Q4 2022 Tourmaline Oil Corp Earnings Call
Speaker 1: To do.
Speaker 2: Good morning ladies and gentlemen and welcome to the Tormaline Q4 2022 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. If at any time during this call you require immediate assistance, please press star zero for the operator.
Speaker 3: I would now like to turn the conference over to Scott Kiriter, Chief Legal Officer. Please go ahead. Thank you operator and welcome everyone to our discussion of Termalines results for the three months and years ending December 31, 2022 and 2021. My name is Scott Kirkker and I'm Termalines Chief Legal Officer.
Speaker 3: 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 termaline annual information form at RMDNA, available on Cedar Hand on our website.
Speaker 3: I also draw your attention to the material factors and assumptions in those advisories.
Speaker 3: I am here with Mike Rose, Termaline's President and Chief Executive Officer and Brian Robinson, Vice President and Finance and Chief Financial Officer, and Jamie Hurd, Manager, Capital Markets for Termaline. 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.
Speaker 3: Thanks Scott, and thanks everybody for dialing in. We'll go over what we thought was a very strong 2022 and that's continued on into 2023. So some of the highlights Our full year 2022 cash flow was a record 4.9 billion or
Speaker 3: 1426 per diluted chair and that's up 67% over 2021. Q422 cashflow was 1.4 billion or 408 per diluted chair. We generated a record 3.2 billion of free cashflow in 2022 and our 22 after tax net earnings were 4.5 billion.
Speaker 3: or 1310 per diluted share. We also paid out 790 per share in base and special dividends to shareholders in 22, which is approximately a 12% trailing yield.
Speaker 3: Our 2P reserve value per diluted share based on the current Jan 123 engineering price deck is $143 per share before tax or 109 after tax. Total proved is 97 before tax 75 after tax on our PDP NAV is 54.
Speaker 3: dollars per share. Full year 2022 average production was up 14% over 2021.
Speaker 3: Our current production is ranging between 520 and 530,000 Buees per day and that's consistent with where our expected first quarter average will be. At current strip pricing, we expect to generate cash flow of approximately 3.8 billion in 2023 and free cash flow.
Speaker 3: 94 million or 0.1 times Q422 annualized cashflow.
Speaker 3: We're up 25% year over year to essentially a billion BUE's. Total proof reserves, we're up 14% and 2P reserves of 4.5 billion BUE's we're up 10% over year end 21.
Speaker 3: We replace 240% of 2022 annual production of 183 million BLEs with our 2P editions of 440 million BLEs and that includes 22 production.
Speaker 3: After 14 years of operations, we have 20.7 TcF of 2P natural gas reserves, one of the largest lowest development costs, lowest emission natural gas reserve bases in North America. Looking at production in a little bit more detail, I mentioned current production. In the last 15 years, we have 20.7 TcF of 2P natural gas reserves, one of the largest lowest development costs, lowest emission natural gas reserve bases in North America.
Speaker 3: between 520 and 530,000 Buis a day and that's despite a reduction in NGL volumes of approximately 8,000 Buis a day relating to a third party pipeline system interruption that lasted six weeks. It's back on stream now.
Speaker 3: And there's no change to our full year 23 average production guidance of a range between 520,000 and 540,000 BUEs per day.
Speaker 3: 22 average liquids production of 112,500 barrels per day was up 16% over 21 and we are the largest and the NGL producer in Canada.
Speaker 3: And on milestone, we produced our 1 billion BLE of production since inception in 2008 on February 9.
Speaker 3: Turning to the financial highlights in a little bit more detail. We generated, as mentioned, a record $3.2 billion of free cash flow in 2022. We increased the quarterly base dividend three times in 22 to an annualized dollar per share, so a 39% increase over the year. And we paid for a special dividend that totaled $7.
Speaker 3: end of $2 per share in early February and we plan to pay special dividends for the remaining three quarters in the year as well. As mentioned, exit 22 net debt was $494 million and that's well below our long-term debt target of 1 to 1.2 billion and the company is actually in a surplus position if he includes the value of our $45 million.
Speaker 3: and up 10%
Speaker 3: year over year. 2022 PDP FDNA costs were 8.74 per B O E. That yielded a PDP reserve recycle ratio of 3.06 and if you use Q4 22 cashflow per B O E of 2980 you get 3.41.
Speaker 3: And after 14 years of operation, that 20.7 T CF of 2P natural gas reserves, we believe is the largest in Canada.
