ARX:

How ARC Built a Sustainable Dividend-paying Exploration and Production Company

ARC’s strategy of risk-managed value creation and its focus on profitability and sustainability have been at the forefront since inception. In our inaugural annual report, we told our unitholders that “ARC was created with the vision to become the premier ‘blue chip’ conventional oil and gas royalty trust in Canada, as measured by quality of assets, management expertise, and long-term investor returns.” 23 years later, these traits have become increasingly important to investors in the face of volatile commodities markets and competitive pressures.

ARC has built a sustainable exploration and production ("E&P") company that is unique and difficult to replicate. This includes delivering thoughtful, profitable growth from development projects while paying a meaningful dividend and preserving a strong balance sheet.

Maintaining Balance Sheet Strength

ARC manages a strong balance sheet to maintain financial flexibility and optionality, targeting conservative net debt levels of 1.0 to 1.5 times annualized funds from operations. This approach has allowed ARC to sustain its base businesses and counter-cyclically fund growth projects during commodity cycle lows and create significant optionality during commodity cycle highs.

Targeting a Payout Ratio of 25 Per Cent

The monthly dividend of $0.05 per share is a key mechanism of ARC’s total return model to deliver value to shareholders. To ensure the sustainability of our dividend, ARC targets a payout ratio of 25 per cent. In other words, ARC targets to return 25 per cent of its funds from operations (or cash flow), in the form of a dividend, back to our shareholders. The remaining 75 per cent is reinvested in sustaining the business as well as funding new growth opportunities.

In 2017, ARC surpassed $6 billion of cumulative dividends paid since inception, and has plans to pay an additional $1 billion over the course of the next five years.

Note: Payout Ratio is calculated as dividends before Dividend Reinvestment Plan and Stock Dividend Program as a percentage of Funds from Operations.

Improving Capital Efficiencies to Preserve Operating Netbacks

Operating in a banded commodity price environment has created a challenging backdrop for North American E&P companies. ARC has a strategy of building Montney businesses that can sustain themselves with less than 100 per cent of their cash flows and in turn, support the growth of new businesses. Through safe and environmentally-responsible operations, these Montney businesses have helped reduce our cost structure and have created efficiencies across all areas of the business. Examples include:

  • Improvements in drilling times and drilling costs that are sustainable across ARC’s asset base;
  • Service cost reductions and optimization of completions operations;
  • Owning and operating our facilities, allowing us to control runtimes and preserve our operating netbacks;
  • Divesting of non-core assets which have higher relative costs to operate and higher asset retirement obligations; and
  • Managing a deliberate physical marketing and financial diversification strategy, which proactively secures market access for future development projects and takes a portfolio management approach to downstream market diversification, thereby enhancing our price realizations.

ARC’s current sustaining capital efficiencies are approximately $10,000 per boe per day, while growth capital efficiencies are approximately $15,000 per boe per day. Capital efficiencies are the capital expenditures required to create one additional barrel of oil equivalent of daily production.

Delivering Full-cycle Asset Return on Invested Capital and Corporate Return on Average Capital Employed

In addition to ARC’s monthly dividend, another element of creating value for shareholders is the ability to generate strong returns on average capital employed (“ROACE”). ROACE is a measurement of corporate-levels returns and a key determinant of a company’s overall profitability. ARC’s low sustaining capital requirements, efficient investment of growth capital, and low-cost funding decisions have led to profitability over the course of its 23-year history, having achieved a double-digit ROACE of 10 per cent since inception. With the current business plan in place, ARC is positioned for continued profitability over the long term.

Note: Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities.

ARC’s Sustainable Funding Model

ARC’s current funding model includes the reinvestment of proceeds from our 2016 non-core dispositions, which has allowed ARC to counter-cyclically fund infrastructure projects like the Dawson Phase III gas processing and liquids-handling facility and the Sunrise Phase II gas processing facility expansion to profitably grow per share cash flow and production. Over a three-year period, ARC will be able to fully fund its dividend obligations (approximately $210 million annually), its sustaining capital requirements (approximately $400 million annually), and the above-mentioned growth projects with funds from operations and non-core disposition proceeds.

Looking beyond 2019, ARC will be able to satisfy its dividend obligations, sustain the business, and fund discretionary growth capital entirely from funds from operations.

Note: Sustaining and growth capital expenditures are before land and net property acquisitions and dispositions.

ARC is delivering strong financial and operational results while managing a responsible growth strategy that ensures future development activities are profitable and sustainable. Our goal remains: to be a self-funded, dividend-paying E&P company with a compelling growth profile, subject to commodity pricing.