Message To Shareholders

Message To Shareholders

On behalf of ARC’s outstanding team of over 500 employees, I am pleased to share with you our 2012 results.

ARC enjoyed another year of exceptional operational and financial results, and continued to create value for our shareholders. Notably, ARC grew production by 12 per cent to reach record levels, added 200 per cent of produced reserves, and further strengthened our balance sheet. Since 2009, ARC has grown production over 50 per cent, an exceptional accomplishment that demonstrates ARC’s trademark capital discipline and the “can do” attitude that exists throughout the organization.

On a personal note, I have been at ARC since we commenced our operations. I was appointed Chief Operating Officer in 2005, President in 2009, and it is now an honour to be named Chief Executive Officer. As President and Chief Executive Officer I want to assure shareholders that our strategy will continue to be clear with an absolute commitment to creating long-term value. At ARC, we understand value creation as a combination of paying the dividend and delivering deliberate and profitable long-term growth. Our focus on acquiring and developing high quality long-life assets combined with operational excellence has resulted in an asset base with extensive development potential. Entering our seventeenth year, the magnitude of opportunity in front of us has never been better. We have a clear line of sight to act on our opportunities that will support our long-term vision of risk managed value creation. We will continue to pay our dividend, while we simultaneously manage the development of our exciting and high rate of return growth opportunities.

Proven Strategy

ARC’s long history of success is tied to our strategic focus on risk managed value creation. Underpinning this strategy is a dedication to developing and producing high quality assets, operational excellence, a culture of leadership and a strong financial position. Our goal of creating shareholder value has never wavered; as we have demonstrated with the achievement of an 18 per cent annualized total return since inception.

The dividend is, and always has been, a critical component of our business model as it ensures both capital discipline and a paced approach to development. Since inception, we have paid over $4.6 billion in dividends to our shareholders, maintaining a minimum annual dividend of $1.20 per share for sixteen years. This history is consistent with our belief that dividends should be set at levels that are sustainable throughout short-term market cycles.

Our long-term focus on building a diverse portfolio of high quality assets has put ARC in an enviable position, allowing us to remain nimble through downturns in any one commodity. Over the last year we took a selective approach to natural gas investment, directing our efforts to oil and liquids-rich opportunities, which offered the highest rates of return due to the relative strength of the crude oil price. The ability to successfully shift our focus to oil and liquids-rich opportunities enabled us to move forward on an ambitious and disciplined capital program that delivered exceptional results, while preserving the strength of our balance sheet.

2012 Highlights

In the past year we have showcased the strength of our strategy, as we managed our business against unpredictable market conditions and a changing industry landscape. With natural gas prices at decade lows and crude oil prices subject to volatile and record wide differentials, ARC was one of the first of our peers to announce a decrease in our capital program from

  • In the past year we have showcased the strength of our strategy, as we managed our business against unpredictable market conditions and a changing industry landscape.

$760 million to $600 million. Despite the reduced capital program, ARC achieved record production of 93,500 boe per day, comfortably within our original production guidance. This was achieved as we developed ARC’s high quality assets and maintained an internal emphasis on aggressive cost management and capital efficiency. Contributing to our strong cash flow results was the shift towards oil and liquids-rich opportunities, as ARC grew oil and liquids volumes 15 per cent from 2011 to 2012, providing strong rates of return and a healthy revenue stream.

In 2012, we executed an active drilling program, drilling 144 gross operated wells. As a result of the robust program, we replaced over 200 per cent of production for the fifth consecutive year, and increased total proved plus probable reserves by six per cent. In the northeast British Columbia Montney, an updated Independent Resources Evaluation reaffirmed the significant natural resource base on ARC’s lands. Most notably, was the identification of a major oil resource of 1.5 billion barrels of discovered petroleum initially in place at ARC’s Tower property. Reserve growth was achieved at impressive Finding and Development costs of $9.01 per boe for proved plus probable reserves (1) – results that are especially remarkable when considering the execution of an oil and liquids focused program, which typically results in higher capital costs than natural gas.

In line with our principle of maintaining financial flexibility, ARC closed the year with a strong balance sheet with net debt to funds from operations at one times. During 2012, ARC issued approximately $400 million of fixed rate term notes, capitalizing on low long-term interest rates, and raised net proceeds of approximately $330 million with the issuance of 14.6 million common shares. Proceeds from the note and equity issuance were used to pay down indebtedness under ARC’s existing credit facility, resulting in net debt that was $150 million lower at year end 2012 than 2011. The proceeds were also used to proactively secure funding for a portion of ARC’s 2013 capital development program. ARC exited 2012 with approximately $1.2 billion of credit capacity, and net debt representing approximately nine per cent of ARC’s total capitalization. ARC targets to stay between one and 1.5 times net debt to funds from operations and less than 20 per cent of total capitalization in order to preserve financial flexibility through commodity price cycles.

