Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tourmaline Oil Corporation first quarter results conference call. [Operator Instructions] Mr. Scott Kirker, you may begin your conference.

[William Scott Kirker, Secretary & General Counsel]

Thanks, Jessa, and welcome everybody to our discussion of Tourmaline's results for the 3 months ended March 31, 2018. My name is Scott Kirker, and I'm the Secretary and General Counsel for Tourmaline. Before we get started, I'd refer you to the advisory on the forward-looking statements contained in the news release as well as the advisories contained in the Tourmaline Annual Information Form and the MD&A available on SEDAR. I would also like to draw your attention, in particular, to the material factors and assumptions in those advisories. I am here with Mike Rose, Tourmaline's President and Chief Executive Officer; and Brian Robinson, Vice President, Finance and Chief Financial Officer. Mike will start by speaking to some of the highlights of the quarter, and after his remarks, we will be open for questions. Go ahead, Mike.

[Michael L. Rose, Chairman, President & CEO]

Thanks, Scott, and thanks, everybody, for dialing in, and we're pleased to review our Q1 2018 results. Some of the highlights include first quarter cash flow of $352 million or $1.30 per diluted share on EP capital spending of $280 million. We generated free cash flow of $136 million in the quarter. Net debt was reduced 7% in the quarter, making a strong balance sheet even stronger. We also increased the dividend for Q2 by 12.5% over what was paid in Q1. We're on track to achieve our full year production guidance of between 270,000 and 280,000 BOEs per day, and our 2018 exit production target is 200 -- between 285,000 and 290,000 BOEs per day. Quickly on the financial results. First quarter cash flow was $352 million, was up 20% over Q1 of 2017. Our first quarter '18 earnings of $129 million were up 30% from the first quarter of 2017 when earnings were $99.5 million, and that highlights the underlying profitability of our EP businesses despite low natural gas prices. And Tourmaline continues to demonstrate strong and appreciating returns on invested capital in all 3 operated complexes.On production. Q1 2018 production of 268,526 BOEs per day was up 15% from Q1 of '17 and 2% from the previous quarter. We did achieve production levels in excess of 280,000 BOEs per day at times during April, so reasonably close to what we want to exit at the full year. Our full year 2018 total production guidance, as mentioned, remains unchanged, and we're also on track for our full year liquids production average of 50,000 barrels per day.We plan to continue to manage our production in the 265,000 to 275,000 BOE per day rate during the second and third quarters, a period of lower AECO gas prices, and then we'll ramp production back up to over 280,000 in Q4, when we expect more favorable natural gas prices. We have approximately 18,500 BOEs per day of production, either shut-in or awaiting facility capacity, and as mentioned, we're going to achieve an exit of between 285,000 and 290,000 BOEs per day. Of note, we are increasing our 2019 production guidance slightly from 283,000 to 291,000 BOEs per day and that's up 3% from previous guidance in the 5-year plan, and that's driven largely by an increase in liquids production across all 3 complexes. We have accelerated a series of liquid growth projects into the fourth quarter of this year, which is what allows for this 2019 increase. And looking at the 5-year plan guidance revisions, we did release an update, and it's on our COV on the website, and we provided some of the highlights and changes that we made to that plan in the press release. The main change is a reduction in the AECO natural gas price that we were using in the plan from last November, and we took that gas price down from CAD 2.50 per Mcf to $2 per Mcf for 2018, and then we reduced it from $2.50 to $2.25 for the balance of the 5-year plan or 2019 through 2022. We were able to increase our liquids production, and we were also able to slightly increase the liquids pricing employed in the plan for the first 2 years, so '18 and '19.It is important to note, though, on the gas front that our realized natural gas price in the first quarter of this year was CAD 2.97 an Mcf, a 43% premium to the actual first quarter AECO index price, and we consistently outperformed those index prices over the last 8 years. Anticipated production and cash flow in 2019 and '20 have been increased, and projected 2019 cash flow is now $1.62 billion or $5.96 per share and that's up 8% from the $1.5 billion of cash flow in the previous plan from November.Free cash flow before dividends in '19 is up materially to $231 million. 2018 production and full year cash flow are essentially unchanged in this new plan with altered pricing. Also, importantly, the EP capital spending in '18 and '19 are unchanged from the previous plan. Moving to some specifics from the EP program. We'll continue to execute an average full year 12 drilling rig program in both '18 and '19. It is a breakup, so we're currently operating 4 rigs in May, and we'll ramp the activity back up in the middle of June of this year.We have accelerated 4 liquids production projects, to be onstream, as mentioned during the fourth quarter of '18. And quickly what those are is, a compression and pipeline project in Spirit River West, that will bring onstream approximately 3,000 barrels per day of light oil; the sweetening facility in Doe is currently under construction, and it will bring on approximately 3,500 barrels per day of condensate production and no incremental gas production; we have a compression and expansion within an associated pipeline looping project in the northern part of the Alberta Deep Basin, and that's expected to increase condensate and natural gas liquid production by about 1,250 barrels per day; and finally, we have an early interim tie-in project at Gundy in BC, that will add approximately 1,500 barrels per day of condensate in the fourth quarter of this year. So those 4 projects have a modest positive impact on 2018 but, obviously, they have a very strong impact on our liquids production in 2019.We remain on track to drill and complete, in aggregate, between 225 and 230 wells for full year 2018, and our D&C capital costs have remained, essentially, unchanged from where we were in 2017.Some of the interesting activity right after break-up, it includes fracking the latest Deep Basin Cardium gas/condensate pad. That was drilled in March and as soon as we can access it, probably in early June, we'll frac that. Recall that 2 of the first 4 wells in that play are 10 to 15 Bcf of gas each and 300,000 barrels of condensate each, and that's from the independent engineering report.We have a major land position in the greater Attachie area in BC, targeting the Montney, and we are going to start drilling that in -- it'll be in the third quarter, when the first quarter [ zonal ] is drilled, and that acreage lies almost exactly in between our Sunrise-Doe complex and our developing Gundy complex. And we'll also drill several exploration new pool wildcats. They're included in the second half 2018 drilling program, and we were able to drill most of those of existing multi-well development pads, and we see it as a great time to do those kinds of EP activities because nobody else is.And that is all we're going to say as far as formal comments, and we're all more than happy to answer any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Jordan McNiven from Tudor, Pickering & Holt.

