Good morning. My name is Cynthia, and I will be your conference operator today. At this time, I would like to welcome everyone to the ARC Resources' Third Quarter 2023 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-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star, then the number two. Thank you. Uncertain , you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. Joining me today are Terry Anderson, President and Chief Executive Officer; Kris Bibby, Chief Financial Officer; Lara Conrad, Chief Development Officer; Armin Jahangiri, Chief Operating Officer; and Ryan Berrett, Senior Vice President, Marketing.
Before I turn it over to the executive team to take you through our third quarter results and 2024 budget, I'll remind everyone that this conference call includes forward-looking statements and non-GAAP 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. I'm going to spend a little time discussing three important items this morning: our Q3 results, an update on Attachie, and our 2024 budget. I'll then hand it over to Kris, who will provide some additional color on our financial performance. Beginning with the quarter, Q3 was a lot like the quarters that preceded it. We executed to plan and delivered solid performance across all aspects of the business. It's certainly not easy, but delivering this type of consistent execution is a defining characteristic for ARC that has served us well over our 28-year history.
Today, we are realizing the benefits of a balanced capital allocation framework that includes not only a base dividend, but also share buybacks at what we deem to be great value. Production per share this quarter is over 25% higher than the second quarter of 2021, the first full quarter following the Seven Generations acquisition. This investment in our assets and our shares to compound per share growth is a strategy we intend to continue based on where our shares trade today.
This quarter, we executed a CAD 400 million capital program and delivered average production of just over 360,000 BOE/D . This represents 5% growth year-over-year and 13% on a per-share basis, highlighting the impact of share repurchases. We had great operational momentum this quarter. Kakwa volumes approached 200,000 BOE/D , driving corporate condensate volumes to 78,000 BOE/D at a time when condensate prices topped CAD 100 per barrel.
As the largest condensate producer in Canada, this has meaningful impact on profitability as operating margins exceeded 60% corporately. In addition, the team safely and efficiently completed the rest of our planned turnarounds for this year. Before I move on to Attachie, I want to quickly highlight an example of our commitment to safety. We recently elected to shut in a few thousand BOE/D of production at Ante Creek to complete some pipeline maintenance on one of our lines. This was identified by our team as a proactive measure to maintain the safety of our operations.
The volumes shut in are mostly natural gas and are expected to be fully restored in Q1 2024. So while it's not material to our overall business, I've said numerous times before, safety is our number one priority, and this is just a great example of that commitment in action.
Now, turning to Attachie, I'm extremely pleased with the progress the team has made to date. Capital costs and timing are both tracking to expectation and what we outlined at our investor update in June. Total cost for Phase I startup remains at CAD 740 million, of which 1/3 will be spent in 2023 and the balance invested in 2024. We expect to be producing between 35,000 and 40,000 BOE/D in 2025, with commissioning volumes coming on by the end of 2024. Recently, we took the time to tour the site and have a look at the progress firsthand.
There are many different projects at multiple stages, but overall, we are about 20% complete on the facilities and infrastructure. On this slide, you can see some of the milestones that have been achieved to date.
The gas sales line is installed, the liquids line is well underway. At the plant site, the tank farm is completed, 75% of the pilings for all the equipment and buildings have been installed, and some of the equipment has arrived on-site. The plant construction, gathering system, and all the other infrastructure is progressing as planned, and over the next few weeks, we'll begin drilling. We are also on track to fully electrify this facility at startup, further lowering our emissions intensity per BOE while delivering low-cost energy to market.
In summary, we've secured all the long lead items, services, and critical permits to execute this project. Attachie will be our eighth Montney infrastructure project, and I'm confident it'll be the most efficient project to date.
We are in great shape, and I'd like to thank our staff and service providers for their excellent work thus far in keeping the project on time, on budget, and ensuring safety is our number one priority. Finally, I'd like to move on to the 2024 budget. The priorities are clear: deliver a safe and capital-efficient program while focusing on completing Attachie. The outcome of this will be a step change in our free cash flow per share growth in 2025 and beyond. Next year, we plan to invest between CAD 1.75 billion and CAD 1.85 billion, and this includes CAD 500 million for the Attachie Phase I startup.
