Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon. My name is Joey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tourmaline Q2 2019 Results Call. [Operator Instructions]Thank you. Scott Kirker, you may begin your conference.

[William Scott Kirker, Secretary & General Counsel]

Thank you, operator. And welcome, everyone, to our discussion of Tourmaline's results for the quarter ended June 30, 2019. My name is Scott Kirker, and I'm the Secretary and General Counsel for Tourmaline. Before we get started, I would 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 MD&A available on SEDAR and also on our website. I'd 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 Finance and Chief Financial Officer. Mike will start by speaking to some of the highlights for the quarter. And after his remarks, we will be open for questions. Go ahead, Mike.

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

Thanks, Scott. Good morning, everybody, and thanks for dialing in. We're pleased to go through Q2 2019 where we realized strong earnings, again, and we continue our focus on generating free cash flow. A few of the highlights. First half '19 production average was just under 287,000 BOEs a day and that included the impact of Q2 gas storage injections and low gas price-related program deferrals that we made in the second quarter. With Gundy Phase 1 now onstream, we reconfirm our full year average production estimate of 300,000 BOEs per day with a range of 295,000 to 305,000 BOEs per day. We expect second half August production of this year of between 300,000 and 305,000 BOEs and that is actually prior to maximizing throughput at the Gundy complex and that will further ramp production up significantly. Q2 '19 earnings were just under $63 million, or $155 million after tax, and that again underscores the profitability of our EP business even during these periods of extremely low natural gas prices. The full year EP capital budget has been reduced by another $25 million, so the total now is $1.125 billion. And even though capital has been revised down again from the original $1.305 billion '19 budget, there is still no change to the full year production guidance of 300,000 BOEs per day. And that's primarily due to continuous incremental drill-and-complete capital cost reductions, and they provided the opportunity to reduce the budget and keep production where it's forecast. Our full year '19 free cash flow is now $196 million, which is more than sufficient to fund the 2019 dividend payment obligation of $125 million. Looking at production in a little bit more detail. Q2 averaged just over 280,000 BOEs per day and that's up 8% from the Q2 2018 period. It was adversely affected by our deferral of approximately 60 million a day of planned new gas well startups out of Q2 and into the second half of the year due to particularly low natural gas prices in June. There were incremental unplanned interruptions on the Enbridge system in BC and it reduced Q2 volumes by an additional 3,500 BOEs per day and that's beyond the major planned outages in May on both the Enbridge and TransCanada systems. And we also injected about 1.6 BCF of natural gas, or 3,000 BOEs per day, on the quarter into storage -- into our storage positions at Dawn and in California. We did that because gas prices were low, and these injected volumes will be produced most likely in Q4 of this year, but we'll do it when prices are favorable and make money on those storage positions. Looking at our liquids production in detail. Q2 2019 liquids production was just under 52,000 barrels per day and that's up 13% year-over-year, but it is behind original expectations. And we detailed the series of operational issues in all 3 core areas to explain that. And then given the lower-than-expected first half production volumes on the liquids side, we're revising our full year total average liquid production down to 61,000 barrels per day from the original 66,000 barrels per day. That's still a 28% year-over-year increase. But most importantly, the exit '19 liquids production estimate remains unchanged. So the strong liquids growth story is fully intact. We simply can't make up the first half shortfall by overproducing in the second half, but the second half outlook has not changed. Just so that that part is clear. And what will drive the second half liquids growth story will be the ability of our Gundy plant to produce that at full volumes and that is going to require access to the North Montney line, which starts up in September, will fully ramp to 200 million per day and that will give us an over 5,000 barrel per day increase in total liquid production from that complex. We have some DUCs to complete on the Peace River High. That's happening right now, and we'll get the full benefit of a NGL optimization project that we executed in the first half of 2019 at our Spirit River 3-10 plant. Looking at our capital program. Q2 2019 total capital spending was $198 million. Total first half '19 spending was $582.6 million, and we