Q2 2024 Tourmaline Oil Corp Earnings Call
Good morning ladies and gentlemen and welcome to the Tourmaline Q2 2024 results conference call. At 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 require immediate assistance please press star zero for the operator.
Operator: 2020-24 results conference call. At this time, all lines are in listen-only mode.
Operator: 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 require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 1st, 2024. I would now like to turn the conference over to Scott Kirker. Please do so.
Operator: Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press R0 for the operator.
Operator: This call has been recorded on Thursday, August 1, 2024.
Scott Kirker: Thank you, Operator, and welcome everyone to our discussion of Tourmaline's financial operating results as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023. My name is Scott Kirker, and I'm the Chief Legal Officer here at Tourmaline Oil. 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, which is available on CDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories.
Scott Kirker: I would now like to turn the conference over to Scott Kirker. Please go ahead. Thank you, operator, and welcome everyone to our discussion of Termaline's financial operating results as of June 30, 2024. And for the three and six months ended June 3, 2024, and 2023.
This call is being recorded on Thursday, August 1st, 2024. I would now like to turn the conference over to Scott Kirker. Please go ahead.
Scott Kirker: Thank you operator and welcome everyone to our discussion of Tourmaline's financial operating results as at June 30, 2024 and for the three and six months ended June 30, 2024 and 2023. My name is Scott Kirker and I'm the Chief Legal Officer here at Tourmaline Oil.
Scott Kirker: My name is Scott Kirker, and I'm a Chief Legal Officer here at Tourmaline Oil. Before we get started, I refer you to the advisory zone forward-looking statements containing the news release as well as the advisories contained in the Tourmaline annual information form and are MDNA that's available on Cedar and on our website. Also draw your attention to the material factors and assumptions in those advisories.
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 that's available on CDAR and on our website.
I also draw your attention to the material factors and assumptions in those advisories.
Scott Kirker: I'm here with Mike Rose, Tourmaline's president and chief executive officer, Ryan Robinson, our chief financial officer, and Jamie Herd, Tourmaline's vice president of capital markets. We'll start by speaking to some of the highlights from the last quarter in our year so far. And after my remarks, we will be open for questions.
Scott Kirker: I'm here with Mike Rose, Tourmaline's President and Chief Executive Officer, Brian Robinson, our Chief Financial Officer, and Jamie Heard, Tourmaline's Vice President of Capital Markets. We'll start by speaking about some of the highlights from the last quarter and our year so far. And after Mike's remarks, we will be open to questions. Thanks, Scott.
Speaker Change: I'm here with Mike Rose, Termaline's President and Chief Executive Officer, Brian Robinson, our Chief Financial Officer, and Jamie Heard, Termaline's Vice President of Capital Markets.
Speaker Change: We'll start by speaking to some of the highlights from the last quarter and our year so far and after Mike's remarks We will be open for questions
Mike Rose: Go ahead, Mike. Thanks, Scott. And thanks, everybody on the line.
Mike Rose: Thanks Scott and thanks everybody on the line. Firstly, a few highlights.
Speaker Change: Go ahead, Mike.
Mike Rose: So firstly, a few highlights. Second quarter, average production of 562,000 B.O. days a day was up 13% over second quarter 23. And within our second quarter 24 average production guidance range, our second quarter cash flow was 755 million or 212 per diluted share on EP expenditures of 307 million in the second quarter. And that generated free cash flow of 434 million, or $1.22 per diluted share. Given the strong continued free cash flow generation in the second quarter and the full year financial outlook, we elected to increase the quarterly based dividend effective Q3 24 by 3% to 33 cents per share, or $1.32 per share on an annualized basis.
Mike: Thanks, Scott, and thanks, everybody, on the line. So firstly, a few highlights.
Mike Rose: Second quarter average production of 562,000 BOEs a day was up 13% over second quarter 23 and within our second quarter 24 average production guidance range. Our second quarter cash flow was $755 million, or $2.12 per diluted share, on EP expenditures of $307 million in the second quarter. And that generated free cash flow of $434 million, or $1.22 per diluted share. Given the strong continued free cash flow generation in the second quarter and the full year financial outlook, we elected to increase the quarterly base dividend effective for Q3-24 by 3% to $0.33 per share or $1.32 per share on an annualized basis. And that's our third base dividend increase of the year. We will also declare and pay a special dividend of $0.50 per share on August 21st this year.
Speaker Change: Second quarter average production of 562,000 BOE's a day was up 13% over second quarter 23 and within our second quarter 24 average production guidance range.
Speaker Change: Our second quarter cash flow was $755 million or $212 per diluted share.
Speaker Change: on EP expenditures of $307 million in the second quarter, and that generated free cash flow.
$434 million or $1.22 per diluted share.
Given the strong continued free cash flow generation in the second quarter and the full year financial outlook, we elected to increase the quarterly base dividend effective Q3 24 by 3% to 33 cents per share or $1.32.
Mike Rose: And that's our third-based dividend increase of the year.
Speaker Change: Thank you very much.
Mike Rose: We also declare and pay a special dividend of 50 cents per share on August 21st of this year. And importantly, we reduced net net by 137 million during the second quarter as well on the production front during this quarter of low natural gas prices. We completed multiple planned facility maintenance turn rounds. We also maximized injection into our gas storage reservoirs in California and a dawn on terrier. Our full year 24 average production guidance range has been revised to 575 to 585,000 B.O. days a day down 5,000 from the 580 to 590 previously. This will account for select third quarter fracked referrals into Q4 as we ship production into an environment of stronger anticipated natural gas prices later this year or early next year.
We also declare and pay a special dividend of 50 cents per share on August 21st of this year.
Mike Rose: And importantly, we reduced net debt by $137 million during the second quarter as well. On the production front, during this quarter of low natural gas prices, we completed multiple planned facility maintenance turnarounds. We also maximized injections into our gas storage reservoirs in California and at Dawn, Ontario. Our full year 24 average production guidance range has been revised to 575 to 585,000 BOEs a day, down 5,000 from the 580 to 590 previously.
