Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Tourmaline Quarter 2 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, July 29, 2021. I would like to turn the conference over to Scott Kirker. Please go ahead.

[William Scott Kirker, General Counsel]

Thank you, operator, and welcome, everyone, to our discussion of Tourmaline Oil Corp's results for the 3 and 6 months ended June 30, 2021 and 2020. My name is Scott Kirker, and I'm the General Counsel of 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 the 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 those advisories.I am here with Mike Rose, Tourmaline's President and Chief Executive Officer; Brian Robinson, Vice President of Finance and Chief Financial Officer; and Jamie Heard, Tourmaline's Senior Capital Markets Analyst. We will 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 L. Rose, Chairman of the Board, President & CEO]

Thanks, Scott, and thanks, everybody, for dialing in. And we're pleased to review our second quarter results and answer questions that shareholders may have.Starting out with the highlights, second quarter 2021 cash flow was $1.89 per diluted share. We had record free cash flow of $343.9 million on production of 410,339 BOEs per day, which exceeded the high end of production expectations despite challenging operating conditions with June's heatwave. The updated 5-year plan at current strip pricing delivers $1.8 billion of free cash flow in 2022 and $7 billion over the full 5-year duration of the plan.We received a credit rating upgrade from BBB to BBB-high in July of '21 by DBRS Morningstar. We now expect to achieve our year-end '21 net debt target of approximately $1 billion or 0.4x debt to cash flow and less than 1x annual free cash flow prior to yearend. With incremental volumes on the GTN Malin/PG&E systems and the company's recently announced Gulf Coast LNG pathway in 2023, Tourmaline will have 905 million a day exposed to export markets on firm long-term transport agreements by exit 2023.Our largest export market, PG&E California, is currently trading at $5.50 per MMBtu in U.S. dollars. Looking at production in a little more detail, as mentioned, second quarter '21 average production was a little over 410,000 BOEs per day and a little over 414,000 BOEs per day prior to storage injections into our storage reservoirs in California and Dawn. So that's a 37% increase over the prior year Q2 2020.We anticipate third quarter average production will range between 450,000 and 460,000 BOEs per day. We expect to reach the 500,000 BOE per day production milestone in Q2 of 2022, primarily through the completion of the Gundy Phase 2 project, the Nig Creek expansion project and the ongoing Laprise development program. 2021 average production for the year remains estimated at 430,000 to 445,000 BOEs per day.Looking at our very strong financial results. Second quarter '21 cash flow was $570 million compared to $225 million or $0.83 per diluted share in Q2 2020. Second quarter '21 after-tax net earnings were very strong at $428 per million -- sorry, $420 million or $1.40 per diluted share, and that compares to $20 million or $0.07 per diluted share in the second quarter of 2020.We delivered free cash flow of $344 million on EP capital spending of $216 million in the second quarter. Full year '21 cash flow of $2.78 billion is now expected, with estimated free cash flow for '21 of $1.47 billion. We received the credit rating upgrade in July of this year, following the close of the Black Swan acquisition, moving up to BBB-high from BBB for both the Issuer Rating and the senior unsecured notes. The credit rating upgrade is expected to result in lower effective interest rates on company debt, which already are extremely low and in the top-tier at 1.72% for the second quarter.Revisiting the capital program and the financial outlook, second quarter '21 E&P capital spending was on target at $216 million. Full year '21 EP capital spending remains at $1.27 billion. Net debt at June 30 of this year was $1.7 billion, which excludes the 2 Northeast BC transactions, which -- with Topaz, which yield $390 million in cash, both of which will close in the third quarter of '21.Exit Q3 '21 expected net debt is approximately $1.4 billion, including the impact of all acquisitions completed to date in 2021. We now expect to achieve the yearend '21 net debt target of approximately $1 billion. As at July 15, 2021, Tourmaline's Topaz equity ownership was valued at $934 million, which essentially offsets the estimated '21 yearend net debt.As mentioned, the updated 5-year plan at current strip pricing now delivers $1.8 billion of free cash flow in '22 and $7 billion over the full 5-year duration of the plan. Looking in a little bit more detail at the growing free cash flow outlook and our plans, our consistent 2021 narrative has been that our top 2 priorities, our modest sustainable dividend increases and continued debt reduction to our long-term debt target of 0.5x debt to cash flow.So far in '21, we've used free cash flow for 2 dividend increases, and we now expect to hit that long-term debt target during Q4 of this year. As we look out to 2022 and the full 5-year plan, the vast majority of the free cash flow will be returned to shareholders. We'll provide more detail on the mix of the return opportunities over the upcoming 2 to 3 months, including continued sustainable-based dividend increases, special dividends and share buybacks where appropriate.We see special dividends matching up well to periods of elevated commodity prices and the excess free cash flow generated during those periods. Recall that our annual EP program generates 3% to 5% annual growth, and the only significant facility project of size in the current 5-year plan is the Gundy Phase 2 expansion, and it will actually be done by the end of this year. The balance of the program in the out years is, thus, very capital-efficient and will continue to generate significant free cash flow.The next large facility project is the Conroy North Montney development, which we've matched up to the LNG Canada startup when we expect very strong western Canadian gas pricing. That time frame is '25,'26. Hence, this project is not in the current 5-year plan, it could be as large as 800 million per day. It will be a very strong utilization of free cash flow in the '26-'27 time frame.We also have an initiative to capture more margin in our liquids business and are currently evaluating strong return projects to that end in this new business segment. These projects will compete for a portion of the free cash flow in the '24-'25 time frame.A brief marketing update. The average realized natural gas price in Q2 '21 was $3.25 per mcf as we benefited from rising commodity prices, select hedging and our broad natural gas market diversification portfolio throughout North America. The accelerated Gundy Phase 2 expansion project is expected to be on stream in January '22 so as to take advantage of potential winter gas price premiums. And we made that acceleration decision a couple of months ago as we were ahead of schedule on the facility prebuild.The PG&E California market continues to be very strong, an average Q2 benchmark price of $4 per MMBtu U.S. and strip pricing at July 23, '21, of $5.48 per million BTUs U.S. for the remainder of '21. NGL price realizations in Q2 '21 were up 130% over Q2 2020. We are Canada's largest NGL producers averaging 55,500 barrels per day during the second quarter, and the NGL pricing outlook continues to improve.Briefly, some comments on the EP program. We drilled 114 net wells in the first half, and we expect to drill approximately 250 net wells for full year '21, completing approximately 220 of these by the end of this year. We are currently operating 12 drilling rigs and will add an additional rig on the former Black Swan lands in September as originally planned. We expect to bring approximately 140 net wells on stream through the balance of this year.Improved drilling time and cost performance for D&C operations has largely offset modest inflationary cost pressures that we are all observing. Drilling times have been materially reduced in all 3 core complexes through the application of multiple evolving technologies that we continue to trial. Recent horizontals in the Laprise BC Montney area are now being drilled to TD in 5 days. Overall, the second half '21 EP capital program is being executed slightly ahead of schedule.Moving to our environmental performance improvement initiatives, we intend to invest $20 million to $40 million per year in these initiatives, primarily in the areas of diesel displacement for EP drilling and completion operations, methane emission reduction and ultimate elimination projects, gas plant emission reduction and associated waste heat recovery installation and our multiple water management projects. The majority of these environment-related capital investments do indeed generate a modest positive return.We estimate that environmental initiatives to date have reduced our annual emissions by approximately 250,000 tons per year so far, a meaningful accomplishment. We have now installed over 200 zero emission electric chemical injection pumps, providing an estimated GHG reduction of 40,000 tonnes of CO2 equivalent per year.The first hybrid gas tier 4 frac unit has been delivered and will be pumping on our BC Montney pads in the second half of 2021. Evolving zero methane emission technology is being implemented on all new well sites in all company-operated areas.And finally, the engineering design has been completed for the NGIF Emissions Testing Centre. That East Edson facility is expected to be fully operational later on in Q3 of this year, and this center will be evolving the next-generation and emission reduction in the field. These are all technologies to be put in place during the next 2 to 5 years. We're not waiting for 2050.And that's the end of the formal comments. So we've got several of us here to answer any questions shareholders might have.

