Tourmaline Oil Corp

TSX:TOU

Earnings Call Transcript 2021-Q4

[Operator]

Good

morning, ladies

and

gentlemen,

and

welcome

to

the

Tourmaline

Q4 2021

Results

Conference

Call.

At

this

time,

all

lines

are

on

listen-only

mode.

Following

the

presentation,

we

will

conduct

a

question-and-answer

session.

[Operator Instructions]



This

call

is

being

recorded

on

Thursday,

March

3, 2022.

I

would

now

like

to

turn

the

conference

over

to

Scott

Kirker.

Please

go

ahead.

[William Scott Kirker]

Thank

you,

operator,

and

welcome

everyone

to

our

discussion

of

Tourmaline's

results

for

the

years

ended

December

31, 2021

and

2020.

My

name

is Scott

Kirker,

and

I'm the

General

Counsel

for

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'm

here

with

Mike

Rose,

Tourmaline's

President,

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

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]

Thanks,

Scott,

and

thanks

everybody

for

dialing

in,

and

we're

pleased

to

go

through

our

strong

2021

results.

So,

lots

of highlights.

Full

year

and average

2021

production

of

441,000

BOEs a

day

was

up

42%

year-over-year.

Our

current

production is

ranging

between 500,000

and

510,000

BOEs

a

day,

and

we

expect

a

Q1

2022

exit

of

between 510,000

and

515,000

BOEs

per

day.

Full

year

2021 after

tax

net

earnings

were

a

record

CAD

2.03

billion

or

CAD 6.40

per

diluted

share.

Our

full

year

2021

cash

flow

was

a

record

CAD

2.93

billion

or

CAD

9.25

per

diluted

share

and

up

147%

year-over-year,

and

importantly,

we

generated

a

record

CAD

1.49

billion

of

free

cash

flow

in

2021.

Exit 2021

net

debt

was CAD

973

million

or

below

the

low

end

of

our

range,

long-term

range

of

CAD 1

billion

to

CAD 1.2

billion.

Year-end

2021 PDP

reserves

of

947

million

BOEs

were

up

50%

year-over-year

including

2021

production.

Total

proved

reserves

of

2.19

billion

BOEs were

up

39%

and

2P

reserves

of

4.24

billion

BOEs

were

up

33%

over

year-end

2020.

We

replaced

677%

of

2021

annual

production

of

161

million

BOEs

with

2P

additions

of

a

little

over 1

billion

BOEs.

The

2P

reserve

value

equates

to

CAD 97.54

per

diluted

share.

The

total

proved

reserve

NAV

equates

to

CAD 62.70

and

PDP

CAD

33.77

using

the

same

pricing

and

discount

rates.

Tourmaline

now

has

19.5

TCF

of

2P

natural

gas

reserves.

Turning

to

production

specifically,

as

mentioned,

current

production

ranging

between

500,000 and 510,000

BOEs

per

day.

Our

full

year

2022

average

production

guidance

of 500,000

BOEs

per

day

remains

unchanged.

All

three

of

our

operated

EP complexes

are

producing

at

or

above

full

year

2022

guidance

levels,

which

of

course

is

very

encouraging.

Looking at some of the

financial highlights,

as

mentioned,

full

year

2021

after tax

net

earnings

were

a

little

over CAD

2

billion.

Fourth

quarter

2021

cash

flow

was

CAD

968

million

and

full

year

2021

cash

flow

was

at

record

CAD

2.93

billion.

On the

shareholder

return

front,

we

increased

the

base

dividend

3

times

in

2021

to

a

total

of

CAD

0.72

per

share,

so

that

was

a

29%

increase

over

the

course

of

the

year,

and

we

paid

our

first

special

dividend

of

CAD

0.75

per

share

in

October

of

2021.

And

we

have

committed

to

returning

the

majority

of

annual

free

cash

flow

to

shareholders,

and

we

are

executing

on

that

plan.

Subsequent

to

year-end

2021,

we

increased

the

annual

base

dividend

up

to

CAD

0.80

per

share

and

paid

our

second

special

dividend

of

CAD

1.25

per

share

this

time

in February.