And, importantly, we reduced net debt by $137 million during the second quarter.
Speaker Change: On the production front, during this quarter of low natural gas prices, we completed multiple planned facility maintenance turnarounds. We also maximized injections into our gas storage reservoirs in California and at Dawn, Ontario.
Our full year 24 average production guidance range has been revised to 575,000 to 585,000 BOEs a day, down 5,000 from the 580,000 to 590,000 previously.
Mike Rose: This will account for select third-quarter frac deferrals into Q4 as we shift production into an environment of higher anticipated natural gas prices later this year or early next year. This less than 1% production deferral is expected to have a minimal impact on our 24 cash flow. Looking a little deeper at the financial results, we realize Q2'24 net earnings of $257 million or $0.72 per diluted share, and that underscores the profitability of the business even in an extremely weak natural gas pricing environment.
Speaker Change: This will account for select third quarter frac deferrals into Q4 as we shift production into an environment of stronger anticipated natural gas prices later this year or early next year.
Mike Rose: This less than 1% production deferrals expected to have minimal impact on our 24 cash flow and actually a positive impact on 25 cash flow and free cash flow based on current strip price.
This less than 1% production deferral is expected to have minimal impact on our 24 cash flow and actually a positive impact on 25 cash flow and free cash flow based on current strip prices.
Mike Rose: Businesses. Looking a little deeper at the financial results, we realized Q2, 24 net earnings of $257 million or $0.72 per diluted share, and that underscores the profitability of the business, even in an extremely weak natural gas pricing environment. As previously mentioned, we remain committed to our long-term net debt target of $1.2 to $1.4 billion, and we intend to continue to make progress toward that target through 2024. As mentioned, we did reduce net debt by $137 million in the quarter. Also, our $45.1 million shares of Tophaz have a market value of around $1.1 billion as at June 30.
Speaker Change: Looking a little deeper at the financial results.
Speaker Change: We realize Q2'24 net earnings of $257 million or...
Speaker Change: 72 cents per diluted share and that underscores the profitability of the business even in an extremely weak natural gas pricing environment.
Mike Rose: As previously mentioned, we remain committed to our long-term net debt target of $1.2 to $1.4 billion, and we intend to continue to make progress toward that target through 2024. And, as mentioned, we did reduce net debt by $137 million in the quarter. Also, our 45.1 million shares of Topaz have a market value of around $1.1 billion as at June 30th.
Speaker Change: As previously mentioned, we remain committed to our long-term net debt target of $1.2 to $1.4 billion.
Speaker Change: and we intend to continue to make progress toward that target through 2024.
Speaker Change: And as mentioned, we did reduce net debt by $137 million in the quarter. Also, our 45.1 million shares of Topaz has a market value of around $1.1 billion as at June 30th.
Mike Rose: On marketing, Tourmaline's average realized natural gas price in the second quarter was 303 per MCF Canadian, significantly higher than the ACO-5A index price of $1.20 per MCF over the same period, and we benefited from our multi-year market diversification and transportation portfolio. We keep growing our export volumes, and now it's back to Exit 24 with a total of 1.26 BCF per day of natural gas going to these export markets. For 2024, the company has an average of 1.03 BCF hedge debt-awaited average fixed price of 466 per MCF Canadian. We have reduced both ACO and station two exposure for the second half of 24 to approximately 9% of our total natural gas portfolio, and that's actually the lowest it's ever been.
Mike Rose: On marketing, Tourmaline's average realized natural gas price in the second quarter was $3.03 per mcf Canadian, significantly higher than the 8.05a index price of $1.20 per mcf over the same period, as we benefited from our multi-year market diversification and transportation portfolio. We keep growing our export volumes and now expect to exit 24 with a total of 1.26 BCF per day of natural gas going to these export markets. For 2024, the company has an average of 1.03 BCF hedged at a weighted average fixed price of $4.66 per MCF Canadian.
Speaker Change: On marketing, Tourmaline's average realized natural gas price in the second quarter was $3.03 per MCF Canadian, significantly higher than the 805A index price of $1.20 per MCF over the same period.
Speaker Change: and we benefited from our multi-year market diversification and transportation portfolio.
Speaker Change: We keep growing our export volumes and now expect to exit 24 with a total of 1.26 BCF per day of natural gas going to these export markets.
Mike Rose: We have reduced both ACO and Station 2 exposure for the second half of 2024 to approximately 9% of our total natural gas portfolio, and that's actually the lowest it's ever been. On EP, we drilled a total of 47 net wells during the second quarter, completed 38 wells, and grew our duck inventory to 36 entering Q3. We're currently operating 14 drilling rigs, and we expect to increase that to 15 by adding a rig in the fourth quarter, and we'll run the 15 rigs through to 2025 spring breakup.
Speaker Change: We have reduced both ACO and Station 2 exposure for the second half of 2024 to approximately 9% of our total natural gas portfolio, and that's actually the lowest it's ever been.
Mike Rose: On EP, we drilled a total of 47 net wells during the second quarter, completed 38 wells, and grew our stock inventory to 36 entering Q3. We're currently operating 14 drilling rigs, and we expect to increase that to 15 by adding a rig in the fourth quarter, and we'll run the 15 rigs through to 2025. 2025 spring break up, so we'll end up drilling more multi-well pads than what's currently in the EP plan for the second half of 24 and the first half 25. And simply, we believe it's a good time to capitalize on our actual lower net drilling costs and our continuously improving drill times.
Speaker Change: On EP, we drilled a total of 47 net wells during the second quarter, completed 38 wells, and grew our duck inventory to 36, entering Q3.
Mike Rose: So we'll end up drilling more multi-well pads than what's currently in the EP plan for the second half of 2024 and first half of 2025. And simply, we believe it's a good time to capitalize on our actual lower net drilling costs and our continuously improving drill time. We will be positioned to deliver production above currently estimated 2025 levels, and of course, that will depend on where the price is, but we do think we're moving into a period of stronger commodity prices. But the 2024 EP capital budget remains unchanged at $2 billion due to steadily improving drilling efficiency.