Speaker 3: Importantly, we've only booked 3,359 gross locations of our total well-defined drilling inventory of over 23,000 locations. So we still only booked 14.6 percent and already have 2P reserves of 4.5 billion BUE. So lots more to come.
Speaker 3: The current future development capital associated with the 2P reserves represents approximately four years of prospective cash flow at strip pricing. As always, in the case, we will systematically convert those 2P reserves into PDP reserves in a very realistic timeframe.
Speaker 3: A little on marketing. We do continue to diversify our natural gas and liquids marketing portfolio in an effort to realize the best possible pricing for all of our hydrocarbon streams. Diversification has played a major role in enhancing Q422 cash flow.
Speaker 3: and that will continue in 2023. In January of this year, we commence delivery of our 140 million per day to the Cheneers Sabine Paths LNG facility. And by virtue of that, became the first Canadian E&P company to participate in the LNG business.
Speaker 3: business with full exposure to JKM pricing and that provides a material increase to our 23 cash flow as of 15 23 the JKM strip is 1924 US per MCF
Speaker 3: During 23, we'll actually increase our natural gas volumes exported to Western U.S. markets from 345 million per day to 495 million per day with an average of 74% of that gas accessing the premium price PG&E California market over the calendar year. Our average realized natural gas pricing Q422 would see...
Speaker 3: that are basis to 9x of 42 cents per MCF US and an average of essentially 700 million per day of un-heaged volumes exposed to export markets in 23 and they're all listed there but the premium ones are summed US Gulf Coast JKM, Mollin and PG&E. A little on E&P in calendar 22 we drilled a total of
Speaker 3: 240 net wells that equated to almost 1.3 million meters, and that was the most in the Western Canadian sedimentary basin. We have no material facility projects in the 23 budget, and we anticipate very strong 23 capital efficiencies of approximately 9,000.
Speaker 3: per flowing B O E and we expect that will rank very well in the North American energy space. We, coming into the year, had 300 valid drilling permits in Northeast BC, and so far we've received an additional 55 drilling permits during the...
Speaker 3: first quarter so far and certainly expect more. On the expiration front in 2022, we drilled 11 new pool or new zone discoveries. And we've made two additional discoveries in 2023 to date and we're currently testing those. Essentially one net rig of the 14 we're currently utilizing.
Speaker 3: in place for over four years, developing and implementing new proprietary emission reduction technologies, executing our expanded water management initiatives, managing our third-party environmental-related research, and evolving large methane testing center in the deep basin.
Speaker 3: and we intend to invest 30 to 50 million per year on further EPI initiatives. We've been displacing diesel with mad gas on all of our drilling rigs in the operated fleet, and we actually have one rig running on high-line power. Since embarking on this diesel displacement initiative over five years ago,
Speaker 3: fresh water intensity for 21 and its well stimulation operations. That intensity is 0.11 barrels per per vehicle battery.
Speaker 3: And finally, we're pleased to announce that the board has declared a quarterly cast dividend on its common shares of 25% 25 cents per common share and that will be payable on March 31 to share holders of record at the close of business on March 15th.
Speaker 2: That's all I'm going to say for comments and so we're more than happy to answer questions that you might have. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the number one in your touch tone phone. You will hear a one-tone prompt acknowledging your request. You will hear a one-tone prompt acknowledging your request.
Speaker 2: Your first question comes from the line of Jeremy MacRaea from Raymond James. Hi guys, just outside the commodity, where do you think Kermelin could really surprise the market this year? Is it like new technology that you guys are working on, new exploration fields?
Speaker 4: like LNG agreements, more acquisitions, just kind of curious where you think he could surprise us.
Speaker 3: Well, I think we could surprise you on any of those and we're working on on all four of those so looking for more gas market diversification Always looking at M&A opportunities, but you know, we prefer things when they're less expensive the expiration programs going very well, so you'll see more disclosure
Speaker 3: on that during the year and you know our kind of preference and how our marketing diversification set up is we're very focused on the west and we've actually had winter in the west and so very strong pricing and we think that puts a pretty good floor on summer particularly what's going on on the west coast in the U.S. where they're
Speaker 3: actually getting dangerously close to the cushion gas and it's staying cold there. So most of that gas is supplied from Canada now into that market and so that puts the floor and I expect the Westgate will be you know in that 2.8 to 3Bs a day for most of the summer. Jamie, do you want to add on that? Now that we have the ability to...
