ARC Resources Ltd. (ARX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the ARC Resources Corporate Update Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, May 27, 2021. And I would like to turn the conference over to Kris Bibby. Please go ahead, sir.

Thank you, Sylvie, and thank you all for joining us for ARC's Virtual Corporate Update. I'm Kris Bibby, Senior Vice President and Chief Financial Officer. And joining me today is Terry Anderson, our President and Chief Executive Officer. Today, we'll be providing an overview of the business following our successful acquisition of Seven Generations and we'll be providing an update on our near-term priorities, which includes an in-depth discussion of our approach to capital allocation and the status of our integration activities with the Seven Generations assets. We're targeting a roughly 30-minute presentation, leaving time at the end for Q&A. As always, our Investor Relations team will be available following the event to answer any further questions you might have. Now before we begin, I need to quickly touch on our regular advisory statements, which I'm going to do even more so quickly than usual, an overall feeling digital fatigue from all these virtual meetings. In these days, I don't want to lose you to multitasking your multiple screens in front of you before we even get started. So all statements made during this webcast are subject to the advisory statements at the end of the presentation, which is available on our website. All dollars are in Canadian dollars, unless otherwise stated. And now with a drum role and without much further ado, I'm going to hand it over to Terry to go through a corporate update as well as an asset review, and then I'll come back on the line. So over to you, Terry.

