Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q3 2021 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, November 4th, 2021. I would now like to turn the conference over to Mr. Scott Cooker, Please go ahead.

Thanks, Operator, and welcome everyone to our discussion of Termline's results for the three and nine-month end of September 30, 2021 and 2020. My name is Scott Kirker, and I'm the General Counsel for Termline. 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 Termline Annual Information Form 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, Manager of our Capital Markets. We will start by speaking to some of the highlights of the last quarter and our year so far. After Mike's remarks, we'll be open for questions. Go ahead, Mike.

Thanks, Scott, and thanks, everybody, for dialing in. Very pleased to review our third quarter 21 results this morning. A few of the highlights, we had record quarterly cash flow of $761 million and free cash flow of $369 million in the third quarter. Current production is ranging between 485,000 and 490,000 BOEs per day, and we do expect to achieve our 500,000 BOE per day exit target in early December. We expect exit 21 net debt of approximately 815 million at current strip pricing after giving effect to the special dividend of 75 cents per share paid in October. The Gundy and Aitken facility expansions in BC will be completed and on production in December, so a little ahead of schedule, and our original methane emission reduction target of 25% below 2018 levels by 2023 has been achieved, and that's three years ahead of schedule. Briefly on production, Q3 21 average production was a little over 456,000 BOEs per day, so in the upper half of our guidance range despite force majeure events impacting our liquids volumes towards the end of September, and those issues have all been rectified. Termaline expects 22 average production of between 500,000 and 510,000 BOEs per day, which is 2.3 BCF per day of natural gas and 115,000 barrels per day of oil condensate and NGLs. Looking at our financial results, as mentioned, third quarter 21 cash flow was 761 million or 232 per fully diluted share, and that compares to $280 million in Q3 of 2020. Nine-month 21 cash flow is $1.96 billion, and we anticipate full-year 21 cash flow of over $3 billion. We delivered free cash flow of $369.5 million in the third quarter on EP capital spending of $380 million. And importantly, third quarter 21 earnings were $361 million or $1.10 per quarter. fully diluted share and that compares to a little under 5 million or 2 cents per diluted share in the corresponding quarter in 2020. An update on the capital program and our financial outlook. As mentioned, 21 EP capital spending was 380 million compared to guidance of 420 million. Our full year 21 EP capital spending of 1.375 billion. and 22 EP capital spending of $1.125 billion remain unchanged from the previously disclosed forecast. We expect exit 21 net debt of approximately $815 million on current strip pricing. Long-term, we intend to keep net debt in the $1 to $1.2 billion range, and we are at our long-term debt target a little early as well. As previously disclosed, we paid a special dividend of 75 cents per share on October 7th and also increased the annual base dividend to 72 cents per share annually. We plan further special dividends over the next several quarters contingent upon commodity prices and free cash flow allocation decisions. Given current strong pricing and the rate of free cash flow accumulation, We expect to pay the next special dividend during the first quarter of 2022. And we're now expecting full year 22 cash flow of $4 billion, yielding free cash flow of $2.8 billion on unchanged EP capital spending of that $1.125 billion. Turning to marketing, our average realized nat gas price in the third quarter was $3.88 per MCF. as we benefited from rising commodity prices, select hedging, and the company's broad natural gas market diversification portfolio throughout North America. We have $591 million a day of fixed price hedges for 2022 at a weighted average price of $3.17 per MCF Canadian, and that represents approximately 25% of 22 gas volumes. We have an average of $149 million a day of very attractive basis hedges in place, and an average $621 million per day in 22 exposed to export markets, including Dawn, Iroquois, U.S. Gulf Coast, Empress McNeil, Chicago, Ventura, Sumas, Moline, and PG&E. Note that the 22 hedged volumes include approximately $145 million per day of lower-priced hedges, and those were acquired in the Modern and Black Swan transactions, and they will systematically expire. We have recently acquired additional transport service, complementing our base service for winter 21-22, and we now have a total of $130 million a day exposed to the US Midwest market, and we are very constructive over the next few months on that market. In November 22, Tourmaline will have $150 million per day exposed to the Gulf Coast market, which will become JKM index exposure in January of 2023. Furthermore, we will add an incremental $100 million per day of exposure to the GTN, Malin, PG&E markets in November 22 and a further $50 million a day on the same system in November of 2023. Importantly, NGL price realizations in Q3 of 21 were up 115% over Q3 2020. And we are Canada's largest NGL producer with anticipated average production levels of approximately 72,000 barrels per day in 2022. We're very busy operationally and pleased to report that the accelerated deep cut facility projects at both Gundy and Aitken are expected to be completed ahead of the revised accelerated schedule, and importantly, on budget. We are operating 13 drilling rigs, so our full fleet as planned, and that's across Alberta and BC. 87 net wells were drilled in the third quarter, 77 net wells were stimulated and brought on production, and we expect to stimulate and bring on production a further 79 net new wells during the fourth quarter of this year. And finally, looking at our ongoing environmental performance improvement efforts, as mentioned, we're pleased to report we've already achieved the methane emission reduction target of 25% from 2018 levels by 2023. 2020 actuals of 405,000 tons are 26% lower than 18 actuals of 547,000 tons. And that's despite production growth of 17% during that period. We will continue further reducing methane, CO2, and other atmospheric emissions throughout the EP portfolio, and we'll revise our five-year environmental performance improvement plan as appropriate as we achieve these targets. And then we'll set new targets again. It's about getting out in the field and getting it done. The company's emission testing center, or we call it the ETC, at the Tourmaline Perpetual Wolf Creek Gas Plant, and it's the first of its kind in the world, is now fully operational. It's a corroboration with NGIF, which is the Natural Gas Innovation Fund and Industry, and it's critical in evolving new technology and methodologies to continue to materially reduce methane and other emissions across our whole EP portfolio. And producing the lowest emission natural gas will allow Canada to grow both domestic production and international exports. And so that's all I was going to say going through the press release. And so we're wide open for questions that listeners might have.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys.