Moving

to

the

budget

and

the

outlook,

Q4 2021 EP

capital

expenditures

were CAD

411

million,

and

as

previously

discussed,

we

accelerated

the

construction

of

the

Gundy

Phase

2

deep

cut

and

the

Aitken

46-C

expansions

into

the

second

half

of

2021.

Both

projects

were

completed

on

budget

and

are

currently

on

stream

and

at

full

capacity.

In

2022

at

current

strip

pricing,

we

expect

to

generate

cash

flow

of CAD

4.05

billion

or

CAD

11.97

per

diluted

share

and

free

cash

flow

of

CAD

2.85

billion

or

CAD

8.43

per

diluted

share

on

unchanged EP

capital

expenditures

of

CAD

1.125

billion

in

2022.

We

continue

to

maintain

our

strong

capital

discipline.

We

always

build

2.5%

inflation

per

annum

on

both

capital

and

operating

costs

into

the

company's

five-year

EP

capital

plan.

As

mentioned, our

exit

2021

net

debt

was CAD

973

million,

or

0.25

times

2021

net

debt

to

Q4 2021

annualized

cash

flow

and

below

the

company's

long-term

debt

target

of CAD

1

billion

to CAD

1.2

billion.

We

had

another

strong

reserve

year

in

2021.

Year-end

2021

PDP

reserves

of

947

million

BOEs.

As

mentioned,

we're

up

50%,

including

annual

production

of

161

million

BOEs.

2021

PDP

FD&A

costs

were

CAD

7.27

per BOE,

including

changes

in

future

development

capital

and

that

yielded

a

PDP reserve

recycle

ratio

of

2.5.

Our

total

approved

FD&A

costs

in

2021

were

CAD 5.94

per

BOE

and

our

2P

FD&A

was

CAD 4.54

per

BOE,

including

changes

in

FDC.

Importantly,

we

have

only

booked

3,168

gross

locations

of

a

total

drilling

inventory

of

22,715

gross

locations.

So

we have

only

booked

14%

of

the

overall

inventory

to

achieve

our

year-end

2021

2P

reserves

of

4.24

billion

BOEs.

So,

there's

lots

more

to

come.

The

current FDCs

associated

with

2P

reserves

represent

only

three

years

of

prospective

cash

flow

at

strip

pricing.

On the

marketing

front

in

2021,

we

further

diversified

the

gas

marketing

portfolio

by

establishing

a

US

Gulf

Coast

LNG

long-term

netback

supply

agreement

with

Cheniere

Energy.

In

2023,

Tourmaline

will

become

the

first

Canadian

EP company

participating

in

the

LNG

business

with

full

exposure

to JKM

pricing,

providing

a

material

increase

to

anticipated

2023

cash

flow.

In

November 2022

of

this

year,

the

company

will

increase

gas

volumes

exported

to

western

US

markets

from

345

million

to

445

million

cubic

feet

per

day,

with

approximately

67%

of

that

gas

accessing

the

premium

priced

PG&E

California

market.

NGL

price

realizations

in

the

fourth

quarter

of

2021

were

up

24%

over third

quarter

2021,

and

a

reminder,

we

are

the

largest

NGL

producer

with

anticipated

average

production

levels

of

over

70,000

barrels

per

day

in

2022.

Turning

to

E&P,

we

are the

busiest

operator

in

the

basin.

We

drilled

a

total

of

280

net

wells

during

2021

for

a

total

of

1.289

million

meters

drilled.

We

have

systematically

increased

our

lateral

length

of

our

horizontals

by

over

30%

since

2018,

while

simultaneously

reducing

actual

drill/complete

costs

per

lateral

foot

by

30%

in

that

time

period.

We

operated

13

drilling

rigs

and

four

to five

frac

spreads

across

the

three

EP

complexes

during

January

and

February

of

this

year

as

planned.

We

continue

to operate

all

five

drilling

rigs

in

Northeast

BC

with

multiple

high-performance

pads

at

Sundown,

Gundy,

Aitken,

and

Laprise,

all

contributing

a

little

ahead

of expectation.

The

facility

expansions

at

Gundy

and

Aitken were

accelerated

in

the

second

half

2021

and

completed

on

budget.

The

Aitken

46-C

expansion

and

deep

cut

installation

was

executed

in

120

days

for

CAD 96.5

million.