Setting the Stage for Long-term Success

Over the past decade ARC has established a strong presence in the world class Montney play. In 2000, we entered the Alberta Montney with the acquisition of the Ante Creek property in northern Alberta, and in 2003 we entered the northeast British Columbia Montney region with the acquisition of the Dawson field. Today, we have amassed one of the largest positions in the Montney fairway with over 700 net sections of land. Reacting to the low natural gas price environment in 2012, we focused on development of Ante Creek, and on the oil and liquids-rich gas development at the Parkland/Tower.  As we invest in these strong netback oil focused properties, ARC is continuing to sustain and grow its natural gas business as natural gas volumes are produced in conjunction with oil production. As a clean burning and highly efficient fuel, there is no doubt of the prominent role natural gas will play in future energy markets worldwide. In 2012, we saw large industry players from around the world focus on the Montney for exactly this reason. The area has garnered attention due to the world class quality reservoir and its proximity to the emerging LNG export market on the west coast of British Columbia. The vast resource base in ARC’s Montney assets provides an extensive inventory of natural gas, crude oil and natural gas liquids development opportunities with considerable upside. Taking a long-term view as to how we will develop these assets, ARC is well positioned for a successful future in which we will create value from our high quality world class oil and natural gas resources.

2013 Capital Budget

ARC’s focus in 2013 is clear. Investment in both infrastructure and commercializing ARC's Montney resources will set the stage for significant growth in 2014. We plan to execute a record 2013 capital budget of $830 million. The program is expected to deliver modest growth through 2013, as we complete large scale projects that will facilitate new production coming on-stream in

  • ARC’s focus in 2013 is clear. Investment in both infrastructure and commercializing ARC's Montney resources will set the stage for significant growth in 2014.

early 2014. A major focus will be the development of the Parkland/Tower area in northeast British Columbia. In late 2012, ARC received government approval to construct two 60 mmcf per day gas plants and liquids handling facilities at the Parkland property. Construction of the first 60 mmcf per day phase commenced late in 2012, with the plant expected to be on-stream in early 2014. At the Tower property, we will continue the drilling program that started in 2012, employing multi-well pad drilling to develop this oil field. Moving to a multi-well pad drilling approach greatly decreases average costs per well, increases capital efficiencies and minimizes our operational footprint. The approach will alter the production profile, given the estimated seven month time period to drill, complete, test and tie-in an entire eight well pad. All wells on a pad will be brought onto production at the same time, resulting in production increasing in a stepped fashion. We are targeting 2013 average production to be in the range of 93,000 to 97,000 boe per day and 2013 exit volumes of approximately 100,000 boe per day, leading to production of greater than 110,000 boe per day in 2014.

Leadership Strength

ARC’s strong leadership team is comprised of a group of highly skilled individuals, with a proven ability to execute. The majority of our officer team has been with ARC for over ten years, and brings a depth of industry knowledge from technical expertise to capital markets to human resources. Guided by strong and consistent leadership, ARC’s employees uphold a culture in which collective goals are met and the bar for continuous improvement is set high. In 2012, the strength of our leadership was once again demonstrated by the achievement of outstanding results. I thank our entire team for their hard work.

In 2012, one of ARC’s founding members and long-time Chief Executive Officer, John Dielwart, announced his retirement, which was effective January 1, 2013. John’s vision and exemplary leadership helped build ARC into the strong organization that it is today. As I take over the reigns as Chief Executive Officer, I want to express my personal gratitude to John and thank him for his commitment and dedication.

I would also like to thank Michael Kanovsky, an original director of the Company, who retired from the board of directors in 2012. Throughout his fifteen years of service to our board, Michael’s broad insight and industry expertise were invaluable.

A Clear Line of Sight

As we enter 2013, I am excited by the opportunities that ARC has before it. I am also aware of the many challenges our industry is facing. The low natural gas prices and volatile crude oil differentials we experienced in 2012 are expected to improve in 2013 but not dissipate. History has shown that the oil and gas industry is cyclical. Throughout ARC’s sixteen year history, our team has experienced many of the same challenges, and we have proven our ability to create value in all market conditions. ARC is in an enviable position with a large, high quality asset base that will deliver profitable growth for years to come. Over the next few years you will see an evolution in our business as we execute larger scale projects. Through this evolution we will proceed with a thoughtful, long-term vision and a clear line of sight to deliver optimal value to our shareholders.

Our strategy is proven, our opportunities are exceptional and our people are ready to execute.


Myron M. Stadnyk,
President and Chief Executive Officer

  1. Excluding future development capital.