Tourmaline Oil Corp

TSX:TOU

Earnings Call Analysis

Strong Production and Financial Performance

In the first quarter of 2024, Tourmaline Oil Corp. achieved significant increases in production and financial metrics. The average production reached 592,000 BOEs per day, marking a 13% increase from the same period in 2023. This performance was within the company's guidance range of 590,000 to 595,000 BOE per day. The company generated a cash flow of $871 million and a free cash flow of $310 million on total capital expenditures of $556 million.

Projected Financial Outlook

Tourmaline's financial outlook for the full year 2024 is robust. With improved strip pricing, the company expects to generate a cash flow of $3.52 billion and a free cash flow of $1.40 billion while maintaining an EP capital spending budget of $2 billion. This forecast shows an improvement of $200 million to $500 million in cash flow for each year of the company's 5-year EP plan.

Dividend Increase and Debt Reduction

In light of strong free cash flow generation, Tourmaline has increased its quarterly base dividend by 7%, resulting in a new rate of $0.32 per share, up from $0.30 per share. Additionally, the company declared a special dividend of $0.50 per share to be paid on May 16, 2024. The company's net debt was reduced by approximately $85 million during the first quarter, bringing it to $1.69 billion. Tourmaline remains committed to reducing its long-term debt further to a target range of $1.2 billion to $1.4 billion.

Record Levels of Liquids Production

The first quarter saw record levels of average liquids production at 145,000 barrels per day, a 27% increase compared to the previous year. This strong performance underscores Tourmaline's effective operational strategies and execution.

Marketing and Hedging Activities

Tourmaline has strategically positioned itself in premium natural gas markets. By the end of 2024, the company expects to have 1.22 Bcf per day of natural gas exported. For the year, 737 million cubic feet per day are hedged at a fixed price of CAD 5.43 per Mcf. The company also has several hedges linked to JKM and NYMEX prices, ensuring diversification and risk management in its marketing strategy.

Strategic Acquisitions and Operational Efficiency

Tourmaline continues to grow its Deep Basin complex through small acquisitions and Crown sales. In the first four months of 2024, the company added over 35 net sections and 49 Tier 1 drilling locations for a total capital expenditure of just under $19 million. Performance in the BC North Montney sub complex has been remarkable, with the drilling of an 8-well pad completed 12 days ahead of schedule and 19% under budget.

Long-term Free Cash Flow and Production Growth

Over the next five years, Tourmaline projects to generate approximately $8.6 billion in free cash flow while growing average production by about 22%. This outlook is supported by strong operational execution and strategic financial management, ensuring sustainable growth and shareholder returns.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Tourmaline Q1 2024 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 2, 2024. I would now like to turn the conference over to Mr. Scott Kirker. Please go ahead.

[W. Kirker, executive]

Thank you, operator, and welcome, everyone, to our discussion of Tourmaline's financial and operating results as of March 31, 2024, and for the 3 months ended March 31, '24 and '23. My name is Scott Kirker, and I'm the Chief Legal Officer of Tourmaline Oil Corp.

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 Tourmaline Annual Information Form and our MD&A available on SEDAR and on our website. We also draw your attention to the material factors and assumptions in those advisories.

I am here with Mike Rose, Tourmaline's President and Chief Executive Officer; Brian Robinson, our Chief Financial Officer; and Jamie Heard, Tourmaline's Vice President of Capital Markets. We'll 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.

[Michael Rose, executive]

Thanks, Scott, and good morning/good afternoon to everybody on the line. We're pleased to review our first quarter '24 results, and as Scott said, answer questions that you may have. So a few of the highlights from the quarter. First quarter '24 average production was 592,000 BOEs a day, and that's up 13% over the first quarter of 2023 at 526,000 BOEs a day and within our 590,000 to 595,000 BOE per day first quarter '24 guidance range announced on March 6 of this year.

First quarter cash flow was $871 million on total capital expenditures of $556 million, and that generated free cash flow of $310 million in the first quarter. In '24, at strip pricing as of April 15, '24, we expect to generate cash flow now of $3.52 billion and free cash flow of $1.40 billion for the full year on unchanged EP capital spending of $2 billion. As a result of improved strip pricing, our cash flow forecast compared to the 5-year EP plan released on March 6 of this year has improved by $200 million to $500 million in each year in the plan.