[Jordan McNiven]

Just wanted to get your thoughts that are kind of long-term around dividend policy and what you look at as a targeted payout ratio and, maybe, how you balance that with your growth opportunities?

[Michael L. Rose, Chairman, President & CEO]

Brian, you want to jump around on that one?

[Brian G. Robinson, VP of Finance, CFO & Director]

Certainly, our plan is to not become a yield company. We will still focus on growing our business under the umbrella of more liquids. What we're looking at is an overall payout ratio of sub-100%. When you consider maintenance capital and the fully loaded dividend, it'll be in that sort of 1.5% to 2.5% range, and we'll build that over time as we develop more and more free cash flow off our asset base and off the strength in the liquids stream that we're anticipating over the out years.

[Operator]

Your next question comes from the line of Fai Lee from Odlum Brown.

[Fai Lee, Equity Analyst]

I just had a question regarding the 5-year assumption on the gas price. Is that -- do you think that's low enough to kind of incent producers to cut back production in the short term? And how does that -- how do you feel about that price, if you get more takeaway capacity of [indiscernible]? I think it's still the long-term price assumption? Or would you be more optimistic about that?

[Michael L. Rose, Chairman, President & CEO]

Well, I'll answer the last question first. I think in the longer term, prices will be higher than that. We use a price that's slightly above strip in our 5-year plan, and that's based on our track record of -- through our marketing function, and I think we have a very strong group of marketers. We always outperform the AECO index by a significant amount, which is why we highlighted that in the press release. I think very few producers can make a true full-cycle return on gas prices. Even at $2.25 an Mcf, we can, and we'll probably have a little bit of company, but not very much. And so, logically, as investors seek businesses that provide a full cycle rate of return, I think, you'll see the supply response as in less capital investment, which is what you're seeing right now, and that will help prices in the longer-term, which is why we kept '18 lower and then brought it up marginally for '19 through '22.

