Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Aaron Bilkoski:
We're at the second annual TD Energy Conference in New York. We're having a series of conversations with leaders shaping Canadian energy's landscape. I'm excited to speak with Kris Bibby, CFO of ARC Resources. ARC has built the largest peer-play Montney business in the sector, and Kris has been at the center of this strategy. Kris, thanks for joining me.
Kris Bibby:
Thanks, Aaron.
Aaron Bilkoski:
I'm going to throw out a quick opening question for those listeners that may be less familiar with your business, could you provide a quick background on ARC and what differentiates your business from the rest of the Montney producers?
Kris Bibby:
You bet, and thanks for this opportunity and thanks to TD. We're really excited to be here today. ARC has been around for 29 years, next year it'll be our 30th year in business, which is quite an accomplishment for a Canadian entity. We are the largest condensate producer in the Montney and in Canada. As you know, condensate is used for diluent with the oil sands, so it's a very premium priced product. We produce overall about 420,000 BOEs a day, so we certainly are one of the larger producers in the basin and about 40% of that is condensate. It drives a revenue split of about 60% for condensate at about 40% from NGLs and natural gas.
Aaron Bilkoski:
Perfect. I'm going to get a little bit more granular with my next question and move down to the asset level, specifically Attachie. It's been at the forefront of your growth strategy for the past few years. You started commercial production on it about a year ago. I guess, my question is as you look back over the last year, what have you learned that you didn't know when you first committed to developing it?
Kris Bibby:
Yeah, Attachie, we've been spending a lot of time talking about it. It's been in our portfolio for more than a decade and we've been speaking about it for a decade. So we finally did take the FID a few years ago, built out the asset on our phase one. It's really exciting. We've learned a lot in the last year. It hasn't gone exactly according to plan, but anytime you're opening up a new area or a new asset, you're going to have a lot of these learnings. So today the asset's doing about 30,000 BOEs a day, of which roughly half of that is condensate. So again, that high value product that we're seeing in the last year, we've went through a few learnings on the technical side. It's ramped up a little bit slower than we would've thought.
Heading into 26, though we do have a lot of operational momentum. We are testing a few new designs on the well side that we're really excited about. A few of the things that we are testing a bit wider spacing is one of the key things that we're testing, a little bit more intensity on the completions as we move into next year, as well as we did put a well into the lower Montney earlier this year. It was very successful, so now we're testing we're going to put a full pad into the lower Montney on the west side of the asset and see how that plays out as we move into the central portion of the asset, we'll be moving into our phase two. So after we get these learnings in '26, we'll look and see if the macro environment supports moving ahead with that.
Aaron Bilkoski:
Sure. Given the learnings that you had talked about and the changes you made to the play, what are some key milestones you're looking for to judge success? Without going into purely technical details, just what should the investors be watching for from ARC?
Kris Bibby:
We've got a lot of these trials on the ground that I talked about, as well as the key thing for us is predictability and repeatability. So we've got what we think are some of the right recipes to move forward with this development, but we do need to see some production history. So realistically we want to see anywhere from six to nine months of repeatable production, pad after pad so that we can have the confidence that when we move forward with our phase two, we know what we're going to get and really what we're focusing on is capital efficiency. So if you put more capital into the ground, can you increase your productivity? And where is the sweet spot in terms of that capital efficiency?
Aaron Bilkoski:
And when we look out to phase two, how should we think about when you anticipate putting phase two into the capital plan? I don't want to hold you to like an FID day like we did in 2025, but are you thinking it could potentially be ready for FID in November of 2026?
Kris Bibby:
Yeah, right now that's what we're thinking, but let's see. Like we said, six to nine months, it's November now, so the earliest we have real production data is kind of mid next year, and then we'll have to put that into the plans for phase two, flow it through and move forward. The other thing we do need to see is a bit more supportive of a macro environment. Oil sitting at $60 is not overly exciting right now, but let's see where we are in about a year and then we'll decide.
Aaron Bilkoski:
Is there a WTI price that Attachie to phase two makes sense versus doesn't make sense to proceed with?
Kris Bibby:
It's going to depend on a couple of things. So obviously TIs is a critical component. Also depends where our stock price is, quite frankly. We've always focused on how do we increase the per share value? If it makes more sense to actually retire more stock at that point in time, that is one thing we'll weigh, but realistically, around $60 is a reasonable price where we move forward, like to see it a little higher. But at $60, the project's economic.
