Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q1 2022 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, May 5, 2022. I would now like to turn the conference over to Mr. Scott Kirkup. Please go ahead.

Thank you, operator, and welcome everyone to our discussion of termination results for the three months ended March 31st, 2022 and 2021. My name is Scott Kirkup. I'm the chief legal officer for termination. Before we get started, I refer you to the advisories and forwarding statements contained in the news release as well as the advisories contained in the termination and the information form and our MDMA is available on CDAR and on our websites. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Mike Rose, Terminants President and Chief Executive Officer, Brian Robinson, Vice President of Finance and Chief Financial Officer, and Jamie Hurd, our Manager of Capital Markets. We will start by speaking to some of the highlights of the last quarter of our year so far. And after the next remarks, we will be open for questions. Go ahead, Mike.

Thanks, Scott, and thanks, everybody, for dialing in. We're pleased to review our Q122 results. Firstly, a few of the highlights. Record quarterly cash flow of $1.076 billion and record quarterly free cash flow of $618 million or $1.82 per billion share. That enabled us to declare a special dividend of $1.50 per common share. That will be paid May 19th of this year. And our trailing 12 months of distributed dividends now total $4.21 per share inclusive of this special dividend, and that's an implied 7% trailing yield at this point. Our full year 2022 free cash flow forecast has increased to $3.9 billion, which will allow us to pay quarterly special dividends through the balance of $22. Our Gulf Coast Shamir LNG arrangement on $140 million per day begins Jan. 1, 2023, and for reference, As of April 21, the JKM strip price was over 25 US per MMBTU. And at March 31, 22, net debt was $769 million, or 0.15 times 22 full-year forecasts for debt-to-cash flow, and that's well below the low end of the target range. Briefly on production. First quarter production of a little over 507,000 BOEs per day was within our guidance range of 500 to 510,000 BOEs per day and above full year average guidance of 500,000 BOEs per day. We exited the first quarter at average production levels of between 515 and 520,000 BOEs per day ahead of expectation and that was driven by higher activity levels during Q1, and strong well performance across all three operating complexes. So far, our record daily production rate achieved is a little over 526,000 BOEs per day, which is actually ahead of the current 23 average production guidance we provide of 515,000 BOEs per day. And we expect Q2 average production of between 500 and 505 because we'll re-inject into storage in Don and in California. We have some of our own facility turnarounds, and there's also third-party pipeline maintenance that typically happens in Q2. Looking at our financial results, as mentioned, first quarter cash flow was a record $1.08 billion. Our full-year 2022 cash flow is now $5.22 billion. That's $15.34 per diluted share, and it's actually up 29% from our previous forecast back in March. Full-year free cash flow, $3.92 billion, and that's $11.53 per diluted share. As mentioned, we achieved the long-term net debt target actually in Q4 of 2021, and we have committed to return the majority of free cash flow to shareholders through these base dividend increases, special dividends, and share buybacks. A component of free cash flow will also be used for asset acquisition opportunities within our three operating complexes and select margin-improving infrastructure investments. Given that record free cash flow outlook for the year, we're pleased to announce quarterly special dividends for the remaining three quarters of 2022. The magnitude of the special dividends in the third and fourth quarters will be a function of commodity prices and results available free cash flow. And also note that additional sustainable base dividend increases are planned for 2022. Touching on capital spending and the financial outlook, first quarter 22 EP capital spending was $442 million. Total capex in the quarter including acquisitions was $479 million. And note that acquisitions of property and land are funded by annual free cash flow and are actually not included in the base EP budget that we put in the five-year plan. We operated a larger proportion of the drilling rig fleet and completion spread through March compared to previous years and that was in part because of continued strong commodity prices and also access was really good. So this will allow for stronger Q2 production volumes than what you would see in our typical annual production profile. and that incremental March activity added approximately $20 million to Q1. Full year 2022 EP capital spending has been increased to $1.225 billion, so that's up from $1.125. The increase includes an incremental $75 million provision for inflation, and that equates to 6.7%. full-year cost inflation on top of other provisions that we