Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tourmaline Oil Corp. third quarter results conference call. [Operator Instructions] I would now like to turn the call over to Mr. Scott Kirker. Please, go ahead.

[William Scott Kirker, Secretary & General Counsel]

Thank you, Amy, and welcome, everyone, to our discussion of Tourmaline's results for the 3 and 9 months ended September 30, 2018. My name is Scott Kirker, and I'm the Secretary and General Counsel for Tourmaline.Before we get started, I'd like to refer you to the advisory on 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'd also like to 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 of the quarter, and after his remarks, we'll be open for questions. Go ahead, Mike.

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

Thanks, Scott, and good morning, everybody, and thank you for dialing in. And we're pleased to review our Q3 2018 results and our 2019 outlook.Starting with the highlights. Q3 production was down 3% from Q2 of 2018 primarily due to weather-related delays that moved planned September production start-ups on 4 large pads into October. We have increased our 2018 production exit estimate to 300,000 BOEs per day due to stronger-than-forecast well performance. Our 2019 production forecast is increased to 300,000 BOE per day on a reduced EP capital program of $1.3 billion. So production for '19 is up 3% and capital spending is down 4% from previous estimate.The Gundy BC Phase 1 deep-cut plant start-up has also been accelerated into Q2 of 2019. And that's a 50,000 BOE per day production increment for the company. Q3 2019 earnings were $55.3 million, continuing the strong earnings performance in a low natural gas price environment. The 4 second half 2018 liquids-focused facility projects, I believe we referred to several times publicly during the year, have now all been completed and are onstream and helping provide the very strong Q4 2018 production growth that we're realizing. We've had very strong well performance both on natural gas and condensate from the new 2018 Montney horizontal wells, particularly at Gundy Creek, and we'll talk more about those later. Looking at production in a little bit more detail. We expect to achieve our originally targeted 290,000 BOE per day 2018 exit volume in mid-November, and we also believe that we will exit at 300,000 BOEs per day, as mentioned, driven primarily by that very strong well performance ahead of forecast. For the 9 months ending September 30, 2018, production has averaged just over 261,000 BOEs per day compared to just over 235,000 BOEs per day for the same period in 2017, and that's an 11% year-over-year increase. Q3 '18 average production of just over 254,000 BOEs per day is up 7% from the corresponding quarter in 2017. As mentioned, Q3 '18 production was 3% lower than Q2, as we rescheduled annual facility turnarounds into July and anticipated period of weaker gas prices across all 3 complexes, and we do continue to experience periodic unscheduled third-party transportation interruptions. And as mentioned, the wet weather deferred the start-up of 4 large pads from September into October. Also, given the impact of the Enbridge 36-inch pipeline interruption that happened in October and the uncertainty surrounding the pipeline capacity after repairs are completed, we expect Q4 production '18 to range between 281,000 and 287,000 BOEs per day, and the full year range is now 265,000 to 270,000 BOEs per day. So we dropped the low end of the range by 1% to account for the uncertainties surrounding the Enbridge disruption.As a result of the higher 2018 production exit rate, the 2019 average production forecast has been increased from 291,000 to 300,000 BOEs per day, so yielding 12% to 13% annual growth. The increased 2019 production levels also include a significantly increased downtime provision, taking it up to 9%, up from 5%, which is what we've historically utilized. The 2019 EP capital program has been decreased from $1.35 billion to $1.3 billion because of stronger well performance and the acceleration of the start-up of the Gundy deep-cut plant.Financial update. Third quarter cash flow of $287 million was up 14% on a diluted share basis from the third quarter of 2017. For the 9 months ending September 30, 2018, cash flow has been $912 million, and that's 6% up from the $857 million in the comparable period in 2017. As mentioned, our Q3 '18 earnings were $55.3 million, and that's up 9% year-over-year. And the company continues to focus on full cycle profitability for the entire EP business.Very strong Q4 production growth that we're realizing now, and improving natural gas prices are expected to yield fourth quarter '18 cash flow in the $380 million to $410 million range. That'll result in full year '18 cash flow of $1.32 billion on total capital spending of $1.15 billion, leaving us with about $169 million of free cash flow for the year.As previously disclosed, Q3 '18 EP capital spending was increased to provide maximum production volumes by November to take advantage of anticipated higher winter 2019 gas prices. And we are seeing those higher prices at several of the hubs that we sell gas at in Canada and the United States.Capital spending in Q4 will be significantly less and so really a similar spending profile to what you would have observed in 2017 across the quarters for the year. Overall, for the 9 months ending September 30, '18, total CapEx, including A&D was $819 million, and that's down 22% from the corresponding period in 2017. That Q3 '18 EP capital spending of just over $400 million included $28 million for the construction of the Gundy C-60-A gas plant, which is now anticipated to start up as mentioned in late Q2 of '19. To-date, we've spent $102 million of the estimated $180 million installed plant cost. And as mentioned, we've accelerated the plant start-up, so correspondingly, we accelerated the capital spending on this project. Our quarterly dividend for Q4 '18 will remain at $0.10 per common share. Should we do a little better than forecast in Q4 from a free cash flow standpoint, we'll consider whether we increase the dividend or not. And we definitely plan to continue to improve shareholder returns in 2019.We continue