Mike Rose: We'll be positioned to deliver production above currently estimated 2025 levels, and of course, that will depend on where the price is. But we do think we're moving into a period of stronger commodity prices. But the 2024 EP capital budget remains unchanged at 2 billion due to the steadily improving drilling efficiencies. As mentioned, given current weak natural gas prices, we've shifted some originally planned well stimulation activity from the third quarter to the fourth quarter of 24. And what we're really trying to do is match our production growth to the natural gas price curve and deliver those flush production volumes into that stronger pricing environment.
Speaker Change: We'll be positioned to deliver production above currently estimated 2025 levels, and of course that will depend on where the price is. But we do think we're moving into a period of stronger commodity prices.
Speaker Change: But the 2024 EP capital budget remains unchanged at $2 billion due to these steadily improving drilling efficiencies.
Mike Rose: As mentioned, given current weak natural gas prices, we've shifted some originally planned well stimulation activity from the third quarter to the fourth quarter of 2024. And what we're really trying to do is match our production growth to the natural gas price curve and deliver those flush production volumes into that stronger pricing environment, and do recall we previously removed our planned 2024 natural gas growth from the EP plan in March of this year in response to weak eco pricing at that time and that's approximately 100 million per day and over the past three years we've consistently matched our growth in natural gas production to our incremental egress out of the western Canadian sedimentary basin and we'll continue with that market diversification strategy.
Mike Rose: And due recall, we previously removed our planned 2024 natural gas growth from the EP plan in March of this year in response to a weak-acre pricing at that time, and that's approximately 100 million per day. And over the past three years, we've consistently matched our growth in natural gas production to our incremental egress out of the Western Canadian Sedimentary Basin.
Mike Rose: And we'll continue with that market diversification strategy.
Mike Rose: Thank you. Further on E&P, an update on our Northmontney development, we're excited about how fast and well our Conroy Phase One development is actually proceeding. There's two important facility components that are being completed during this year. The first, the liquid condensate hub, which we actually started late in 2023. It will service both the Phase One and ultimately the Phase Two Northmontney development, and it provides 20,000 barrels per day of condensate, more captain-treating, and 70,000 barrels of condensate storage and will have regional pipeline inter-connections. The total capital cost for that project is approximately 70 million then.
Mike Rose: Further on E&P, an update on our North Montagny development. We're excited about how fast and well our Conroy phase one development is actually proceeding. There are two important facility components that are being completed during this year. The first is the liquids condensate hub, which we actually started late in 2023. It will service both the phase one and ultimately the phase two North Montagny developments, and it provides 20,000 barrels per day of condensate mercaptan treatment and 70,000 barrels of condensate storage and will have regional pipeline interconnection. The total capital cost for that project is approximately $70 million, and when we did our budget reduction in March of this year, we left that project in.
Speaker Change: Further on E&P, an update on our North Montney development. We're excited about how fast and well our Conroy phase one development is actually proceeding.
Mike Rose: When we did our budget reduction in March of this year, we left that project in. The second, the Birch A-44i Compressor Station expansion will be completed during this quarter, and it's expected to add a net 6,000 BUE's a day to Tourmaline production levels in 2025. Some of the other facility components in the overall Conroy development include the Acne Sales Compressor, the Gundie A-20i compressor expansion. That will be completed this year as well, and then the Acne Regional Gathering Lines and the Acne Plant expansion, which are expected to commence construction in 2025. So we'll add 10 to 15,000 BUE's a day in 25 through completion of the ongoing 24 facility projects.
Mike Rose: The second, the Birch A44I compressor station expansion, will be completed during this quarter, and it's expected to add a net 6,000 BOEs a day to tourmaline production levels in 2025. Some of the other facility components in the overall Conroy development include the Aitken sales compressor, the Gundy A20I compressor expansion that will be completed this year as well, and then the Aitken regional gathering lines and the Aitken plant expansion, which are expected to commence construction in 2025. So we'll add 10 to 15,000 BOEs a day in 2025 through the completion of the ongoing 24 facility projects. Ultimately, the North Montagny Phase 1 development will add 50,000 BOEs a day over the next three years.
Speaker Change: The Gundy A20i Compressor Expansion that will be completed this year as well. And then the Aitkin Regional Gathering Lines and the Aitkin Plant Expansion, which are expected to commence construction in 2025.
Mike Rose: Ultimately, the Northmontney Phase One development will add 50,000 BUE's a day over the next three years. Of note, the company's received an additional 63 drilling permits since March 6th of this year for a total of 315 new drilling permits in North East BC since January 1st of 2023. Looking at our EPI or environmental performance improvement, the company's diesel displacement initiative and drilling and completion operations has displaced approximately 152 million liters of diesel and replaced it with net gas, and that saved us approximately $150 million than that since June of 2017. And obviously, this has reduced a significant volume of a myriad of emissions.
Mike Rose: Of note, the company has received an additional 63 drilling permits since March 6th of this year for a total of 315 new drilling permits in Northeast BC since January 1st, 2023. Looking at our EPI or Environmental Performance Improvement, the company's diesel displacement initiative and drilling and completion operations have displaced approximately 152 million liters of diesel and replaced it with natural gas, and that saved us approximately 150 million dollars since June of 2017.
Speaker Change: since March 6th of this year for a total of 315 new drilling permits in Northeast BC since January 1st of 2023.
Speaker Change: Looking at our EPI, or Environmental Performance Improvement.
Speaker Change: has displaced approximately 152 million liters of diesel and replaced it with nat gas, and that saved us approximately $150 million since June of 2017. And obviously this has reduced a significant volume of a myriad of emissions.