Well, thank you, Kris, and thank you to everyone joining us today for this update. Like Kris said, our promise to you today is to be efficient and focused with this 30-minute presentation. Although only Kris and I are speaking with you today, the entire ARC executive team drives the successful execution of the business plan. We have a very experienced and commercially astute team that I'm privileged to work with every day. Our goal is to walk through who is ARC today: what's changed; what hasn't; why are we excited about the future of our company and where we're going; and how are we going to get there. Our company has taken a major step forward by successfully completing the acquisition of Seven Generations, and we believe with our combined size, scale and focus in the Montney, we are uniquely positioned to deliver tremendous value to our shareholders in the years to come. So I'd like to begin by taking a look at who we are today. First off, ARC is a much bigger, stronger and relevant energy company, currently producing approximately 340,000 BOE per day. We are North America's premier Montney producer, a pure-play Montney investment. We have the largest land holdings and largest production in the Montney, which continues to be the best, most economic and profitable play in all of North America. We also have a large contiguous land base across the fairway that drives efficient operational execution. We are also Canada's largest producer of condensate and third largest producer of natural gas, providing diversification to our commodity mix. You put this all together, and today, ARC has a long-term focus on profitable and risk management; a strong balance sheet; our investment-grade position provides more financial flexibility and a lower cost of capital; decades of top-tier inventory, providing a long runway of high-quality development opportunities long into the future, again, with commodity and geographic optionality; an exceptional free funds flow profile, we expect to generate $1 billion in free funds flow in 2021 alone, which leads our peers; industry-leading ESG performance, an important focus area that sets us apart from our peer group and something that we know is not only valued by our investors and stakeholders, but it is expected of us, and we agree; solid returns to shareholders with a 3% dividend yield today and free funds flow optionality to increase this later in the year. We are also one of the lowest cost producers as a result of our owning and operating our facilities, along with the land base that is substantially all 100% working interest. This is where we sit today, a new ARC, a premier investment opportunity for exposure to the Montney. While the Seven Generations transaction was clearly transformative, our guiding principles on which we have built our business remain the same. These principles have guided our performance over the past 25 years which have delivered considerable success, and they will continue to drive strong performance over the next 25 years. First, it starts with our sustainable business model, which is driven by our exceptional people, high-quality, long-life Montney assets and our relentless focus on delivering long-term corporate profitability. Second is managing risk around all aspects of our business, managing operational and financial risk, commodity price volatility, how we manage our commercial and marketing activities. Risk management is critical in everything we do. Third is capital discipline, which is all about efficiently executing our capital program and maximizing returns on every dollar invested. And fourth is our own and operated infrastructure. As I mentioned earlier, this allows us to control our destiny. Our suite of facilities have low-cost structures, preserve our netbacks and volatile commodity price environments and allows us to retain the economics of facility optimization projects. And finally, operational excellence, which keeps us focused on continually realizing efficiencies, reducing our operating costs and maintaining our leading ESG performance. These guiding principles remain the solid foundation in how we will successfully manage risk while creating value and executing our business plans. I know there are a lot of words on this next slide, but what we're really trying to articulate is that we think ARC can deliver it all to be that premier business. The investor feedback we have received is that investors want to invest in a business that has a strong balance sheet that can withstand commodity price volatility. They want to invest in a business that exercises capital discipline and has excellent cost control so they can generate significant free funds flow. They are looking for returns of capital, whether it's through a dividend or a share buyback program. They want to invest in a company that has high-quality inventory that will allow them to grow the business modestly and profitably when it makes sense to do so. And lastly, they want to invest in a company that prioritizes strong ESG performance and that recognizes responsible development and economic benefits can and must go hand-in-hand. ARC does all of these things and does it well. And now with our increased capital optionality, size and scale, we are even better positioned to deliver enhanced shareholder returns. So what does ARC plan to do with this unique position of ours? In 2021, ARC's objectives are pretty simple. First, we will fully integrate Seven Generations that includes integrating the people, assets and processes, and realizing the $160 million of cost savings and synergies that we've identified as quickly and efficiently as we can. Second, we plan to strengthen our investment-grade financial position by reducing our net debt outstanding to approximately 1x funds from operation, which we have a line of sight to this happening in Q3 of this year. Third, once our debt reduction target is met, we plan to sanction and commence development of our Attachie West Phase I. We're not only focused on today, but planning for the future to increase our free funds flow and to deliver greater shareholder value and Attachie West will support these efforts. And fourth, we plan to sustainably increase our dividend. And fifth, we expect to initiate an NCIB later this year so that we can repurchase a portion of ARC's common shares outstanding. This will help improve our per share metrics. Kris and I will spend a little time -- a little more time speaking to each of these objectives and how we're approaching them. But I first want to start with the integration. So we are now almost 2 months past the close of the transaction, and I'm very happy with the progress we've made. The integration really boils down to people, assets and processes. And starting with the people, I'm pleased to say that most of our people decisions have been completed. Our leadership team has been working collaboratively over the last 2 months, and I'm impressed to see the bench strength of our team in action. The knowledge sharing that is happening between employees and advancing the integration proves that people continue to be critical to the success of the business. Next is integrating the Kakwa assets. Our technical teams have been working hard to realize immediate operations, drilling and completion synergies. With our improved purchasing power, we are seeing a lot of success here. We're also incorporating learnings from ARC legacy assets to Kakwa and vice versa, which is also improving our development capital efficiency. Next is integrating our systems and processes. This has been a big focus for us to ensure we can report, budget and plan more efficiently, an effort that is well underway and on track. And we are also tracking well on our cost savings and synergies and expect to fully realize the $160 million identified by the end of this year. Overall, the integration is proceeding as expected, and we have the team to thank for that. I'm very proud of the way the team has not only came together as one, but more importantly, has done so well safely and efficiently executing the business and delivering strong results. Now before we take a closer look at the objectives, I thought it would be helpful to do a quick overview of our assets, which showcase why we love the Montney so much. ARC has an unparalleled Montney portfolio with our land situated in most of the sweet spots of the Montney fairway. We believe that Montney is one of the most profitable resource plays in North America. We love the Montney for how efficient it is, with 300 feet thickness multilayer development opportunities. We have decades of top-tier, low-cost inventory that deliver some of the best economics in the basin and across the continent. We also like it for the optionality. We have a balanced portfolio in Alberta and BC and a balanced commodity mix and a significant egress optionality, which all help ARC to manage risk and maximize returns during commodity price volatility. So let's start with looking at our assets individually here and start with our flagship Montney asset, which is Greater Dawson. Home to the first Montney horizontal well ever to be drilled and completed with multistage fracking over 15 years ago. I was part of the technical team that actually did that 15 years ago, which kind of shows how old I am. But it was a great success to kick off the Montney boom. The Greater Dawson is a liquids-rich natural gas and condensate play with a large integrated network of owned and operated infrastructure and a competitive low-cost structure and low breakevens, delivering superior economics and significant free funds flow. This asset is ideally situated and is in close proximity to natural gas and liquids egress pipelines, as you can see on the map. The beauty of the Greater Dawson is that it started out as a dry gas play with development focused in the Upper Montney, and it has evolved into a multilayer development with tremendous commodity optionality that allows us to target the highest return projects, depending on the prevailing commodity prices. The Greater Dawson area produces around 100,000 BOE per day and still has decades of development opportunity to sustain and grow production. So Sunrise, it is ARC's dry gas gem. Although this property consistently of 36 net sections, it has up to 5 layers of development, which yields that significant development potential with about 10 Tcf of gas originally in place. Production at Sunrise is now approximately 300 million cubic feet a day of natural gas, now that we have brought onstream our most recent highly economic 40 million cubic feet a day expansion earlier this month. And I had mentioned about owning and operating our facilities. And this is a prime example of spending $10 million to optimize this facility and had 40 million cubic feet a day of production, which is wildly robust economics. And this property is our most profitable and most efficient asset, operating expenses of approximately only $0.20 an Mcf and capital efficiency of $5,000 per flowing barrel oil equivalent, delivering, finding and development costs of just $0.35 an Mcf. The full cycle costs at Sunrise are about $0.90 an Mcf, which is the most efficient dry gas play in North America. We also love Sunrise for its leading environmental performance. The Sunrise facility is electrified through BC Hydro, as is most of the field, driving ultra-low emissions. And Sunrise is also about 10 miles from the inlet for the Coastal GasLink, which you can see on the map displayed. This strategically positions or for potential LNG exposure. ARC has recently added our Kakwa asset through the acquisition of Seven Generations. Kakwa is a premier condensate-rich and high-deliverability natural gas play that's consistently at the top-performing condensate wells month-over-month in Western Canada. ARC's near-term objective for Kakwa is to integrate the asset into our portfolio and focus on maximizing free funds flow generation. As we do this, we expect to improve the area's capital efficiency and moderate the current decline rate of about 40% by about 2% annually. We're also working on rightsizing our physical transportation commitments associated with this asset, looking to optimize our existing transportation contracts. Through this process, we will reduce our corporate transportation costs and increased free funds growth. Just a note that the map you see here shows only Nest 1, 2 and 3 lands as this is where development activities will be focused. We have other lands in the Montney that are further down the road in our development plans. Currently, we see a decade of top-tier development opportunities to sustain production at current levels. Looking at Ante Creek, it is ARC's light oil play in Northern Alberta and one that generates significant free funds flow for us. This asset is more of a conventional play with lower declines, stable base production and large contiguous land base. Our objective at Ante Creek is to deliver profitable light oil production by leveraging our recent facility expansion and benefiting from the efficiency gains as we've realized moving to larger multi-well pad. And last, but certainly not least is Attachie, ARC's highly prospective condensate and liquids-rich natural gas play prime for large-scale development. If you've been following ARC for the past 5, 10 years, you'll have heard us speak a lot about Attachie and why we like it as our next major development opportunity. For those new to ARC, Attachie consists of over 300 net sections or 200,000 contiguous net acres of 100% owned land. There is a massive multilayer development potential at Attachie, with 9 billion barrels of oil and over 30 Tcf of gas in place and over 1,500 future drilling locations identified. We spent the last decade building this land base. And over that time, our confidence in the asset has only gotten stronger. We are finally ready to get going on attach, and we'll talk more about the development plan in a few slides. Now without question, all these great assets are a major part of our story, but it's important to note we cannot unlock their value unless we do so responsibly. ESG has been -- has become increasingly important to our stakeholders and investors over the years, and it's been important to us too. We have a long history of strong ESG performance at ARC. This graph or this chart spotlights how well Canadian energy companies perform on the world stage. We are a leader. Canadian energy companies lead that world stage. And it reflects ARC's global leading performance on an environmental, social and governance factors. So what exactly is ARC doing to set us apart? Well, first is our leading environmental performance, and specifically, ARC's air emissions performance. Strong environmental performance is ingrained in how we develop our assets from facility electrification through BC Hydro, to proactive fugitive emissions management. In 2019, both ARC and Seven Generations had the lowest greenhouse gas emissions intensity profiles among Canadian upstream E&P companies. Next is our social performance, which includes ARC's top priority, the safety of our employees and contractors. I'm so proud of the work our employees have done to keep everyone safe, especially through the COVID pandemic. We now have worked over 7 years without a lost time incident for our employees, which is a remarkable achievement that we should all be proud of. Lastly is our strong governance practices in managing risk around all aspects of the business. And with that, I will pass it over to Kris to walk you through our capital allocation principles and priorities. Kris?

