Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2022-Q3

[Operator]

Good day, ladies and gentlemen, and Welcome to the Tourmaline Q3 2022 Results Conference Call. [Operator Instructions]

This call is being recorded on Wednesday, November -- sorry, Thursday, November 3, 2022. I would now like to turn the conference over to Scott Kirker. Please go ahead.

[W. Kirker, executive]

Thanks, Michelle, and welcome, everyone, to our discussion of Tourmaline's results as at September 30, 2022, and for the 3 and 9 months ended September 30, 2022, and 2021. My name is Scott Kirker, and I am Tourmaline's Chief Legal Officer.

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'm here with Mike Rose, Tourmaline's President and Chief Executive Officer; Brian Robinson, Vice President, Finance and Chief Financial Officer; and Jamie Heard, our Manager of Capital Markets. We will start by speaking to some of the highlights in the last quarter and our year so far. And after Mike's remarks, we will be open for questions.

So go ahead, Mike.

[Michael Rose, executive]

Great. Thanks, Scott, and good morning, everybody. We're pleased to review our Q3 results with you. A few of the highlights.

Third quarter '22 after-tax cash flow was $1.05 billion or $3.07 per diluted share, and that's up 38% over the corresponding period in 2021. Third quarter free cash flow was $568 million or $1.66 per diluted share. We will pay a special dividend of $2.25 per share on November 18 to shareholders of record on November 9.

And beginning in Q4 of this year, we'll increase the quarterly base dividend by 11% to $0.25 per share, providing for an annualized dividend of $1 per share. Including the payments of both the Q4 special dividend and the base dividend, we will pay a total of $7.90 per share in dividends in '22, resulting in approximately a 10% yield.

Third quarter '22 EP capital spending was $469 million, and that's within previously disclosed guidance. Third quarter '22 net earnings were $2.01 billion. Our net debt at September 30 was $565 million, and that's well below our long-term debt target range of $1 billion to $1.2 billion. And at current strip pricing, full year '22 cash flow will be $4.76 billion. That's what's anticipated in that $13.90 per diluted share.

Looking at production, Q3 '22 production was 482,000 BOEs per day, and that's within the guidance range of 480,000 to 485,000 BOEs per day. We are executing the Q4 '22 production ramp, with anticipated November average production between 520,000 and 530,000 BOEs per day and anticipated December average production between 530,000 and 540,000 BOEs per day.

Our 2023 average production guidance remains at 545,000 BOEs per day, consisting of 2.5 Bs a day of natural gas and over 125,000 barrels per day of oil, condensate and NGLs. A brief marketing update. Average realized nat gas price in Q3 was $5.37 per Mcf, as we continue to benefit from rising natural gas prices when compared to the corresponding quarter in 2021.

Tourmaline currently has 754 million per day, accessing U.S. markets through long-term firm transport agreements. That increases to 854 million per day in Q2 of '23 and then to 926 million per day at exit '23. We are amongst the most diversified of all North American large gas producers from a market access standpoint.

Right now, we have an average of 711 million per day hedged for '23 at a weighted average fixed price of CAD 577 per Mcf, and an average of 110 million per day hedged at a basis to NYMEX of USD 0.12 per Mcf, and an average 754 million per day of unhedged volumes exposed to export markets in '23. And those markets include Dawn, Iroquois, Empress to Chicago, Ventura, Sumas, U.S. Gulf Coast, JKM, Malin and PG&E. And we are pursuing multiple additional market diversification opportunities for both nat gas and our natural gas liquids.

Looking at CapEx and the financial outlook. Forecast full year '22 EP capital spending remains at $1.5 billion and full year '23 EP capital spending remains at $1.6 billion. We expect '23 cash flow of $5.4 billion and free cash flow of $3.7 billion at strip pricing as of October 14, '22. The current 7-year EP growth plan is expected to deliver an estimated free cash flow at strip of $19.4 billion on total CapEx of $13.4 billion during the period.

Commencing in Q4 '22, we will increase the base dividend by 11% to $0.25 per share, the quarterly base dividend. And as mentioned, we have elected to declare and pay a special dividend in Q4 of $2.25 per share. We continue to focus on returning the majority of free cash flow to shareholders through base dividend increases, special dividends and share buybacks.

The magnitude of the special dividends will be a function of commodity prices and available quarterly free cash flow. The company now anticipates returning greater than 75% of free cash flow to shareholders in calendar '22, achieving a year-end net debt to cash flow ratio of approximately 0.1x, which positions us to return between 50% and 90% of free cash flow in calendar '23 while also growing production by approximately 7%.

A component of free cash flow will also be used for modest incremental EP investments. Those include new pool, new zone exploration opportunities, asset acquisitions within existing core complexes and select margin-improving infrastructure investments. Tourmaline completed the previously announced Rising Star Resources Limited acquisition during the third quarter of '22.

A brief EP update. We're currently operating 13 rigs across the 3 EP complexes. We drilled 86 net wells and completed 75 net wells during the third quarter. And we are the most active driller in Canada on a meters drilled basis. We expect to tie in and bring on production a total of 75 net wells in November and December and will carry approximately 24 DUCs over into early 2023.

