Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Tourmaline Q1 2020 Results Conference Call. [Operator Instructions] Also, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Kirker, General Counsel for Tourmaline. Thank you. Please go ahead.

[William Scott Kirker, Secretary & General Counsel]

Thanks, Chris, and welcome, everyone, to our discussion of Tourmaline's results for the first quarter with the 3 months ended March 31, 2020. My name is Scott Kirker, and I'm Secretary and General Counsel 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 Tourmaline annual information form and our MD&A available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in these 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 Heard, our Senior Capital Markets Analyst. Mike will start by speaking to some of the highlights of the last quarter and our year. And his remarks will be -- after his remarks, we'll be open for questions. Thanks. Go ahead, Mike.

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

Thanks, Scott, and good morning, everybody, and thank you for dialing in. So we're pleased to review our financial and operating results for the first quarter of 2020 and provide updates on our 2020 budget, our dividend and ongoing EP activities. Looking at some of the highlights. First quarter 2020 cash flow was $283.7 million or $1.05 per diluted share on first quarter E&P capital spending of $306 million. First quarter '20 production averaged a record 308,349 BOEs a day, and that's up 5% over the first quarter of 2019. We have reduced our full year 2020 EP capital budget from the originally planned $925 million to a maintenance capital budget of $800 million, leaving approximately $400 million for the second half of 2020, and that will facilitate a very strong 2020 exit rate of between 315,000 and 320,000 BOEs a day. That maintenance capital budget will deliver full year average production now of between 305,000 and 310,000 BOEs a day. That represents 6% year-over-year growth, and it will provide full year cash flow at strip of $1 billion. So Tourmaline's in a very strong position. Of note, Q1 2020 OpEx was $2.97 a BOE, and that's down 15% from Q1 2019 and 9% from our overall 2019 OpEx average. So these are meaningful and sustainable reductions. Looking a little bit more at the 2020 EP capital program and related guidance. Our 2020 Tourmaline aggregate dividend of $130 million and our net Topaz aggregate dividend of $17 million will be paid from our estimated 2020 free cash flow of $173 million. 2021 average production is now forecast at 320,000 BOEs per day on EP spending of $900 million, which will yield cash flow of $1.27 billion or $4.70 per diluted share for the full year. We'll also generate at strip estimated free cash flow of $337 million. So growing significantly in 2021 again. We estimate that we'll have $1.1 billion of available liquidity at December 31 of this year on aggregate credit capacity of $2.875 billion, and that includes a revolver and a term loan with a maturity of June 2024. Our cash flow is most sensitive to natural gas prices and the Canadian-U.S. dollar differential. We believe that the significant capital spending reductions, which have been announced by most oil and gas producers in the past 2 weeks, will result in a decreased supply of natural gas, strengthening prices in 2021. A CAD 0.10 per Mcf increase in the annual NYMEX natural gas price increases our annual cash flow by approximately $50 million. We have an estimated $1 billion of Topaz equity that can be realized to fund 2020 and 2021 acquisition activities as well as potentially reduce our short-term debt. A second half 2020 Topaz public liquidity event is anticipated, and the company believes conditions will be favorable for such a transaction as stability returns to the global financial markets. A few more comments on production and the production outlook. As mentioned, our maintenance EP capital budget for 2020 of $800 million, along with the 2 corporate acquisitions completed to date, will yield 2020 average production again of between 305,000 and 310,000 BOEs per day. We have deferred a subset of the originally planned Q2 EP activity in 2020 until the second half of this year as we are planning to fill our natural gas storage positions in both California and Dawn, and that reduces Q2 by about 6,000 BOEs per day. So that will yield anticipated Q2 average production of between 295,000 and 300,000 BOEs per day for the whole corporation. These injected storage volumes will be recovered predominantly in Q4 of this year when prices are certainly expected to be higher. So it won't affect the overall full year 2020 average production level. Our 2020 EP activity will be phased so as to yield strong Q4 and strong 2020 exit production volumes. We believe Q4, and we're forecasting Q4 2020 at between 310,000 and 