had in the budget already, and also $25 million allocated to following up the multiple successful new zone, new pool expiration discoveries we've made, and we're quite excited by that. First quarter, 22 exit net debt, as mentioned, was $769 million, well below the long-term bottom end of the net debt target range of $1 billion. Briefly on marketing, we have $625 million per day accessing U.S. markets through long-term firm transport agreements, and this volume will grow to $905 million per day by exit 2023. Importantly, of course, our $140 million per day Gulf Coast LNG deal commences Jan. 1, 2023, or eight months from now. Approximately 60% of the current lower price hedges that we assumed through the acquisition of Jupiter, Modern and Black Swan will systematically roll off and these production volumes will benefit from the much higher current strip pricing for winter 2022-2023. Notably, realized NGL prices averaged 44.82 per barrel in Q1 of 22 and that's up 63% year-over-year and we do expect further strengthening of realized NGL prices through the balance of the year and recall that Tourmaline is the largest NGL producer in Canada. On EP, 84.7 new net wells were brought on production during the first quarter of 22 and we anticipate a further 44 wells coming on stream during the second quarter, and that in part is related to the increased activity in March of this year. We did achieve new record horizontal well lengths with associated record low drilling times in all three EP complexes. A couple of the pacesetters include at Progress, a lower Charity Lake horizontal, 3,509 meters long that we drilled from surface to TD with the assembly in the ground in 11.7 days. And in the greater Aitken area, we drilled just over 2,000 meters horizontal from surface to TD again with the assembly in the ground in under five days. So think about that, 4.9 days is the total. So these continually improving drill times really help reduce the impact of ongoing inflationary pressures. Some detail on our North Montney development. We continue to plan for what we call Conroy, which is our North Montney development. Notably, this expected 100,000 DOE per day liquid-rich gas project actually represents one of the largest single conventional developments upcoming in the western Canadian sedimentary basin over the next few years. So we are going to continue to grow tourmaline in a meaningful way. Current timing for full project start-up is 2025-2026, and that coincides with the start-up of LNG Canada, which we expect to be structurally positive for Western Canadian gas supply demand dynamics and, of course, natural gas pricing. So far, that full development, including production, cash flow, and capital spending, is not in the existing five-year plan that we have just published or revised one. We've drilled so far over the past nine to 12 months, 12 delineation pads on the new LaPree's Conroy Aitken lens, and that's to define liquid content, well performance profiles, and capital costs in advance of the full development. And the results, we're pleased to say, have been very strong. As part of our long-term associated congroin facilities plan, we acquired the remaining 50% non-off interest in the two Aitkin area gas plants that came in the Black Swan acquisition from Ulta Gas for $224 million, and that closed during Q2. The plants, including the deep cut expansion, have a combined processing capacity of $290 million per day, and both are operating at full capacity. Annual off-ex savings resulting from this transaction are estimated at about $27 million per year. On environmental performance improvement, after achieving our net 25% methane emission reduction target three years ahead of schedule, we're currently establishing new rigorous targets to further reduce those emissions and technology initiatives currently being developed include continued pneumatic pump retrofits, installation of solar electric pumps, conversion of separators to full solar electric and the pursuit of zero emission well site technology. We have successfully transitioned all of our drilling rigs under contract from diesel to natural gas achieving both a material emissions reduction and a net cost savings. We also continue to evolve several CCUF initiatives within all three operating complexes and plan to implement these potentially material emission reduction opportunities at a selection of our gas plants in the 2025 to 2030 timeframe. Tourmaline will begin providing low emission Canadian natural gas to Europe and Asia in 2023 via our Gulf Coast LNG pathway. And we'll continue to explore opportunities to expand this business segment. We believe that a growing Canadian LNG business providing ever lower emission Canadian natural gas to the developing world is one of the best things our country can actually do for the global atmosphere. And it's an enormous sustainable win for the entire Canadian economy. So It's an environmental win, an economic win, and an energy security win. So kind of a hat trick for Canada as we go through the playoffs here. So that's it, and happy to answer questions.

