Tourmaline Oil Corp.

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q2 2023 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, August 3rd, 2023. I would now like to turn the conference over to Scott Kirker. Please go ahead.

Thank you, Operator, and welcome everyone to our discussion of Termline's results as of June 30, 2023, and for the three and six months ended June 30, 2023 and 2022. My name is Scott Kirker, 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 Forum 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, Brian Robinson, our Vice President of Finance, and Chief Financial Officer, and Jamie Hurd, our Manager of Capital Markets. We'll start to speak in some of the highlights over the last quarter and our year so far. After remarks, we'll be open for questions. Go ahead, Mike.

Thanks, Scott. Thanks, everybody online for dialing in, and we're pleased to go through our second quarter 23 results. A few highlights. Second quarter cash flow was $784 million, or $228 per diluted share. We generated quarterly free cash flow of $545 million, or $1.59 per diluted share, and that enabled Tourmaline to declare a special dividend of $1 per common share to be paid on August 22nd. We realized strong earnings of $510 million or $1.49 per share in the quarter. And we've had continued strong results from our North Montney delineation program with pad payouts in some cases as little as three months, and we'll talk more about that in a moment. Starting with production, second quarter 23 production averaged 496,000 BOEs per day, and as previously disclosed, was impacted by wildfires in both of our major gas complexes, the Alberta Peak Basin and the BC Montney gas complex. The total Q2 fire-related production impact in the end was 17,000 BOEs per day, or 3%. And second quarter production was also reduced by over 6,000 BOEs per day due to our seasonal storage injections at both Don and Ontario and in California. All tourmaline-operated production facilities in both complexes were returned to normal operations by the second half of June. A portion of our company production that accesses third-party facilities in the North Montney complex was adjacent to the Donny Creek fire, and it remained slightly below expected levels during July, a 2,000 to 3,000 BUE per day impact. The multiple wildfire outbreaks in both gas complexes delayed our startup of post-spring breakup drilling and completion activities, and that will reduce Q3 production volumes. Our Q3 23 average production expectation is 495,000 to 505,000 BOEs per day. Do recall that Q3 is restricted by several planned plant turnarounds during the quarter. Current production capability is significantly higher than the forecast average for Q3. We'll also, during the quarter, bring 90 wells to production capability either on stream or awaiting access, and everything will flow unrestricted in Q4. That's why we expect 23 exit production levels, well in excess of 550,000 BOEs per day, and our 24 average production guidance of 550,000 BOEs per day remains unchanged. We're now operating our full 13-rig drilling fleet, but we don't believe it's prudent to add additional rigs and capital to our second half 23 program in order to offset the fire-related production deferral. So our 23 full-year average production is now anticipated to be $520,000 VOEs per day at the low end of our original 23 production guidance range of 520,000 to 540,000 VOEs per day. Looking at financial results, second quarter, 23 cash flow was mentioned with $784 million. On total capital spending of $277 million, EP spending was less than that at $225 million. and we generated free cash flow of $1.59 per diluted share. Strong earnings of $511 million. Exit Q2 23 net debt was $791 million, and that's well below our long-term net debt target of $1 to $1.2 billion. The company is in a surplus position when including the value of our 45.1 million shares of Topaz Energy Corp. Briefly on marketing, our average realized natural gas price for the quarter was $4.31 per MCF, significantly higher than the ACO 5A benchmark price of $2.46 per MCF Canadian over the period, but down from Q1 realized price level. We have an average of $779 million per day hedged at a weighted average fixed price of 532 per MCF Canadian, an average of 142 million a day hedged at a basis to NYMEX of 44 cents per MCF US, and an average of 776 million per day of unhedged volumes exposed to export markets. And that's all for the second half of 23. In 2024, we have an average of 582 million million cubic feet per day hedged at a weighted average fixed price of $5.27 Canadian per MCF, an average of 129 million cubic feet per day hedged at a basis to 9x of minus 10 cents per MCF US, and an average of 863 million cubic feet per day of unhedged volumes exposed to export markets. During the second quarter of 23, tourmaline entered into an incremental 106 million cubic feet per day in export contracts, and that increases our total exports to all points to a little over a BCF of natural gas by exit this year. Of note, Tourmaline has also joined the Rockies LNG partners and is excited to assist in moving that LNG project forward. We will continue to expand the size and breadth of our LNG business in both the short and the long term, and we'll provide updates on that during the second half of this year. Turning to our EP program, as mentioned, we're operating a full 13-drilling rig fleet and have three to four frac spreads working across the three EP complexes. We're in various stages of completion currently on over 45 wells, either cracking or flowing back or equipping for production. Tourmaline successfully drilled an additional two new pool wildcats during July, bringing the total exploration new pool, new zone program successes to 17 over the past three years. And we see that has proven out to be a great value-adding initiative. A little bit on the South Montney complex in BC. We are evolving a new growth project in that complex in addition to the planned major North Montney development. And we'll decide over the next several quarters on the project timing and what the scale of that project will be. As part of putting that together, we've acquired 28 growth sections of additional land for approximately $25 million, with 135 internally estimated incremental Montney drilling locations on those lands. We also completed a complementary acquisition for $32.5 million during the second quarter, and that facilitates future expansions of operated gas and liquid processing capacity in the South Montney. Looking at the North Montney, we continue to prepare the execution plan for the approximate 100,000 BUE per day development that's scheduled for the 2025 to 2027 timeframe. Initial expenditures will commence in 24 on newly acquired permits in the project area. We've drilled a total of 18 delineation paths in the North Montney complex. over the past two years in advance of the major facility building development program. And we continue to refine our gas and liquid performance curves and optimum completion designs with those delineation pads. The B10B pad at Aitken underscores the very strong economic returns that we realize in the North Montney complex. This was a fixed-wall pad that we drilled, completed, and brought on stream very late in the fourth quarter of 2021. Average per well IP 365 from the six wells was 5.3 million cubic feet per day of natural gas and 224 barrels per day of condensate. Estimated average 2p reserves per well bore or 12.6 BCF of gas and 260,000 barrels of condensate. Just looking at the economic investments, total capital for construction, drilling, completions, equipping, and pipeline tie-in for the whole pad and all six wells was $30.6 million. The income we've earned to date on the six-well pad is in excess of $130 million, and that results in a tail period of only three months. and the forecast internal rate of return of the pad is well in excess of 1,000%. In here, and actually in all of our complexes, our development will continue to seek that balance between initial deliverability, ultimate reserve recovery, and most importantly, economic return. Of note, Tourmaline's also received 97 new permits so far in 2023 in the North Montney project area. And that includes a significant portion of new service disturbance permits. And we have renewed our normal course issuer bid as of the press release of one. And I think I'll stop there. And the four of us are here to answer questions that you might have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by 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 star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jeremy McRae, Raymond James. Jeremy, please go ahead.