Thanks for the asset overview and a brief overview of our ESG principles. I'll take over for a few minutes and let you catch some water and catch your breath. 17 slides in a row is a lot. As Terry has mentioned, ARC is currently generating meaningful free funds flow. And I want to spend some time walking through how we're thinking about allocating our capital so we can deliver optimal returns to our shareholders. Our investment framework and our capital allocation philosophies are unsurprisingly really quite simple: protect the dividend, manage debt at very conservative levels, profitably sustain production through efficient execution and controlling our corporate decline rates. And then with any remaining free funds flow, we can direct those to either organic growth opportunities, incremental returns to shareholders, and possibly, strategic M&A activities. As many of you know and model at Strip, ARC expects to generate over $1 billion of free funds flow in '21 and in '22 after sustaining our production basin. I want to speak to you on the allocation of that free funds flow to strengthening our balance sheet in the near term by bringing our net debt down to roughly $1.5 billion or 1x funds from operations. And then as Terry mentioned, investing in the development of our Attachie West Phase I. And very importantly, increasing our return of capital to shareholders through sustainable dividend increases and/or share repurchases. So in the following slides, I will walk you through each of these in a little more detail on how we are thinking about these various options. So now, it would be -- it wouldn't be an ARC presentation if we didn't start with a balance sheet slide once we get to the capital allocation portion. Our views on protecting the financial position and maintaining financial flexibility have not changed and will not change. So similar to our guiding principles that Terry spoke to, it's a fundamental belief that we should always have a strong balance sheet and ample liquidity. Really, ultimately, at the end of the day, the strong balance sheet is your ultimate hedge against any volatility or surprises that may come our way, as we've learned over the last year. Immediately following the Seven Generations acquisition, ARC's net debt outstanding was approximately $2.4 billion outstanding or 1.4x. So prefunds roll will first be used to strengthen our balance sheet. And as Terry mentioned, we expect to be around 1x in the third quarter of 2021. The deleveraging plan we had in place originally has improved considerably with the strengthened commodity backdrop. And today, we're looking at bringing our absolute debt levels, as I said, down to roughly $1.5 billion or less than 1x funds from operations by the end of 2021. Next, another hallmark of ARC's business in our history over the last 25 years is our dividend. The dividend is a critical vehicle for delivering returns to our shareholders, and over our 25-year history, has really been our primary returns to our shareholders. We've distributed $35 a share or roughly $6.7 billion to our shareholders over that time. I'm an accountant at heart and in actuality, and dividends are paid out of profits. And consistent with ARC's guiding principles, we need to ensure we take a risk-managed approach to how we do this responsibly. When we think of dividend increases, it is clear that they should only be adjusted and increased when there is a permanent increase in profits and when that increase can be sustained at the forward commodity prices and lower commodity prices, assuming some volatility going forward. With the current higher prices that we're experiencing and the Attachie development and the recent closing of the Seven Generations acquisition, we see a line of sight to increased earnings. And with that, more options to deliver enhanced shareholder value very soon. Now with that, I'm also going to hand it back to Terry to speak a little bit more in detail on our plans for the development of our Attachie asset.

