Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline quarter two results conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, July 29th, 2021. I would like to turn the conference over to Scott Kirker. Please go ahead.

Thank you, Operator, and welcome everyone to our discussion of Tourmaline Oil Corp's results for the three and six months ended June 30, 2021 and 2020. My name is Scott Kirker, and I'm the General Counsel of Tourmaline. Before we get started, I refer you to the advisories on forward-looking statements contained in the news release, as well as the advisories contained in the Tourmaline Annual Information Forum and our MD&A available on CDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I am here with Mike Rose, Tourmaline's President and Chief Executive Officer, Brian Robinson, Vice President of Finance and Chief Financial Officer, and Jamie Hurd, Tourmaline's Senior Capital Markets Analyst. We will start by speaking to some of the highlights of the last quarter and our year so far. After Mike's remarks, we will be open for questions. Go ahead, Mike.

Thanks, Scott, and thanks, everybody, for dialing in. And we're pleased to review our second quarter results and answer questions that shareholders may have. Starting out with the highlights, second quarter 2021 cash flow was $1.89 per diluted share. We had record-free cash flow of $343.9 million on production of 410,339 DOEs per day, which exceeded the high end of production expectations despite challenging operating conditions with June's heat wave. The updated five-year plan at current strip pricing delivers $1.8 billion of free cash flow in 2022 and $7 billion over the full five-year duration of the plan. We received a credit rating upgrade from BBB to BBB High in July of 21 by DBRS Morningstar. We now expect to achieve our year-end 21 net debt target of approximately $1 billion or 0.4 times debt cash flow and less than one times annual free cash flow prior to year end. With incremental volumes on the GTN Malin PG&E systems and the company's recently announced Gulf Coast LNG pathway in 2023, Tourmaline will have $905 million a day exposed to export markets on firm long-term transport agreements by exit 2023. Our largest export market, PG&E California, is currently trading at $5.50 per MMBTU in U.S. dollars. Looking at production in a little more detail, as mentioned, second quarter, 21 average production was a little over 410,000 BOEs per day and a little over 414,000 BOEs per day prior to storage injections into our storage reservoirs in California and Dawn. So that's a 37% increase over the prior year, Q2 2020. We anticipate third quarter average production will range between 450,000 and 460,000 VOEs per day. We expect to reach the 500,000 VOE per day production milestone in Q2 of 2022, primarily through the completion of The Gundy Phase 2 project, the Neat Creek expansion project, and the ongoing LaPree's development program. 2021 average production for the year remains estimated at 430,000 to 445,000 BUEs per day. Looking at our very strong financial results, second quarter 21 cash flow was $570 million compared to $225 million or $0.83 per diluted share in Q2 2020. Second quarter 21 after-tax net earnings were very strong at $428 million or $1.40 per diluted share, and that compares to $20 million or 7 cents per diluted share in the second quarter of 2020. We delivered free cash flow of $344 million on EP capital spending of $216 million in the second quarter. Full year 21 cash flow of $2.78 billion is now expected with estimated free cash flow for 21 of $1.47 billion. We received the credit rating upgrade in July of this year following the close of the Black Swan acquisition, moving up to BBB high from BBB for both the issuer rating and the senior unsecured notes. The credit rating upgrade is expected to result in lower effective interest rates on company debt which already are extremely low and in the top tier at 1.72% for the second quarter. Revisiting the capital program and the financial outlook, second quarter 21 E&P capital spending was on target at 216 million. Full year 21 E&P capital spending remains at 1.27 billion. Net debt at June 30th of this year was 1.7 billion. which excludes the two Northeast BC transactions with Tobas, which yield 390 million in cash, both of which will close in the third quarter of 21. Exit Q3 21 expected net debt is approximately 1.4 billion, including the impact of all acquisitions completed to date in 2021. We now expect to achieve the year-end 21 net debt target of approximately 1 billion As at July 15, 2021, Tourmaline's Topaz equity ownership was valued at $934 million, which essentially offsets the estimated 21-year-end net debt. As mentioned, the updated five-year plan and current strict pricing now delivers $1.8 billion of free cash flow in 2022 and $7 billion over the full five-year duration of the plan. Looking at a little bit more detail at the growing free cash flow outlook and our plans, our consistent 2021 narrative has been that our top two