Our disciplined and balanced business approach continues to yield long-term value to our shareholders. At ARC, we believe value creation is a combination of paying a dividend and delivering sustainable and profitable growth.
During the year, we successfully executed our largest capital program to-date, grew production, and advanced large scale development plans for our Montney assets. Notably, we executed our capital program while paying over $374 million in dividends to our shareholders and maintaining our strong balance sheet. The year was also punctuated by the milestone of exceeding 100,000 boe per day in production in the fourth quarter, and since inception ARC has grown production tenfold. It is an exciting achievement for ARC, but one which our team sees as a moment in time, as we look ahead to the next milestone. We have already begun to execute another strong capital program and are on our way to targeted annual production of over 110,000 boe per day in 2014. Our technical expertise and long-term vision has enabled us to build a balanced portfolio of high quality assets, which provides ARC with a breadth of internal development opportunities to drive value creation for years to come. As the scale of our operations expands, capital discipline and optimizing efficiencies remains a cornerstone of our business. We will continue to be judicious in our capital allocation and development of our assets with the goal of maximizing value for our shareholders. Just as operating as a low cost producer is in our DNA, so is paying a dividend. ARC has paid an annual dividend of $1.20 per share or higher for over 17 years. Our ability to grow profitably while paying a meaningful dividend to our shareholders demonstrates the quality of our asset base across western Canada. As we move forward in 2014, the momentum we have built will allow us to reach new heights and continue to add value for our shareholders.
For ARC, 2013 was a year of outstanding results. A disciplined capital program of $860 million set the stage for significant production growth in 2014. We achieved record annual production of 96,000 boe per day. While executing a robust drilling program of 167 gross operated wells, we replaced approximately 200 per cent of produced reserves; meaning that for every barrel produced we added two barrels of reserves. We efficiently increased total Proved plus Probable reserves by four per cent to 634 mmboe at a cost of $12.07(1) per boe. Low replacement costs reflect ARC’s high quality assets, cost management and capital allocation to the highest rate of return projects. A focus on innovation and implementation of advanced technologies resulted in improved project economics and enhanced recovery factors. For example, the use of multi-well pad development and longer horizontal laterals led to realized cost savings and lower future development capital costs.
ARC delivered a 27% annual total return to investors in 2013.
Canadian energy markets continued to witness volatility through the year. Despite this, ARC’s share price set a new five-year high, delivering a 27 per cent total annual return to you, our shareholders. Natural gas and crude oil prices saw positive increases; however price differentials between industry benchmark prices and realized prices remained volatile. Through our focused strategy of risk managed value creation, we mitigated risks and maintained balance sheet strength. Funds from operations of $862 million or $2.76 per share were achieved as a result of higher production volumes and higher realized commodity prices. We closed the year with a strong balance sheet with total available credit facilities of $2 billion with approximately $900 million drawn. Available credit capacity remains healthy at almost $1 billion after a working capital deficit. ARC’s net debt to funds from operations was 1.2 times and net debt was approximately ten per cent of total capitalization. ARC takes a conservative view on debt levels targeting net debt to not exceed 1.5 times annualized funds from operations.
Through our focused strategy of risk managed value creation, we mitigated risks and maintained balance sheet strength.
Access to markets and transportation continued to be a challenge faced by our industry in 2013. Across North America limitations on pipeline and refinery capacity impacted the price producers received for their product. This was especially true for Canadian producers who in the past few years have received historically wide discounts for their production compared to West Texas Intermediate and NYMEX benchmark prices. To mitigate these risks, ARC executes an integrated market strategy that includes physical commodity marketing and financial risk management.
ARC in the Montney
ARC’s Montney assets, located in northern Alberta and northeast British Columbia, continue to be the key growth driver for the company. Today, we hold approximately 900 net sections of Montney land in some of the best parts of the play. The Montney provides us with exposure to natural gas, natural gas liquids and oil production. In 2013, we added 175 net sections to our Montney land base across Alberta and British Columbia, with key additions in the Ante Creek and Attachie areas. An independent resources evaluation of our northeast British Columbia Montney lands reaffirmed the significant resource base in the area, identifying TPIIP(2) of 55 tcf of natural gas resource and 2.2 billion barrels of oil resource, representing meaningful year-over-year increases to resources estimates.
We executed an active capital program in the Montney in 2013 spending a total of approximately $590 million, setting the stage for significant growth in 2014. Construction of a new natural gas processing and associated liquids handling facility was completed in December at Parkland /Tower in northeast British Columbia. With the start-up of the facility, we began to bring on new production from wells drilled earlier in the year, and additional volumes will be seen in 2014 as the wells are systematically brought on production. ARC was one of the first entrants in the Montney over a decade ago, and we have taken a paced approach to the development of our assets. The geology of the Montney is not homogenous across the play, and we take the necessary time to learn about the resource in each area and to de-risk the property before moving to full scale commercialization. This staged approach to development reflects our corporate strategy of risk managed value creation, in which we aim to minimize risk in the development of our assets. Currently in the Montney, we have properties in varying stages of development from pilot projects, to active commercialization to sustaining free cash flow properties.
