Tourmaline Oil Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Tourmaline Q3 2023 Year Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. Please be advised that This call is being recorded on Thursday, November 2, 2023. I would now like to turn the conference over to Jamie Hurd.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to our discussion of Tourmaline's results as of September 30, 2023 and for the 3 9 months ended My name is Jamie Heard and I am Tourmaline's Manager of Capital Markets. Before we get started, I refer you to their advisories on forward looking As well as the advisories contained in the Tourmaline Annual Information Form and our MD and A available on SEDAR and 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 and Brian Robinson, our Vice President, Finance and Chief Financial Officer. We will start by speaking to some of the highlights of the last quarter and our year so far.

Speaker 1

After Mike's remarks, we'll be open for questions. Mike, please go ahead. Thanks, Jamie, and welcome everybody. Thanks for dialing We

Speaker 2

are pleased to review our Q3 results, outline our 24 plans and answer questions you may have. So firstly, a few highlights. 3rd quarter cash flow was $878,000,000 or $2.55 per diluted share. We generated Free cash flow in the Q3 of $332,000,000 or $0.96 per diluted share and that enabled us to declare a special dividend of $1 per common share and that was paid on November 1. The company has distributed total dividends of $6.52 per share inclusive The November 1 special since December 1, 2022 and that's an implied 9% trailing yield.

Speaker 2

Full year 2023 free cash flow forecast is now $1,900,000,000 so up. September 30, 2023 net debt was $880,000,000 which is 0.3 times Q3 2023 annualized cash flow of $3,500,000,000 3rd quarter net Earnings were $275,000,000 or $0.80 per diluted share. And as you know, in October, we entered into an agreement to acquire all the The Bonavista Energy Corporation for $1,450,000,000 that consisted of $725,000,000 internally in common shares And $725,000,000 of cash, less Bonavista's net debt at closing. And the closing of the transaction is still expected to occur in the second half of this month. Starting with production, our 3rd quarter Average production of 502,000 BOEs per day was The higher end of our guidance of $495,000 to $505,000 BOEs per day.

Speaker 2

3rd quarter was reduced by our planned Our 2023 average production guidance remains at 520,000 BOEs per day, And we expect exit 23 production of over 600,000 BOEs per day and that would include the acquired Bonavista volumes. Inclusive of the Bonavista assets on a maintenance only capital budget, we anticipate 24 average annual production to range between 610,000 BOEs per day and the formal guidance we're using in the 5 year plan is 600,000 BOEs per day. We do plan to grow production from the Bonavista assets in 2025 And that will be into an anticipated higher gas price environment. 2024 average liquids production of over 140,000 Barrels per day is now forecast as the company evolves into one of the largest Canadian liquids producers. Tourmaline is Canada's largest natural gas producer with forecast production of over 2.7 Bcf per day in calendar 2024.

Speaker 2

Briefly on financial results, as mentioned, 3rd quarter cash flow was $879,000,000 on total CapEx of 565,000,000 EP spending was $533,000,000 so a little under forecast and we generated free cash flow of 3 32,000,000 in the quarter. As of September 30, 2023, the company from a balance sheet perspective is actually in a surplus position When you include the value of our 45,100,000 shares of Topaz Energy Corp. And the continued strong free cash flow that we Generated during the Q3 as well as the forecast free cash flow for the Q4 of this year allowed the company to pay the previously announced Special dividend of $1 per share. And we also increased the base dividend from $1.04 to $1.12 per share on an annualized basis. And that's effective as of the December 23 quarterly base dividend payment.

Speaker 2

Looking at marketing, Our average realized natural gas price for the quarter was CAD 4.56 per Mcf and that was significantly higher than the AECO 5A Benchmark price of CAD2.64 per Mcf. In the Q4 of this We have an average of $755,000,000 per day hedged at a weighted average fixed price of $5.07 per Mcf Canadian. For 2024, the company has an average of $722,000,000 per day, hedged at a weighted average price of CAD5.35 per Mcf, an average of CAD119,000,000 per day hedged at a basis to NYMEX of minus $0.05 per Mcf U. S. And we have an average of $833,000,000 per day of unhedged volumes Exposed to export markets in 2024 and of that volume component, 65% is exposed to the premium export markets, Which for us are the U.