to maintain a very strong balance sheet. Exit '18 debt to cash flow ratio is expected to be about 1.2x and 2019 debt to cash flow is expected to be 0.8x. The board has approved the 2019 capital program of $1.3 billion with average '19 production up 3% to the 300,000 BOEs per day. The program consists of approximately 264 new net wells, so the drill/complete/equip/tie-in capital for that program is $1.1 billion. So it's a very strongly drill/complete-oriented budget. Our '19 cash flow of $1.67 billion is anticipated on that spending of $1.3 billion, so that'll yield $330 million of free cash flow, and that's up $100 million net from our previous 2019 outlook.Quickly on gas marketing and transportation. Tourmaline's gas market diversification strategy, which we formulated and acted on over 6 years ago, continues to provide upside to realized natural gas pricing in every quarter. And the best evidence of that is our realized overall Q3 '18 gas price of $2.54 an Mcf compared to the AECO quarterly index price for the quarter of $1.20 per Mcf. We now have approximately 440 million cubic feet per day. That is sold at 6 hubs with gas prices indexed to the prevailing NYMEX price. The daily NYMEX price volumes will grow to 540 million in mid-'19 via additional long-term firm transportation deals taking effect. Moving to the EP program. As mentioned, we ramped the program up significantly from Q2 levels. We're currently operating 15 drilling rigs with 2 to 3 frac spreads employed across the 3 core complexes. A total of 150 new wells will we brought onstream during the second half of this year, and the majority of those will commence production during the fourth quarter.We do continue to pursue a number of new technologies across the business aimed at realizing drill/complete capital cost reductions. Horizontal drilling costs in certain areas within the Alberta Deep Basin complex have reduced drill costs from an average of $2.5 million in '16 and '17 to $1.6 million in 2018. So a step-change and a meaningful one. And we'll continue to evolve that technology and see how widespread the application of it is.Looking at our liquids business specifically. The 4 previously discussed second half '18 liquids-focused facility projects were all completed between September 25 and November 5, and they're onstream. And those 4 include the Doe 2-11 Montney sweetening and debottlenecking facility in BC, the Wroe expansion and Cecilia pipeline loop in the Alberta Deep Basin, the South Gundy BC liquids-rich Montney tie-in and the Spirit River West compression and pipeline project. We'll exit '18 with liquids production of approximately 60,000 barrels per day. That's oil condensate and NGLs. The accelerated start-up of Gundy Phase 1 and the stronger liquids production rates from a number of wells will yield increased '19 total average liquid production of 66,000 barrels per day, and that's up a little bit from the 64,500 barrels per day that we were forecasting previously. The company has not had any production curtailed as a result of recent pipeline apportionments and does not anticipate constraints during the fourth quarter of this year.Our realized oil differential in Q3 was approximately 20% better than the dip on the index price. For the fourth quarter, we expect to realize approximately 32% better than the current index price. And our condensate differential in Q3 was actually 59% better than the Peace condensate differential index price. Looking at the BC Montney gas condensate complex in a little bit more detail. The Doe 2-11 sweetening/liquids debottlenecking facility was commissioned during the last week of September, and that's added to both 3,000 barrels per day of condensate and NGLs, and it allowed us to bring on 20 Montney Turbidite wells, and we have more to bring onstream as facility capacity allows. The Gundy 200 million a day deep-cut gas plant is currently under construction in the field, and we're anticipating a June 19 start-up, approximately 3 months ahead of our original schedule. And that plant also brings on between 15,000 and 17,500 barrels per day of condensate and NGLs along with the 200 million per day of natural gas.The well performance and liquids rates at Gundy Creek and BC continue to improve. The 16 Tourmaline drilled and completed wells that have over 300 days of production history are tracking thus far an 8.5 BCF gas performance curve, and that's up from the 4.5 BCF in 2016. Average condensate per well recoveries of 290,000 to 300,000 barrels and deep-cut NGL recoveries, similar 300,000 barrels, are estimated, and that's yielding total per well reserves of 1.85 million BOEs. Our current well costs, so that's drill/frac/complete, are averaging between $3.3 million and $3.5 million. The gas and liquids at Gundy are sweet, which also drives very low OpEx once those hydrocarbons are in our own plant, and so we're expecting $3 to $3.25 per BOE. So those increased per well gas and condensate recoveries, the very low capital costs for drilling and completion and the very low operating cost structure in company-operated facilities, we think render the Gundy complex as one of the most economic Montney developments in the Western Canadian sedimentary basin and perhaps maybe the most profitable. We have had very high gas and condensate production rates from the most recent Gundy pads. That's updated in the COV. I don't need to read all these well results. Suffice to say, they're very exciting and prolific wells. Gundy Phase 1 will add 50,000 BOEs per day in mid-'19, and it is in the 5-year development and growth plan. Gundy Phase 2 and the additional 50,000 BOEs per day of growth that it would provide is not in our 5-year plan at the current time from either a production or a capital spending standpoint. Of note, each phase -- Gundy Phase 1 and Phase 2, each phase will generate approximately $300 million of cash flow annually with an estimated annual maintenance capital to keep the plant full of 100 million per annum, and there's lots of performance curve detail and some updated maps in the new field that went up last night. So that's all I was going to say with the formal remarks. And we're more than happy to answer any questions that people on the line might have.

