Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q4 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. I would now like to turn the conference over to Scott Kirker, Chief Legal Officer. Please go ahead.

Thank you, Operator, and welcome everyone to our discussion of Termaline's results for the three months and years ending December 31, 2022 and 2021. My name is Scott Kirker and I'm Termaline'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 Termaline 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 Robinson, Vice President of Finance and Chief Financial Officer, and Jamie Hurd, the Manager of Capital Markets for Tourmaline. 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. We'll go over what we thought was a very strong 2022, and that's continued on into 2023. So some of the highlights. Our full-year 2022 cash flow was a record $4.9 billion, or $14.26 per diluted share, and that's up 67% over 2021. Q4 2022 cash flow was $1.4 billion, or $4.08 per diluted share. We generated a record $3.2 billion of free cash flow in 2022, and our 2022 after-tax net earnings were $4.5 billion, or $13.10 per diluted share. We also paid out $7.90 per share and based in special dividends to shareholders in 2022, which is approximately a 12% trailing yield. Our 2P reserve value per diluted share based on the current Jan 1-23 engineering price deck is $143 per share before tax or $109 after tax. Total approved is $97 before tax. 75 after tax and our PDP NAV is $54 per share. Full year 2022 average production was up 14% over 2021. Our current production is ranging between 520 and 530,000 BUEs per day and that's consistent with where our expected first quarter average will be. At current strip pricing, we expect to generate Cash flow of approximately $3.8 billion in 2023 and free cash flow of approximately $2 billion on unchanged EP capex of $1.675 billion. So we're trading right now at an approximately 10% free cash flow yield. Exit 22 net debt was $494 million or 0.1 times Q4 22 annualized cash flow. Year-end PDP reserves. We're up 25% year-over-year to essentially a billion BOEs. Total approved reserves were up 14%, and 2P reserves of 4.5 billion BOEs were up 10% over year-end 21. We replaced 240% of 2022 annual production of 183 million BOEs with our 2P additions of 440 million BOEs, and that includes 22 production. After 14 years of operations, we have 20.7 TCF of 2P natural gas reserves, one of the largest, lowest development cost, lowest emission natural gas reserve bases in North America. Looking at production in a little bit more detail, I mentioned current production between 520 and 530,000 BOEs a day, and that's despite a reduction in NGL volumes of approximately 8,000 BOEs a day relating to a third party pipeline system interruption that lasted six weeks. It's back on stream now and there's no change to our full year 23 average production guidance of a range between 520,000 and 540,000 BOEs per day. 22 average liquids production of 112,500 barrels per day was up 16% over 21. and we are the largest NGL producer in Canada. And a milestone, we produced our one billionth BOE of production since inception in 2008 on February 9th. Turning to the financial highlights in a little bit more detail, we generated, as mentioned, a record $3.2 billion of free cash flow in 2022, We increased the quarterly base dividend three times in 2022 to an annualized dollar per share, so a 39% increase over the year. And we paid for special dividends that totaled $7 per share in calendar 2022. And we have committed to returning the majority of annual free cash flow to shareholders, and we're certainly executing on that plan. And in 2023, we plan to return between 50% and 90% of free cash flow to shareholders. This year, so far, we paid a special dividend of $2 per share in early February, and we plan to pay special dividends for the remaining three quarters in the year as well. As mentioned, exit 22 net debt was $494 million, and that's well below our long-term debt target of $1 to $1.2 billion. And the company is actually in a surplus position if you include the value of our 45 million shares of Topaz Energy Corp. A little more on 22 reserves. As mentioned, PDP is now a billion BOEs and was up 25% year over year. And we're very happy to have two P reserves now of 4.5 billion BOEs and up 10% year over year. 2022 PDP FD&A costs were $8.74 per BOE, and that yielded a PDP reserve recycle ratio of 3.06. And if you use Q4 22 cash flow per BOE of 29.80, you get 3.41. And after 14 years of operation, that 