Speaker 2

S. Gulf Coast, our Western U. S. Hubs, JKM and Sumas. The company's exposure to Western U.

Speaker 2

S. Markets will increase this month with the addition of 82,000,000 per day With this addition and others, the company's natural gas exports will reach 1.08 Bcf per day by exit of this year. We have further diversified our natural gas marketing portfolio by entering to a long term Enrihub netback arrangement and that will move approximately $60,000,000 per day to the U. S. Gulf Coast and that will expect We're expecting that to commence in November of 2026.

Speaker 2

And we joined the Niztanaan Venture as an industry supporter. That's an indigenous led project that will create a multi product utility corridor including natgas and that will connect Alberta, Saskatchewan and Manitoba Tidewater on Hudson's Bay and the project ultimately involves support for containers, potash and other prairie products And Envision's electrified LNG facility actually on Hudson's Bay. Looking at our capital budget and financial outlook, As mentioned, Q3 CapEx was $533,000,000 on E and P, full year 23EP Capital spending is now anticipated to be approximately $1,825,000,000 and that is up from the prior one point $675,000,000,000 That increase includes the incorporation of anticipated Bonavista related Capital expenditures post closing this quarter, incremental inflation of approximately 5% over forecast levels As that happened as we locked in services during the second and third quarters of this year for the second half twenty twenty three It's a first half twenty twenty four EP season. And also we're accelerating the fracking of 2 pads into 2023 from or Q4 of 2023 from Q1 of 2024 due to faster realized drilling times. Our Board of Directors has improved Approved a full year 24 EP capital budget of $2,150,000,000 that reflects 14 to 15 rig program and that includes $225,000,000 associated with the Bonavista assets.

Speaker 2

That 24 EP program is expected to deliver cash flow at strip pricing of 4,500,000,000 And free cash flow of $2,200,000,000 and those are both up from previous estimates. And as in previous years, we are strongly committed to The majority of free cash flow to shareholders and we plan to continue our practice of quarterly special dividends during calendar 2024. Our updated 5 year plan incorporates modest growth from the Bonavista assets commencing in 2025 as well as the deferral of the North Montney Phase 2 Conroy development by 1 year. And that deferral allows us The spread out facilities CapEx, evaluate potential Phase 2 facility electrification options And it results in a significant increase in free cash flow, particularly in that 26 to 28 timeframe. And of note, between 20222028, Tourmaline anticipates organically growing the Northeast We see Montney gas condensate complex production or volumes by over 125,000 BOEs per day And that's without the North Montney Phase 2 Conroy project.

Speaker 2

A brief EP update. We continue to operate all 13 drilling rigs and 3 to 4 frac spreads across our 3 EP complexes. And we anticipate adding 1 to 2 drilling rigs in calendar 2024 to accommodate drilling on the Bonavista assets. During the Q4 of this year, we will bring 76 new wells on stream and that will drive very strong Q4 Average production volumes and a strong 2023 production exit level. During the Q3, we delivered new pace that are well in the North Montney, 4.91 days from spud to rig release For a 4164 meter horizontal well.

Speaker 2

On the exploration front, as of the end of September, The company has made 19 new pool new zone discoveries and drilled 1 uneconomic marginal oil well Since we started that exploration program well over 3 years ago. The program has yielded 1.26 Tcf booked 2P reserves at year end 2022 and has also added an estimated 9 57 Tier 1 and Tier 2 drilling locations to an already very large inventory. Looking at the North Deep Basin, We are planning a new facility project that will optimize production at the existing Musgrove and Kakwa plants that we operate. And it's expected to add 15,000 BOEs per day during 2025 and 2026, again into that anticipated stronger natural gas Pricing environment. We also completed the acquisition of assets from Whitehorse Resources Limited during the Q3 of $23,000,000 for $19,100,000 and this acquisition expands our land holdings and inventory adjacent to a Cardium oil discovery that we made in the Q1 of this year in the West Haven Kakwa area and we provided some details on that well.

Speaker 2

And on the Board front, we're very pleased to announce Christopher Lee has been appointed to our Board of Directors and he was at his first meeting yesterday. So I think that's enough On the review of the press release and we're more than happy to answer questions that you may have.