Mike Rose: And obviously, this has reduced a significant volume of a myriad of emissions. Our joint venture with Clean Energy Fuels for CNG and long haul trucks continues with one station now fully operational in Edmonton, and there are four other stations that are under construction, and we expect them to be operational in the first quarter of 2025. So this initiative is a further significant diesel displacement opportunity. Our methane technologies continue to be advanced at the NGIF, the Tourmaline Perpetual Emission Testing Center, or the ETC.
Mike Rose: Our joint venture with Clean Energy Fuels for CNG and long haul trucks continues with one station now fully operational with Edmonton, and there's four other stations that are under construction, and we expect them to be operating in the first quarter of 2025. So this initiative is a further significant diesel displacement opportunity. Our methane technologies continue to be advanced at the NGIF Termaline Perpetual Emission Testing Center, or the ETC. It's the only one of this scale in the world, and it recently received a $15 million grant from the Alberta government to enable acceleration of these technology initiatives around the measurement and mitigation of methane emissions.
Speaker Change: in the first quarter of 2025. So this initiative is a further significant diesel displacement opportunity.
Mike Rose: It's the only one of this scale in the world, and it recently received a $15 million grant from the Alberta government to enable acceleration of these technology initiatives around the measurement and mitigation of methane emissions. And that's all I was going to say for kind of formal remarks from the press release, and we'll open it up for questions.
Speaker Change: or the ETC. It's the only one of this scale in the world, and it recently received a $15 million grant from the Alberta government to enable acceleration of these technology initiatives around the measurement and mitigation of methane.
Scott Kirker: And that's all I was going to say for kind of formal remarks out of the press release, and we'll open it up for questions.
Speaker Change: That's all I was going to say for kind of formal remarks out of the press release and we'll open it up for questions.
Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear three tone prompts acknowledging your request and your questions that we pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speaker phone, please lift the hands up before pressing any keys. One moment, please, for your first question.
Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be answered in the order they are received. Should you wish to decline from the polling process, please press star followed by the T. If you are using a speakerphone, please lift the handset before pressing any key. One moment, please, for your first question. Your first question comes from Michael Harvey with RBC Capital Markets. Your line is now open.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the 2.
Michael Harvey: Your first question comes from Michael Harvey. Your first question comes from Michael Harvey with RBC Capital Markets. Your line is now open.
Speaker Change: Your first question comes from Michael Harvey with RBC Capital Markets. Your line is now open.
Michael Harvey: Yeah, sure. Good morning, guys.
Michael Harvey: Yeah sure.
Michael Harvey: Good morning, guys. So a couple of quick ones for me. I guess first on the program you mentioned lower drilling costs just as a driver for the added rig. Just curious if that's a termally specific item or if you're seeing lower costs anywhere in the industry. Any color on that would be. Would be helpful, and then the second one just more macro related, related strip still above 325 and 2025. If you were to see that drop, is there a price where you pull back on growth and I guess just on the flip side.
Michael Harvey: Yeah sure, good morning guys. So a couple quick ones for me, I guess first on the program, you mentioned lower drilling costs, just as a driver for the added rig. Just curious if that's a tourmaline specific item, or if you're seeing lower costs anywhere in the industry, any color on that would be?
Michael Harvey: So a couple of quick ones for me, I guess, first on the program, you mentioned lower drilling costs just as a driver for the added rig. Just curious if that's a Tourmaline-specific item, or if you're seeing lower costs anywhere in the industry. Any color on that would be helpful. And then the second one, just more macro related, the strip still above $3.25 in 2025. If you were to see that drop, is there a price where you'd pull back on growth? And I guess just on the flip side, is there a higher price where you'd look to accelerate? Just kind of trying to understand if there is.
Speaker Change: would be helpful, and then the second one, just more macro-related.
Speaker Change: Strip still above 325 in 2025.
Michael Rose: Is there a higher price where you look to accelerate? Just kind of trying to understand if there's a bit of a snack bracket in terms of where you think the budgets most suited. All in context, every marketing of course, but that's it for me. Okay.
Speaker Change: Is there a higher price where you'd look to accelerate? Just kind of trying to understand if there's a bit of a snack bracket in terms of where you think the budget's most suited, all in context of your marketing, of course, but that's it for me.
Mike Rose: Okay, yeah, thanks, Mike. I'll start.
Michael Rose: Yeah, thanks, Michael.
Michael Rose: I'll start. On drilling costs, our costs are certainly lower than they were in the previous cycle, so we renegotiate during the second quarter and then fix our costs for kind of July 1 through to next break up, and they are down. I can't speak for everyone else in industry, but so we're realizing lower costs, and you know that gets coupled with the improving drill times.
Speaker Change: On drilling costs, our costs are certainly lower than they were in the previous cycle so we renegotiate during the second quarter.
Mike Rose: On drilling costs, our costs are certainly lower than they were in the previous cycle, so we renegotiate during the second quarter and then fix our costs for July 1 through the next breakup, and they are down. And I can't speak for everyone else in the industry, but we're realizing lower costs, and that gets coupled with improving drill times. So we do think it's a good time to add that extra rate. And just to put a little color on it, you know, 80% of the time for us to drill and complete a pad is on the drilling side.
Michael Rose: So we do think it's a good time to add that extra break and just to put a little color on it. You know 80% of the time for us to drill and complete a pad is on the drilling side, so we're quite comfortable drilling these pads. We will continue to watch the gas price. We always finalize our EP budget for the upcoming year in November and release that. I need two three so to kind of answer your second question, you know there is certainly upside in our production volumes. In 2025, we'll get you know three months here to watch it and see how it shapes up by the beginning of November and then decide you know how much more activity we do or if the prices retreat, as you mentioned, is always a possibility.
Speaker Change: So, we do think it's a good time to add that extra rig. And just to put a little color on it, you know, 80% of the time for us to drill and complete a pad is on the drilling side, so we're quite comfortable drilling these pads. We'll continue to watch.