The capital program is balanced geographically with a 50/50 split between Alberta and British Columbia, and we'll deliver average annual production between 350,000 and 360,000 BOE/D . This budget is approximately CAD 200 million lower than communicated previously at the Investor Day in June, and 25% lower than the 2023 capital budget once you adjust for the Attachie capital in each year.
The primary contributors to lower capital are, first, operational decisions to minimize non-productive capital, second, realize cost savings on certain items, and third, a lower decline rate in 2024. At Kakwa, which is our flagship condensate producing asset, we are investing less capital and holding condensate volumes flat year-over-year. The primary drivers of this are twofold: a lower decline rate and a shift back to the condensate-rich areas of the asset.
This follows our planned activity in 2023 that focused in areas with slightly lower condensate gas ratios. Longer term, our overall condensate growth will be driven by Attachie, which is, 60% liquids, of which 75% is condensate. ARC reached an important milestone at Kakwa this quarter. We achieved payout for the asset that we acquired in the second quarter of 2021.
So in less than three years, Kakwa has generated cumulative free cash flow at the asset level of CAD 4.2 billion, which is equal to the purchase price, and we still have approximately 15 years of high-quality inventory ahead of us. I'm extremely proud of how we've made a world-class asset even better by leveraging the strengths embedded in our company.
Moving on to Northeast BC, we expect to produce near our capacity, with modest growth at Sunrise following the facility expansion project completed in 2023. This will increase capacity at Sunrise to 360 million cubic feet per day, which is directly connected to Coastal GasLink and will supply LNG projects off the West Coast of Canada. To summarize, 2024 will serve as a banner year and set the stage for a step change in our free cash flow per share growth in 2025. With that, I'll turn it over to Kris.
Thanks, Terry, and good morning, everyone. First, I'll touch on the quarter itself. ARC delivered average production of 360,000 BOE/D and generated funds from operations of CAD 662 million. Both were directly in line with analyst forecasts, while free cash flow of CAD 261 million exceeded expectations by about 45%, primarily due to lower capital expenditures during the quarter. In terms of capital, we invested CAD 400 million in the quarter, split between Kakwa and in Northeast BC, including approximately CAD 60 million at Attachie.
ARC maintained full-year guidance for production, capital spending, and costs, with fourth quarter production forecast to be approximately 355,000 BOE/D . When I look back at our financial performance over this quarter, what stood out was profitability and margins, and how market diversification and a balanced commodity mix played a key role. First, as it relates to natural gas, ARC realized $3.16 per Mcf in the quarter, which registered as a 32% premium relative to the local AECO benchmark.
This was mainly driven by our transportation portfolio to the U.S. demand markets in California, Chicago, and in the U.S. Gulf Coast. In periods of volatility, we are typically able to capture better margins for our gas, and Q3 was a great example of this. Second, ARC's 360,000 BOE/D of production included 87,000 barrels per day of crude oil and condensate, which, as Terry already mentioned, averaged greater than CAD 100 per barrel in the quarter.
As a reminder, we are Canada's largest condensate producer, which is structurally short market. Western Canada consumes about 700,000 barrels a day in the oil sands, and altogether, the market produces roughly 450,000 barrels a day locally. The 250,000 barrel a day shortfall is imported via two pipelines from the U.S., which are operating at or near capacity. So it's structurally a strong market for us long term. We returned 71% of free cash flow to shareholders in the quarter through a combination of dividends and share repurchases, and the balance was used to reduce debt.
As we have stated in the past, we plan to return essentially all free funds flow to shareholders this year and in 2024, implying an increase in the percentage returned over the remainder of the year. To this end, net debt at quarter end was CAD 1.2 billion, which is the right level for our business, factoring in our asset quality and duration, low cost structure, and our low emissions intensity. Combined, these attributes shield our business and ensure we are profitable and sustainable through commodity cycles.