The

previous

owner

had

estimated

270

days

for

a

CapEx

of

CAD

116

million.

We

continue

to

evolve

the

Conroy,

North

Montney

development

project.

This

minimum

100,000 BOE

per

day

gas

and

liquids

project

is

currently

planned

in

the

2025-2026

timeframe

coinciding

with

the

projected

startup

of

LNG

Canada

and

the

anticipated

related

strong

intra-Basin

natural

gas

pricing.

And

some

strong

recent

pads,

the

three-well

Upper

Charlie

Lake

pad

in

our

Peace

River

High

complex

has

averaged

a

combined

production

rate

of 2,500

barrels

of

oil

per

day

and

a

little

under

3

million

a

day

of

gas

over

the

first

two

weeks

of

production.

It

just

came

on

stream

and

we

had

a

very

strong

two-well

Wilrich

pad

at

Smoky

in

the

north

end

of

the

Deep

Basin

complex,

which

between

the

two

wells

combined

tested

at

over

65

million

per

day

during

the

testing

period,

a

goal

or

a

good

time

for

some

very

strong

wells.

We

are

updating

our

exploration

program.

We've

been

working

on

it

for

over

two

years.

We

have

successfully

tested

six

new

horizon

spread

across

the

three

operated

complex,

so

it's

working

well.

In

our

year-end

2021

reserve

report,

we've

already

booked

845

Bcf

of

2P

reserves

from

the

discovery

so

far,

and

further

successful

delineation

drilling

is

planned

in

all

three

complexes

over

the

next

12

months,

and

we

will

disclose

further

details

in

upcoming

quarters

as

we

can,

and

this

initiative,

we

believe,

provide

shareholders

with

an

additional

unique

long-term

growth

and

value

accretion

opportunity

on

top

of

the

regular

EP

program.

A

brief

acquisition

update,

we

indicated

mid-2021

that

we

were

pausing

our

larger

corporate

acquisitions,

but

we

have

also

indicated

that

CAD 200

million

to

CAD

300 million

of

annual

free

cash

flow

could

be

allocated

to

further

smaller

complementary

asset

acquisitions

within

our

existing

complexes.

During

Q4

2021

and

thus

far

in

Q1

of

this

year,

we

completed

a

number

of

these

small

acquisitions

that

in

aggregate

we

believe

are

meaningful.

So

to

that

end,

we've

acquired

2,400

BOEs per

day

of

production,

an

estimated

43

million

BOEs

of

2P

reserves.

Those

are

internal

company

estimates,

295

gross

sections

of

land,

and

that

includes

land

sales

that

we've

gone

to

an

additional

238

gross

drilling

locations

for

total

cash

outlay

between

the

two

quarters

of

just

a

little

under

CAD 64

million.

So,

very

strong

metrics.

Looking

at

environmental

performance

improvement,

we

had

a

very

busy

and

successful

year

in

2021

with

multiple

initiatives

making

measurable

progress

on

emissions

reduction.

We

have

an

engineering

team

in

place

and

it's

been

there

for

over

three

years,

developing

and

implementing

new

proprietary

emission

reduction

technologies,

executing

our

expanded

water

management

initiatives,

managing

third-party

environmental-related

research,

evolving

a

methane

testing

center

and

managing

an

emerging

carbon

offset

business.

We

are

investing

CAD

20 million

to

CAD 40

million

per

year

now

on

environmental

performance

improvement

activities.

We

have

now

displaced

diesel

with

nat

gas

on

all

of

the

drilling

rigs

in

the

operated

fleet

and

we

have,

where

possible,

one

rig

running

directly

on

high line

power,

and

this

has

provided

a

significant

emissions

reduction

and

cost

savings,

so

a

double

win

for

shareholders.

During 2021,

we

entered

into

a

JV with

Trican

to

utilize

the

first

Tier

4

nat

gas

frac

unit

in

Canada,

so

further

work

on

our

diesel

displacement

initiatives. The

company achieved its

net

25%

methane

reduction

target

in

2021

three

years

earlier

than

anticipated,

and

we're

not

done

there

and

we've

set

new

methane

reduction

targets

and

we'll

execute

on

those

as

well.

In

2021,

the

Emission

Testing

Center

or

what we

refer

to

in

our

literature

is

the

ETC,

it's

the

first

of

its

kind

in

the

world.