Mike Rose: So we're quite comfortable drilling these pads, we'll continue to watch the gas price, and we always finalize our EP budget for the upcoming year in November and release that in Q3. So to kind of answer your second question, there is certainly upside in our production volumes in 2025. We'll get, you know, three months here to watch it and see how it shapes up by the beginning of November and then decide, you know, how much more activity we do or if prices retreat, which is always a possibility, we can decide to add volumes in the second half of 2025.
Speaker Change: our EP budget for the upcoming year in November and release that in Q3. So to kind of answer your second question...
Speaker Change: There is certainly upside in our production volumes in 2025. We'll get three months here to watch it and see how it shapes up by the beginning of November and then decide how much more activity we do or if the prices retreat, as you
Michael Harvey: We can decide to add the volumes in the second half of 2025, so I think of the large Canadian gas producers who have always been the most disciplined about watching the strip and not bringing extra volumes to our two hubs equal when station two when prices are low. Great thanks, Mike.
Speaker Change: mentioned, is always a possibility. We can decide to add the volumes in the second half of 2025. So I think of the large Canadian gas producers, we've always been the most disciplined about watching the strip and not bringing extra volumes to our two hubs, ACO and Station 2, when prices are low.
Josh: Your next question comes from Josh. So where's team with you?
Operator: Your next question comes from Josh Silverstein with UBS. Your line is now open.
Speaker Change: Great. Thanks, Mike.
Josh: Your line is now open.
Speaker Change: Your next question comes from Josh Silverstein with UBS. Your line is now open.
Josh: Good, thanks. Good morning, guys. Just wanted to focus on Cheryl's returns. You guys are pretty close to the high end of the target net debt range.
Josh Silverstein: Good morning, guys. I just wanted to focus on shareholder returns. You guys are pretty close to the high end of the target net debt range. As you get there, how do you think about the allocation of free cash flow? Can you get up to 100%?
Josh Silverstein: Good morning, guys. Just wanted to focus on Cheryl DeReturns.
Mike Rose: As you get there, how do you think about the allocation of free cash flow? Can you get up to 100% or do you want to build some cash? And then maybe along with the same lines, you know you guys are clearly biased towards the dividend but mention that you do have the buyback at your disposal. How could that start to enter the total return equation as well? You bet. Well, our free cash flow funds, dividends, debt reduction, midstream investments, expiration, and share buy back. So we were very happy with the amount of free cash flow that we had in the second quarter, but we can't fund everything.
Josh Silverstein: As you get there, how do you think about the allocation of free cash flow? Can you get up to a hundred percent or do you want to build some some cash?
Speaker Change: and then maybe along the same lines, you know, you guys are clearly biased towards the dividend, but mentioned that you do have the buyback at your disposal. How could that start to enter the the shoulder return equation as well? Thanks.
Mike Rose: Or do you want to build some cash? And then maybe, along the same lines, you guys are clearly biased towards the dividend but mentioned that you do have the buyback at your disposal. How could that start to enter the shareholder return equation as well? Thanks.
Speaker Change: You bet. Well, our free cash flow funds...
Mike Rose: You bet. Well, our free cash flow funds dividends, debt reduction, midstream investments, expiration, and share buyback. So we were very happy with the amount of free cash flow that we had in the second quarter, but we can't fund everything, so we chose debt reduction and a modest base dividend increase and the special dividend for the current quarter. But we're always looking at that mix of how we use and how we distribute that free cash flow.
Speaker Change: Dividends, debt reduction, midstream investments.
Josh Silverstein: [inaudible]
Mike Rose: So we chose debt reduction and modest-based dividend increase and the special dividend for the current quarter, but we're always looking at that mix of how we use and how we distribute that free cash flow.
Josh Silverstein: and a modest base dividend increase and the special dividend for the current quarter. But we're always looking at that mix of how we use and how we distribute that free cashflow.
Mike Rose: The other thing I would mention is that our debt target, we're not aspiring, so we'll continue to work on it through 25 and perhaps in the early 26 before it's back down in that range. And then further, it is not to forget the fact that we have a significant topaz position and that equity valuation has improved, which essentially acts as a bit of a counterweight to the net debt question. That's all right.
Mike Rose: The other thing I would mention is that our debt target, we're not aiming to have it right back at that original 1.2 to 1.4 by the end of 2024 by any means, so we'll continue to work on it through 2025 and perhaps into early 2026 before it's back down in that range. And then there is also not to forget the fact that we have a significant towpath position and that equity valuation has improved, which essentially acts as a bit of a counterweight to the net debt question.
Speaker Change: I mean the other thing I would mention is that
Josh Silverstein: Our debt target, we're not aspiring to have it right back at that original 1.2 to 1.4 by the end of 2024 by any means, so we'll continue to work on it through 2025 and perhaps into early 2026 before it's
Josh Silverstein: back down in that range. And then further is not to forget the fact that we have a significant towpaths position and that equity valuation has improved which essentially acts as a bit of a counterweight to the net debt question.
Mike Rose: That's helpful. And then, was there any shift in thinking about buybacks versus dividends?
Mike Rose: And is there any shift in thinking about the buybacks versus the dividends? Well, we're always looking at it and evaluating how it correlates to the valuation of the company. And, as I mentioned, we can't do everything with the amount of free cash flow we have, even though it's quite significant in second quarter. I think we're also really happy with how consistently we've been with that special. And so we're able to continue to offer that special quarter after quarter. We see potential for it to grow in the years ahead of us as well.
Speaker Change: That's helpful. And is there any shift in thinking about the buybacks versus the versus dividends?
Mike Rose: Well, we're always looking at it and evaluating, you know, how it correlates to the valuation of the company and, you know, as I mentioned, we can't do everything with the amount of free cash flow we have, even though it's quite significant in the second quarter. I think we're also really happy with how consistent we've been with that special, and so we're able to continue to offer that special quarter after quarter. We see potential for it to grow in the years ahead of us as well.
Speaker Change: Well we're always looking at it and and evaluating you know how it correlates to the valuation of the company and you know as I mentioned we can't do everything with the amount of free cash flow we have even though it's it's quite significant in in second quarter.