Now, looking ahead to the 2024 budget, our top priority is a capital-efficient program that will provide long-term per share growth. We will achieve this by continuing to invest in our assets and balance that with a meaningful return of capital to our shareholders. This is the optimal way to generate an attractive and competitive total return.
Production guidance for 2024 of 350,000-360,000 BOE/D incorporates the anticipated expiry of an ethane sales contract in the second quarter, which will reduce reported NGL production by approximately 5,000 barrels per day on an annualized basis. We plan to reinject ethane into the natural gas stream, resulting in higher revenue from sales of higher heat content gas, offsetting the impact to funds from operations. In terms of capital, we are investing CAD 1.8 billion in 2024.
As mentioned, this is about CAD 200 million less than 2023, once you adjust for the Attachie growth capital, and we are generating the same or slightly higher production levels. This is driven by two things. First, a lower corporate decline in 2024. Therefore, we need to drill and complete fewer wells to offset production declines. Second, a concerted effort to further reduce non-productive capital in our business. This is particularly true at Kakwa. Next year, we are investing less capital, both capital in facilities and in wells, and expect to maintain flat condensate volumes in 2024.
As planned, total production at Kakwa is expected to average 180,000 BOE/D or 175,000 BOEs per day, once you adjust for the ethane contract expiry in the second quarter of next year. Over the long term, we think this is the optimal production level to maximize free cash flow and asset level returns. In terms of our cost structure, we forecast little change in 2024.
Operating and transportation costs are forecast to be relatively unchanged year-over-year, at approximately CAD 10 per BOE combined. To provide some additional context on our cost structure and resiliency of our business, we can sustain production in the 350,000-360,000 BOE /D range and fund the current dividend with organic cash flow below $45 a barrel WTI and CAD 2 AECO per Mcf. This is based on our cost structure today, so does not include any deflation that would be expected in a very low commodity price environment.
Beyond our low cost structure, our competitive strengths also include our infrastructure footprint, asset quality, and market and commodity diversification. At strip pricing, the 2024 program is expected to generate CAD 3.0 billion-CAD 3.2 billion of cash flow and roughly CAD 1.4 billion of free cash flow. Free cash flow will once again be returned to shareholders through a combination of a growing dividend and share repurchases, given the value of our shares today. Finally, as we look out further, the five-year outlook is essentially unchanged from what we first introduced at our investor update in June.
We intend to deliver, we intend to deliver a balanced program that invests in our best projects, like Attachie, while reducing the share count to compound that per share growth. The step change in our per share metrics will first occur in 2025. Incorporating Attachie, we anticipate 10% growth on a production basis and CAD 600 million increase in free cash flow. This is equivalent to more than CAD 1 per share relative to our 2024 on an unchanged commodity price deck of $70 WTI and $3.50 NYMEX US. With that, I'll pass it back to Terry for closing remarks.
Thanks, Kris. Looking ahead, as the largest Montney producer, I have never had more conviction in our business and where we are headed. We've communicated a five-year plan that adds significant value through investing in our business to grow free cash flow, increase the dividend, and buy back our shares. This plan will nearly triple free cash flow to approximately CAD 5 per share. As I look forward out towards 2030, ARC will be a larger, more profitable company with expanded reach to global markets through our LNG agreements.
At the same time, the build-out of LNG in Western Canada will fundamentally improve the dynamics of our market, providing additional optionality for value creation along the way. With that, I want to again thank all of our staff for their commitment and contribution towards our success. Thank you. Operator, you can open the line to questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press the star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star, then the number two. There will be a brief pause while questions are being registered. Our first question comes from Michael Harvey from RBC Capital Markets. Please go ahead. Your line is open.
Sure. Thanks. Good morning, guys. I just had a couple questions. The first one's on your natural gas price hub exposure. Looks like your AECO percentage is increasing quite a bit in 25, then 26 and 27. I assume that's by design, but maybe you could just confirm that or if we'll see that be adjusted kind of as we move forward over the next couple of years.
And then the second one was j ust on the drilling plan at Attachie, when you start moving rigs there, I think later this year, so it's been a few years since you've drilled a well there. Is there anything different you're going to be doing, just well design-wise, you may have learned, from Kakwa or otherwise, that you think may impact the recovery profile in that area? And that's it for me.