Perfect. Thanks, Kris. And yes, I've got a few slides here on Attachie and excited to speak about Attachie. As I mentioned earlier, we've talked about Attachie for a number of years, but we are ready to get going on Attachie. Our technical teams have continued to build their understanding of this highly prospective asset so that we can develop it in the most capital-efficient manner possible. You can only get -- you only get one chance to deliver the lowest cost structure in day 1, and we've done all the necessary work to deliver on that. We have all the regulatory approvals for the facility. We've built a high-grade access road into the area, which is going to help us building the facilities and the drilling operations that go on to fill this facility. We planned out our water handling facility to maximize operational efficiency. This is very important to managing the cost structure on day 1. And we've secured gas takeaway on the North Montney mainline. And we are progressing commercial negotiations for liquids egress. So ARC is ready to sanction Attachie West Phase I once our debt levels reach 1x funds from operation. Kris talked about being an accountant and so this is where he forces me to hold off on getting going on this project until our balance sheet is strong to weather any storm. On this next slide here, as we've optimized the well and pad designs in the area in 2018 and '19, our confidence has grown in the predictability of the results. And so we have designed a 90 million cubic feet a day facility with condensate and NGL capacity of 25,000 barrels a day, of which 75% of that is -- will be condensate. Facility capital supporting infrastructure like sales lines and water handling assets -- water handling as well as the wells to initially fill the facility is expected to total approximately $600 million, which ARC plans to invest over the course of 2022 and 2023. ARC's typical facility time line for construction from sanction to onstream ranges from 18 to 24 months. And we expect to sanction this project in Q4 of 2021. So a few months out here, subject to our Board approval and with a targeted onstream date of Q3 of 2023. We have shown this next slide in other investor materials for other development opportunities. And the reason we like to show this slide is it highlights the strong cash flow generation capabilities of our own and operated facilities. Attachie West is the leading development opportunity in our portfolio to -- for exactly this reason. Not only does it deliver high-value liquids and robust full cycle economics, amount of free cash flow that the area will generate once the facility is on stream is very meaningful, approximately $250 million annually. With our large contiguous land base, over 200,000 net acres at Attachie, and decades worth of development opportunities, we can easily envision a similar cash flow profile for Phase II, Phase III and so on over the coming years. These businesses are sustainable, meaningful and repeatable. We are excited about this asset and looking forward to sharing our plans later this year. So back to you, Kris.