Josh Silverstein: I think we're also really happy with how consistent we've been with that special and so we're able to continue to offer that special quarter after quarter.
Mike Rose: The buyback is always thought to be more defensive, and so if a stock were to become fundamentally dislocated, we've got it there and ready, and we would act on it, and we have acted on it before in 2020 and 2021.
Mike Rose: The buyback is always thought to be more defensive. So if the stock were to become fundamentally dislocated, we've got it there and ready, and we would act on it, and we have acted on it before in 2021. Great.
Josh Silverstein: We see potential for it to grow in the years ahead of us as well. The buyback is always thought to be more defensive. So if a stock were to become fundamentally dislocated, we've got it there and ready, and we would act on it, and we have acted on it before in 2020 and 2021.
Mike Rose: Great, thanks. And then just as a follow-up, you did add a little bit of capacity, export capacity as well. With the startup of LNG Canada around the corner, how are you thinking about the level of eco exposure versus weighing some additional transport that you guys may need as your volumes are growing? Well, we'll end up with more eco.
Josh: Thanks.
Mike Rose: And then just as a follow-up, you know, you did add a little bit of capacity as well with the startup of Ellen, you can it around the corner. How you thinking about the level of eco exposure versus weighing some additional transport that you guys may need as your volumes are growing? Well, we'll end up with more eco in station two exposure as we execute that five-year development plan. And we'd always time the North Montany development phase one to the startup of LNG Canada because we do think that'll be structurally positive for in-basin pricing here at the two hubs when you pull, you know, ultimately to BCF a day west out of a basin that's, you know, more or less in supply-demand balance.
Speaker Change: Great, thanks and then just as a follow up.
Speaker Change: You know, you did add a little bit of capacity.
Speaker Change: as well. With the startup of LNG Canada around the corner, how are you thinking about the level of eco-exposure versus weighing some additional transport that you guys may need as your volumes are growing?
Mike Rose: Well, we'll end up with more ECO and Station 2 exposure as we execute that five-year development plan. And we'd always time the North Montagny development, Phase 1, to the startup of LNG Canada because we do think that'll be structurally positive for in-basin pricing here at the two hubs when you pull, you know, ultimately two BCF a day west out of a basin that's, you know, more or less in But at the same time, we'll continue to evolve more transport both south into the U.S. and west.
Speaker Change: Well, we'll end up with more ACO and Station 2 exposure as we execute that five-year development plan.
Speaker Change: And we'd always time the North Montany development, phase one.
Speaker Change: to the startup of LNG Canada, because we do think that will be structurally positive for in-basin pricing here at the two hubs when you pull, you know, ultimately two BCF a day west out of a basin that's, you know, more or less in supply and demand.
Mike Rose: But at the same time, we'll continue to evolve more transport both south into the US and west.
Speaker Change: balance, but at the same time we'll continue to evolve more transport both south into the US and west.
Josh: Great. Thanks, guys.
Jamie Cubic: Next question comes from Jamie Cubic with CIDC. Your line is now open. Yeah.
Operator: Your next question comes from Jamie Kubik with CIBC. Your line is now open.
Speaker Change: Great. Thanks, guys.
Speaker Change: Your next question comes from Jamie Kubik with CIBC. Your line is now open.
Jamie Kubik: Yeah, good morning, thanks for taking my question. Just similar to an earlier question that you had there, you do mention some productive upside in the program for 2025 with some of the drilling changes that you've undergone here. Are you able to help frame how much that could potentially be and maybe the second part of that is just around the gas macro for 2025? We've heard other operators similar trying to time production additions into a stronger price environment. Would you expect 2025 to still be relatively undersupplied in Western Canada? Or is this starting to shift a bit in your view?
Jamie Cubic: Good morning. Thanks for taking my question. Just similar to an earlier question that you had there. You do mention some productive upside in program for 2025 with some of the drilling changes that you've undergone here. Are you able to help frame how much that could potentially be? And maybe the second part of that is just around the gas macro for 2025. We've heard other operators similar trying to time production additions into a stronger price environment. Would you expect 2025 still to be relatively under supply in Western Canada? Is this certain shift a bit in your view?
Jamie Kubik: Good morning, thanks for taking my question. Just similar to an earlier question that you had there, you do mention some productive upside in the program for 2025 with some of the drilling changes that you've
Speaker Change: undergone here. Are you able to help frame how much that could potentially be?
Speaker Change: And maybe second part of that is just around the gas macro for 2025. We've heard other operators similar trying to time production additions into a stronger price environment. Would you expect 2025 still to be relatively undersupplied in Western Canada? Or is this starting to shift a bit?
Jamie Cubic: That's it for me. Thanks.
Mike Rose: We think 2025 is going to be under supply throughout North America, and so we're very bullish on gas. That being said, we'll continue to be very careful. So we've got a whole series of projects, you know, some of which we're building right now that can add volume in 25 and 26, but we'll see what that mix of projects looks like as we watch the gas price strip progress here for the next three months or so. So, you know, we can add another three to five percent who are 2025 volumes, but we're not going to do that yet.
Mike Rose: Yeah, we think 2025 is going to be undersupplied throughout North America, and so we're very bullish on gas. But that being said, we'll continue to be very careful.
Speaker Change: in your view. That's it for me. Thanks.
Speaker Change: We think 2025 is going to be undersupplied throughout North America, so we're very bullish on gas. That being said, we'll continue to be very careful. We've got a whole series of projects, some of which we're building right now, that can add volume in 2025 and 2026.
Mike Rose: So we've got a whole series of projects, you know, some of which we're building right now, that can add volume in 2025 and 2026. But we'll see what that mix of projects looks like as we watch the gas price strip progress here for the next three months or so. So, you know, we can add another three to 5% to our 2025 volumes, but we're not going to do that if the price isn't sufficient.