Hey, Michael, it's Ryan. Thanks for the question. I'll tackle the first question on your AECO pricing hub. Yeah, no, you're correct. This is by design. We are increasing our exposure as, you know, the buildup of LNG Canada comes on, and we start to see those volumes flow in the middle of the decade. So by design, but, you know, as you know, we always have a balanced portfolio, and we'll continue to do so.
Michael, this is Armin. In regards to your question about drilling, we're quite excited to go back to Attachie. Obviously, there's been a lot of learning from all the other operations that we are doing in rest of Northeast BC and Kakwa, and all those learnings are going to be transferable. We are expecting to be able to hit the ground running in Attachie and incorporate a lot of those efficiencies that we've realized over the last couple of years.
Right on. And you know, would there be changes to things like well length, frack design, that kind of stuff, or you know, maybe you're just kind of getting started in that process?
Well, initially, I think it's going to be fairly consistent with where we ended Attachie a couple of years ago, but there's obviously always opportunity for improvement. We look at our well placement, if there's an opportunity to extend the lateral length, for example, to improve capital efficiency, we always do that, so nothing out of ordinary.
Gotcha. Great. Thanks for that, guys.
Thank you. Our next question comes from Patrick O'Rourke, from ATB Capital Markets. Please go ahead. Your line is open. One moment.
Hello.
Patrick, your line is open. Please ask your question.
Yeah, can you guys hear me?
Yes, we can.
Hello?
Yeah, we can hear you, Patrick.
Okay. Sorry, the operator was talking over me there, so I wasn't sure if you could, but I apologize for any miscommunication there. Just kind of wondering and wanted to unpack here with respect to the CAD 200 million improvement in the capital budget, and you guys are talking about non-productive capital. Sort of how durable those improvements are out through sort of the life of the asset.
And then just wondering, are there any sort of analogous improvements that you can see at something like Attachie, where we could see the capital efficiency profile improve and, you know, incremental free cash flow from sort of similar type improvements?
You bet, Patrick. It's Kris here. I'll take a stab at it. You know, the CAD 200 million does apply across the entire asset base, so it's not really an asset-specific number. And really, what we've done is we've just optimized basically the delivery time of the wells, so that, you know, we aren't investing as much capital prior to needing some of that production or even facilities. So if you think about it, you know, we would have less invested in basically DUCs than we would have otherwise had. And part of the reason we're comfortable doing that, you know, we've spent a lot of time working on predictability of results and deliverability results.
So it gives us the comfort that we can, you know, tighten up some of the white space, perhaps, that we would have otherwise had in some of our safety margin, just because we have spent so much time on the predictability to have a very high confidence factor in what the outcomes are going to be. And so could that lead into further improvements down the road? You know, it's hard to say right now. We're comfortable with this tightening and let us get through, you know, the next year or so, and then we can see where we get to.
Okay. And then, just kind of maybe shifting gears a little bit here. You, you talked a little bit about, natural gas price exposures, but, can you maybe, provide a little bit of an update in terms of the time frames and key milestones for, you know, Cedar in particular, but also, your Corpus Christi exposure, and when we'll start to see the benefit of that?
Yeah. Hey, Patrick, it's Ryan. I'll just dig into both those questions. Obviously, as you know, we signed a Cheniere contract with Corpus Christi about a year and a half ago. Cheniere came out yesterday and, or two days ago, and talked about the startup of construction on those on the Phase III of the expansion. We're train seven of that expansion, and we would expect our service to come into service roughly near the end of 2026. So no real change on that front.
On the Cedar front, we continue to work through all the various commercial arrangements. Pembina came out this morning and has talked about potentially a slippage into Q1 of their FID. We are working through definitive agreements on both offtake and on the tolling, and would hopefully be in line with Pembina's timing on that.
Okay, great. Thank you very much.
Thank you. The next question comes from Jamie Kubik, from CIBC. Please go ahead. Your line is open.
