Tourmaline Oil Corp.

Good day, ladies and gentlemen, and welcome to the Tourmaline Q3 2022 results conference call. At this time, all lines are in a 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 3, 2022. I would now like to turn the conference over to Scott Kerker. Please go ahead.

Thanks, Michelle, and welcome everyone to our discussion of Termline's results as at September 30, 2022, and for the three and nine months ended September 30 in 2022 and 2021. My name is Scott Kerker, and I am Termline's Chief Legal Officer. 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 RMDNA 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, 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 in the last quarter and our year so far, and after Mike's remarks, we'll be open for questions. Go ahead, Mike.

Great. Thanks, Scott. And good morning, everybody. We're pleased to review our Q3 results with you. A few of the highlights, third quarter, $22. After-tax cash flow was $1.05 billion or $3.07 per diluted share. That's up 38% over the corresponding period in 2021. Third quarter free cash flow was $568 million or $1.66 per diluted share. We will pay a special dividend of $2.25 per share on November 18th to shareholders of record on November 9th. And beginning in Q4 this year, will increase the quarterly base dividend by 11% to $0.25 per share, providing for an annualized dividend of $1 per share. Including the payments of both the Q4 special dividend and the base dividend, we will pay a total of $7.90 per share in dividends in 2022, resulting in approximately a 10% yield. Third quarter, 22 EP capital spending was $469 million, and that's within previously disclosed guidance. Third quarter, 22 net earnings were $2.01 billion. Our net debt at September 30th was $565 million, and that's well below our long-term debt target range of $1 to $1.2 billion. And at current strip pricing, full year 22 cash flow, will be $4.76 billion. That's what's anticipated, and that's $13.90 per diluted share. Looking at production, Q3-22 production was 482,000 BOEs per day, and that's within the guidance range of 480,000 to 485,000 BOEs per day. We are executing the Q4-22 production ramp, with anticipated November average production between 520 and 530,000 BOEs per day and anticipated December average production between 530 and 540,000 BOEs per day. Our 2023 average production guidance remains at 545,000 BOEs per day consisting of two and a half bees a day of natural gas and over 125,000 barrels per day of oil condensate and NGLs. A brief marketing update. Average realized nat gas price in Q3 was $5.37 per MCF as we continue to benefit from rising natural gas prices when compared to the corresponding quarter in 2021. Tourmaline currently has $754 million per day accessing U.S. markets through long-term firm transport agreements. That increases to $854 million per day in Q2 of 23 and then to $926 million per day at exit 23. We are amongst the most diversified of all North American large gas producers from a market access standpoint. Right now we have an average of $711 million per day hedged for 23 at a weighted average fixed price of $577 per MCF Canadian and an average of $110 million per day hedged at a basis to NYMEX of US $0.12 per MCF and an average $754 million per day of unhedged volumes exposed to export markets in 23 and those markets include Dawn, Iroquois, Empress, Chicago, Ventura, Sumas, U.S. Gulf Coast, JKM, Malin, and PG&E. And we are pursuing multiple additional market diversification opportunities for both NatGas and our natural gas liquids. Looking at CapEx and the financial outlook, Forecast full year 22 EP capital spending remains at $1.5 billion and full year 23 EP capital spending remains at $1.6 billion. We expect 23 cash flow of $5.4 billion and free cash flow of $3.7 billion at strip pricing as of October 14, 2022. The current seven-year EP growth plan is expected to deliver an estimated free cash flow at strip of $19.4 billion on total CapEx of $13.4 billion during the period. Commencing in Q4 2022, we will increase the base dividend by 11% to $0.25 per share, the quarterly base dividend. And as mentioned, we have elected to declare and pay a special dividend in Q4 of $2.25 per share. We continue to focus on returning the majority of free cash flow to shareholders through base dividend increases, special dividends, and share buybacks. The magnitude of the special dividends will be a function of commodity prices and available quarterly free cash flow. The company now anticipates returning greater than 75% of free cash flow to shareholders in calendar 22, achieving a year-end net debt to cash flow ratio of approximately 0.1 times, which positions us to return between 50 and 90% of free cash flow in calendar 23, while also growing production by approximately 7%. A component of free cash flow will also be used for modest incremental EP investments. Those include new pool, new zone expiration opportunities, asset acquisitions within existing core complexes, and select margin improving infrastructure investments. Tourmaline completed the previously announced Rising Star Resources limited acquisition during the third quarter of 22. A brief EP update. We're currently operating 13 rigs across the three EP complexes. We drilled 86 net wells and completed 75 net wells during the third quarter. And we are the most active driller in Canada on a meters drilled basis. We expect to tie in and bring on production a total of 75 net wells in November and December, and will carry approximately 24 ducts over into early 2023. The distribution of rigs is eight rigs in the deep basin, four we continue to operate in our BC Montigny complex, and then we have one rig working on the Peace River High. Importantly, continuous improvement in new technology applications and our related drilling methodologies has resulted in a 37% improvement in meters drilled per day between April 2020 and July of this year in our BC Montney complex. The Q422 and 23 EP programs include multiple new zone and new pool exploration tests across all three operating complexes. as we expand the highly successful and somewhat unique exploration effort. So lots more to follow from this program over the next quarters. And looking at our environmental performance improvement, we've had a great year on that front and we continue to invest significant capital in these efforts. We actually are investing profits and free cash flow in our environmental performance improvement initiatives, and we are reducing emissions right now. So some of the highlights over the past 12 months, we achieved our net 25% methane reduction target three years earlier than targeted. Our emission testing center, or as we call it, the ETC, the first of its kind in the world at the West Wolf Gas Plant, is fully operational, and we continue to grow the scope of methane emission reduction technology investigations at the site. We received preliminary platinum ratings from the Project Canary or Trustwell assessment on a series of our operated Northeast BC assets, and our score ranks in the top 10% in North America. All of our contracted drilling rig fleet is displacing diesel with nat gas or running fully electric, and we were operating three CAT Tier IV DGB natural gas-powered crack spreads in Western Canada, so the most of any operator in July of 22. Tourmaline's invested over $25 million during the past five years in water recycling and water management facilities as part of an ongoing effort to ultimately eliminate fresh water in our well stimulation activities. And Tourmaline's also a major participant in the Natural Gas Innovation Fund, or NGIF, And that's a corroborative effort to produce lower emission nat gas across the whole spectrum of operations. The company's sponsoring emerging cleantech companies in the areas of diesel displacement, methane emission monitoring and reduction, waste heat recovery, carbon capture, and water recycling technologies. And that's all we were going to say as far as formal remarks, so happy to move to the Q&A portion. Michelle, if you want to give them the instructions on that.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press 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 two. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question.