[Operator]

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

[Jordan McNiven]

Just wondering if we could get a little more color on Gundy and the impressive [ CDRs ] we're seeing there. Is there anything different in terms of the zones you're targeting, maybe the geology as we go north or south across the play or different completions that are driving that? Or just any color there would be helpful.

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

We have 4 different horizons that we're pursuing. And in the 2 pads that we drilled and completed in 2018, we've had increased liquids across all 4 zones. We continue to evolve what we do on the completion front number of stages and tonnages to maximize liquids and gas production. It's a very large property. And so we now have 4 Tourmaline-operated pads. We had the 25 wells that Shell had drilled previously on the property. So we'll continue to evolve our performance curves. We haven't taken in our guidance for '19 and beyond. We haven't applied these higher condensate rates across the whole property yet. We want to drill some more wells and just see what the variation is. But net-net, all the wells, '17 and '18, are extremely strong and in excess of the original performance curves when we started developing this property. Is that helpful?

[Jordan McNiven]

Yes, that's good. Are you able to give us an indication of where we're at kind of leading edge on stages and tonnage?

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

I think we've got some of that in the COV.

[Operator]

[Operator Instructions] And there are no further questions in the queue at this time. I turn the call back to the presenters.

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

Thank you, Amy. And thank you all for listening into our call. Look forward to chatting with you at the end of year.

[Operator]

And this concludes today's conference call. You may now disconnect.