one moment for your first question operator Is anyone there?

Hi, sorry about that. Faye Lee, Adam Brown, please go ahead.

Hi, it's Faye here from Adlam.

Faye.

Mike, I'm just wondering if you can comment maybe about if you're seeing any labor pressures or cost pressures for next year. Just wondering if you'd comment a bit on that, please.

Sure. Well, firstly, being a consistent heavy user of services in good times and bad, Tourmaline always has access to the services we require. We've certainly seen some modest price increases, approximately 5% over the past six months on the drilling and completion side. And remember, FI, we build 2.5% per annum inflation on both capital and operating in the five-year plan, which compounds through the plan, so really a material contingency is already built into our outlook. And, you know, the majority of our service costs are locked in through the breakup. And we will observe, you know, if and what they are as far as further increases in inflationary pressures for the second half of 2022, primarily.

Okay, great. Also great to see the, you know, reaching the emissions reduction target three years ahead of schedule. I know you're continuing to work on further reducing that. I'm just wondering, in terms of the success you've had, if you can talk to me a little bit about how much are you expecting to see further significant reductions, or do you think the ability to further reduce methane will slow down just given your head of schedule? I'm just trying to understand that. The trajectory.

Yeah, yeah, no, it's really good question and you know we have a technical and operational plan in place targeting the next 25% reduction. We were actually just going over it yesterday and and firm plans on on how we get there and that's kind of been our approach on the environmental performance improvement is create five year plans that really match our our financial plans. uh set realistic targets with you know a technology pathway uh to to achieve those reductions and then achieve them and uh the first 25 reduction in methane we got early and i hope we do the same on the second okay sounds great thank you ladies and gentlemen as a reminder should you have a question please press star followed by the one on your touchstone phone

Your next question comes from Joseph Schartner of Schartner Energy Research.