ensured that EP capital spending and the dividend payment were less than cash flow during the first half of '19 and that process will continue going forward. We did defer 15 Q2 planned gas well completions into the second half of the year because of the aforementioned low gas prices during the second quarter. We'll frack and bring these wells on stream when natural gas prices improve, and the current planned timing for that is in the October/November time frame at the beginning of the winter heating season when we expect the incremental gas price to be significantly improved. Looking at Q2 '19 financial results. Q2 cash flow was just under $227 million and that's down from first quarter cash flow of $419 million and that's due to a number of factors, but primarily the Q2 AECO index price of $1.04 per Mcf compared to $2.64 per Mcf in the prior quarter. Much lower NYMEX gas prices and much lower NGL pricing also reduced our Q2 cash flow from Q1. The June '19 AECO 5a index price was $0.49 an Mcf, as previously disclosed. So we reduced planned June incremental gas volumes accessing AECO by approximately 60 million per day. July AECO 5a prices have improved. They're $1.29 per Mcf. I mean that's not a fantastic number, but it's a lot better than June, and we expect that supply demand balance at AECO to continue to tighten. Q2 '19 Station 2 prices in BC were $0.61 an Mcf, so that didn't help Q2 cash flow either. And although, we're probably amongst the best and most diversified on our gas marketing and transportation in Canada, the 7 NYMEX-based gas hubs that we sell gas at were also down 55% in aggregate in Q2 from Q1 of '19. NGL pricing was weak in Q2. Our ability to ship propane from Gundy to the Ridley Island export terminal is certainly a positive on our overall NGL pricing equation for the second half of the year. On a positive note, our oil marketing terminal on the Peace River High was expanded during the second quarter and it's expected to generate about $10 million per year of third-party revenue and enhanced oil revenue and adding that to the company's expanding gas processing and water management businesses, and we're quite excited about our third-party revenue growth outlook as we continue to maximize the benefit we get from our significant infrastructure assets. Given continuing low gas prices at the 2 Canadian hubs as mentioned and the 7 U.S. hubs, and our reduced first half liquids volumes, we have reduced our full year forecast gas prices and our full year cash flow estimate to $1.35 billion, down from $1.5 billion we were carrying previously and that really takes into effect Q2 cash flow. The revision still provides $196 million of free cash flow after the planned capital program, so more than sufficient to fund the existing dividend obligation. Briefly on the EP program, the big highlight, of course, is our new 100% working interest Gundy deep-cut processing facility was commissioned in late May, and the turbo-expander with the associated incremental liquids production started up during June. Current daily maximum throughput at the facility is between 130 million and 135 million per day. We've on occasion had it higher than that, but the pressure restriction, which wasn't forecast on the Enbridge system related to the Q4 2018 Ft. Nelson mainline pipeline rupture has limited volumes to about this level. So we're limited to 80% of MOP, or maximum operating pressure. So we can't fully ramp through the Enbridge system at this time to 200 million a day. We will be duly connected to the TransCanada and North Montney line, that starts up in September, and at that point, we'll ramp Gundy to full volume and realize the big benefit of the increased condensate propane and associated NGLs, which will be more than 5,000 barrels per day, addition from where we're at today. Very encouraging, our June OpEx for the overall Northeast BC Montney gas condensate complex, so that's Gundy plus Doe-Sunrise, was a record low $2.50 per BOE, and it's driven mostly by dedicating volumes from third-party back into the new Gundy plant, but it's very encouraging going forward because that's where the significant component of growth over the next 2 or 3 years for the overall company is coming from. So that's well ahead of the expectation and provides upside for our netbacks going forward. We continue to build the DUC inventory, or drilled uncompleted well inventory, in the Alberta Deep Basin. We anticipate fracking and bringing on production from between 30 and 40 wells in the September to November time frame, and those incremental gas volumes will realize improved winter pricing at that point. And with the Alberta Deep Basin complex now in a maintenance capital mode, we plan to maximize production on an annual basis in Q4, then Q1s or the winter periods, and we'll have lower planned production during the summer months or Q2 and Q3, so a little different production profile going forward for that asset. And that's the end of the formal comments, so we'll open it up for questions at this point.