Thanks for the Attachie review, Terry. That last slide is always one of my favorites, just how we do -- target these businesses to generate free funds flow. I'd now like to briefly touch on our remaining option for our free cash flow available. We have available to allocate, and that is strategic M&A. ARC has no holes in its portfolio, but we will continue to evaluate opportunities with our screening criteria. This question has come up with investors and analysts many times over the course of the last few years. The 5 criteria on our slide have not changed during this time. And throughout the past probably 18 months, when we've indicated that very few opportunities met all 5 criteria, Seven Generations was always at the top of our list and always at the back of our minds. So you can expect us to continue to evaluate opportunities against these criteria. We're not the type of company that's going to be publicly talking about whether we are or not doing M&A, but you can trust that we will always be evaluating opportunities against this criteria and expect us to act accordingly. This is a new slide for us now, and it is an exciting one. So it does -- it's summarizing how we plan to allocate our [indiscernible] over the near term. And really, ARC's sustaining capital requirements to maintain our production at roughly 340,000 BOEs a day, we've talked about previously in that $1 billion to $1.1 billion range. And ARC can easily fund that along with our existing dividend at well less than USD 40 WTI and a very low CAD 1.90 per GJ AECO. So very low sustaining rates. And obviously, there's a lot of interplay given our balanced commodity mix between those 2 commodities. So if one's higher, the other one is lower and vice versa. After that, we can fully fund our Attachie Phase I development and start delivering incremental returns through dividend increases and share buybacks at less than USD 45 WTI and CAD 2.25 a GJ AECO. So when we take a step back and look at what we've designed this business to do, it's to be able to return capital to our shareholders and modestly grow it at roughly that 5% target. Terry was talking about at USD 45 WTI and CAD 2.25 AECO. So the very modest levels where we can achieve all of our targets and goals and have incremental returns to shareholders. Now dare to dream a little bit, but at pricing of roughly USD 55 WTI and CAD 2.50 AECO, so still under where price realizations are today. ARC can deliver substantial additional returns of capital to shareholders, and we'll still make sure that we keep the balance sheet in great shape and have enough dry powder for either new organic growth opportunities, strategic M&A or even further incremental returns to our shareholders. Now ARC has a tremendous amount of optionality internally. It's also important that we don't focus only on looking internal, and we do also compare ourselves against our new North American peer group. The chart on the left maps out expected cash returns, and it's represented by a combination of dividend yield, Terry referred to roughly 3%, and our free cash flow yield retained in the organization. ARC ranks as the best in this peer group of Canadian senior E&Ps and third overall in North America on this data set, delivering both income through our dividend and returns through our free funds flow generation. The chart on the right, which is return on average capital employed, is another important financial metric that ARC uses to evaluate the health of our underlying business as well as our ability to invest capital wisely in the past and reviewing our past decisions. Again, ARC is positioned very favorably amongst its North American senior E&P peers, with our long-term focus on corporate profitability on display and leading the pack. ARC is a premier differentiated business with tremendous capital allocation opportunities, both today and well into the future. And with that, I'm going to turn it back over to Terry for a few closing remarks before we get to the Q&A portion of this session.

