Q1 2022 Tourmaline Oil Corp Earnings Call

Okay.

Good morning, ladies and gentlemen, and welcome to the Marine Q1, 2022 results conference call.

This time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.

If at any time during this call you'll require immediate assistance. Please press star zero for the operator. This call is being recorded on Tuesday may 5th 2022, I would now like to turn the conference over to Mr. Scott Cook up. Please go ahead.

Thank you operator, and welcome everyone to our discussion of term lease results for the three months ended March 31, 2022 and 2021.

My name is Scott Kirker, and I'm, the Chief legal officer for Germany, before we get started I refer you to the advisories and forward looking statements contained in the news release as well as the advisories contains a tripling annual information form.

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 Rowe assemblies, President and Chief Executive Officer, Brian Robinson, Vice President Finance, and Chief Financial Officer, and Jamie herd.

<unk> capital markets.

I'll start by speaking to some pilots for the last quarter and our year so far.

<unk> remarks, we will be open for questions.

Thanks, Scott and thanks to everybody for dialing in we're pleased to review our Q1 'twenty two results.

Firstly, a few of the highlights our record quarterly cash flow of one point <unk> $7 6 billion and record quarterly free cash flow of $618 million or $1 82 per diluted share that enabled us to declare a special dividend of $1 50 per common share that will be paid may 19th of this year.

And our trailing 12 months of distributed dividends now total $4 21 per share.

This special dividend and that set an implied 7% trailing yield at this point, our full year 'twenty two free cash flow forecast has increased to $3 9 billion, which will allow us to pay a quarterly special dividends through the balance of 'twenty two.

Our Gulf Coast Cheniere LNG arrangement on a 140 million per day begins Jan one two.

2023 and for reference.

As of April 21, the GKN strip.

Strip price was over 25 U S per btu.

And at March 31, 22, net debt was $769 million or one five times.

22 full year forecast for debt to cash flow.

And that's well below the low end of the target range.

Briefly on production.

First quarter production.

A little over 507000 Boe per day.

It was within our guidance range of 500 to 510000 Boe's per day and above full year average guidance of 500000 Boe's per day.

We exited the first quarter at average production levels of between 515, and 520000 BOE per day ahead of expectations and that was driven by higher activity levels during Q1, and strong well performance across all three operating complexes. So.

So far our record daily.

<unk> rate achieved.

It is a little over 526000 BOE per day, which is actually ahead of the current 23 average production guidance, we provided of 515000 Boe per day.

And we expect Q2 average production of between 505 or five.

Because we will re inject into storage and dawn and in California, We have some of our own facility turnarounds and there is also third party pipeline maintenance that typically happens in in Q2.

Looking at our financial results.

As mentioned first quarter cash flow was a record $1 8 billion.

Our full year 22 cash flow.

Is now 522 billion at $15 34 per diluted share and it's actually up 29% from our previous forecast back in March.

Full year free cash flow of $3 92 billion and that's $11 53 per diluted share.

As mentioned, we achieved our long term net debt target actually in Q4 of 2021.

And we are committed to returning the majority of free cash flow to shareholders through these base dividend increases special dividends and share buybacks a component of free cash flow will also be used for asset acquisition opportunities within our three operated complexes and select margin improving infrastructure investments.

Given that record free cash flow outlook through the for the year.

We are pleased to announce quarterly special dividends for the remaining three quarters of 2020 to the magnitude of the special dividends in the third and fourth quarters, there will be a function of commodity prices and resulting available free cash flow.

And also note that additional sustainable base dividend increases are planned for 2022.

Touching on capital spending and the financial outlook first quarter 'twenty to E&P capital spending was $442 million.

Total capex in the quarter, including acquisitions was $479 million and note that acquisitions of property and land are funded by.

Annual free cash flow and are actually not included in the base budget that we put in the five year plan.

We operated a larger proportion of the drilling rig fleet and completion spreads through March compared to previous years.

And that was in part because of continued strong commodity prices and also access was really good. So this will allow for a stronger Q2 production volumes than what you would see in our typical annual production profile.

And that incremental March activity added approximately $20 million to Q1.

Full year 'twenty, two E&P capital spending.