priorities are modest sustainable dividend increases and continued debt reduction to our long-term debt target of 0.5 times debt to cash flow. So far in 21, we've used free cash flow for two dividend increases, and we now expect to hit that long-term debt target during Q4 of this year. As we look out to 2022 and the full five-year plan, the vast majority of the free cash flow will be returned to shareholders. We'll provide more detail on the mix of the return opportunities over the upcoming two to three months, including continued sustainable base dividend increases, special dividends, and share buybacks where appropriate. We see special dividends matching up well to periods of elevated commodity prices and the excess free cash flow generated during those periods. Recall that our annual EP program generates 3% to 5% annual growth, and the only significant facility project of size in the current five-year plan is the Gundy Phase II expansion, and it will actually be done by the end of this year. The balance of the program in the out years is thus very capital efficient and will continue to generate significant free cash flow. The next large facility project is the Conroy North Montney development, which we've matched up to the LNG Canada startup when we expect very strong Western Canadian gas pricing. That time frame is 25-26. Hence, this project's not in the current five-year plan. It could be as large as $800 million per day. It will be a very strong utilization of free cash flow in the 26-27 time frame. We also have an initiative to capture more margin in our liquids business. and are currently evaluating strong return projects to that end and this new business segment. These projects will compete for a portion of the free cash flow in the 24-25 timeframe. A brief marketing update. The average realized natural gas price in Q2 21 was $3.25 per MCF, as we've benefited from rising commodity prices, select hedging, and our broad natural gas market diversification portfolio throughout North America. The accelerated Gundy phase two expansion project is expected to be on stream in January 22 so as to take advantage of potential winter gas price premiums. And we made that acceleration decision a couple of months ago as we were ahead of schedule on the facility pre-bill. The PG&E California market continues to be very strong an average Q2 benchmark price of $4 for MMDTU US and strip pricing at July 23rd, 21 of 548 per million BTUs US for the remainder of 21. NGL price realizations in Q2 21 were up 130% over Q2 2020. We are Canada's largest NGL producer, averaging 55,500 barrels per day during the second quarter. and the NGL pricing outlook continues to improve. Briefly, some comments on the EP program. We drilled 114 net wells in the first half, and we expect to drill approximately 250 net wells for full year 21, completing approximately 220 of these by the end of this year. We are currently operating 12 drilling rigs, and we'll add an additional rig on the former Black Swan lands in September as originally planned. We expect to bring approximately 140 net wells on stream through the balance of this year. Improved drilling time and cost performance for D and C operations has largely offset modest inflationary cost pressures that we are all observing. Drilling times have been materially reduced in all three core complexes through the application of multiple evolving technologies that we continue to trial. Recent horizontals in the LaPree, BC, Montney area are now being drilled to TD in five days. Overall, the second half 21 EP capital program is being executed slightly ahead of schedule. Moving to our environmental performance improvement initiatives, we intend to invest 20 to 40 million per year in these initiatives, primarily in the areas of diesel displacement for EP drilling and completion operations, methane emission reduction and ultimate elimination projects, gas plant emission reduction and associated waste heat recovery installation, and our multiple water management projects. The majority of these environment-related capital investments do indeed generate a modest positive return. We estimate that environmental initiatives to date have reduced our annual emissions by approximately 250,000 tons per year so far a meaningful accomplishment. We have now installed over 200 zero emission electric chemical injection pumps, providing an estimated GHG reduction of 40,000 tons of CO2 equivalent per year. The first hybrid gas tier four frac unit has been delivered and will be pumping on our BC Montney pads in the second half of 2021. Evolving zero methane emission technology is being implemented on all new well sites in all company-operated areas. And finally, the engineering design has been completed for the NGIF Emissions Testing Center. That East Edson facility is expected to be fully operational later on in Q3 of this year. And this center will be evolving the next generation in emission reduction in the field These are all technologies to be put in place during the next two to five years.