[Operator]

[Operator Instructions] The next question comes from the line of David Popowich from CIBC.

[David Popowich, Director of Institutional Equity Research]

I guess this is kind of a follow-up to the previous question but, obviously, there's a lot of noise about LNG Canada possibly sanctioning the project this year. I was just wondering if we can get your views on the direct and indirect consequences of an FID on Tourmaline's northeast BC gas operations, specifically with respect to maybe marketing and maybe competition for services as well?

[Michael L. Rose, Chairman, President & CEO]

Well, we're certainly cheering LNG Canada on, because we'd love that project FID and, intuitively, if 1 project goes ahead, we think it'll be followed by others, and we kind of think that's how Canada should view its LNG business, that we shouldn't be happy with 2 Bs a day on the West Coast. The reality is the Montney and BC and Alberta and the Alberta Deep Basin, which is connected hydraulically, it can support 10 Bs a day plus of LNG exports on the West Coast. So we think it would be very good for Canada, and it would be very good too, obviously, for Western Canadian gas producers. Participating from a supply standpoint is something that we've always said that we're interested in doing, and it is consistent with our long-dated marketing and transportation strategy and diversification strategy to export gas on all the existing pipelines, which we currently do, and we welcome another one which goes to the West Coast.

[David Popowich, Director of Institutional Equity Research]

You expect to see no change to your 5-year plan on the back of that?

[Michael L. Rose, Chairman, President & CEO]

Yes. So inside the 5-year plan, the timeframe for when it starts up, but if it has a positive buoyant effect on gas prices and we have more cash flow to invest as a result, than the 5-year plan would get changed. But, I guess, we got to see what happens first.

[Operator]

Your next question comes from the line of Peter Cooke from Logan Capital.

[Peter F. Cooke, MD & Member of Advisory Board]

Mike, any thoughts given the low price of the stock? I look at the stock back when you went public and, I guess, it's dropped about 10% or 15% from there. Any thoughts of buying any stock back from the market at these levels?

[Michael L. Rose, Chairman, President & CEO]

We talk about that with the Board. I mean, for free cash flow, we have a number of options to invest that: one is increasing the dividend; one is increasing the growth rate; one is reducing debt; and one is buying back stock. So right now, we're doing 3 of those 4, and we'll continue to look at our stock price, how much free cash flow we have available, and see if we do the fourth or not. But right now, we have no plans to, and that may change in the future and it may not.

[Peter F. Cooke, MD & Member of Advisory Board]

Excellent. Another though on -- any hedges on natural gas at this point?

[Michael L. Rose, Chairman, President & CEO]

Yes. We have it all detailed, Peter, I think, on our website, and we also show our pricing at the -- because we sell at 8 different hubs, 2 in Canada and 6 in the U.S.. While Dawn is in Canada, but it's priced off NYMEX, and so we've tried to provide a lot of disclosure around our pricing and hedging there. So -- but if you have any further questions about it, give Brian a call.

[David Popowich, Director of Institutional Equity Research]

No problem. Just one other question. On the declining curve that you have, I mean, what -- how much do you guys have to spend every year just to maintain production at where it is at this point?

[Michael L. Rose, Chairman, President & CEO]

Yes. We -- our maintenance capital to stay flat at 270,000 BOEs a day is about CAD 850 million.

[Operator]

There are no further questions at this time. I'll turn the call back over to the presenters.

[William Scott Kirker, Secretary & General Counsel]

Thank you, Jessa, and thanks, everybody, for listening into our call. We'll talk to you again in next quarter.

[Michael L. Rose, Chairman, President & CEO]

Thanks, everybody.

[Operator]

This concludes today's conference call. You may now disconnect.