Yeah, good morning. Thanks for taking my questions. I have two here. So first, capital spending for ARC has come in lower than, I'd say, budgeted for the first three quarters of the year. Can you just outline what's driven the savings this year, and, and how should we think about the full year budget for 2023 based on where you're at today?
You bet. Hey, Jamie, it's Kris here again. You know, I would hesitate to call them savings. Really, this is just a timing issue. So, you know, we would expect to meet our capital guidance of CAD 180-CAD 190 here by the end of the year, which does imply, you know, quite a very active Q4 spend. So I think, you know, we are comfortable with it, but we're ramping up activities and Q4 should be in line to get to our full year guidance.
Okay, thanks. And then second question: in the 2024 budget, you do have oil and condensate volumes growing relative to the 2023 guidance, and you indicate condensate volumes at Kakwa are expected to stay flat. Can you just talk about where you expect the growth is gonna come from next year?
You bet. Hey, Jamie, it's Lara. As far as where the condensate comes from, I mean, really, it's gonna be our two key properties that are condensate-rich, so Kakwa and Attachie. So effectively, as we bring Attachie on in Q4, you're gonna see that condensate add coming up. And then the nice part of that, of course, is into 2025, Attachie will be at capacity, and that condensate volume will be consistent for us go forward.
Okay, that's all for me. Thank you.
Thank you. Our next question comes from Travis Wood, from National Bank Financial. Please go ahead. Your line is open.
F acility, and then through next year. So kind of the key item.
Apologies. Sorry to interrupt, Travis. Please do ask your question again. Thank you.
Okay, my question is wanting to understand the critical path around Attachie. Just getting kind of a timeline or, you know, the items that you see the most relevant, that you want to check off the to-do list as you get ready for, processing that Attachie. So for example, rig mobility for this quarter, starting to drill the wells. You commented on, the natural gas line is complete. Kind of, so what's the timeline for the liquids line and kind of any of the key factors and timelines that can keep us comfortable that everything remains on schedule?
Travis, this is Armin. So we have multiple, obviously, activity or projects underway in Attachie. As Terry alluded to, it's fairly active, and it's going to be over the next 12 months until we get the facility to the commissioning phase. Obviously, there's the liquid sales line is an is a major, major project for us that we've already started working on it. Expected to finish around Q1 of next year. The construction of the plant itself is a major task. The plant includes also water recycling hub that is gonna be included in it. So that is going to be an activity that is going to continue over the next 12 months or so. Terry also spoke about the electrification.
So we've received all our necessary permits to start building the transmission line and substation. So there's quite a lot happening over the next 12 months. In terms of what is on critical path, I mean, obviously, the big project is the plant, and that's the one we need to have up and running, and I see absolutely no reason to be concerned about the timeline. I think the project is going as per the plan, on schedule, on budget.
Okay. Thanks very much, Armin. That's all for me.
Thank you. Ladies and gentlemen, as a reminder, if you do wish to register for a question, please press the star, then the number one on your telephone keypad. Our next question comes from Mike Dunn, from Stifel. Please go ahead. Your line is open.
Thanks. Good morning, everyone. Can you hear me okay? Yes, we can.
Great. A couple questions from me, if I may. Just on the electrification at Attachie, is the timing of that reliant on Site C completion, or is it sort of connected to the grid independent of Site C?
Mike, Armin here. No, it has nothing to do with Site C. That's the power for that facility has already been secured through BC Hydro.
Okay, thanks. And secondly, just maybe a follow-up from, I think it was Kris's response to Patrick earlier. The 2024 production guidance, are we to infer that there's less margin of safety to meeting the targets than maybe there was in the past?
It's Kris. No, I wouldn't interpret it that way because of the mitigation items that we talked about in terms of better predictability, understanding white space in the schedule. So I would say, no, it's not a higher risk program from a production standpoint.
Okay. Thanks, Kris. That's all for me. I'll turn it back.
Thank you. There are no further questions at this time. I will return the conference back to the speakers.
All right. Thanks, everyone, for joining. That concludes the call. Have a good day.
Thank you, ladies and gentlemen, this does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.