315,000 BOEs per day and as mentioned, an exit of between 315,000 and 320,000 BOEs per day. So we will be well positioned to deliver strong year-over-year cash flow and production growth again in 2021. Of note, should weak liquid prices and stronger-than-forecast natural gas prices continue, the company can evolve the overall production mix from the current 80:20 gas total liquid split to 83:17 over the next few quarters. On the acquisition front, during Q1, Tourmaline acquired Polar Star Canadian Oil and Gas Inc., or Polar Star, in February for a total cash consideration of $12 million, including the assumption of working capital. The acquired B.C. assets include approximately 2,500 BOEs per day of production, 2P reserves of over 80 million BOEs and over 100,000 net acres of Montney land, along with a compressor station. We closed the acquisition of Chinook Energy Inc. on April 21, 2020, for total cash consideration of approximately $24.4 million, including assumed net debt. The Chinook B.C. assets include approximately 3,500 BOEs per day of production, 35.6 million BOEs of booked 2P reserves, 54,000 acres of Montney rights, a gas plant and compressor station and an important 190 million per day regional 12-inch pipeline. We have reduced the OpEx of the acquired assets significantly already. Minimal development of the assets is expected over the next 2 years. We are in the process of assembling a regional facility plan. That's a key aspect of the future development of these assets, and it will most likely include a Gundy size and scale deep-cut facility, which, as you recall, is 200 million a day with approximately 15,000 barrels per day of condensate and natural gas liquids. We provided a fairly detailed marketing update. Recall Tourmaline is Canada's largest natural gas producer with forecast average 2020 gas production of approximately 1.5 Bcf per day. We have a significant amount of 2020 natural gas price -- of our natural gas price protected and significant volumes are exported to NYMEX-priced hubs. We also have significant light oil and condensate volumes price protected in 2020, and the details of those transactions are described in this release for your benefit. Natural gas fundamentals for 2021 are steadily improving. We've been able to execute hedges above our 2021 AECO gas price assumption of CAD 2.62 per Mcf in '21, and will continue to benefit from the strength in the forward natural gas price curve. We also have over 210,000 barrels of oil and condensate storage capability across our 3 operated core complexes, which does provide additional flexibility in what is a very volatile liquid pricing environment. Looking at some of the EP activities. We are currently operating 3 drilling rigs, and we do plan to operate our 8 to 10 rig drilling fleet during the second half of this year. The timing of our second half 2020 frac activity is flexible, and it will be controlled in part by Q3 and Q4 commodity prices. We will maximize gas volumes in conjunction with the anticipated improving 2020/'21 natural gas prices. We set new pacesetter drill-and-complete capital cost records in all 3 of our core operated complexes, reducing our average completed well costs by approximately 5% thus far in 2020 as compared to 2019. We do expect further capital cost reductions when we engage our full drilling fleet in the second half of 2020. And that provides additional capital flexibility around that maintenance capital number that we've quoted. We are on track to realize record EP capital efficiencies in 2020 for the company of less than $7,000 flowing BOE. Tourmaline drilled one of the first pads in Western Canada, utilizing high line power in the Peace River High complex, and this initiative completely eliminates diesel from the lease. And it's really the next step along the path of emissions reduction beyond utilizing bi-fuel. Looking at our operating environment and the COVID-19 pandemic. During this period of uncertainty, the company, as always, is committed to maintaining its strong balance sheet and financial liquidity. At March 31, 2020, we had $1.3 billion in unutilized borrowing capacity within our credit facilities, and all of it is covenant-based, and we have significant coverage room on both of those covenants. In response to the COVID-19 pandemic, the company is following all rules and regulations as set out by the relevant health authorities, and we've implemented relevant health and safety protocols into our operations. Tourmaline and its staff have been able to adapt to this new work environment without significant disruptions at any operated facility or in our day-to-day operations. So that's all I was going to say for formal remarks, and we'll be more than happy to answer questions you may have.

[Operator]

[Operator Instructions] Our first question is from Fai Lee with Odlum Brown.