The distribution of rigs is 8 rigs in the Deep Basin 4. We continue to operate in our BC Montney complex, and then we have 1 rig working on the Peace River High. Importantly, continuous improvement in new technology applications and our related drilling methodologies has resulted in a 37% improvement in meters drilled per day between April 2020 and July of this year in our BC Montney complex.

The Q4 '22 and '23 EP programs include multiple new zone and new pool exploration tests across all 3 operated complexes, as we expand the highly successful and somewhat unique exploration efforts. So lots more to follow from this program over the next quarters.

And looking at our environmental performance improvement, we've had a great year on that front, and we continue to invest significant capital in these efforts. We actually are investing profits and free cash flow in our environmental performance improvement initiatives, and we are reducing emissions right now.

So some of the highlights. Over the past 12 months, we achieved our net 25% methane reduction target 3 years earlier than targeted. Our Emission Testing Center, as we call it, the ETC, the first of its kind in the world, at the West Wolf gas plant, is fully operational. And we continue to grow the scope of methane emission reduction technology investigations at the site.

We received preliminary platinum ratings from the Project Canary or Trustwell assessment on a series of our operated Northeast BC assets, and our score ranks in the top 10% in North America. All of our contracted drilling rig fleet is displacing diesel with nat gas or running fully electric. And we were operating 3 Cat Tier 4 DGB natural gas-powered frac spreads in Western Canada, so the most of any operator in July of '22.

Tourmaline has invested over $25 million during the past 5 years in water recycling and water management facilities as part of an ongoing effort to ultimately eliminate freshwater in our well-stimulation activities. And Tourmaline is also a major participant in the Natural Gas Innovation Fund, or NGIF, and that's a corroborative effort to produce lower-emission nat gas across the whole spectrum of operations. The company is sponsoring emerging clean tech companies in the areas of diesel displacement, methane emission monitoring and reduction, waste heat recovery, carbon capture and water recycling technologies.

And that's all we were going to say as far as formal remarks. So happy to move to the Q&A portion.

[W. Kirker, executive]

Michelle, if you want to give them instructions on that.

[Operator]

[Operator Instructions]

First question comes from Donald Textor of DFT Energy.

[Donald Textor, analyst]

Mike, I know you're not a direct participant in the Canada LNG project, but could you just make some -- maybe some observations as how that project is going and how you see that affecting BC gas prices out there in '25 and '26?

[Michael Rose, executive]

Sure. I mean as far as the actual true project update, I mean, best to check with TransCanada and LNG Canada. But what we have observed is that both the Coastal Link Pipeline and the Kitimat liquefaction facilities are more than 50% completed. And the companies that operate those projects are both saying that they're going to be completed and onstream in 2025. And we think that's very important for Canada as we actually get a new pipeline built, and we'll see if that project gets upsized.

We believe that when you start moving, even if it's just 2 Bs and not 4 Bs a day, West, that's going to be structurally positive for both Station 2 gas prices in BC and AECO prices in Alberta as you'll take a basin that's roughly imbalanced from a supply-demand standpoint. The Western Canadian Sedimentary Basin can pull between 10% and 15% of the gas away to a new destination on the West Coast. So we see that as very positive for pricing, and that's why we time our North Montney development that we call Conroy in that '25 to '27 time period. We think that's the appropriate time to bring new gas supply into the market.

[Donald Textor, analyst]

Sorry, but is Petro-Canada -- and not Petro-Canada, sorry, a Chinese company, and the Petronas and so the others, are they all covered on their gas, do you think, in terms of...

[Michael Rose, executive]

So I think it's probably best you check with them. Our estimates indicate that of the 2 Bs that are required, probably 1.4 of it exists now.

[Operator]

The next question comes from Fai Lee of Odlum Brown.

[Fai Lee, analyst]

Mike, it's Fai here. I'm just wondering if you can comment a bit, so maybe just give some color on, I guess, the inflationary pressures that you could be facing as we head into 2023 and the steps that you're taking to mitigate the potential cost inflation?

[Michael Rose, executive]

Sure. We, with our Q2 release in late July, included an inflation contingency for the balance of '22 and '23, and that was an 18% increase in CapEx over 2021 levels. So we think we've got an appropriate contingency from that standpoint. What do we do to mitigate inflationary pressures? I think being the largest operator does allow us to access premium equipment and crews, which typically perform better. So that helps.

We plan far in advance, like 2 to 3 years ahead, so we can avoid some of the pinch points on tubulars with steel pricing by ordering in advance. I mean, it's not like we're not facing any inflationary pressures, but I think we do a good job mitigating it from that standpoint.

And then from a drilling and completion methodology standpoint, we think we're very strong in that area as an operator and continue to seek ways to drop times on fracking and drilling. And I did outline one highlight on just how much we've dropped our Montney drilling times over the past couple of years. So that's a nice kind of hedge against inflationary pressures.