Aaron Bilkoski:
Right. And I guess that's one of the unspoken benefits or less spoken benefits of deferring phase two into subsequent years, you freed up a lot of free cash flow that could be potentially returned to shareholders in the form of an NCIB?
Kris Bibby:
Absolutely. We had roughly $300 to $350 million of capital that was going to be going into phase two in '26. Now we'll just take that capital, put it against the buyback and retire more shares, and we think that's equally a creative use of capital.
Aaron Bilkoski:
Great. I know the focus from investors has largely been on Attachie over the last two, maybe even three years, but I think that overlooks some of the other quality assets you have in your portfolio. You have, as you alluded to in your intro, a very condensate weighted asset. You're the largest condensate producer in the Kakwa area. You have Greater Sundance, which the original business was built on. You have Sunrise, a dry gas asset that is fairly strategically positioned when we think about a build out of LNG Canada. Maybe we can dive down to some of those assets a little bit. Can you talk a little bit about what motivated you to purchase the recent Kakwa asset?
Kris Bibby:
It's quite fascinating. Kakwa is a beast of an asset that overall ARC acquired through our combination with Seven Gen a few years ago, I think it was close to five years ago now. And really what we learned from that is just how prolific this asset is. And so the beauty of ARC, we've got a tremendous inventory, so we don't need incremental inventory, but what we do when we're looking at a value in any M&A type of transaction is, does it put the company in a better spot? Are we a better company after a transaction? Compared to prior and specifically this year we had the opportunity to buy from Strathcona. We bought 40,000 BOEs a day contiguous with our Kakwa asset. So anytime you have a contiguous asset, you're going to be able to get a tremendous amount of synergies out of this asset. So we bought 40,000 for roughly $1.6 billion.
We said at the time, 35,000 to 40,000 BOEs a day. That portion of the asset is performing fantastic right now. The quarter we just released, it produced just over 40,000 BOEs a day, so slightly ahead of our expectations. And really the beauty of the transaction was, it was accreted both from a free cash flow perspective but also from an inventory perspective. So Kakwa, we would've had about a 12-year inventory remaining a top-tier inventory that with this asset we just bought, we think that extends it probably out to about 15 years. So accreted both from financially as well as on the inventory side.
Aaron Bilkoski:
My next question is at Greater Dawson, it's taken a backseat to both Attachie and Kakwa. How should investors think about how Dawson fits within the portfolio? Is it a growth asset? Is it a free cash flow that funds other properties?
Kris Bibby:
It's funny you mentioned that, it was a core asset of ARC, and really it is just the cornerstone asset that's repeatable, predictable, and just a cash flow generating machine. The beauty of it is gives us optionality. So at Greater Dawson producing roughly 90,000 BOEs a day, it's about 80% gas, 20% liquids. It varies a little bit, but not a lot. And we've got a tremendous amount of inventory there. So more than 60% of the asset is undeveloped. And what that gives us is the optionality. If we choose to grow there, we could. We certainly have the inventory and running room. Right now though we think in this macro environment it probably makes sense just to harvest the free cash flow, keep it around 90,000 BOEs a day. It's got something like a 25-year inventory life at that rate and just harvest the free cash flow to fund both buybacks, our dividend as well as investing in the other assets primarily over the near term. That's going to be in an Attachie.
Aaron Bilkoski:
When it comes to dry gas assets, Sunrise is a very high-quality asset. It's a low-cost asset. It's strategically located at the very end of Coastal GasLink pipeline. What would it take you to proceed with further growth of Sunrise?
Kris Bibby:
Yeah, Sunrise, we view it as kind of probably one of the premier natural gas assets in North America, extremely low cost, very prolific and a tremendous amount of inventory there. So really, and like you mentioned, it is directly connected to Coastal GasLink. It gives us some optionality into the LNG side. So really it's going to take some signals. So Western Canada has a lot of dry gas inventory, so it is a bit of a swing asset for us. Right now we think we're heading into a very constructive pricing environment for natural gas here over the coming years. So that's something where were a little lean. We produce roughly 360 to 400 million a day there today. We'll keep that relatively flat as we head into this constructive environment and see. It gives us a lot of optionality to be able to grow if we want to and it's a very low cost asset.
