ARC Resources Ltd. (ARX) Earnings Call Transcript

Good morning, everyone, and welcome to ARC Resources Call on ESG and our recently released ESG report. My name is Kris Bibby. I'm the Senior Vice President and Chief Financial Officer here at ARC Resources. And today with me, I have Armin Jahangiri, our Vice President of Operations and responsible for the ESG report overall; as well as Terry Anderson, our Chief Executive Officer. The plan for today will be, we will go through a small slide show that we have on the webcast targeting roughly 20 to 30 minutes. During that time, you do have the availability or the functionality to submit questions for us to answer after the call, we will deal with all questions at the end. And with that, I'm going to turn this over to Terry Anderson to get us kicked off and look forward to having a great chat today. Thanks, everyone, for attending.

Okay. Well, thanks, Kris. Well, it's our pleasure to discuss the key highlights of ARC 2020 ESG report. We have a great story to tell. So let's get started. I'm going to start on the corporate profile slide here. I first want to start off with a few high-level comments. ARC is a leading energy company for the past 24 years. We have long-standing guiding principles in how we conduct our business that really differentiates us from our peers. One of these key principles is about managing risk throughout our business, which has allowed us to successfully manage the downturn cycles over the past 2 decades. And most recently, this year, in these unprecedented times, we made swift decisions to protect our business and and we see a line of sight to coming out of this downturn on the positive side. We take an integrated approach to sustainability, meaning that we try to balance all aspects of our business to ensure enduring success. And responsible development is ingrained in our long-term strategy and our decision-making process. So take a look at the Canadian energy sector compared to the world. So the Canadian energy sector is in a unique position as we have the best ESG score of any country that has meaningful reserves. So Canada should be looked upon to help deliver the cleanest energy to meet the world's energy demand. Canada's portion of global greenhouse gas emissions is small at 1.3%. Within Canada, the oil and gas sector accounts for about 1/4 of the greenhouse gas emissions and ARC's emissions are only 0.26% of the oil and gas sector. This slide benchmarks global oil and gas companies ESG performance. The red dots identify Canadian companies, which compete very well with other countries. ARC's ESG performance is excellent compared to Canadian and global oil and gas companies. I would say ARC continues to punch above its weight class in ESG performance. And I think that's because we have been focused on ESG for the past 20 years. So it's not something new, and it's part of our culture. Our energy creates a better world for everyone is ARC's purpose statement, which really guides the corporate strategy, delivering top-tier ESG performance is a key component of our strategy. As an energy producer, we have the opportunity and the obligation to be a leader in ESG. So these last 4 slides have touched on a broader, high level topics. Now I want to turn it over to Armin to discuss ARC's approach to ESG and get into more of the details of our ESG report. Armin?