Just a couple questions for me. Can you give me some more detail on the Rockies LNG? Why now? You know, what do you think you can do to move this project more forward here? Just kind of, you know, how does your participation maybe change the size, scope, timeframe of this project? And then just my second question, you have a number of wildcat exploration success scenes and even this new South Montney block. is in any of this growth in your five-year plan and you know, how material could this be here? So anyways, I'll leave it at that.

Sure. I'll answer the last question first. No, the new pool of wildcats aren't factored into the plan, but we will roll them in, you know, particularly when we come out with the final 24 capital program. And we usually do a major plan revision at that point. Some of them are the ones that we made discoveries a couple of years ago. They're already actually in the plan. And as far as the Rockies LNG, we've been watching that for an extended period of time. We've seen significant progress made both on the liquefaction piece and the consortium and the First Nations backing for the project. So we thought it was an appropriate time to join. What do we bring? Well, we are the largest gas producer and a low-cost potential supplier, and we're investment-grade as well. So, yeah, we're excited, and we're going to do everything we can to drive that project to fruition.

Okay. Thanks, Mike. Thank you. Your next question comes from Phil Lamoureux. Phil, please go ahead.

So, Mike, could you give us a little more update on the status of this long-awaited pipeline to the Pacific? It's been going on for about a decade, in my mind. And with all the horrible fires over Canada, is the ranch safe? Did you get any risk over there?

Is what safe, Bill?

Your ranch.

The ranch. Yeah. Yeah, though the fires, there haven't been many fires down south. They've been Unfortunately, they're right in the middle of our two gas complexes, but we're past that now. As far as LNG Canada and the Coastal Gas Link, those are projects run by other companies, so we just rely on the same public data that you do, but what we're hearing is that the pipeline is 90% complete and the liquefaction facility is 85% complete, so it appears to be on schedule for mid-2025, and we think that'll be a very positive event for natural gas prices in the Western Canadian Sedimentary Basin, both ACO and Station 2, as you'll pull two bees a day and then hopefully phase two FIDs, and it's four bees a day. You'll pull them west out of a basin that's you know, more or less in supply-demand balance. So, yeah, it's an exciting time for Canada. It's probably been going on for more than 10 years, but at least it's happening. Good. Good to hear. Thanks for dialing in, Phil.

Okay.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1 on your touchtone phone.

There are no further questions at this time.

I will now turn it back for closing remarks.

Thank you, Operator. Thanks, everyone, for your time to attend our conference call. We look forward to speaking with you in the next quarter.

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