[Fai Lee, analyst]

And I guess, related to that question, can you just maybe comment on your confidence? I know that you did reflect some -- you pointed out inflation -- cost inflation next year in your budget. But I'm just wondering, what's your confidence level around that budget? And if it ends up being potentially higher than what you're forecasting, where do you think the risk is around that?

[Michael Rose, executive]

Well, we're pretty confident in the number we put out there, Fai. It's a significant increase. And obviously, we continue to monitor all of the cost inputs. And if it's not enough, then we'll make the appropriate adjustments. But as it stands now, we're very confident in what we put out there.

[Operator]

The next question comes from Jeremy McCrea from Raymond James.

[Jeremy McCrea, analyst]

I just wanted to know if you can comment a bit more on the M&A market. You guys have been pretty aggressive in the past -- and I'm just wondering if the outlook today is accretive, what you think of valuations here now and if there's really as much opportunity as there once was in the past?

[Michael Rose, executive]

Well, there's still lots of opportunities out there. They are more expensive than they were in second half '20 and first half '21, which is why we backed off a little bit. But it doesn't mean we stopped looking. And we know a number of opportunities that could materialize over the next couple of years.

We have pretty rigorous screening criteria. The free cash flow yield from M&A needs to be better than what we can deliver with our base EP plan that we lay out in that 7-year outlook. And the acquisitions that we've completed to date meet that screening criteria. So we continue to look and be creative, and it's another part of the business that we're excited about.

[Jeremy McCrea, analyst]

Okay. And then just quickly, just as one more. Your tax outlook here keeps kind of creeping up for 2023, 2024. Is there anything or mitigation things that you're looking at to reduce that going forward?

[Brian Robinson, executive]

We're always looking at ways that we can optimize our tax position. So that's an ongoing process. We've got -- we're certainly aware that the tax horizon has moved in. We've got a good provision for it in 2023 and '24, and we'll just continue working on it. So there's nothing specific that we're ready to speak to right now. And we're certainly going to always be totally compliant with the rules, and we'll pay our cash taxes as we enjoy these higher product prices.

[Operator]

[Operator Instructions]

The next question comes from Michael Harvey of RBC Capital Markets.

[Michael Harvey, analyst]

Yes. So I just had a question on that 50% to 90% range for next year, pretty wide range, both percentage-wise and also just the gross dollar value. Maybe if you could just comment on some of the drivers, which would put you kind of towards the high end of that range or the lower? Or is it all just kind of M&A-driven?

[Michael Rose, executive]

Mike, the range gives Tourmaline plenty of flexibility on both opportunities that we might move forward on and also flexibility given potential volatility in commodity prices. So in general, if commodity prices are pushed downward, expect us near the higher end of that range. If commodity prices push upward, we would navigate towards the lower of that range.

At the 90% level today on strip, we're able to maintain the return to shareholders we're delivering to you today in each subsequent quarter. And so -- what we're seeing today is we have the ability to continue to push the base dividend and incrementally grow it over time and also deliver these special dividends within this range without any fluctuation, downwards or upwards.

And as you look forward to the now 7-year plan, EP plan, we're able to deliver base and special dividends on strip each year of that plan. So I think you can kind of use these ranges as a forward guide beyond '23 as well.

[Michael Harvey, analyst]

Okay. So if commodity prices go up, you'll pay out less and then presumably more cash will go to, I guess, debt repayment or other things. Is that the right way to think about it?

[Michael Rose, executive]

Yes, in general, the quantum would be similar. It's the percentage payout they would be a bit less. And exactly, you could store more cash on the balance sheet. And you could also allocate more cash to some of these other investment opportunities you've been highlighting in the release.

[Operator]

The next question comes from Peter Cooke, Logan Capital.

[Peter Cooke, analyst]

And Mike, just a question on the LNG. It looked a little confusing on your change in the accounting and what you're doing there. Could you just review that just a tiny bit as to what that was all about?

[Michael Rose, executive]

It's going to be handled as an embedded derivative rather than a physical contract going forward. And it's just on the 1 LNG contract on our delivery to the Gulf Coast on 140 million a day.

[Brian Robinson, executive]

And it has no impact on our cash flows, our capital spending, our cash taxes, other cash costs or production. So the numbers in the statements on the P&L side are all unrealized. We haven't started delivering to that contract at all yet.

[Peter Cooke, analyst]

Will you be delivering that come January 1, pretty much? Is that...

[Michael Rose, executive]

Yes.

[Brian Robinson, executive]

Yes.

[Michael Rose, executive]

Yes. That's the plan.

[Brian Robinson, executive]

As scheduled, and it's a 15-year term. And we continue to view it as a key component of our -- an extension of our market diversification strategy. And there's only a few producers that are doing what we're doing, which is gathering the benefit from these Asian natural gas prices, and that's what we can capture there.

[Peter Cooke, analyst]

I guess, the question is, does the U.S. have the capability to ship it to manufacture at this point?

[Michael Rose, executive]

No, it's a growing business worldwide. So I mean the outlook for LNG, we think, is very robust.

[Operator]

[Operator Instructions]

There are no further questions at this time. Please continue.

[W. Kirker, executive]

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

[Operator]

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.