Okay. Thanks, Kris. So as we've discussed here today, ARC is in an advantaged position following the acquisition of Seven Generation. The question is, how do we take advantage of our strong position to enhance shareholder value? So why own ARC? Well, as the largest Montney producer, ARC has the size and scale that is needed in today's market and the commodity torque from condensate and gas to provide increased flexibility within the portfolio to maximize returns and manage risk. As Kris outlined, we have the capital allocation optionality today and for years to come, which will allow us to deliver everything that today's investors want. And finally, ARC's financial position, substantial free cash flow profile, sustainable dividend, profitable production growth and meeting ESG performance are what make ARC a superior investment opportunity, not only in the Montney, but in Canada and across North America as well. We are ARC Resources, the largest pure-play premium Montney producer. Thank you for your time today, and I hope we were clear, concise and effective in sharing our story. And sorry, Kris, we're 3 minutes over the 9:30 mark, but we are close to being on time. I like to be efficient and on time. So.

That's perfect. Okay. With that, now we're going to pass it back to Sylvie, our operator, and to start with the Q&A portion of the call. [Operator Instructions] So with that, back to you, Sylvie.

[Operator Instructions]

And in the meantime, I'll knock off a couple that have come in over the web as we've been speaking. The first question is around how active we expect to be with our NCIB that we look to hopefully initiate later this year. I think we will do it on a portfolio approach as we approach all of our capital allocation and really a lot of our business opportunities. Given where pricing is and our targeted debt to cash flow range of 1 to 1.5x, a little bit of context on that is we would expect, in a higher price environment like we are today, that we should be at the lower end of our range. So think about us keeping that debt in that 1x range. And so really, it will be about how do we balance the different opportunities that we have in front of us with that portfolio approach. So we'll dedicate some of the free fund flow to the NCIB for sure, but we'll be very mindful of how our balance sheet is looking at the forward curve and with any commodity price volatility we're experiencing. The next one we'll probably talk to is conversion -- investing in natural gas conversion to hydrogen, And I'll probably just kick that over to Terry to speak at the high level.