Speaker 3: Drill Warmer land in the North Madenade, I think you should be closely watching well results as we come up with more and more new pads and new wells in the corner area and we're very constructive on what we've seen so far but I think we're going to have a chance now in 2023 to showcase how that access performing and I think it's going to you know compare it very very well relative to the results you've seen.
Speaker 3: certainly some upside if you know ahead of expectation well performance continues but we're not changing anything at this point.
Speaker 4: Okay, and just maybe just last question here.
Speaker 4: You know, just what the gas prices falling quite a bit. How has that opened up much more M&A here at these prices here? Are you seeing more in bounds? You know, how has kind of the first couple months here of Q1, you know, look versus what it was last year here?
Speaker 3: I think that price fall that you refer to was very rapid. I don't think you've seen that kind of play out in the M&A market yet. Just too soon.
Speaker 2: Okay, thanks, Ed. A set of minder, if you have any questions, please press star followed by the number one on your telephone keypad.
Speaker 2: Your next question comes from the line of Lee Cooperman from Omega Family. Your line is now open.
Speaker 5: Thank you. Let me congratulate you guys in doing a fabulous job on behalf of all the shareholders.
Speaker 5: I think you've done nothing to a brilliant job in positioning the company. So I've got to ask you since you're so smart, what are your priorities for the use of your free cash flow? I think I know the answer, but it could be dividends, M&A, debt repayment, which doesn't seem to be likely in stock repurchase.
Speaker 3: You know, where do you want to be a big buy of your own stock? Well, we're just looking at that right now. I think we've always said that, you know, we'd be there in a defensive way if there's a market dislocation. We currently don't have a programmatic buyback in place, but we're absolutely looking at it and
Speaker 3: All of those uses the free cash flow you referred to will execute on. We also like midstream investments where we can permanently improve our margin. You see how large our reserve base is now. So if we can make investments that improve that margin by a dollar or two per B a week. So if you can make investments that improve that margin by a dollar or two per B a month.
Speaker 3: We think that's a huge win for shareholders and a good use of free cash roll on behalf of those shareholders.
Speaker 5: Right, well, you know, I'm going to watch what you do because I have so much respect for you, but you know, the average analyst expectation for our target is about 90 bucks, it's not good 60, it's 50 percent upside. If you agree with that and you think it makes sense, I would think we purchase we shouldn't be far off.
Speaker 5: I don't have a lot of respect for the analyst input. Your brother-in-law's company, when it's stocked with two bucks, everybody had two dollar target and now everybody had a thirty dollar target. Whatever. Oh, thanks. Thanks for your support, too. Thank you for your performance.
Speaker 2: Your next question comes from the line of Jamie Kubik from CIBC. Your line is now open.
Speaker 6: Yeah, good morning and thanks for taking my question. I just have one and I appreciate that a couple months ago, termally, and refined it.
capital spending guidance for 2023 but if natural gas prices remain relatively weak here, would you look to potentially adjust that for the back half of 2023? Thanks. Well, we'll look at it. I mean, we get the usual break up related natural slowdown in operation so we'll go from 14 rigs to 4 rigs.
through Q2 and it gives us three or four months from here to see where natural gas prices settle out. We think they have bottom but I think we're all not particularly good at predicting where natural gas prices are going to go. So at this point in time, no change to the EP program and we're like right on target as mentioned.
But if gas completely falls away, we would definitely look at something in the second half of the year. So to be determined.
If gas completely falls away, we would definitely look at something in the second half of the year. Okay. Thank you.
Your next question comes from the line of Philele from Audlum Brown. Your line is now open.
Okay, thanks. My judges, my question is just comment a little bit about what you're seeing in terms of cost inflation and cost inflation pressures right now.
Yeah, I mean, we took our inflation provision up when we kind of provided an off-subdate on January 12 of this year. So in mid-22, we'd estimated inflation at 18% over 21 average costs and then that was not a large enough provision. So when we...
Talk to the market in mid-January, we took that up to 25 percent and we think that's more than adequate at this point in time.
Okay. And do you see any potential for that pressure to ease given the lower commodity price environment? Well, you think so. You know, again, I'd say it's too early to see that, but I mean, that would, if we're going to have to deal with lower gas prices, I'd love to deal with lower costs. Okay.
It kind of related to that, I guess, with the Conway Northmont need development project. They're, you know, in terms of thinking about inflation and risk their cost over lines. How are you trying to think about that right now and trying to mitigate that type of risk?