Speaker Change: But we'll see what that mix of projects looks like as we watch the gas price strip progress here for the next three months or so. So, you know, we can add another three to five percent to our 2025 volumes, but we're not going to do that if the price isn't sufficient.
Jamie Cubic: The price isn't sufficient. Yeah, thank you very much.
Mike Rose: Bear in mind, Jamie, how big some of these changes in 2025 are, you know, in terms of how many LNG plants are coming on line, how strong domestic power consumption has been. And, you know, we've all been watching peer calls south of the border.
Mike Rose: Jamie is how big some of these changes in 25 are, you know, in terms of how many energy planter are sparring up how strong domestic power consumption has been. And, you know, we've all been watching pure calls south of the border. The impetus for additional activity in the back after this year is very low. So, we have an outlook for declines; mains will we have an outlook for flat for tail volumes in Appalachia. We're not carrying really any productive momentum or any capital momentum into 25, and so that's part of what we've kind of designed here is providing some optionality in term lean to be able to react quickly if the opportunity arises. But as Mike was speaking to, you know, if we don't get lucky on whether or there are a couple along the way, we can always move those volumes throughout the 25 year into a period where that price is starting to strengthen.
Speaker Change: Bear in mind, Jamie, is how big some of these changes in 25 are, you know, in terms of how many LNG plants are spiring up, how strong domestic power consumption has been. And, you know, we've all been watching peer calls south of the border.
Mike Rose: The impetus for additional activity in the back half of this year is very low, and we have an outlook for declines in Haynesville. We have an outlook for flat to curtailed volumes in Appalachia. We're not really carrying any productive momentum or any capital momentum into 25. And so that's part of what we've kind of designed here, providing some optionality in Tourmaline to be able to react quickly if the opportunity arises. But as Mike was speaking to, you know, if we don't get lucky with weather or there are hiccups along the way, we can always move those volumes throughout the 25 years into a period where that price is starting to strengthen.
Speaker Change: Impetus for additional activity in the back half of this year is very low. We have an outlook for declines in the Haynesville. We have an outlook for flat to curtailed volumes in Appalachia. We're not carrying really any productive momentum or any capital momentum in a 25. And so that's part of what we've kind of designed here, is providing some optionality in tourmaline to be able to react quickly if the opportunity arises.
Jamie Cubic: Okay, that's good color. Thank you.
Operator: Okay, that's a good color. Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star.
Speaker Change: Okay, that's good color. Thank you.
Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one.
Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the number. Your next question comes from Dane Grigorous with NVENDA. Please go ahead. Hey guys, thanks for taking my question.
Dane Gregoris: Your next question comes from Dane, Gregorist with and Venus, please go ahead.
Dane Gregoris: Hey guys, thanks for taking my question. I was wondering if you could comment on the California natural gas market and particularly in light of, you know, anticipated data center buildup.
Dane Grigorous: Sure, I think Jamie's probably the most knowledgeable on that. We obviously really like the California market, and we've been building our volumes to access that market for almost 10 years now, so we're up to almost half a BCF a day accessing that market, and it's one of the premium priced markets in all of North America. At times, it trades almost at LNG prices, and Jamie, why don't you take it from there? Yeah, so as Mike was saying, we're roughly a quarter of the market share up in Northern California. Prices have really strengthened even just recently over the last couple of weeks.
Mike Rose: Sure, I think Jamie's probably the most versant on that. We obviously really like the California market, and we've been building our volumes to access that market for almost 10 years now. So we're up to almost half a BCF a day accessing that market, and it's one of the premium price markets in all of North America. At times, it trades almost at LNG pricing.
Jamie Heard: And Jamie, when do you take it from there? Yeah, so as Mike was saying, we're roughly a quarter of the market share up in Northern California. Prices really strengthened even just recently or the last couple of weeks. We've seen it rocket from twos to trees on just heat, and the consumption of gas during heat still remains really, really high. And basically is the main service of how they balance their grid after six PM is gases basically carrying the vast majority of the weight there.
Jamie Heard: We've seen it rocket from twos to threes on just heat, and the consumption of gas during heat still remains really, really high and basically is the main service of how they balance their grid after 6pm as gas is basically carrying the vast majority of the weight there. And when we look at how the state is planned going forward, we also see the data center built there, similar to other areas that we also sell gas to. We see data center ads in ERCOT and MISO, and KISA will be no different.
Speaker Change: on just heat and the consumption of gas during heat.
Speaker Change: still remains really, really high and basically is the main service of how they balance their grid after 6 p.m. as gas is basically carrying the vast majority of the weight there. And when we look at how the state is
Jamie Heard: And when we look at how the state is, you know, plan going forward, we also see the data center build there similar to other areas that we also sell gas to. We see the data center ads in Erkott, and my son and Kaisa will be no different. We definitely see data centers queuing to try to grab additional capacity, which will put, you know, ever more demand on the gas there.
Jamie Heard: We definitely see data centers queuing to try to grab additional capacity, which will put even more demand on the gas there. But in addition to data centers, we actually think one of the more interesting aspects of California is how it interconnects with the Mexico LNG build out. Much of the Mexico LNG build out is Pacific facing, so there is interconnection with how those gas flows interact with Southern California and, to some extent, Northern California.
Jamie Heard: But in addition to data centers, we actually think one of the more interesting aspects of California is how it interconnects with the Mexico LNG build-out. Much of the Mexico LNG build-out is specific facing; there is interconnection with how those gas flows interact with Southern California, and to some extent, Northern California. We've been beginning to add some of our transport into SoCal to have access to both of those markets. And as those plants fire up, it's going to have an additional strain in that system, which could have definitely increased upside and pricing.
Speaker Change: Much of the Mexico LNG build-out is Pacific facing. There is interconnection with how those gas flows interact with Southern California and to some extent Northern California. We've been beginning to add some of our...