[William Scott Kirker, Secretary & General Counsel]

And back to you, operator.

[Operator]

[Operator Instructions] Your first question comes from the line of Michael Shannon from BT Global.

[Michael C. Shannon, Partner & Portfolio Manager]

Mike, I'm wondering if you could -- when we're sort of looking at plummeting new lows here in terms of the stock price going back to 2016, let's say, the first time that, before the end of last year, that the oil market and gas market crapped out. I mean it seems to me that the company has built an awful lot of value as a company since the beginning of 2016, and maybe you could just sort of give us, which I'm sure, you have just offhand, your quick elevator pitch as to how much more value has been created in the company in terms of all the work that you've done. Let alone, obviously, the stock market response to day-to-day prices, and so on, but maybe you could just tell us what's happened since 2016 to make Tourmaline more valuable than it was?

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

Well, from a reserve perspective, on the value piece, our year-end '18 reserves were 2.4 billion BOEs, which using engineering price deck, which is ahead of strip, although closer to strip than it's been in the past. That's a 2P NAV of $55 a share, and we booked 2,000 of the 15,000 locations that we control. So we booked about 15% of our inventory. So there's a huge value accretion piece that come to the story and that will be the piece at which we get that realized. It will be controlled really by the natural gas price. I mean in the space of 10 years, we've gone from 0 to 300,000 BOEs a day, and we've drilled up 7% of that inventory, so we're really just getting going from that perspective. We are Canada's -- are the largest producer of natural gas in Canada. We're the lowest cost producer. We have the largest gas infrastructure of any E&P other than the midstreamers in Western Canada. And Brian, I know has the numbers. He went back to IPO days, how much cash flow has appreciated on a per share basis. Brian?

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

Yes. I think our cash flow was about 450% of where it was on a per share basis when we IPOed the company. And also, we've just methodically brought our D&C cost down every year. We're about 1/3 less than we were 2 years ago. We brought our operating and transport and interest and financing costs down, we're continuing to do that. So as we chip away each of those items that improves our margins, and I mean we've done so in an eroding product price environment too, and we've also kept our balance sheet in really great shape. We kept it in check.

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

That helps?

[Michael C. Shannon, Partner & Portfolio Manager]

Yes. That's helpful. I wonder if you sort of also recalibrated or that's probably the process in the next couple of days, but recalibrating analysts' expectations so that when numbers do come out, we can show a beat. I know it's -- I'm planned out -- planned for obviously, but...

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

Yes, I mean, if the pricing is down 60%, NYMEX, AECO Station 2 and NGLs, we're not going to beat on cash flow. Our full year cash flow adjustment down to the $1.35 billion, it is pretty much where the analytical community was before we released Q2. And so I mean, I think, we are well aligned at that point, Mike. So I mean really, we've had 4 fantastic releases in a row and the stock didn't go up.

[Operator]

You next question comes from the line of Josef Schachter from Schachter Energy Research.

[Josef I. Schachter, Author & President]

I have 2 of them. Number one, you've got an approval for an NCIB. Your debt level is pretty low. Are you willing to, once you get the TSX approval, start moving on your NCIB in second half of 2019?

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

It's Brian speaking, and we already have our TSX approval, so we're all set to go. And our thinking at the moment is that we will certainly consider small tactical share buybacks over the next little while. We're not willing to significantly lean on our balance sheet. We're very proud of the fact that we accumulated free cash flow over the first half of the year, and we've done so in excess of our dividend payment. And our overall long-term plan is to ensure our capital program, our maintenance and growth component are protected, our dividend is protected and to the extent we have residual free cash flow over and above that then we would be more inclined to systemically buy back a bit of stock, but we will certainly be looking at it very carefully over the short and long period.

[Josef I. Schachter, Author & President]

Second question more of an industry one. There's lots of articles about the government -- provincial government looking at different ways to help the natural gas sector, royalty credits, or we've heard the comments about apportionment. Mike, what are your thoughts right now and what is reasonable? And what would be something that you'd like to see, which would be beneficial to Tourmaline?