[Operator]

[Operator Instructions] Your first question comes from Fai Lee with Odlum Brown.

[Fai Lee, Equity Analyst]

It's Fai here. Mike, I'm just wondering about this Gulf Coast LNG pathway. I just want to confirm if the -- are the volumes moving on the TC pipeline Alberta Xpress AXP project, is that how the volumes are getting to the Gulf Coast?

[Michael L. Rose, Chairman of the Board, President & CEO]

Well, that -- yes, but there's really 4 pipeline segments to get it there, all Trans-Canada operated if you go all the way back to the NGTL system. And the total tolls are USD 0.86.

[Fai Lee, Equity Analyst]

Right. And is there potential room for expanding those volumes that you've -- in the future or is it kind of what you kind of -- the agreement you've reached is kind of sort of the maximum point?

[Michael L. Rose, Chairman of the Board, President & CEO]

I think we've taken up all the available space in that pipeline system.

[Fai Lee, Equity Analyst]

Okay. Yes, that's what I wanted to get. That's what it looked like. Okay. Great. And in terms of returning cash to -- return cash to shareholders, the free cash flow, in terms of share buybacks, I'm just wondering -- I know you had provided more detail there, but do you have any initial thoughts on how you're going to handle the share buyback? Do you have some criteria in mind or how that's going to be handled relative to preference versus a special dividend?