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer session. And your first question comes from the line of Jamie Kubik from CIBC. Your line is open.

Speaker 3

Yes. Good morning and thanks for taking my question. Just a question related to the Bonavista deal. Tourmaline has been relatively quiet in the past couple of years on the M and A front. Can you just talk a little bit more about What the Bonavista acquisition brings to the company and maybe a little bit more on Tourmaline's appetite for acquisitions in the current environment?

Speaker 3

Thanks.

Speaker 2

Sure. We've been tracking Bonavista and the progress of that company for well over 2 years as they Improved their balance sheet, eliminated debt and moved into free cash flow generating mode. And That's one of our key criteria when we complete M and A is that free cash flow yield from an acquisition Has to be as good or better than what our organic 5 year EP plan can deliver and that was certainly the case with the Bonavista transaction. It's a significant addition to our existing Deep Basin complex. We see opportunities for cost reduction and production Optimization and partly because they've been really on a maintenance capital budget for several years, we see Lots of opportunity for improvement and large inventory and ability to grow the production and we'll do it modestly as mentioned and start that in 'twenty five when we think gas prices will be better than 'twenty four.

Speaker 2

Although 'twenty four, it's just hard to call. I think with the startup of LNG Canada and the Gulf Coast LNG expansion, I think we all expect stronger pricing in As far as further M and A, we're always looking, we always have been, but we've got very strict criteria Before we want to consummate any kind of deal and being that we've kept our geography the same with the 3 Core complexes were well versed in kind of what's out there. So hopefully that helps Jamie.

Speaker 3

Yes, that's good. And then maybe second question for me is just there's been a fair bit of commentary out there about the increase in service activity that could The company, the LNG Canada project coming up, have you seen this come through in any of the recent pricing and has Tourmaline contracted services to sort of get ahead of this Would be my second question.

Speaker 2

More from a facility construction standpoint or just drilling and completion?

Speaker 4

Yes, both I suppose, Mike.

Speaker 2

Okay. Well, we have contracted our drilling and completion services and indeed we're 5 Higher for that next tranche of activity than what we were originally forecasting. So that's all worked into Our balance of 23, 2024 Capital Program. Our Montney Phase 1 development, we're already working on some of the components of that and we've assembled A piece of the infrastructure already for that. So I think we're reasonably well insulated from further facility increases.

Speaker 3

Okay, great. That's it for me. Thank you.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Mike Dunn from Stifel. Your line is open.

Speaker 4

Thanks. Good morning, everyone. A couple of questions for me. Firstly, on the Cardium oil discovery, just wondering if you could frame what the economics might look like for those wells under development mode, maybe what well costs might look like. And I'll follow-up the second question after.

Speaker 2

Okay, sure. Well, it's a strong well. It looks like somewhere between 250,300,000 Barrels are estimate of recoverable oil and probably 2 Bcf with that. That was Off the three well pad, but we only drilled 1 Cardium location. We actually made 2 other new pool discoveries off the same pad.

Speaker 2

So 3 horizontals on that pad into 3 different zones. So, as we move into development mode, we'll do a delineation pad in 2024 and then develop In 2025, we expect to continually reduce the drilling and completion costs. So Economics are obviously very strong with current pricing. So you're looking at IRRs north of 50% on something like that, Reserves of that nature and that deliverability and well performance profile. So yes, very strong and The gas will be connected to our Musgrove plant.

Speaker 2

So we really have the gas solution already in place.

Speaker 4

Great. Thanks, Mike. And then just on your options or how you're looking at How electrification might occur for your North Montney Phase 2 project? Maybe just if you could just frame For me, what the hurdles are there? I have heard that electrifying gas plants north of Peace River It's a lot more challenging.

Speaker 4

Yes. We're looking at

Speaker 2

it lots of options. It's not clear yet what will happen to the grid. The other way you can electrify is generate it with natural gas and couple that with CCUS. So We're evolving all of those potential solutions along. And as we Complete that evolution we thought appropriate to move Phase 2 by 1 year.

Speaker 2

But really our plan, We focused on shareholder returns rather than very rapid growth. So we're very happy with what the 5 year plan looks like in Spreading out of facility expenditures. So it's over the 5 years, it's a 33% increase in free cash flow that we The vast majority of which will be returned to shareholders.