He has been increased to one to $2 5 billion.

So thats up from $1 <unk> five.

Increase includes an incremental $75 million provision.

For inflation and that equates to six 7% full year cost inflation on top of other provisions that we had in the budget already and also a $25 million allocated to.

Following up the multiple successful news on new pool.

Exploration discoveries, we've made and we're quite excited by that.

First quarter 'twenty to exit net debt as mentioned was $769 million well below the long term bottom end of the net debt.

That target range of $1 billion.

Briefly on marketing.

We have 625 million per day accessing U S markets.

Through long term firm transport agreements and this volume will grow to 905 million per day by exit 2023.

And importantly of course are 140 million per day Gulf Coast LNG deal commence as Jan $1 23, or eight months from now.

Approximately 60% of the current lower price hedges that we assumed.

Through the acquisitions acquisition, sorry of Jupiter, modern and Black Swan will systematically roll off and these production volumes will benefit from the much higher current strip pricing for winter 'twenty two 'twenty three.

And notably realized NGL prices averaged.

Averaged $44 82 per barrel in Q2, sorry, Q1 of 'twenty, two and that's up 63% year over year and we do expect further strengthening of realized NGL prices through the balance of the year and recall that <unk> is the largest NGL producer in Canada.

On EEP.

$84 seven new net wells were brought on production during the first quarter of 'twenty two.

And we anticipate a further 44 wells coming on stream during the second quarter and that in part is related to the increased activity in March of this year.

We did achieved new record horizontal well lengths with associated record low drilling times and all three EP complexes.

Couple of Pacesetters include our progress lower charity Lake horizontal <unk>.

30 509 meters long.

That we drilled from surface to TD with the assembly in the ground and 11 seven days.

And in the greater <unk> area, we drilled.

Just over 2000 meter montney horizontal.

From surface to TD again with the assembly in the ground in under five days, So think about that $4. Nine days was the total so these continually improving drill times really help reduce the impact of.

Ongoing inflationary pressures.

Some detail on our North Montney development, we continue to plan for what we call Conroy, which is our north Montney development, notably this expected 100000 <unk> per day liquid rich gas project.

Actually represents one of the largest single conventional developments upcoming in the western Canadian sedimentary basin over the next few years. So we're going to continue to grow <unk> in a meaningful way.

The current timing for full project startup is 2025, 2026 and that coincides with the startup of LNG, Canada.

Which we expect to be structurally positive for western Canadian gas supply demand dynamics and of course natural gas pricing.

So far that full development.

Including production cash flow and capital spending is not in the existing five year plan that we just published a revised one.

We've drilled so far over the past nine to 12 months 12 delineation pads.

The new law <unk> Conroy Aitken lands.

Thats to define liquid content, well performance profiles and capital costs in advance of the full development and the results. We're pleased to say have been very strong.

As part of our <unk>.

Long term associated Conroy facilities plan, we acquired the remaining 50% non op interest in the two aitken area gas plants that.

Came in a black Swan acquisition from Alton gas for $224 million.

That closed during Q2.

The plants, including the deep Tad expansion have a combined processing capacity of 290 million per day and both are operating at full capacity annual.

Annual Opex savings, resulting from this transaction are estimated at about $27 million per year.

On environmental performance improvement.

After achieving our net 25% methane emission.

Our reduction target three years ahead of schedule.

We're currently establishing.

Establishing new.

Rigorous targets to further reduce those emissions in technology initiatives currently being developed include <unk>.

Continued pneumatic pump retrofits installation of solar electric pumps.

Conversion of separators to full solar electric and the pursuit of zero emission well site technology.

We have success.

<unk> successfully transitioned all of our drilling rigs under contract from diesel to natural gas achieved.

Achieving both on material emissions reduction and our net cost savings. We also continue to evolve several <unk> initiatives within all three operated complexes and plan to implement these potentially material emission reduction opportunities at <unk>.

Selection of our gas plants in the 25% to 2030.

Timeframe.

<unk> will begin providing low emission Canadian natural gas to Europe , and Asia in 2023 via our Gulf Coast LNG pathway, and we will continue to explore opportunities to expand.

This business segment.