20.7 TCF of 2P natural gas reserves, we believe, is the largest in Canada. Importantly, we've only booked 3,359 gross locations of our total well-defined drilling inventory of over 23,000 locations, so we've still only booked 14.6% and already have 2P reserves of 4.5 billion BUEs, so lots more to come. The current future development capital associated with the 2P reserves represents approximately four years of prospective cash flow at strip pricing. And so has always been the case, we will systematically convert those 2P reserves into PDP reserves in a very realistic timeframe. A little on marketing, we do continue to diversify our natural gas and liquids marketing portfolio in an effort to realize the best possible pricing for all of our hydrocarbon streams. Diversification has played a major role in enhancing Q4 22 cash flow. and that will continue in 2023. In January of this year, we commenced delivery of our $140 million per day to the Chenier Sabine Pass LNG facility, and by virtue of that became the first Canadian E&P company to participate in the LNG business with full exposure to JKM pricing, and that provides a material increase to our $23 cash flow. As of Feb 15, 23, the JKM strip is $19.24 US per MCF. During 23, we'll actually increase our natural gas volumes exported to Western US markets from $345 million per day to $495 million per day, with an average of 74% of that gas accessing the premium-priced PG&E California market over the calendar year. Our average realized natural gas price in Q4-22 was $6.89 per MCF, as we benefited from that aforementioned strong gas pricing in western North America. We have an average of $791 million per day hedged for 23 at a weighted average fixed price of $5.93 per MCF Canadian, $140 million per day hedged at a basis to NYMEX of $0.42 per MCF U.S., and an average of essentially $700 million per day of unhedged volumes exposed to export markets in 23, and they're all listed there, but the premium ones are Sumas, U.S. Gulf Coast, JKM, Moline, and PG&E. A little on E&P. In calendar 22, we drilled a total of 240 net wells. That equated to almost $1.3 million. and that was the most in the western Canadian sedimentary basin. We have no material facility projects in the 23 budget, hence we anticipate very strong 23 capital efficiencies of approximately 9,000 per flowing BOE, and we expect that will rank very well in the North American energy space. We, coming into the year, had 300 valid drilling permits in northeast BC. and so far we've received an additional 55 drilling permits during the first quarter so far and certainly expect more. On the exploration front in 2022, we drilled 11 new pool or new zone discoveries and we've made two additional discoveries in 2023 to date and we're currently testing those. Essentially one net rig of the 14 we're currently utilizing We'll continue to drill new pool, new zone exploration wells in 23, and these successful discoveries ultimately will access our existing infrastructure. Turning to environmental performance improvement, we've had an engineering team in place for over four years, developing and implementing new proprietary emission reduction technologies, executing our expanded water management initiatives, managing our third-party environmental-related research, and evolving a large methane testing center in the deep basin. And we intend to invest 30 to 50 million per year on further EPI initiatives. We've been displacing diesel with nat gas on all of our drilling rigs in the operated fleet, and we actually have one rig running on high line power. Since embarking on this diesel displacement initiative over five years ago, We've displaced approximately 91 million liters of diesel, and that has actually saved us 86 million while yielding an emission reduction of a little under 58,000 tons. The company is recognized as having the lowest freshwater intensity for 21 in its well stimulation operations, and that intensity is 0.11 barrels per BOE. And finally, we're pleased to announce that the board has declared a quarterly cash dividend on its common shares of 25 cents per common share, and that'll be payable on March 31st to shareholders of record at the close of business on March 15th. That's all I was going to say for comments, and so we're more than happy to answer questions that you might have.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a one-tone prompt acknowledging your request. Your first question comes from the line of Jeremy Macrea from Raymond James. Your line is now open.