Please go ahead. Good morning, Mike, and congratulations on the fabulous quarter and the discussion you mentioned about the specialty event for the Q1 potentially. What I wanted to cover was two areas. One, the LNG potential on the Gulf Coast. You've got the contract with $140 million a day with Chenier. And you have slide 23 on the presentation showing the routing from the Montney down to Corpus Christi. Is there more capacity on that line? And with Chenier expanding the Sabine Pass and, as you show on the chart, Corpus Christi Stage 3, or other people in the LNG business, even though Chenier is the biggest, are there more opportunities? And do you see in the next six months, a year, of announcing additional export potential at that hub.

Okay, yeah, I'll answer a few of those. At this point in time, there's not more space on that pipeline routing that we've established to get from BC and Alberta down to the Gulf Coast, although we'll monitor the situation. We're looking at other opportunities to grow our LNG supply commitments going south and going west as well. And so, you know, we'll advise as any of those opportunities get firmed up.

And what is the difference between NYMEX and JKM pricing right now, just to get an idea of what the list could be?

So current spot JKM has been pretty volatile, but, you know, has traded recently in the 30s. In 2023, when the contract comes on in our five-year plan, we grabbed the forward strip in mid-October, and it was just over $11. And so the cash flow impact is reflected in the five-year plan, and it's significant. It's in the order of hundreds of millions of dollars a year.

Yeah, yeah. No, that's good. It would be nice if you could find more rooting down there to do additional volumes going forward. The second area I wanted to cover was, the new dual fuel fracture equipment from Trican. Has that been in the field working and are you comfortable that you're getting the potential for 85% removal of diesel or is that still something that's still a little too early to have a definitive comfort zone on?

It's just arrived and we're using it and we will employ it on a full-time basis really for the next three years and We think the technology is solid and that 85% reduction is the ultimate goal. But, you know, too early to say, you know, what we're achieving right at this point in time. But we're excited that it's there and really excited to use it jointly with Trican.

Super. That's it for me. Thank you and congratulations again.

Thanks, Joseph.

Your next question comes from Patrick O'Rourke, ATB Capital Markets. Please go ahead.

Oh, hey, good morning, guys. Strong quarter there. Just curious, I know you're talking about the timing for the next special dividend being Q1. I was wondering if you could maybe just walk us through philosophically your view on that and then maybe sort of the impacts. I know there's seasonality both to your capital program and probably more so to your cash flows with winter gas demand here. Just sort of how you incorporate that and what the sort of cadence we could expect for special dividends beyond Q1 in 2022 is.

Sure. And special dividends really are just, you know, one of the many routes that we can return capital to shareholders. We're, you know, always going to be pursuing, you know, sustainable base dividend increases. We've done one to two per year since we started paying a dividend in mid- so I think shareholders can look forward to perhaps a similar cadence on the base. Specials are attractive to us in periods of elevated commodity prices, and we won't let cash build up to too high a level on the balance sheet beyond our long-term debt target, which we are at now. So currently we expect to pay the next dividend in Q1 of specials, sorry, Q1 of 2022. as our anticipated exit 21 debt's only a little over $800 million. So we have the room. It's hard to predict the exact cadence, Patrick, just as commodity prices will be volatile. I think our EP capital program, you know, it's unchanged, and you know kind of the distribution and cadence of that on an annual basis. So I think that can provide some guidance if commodity prices stay elevated. as to what the pace and size of the specials might be through the balance of 2022.

So is it safe to say, like in Q1, where we've got elevated natural gas strip right now, if you have, call it, for all intents and purposes, a bumper crop of cash flow, that's how we would expect you to distribute it?

Well, yeah, we are committed that the majority of free cash flow will be returned to shareholders but you know we always do point out that over the course of the year there are some other you know very viable potential recipients of free cash flow and that includes you know liquids midstream investments and and potential bolt-on asset acquisitions will also compete for that free cash flow but I mean the reality is and if you look at the free cash flow off strip for 22 right now We have room to do a significant number of bolt-on acquisitions. We're not close on anything on the midstream side and an enormous amount of free cash flow to distribute. I think it's a good situation to be in.