First question comes from Donald Texer of DFT Energy. Please go ahead.

Morning, Mike. How are you? Good, Don.

How are you?

Good, good. Mike, I know you're not a direct participant in the Canada LNG project, but could you just make maybe some observations as to how that project's going and how you see that affecting BC gas prices out there in 25 and 26?

Sure. I mean, as far as the actual true project update, I mean, best to check with TransCanada and LNG Canada about, you know, what we've observed is that both the Coastal Link Pipeline and the Kitimat liquefaction facilities are more than 50% completed and the companies that operate those projects are both saying that they're going to be completed and on stream in 2025. And we think that's very important for Canada as we actually get a new pipeline built and we will see if that project gets upsized. We believe that when you start moving, even if it's just two bees and not four bees a day, west that's going to be structurally positive for both station two gas prices in bc and and eco prices uh in alberta as you'll take a basin that's you know roughly in balance uh from supply demand standpoints the western canadian sedimentary basin and pull you know between 10 and 15 percent of the gas away to a new destination on the west coast so we see that as Very positive for pricing, and that's why we time our North Montney development that we call Conroy in that 25 to 27 time period. We think that's the appropriate time to bring new gas supply into the market.

Sorry, but is Petro Canada and not Petro Canada, sorry, the Chinese company and the Petronas and some of the others, are they all covered on their gas, do you think?

Well, I think, you know, John, probably best you check with them. You know, our estimates, you know, indicate that of the two Bs that are required, probably 1.4 of it exists now.

Okay. Thanks, Mike. You bet.

Thank you. The next question comes from Faye Lee of Ogden Brown. Please go ahead.

Hi, Mike. It's Faye here. I'm just wondering if you can comment a bit, maybe just give some color on, I guess, the inflationary pressures that you'd be facing as we head into 2023 and the steps that you're taking to mitigate the potential cost inflation.

Sure. We, with our Q2 release in late July, included an inflation contingency for the balance of 2022. and 23, and that was an 18% increase in capex over 2021 levels. So we think we've got an appropriate contingency from that standpoint. What do we do to mitigate inflationary pressures? I think being the largest operator does allow us to access premium equipment and crews, which typically perform better So that helps. We plan far in advance, like two to three years ahead, so we can avoid some of the pinch points on tubulars with steel pricing by ordering in advance. I mean, it's not like we're not facing any inflationary pressures, but I think we do a good job mitigating it from that standpoint. And then from a drilling and completion methodology standpoint, we think we're very strong in that area as an operator and continue to seek ways to drop times on fracking and drilling. And I did outline one highlight on just how much we've dropped our Montney drilling times over the past couple of years. So that's a nice kind of hedge against inflationary pressures.