Yeah, on the drilling side, I mean that is our best drilling area from our performance standpoint. So we're not in those, you know, 3000 meter money or as long as off in six to seven days now. And so, you know, we're, and we've done 14 pads.
because of inflation. You know, we have assembled some of the parts of the North Montany infrastructure already, if you look back at the acquisitions, we've done there's some pipelines and a liquids hub and other parts of it are on the ground. It will be, you know, one of the largest, maybe the largest, western Canadian.
conventional project at about a hundred thousand B.O.E.s a day in that sort of 25 to 27 time frame. So it's a little bit out there time-wise. It's in the back half of our five to six-year EP plan. We don't start incurring expenditures until late 24 and that will be the long lead time.
components of the deep cuts of the turbo expander. So, you know, we've got some time to see where inflation goes. So we got to contain on the DNC side and we're pretty good at building and installing these plants and we're usually had a schedule and very efficient in our construction operations.
Yeah, we're looking forward to getting that done.
forward to getting that done. Okay, thank you so much.
Your next question comes from the line of Hank Van Wood investor. Your line is now open.
Thank you.
Certainly has posted an $885 million loss in financial instruments for $22. Can you give me some clarity and explain what they are? And perhaps tell me what instruments you have in place for 2023. Thank you.
The majority of this loss actually relates to our embedded derivative associated with our JKM contract. This is something that's going to move around quarter to quarter based on the fair value of the JKM forward strip for the next 15 years. The numbers are large because the value of this contract has been large. JKM came down a little bit between Q3 to Q4 and so that value of...
that doesn't have these forward embedded derivative adjustments, which frankly make earnings less easy to understand as a judgment of the performance of the business.
Yeah, unfortunately, though, it looks like the market looks at the earnings. And certainly today, Termine has got a fairly large hit on their share price.
I'm not sure how you can...
protect that in 2023. You know the shareholder I don't like to see those kind of drops in the share value.
Yep, I totally understand that. And I think over a longer period of time, and especially looking at earnings over multiple quarters or definitely last year's annual earnings are fantastic, you're going to see extremely strong financial results from term-ling. And I think as the market continues as I just, the outlook that we have ahead of us, you're going to see that reflect on the share price performance.
Okay, thank you so much for the explanation and I remain the head dedicated shareholder. Your next question comes from the line of Peter Cook from Logan Capital. Their line is now open. Thank you.
Hey Mike, congratulations again on a great report. Question on that LNG contract.
Let's see, it's 3,000 miles you're shipping the gas. What's your cost on shipping? And also in the compression of that gas, I'll just curious what your net revenue would be.
We pay 86 cents you ask to get from here in Alberta or BC to planting on the Gulf Coast.
And then our liquid faction and shipping and transport costs all in, so that would include the pipeline the 3000 miles you refer to. It's about 5 US.
Come on.
5 so when we get so with JKM 25 we net 20 it's kind of a easy way to look on it
So when we get so if JKM 25 we net 20 it's kind of a easy way to look on it. Thank you.
Yeah, it's confusing because...
on that derivative because you had a billion and a half derivative on your net earnings in the quarter and that's all based on the LNG project.
It's based on that contract, that's correct. So I can't remember in Q3. I think it was a $2 billion win on earnings. And then it rips around in Q4. So it's going to be pointed out it just creates noise.
The fundamental profitability of the business, I mean I look at the 3.5 billion, we're counting 22.1.5 is the JKM contract, so it's a net positive and then you've got 2 billion of operated earnings if you like. It's kind of up.
good way to look at it, right? And do you want to ask? Yeah, like on this contract point forward, over time, as we continue to physically deliver, in the absence of sort of unusual world events that are really causing big movements in one specific market, like for example, JKM.
That will narrow. So you won't see as much swinging in this. We had a huge initial lift in its overall evaluation. Then it pulled back a bit and over time it will just sort of narrow more and more and more with the expectation.
The good part though is it's a huge win to our cash flow and free cash flow in in 2023 and that's all I think of at Peter.
It also looked like you sold forward and got about a $34 price for a fair amount.
Yep, that's where mostly bias towards the summer.
Okay, thanks.
Okay, thanks. Thank you. Thanks for the support.
Yep good. As of the moment, there are no further questions at this time. Mr. Scott Kircher, please continue.
Thanks everyone and thanks operator. Thanks everyone for attending and we'll see you next quarter.