Just one more question. One of the slides we watch pretty closely in the investor deck is the five-year plan. I think that you guys convey the plan really well there in those tables. One of the things that stood out to us with this November update is that call it 23 through 25, so years 3, 4, and 5 seem to have more of an impact on the free cash flow side and maybe call it more of a structural improvement in the outlook for the business. I'm just wondering if you can provide us some color in terms of what's driving that.

I think commodity prices are a big part of this, Patrick. You have seen a little bit less backwardation in the natural gas strip and also the liquid strips. And on the liquid strips, it's important to identify that NGL prices have really, really improved and have remained robust really through the next two or three years. And Tourmaline is going to benefit from these rising propane and rising butane prices. Also, as we spoke a little bit to earlier, the J-CAM price is really starting to thrive in 2023 as that plant comes on. So that's also part of it.

So I think commodity prices are a significant part of the Q over Q change.

Okay, thank you. Thank you.

Your next question comes from Elias Foscolos, IA Capital Markets. Please go ahead.

Good morning, and thanks for taking my call. I want to focus on the last comment, actually, which is LPG or butane and propane type pricing. Do you have exposure to the Far East and is that showing through the numbers now or can that show through directly later?

Thanks for your question. It's Brian and we absolutely do have exposure there so we are a significant party that delivers into the RIPIT facility that's operated by Alpha Gas and we capture about a $10 to $12 improvement over what we were selling those same barrels for Saskatchewan. Our commitment increased after the Black Swan transaction. So if you look at our total propane stream, 9,500 barrels goes there of the roughly 20,000 barrels of propane that we produce.

Great. Thanks for that. And any butane exposure also?

Our butane is currently more sold into the Western Canadian market. I would say that NGL prices through 2021 are pushing up to almost 50% of WTI, whereas if you did the same calculation last year, that total stream was in the order of between 25% and 30%.

Something that slides under the radar is ethane, but the fundamentals for ethane are really improving with you know, additional demand projects being announced by some of the consumption or consumers of ethane in Alberta. So, you know, 21% of the stream is C2, and the outlook for ethane has also improved, particularly kind of mid-decade.

Yeah, that was actually going to be my next question. So, with the potential new cracker coming on, can we see not only better ethane prices, but some investment in midstream products that might directly feed into a cracker. So that was actually my next question. Thanks.

Well, that's part of our long-term kind of midstream strategy that will continue to evolve and the pace and cadence of those capital investments and where those projects are located.

Okay. One last question, and it has to do with the balance sheet. You've targeted a certain absolute debt number. and I'm going to throw this in. Given that financial institutions have talked about lending less to E&P producers for all practical purposes, carbon producers, I also know you have flexibility in terms of term debt. Can we see potentially the debt number going down as a function of that, or can we see a shift in the debt mix going forward?

Well, I think we've paid really good attention to our balance sheet really over the past two years. So our current debt to cash flow is about 0.25 times annual cash flow, and our long-term debt is now less than half a turn of annual free cash flow. So I think we've essentially insulated ourselves from the financial institutions.

And certainly, your question on the mix, $450 million of our debt is turned out through these two debt offerings we've done here in the last 12 months. And that then leaves a smaller proportion that is the revolver or the conventional Canadian bank syndicate. And it'll be relatively small in the equation.

And to put that in perspective, with term lien generating roughly $700 million of free cash flow a quarter, you could bring down the revolver in three months if you wanted to.

Yeah, no, the math is evident. But thanks very much for the color on both those sort of slots of questions.

You betcha. No, thanks.

Ladies and gentlemen, then off with the questions at this time. I'll now turn it back to Mr. Kirker.

Thanks, everyone, for attending, and we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.