The Montney continued to garner international attention in 2013, for its world class reservoir and proximity to the emerging LNG export market on the west coast of British Columbia. ARC’s relationship to future LNG projects continues to be one of the most asked questions I receive from investors. Early in my career I had the opportunity to work on LNG in Malaysia and I have a firm understanding of the scope and scale of such projects. ARC will not take an equity position in an LNG facility; however I believe as one of the largest land holders in the Montney, we are well positioned to backstop production demand and will ultimately benefit from the development of additional export markets.
2014 Capital Program
In 2014, ARC will continue to chart new heights, executing a $915 million capital program, which will be carried out with an ongoing focus on capital discipline. With outstanding opportunities across our portfolio, we will create value by investing in the highest rate of return projects including oil, liquids-rich gas and natural gas development. We expect to deliver significant year-over-year production growth, targeting average production to be in the range of 110,000 to 114,000 boe per day. The Montney will remain a focus of development as we plan to spend approximately $600 million in the region. The majority of capital will be directed to oil and liquids-rich natural gas development, which remains attractive due to the relative strength of crude oil and liquids prices; however 20 per cent of the budget will be directed towards counter-cyclical development of our low cost, high rate of return natural gas opportunities at Sunrise and Dawson. We began piloting production at Sunrise in mid-2011 and are confident to move this exceptional property to the next stage of development with the investment of $120 million. Production at Sunrise is expected to increase from 20 mmcf per day to 60 mmcf per day over the course of 2014. In addition, we have begun planning for the construction of a 60 mmcf per day gas plant in the region, which is expected to be on-stream in late 2015. Across our portfolio we will continue to implement multi-well pad development, which has resulted in decreased per well drill, complete and tie-in costs. In addition to development of established properties, the budget includes investment in key pilot projects that will set the stage for future commercial development in the coming years.
In 2014, ARC will continue to chart new heights, executing a $915 million capital program, which will be carried out with an ongoing focus on capital discipline.
Performance Driven by People
All of ARC’s accomplishments begin and end with our outstanding team of 560 people. Across our operations, the technical expertise and dedication of ARC’s employees drive the company forward. ARC’s culture of collaboration, innovation and entrepreneurialism sets us apart from our peers. Strong leadership, at every level of the organization ensures we are pulling together towards a common goal. At ARC, we also benefit from a highly experienced and committed Board of Directors, and I am grateful for their insightful guidance. I thank our entire team for their ongoing hard work and commitment in 2013.
Steve Sinclair, ARC’s long-time Chief Financial Officer, announced his retirement in 2013. Steve’s contribution to ARC is immeasurable. His leadership, not only in his capacity as Chief Financial Officer, but in laying the foundations of ARC’s culture has been critical to ARC’s success. On a personal note, it has been a great pleasure working alongside Steve for the past 17 years and I want to thank him for his vision and dedication to ARC.
I am pleased to share the promotions of Van Dafoe and Terry Anderson, both of whom have been with ARC for over 14 years. Van has been promoted to the position of Senior Vice President and Chief Financial Officer, previously holding the position of Senior Vice President, Finance. Terry Anderson has been promoted to Senior Vice President and Chief Operating Office from the position of Senior Vice President, Engineering and Land. Terry and Van have long been critical members of our senior management team and both bring extensive knowledge and experience to their new roles.
I would also like to extend my gratitude to Allan Twa. Allan, who retired from the law firm of Burnet, Duckworth & Palmer LLP in 2013, acted as ARC’s Corporate Secretary since inception of the company in 1996. Grant Zawalsky, also of Burnet, Duckworth & Palmer LLP, has been appointed to the role of Corporate Secretary. Grant is an experienced and trusted corporate secretary and on behalf of ARC’s Board of Directors I am very pleased to welcome him to ARC.
As part of our unwavering commitment to deliver value to our shareholders, ARC is dedicated to responsible operatorship and continuing to be a positive force in the communities in which we live and work. The health and safety of our people, communities and the environment are of utmost importance to us. During the year, ARC was recognized for its environmental initiatives, receiving the CAPP Responsible Canadian Energy Chair’s Award for the low-emissions design of our Dawson gas plant, a #1 ranking on the CDP Canada 200 Carbon Performance Leadership Index and inclusion in the Corporate Knights Future 40 Most Responsible Corporate Leaders in Canada.
One of the highlights for me as the President and CEO of ARC is the opportunity to give back through community investment. In 2013, we donated $2.3 million to not-for-profit organizations throughout our operating areas. ARC looks to create multi-year partnerships with organizations whose work has an outstanding impact in building stronger and healthier communities. Beyond monetary contributions, ARC has an active culture of volunteerism and community leadership. I am consistently amazed by the generosity, compassion and spirit of ARC employees.
Charting New Heights
The theme for this year’s annual report of Charting New Heights is not only a fitting reflection of our accomplishments in 2013, but an indication of what to expect from ARC in the coming years. It is my belief that a successful company requires the following elements: a team of hard working and passionate people who are experts in their field, a culture to support collaboration and innovation, a high quality asset base and a strong strategy to chart the course. At ARC, we have all of these attributes. We are excited by the opportunities ahead of us and on behalf of ARC’s entire team and your Board of Directors I thank you for your ongoing support.
Myron M. Stadnyk
President and Chief Executive Officer