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 pulled in the order they are received. Should you wish to decline from the polling process, please press the star, followed by the number two. One moment for your first question. Your first question comes from Patrick O'Rourke, ATB Markets. Please go ahead.

Hey, guys. Good morning. Thank you for taking my question, and congratulations on the very impressive special dividend there. I'm just wondering, and we have a small ball here, but in terms of the UltaGas, working interest acquisition there. To my recollection, your pre-existing working interest or operating interest in Atlanta had not been dropped down into your sort of infrastructure structure that you have here. You're well through your net debt target. You've got a very good-looking free cash flow profile going forward. are you still looking to sort of monetize into your royalty vehicle some of these facility working interests? It's something we always keep in mind, but nothing imminent at this point. And it was important for us to consolidate to 100% in the North Montney facilities prior to embarking on a significant build-out over the next few years. Okay. Okay. And then just a second question very briefly here. You know, I think that you guys have been on record saying that you've sort of acquired a lot of the core properties that you were looking to for your medium and longer term strategy. Obviously, the cash taxability horizon is creeping up on you very fast with where stir prices have gone here. I'm just wondering how sort of tax pools can come into play in any sort of incremental M&A going forward here for Tourmaline?

It's Brian speaking. I mean, certainly if you go back over the last sort of 30 months, the acquisitions that we did do greatly enhanced our tax pools. So the tax basis on those businesses was higher than the actual flowing barrels and so on. So we're happy about that. And that has been an aid force in pushing the tax rising out. We started the year here with above $9 billion in tax pools. taken out first year in 2022. And the tax horizon will get pushed out a bit, as Mike mentioned, with the investments that we're planning on our Conroy North Mountain development. But to be sure, there is going to be cash taxes here, and we're going to be fully taxable in the later years in that plan that we've laid out for you.

Okay, thank you. Thank you.

Your next question comes from Filey Odlum-Brown. Please go ahead.

Great. Thank you. I'm just wondering if you can help me. I just want to understand the Chenier LNG deal, make sure I understand it correctly. You basically ship the gas to the Gulf Coast. I think the toll you talked about was $0.86. I'm assuming there's some processing fee that Chenier will collect. for processing and converting it to liquid, and then you transfer it to Asia, there may be some cost to that. So let's say if I send a cost to get to the Gulf Coast, liquefy, and ship to Asia, about $7, if the pricing is at $26, would you collect the $19, unless you're off-costing the net pack? Is that the way to think about it?

That's roughly the way to think about it. The $7 index might be a little impressive, but yes, it's in U.S. dollars. That would be our net back. To put it another way, this is maybe 6% of our gas, but it's going to amount to roughly 13% to 15% of our revenue. It's a very material cash flow impact in 2023. And over the last six months, you've seen the forward years, so 2024, 2025, 2026, on JPM pricing also greatly improve, all of which are now well over $10. So it's going to be definitely a very valuable contract, particularly in the near term.

And sorry, when you said $7 is aggressive, like too low or too high?

Probably a little high.

A little high. Okay. All right. So maybe six or something. Okay. And The dynamic has obviously changed since you put the deal in place last year. It looks like European pricing might be a little bit better and maybe a little cheaper to ship there. Can you switch over or is the deal kind of locked to JTM?

It is a JTM index deal. In the long term, the floating ARB between TTF and JTM should actually be relatively tight. It'll be the shipping ARB between the two jurisdictions. So while this year definitely has featured some real tightness as Europe has rapidly transitioned to LNG imports, over the longer term, we think those two markets will hold hands very nicely. And so we see the JPM market as an indicative market for basically all LNG floating prices.

