the condensate versus the gas for Kakwa in 2022? Just have another follow-up on the inventory at Kakwa.
Specific to Kakwa as far as the performance, you're right. We did see some strong technical revisions from the base performance at Kakwa, and that's really a result of us widening our interwell spacing. That's what was driving those increases. As far as the condensate versus gas, we saw positive technical revisions in both categories for Kakwa. Again, really just talking to that stronger performance, lower decline, and the result of widening that interwell spacing. Overall, very pleased. You know, the property's performing as predicted, which is why, as you can see, we came in on our guidance. Yeah, very, very pleased.
Okay, thanks. On the Kakwa well inventory, it looks like in your updated slides, there's maybe about 1,000 wells left. If you just wanted to hold things flat there, how many wells do you think you guys would need to drill every year?
As far as drilling at Kakwa, I wanna say the sustaining well count is sort of in that 60-80 well count, dependent on which area of the field. As you say, the CGRs are different. If we talk about holding flat on a BOE basis, I'd say it's in that range. As you can tell, we have a very strong inventory to keep Kakwa sustained at the 180,000-200,000 run rate that we're running it at right now for many years to come.
Okay, great. That's all the questions from me. Thank you.
Thanks.
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 Aaron Bilkoski of TD Securities. Please go ahead. Aaron, please go ahead. Your line is open.
Oh, sorry about that. you said if you were to sanction Attachie later this year, when could we expect it to come on stream?
It all depends exactly when we sanction it because there's some winter construction that has to happen. We believe 18 months is our timing. 18 months from the sanction, and then we need a couple of months to, I guess, commission and ramp up the production on that. That's kind of our timing. We've been consistent on that.
Okay. Thank you again.
You're welcome.
Thank you. The next question comes from Patrick O'Rourke of ATB. I'm sorry, ATB Capital Markets, please go ahead.
Hey, guys. Good morning. Solid reserve report and driven by Kakwa there. Maybe just to build upon what Mike Dunn was asking on the inventory. The 1,000 locations that you have there, including sort of what's booked and what's unbooked there, what does that consider currently in the lower Montney? Is there any potential upside to that number going forward here?
When we talk about Kakwa, we're very much focused on the middle Montney. That is our proven layer. When you think about what's in our reserves report, that will be entirely focused on the middle Montney. The lower Montney really isn't playing a big component in those reserve or in those well counts. You're correct that if we see value in that and a way of developing that as a separate layer, you would see those inventory counts come up.
I know going back to the days, when Seven Generations was operating the asset, they did have a few lower Montney pilots, at the time. Are you able to provide any sort of update on the learnings that you've had since acquiring those?
We have drilled some lower Montney wells. Our view is that they need to be co-developed, that if you come in after having drilled up the middle Montney, those are not actually fully separate layers. If you think about our Sunrise asset, you know, we knew from very early days we had enough vertical separation and frac barriers within that reservoir that we could come in and develop the lower Montney, and it was completely isolated from the upper and middle Montney. At Kakwa, the layers are a little bit closer together, and we don't see that same segregation. Our view is you either have to co-develop it or, once you've developed the middle Montney, you really are already impacting the reserves out of that lower Montney.
We think about our overall development plan as a 3D development plan.
Okay, perfect. Thank you.
Thank you. There are no further questions at this time. I will turn the conference back to Mr. Lewko for closing remarks.
All right. Thanks everyone for joining the call. We look forward to connecting with you on any further questions you might have in the future. Thank you.
Ladies and gentlemen, this does conclude the conference call for today.