Thanks, Terry. Our objective from the presentation today is to, first and foremost, highlight ARC's ESG performance. But more importantly, we would like to use this opportunity to explain our strategy around ESG and and highlight our organizational commitment related to the 3 elements of environmental, social and governance. What you see in here today will explain the direction we've chosen to take as an organization and our goal is to continue improving going forward. In terms of environment, our objective is to produce our energy with the lowest possible emissions intensity. We believe this is fully aligned with our organizational purpose. As you can see in our 2020 ESG report, we have already delivered on this commitment, and our goal is to maintain that leadership position. On the social side, we are committing to a diverse and inclusive working environment with equal opportunity for everyone. In addition, we are committing to building a strong relationship within the indigenous communities and stakeholders. And in terms of governance, our Board will continue to provide a strong guidance in all matters related to ESG. And more importantly, our independent directors will continue to ensure that the executive compensation is linked to performance, which does include demonstrating leadership in ESG. Our 2020 ESG report is our 12th formal report related to ESG and sustainability. But we believe it shows significant improvements in many ways. In particular, the new report is enhanced in 3 areas. Number one, this report has been prepared based on a detailed materiality assessment. We started the process with materiality assessment to ensure we address all the investors asks. And as a result, we are glad to report that our 2020 ESG report is fully aligned with SASB framework and TCFD recommendations. Number two is that, as I mentioned earlier, our ESG report goes beyond reporting numbers. It is -- it highlights ARC organizational commitment related to ESG. We believe this will be helpful to our investors that it links our performance and targets in the context of our ESG strategy. The third enhancement is expanding our target setting approach to beyond emissions. In alignment with our commitments, we now have set targets in all 3 elements of environment, social and governance. We are proud of these enhancements and are looking forward to hearing your feedback when we meet one-on-one in the future. We will now go through all the 3 elements of our ESG report. Starting with governance. ARC benefits from accessing a very strong board. 8 of our 9 directors, including our Chairman of the Board, are independent. We also have 22% female representation on the Board. Our Board provides great coverage over all elements of ESG through various sub-committees. Our safety, reserves and operational Excellence Committee as well as governance, human resources and risk provide the largest coverage over ESG-related policies and strategy. ARC's key goals and objectives related to governance are first and foremost, to maintain our Board's structure of independent directors. In addition, one of our most important targets is to increase gender diversity on our Board. We have set a new target to achieve 30% female representation on the Board within 3 years. We will also continue to make sure ESG targets are part of our corporate scorecard. And we will use third-party assurance on all the key elements of ESG performance. We are very proud of our environmental performance. ARC has delivered the lowest GHG emissions intensity amongst its peer group -- peer group of companies. That is the result of team's strong performance relative to the target we set 2 years ago. Our target was to reduce our emissions intensity by 25% relative to our 2017 baseline in 5 years. We were able to achieve 47% reduction in just 2 years. In addition, we are also very proud of our water management performance. We invested $55 million in water-related projects between 2017 and 2019. We believe that helped us significantly reduce the risk of accessing water and help reduce our well completions costs and generate a strong economic return. To fully address all the recommendation of TCFD, in our new report, we have introduced the discussions around climate change and the potential risk factors as well as our mitigation strategy. We believe Arc's access to substantial clean natural gas reserves in Northeast BC, provides the company with the opportunity to play a significant role in Canada's transition to decarbonized world. We believe natural gas will play an important role in this transition as a viable low-carbon energy source. Our production in British Columbia delivers economic natural gas with minimal greenhouse gas emissions. This provides a robust solution to the climate change problem and a resilient business model that is going to be part of the solution in the years to come. Application of the new technology has been an important enabler in delivering our top environmental performance. We are very proud of our technical team's capability in identifying and implementing new solutions. We have put together a technical team with access to funds and the mandate to identify, evaluate and implement projects that will surely result in more emissions reduction projects in the future. To maintain our strong leadership position, we have set a new target in our 2020 ESG report, over and above the already achieved 47% reduction. The new target is to reduce our emissions intensity in just 5 years by another 20% relative to our 2019 baseline. We are going to deliver that through implementation of various projects that will help reduce our absolute emissions by about 70,000 tonnes of CO2 equivalent. The bulk of ARC's future growth is also focused on the development of our BC Montney that has one of the cleanest gas and condensate barrels produced in the world. ARC's strong environmental performance is not limited to air emissions. The development of unconventional gas is dependent on the use of water for hydraulic fracturing operation. And to support a risk-free operation, the company has invested $55 million, as I mentioned earlier. The investment not only helped with recycling and reusing large volume of produced water, but it also provides a strong economic return. In terms of liability management, ARC believes in proactive and steady investment. It is the obligation of every responsible producer to return the sites back to their original status. ARC has continuously invested in these projects with the mindset of reducing our number of inactive sites and manage our corporate liability. Investment in asset integrity is another area that we are very proud of. Investment in inspection and monitoring activities as well as other infrastructure improvement projects has resulted in lower number of pipeline incidents and volume of the spills. Our 2020 ESG report covers a wide range of new targets we have set in regards to the environment. These new targets will help ARC to stay on track to maintain its leadership position in terms of environmental performance. In addition to our environmental performance, we are also very proud of our results in the social space. First and foremost, in terms of safety, our strong performance continued with now over 6 years without an employee lost time injury incident. Creating a diverse and inclusive working environment is an important priority for us at ARC, and we are making good progress towards our gender diversity goals. Our strong safety performance is not limited to our employee lost time injury incident rates. We have also achieved a strong result in both contractor and employee total recordable injury incident frequency over the last 3 years. We are in the process of developing a 5-year strategy around safety that is focused on creating a strong step change and raising the bar further. We are very proud of our strong relationship with indigenous communities. ARC acknowledges the recommendations published in the United Nations declaration of the rights of indigenous peoples and believe in proactive engagement with indigenous communities to collect their input in regards to development activities. We are also committed to providing employment and business opportunities for our -- to our indigenous partners. In terms of the stakeholder relations, one of our key organizational objectives has always been to work closely with the stakeholders and communities we work at. ARC is working proactively with the communities to ensure our operation has no negative long-term impact. We are proud of this performance, and we will continue to work closely with our neighbors. Our performance as an organization, as is evident in our ESG report, is all because of our people and the culture of the organization. Our most recent engagement survey demonstrated a score of 92%, which we believe is truly a best-in-class performance. Here is the summary of all the new targets ARC has set in its 2020 ESG report regarding the social element. The one I would like to highlight, in particular, is to plan to revamp our recruitment strategy with the objective to further improve our workforce diversity in the positions that are currently underrepresented. We believe that in order to achieve more diversity at senior levels in our industry, companies should improve their efforts to recruit and develop their talents with diversity in mind. In conclusion, we believe ARC's ESG performance is as robust as its financial and operational performance. Our target is to continue to remain a top performer in all aspects of ESG. And the new targets we've set in our 2020 report enable us to achieve that. Our 2020 ESG report also shows our long-term organizational commitment to ESG. Hopefully, we were successful in showcasing that today. With that, we are happy to answer your questions.

Thanks, Armin. Thanks, Terry. I appreciate the insights. As Armin mentioned, we're now going to flip over to the Q&A side of the equation. We do have a few questions that have come in during the presentation, but please if you do have any further questions, take your opportunity now and submit them, and we will get to them in order. The first question that's come in. And Terry, I think you're probably in the best place to start this answer to a minimum. The federal government and a few other large organizations have committed to becoming net 0 emitters by 2050. What are ARC's thoughts on this target?

Well, I guess, ARC's very supportive of these aspirations to become net 0 by 2050. That sounds great. We're taking -- I guess, how we look at it is we're taking a practical approach to emissions reduction and are really focused on how can we significantly reduce our emissions now. So in the 0 to 5 years to 10 years time frame, and that's our focus and not focused on the 30 years. We're focused more near-term and as Armin showed in the one slide there, emission slide, we have a strong track record of reducing our absolute emissions year-over-year. So that's -- we're supportive of that, but our focus is more of just today and really trying to drive down our emissions in the near term. So that would be our view.

Great. Thanks, Terry. It's a practical approach, as we've discussed many times. The next question, I think, Armin, why don't we kick this one over to you. What are ARC's actual plans to meet the new GHG emissions intensity reduction target over the next several years?

The team has identified a whole bunch of opportunities within the organization from application of the new technology, modifications to some of our sites and equipment but the primary driver for our emissions reduction going forward continues to be the electrification of our facilities. That has been a big part of our strategy over the last few years and will continue to be our efforts going forward. We hope to achieve that within the time frame that we have identified, but we are striving to exceed that, if possible.