Okay. Sorry, the last question for me is, in your five-year plan, you know, this $26 strict pricing, is that built into your five-year plan right now in terms of for next year, or?

It's the exact script that JKM has, so it is evaporated, but it's in there.

Yeah, the five-year plan is on the April 14th strip. At that time, 2023 was $23, and the evaporation is roughly three bucks a year. I think the last year is, you know, low.

Okay, great. Thank you.

Your next question comes from Aaron Bilkoski, TD, please go ahead.

Hi, good morning. I guess my question is around the use of free cash flow. So when you talk about the majority of free cash flow going to shareholders, if I assume that means either 50% or even more than 50%, you'll be building net cash and getting further and further away from that $1 billion permanent debt target. I guess my question is, are you comfortable being in a net cash position for a period of time? And if the answer to that is yes, what would you be waiting on before you deploy that?

We're comfortable taking debt well below the billion dollar bottom end of our sort of long-term debt target. To some extent, you know, we can bank cash for the North Montney development, which will be a significant expenditure. So, you know, as we start proceeding with that, we might in effect have it pre-financed. We do allocate pools of available free cash flow for you know, ongoing asset acquisition, obviously that slowed down and we backed away from certainly corporate M&A. We're always looking for midstream deals that improve the margin on every BOE we produce. And, you know, even if it's just a couple bucks of BOE, when you convolve it with our 20,000 plus location inventory, we think those are very good investments to make on behalf of shareholders. Brian or Jamie, anything you guys want to add? I think we just underscore we're definitely committed to returning the majority of pre-cash to shareholders this year. So that's, you know, per share, total pre-cash per share is $12. The majority means an excess of $6 to be distributed through base dividends, special dividends, and potential taxable share buybacks.

Thanks. Can I ask another one? Yep. To what extent can, I guess, have you hedged, can you hedge, and are you willing to hedge JKM in 2023 and beyond?

We are starting to explore those opportunities and work on it. We haven't done a lot of that yet, but we fully plan on doing so.

Thanks, guys. Yeah, thanks, Aaron.

Your next question comes from Joseph Schachter, Schachter Energy Research. Please go ahead.

Thanks very much. Thanks very much for taking my question, and congratulations on the results and the comments you made on the dividend and special dividend. The question is more on the S of the ESG, the societal thing. With storage being so low in both sides of the border, the data from EIA last week was 17% below the five-year average and 21.4% below that. prior year, are we looking at a potential that we'll get to November when we go into withdrawal season, that we may have a shortage of supply if we have a normal or worse than normal winter? And where do you see pricing going? Are we looking at double-digit? Does this then become a thing where there's a bullseye on the industry because of the moving prices, which could be triple for winter heating in 2022-23 versus 2021-22?

Well, they're all good questions. I mean, obviously, it's a very volatile environment. I'd say supply and demand are relatively in balance. So we do expect storage injections to pick up here on both sides of the border. And I think we'll head into winter probably lower than normal, but I suspect we'll have adequate supplies. And I don't think anybody wants You know, really egregious price spikes. I know where you're going with it, and we agree with you. It's really not constructive for anybody. Kind of on the theme of energy security, if you are an exporting jurisdiction, if Canada exports its gas, North America as a whole exports its gas, that gives you another lever to make sure you always have enough gas at home you can price to the point where exports are out. And so the scenario in which North America as a whole could run out of gas is extremely draconian, very unlikely.

Yeah, the only problem would be, of course, the price, which would be the consumers and given all the other inflectionary pressures, that kind of turns the industry into a political football, which we all hope doesn't happen. That's it for me. Thanks very much. Just wanted to get your insights on that. You betcha.

Thanks.

There are no further questions at this time. Please, I'm going to turn this back over to Mr. Scott Cooper. Thank you.

Thanks, everyone, for spending some time with us. We'll talk to you next quarter.

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