Hi, guys. Just outside the commodity market, Where do you think Tourmaline could really surprise the market this year? Is it like new technology that you guys are working on, new exploration fields, like LNG agreements, more acquisitions? Just kind of curious where you think you could surprise us.

Well, I think we could surprise you on any of those, and we're working on all four of those. So looking for more gas market diversification, always looking at M&A opportunities, but we prefer things when they're less expensive. The expiration program is going very well, so you'll see more disclosure on that during the year. And, you know, our kind of preference and how our marketing diversification set up is we're very focused on the West, and we've actually had winter in the West, and so very strong pricing, and we think that puts a pretty good floor on summer, particularly what's going on on the West Coast in the U.S., where they're actually getting dangerously close to cushion gas and it's staying cold there. So most of that gas is supplied from Canada now into that market, and so that puts a floor, and I expect the Westgate will be in that 2.8 to 3 Bs a day for most of the summer. Jamie, anything you want to add on that?

Now that we have the ability to drill more of our land in the North Montney, I think you should be closely watching well results as we come out with more and more new pads and new wells in the Conner area, and we're very constructive on what we've seen so far, but I think we're going to have a chance now in 2023 to showcase how that asset's performing, and I think it's going to compare very, very well relative to the results you've seen from us and others over the last two years.

Okay. And just on your guidance with those new wells that you're potentially you know, coming in better, just, you know, improving efficiencies. Is that reflected in your guidance? Like, how much would that be reflected in your guidance, if at all?

But there's certainly some upside if, you know, ahead of expectation, well performance continues, but we're not changing anything at this point.

Okay. And just maybe just last question here. You know, just with the gas prices falling quite a bit, how that opened up much more M&A here at these prices here? Are you seeing more You know, how is kind of the first couple of months here of Q1, you know, look versus what it was last year here?

I'd say, you know, that price fall that you referred to was very rapid. And I'd say that, you know, I don't think you've seen that kind of play out in the M&A market yet. Just too soon.

Okay. Thanks, guys. Great. Thank you.

As a reminder, if you have any questions, please press star followed by the number one on your telephone keypad. Your next question comes from the line of Lee Cooperman from Omega Family. Your line is now open.

Thank you. Let me congratulate you guys on doing a fabulous job on behalf of all the shareholders. I think you've done nothing short of a brilliant job in positioning the company. So I've got to ask you, since you're so smart, what are your priorities for the use of your free cash flow? I mean, I think I know the answer, but it could be dividends, M&A, debt repayment, which doesn't seem to be likely, and stock repurchase. Where do you want to be a big buyer of your own stock?

Well, we're just looking at that right now. I think we've always said that we'd be there in a defensive way if there's a market dislocation. We currently don't have a programmatic solution. buyback in place, but we're absolutely looking at it, and all of those uses of free cash flow you referred to will execute on. We also like midstream investments where we can permanently improve our margin. You see how large our reserve base is now, so if we can make investments that improve that margin by $1 or $2 per BOE, we think that's a huge win for shareholders and a you know, a good use of free cash flow on behalf of those shareholders?

Right. Well, you know, I'm going to watch what you do because I have so much respect for you. But, you know, the average analyst expectation for our target is about $90 and stock at $60. That's 50% upside. If you agree with that and you think it makes sense, I would think repurchase, we shouldn't be far off. You know, I don't have a lot of respect for the analyst input. You know, your brother-in-law's company, You know, when the stock was $2, everybody had a $2 target. Now everybody has a $30 target. So whatever.

Oh, thanks.

Thanks for your support, too. Okay.

Thank you for your performance. I appreciate it.

Your next question comes from the line of Jamie Kubik from CIBC. Your line is now open.

Yeah, good morning, and thanks for taking my question. I just have one, and I appreciate that a couple months ago, Termline refined its capital spending guidance for 2023, but if natural gas prices remain relatively weak here, would you look to potentially adjust that for the back half of 2023? Thanks.

Yeah, we'll look at it. I mean, we get the usual breakup-related natural slowdown and So we'll go from 14 rigs to four rigs through Q2, and it gives us three or four months from here to see where natural gas prices settle out. We think they've bottomed, but I think we're all not particularly good at predicting where natural gas prices are going to go. So at this point in time, no change to the EP program, and we're like right on target as mentioned. But, you know, if gas completely falls away, we would definitely look at something in the second half of the year. So, to be determined.

Okay. Thank you.

Your next question comes from the line of Filey from Odlam Brown. Your line is now open.

Okay. Thanks. Mike, I'm just wondering if you could just comment a little bit about what you're seeing in terms of cost inflation and cost inflation pressures right now.

Yeah, I mean, we took our inflation provision up when we kind of provided an offset date on January 12th of this year. So in mid-22, we'd estimated inflation at 18% over 21 average costs, and then the That was not a large enough provision. So when we talked to the market in mid-January, we took that up to 25%. And we think that's more than adequate at this point in time.

Okay. And do you see any potential for that pressure to ease given the lower commodity price environment?

Well, you'd think so. You know, again, I'd say it's too early to see that. But, I mean, if we're going to have to deal with lower gas prices, I'd love to deal with lower costs.

Okay. And just kind of related to that, I guess, with the Conroy North Mountain Development Project, in terms of thinking about inflation and the risks there, cost overruns, how are you kind of thinking about that right now and trying to mitigate that type of risk?