Aaron Bilkoski:
Thanks. I touched on Coastal Gas Link, which obviously feeds LNG Canada. You have a supply agreement, LNG Canada's along with other agreements that diversify your gas price to global benchmarks. Can you talk a little bit about why you felt that was important to diversify out of the WCSB and how much of your gas is eventually going to be exposed to global benchmarks?
Kris Bibby:
Pretty simply on the marketing side, one of the key tenets that we keep is get your gas to where it's being consumed, not where it's being produced. So trying to get out a basin has been a focus for us for many years. It started just after I joined ARC back in roughly 2014. We started diversifying outside of the basin. And to do that we were taking transport on long haul pipes, but we were doing this in ARC's name, and so the reason to bring that up is that means the cost structure is a lot lower than if you went and tried to recreate that today. So right now about 50% of our gas get sold into the US directly on basically permanent pipe, meaning we have the rights to that pipe basically in perpetuity getting us access to premium markets.
Is an extension of that is the LNG agreements that you're starting to talk about where we've signed three LNG agreements overall. Two with Cheniere on the Gulf Coast and then one on the West Coast more recently with a project called Cedar. And really what we're trying to do again is very simply get the gas to where it's being consumed, which does mean we're transporting gas across North America to the Gulf Coast, liquefying it, and then sending it into Asia and one contract into Europe.
West Coast, very similar, get the gas to the West Coast and then sending it into Asia. At the end of the day, after all three contracts are on over the coming years, by the end of the decade, we'll have roughly a third of our gas going into international markets, roughly a third going into US markets and about a third staying domestically here in Canada. With given the LNG backdrop and growth in LNG demand, there is an opportunity where we think the domestic market actually could also be a reasonable market to sell gas into over the long term.
Aaron Bilkoski:
Is that a reasonable mix that you would hope to achieve? Are you at the level of diversification that you would hope to be at five years from now?
Kris Bibby:
Yeah, we've always talked about, we'd like about a third. We do have obviously a lot of resource behind us, so if we wanted to increase more, we could consider it. Right now about a third feels right, both from a commitment level, the balance sheet can support all of these contracts. And it's still pretty early on, so we've still got a lot to learn about LNG, so we're comfortable this exposure and we'll kind of assess it over time. It's similar to how when we talk about capital allocation, we want to have a balanced approach. It's very similar on the marketing side as well as even on the production side, how we've got a multitude of asset bases that kind of produce. It gives us a lot of stability and gives us really defensible positions.
Aaron Bilkoski:
When it comes to WCSB gas, it's obviously been recently weak, certainly improving now. You're one of the more proactive companies in pulling excess supply out of the market when demand isn't there for it, despite the fact that the asset that you tend to shut in is one of the lowest costs producing assets in the WCSB. Why is it that you are more nimble than your peers?
Kris Bibby:
It's a great question. It is pretty ironic that we are shutting some of the lowest cost gas in North America, but the reality is, we refuse to waste the resource and we are a for-profit entity, so if we're not going to recover our costs and make our cost of capital, it does not make sense to produce that asset. Obviously for ARC as a corporation, it's a bit easier for us. 60% of our revenue comes from liquids. We refuse to waste that resource. You have to invest in the ground, in the facilities to be able to get to that resource, so we will wait for better days, which again, with the backdrop of the macro coming in, with quite a bit of growth coming, we think we're at the precipice of it, but let's wait and see. Going forward, if the markets aren't there and the price is not there, we will not hesitate to pull volumes. We've done it for a couple of years now. Prefer not to, but we think it's the right decision over the long term and investors have been very supportive of it.
Aaron Bilkoski:
What's the single most important strategic direction your company is taking today to ensure you outperform over the next five years?
Kris Bibby:
Let's take a step back and look at the organization. What we focus on is having a balanced capital allocation approach. And what we mean by that? We want to continue to invest in our assets when it makes sense in the macro environment. We want to continue to pay our dividend. We paid a dividend for 30 years, and then as it makes sense, we'll also continue to retire shares. We've got the inventory behind the company that we don't need anything. There's no holes in the inventory. We don't need to do M&A transactions. We've got a very strong balance sheet, investment grade rating. So we don't need anything, it's just about executing our plan consistently and over a long period of time. What that will do is, over time, the value of that will keep the shareholders. There will be ups and there will be downs, but a consistent long-term approach is where we're going to win.
Aaron Bilkoski:
Thank you very much. I appreciate your time.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.