So sorry, natural gas conversion to hydrogen.

Yes.

Well, yes, I think that's something that we -- as a company, we're looking into that in I think, obviously, it bodes well from the perspective of -- we have a lot of natural gas, a lot of resource and hydrogen within there. And that's something that we're just starting to evaluate and seeing the potential, but we're still at the very early stages of looking at that opportunity. But if it comes to fruition, and I think the company obviously is positioned very well being the third largest natural gas producer in Canada to take advantage of that opportunity when it comes up.

Right. Next question we'll go to is the Attachie breakdown of capital costs. The question is around the estimated total capital cost of $600 million and any breakdowns that we would have on that. So I'll hand that back to Terry.

Yes. So the cost of the $600 million is roughly half of it is there are facilities, pipelines. And when I say facilities, I'm talking, obviously, the water handling facilities, obviously, the gas plant, the liquids handling and the role going into that facility also. So that's about $300 million. It takes another $300 million of drilling and completion activity to fill that up and have that full for the first year. And we also need to be thinking past just the first year, and that's where we talk about having another $100 million to actually be thinking about the following year past the initial start-up so that we can keep that production fall throughout the year -- the following year. So for initial facility and initial fill up and holding production flat for the first year is at $600 million then we look at another $100 million thinking about the year ahead, so that the facility as well.

All right. Thanks, Terry. Next question coming in from Alex. Why an NCIB versus a component of variable dividend? I think we're certainly still evaluating. Obviously, variable dividends are quite popular with a few companies in the U.S., and generically, I would say some U.S. investors. And really, we are still in the process of evaluating does that make sense eventually, does that actually lead to higher shareholder returns and valuation, so it is something we'll be mindful of. But given where a relative valuation metrics are to our peers. We currently think that an NCIB could be more effective in the near term. Next question probably move to -- is related to the -- with the takeover of -- or business combination with Seven Generations. If you get bought a bottleneck to sell products within the limitations of new pipelines. I'd say no Egress right now across our portfolio is quite good. We are mindful of it. We are, as I'm sure you heard during the presentation, Canada's largest producer of condensate. So we do monitor and look at all of our pipeline Egress and currently have in excess of Egress on the natural gas side. So it is something that we're mindful of. But right now, there are no material bottlenecks in our portfolio that we need to address. The next question we'll probably move to -- as and I'll just read it here and then we can respond to it. As you think about free cash flow and project-based returns, how does an Attachie greenfield project compared to Kakwa? Capturing C5 exposure could be better suited across the Nest region. And so really, we're talking about Attachie versus Kakwa incremental production, and I'll kick that to Terry.