Jamie Heard: We've been beginning to add some of our transport into SoCal to have access to both of those markets. And as those plants fire up, it's going to put an additional strain on that system, which could definitely increase the upside in pricing. And from our perspective, there's no view of increased volume into that state from new pipe or expanded pipe. So it's going to be a very, very tight system that is rewarded with extremely high gas prices in both winter and summer and years prior. And as we look forward for the next five to 10 years, we think that could definitely happen again. And it's never fully appreciated in strips.
Speaker Change: And as those plants fire up, it's going to have an additional strain in that system which could have definitely increased upside in pricing. And from our perspective, there's no view of increased volume into that state from new pipe or expanded pipe. So, it's...
Jamie Heard: And from our perspective, there's no view of increased volume into that state from new pipe or expanded pipe. So it's going to be a very, very tight system that has rewarded Termaline with extremely strong gas prices in both winter and summer and years prior. And as we look forward for the next five to 10 years, we think that could definitely happen again.
Jamie Heard: And it's never fully appreciated and strep. You kind of have to get into the, you know, weather event or the scenario that creates the tightness. And then much of those gains are enjoyable cash.
Operator: You kind of have to get into the weather event or the scenario that creates the tightness, and then much of those gains are enjoyed in cash. And so it's not something that really sits in our five-year plan. And that's actually true of most of our demand markets; that upside potential for cash flows to be bolstered by a weather event or a demand event has to kind of occur in the quarter you're in. And so it's an upside to the financial forecast. We show that it basically dictates your pricing.
Jamie Heard: And so it's not something that really sits in our five-year plan. And that's actually true of most of our demand markets: that upside potential for cash flows to be bolstered by a weather event or a demand event. It has to kind of occur in the quarter you're in. And so it's an upside to the financial forecast. We show that just basically dictates your price.
Speaker Change: It has to kind of occur in the quarter you're in, and so it's an upside to the financial forecast we show that just basically dictates your pricing.
Dane Gregoris: Thank you. Thanks, guys. That's excellent. Appreciate it. Thank you.
Speaker Change: Thanks, guys. That's excellent. Appreciate it.
Operator: There are no further questions at this time.
Operator: There are no further questions at this time. I will now turn the call over to you. One moment, please. Your next question is from Anthony Linton with Jeffries. Your line is now open.
Speaker Change: Thank you.
Operator: I will now turn the call over. One moment, please.
Speaker Change: There are no further questions at this time. I will now turn the call over.
Anthony Linton: Your next question is from Anthony Linton with Jeffries. Your line is now open.
Speaker Change: This question is from Anthony Linton with Jeffreys. Your line is now open.
Anthony Linton: Hey guys, thanks a lot for taking my questions this morning. Just a quick one from me and building off some of the questions that have already been asked. Can you just talk about how you're thinking about your hedging profile moving into 2025, just with some of the volumes taking up on the quarter.
Anthony Linton: Hey guys, thanks a lot for taking my questions this morning. Just a quick one from me and building on some of the questions that have already been asked. Can you just talk about how you're thinking about your hedging profile moving into 2025, just with some of the volumes ticking up in the quarter?
Anthony Linton: Hey guys, thanks a lot for taking my questions this morning. Just a quick one from me and building off some of the questions that have already been asked. Can you just talk about how you're thinking about your hedging profile moving into 2025, just with some of the volumes ticking up on the quarter? Thanks.
Mike Rose: Thanks. Typically, we don't go above 50 percent edge of total volumes, but we can, you know, go above that level in certain markets, which we have at Equal in Station Two. It's the most catch we've ever been through Q2 and Q3 of this year. And then, as you look out 25 and 26, we'll steadily add to those hedge volumes. We've seen a lot of action on the curve's particularity south of the border. We think 25 has been kind of artificially pushed down with some very large hedge volumes by operators in the U.S. But as that strip recovers, we'll look at adding more hedges to our 25 book.
Mike Rose: Typically, we don't go above 50% hedged total volumes, but we can, you know, go above that level in certain markets, which we have at Echo and Station 2. It's the most hedged we've ever been through Q2 and Q3 of this year. And then as you look out 25 and 26, we'll steadily add to those hedged volumes. We've seen a lot of action on the Kurds, particularly south of the
Speaker Change: on the Kurds, particularly south of the border. We think 25 has been kind of artificially pushed down with some very large hedge volumes by operators in the U.S. But as that strip recovers, we'll look at adding more hedges to our 25 book.
Mike Rose: We think 25 has been kind of artificially pushed down by some very large hedge volumes by operators in the US. But as that strip recovers, we'll look at adding more hedges to our 25 book. And you know, we sell at 16 different hubs, and each hub is a little different. We have strategies that revolve around each of those hubs and take advantage of various price dislocations in various time frames. So we typically don't hedge very large volumes programmatically. We're very surgical and site-specific about our program. And a little more open in the winter, and then also. Premium Markets were generally a little left-handed.
Mike Rose: And, you know, we sell at 16 different hubs. And each hub is a little different. And we have strategies that revolve around each of those hubs and take advantage of various price dislocations in various time frames. So we typically don't hedge very large volumes programmatically. We're very surgical in site specific about our program. And a little more open in the winter. And then also, these premium markets were generally a little less hedged. If you look across our hedge book, they're into 25 and 26. Got it. Okay.
Speaker Change: These premium markets were generally a little less hedged if you look across our hedge book there into 25 and 26.
Anthony Linton: Got it. Okay, that's helpful. Thank you.
Anthony Linton: That's helpful. Thank you.
Mike Rose: Thank you. Thank you.
Operator: There are no further questions at this time. I will now turn the call over to Tourmaline for closing remarks.
Operator: I don't know for the questions at this time.
Scott Kirker: I will now turn the call over to Tourmelling for closing remarks. Thank you very much. I'll talk to you next quarter. Appreciate it. Thank you.
Mike Rose: Thanks, everyone. I'll talk to you next quarter. I appreciate your time.
Speaker Change: Thanks, everyone. We'll talk to you next quarter. Appreciate your time. Thank you.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating in SAE. Please disconnect your lines.
Operator: Ladies and gentlemen, this concludes your conference call for today.