Given the strong free cash flow generation in the first quarter and our full year financial outlook, we've elected to increase the quarterly base dividend effective Q2 '24 by 7% or $0.32 per share per quarter from the current $0.30 per share and as well declare and pay a special dividend of $0.50 per share on May 16 of this year to shareholders of record on May 9. Of note, we also reduced our net debt by approximately $85 million during the first quarter.

Just briefly on production. First quarter average liquids production was a record 145,000 barrels per day, and that's up 27% over the corresponding period in '23 at 114,000 barrels per day. Our full year '24 average production guidance remains unchanged at 580,000 to 590,000 BOE per day with the revised capital budget announced on March 6, '24.

On financial results, we realized Q1 '24 net earnings of $245 million, and that underscores the profitability of the business even in extremely weak natural gas pricing environment. Exit Q1 '24 net debt was $1.69 billion, and as previously announced, we remain committed to a long-term debt target of $1.2 billion to $1.4 billion and intend to progress towards that target through 2024 and into 2025. And as mentioned, we reduced our net debt by $85 million already.

And in addition, we have 45.1 million shares of Topaz Energy Corp., which had a market value of approximately $1 billion as at March 31 of this year. And over the next 5 years, we forecast that we will generate approximately $8.6 billion in free cash flow at strip while growing average production in that period by approximately 22%.

Some comments on marketing. We expect to exit 2024 with a total of 1.22 Bcf per day of natural gas going to export markets. For 2024, we have an average of 737 million cubic feet per day hedged at a weighted average fixed price of CAD 5.43 an Mcf. We also have an average of 196 million hedged at a basis to NYMEX of USD minus $0.33 an Mcf and an average of 980 million per day of unhedged volumes exposed to export markets in 2024. And of this 980 million cubic feet per day, 59% is exposed to the premium markets such as the U.S. Gulf Coast, JKM, Dutch TTF, Malin, PGE and Sumas. We have 37 million cubic feet per day hedged at a weighted average fixed JKM price of USD 20.34 per Mcf in 2024, and at the same of 22 million cubic feet per day hedged at a weighted average fixed JKM price of USD 17.53 per Mcf.

In the first quarter, we did complete and we announced it previously, our second LNG agreement, increasing exposure to JKM by entering into a netback agreement with Trafigura Pte Limited. That's based on 62,500 million BTUs per day for a 7-year term starting January 2027, with the potential to extend to December 2039. And that agreement is not dependent upon incremental FERC approvals. In 2024 of March, we commenced our third LNG agreement, and that's delivering 50,000 million BTUs indexed to the Dutch TTF price less associated deductions.

We also entered into 4 natural gas-to-power agreements, providing exposure to the AESO power market. In '23, the first of these agreements realized a natural gas price equivalent of $7.57 per Mcf, which represents a $4.89 per Mcf premium to the AECO index for the year, and that generated $16.7 million in realized revenue above the AECO 5A index, so we're happy with that.

Looking at our EP and operations, we operated between 13 and 15 drilling rigs during the first quarter of this year. We're currently operating 6 (sic) [ 5 ] rigs. Strong well performance on Glauc trend continues in the southern Deep Basin, with all of our recent down-dip wells significantly outperforming historical trends. And these results are detailed in the updated corporate overview that was also released with our financial results yesterday.

The company continues to systematically grow the Deep Basin complex, and that's through small acquisitions and Crown sales. During the first 4 months of this year, we've added a little over 35 net sections through 17 separate small transactions or land sales, and that added 49 Tier 1 drilling locations. One of the transactions had 600 BOEs a day of production associated with it. And total CapEx for all of that activity was just a little under $19 million.

Our improving EP execution continues in the BC North Montney sub complex. We drilled the 8-well North Montney/Laprise C-54-H pad in a total of 44.5 days. That's 12 days ahead of schedule. The 8 wells, with an average horizontal length of just a little bit under 2,000 meters, were drilled for a total pad cost of $13.4 million, and that's 19% under the AFE at the time, and we AFE these things relatively cheaply given previous performance. So every well in that pad was done in under 6 days.

And I think that's all I'll say for formal remarks, and we can go to Q&A, and all of us are here to answer questions.

[Operator]

[Operator Instructions] There are no questions at this time. Please proceed.

[W. Kirker, executive]

Thanks, everyone, for dialing in. We'll talk to you after the next quarter. I appreciate your time.

[Michael Rose, executive]

Thanks, everybody.

[Operator]

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