We believe that a growing Canadian LNG business, providing ever lower emission Canadian natural gas to the developing world is one of the best things our country can actually do for the global atmosphere and it's an enormous sustainable win for the entire Canadian economy. So it's an environmental in an economic win and an energy secured.

When so kind of a hat trick for Canada as we go through the playoffs here so thats it.

And happy to answer questions.

Thank you ladies and gentlemen, we will now begin the question answer session should you have a question. Please press the star followed by one on your Touchtone phone.

Three Cohen from acknowledging your request and your questions will be pulled in or the DRC should you wish to decline from the polling process. Please press star followed by the number one.

One more mindful of your first question.

Your first question comes from Patrick O'rourke.

Phebe markets. Please go ahead.

Hey, guys. Good morning. Thank you for taking my question and congratulations on the very impressive special dividend there.

Just wondering and maybe this is a small ball here, but in terms of the Alta gas working interest acquisition there to my recollection. Your pre existing working interest are operating interest in that plant had enough and dropdown into your sort of infrastructure.

Structure that you have here.

Youre well through your net debt target.

Sure.

Terry.

Looking at free cash flow profile going forward are you still looking to sort of monetize into your royalty vehicles. Some of these facility working interests.

It's something we always keep in mind, but nothing imminent at this point and it was important for us to consolidate to a 100% in the north montney facilities prior to embarking on a significant build out over the next few years.

Okay and then just.

Second question very briefly here I think that you guys have been on record, saying that you've sort of acquired a lot of the core properties that you were looking to for your medium and longer term strategy. Obviously, the cash taxability horizon is creeping up on you very fast with Morningstar prices have gone here I'm, just wondering how sort of tax pools.

Come into play in any sort of incremental Emma.

M&A going forward here for terminally.

Its Brian speaking I mean, certainly.

If you go back over the last sort of 30 months or the acquisitions that we did do greatly enhanced our tax pools. So the tax basis on those businesses was higher than the actual.

Flowing barrels and so on so we're happy about that and that has been in Asia for us in pushing the tax horizon out we started the year here with about $9 billion in tax pools and of course, our most favorable one taken out the first year in 2022.

<unk>.

The tax horizon will get pushed out a bit as Mike mentioned.

With the investments that we're planning on our Conroy, North Montney development, but to be sure. There is going to be cash taxes here and we're going to be fully taxable and in the later years in that plan that we've laid out for you.

Okay. Thank you.

Thank you.

Your next question comes from Spy elite with long Brown. Please go ahead.

Great. Thank you.

I'm just wondering.

You can help me I just want to understand the Cheniere LNG deal make sure I understand correctly.

You basically ship the gas to the Gulf Coast I think the total you've talked about with 86%.

I'm, assuming there's some processing fee that 10 year.

Correct.

Processing and <unk>.

Liquid and then you transfer it to Asia.

Some cost to that so.

So, let's say if I assume that.

Cost to get to the Gulf Coast Liquefy and shipped age is about $7.

If the pricing stay at that 26, we do collect the $19.

Unless your op cost in the netback of about the way to think about it.

That's roughly the way to think about $7 do you think might be a little aggressive, but yes. It's in the U S dollar that would be our netback.

Put it another way, maybe 6% of our gas, but it is going to be enough, it's going to amount to roughly 13% to 15% of our revenue. It's a very material cash flow impact in 2023 and over the last six months <unk> seen the forward year. So 'twenty four 'twenty five 'twenty six on JK pricing also greatly improved.

All of which are now well over $10. So it is going to be definitely a very valuable contracts, particularly in the near term.

And sorry, when you say at $7, an aggressive like too low or too high.

Probably a little high.

Okay.

Alright, so maybe six or something.

Okay, and the dynamic has obviously changed.

Since you put the deal in place last year.

It looks like European pricing might be a little bit better than maybe the cheaper to ship there can you.

Switchover.

The deal kind of lot T J Kim is.

It is a <unk> index deal in the long term the floating or between <unk> should actually be relatively tight it'll be the shipping are between the two jurisdictions. So while this year definitely is featured some real tightness as Europe has rapidly transition to LNG imports over the longer term, we think those two.