Yes. I think obviously, we talk a lot about risk management. And when I look at the 2 opportunities, it's great that we have both in our portfolio. Obviously, Kakwa we have a higher decline that I mentioned around 40%. And we want to bring that decline down to the mid-30s. ARC legacy assets were around 30%, and we have Kakwa at 40. So roughly saying production so that corporate right now is 35%. But I want to bring Kakwa down to about 2% per year if we sustain production at where it's at right now. And also, it allows us to improve the capital efficiency by increasing our inter-well spacing, and that's one thing that we have initiated in the Kakwa area. We believe we can become more capital efficient by doing that. So a combination of that Kakwa efficiency and the lower decline, obviously, yields lower sustaining capital. And then when I take a look at Attachie, so this is about building a new area and about managing production risk as we build a brand-new area. So with -- obviously, with Kakwa, we actually have more comfort on advancing in Attachie because we have a new big area like Kakwa. But with Attachie, we can build that up and we've spent so much time and effort, and we know and we're very confident in the returns on the full cycle returns of that project being over -- around that 30% or greater than 30%, especially at today's prices. So that is a very robust opportunity. But we -- obviously, I mentioned about how it takes 18 to 24 months to build out these larger facilities So in the meantime, at Kakwa, we can look at opportunities to be efficient and drill a few more wells and increase that production. The other nice thing about actually having some spare capacity is that when you bring on these wells, they are very prolific wells. And so there's a lot of flush production that can come out of these wells and having that extra capacity really helps pay these wells out quicker. Where currently on the ARC legacy assets, our facilities are always full. And so we always are pinching wells back instead of seeing that full potential. So we're going to try to manage risk, bring on Attachie, manage the decline at Kakwa and we can opportunistically increase production during the build phases where we think we're comfortable doing that. So it's all about managing the risk and delivering the long-term return. And that's the thing. You've got to focus on the longer term when you're looking at these opportunities, not just right today.

Thanks, Terry. We do have more online questions to get to, but I was just going to reach out to Sylvie and see if we've got anybody queued for audio questions. And I'm getting some shaking her head, so no, I assume we're fine. So there's a few questions from the web that are kind of addressing share buybacks versus dividend increases versus organic growth. And I think I want to go back to something that Terry said, and that is -- we believe we can do all of them. And so it is about delivering on all investor requests in terms of buybacks, increase per share metrics and get better valuation. The modest growth profile of 5% to really grow our business and move the business forward, increase earnings, which then also lead to increased dividends going forward. And so again, reiterate it -- we think we have the ability to do all of these capital allocation options with our portfolio approach. I think the next question we probably want to get to is after the first phase of Attachie, what major expansion would be next? And what's the thought process that would go into determining that, Terry?

Yes. So obviously, I had mentioned we have multiple phases of development potential at attaching. We typically like to spread out our development from going from one area to another area. So for example, the first phase of Attachie. After that, we'd be looking at maybe going into like our Septimus is an area that we've been -- we're very excited about developing Septimus. It's -- the land base has been proven up by competitors to the south and east and north of us. So we have no concerns from a reservoir perspective. And it's a dryer gas compared to Attachie. And with Attachie, 60% liquids where Septimus is more like maybe 15% to 20% liquids at the high end. So it depends on which commodity too. And really, from a commodity perspective, we see a robust pricing for both gas and condensate going forward here. So it's a matter of trying to manage risk in there. But I do say the Attachie, the next phase of Attachie is obviously going to benefit from some of the common infrastructure that we have put in place being mainly like the pipelines, for example, we sized them for the next phases of development. There was some facility expansion or facility capacity that we've already planned into this first phase. And so the next phase of Attachie will actually be more efficient than this current one because of some of the extra costs that we're incurring today for the future. So it's about managing risk. But obviously, both going looking at activeness and Attachie both in very robust economics. So we have the luxury of choosing and we're working on both options right now. So stay tuned. We'll get to that in a bit.

Thanks, Terry. And just a quick add on that. I mean, given the -- we do have North Montney takeaway at Attachie, the sales gas from there, we do have multiple commodity exposures across the portfolio. And so it does give us, again, the flexibility. And again, we've designed it so that we do have a balanced commodity outlook again from a derisking standpoint at the end of the day. I think we're probably coming up on near the end of our time here that we want to allocate to this. So I think we're probably going to shut this down. And I think I did want to certainly thank everyone for their time and do look forward to connecting with everyone in the coming days and weeks to further discuss our business plans. And I want to thank everyone for attending and for everyone working hard on this presentation to get it to you and look forward to chatting with everyone sooner than later.

Yes. And I'd say thanks for everybody for attending and supporting ARC Resources. We have a very bright future ahead of us, and hold on, it's going to be a fun ride.

Thanks, everyone.

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.