Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q2 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 July 28, 2022. I would now like to turn the conference over to Jamie Hurd. Please go ahead.

Thank you, operator. And welcome everyone to our discussion of Tourmaline's results for the three and six months ended, June 30th, 2022 and 2021. My name is Jamie Hurd and I am Manager of Capital Markets for 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 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'm here with Mike Rose, Tourmaline's President and Chief Executive Officer, and Brian Robertson, Vice President, Finance, and Chief Financial Officer. We will start by speaking to some of the highlights of the last quarter in our year so far. After Mike's remarks, we will be open for questions. Mike, please go ahead.

Thanks, Jamie. Welcome, everybody, and thanks for dialing in. We're pleased to review our Q2 results and go over the related operational and financial updates. First the highlights, second quarter 22 cash flow was a record 1.35 billion and that's 137% increase over the second quarter of 2021. Net debt at June 30th was 430 million which is well below our long-term debt target of one to 1.2 billion. Second quarter 22 free cash flow was a record 1.1 billion or 325 per diluted share And that enabled us to declare a special dividend of $2 per common share to be paid August 12th to shareholders of record on August 5th. Our trailing 12-month of distributed dividends now total $6.28 per share, inclusive of this special dividend, and that's an implied 9% trailing yield. Second quarter, 22 EP capital spending was $229 million. Well, within guidance and second quarter 22 net earnings were $823 million or $240 per diluted share. We, with our update, released a new EP growth plan for the period 2022 to 2028. It generates $31.4 billion of cash flow and $18 billion of free cash flow at strict pricing as of July 18, 2022. on total EP spending over the period of $12.7 billion. Average annual production growth during this plan is approximately 6%, and the total growth over the period is 40%. Looking at production briefly, second quarter 22 production average was 503,000 BOEs per day, or 506,000 prior to our Q2 storage injections in Don and California. and within previous disclosed guidance range. It's a 23% increase over the second quarter of 2021 production of 410,000 BOEs per day. The modest EP activity increase post-breakup will lead to a higher Q4 2022 production forecast, now 520,000 to 525,000 BOEs per day, and that's up from 510,000 BOEs per day in the previous May plan. A full year 22 average production forecast of 507,000 BOEs per day is now expected. Full year 22 average liquids production of over 115,000 barrels per day is expected, and that's up 19% from average 21 levels, and that's condensate oil and NGLs. Looking at our financial results in a little more detail, as mentioned, both quarterly cash flow and free cash flow were records. At current strip pricing, the July 18th strip full year 22 cash flow of $5 billion is now anticipated or $14.69 per fully diluted share. Given the strong commodity price outlook and anticipated record cash flow in 22, we intend to return a minimum of 60% of free cash flow to shareholders in calendar 22. We intend to pay quarterly special dividends through the balance of 2022 and now 2023. The magnitude of these special dividends will be a function of commodity prices and available quarterly free cash flow. We do intend to return the majority of free cash flow, so greater than 60% in 2022 and a range of 50% to 75% in 2023 to shareholders through base dividend increases, special dividends, and share buybacks. Component of free cash flow will also be used for modest incremental EP investments, and that includes new pool, new zone expiration opportunities, continued asset acquisitions within existing core complexes, and select margin improving infrastructure investments. Moving to marketing, Tourmaline currently has $620 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. We are amongst the most diversified of all North American large gas producers from a market access standpoint, and we continue to explore opportunities to expand this export capability. The company's $140 million per day Gulf Coast LNG deal with Chenier commences Jan. 1, 2023, and it provides exposure to JKM pricing over the 15-year term of the deal. The JKM strip was $31.88 US per million BTU as of July 19, 2022. Realized NGL prices were $51.83 per barrel in Q2 2022, and that's up 99% from the Q2 2021 time period. And we are the largest NGL producer in Canada. Looking at our longer-term EP strategy, the new EP growth plan extends through 28, as mentioned, and it incorporates the current 12 to 13 drilling rig fleet that we have in our employ through second half of 22 and through the balance of the plan. And we felt it was prudent to retain the drilling and completion services that we'd already secured on a go-forward basis. The previous plan could be executed with approximately 11 drilling rigs. The new EP growth plan also includes phase one of the Conroy-Northmonty development project, commencing production through new tourmaline facilities in the first quarter of 2026, and with phase two startup of that project in 2028. The new EP growth plan, 22 through 28, generates $31.4 billion of cash flow and $18 billion of free cash flow at strip pricing on total EP spending of $12.7 billion. And as mentioned, average annual production growth during the plan is approximately 6%. The updated EP plan will consume approximately 2,500 gross drilling locations through to end 28, and that's only 11% of our current inventory of over 22,000 locations. We believe the modestly increased capital program on very high return EP projects is a good utilization of free cash flow And given elevated commodity prices and the related very short payout periods, these incremental expenditures actually increase free cash flow in the year of expenditure. The total incremental gas production of $250 million per day in the 23-24 timeframe via the expanded program, which is up approximately a net $100 million per day from the previous EP plan, coincides with incremental basin egress, which is consistent with our long-term balanced basin supply narrative. Through expansions on the GTN system and the company's Gulf Coast Chenier LNG agreement, we have 300 million per day of incremental basin egress commencing in 23. So it more than offset any of the growth that we'll see in 23, 24. And of note, these gas volumes will access the two destinations with a sustained premium gas price, international LNG and California. Tourmaline is able to deliver a