[Michael L. Rose, Chairman of the Board, President & CEO]

Well, it will be in the mix of return to shareholder opportunities. We just renewed our NCIB, as you probably saw when we announced the closing of the Black Swan transaction.

[Fai Lee, Equity Analyst]

Right, but do you have a like -- like there's some criteria, you say, okay, well, do a share buyback in risk conditions or are you just going to try and come up with some sort of mix between the 2?

[Michael L. Rose, Chairman of the Board, President & CEO]

Well, we're finalizing what the mix between all the various return opportunities are. I mean, obviously -- and our actions have demonstrated that we like base -- sustainable base dividend increases and in times and periods of significantly more free cash flow, the model, we like the special dividend as well.

[Operator]

Your next question comes from Sean McPherson from Industrial Alliance.

[Sean McPherson, Research Associate]

[indiscernible] quick question. I know...

[Michael L. Rose, Chairman of the Board, President & CEO]

Yes, we can't hear you very well.

[Sean McPherson, Research Associate]

Okay. That's a bit better?

[Michael L. Rose, Chairman of the Board, President & CEO]

That's a little better.

[Sean McPherson, Research Associate]

Okay. Earlier this month, you guys announced a focus on cutting costs with each dollar supposed to add like $180 million to free cash flow. Any idea of how many dollars in costs you might be able to cut?

[Michael L. Rose, Chairman of the Board, President & CEO]

Well, I mean, our goal internally is to initially try and shave $1 off over the next -- or $1 of improved margin over the next 12-18 months. So we're working away on it and we've actually made good headway already.

[Operator]

Your next question comes from Josef Schachter from Schachter Energy Research.

[Josef I. Schachter, Author & President]

Two questions for me. First one on the technology side. We're seeing more comments in the States about intelligent fracking systems. Are you using that in Canada? And are you finding that the well productivity using these new frac and there's a DGB unit capable of doing that, the new unit that's coming on, as you mentioned, in the next short while?

[Michael L. Rose, Chairman of the Board, President & CEO]

That technology specifically is not something we're trialing right now, but we're always evolving and improving our frac technology and performance and simultaneously trying to deliver better well performance for less dollars. So it's never complete. It's always improving.

[Josef I. Schachter, Author & President]

Okay. So real-time fracking is not really something that's really shown up that much yet in terms of improvement and well performance?

[Michael L. Rose, Chairman of the Board, President & CEO]

Well, I mean -- yes. That specific technology we're not using, but I mean, we are certainly using real-time frac technology as we stimulate these wells.

[Josef I. Schachter, Author & President]

Okay, super. Second question for me on the M&A side. Is there much more available in your 2 core areas that you're looking at and -- or do you have really the footprint you want? And the part of -- the additional part then is, are you looking to build a third core area and would that be again in natural gas and NGLs or would you be looking at a core area in, let's say, conventional of the oil business?

[Michael L. Rose, Chairman of the Board, President & CEO]

We've largely acquired the targets that we wanted in the Alberta Deep Basin and the BC Montney, which are our 2 large gas complexes. It doesn't preclude us from doing small, and I mean small bolt-on asset transactions within either of those areas, but we have nothing close on that front anyway. We have a third core area, and that's our Peace River High, Charlie Lake, Montney, and it's about 60% oil, 40% gas, and it generates this year about $100 million of free cash flow on a $70 million capital investment.So we really like that area, even though it's significantly smaller than our 2 large gas complexes. And as far as establishing a fourth core area, we have so much inventory, so many projects and so much production in the 3 complexes we have already that we have decades of drilling and EP development to put in place. And so I think we're very happy with what we have under Tourmaline supervision right now.

[Josef I. Schachter, Author & President]

Super. Congratulations again on the great quarter.

[Operator]

Your next question comes from Dan Lloyd from Forge First.

[Daniel Lloyd, Portfolio Manager]

I'm just curious if you can give some color or maybe the Tourmaline perspective on the BC government Blueberry River First Nation judgment? And then kind of a follow-up I guess if you could maybe speak to ideally the strength of your relationship with the Blueberry River First Nation?

[Michael L. Rose, Chairman of the Board, President & CEO]

We've been working in that North Montney area in and around the BRFN for over 5 years and I think we've established a good working relationship, and we continue at our full operational pace in that subarea within our overall BC Montney complex. And then all I would say on the government was that I believe they chose not to appeal the BC Supreme Court decision, and I think that ruling came out yesterday.

[Operator]

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

[William Scott Kirker, General Counsel]

Thanks, everyone, for dialing in. We'll talk to you next quarter.

[Operator]

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