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

Well, I can tell you that the Alberta government is firmly committed to improve the short, medium and long-term prospects of the natural gas industry in Alberta and Western Canada. They are working closely with the industry, including us on a regular basis, to make that happen. And we are encouraged on where things are going to go and really being that we're in the middle of a bunch of actions, I would say that's about all-in-all disclosed at this point in time, but the UCP government is firmly committed to the Western Canadian gas business. Leave it at that, Josef.

[Josef I. Schachter, Author & President]

Okay. So we'll just have to be patient.

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

Yes.

[Operator]

[Operator Instructions] You next question comes from the line of Peter Cooke from Logan Capital.

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

One question. Regarding the dividend, I mean I look at the price of stock where it is now, it seems like the price of the stock is a heck of a lot better use of your cash than paying a dividend, given how low it is. While I like the dividend, it just seems like they're giving the stock away at this level.

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

Well, we have choices on what we do with free cash flow. I mean good news, Peter, is we do have free cash flow, and so a small dividend was kind of always part of our plan as the company grew and matured and part of the rationale for that was it would provide access to the AUM that requires a dividend payment before the investing. We have seen some new entrants into our stock because of the dividend and it allows us to reward shareholders, while we wait for their underlying equity value to get properly appreciated by the markets at large.

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

Well, I guess, the big question really is, looking at the cash flow going forward, with the price of natural gas as low as it is, do you really have the confidence that you're going to see the gas prices moving enough to really give you the free cash flow over the next year or so?

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

We do. I mean we do see that supply-demand tightening both on our side of the border and your side of the border. I mean I think if you look through the narratives from a lot of the large U.S. gas producers over the last month or so that amount of new supply coming is continually revised down. I think we can generate full cycle returns at a lower net gas price than most of our U.S. counterparts. So when NYMEX down -- is down around $2.20 an Mcf, those companies have to cut back because they can't make it on a full cycle basis and that's exactly what we're seeing. So we expect over the next 12 to 18 months to see the supply-demand be a much more positive story both in Canada and the U.S., but we'll watch our capital in the meantime.

[Operator]

Your next question comes from the line of [ Andy Creanga, ] who is a private investor.

[Unknown Attendee]

Just a question I have perhaps I need something as far as the Q2, do the company make money or the company lost money?

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

Well, the company made money. We had earnings. We had after-tax earnings of $154 million, pretax earnings of $63 million, I think it was.

[Unknown Attendee]

So the company made $168 million for the last quarter?

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

No, no. No, our after-tax earnings number was over $150 million and our pretax earnings number was in that $60 million range. It was $62.8 million pretax and $154.9 million after-tax. So we made money like we had earnings. We had free cash flow. We had a little bit of free cash flow yield, but we were a little light on the revenues and cash flows that we generate from our liquid business, I think, is what we are underscoring. And also, we had tremendously weak gas prices on all of our hubs that we sold gas at.

[Unknown Attendee]

Okay. But this number, the profit that company made, it's a good number. I still don't understand why the stock is down. I don't know how much it is right now. I mean I'm watching right now, but down almost $2.50 down. What was bad news in order for the investors to react that way?

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

Cash flow was less than what market consensus was for the reasons that Brian outlined. So the stock is definitely down today. You're right. We look at it as a great buying opportunity based on all the other fundamental valuation parameters for the company. So appreciate your support.

[Operator]

Your next question comes from the line of [ Rick Locke from Community and Gas ].

[Unknown Analyst]

I was wondering if you were talking to West Coast often regarding their new proposed plant, petrochemical plant, in Prince George to supply them?

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

We haven't thus far. We're involved in a number of other gas supply discussions, be it a petrochemical or LNG, but that is one we haven't talked to actually. Brian?

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

No. We're aware of it, but we haven't spoken directly to them yet. As Mike said, there was all kinds of different items that we look at. We look at the PGHs, methanol and we look at the LNG opportunities. And certainly, this is another one that's out there and we haven't directly contacted them.

[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]

Thanks, Joey. Thanks, everyone, for attending our conference call, and we'll talk to you, again, next quarter.