strong, sustainable annual return to shareholders, so greater than 60% of free cash flow in 2022, a meaningful, sustained annual production growth profile, so 6% over the next six years, and continued material value accretion through profitable annual reserve additions. Looking at our capital spending and our financial outlook, as mentioned, second quarter 22 EP capex was $223 million, and within guidance, the full year 22 EP capital budget has been increased to $1.5 billion, and that reflects the increased second half 22 EP program, as well as a further contingency for inflation. Our 23 EP capital program is estimated at $1.6 billion. That reflects the 12 to 13 rig program for the full year and a much increased inflation contingency for 23 over what was in the May 22 plan. The EP program is expected to deliver annual production of 545,000 BOEs per day and cash flow at strip pricing of $5.1 billion per year. free cash flow of 3.5 billion so not evaporated from the results that you'll see in 2022. uh the second half 22 and 23 capex programs include up to 10 incremental exploration new zone or new pool wells and that's following up on multiple successes to date net debt at june 30 22 was 430 million well below the long-term debt target of 1 to 1.2 billion And this places the company in an excellent position to concurrently fund the Conroy North Montney development and continue with our free cash flow allocation strategy and returns to shareholders. A little bit more on the Conroy North Montney development. The new EP growth plan incorporates the full project with January 1, 26 targeted on stream date for phase one. And the second phase will be on stream in 28. And each phase consists of 50,000 BOEs per day of production. Phase two could be accelerated contingent upon commodity prices and overall basin egress considerations. We've drilled a total of 14 delineation paths within that North Montney project area over the past 18 months, really to confirm well performance and capital costs. Capital costs are definitely on target. and well below those of previous operators. And well performance has exceeded original expectation for the vast majority of the new paths. As part of this North Motney development project, we've negotiated a new long-term transportation and fractionation arrangement with Pembina Pipeline Corporation for the incremental or growth condensate in NGL volumes from the project area. And this agreement ensures that all new company liquid volumes will flow upon project startup along with significant flexibility and strong operating margins for tourmaline in the overall North Montney development area. And as part of the long-term associated facility strategy and build-out, we closed the previously announced acquisition of the 50% non-operated interest in the two Aitken area gas plants during the second quarter of 2022. We're also pleased to announce that we've entered into a binding agreement to acquire Rising Star for $194.3 million. Closing is expected to occur in the first half of August of this year. The purchase price includes common shares of Topaz Energy Corp. that we currently own with the balance paid in cash. Rising Star assets are located within our Peace River High Charity Lake complex. Current production from the acquired assets is approximately 5,700 BOEs per day, and we estimate 2P reserves at 50 million BOEs. Rising Star has no outstanding debt. Included in the acquisition are facilities that complement our existing infrastructure, and the pooling of land bases will facilitate drilling of much longer horizontals in the lower Charter Lake that we've been delivering very strong results from recently. And do recall that we kind of invented this play about a decade ago. In a further transaction, we have entered into a definitive agreement to sell a gore to Topaz on the Rising Star lands, along with a similar gore on lands acquired during the past year or so, primarily in the Deep Basin. Tourmaline will receive cash proceeds of $52 million from Topaz in third quarter of 2022. We may also pursue dispositions of non-core components of the Rising Star asset base during the balance of 22. Specifically on EP in the quarter, we drilled 33.5 net wells and completed 25.5 net wells in second quarter. 26 new net wells were brought on production. A total of 142.7 net wells are anticipated to come on production during the second half of this year. and we currently have 13 drilling rigs and five frac spreads active across our three EP complexes. We're excited about how the two and a half year old exploration program is proceeding, and really the best way to manage an exploration program is to not say anything until it's worked, and it most certainly has. The ongoing new pool, new zone exploration effort has yielded three significant successes to date. We have 41 successful producing horizontals into a new liquid-rich gas zone in the Alberta Deep Basin with just under 500 BCF equivalent of 2P reserves already booked in the December 31-21 GLJ Reserve Report. We expect a further seven horizontals to be drilled into this horizon in the Deep Basin during the second half. We have seven producing horizontals into new zones in our South Montney BC complex with 318 BCF equivalent of 2P reserves booked at year end 21. The third play has no reserves booked yet, but it does have two successful horizontals into the same zone, 32 kilometres apart, drilled and successfully tested, so more follow-up planned there. And we have new zone, new play exploration wells planned on the Peace River High and in the Deep Basin in completely different zones during the second half of this year. Looking at our ongoing environmental performance improvement, we're very pleased that we received preliminary platinum ratings from Project Canary, the Trustwell assessment of a series of company-operated Northeast BC assets with an average score of 131 achieved. And to our knowledge, we're the first Canadian gas company with a Trustwell score, and this ranks in the top 10% in all of North American E&Ps. On the diesel displacement initiative, all of our contracted rig fleet is displacing diesel with nat gas or actually running fully electric. And Tourmaline was operating the available three tier four natural gas powered frac spreads in Western Canada during July of 22. And this evolving diesel displacement initiative significantly reduces emissions and costs for the company. And finally, we're also pleased to announce that TSX has approved the renewal of our normal course issuer bid, and that will be in place for the next year. So that's all I was going to say, and it's a lot, so we can turn it over for Q&A now, and Brian and I and Jamie can hopefully answer your questions.