Yeah, no, on the drilling side, I mean, that is our best drilling area from a performance standpoint. So we're knocking those 3,000-meter Montney horizontals off in six to seven days now. And we've done 14 pads up there as part of that North Montney delineation before we put the infrastructure on the ground. So big win there because that's down sort of 15% year over year on drill time. So that contains costs, if you like. We don't get a net win now because of inflation. You know, we have assembled some of the parts of the North Montney infrastructure already. If you look back at the acquisitions we've done, there's some pipelines and a liquids hub and other parts of it are on the ground. It will be, you know, one of the largest, maybe the largest Western Canadian conventional project at about 100,000 BOEs a day in that sort of 25 to 27 timeframe. So it's a little bit out there. It's in the back half of our five to six year EP plan. We don't start incurring expenditures until late 24, and that will be the long lead time components of the deep cuts, the turbo expanders. So we've got some time to see where inflation goes. So we've got it contained on the D&C side, and we're pretty good at building and installing these plants. ahead of schedule and very efficient in our construction operations. So, yeah, we're looking forward to getting that done.

Okay, great. Thank you so much.

Your next question comes from the line of Hank Van Book, investor.

Your line is now open.

Hi, thank you. Thermaline has posted an $885 million loss in financial instruments for 2022. Can you give me some clarity and explain what they are, and perhaps tell me what instruments you have in place for 2023? Thank you.

The majority of this loss actually relates to our abetted derivative associated with our J-CAM contract. This is something that's going to move around quarter to quarter based on the fair value of the J-CAM forward strip for the next 15 years. The numbers are large because the value of this contract has been large. J-CAM came down a little bit between Q3 to Q4, and so that value of the entire 15 years is PVed and adjusted. It was also a large gain in our Q3 disclosure as well. This does add some noise into our earnings disclosure. we would definitely encourage you to think and look more closely at the cash flow disclosure on a quarter-to-quarter basis because it doesn't have these forward embedded derivative adjustments, which, frankly, make earnings less easy to understand as a judgment of the performance of the business.

Yeah, unfortunately, though, it looks like the market looks at the earnings, and certainly today, Termolina has got a fairly large hit on their share price. You know, I'm not sure how you can protect that in 2023. You know, as a shareholder, I don't like to see those kind of drops in the share value.

Yep, I totally understand that. And I think over a longer period of time, and especially looking at earnings over multiple quarters or definitely last year's annual earnings are fantastic, you're going to see extremely strong financial results from Tourmaline. And I think as the market continues to digest the outlook that we have ahead of us you're going to see that reflected in the share price performance.

Okay. Thank you so much for the explanation, and I remain a dedicated shareholder. Thank you.

Thank you.

Your next question comes from the line of Peter Cook from Logan Capital. Your line is now open.

Hey, Mike, and congratulations again on a great report. Question on that LNG contract. What's the... It's 3,000 miles you're shipping the gas. What's your cost on shipping? And also in the compression of that gas, I'm just curious what your net would be, net revenue would be.

We pay 86 cents U.S. to get from here in Alberta or B.C. to plant inlet on the Gulf Coast. And then... Our liquefaction and shipping and transport costs all in, so that would include the pipeline, the 3,000 miles you refer to, is about $5 U.S. How much? $5. So if JKM is $25, we net $20. It's kind of an easy way to look at it. Okay.

Yes, it's confusing on that derivative because you had a billion and a half derivative. on your net earnings in the quarter, and that's all based on the LNG project?

It's based on that contract, that's correct. So it was, I can't remember, in Q3, I think it was a $2 billion win on earnings, and then it rips around in Q4. So as Amy pointed out, it just creates noise. The fundamental profitability of the business, I mean, I look at the $3.5 billion per capita. One and a half is the JKM contract, so it's a net positive, and then you've got $2 billion of operated earnings, if you like. It's kind of a good way to look at it. Brian, anything you want to add?

Yeah, like on this contract point forward, over time as we continue to physically deliver, in the absence of sort of unusual world events that are really important, causing big movements in one specific market, like, for example, JKM, that will narrow. So you won't see as much swinging in this. We had a huge initial lift in its overall valuation. Then it pulled back a bit. And over time, it will just sort of narrow more and more and more would be our expectation.

The good part, though, is it's a huge win to our cash flow and free cash flow in 2023. And that's how I think about it, Peter.

Mm-hmm. It also looked like you sold forward and got about a $34 price for a fair amount.

Yeah, mostly biased towards the summer.

Okay, thanks. Thank you. Thanks for the support. Yeah, good.

As of the moment, there are no further questions at this time.

Mr. Scott Kirker, please continue.

Thanks, everyone, and thanks, Operator. Thanks everyone for attending and we'll see you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.