Speaker 4

Great. That's all. That's all for me folks. Thank you.

Operator

Thank you. And your next question comes from the line of Dennis DeSilva from Middlefield Group. Your line is open.

Speaker 5

Hey, good morning, Mike. Good Q3 results. Quick question on the CapEx for 2024. Maybe give a little more insight into the increase in the plug and perf, your early days on that and How you're maybe translating some of the anticipated improvements in well results into your Production for 2024 going forward?

Speaker 2

Sure. Well, I'll sort of not answer those necessarily in the Order you asked them. We don't incorporate improved production from trialing of new technology until It's trialed and we've been able to evaluate the results. So we just use existing performance curves as we build up 2024 and Performance over the 5 years. The 2024 capital budget, there's $225,000,000 in there for The Bonavista asset.

Speaker 2

So the EP spending 24 that we put out yesterday compared to the guidance that was out there, The EP spending is actually down when you incorporate Bonavista. We do fund the exploration program and what we call our environmental Performance improvement initiative. So that's the diesel displacement and methane mitigation. That's funded out of free cash flow and gets added on to that 2.15 capital budget. So we thought we've done a pretty good job holding it.

Speaker 2

And in fact, as I mentioned, EP spending's Actually down a little bit. As far as plug and perf and some of the more liquid rich horizons in the Montney, particularly in the North Montney, we've been doing that And we'll continue to evaluate what's the best option going forward. And our main focus is Economic return, obviously, we look at EUR and we look at well performance, but we're driven by economic return and That's kind of the sort of guiding philosophy in that change to the 5 year plan as well. We want to make as much money and be as profitable as possible. And so we're really excited about what that new plan looks like.

Speaker 5

Great. Thanks, Mike.

Speaker 6

Thanks, Mike, I was just wondering about your exposure to Ayco more in the 25 to 27 timeframe With LNG Canada coming on, are you anticipating having more exposure than you currently have to the AECO pricing or Something similar to, I guess.

Speaker 2

Yes. No, thanks, Fai. I might let Jamie jump in on that one.

Speaker 1

Yes, we do generally grow our exposure and we have this in the presentation on Slide 23, but we're happy with the growing exposure to AECO in And that's because it also coordinates with the startup of LNG Canada, which we think will be a bullish and tightening Aspect of the supply and demand dynamics in the WCSB, we are we have been over the last 2 years adding Export exposure into the West Coast. So we've added, as we mentioned in the press release today, additional exposure in the California. And these markets have an extremely high premium gas price markets for us in 2023 and we anticipate also them to be at a high premium in 2024. But in 2025 and 2026 as we bring on the Phase 1 of Conry, we're happy to have those exposed volumes sitting into the AECO bucket for now because we see AECO As a tight and very competitive market for our gas with

Speaker 2

the start up of LNG Canada.

Speaker 6

Okay. Thanks. Yes, I did see that Slide of increasing exposure, I just wanted to ensure if that was going to change dramatically as time passes.

Speaker 1

Well, in general, the slide also incorporates the growth we have folding into the plan. We don't forecast Added transportation agreement. So over time, we're always looking to augment our portfolio into premium markets. And so I think it is Reasonable for you to anticipate there to be small changes to the physical nature of this plan. And of course, every year we're looking to tactically add hedges that add value into the portfolio.

Speaker 1

So we're not a structural hedger, but we do like to look out the curve and find areas in each of our markets, including our local one, Where we can protect exposure, particularly often in the summers. But in general, our view is that 2025 and 26 are going to be buoyant gas price markets and likely Offer prices higher than they are today. So I don't think we're that aggressive on looking at locking in any of the pricing in 2025, 26 at the current time.

Speaker 6

Okay, great. Thanks for that. Thanks, Malorie.

Speaker 2

Thank you.

Operator

And there are no further questions at this time. I would like to turn it to Jamie Heard for further remarks.

Speaker 1

Yes. We thank you all for dialing in today and joining us on this conference call. We hope you have a good rest of your day. Thanks.

Powered by Quartr
Earnings Conference Call
Tourmaline Oil Q3 2023
00:00 / 00:00