It's

at

the

West

Wolf

gas

plant

in

the

Deep

Basin, and

it

became

fully

operational

in

Q4

and

it's

critical

in

evolving

new

technology

and

methodologies

to

materially

reduce

methane

and

other

emissions

across

the

entire

EP

business.

We

did

announce

that

the

Board

of

Directors

have

declared

a

quarterly

cash

dividend

on

the

common

shares

of

CAD

0.20

per

common

share

as

anticipated.

And

finally,

related

to

our

emission

reduction

natural

gas,

we

see

as the

great

enabler

of

our

future

energy

transformation.

It

will

be

the

largest

component

of

the

future

energy

stack

for

a

very

long

time,

and

Canada

should

be

supplying

as

much

of

our

low

emission

natural

gas

to

the

rest

of

the

world

through

a

material

and

growing

LNG

business,

the

best

thing

we

can

do

for

global

emissions

and

for

the

Canadian

economy.

So,

we're

more

than interested

in

answering

any

questions

that

you

might

have.

[Operator]

Thank

you,

ladies

and

gentlemen.

We

will

now

begin

our

question-and-answer

session.

[Operator Instructions]



Your

first

question

will

come

from

[ph]



Josef of

Schachter (15:54).

Please

go

ahead.

[Josef Schachter, Analyst, Schachter Energy Research Services Inc.]

It's

Josef Schachter

there.

I'll – that'll be me.

Good

morning,

everyone

and

congratulations

on

a

great

year,

and

Mike

and

Scott

and

Brian,

and

of

course,

2022

looks

like

an

exciting

year.

I

have

two

questions.

One,

you're

looking

at

doing

your

stock

buybacks,

your

purchase

prices

last

year

were

200,000

shares

at CAD

32.73

your

PDP

level.

Is

that

the

kind

of

number

you're

looking

that

whenever

the

market

backs

off

and

it

gets

to

PDP,

or

are

you

looking

at

some

level

going

forward

between

PDP

and

1P

as

a

purchase

price

for

your

share

buybacks?

[Michael L. Rose]

Yeah.

I

think

you've

probably

hit

on

it,

Josef.

So

we

reset

our

targets

with

the

new

reserve

report.

And

so,

in

that

range

is

reasonable,

but

we're

continually

evolving

our

shareholder

return

equation

and

how

we

treat

all

of the

parameters

in

it.

And

so,

we're

going

to

do

a

mix

of

all

of

the

identified

allocation

opportunities

or

silos.

So

share

buybacks

and

base

dividend

increases

and

special

dividends

while

we

have

elevated

commodity

prices.

[Josef Schachter, Analyst, Schachter Energy Research Services Inc.]

Sure.

And

second

question

for

me

with

LNG

now

and

all

the problems

in

Ukraine

and

security

of

supply

and

shortages

around

the

world,

are

there

any

other

initiatives

that

Tourmaline

is

looking

at

to

get

into

the

LNG

space

into

a

greater

degree

and

being

involved

in

new

projects

and

maybe

even

owning

pieces

of

it?

How

do

you

see

going

forward

Tourmaline

building

up

its

potential

LNG

on

top

of

the

very

attractive

deal

you

did

with

Cheniere?

[Michael L. Rose]

Yeah.

So,

I

mean,

the

Cheniere

deal,

I

mean,

I

guess, will

be

the

first

Canadian

company

actually

able

to

ship

gas

to

Europe

and

where

those

cargoes

go.

We'll

see.

But

that

starts

up

in

January

of

2023.

And

yes,

of

course,

we're

looking

at

as

many

other

LNG

opportunities

as

we

can.

And

I

think,

you

know

the limitations

other

than

Coastal

GasLink

and

LNG

Canada.

To

grow

our

Canadian

LNG

business,

we

need

more

pipelines

and

more

projects.

But

we're

looking

at

all

of

the

various

opportunities

to

move

gas

offshore

and

get

it

to

Europe

and,

of

course,

Asia,

where –

that's

where

we

can

accomplish

the

greatest

emission

reduction

possible.

And

it's

the

best

thing,

as

I

mentioned,

that

Canada

can

do.

So,

yeah,

it's

encouraging

from

that

standpoint.