And I guess related to that question, can you just maybe comment on your confidence? I know that you did reflect, you know, you pointed out inflation, cost of inflation next year in your budget, but I'm just wondering what's your confidence level around that budget? And, you know, if it ends up being, you know, potentially higher than what you're forecasting, where do you think the risk is around that?

Well, we're pretty confident in the number we put out there, Fi. It's a significant increase. And, you know, obviously we continue to monitor all of the cost inputs. And, you know, if it's not enough, then, you know, we'll make the appropriate adjustments. But as it stands now, we're very confident in what we've put out there. Okay. Thanks. Thanks, Rick. You bet. Thank you.

Thank you. The next question comes from Jeremy McRae from Raymond James. Please go ahead.

Hi, guys. I just wanted to know if you can comment a bit more on the M&A market. You know, you guys have been pretty aggressive in the past, and I'm just wondering if the outlook today is as a creative, what you think of valuations here now, and if there's really as much opportunity as there once was in the past.

Well, there's still lots of opportunities out there. They're more expensive than they were in second half 20 and first half 21, which is why we've backed off a little bit. But it doesn't mean we stop looking. And we know a number of opportunities that could materialize over the next couple of years. We have pretty rigorous screening criteria. The free cash flow yield from M&A needs to be better than what we can deliver with our base EP plan that we lay out in that seven-year outlook, and the acquisitions that we've completed to date meet that screening criteria. So we continue to look and be creative, and it's another part of the business that we're excited about.

And then just quickly, just as a quick one more, your techs,

outlook here you know keeps kind of creeping up for you know 2023 2024 is there any thing or mitigation things that you're looking at to reduce that going forward um we're always looking at ways that we can optimize our tax position so that's an ongoing process um we've got we're certainly aware that the tax horizon has moved in. We've got a good provision for it in 2023 and 24, and we'll just continue working on it. So there's nothing specific that we're ready to speak to right now, and we're certainly going to always be totally compliant with the rules, and we'll pay our cash taxes as we enjoy these higher product prices.

Thanks, Seth. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. The next question comes from Michael Harvey of RBC Capital Markets. Please go ahead.

Yeah, sure. Good morning. So I just had a question on that 50% to 90% range for next year. Pretty wide range, both percentage-wise and also just the gross dollar value. Maybe you could just comment on some of the drivers, which would put you – kind of towards the high end of that range or the lower, or is it all just kind of M&A driven?

Yeah, hi, Mike. The range gives Termaline plenty of flexibility on both opportunities that we might move forward on and also flexibility given potential volatility in commodity prices. So in general, if commodity prices are pushed downward, expect us near the higher end of that range. If commodity prices push upward, we would navigate towards the lower end of that range At the 90% level today on Strip, we're able to maintain the return to shareholders we're delivering to you today in each subsequent quarter. And so what we're seeing today is we have the ability to continue to push the base dividend and incrementally grow it over time and also deliver these special dividends within this range without any fluctuation downwards or upwards. And as you look forward to the now seven-year plan, the EP plan, we're able to deliver base and special dividends on strip each year of that plan. So I think you can kind of use these ranges as a forward guide beyond 23 as well.

Okay, so if commodity prices go up, you'll pay out less, and then presumably more cash will go to, I guess, debt repayment or other things. Is that the right way to think about it?

Yeah, in general, the quantum would be similar. It's the percentage payout that would be a bit less. And exactly, you could store more cash on the balance sheet, and you could also allocate more cash to some of these other investment opportunities you've been highlighting in the release.

Gotcha. Thanks, guys. Thanks, Mike.

Thank you. The next question comes from Peter Cook, Logan Capital. Please go ahead.

Mike, just a question on the LNG. It's a little confusing on your change in the accounting and what you're doing there. Could you just review that just a tiny bit as to what that was all about?

It's going to be handled as an embedded derivative rather than a physical contract going forward. And it's just on the one LNG contract on our delivery to the Gulf Coast on $140 million a day.

And it has no impact on our cash flows, our capital spending, our cash taxes, other cash costs, or our production levels at all. So the numbers in the statements on the P&L side are all unrealized. We haven't started delivering to that contract at all yet.

Well, you'll be delivering that come January 1, pretty much, is that?

Yep, that's the plan. As scheduled, and it's a 15-year term, and We continue to view it as a key component of an extension of our market diversification strategy, and there's only a few producers that are doing what we're doing, which is gathering the benefit from these Asian natural gas prices, and that's what we've captured there.

I guess the question is, does the U.S. have the capability to ship it to manufacture at this point?

Well, it's a growing business worldwide. So, I mean, the outlook for LNG we think is, you know, very robust.

Right, right. Okay, thanks. You betcha. Good talking to you. Well, great quarter.

Thank you. Thanks.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. No further questions at this time. Please continue.

Thanks, everyone, for dialing in. We'll talk to you next quarter.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.