<unk> will hold hands very nicely and so we see the <unk> market as an indicative market for basically all LNG floating prices.

Okay.

Sorry, the last question for me is.

In your five year plan.

$26 strip pricing is that built into your five year plan right now for next year or.

It's the exact strip that GKN has so it is not related but it's in their.

Five year plan as Ron on the April 14th strip at that time, 2023 was $23 and the backwardation is roughly three bucks a year I think the last year is in the low teens.

Okay. Okay. Thank you.

Okay.

Your next question comes from Iran. Bill Koskey TD. Please go ahead.

Hi, Good morning, I guess my question is around the use of free cash flow. So when you talk about the majority of free cash flow going to shareholders. If I assume that means either 50% or even more than 50% you'll be building net cash and getting further and further away from that $1 billion permanent debt target. I guess my question is are you comfortable being in a net cash position.

At a time and if the answer to that yes.

Would you be waiting on before you deploy that.

We're comfortable taking debt well below the $1 billion bottom end of our sort of long term debt target.

To some extent.

We can bank cash for the North Montney development, which will be a significant expenditure. So as we start proceeding with that we might in fact have it pre financed.

We do allocate pool.

Pools of available free cash flow for ongoing asset acquisition, obviously that slowed down and we backed away from certainly corporate M&A, we're always looking for midstream deals that improve.

The margin on every Bowie, we produce.

And even if it's just a couple of Bucks a Boe when you can ball that with our 20000 plus location inventory. We think those are very good investments to make on behalf of our shareholders, Brian or Jamie anything you guys want to add.

I think we've just underscore we're definitely committed to returning the majority of free cash to shareholders. This year. So that's <unk>.

Sure total free cash flow per share was $12. The majority means the next asset of six.

<unk> distributed through base dividends special dividends and potential tactical share buybacks.

Thanks can I ask another one.

Yes.

To what extent can I guess have you hedged can you had are you willing to hedge.

<unk> in 2023 and beyond.

Okay.

We are starting to explore those opportunities and work on it we haven't done a lot of that yet.

We fully plan on doing so.

Thanks, guys.

Yes, Thank you Sir.

Your next question comes from Josef Schachter with Schachter Energy Research. Please go ahead.

Thanks, very much thanks, very much for taking my question and congratulations on the results.

Comments you made on the dividend special dividend. My question is more on the sort of the ESG the societal thing.

With storage being so low in both sides of the border.

Data from EIA last week with 17% below the five year average of $21 four below the prior year are we looking at a potential there when we get to November when we go into withdrawal season that we may have a shortage of supply if we have a normal or worse than normal winter.

Where do you see pricing going on where you're looking at double digit.

Become.

I think where there is a bulls eye on the industry because of the move in prices, which could be triple for winter heating.

<unk> thousand 223 versus 'twenty, one 'twenty two.

Well those are all good questions I mean, obviously, it's a very volatile environment, I'd say supply and demand are.

Relatively in balance so we do expect.

Norwich Inge.

Injections to pick up here bolt on both sides of the border.

And I think we will head into winter, probably lower than normal, but I suspect we will have <unk>.

Adequate supplies and I don't think anybody wants.

Really egregious price spikes, Ed I know, where youre going with it and we agree with you it's really not constructive for anybody.

Yes, it's kind of on the theme of energy security. If you are an exporting jurisdiction in Canada export this gas North America as a whole export those gas.

Gives you another lever to make sure you always have enough gas at home you can price to the point, where exports are out and so that scenario in which North America as a whole could run out of gas is extremely draconian very unlikely.

Yes, the only problem would be of course, the price, which would be the consumers and.

Given all the other inflationary pressures that kind of turns it into a sort of the industry into a political football, which we all hope doesn't happen.

That's it from me thanks, very much just wanted to get your Alex I saw that you bet yeah. Thanks Joseph.

Yeah.

There are no further questions at this time.

Please I'm going to turn this back over to Mr. Scott. Thank you.

Thanks, everyone for spending some time with US we'll talk to you next quarter.

Ladies and gentlemen, this concludes our conference call for today, we thank you for participating and ask that you. Please disconnect your lines.

Thank you.

Yes.