It's

just

a

bit

discouraging

that

the

10 Bcf

a

day

that

could

have been

on

Canadian

coasts

if

we'd

done

things

right

in

kind

of

2009

to

2012.

It

all

ended

up

on

the

Texas

Gulf

Coast.

And

so,

now

it's

our

turn

to

build

it

up

in

Canada.

[Josef Schachter, Analyst, Schachter Energy Research Services Inc.]

Right.

Would

you

look

at

just

being

a

provider

to

the

LNG

projects

or

would

you

look

at

having

some

ownership

as

well?

[Michael L. Rose]

I

think

at

this

point

in

time,

we

prefer

to

be

a

provider.

[Josef Schachter, Analyst, Schachter Energy Research Services Inc.]

Okay.

That

does

it for

me.

Thanks very

much

and

again

congratulations.

[Michael L. Rose]

Thank

you.

[Operator]

Your

next

question

will

come

from

Fai

Lee

with

Odlum

Brown.

Please

go

ahead.

[Fai Lee, Analyst, Odlum Brown Ltd.]

Hi.

Thank you.

Fai

here.

[ph]



Just a

quick

(19:36) question,

like

in

terms

of

this,

the

JKM

exposure, obviously,

prices

are a

lot

higher

and

I

think

the

future

[indiscernible]



(19:43)

a

bit.

Wondering

how

you're

building

on

to your

five-year

plan

in

terms

of

the

pricing?

[Michael L. Rose]

Sure.

So,

basically,

every

time you

run

the

five-year

plan,

we're

running

a

strip

and

the

five-year

plan

was

most

recently

run

on

the

February

15 strip,

at

which

time

the

[ph]



California

3

JKM

price

is

roughly

CAD

18 (20:01).

And

so

we

reflect

the

future

strip

pricing,

which

does

[indiscernible]



(20:08)

from

there

over

the

five-year

plan

and

that

benefit

has

layered

in

nicely

into

the

future

cash

flows.

And

I would

point

out

that

today

JKM

2023

is

north

of

CAD 20.

So

as

we

continue

to

march

forward

through

the

year

and

through

the

disruptions

we've

seen

in

the

market,

the

contract

appears

to

be

getting

more and

more

valuable.

[Fai Lee, Analyst, Odlum Brown Ltd.]

Okay.

Great. Thank

you.

[Operator Instructions]

[Operator]

Your

next question

will

come

from

Cam

Bean

with

Scotiabank.

Please

go

ahead.

[Cameron Bean, Analyst, Scotia Capital, Inc.]

Hey,

guys.

Congratulations

on

the

great

2021

results. Just

a

quick

question

on

the

reserves

report,

how

is

the

Conroy,

Northern

Montney

project

represented

in

there

in

terms

of

FDC and

reserve

bookings

beyond

2025?

[Michael L. Rose]

Well,

it

rolled

in

pretty

much

as

we

did

the

acquisitions

in

the

North

Montney.

So

that

includes

Polar

Star,

which

was

done

in

2021,

and

then

Saguaro

and

Black

Swan

in

2021.

And

so

those

make

up

the

majority

of

the,

what

we

will

term

Conroy,

which

is

a

broader

kind

of Laprise, Aitken

development,

and

we're

planning

the

facilities

now

and

what

the

liquid

infrastructure

related

that –

to

that

looks

like,

but

they're

in

there

and,

obviously,

there's

lots

of

upside.

We

haven't

booked

all

the

locations

that

came

with

those

acquisitions,

but

there's

a

very

long

runway

of

further

bookings

and

additional

locations

to

be

put

in

inventory

in

those

areas.

Is

that

helpful?

[Cameron Bean, Analyst, Scotia Capital, Inc.]

Yeah.

Thank

you

very

much.

[Operator]

There

are

no further

questions

at

this

time.

Scott

Kirker,

please

go

ahead.

[William Scott Kirker]

Thank

you,

operator.

Thanks

everyone

for

listening

in

and

we

look

forward

to

chatting

with

you

all

at

the end

of

the next

quarter.

[Operator]

Ladies

and

gentlemen,

this

concludes

your

conference

call

for

today.

We

thank

you

for

participating

and

we

ask

that

you

please

disconnect

your

lines.