[Fai Lee, Equity Analyst]

It's Fai here. Mike, I was just wondering in terms of these commodity markets, obviously the results had a lot of change up in the air, and could also create a lot of M&A opportunities. I'm just wondering how you think about in terms of a strategy to stay focused, given a lot seems to be going on and what your thoughts are in terms of areas of M&A that seem particularly interesting to you.

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

Well, there's 2 elements to Tourmaline's business plan. The first is the EP organic activity, and that's captured in the 5-year plan, which provides modest growth and generates significant free cash flow. The other aspect to our business plan is M&A, and we finance that via our equity position in Topaz. And so that puts Tourmaline in a bit of a unique position. We're patient on M&A activity. We did complete 2 transactions, quite small, in Q1. It essentially created really a new core sub-complex, just a dip of our main Gundy complex in Northeast B.C. So we're being very patient. We see this as a generational opportunity in the M&A business, considering what assets and companies are trading at. Our goal is to keep the overall basin gas supply in the same position. So we don't want to grow gas supply, and so we plan to grow our gas business through selective and very accretive acquisitions.

[Fai Lee, Equity Analyst]

Okay. And so you are more focused on the gas side of the business than, say, oil or liquids?

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

Well, I'd say the overriding factor is we'll look at opportunities within all 3 of our core operated complexes. But we're 80% gas, so it will be gas weighted, no doubt.

[Fai Lee, Equity Analyst]

Okay. So something adjacent to what your current business is at?

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

Yes. We're not looking outside our 3 complexes. Where our infrastructure is all in place, and in a lot of cases, what we could potentially acquire, we will be serviced by our existing infrastructure footprint.

[Fai Lee, Equity Analyst]

Okay. And do you see a scenario where it might actually get cheaper to buy something rather than to produce and shift some of that organic growth capital over to the acquisition side?

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

Yes. Well, we're not really growing that much on the organic side. It's sort of 4% to 5%. Our operating metrics are always better when the facilities are close to full. And so part of the rationale for creating the Topaz vehicle back in Q4 of last year was it does provide us an opportunity to have capital to pursue acquisitions without increasing our debt or leverage metrics.

[Operator]

[Operator Instructions] The next question is from Jordan McNiven with Tudor, Pickering, Holt.

[Jordan McNiven]

Just noticed in the quarter here, you layered in some fairly significant condensate differential hedging. I assume that's reflective of risk you guys see to the condensate market with the oil sands shut-ins and such. Just wondering if you could provide a bit more color there on exactly what you're seeing in the market, and kind of what you're expecting and story dynamics and that type of thing.

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

Sure. Thanks, Jordan. It's Brian speaking, Jordan. So we've put a lot of our differential work into place well before the pandemic. So we're continually fixing out those basis numbers on our 30,000 barrels of oil and condensate. On condensate specifically, there have been periods where that differential has blown out just due to lack of bid. That seems to have come back in. And in fact, in the last couple of days, we were doing August through to December at -- in that USD 5.25 to USD 5.50 range on the differential itself. Our total portfolio right now, I think, is around $7.50. So a little wider than historical numbers, but we're not selling a lot on that day cash basis differential that you often will observe on your screen.

[Jordan McNiven]

Okay. Perfect. And I guess if things do get ugly again, and we do see kind of that market kind of dry up and the cash market get a little bit ugly, what degree of flexibility do you have to potentially blend down some of that condensate into, say, more of a light oil and sell it into the light oil stream versus the condensate stream?

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

So we actually are doing that to some extent now, Jordan. And because we have our blending terminal, we're able to take advantage of that directly. And we've also had some other markets we are pursuing, where we're doing that with small quantities of our condensates. So it's certainly an option and it seems to be generally improving as well. The sweet barrels seem to be moving a little better. And so as we're able to blend up into those barrels, that certainly is helpful.

[Operator]

[Operator Instructions] And we have no further questions at this time. I'll turn the call back to the presenters for any closing remarks.

[William Scott Kirker, Secretary & General Counsel]

Thank you. It's Scott here. Thanks, everybody, for dialing in, and we'll talk to you -- we look forward to talking to you in the next quarter.

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

Yes. Stay healthy, everybody.

[Operator]

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