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Edited Transcript of TOU.TO earnings conference call or presentation 4-Mar-20 4:00pm GMT

Q4 2019 Tourmaline Oil Corp Earnings Call

Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Tourmaline Oil Corp earnings conference call or presentation Wednesday, March 4, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian G. Robinson

Tourmaline Oil Corp. - VP of Finance, CFO & Director

* Michael L. Rose

Tourmaline Oil Corp. - Chairman, President & CEO

* William Scott Kirker

Tourmaline Oil Corp. - Secretary & General Counsel

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Conference Call Participants

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* Fai Lee

Odlum Brown Limited, Research Division - Equity Analyst

* Patrick Joseph O'Rourke

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Junior and Mid-Cap Exploration and Production

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Tourmaline Oil Corp. Fourth Quarter Results 2019 Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Scott Kirker. Thank you. Please go ahead, sir.

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William Scott Kirker, Tourmaline Oil Corp. - Secretary & General Counsel [2]

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Thanks, Casey, and welcome everyone to our discussion of Tourmaline's results for the fourth quarter and year-ended December 31, 2019. My name is Scott Kirker. I'm the Secretary and General Counsel for Tourmaline.

Before we get started, I refer you to the advisories on forward-looking statements contained in the news release as well as the advisories contained in the Tourmaline annual information form and MD&A available on SEDAR and on our website. I'd also draw your attention to the material factors and assumptions in those advisories.

I'm here with Mike Rose, Tourmaline's President and Chief Executive Officer; and Brian Robinson, Vice President, Finance and Chief Financial Officer. Mike will start by speaking to some of the highlights of the last quarter and our year. And after his remarks, we will be opening up for questions.

Go ahead, Mike.

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Michael L. Rose, Tourmaline Oil Corp. - Chairman, President & CEO [3]

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Thanks, Scott, and thanks, everybody, for dialing in. 2019 was a very strong year for Tourmaline as we generated record free cash flow, grew production by 10% and our 2P reserves increased to 2.6 billion BOEs.

Some select highlights. Our full year earnings were $319.7 million or $1.18 per diluted share. Our annual cash flow was $1.2 billion or $4.43 per diluted share and Q4 '19 cash flow was $336 million, $1.24 per diluted share. Free cash flow for '19 was $144.9 million, and that's a 27% increase over 2018. And Q4 free cash flow was $67.1 million, and that represents an annualized free cash flow yield of approximately 8%.

We grew our annual liquids volumes by 16% in 2019, and our total average production volumes by 10%. The company posted a record capital efficiency of $86.50 per flowing barrel, and that's a 23% improvement over the prior year. And we added 250.7 million BOEs of 2P reserves after adding back our annual production of 106 million BOEs.

2P FD&A in '19 was $4.26 a BOE, including FDC. Total proved FD&A was $6.15 a BOE, including FDC. And our PDP 2019 FD&A was $8.01 per BOE. And then last week, subsequent to the quarter, we announced an update to our Northeast BC consolidation activities. And through the 2 corporate transactions detailed, we've added approximately 6,000 BOEs a day of current production, 2P reserves of 116.3 million BOEs, significant amount of new Montney acreage and the purchase price was $33.4 million. So obviously, extremely strong metrics in all regards there.

Just moving a little more detail on 2019 reserves. Our year-end PDP reserve balance is now 527.4 million BOEs, and that was up 34% over year-end '18, adding back '19 production. Total proved reserves are now 1.294 billion BOEs, and that's up 16% over 2018, adding back production. And similarly, the 2P closing balance is 2.6 billion BOEs, and it's up 10%, including '19 production.

PDP F&D costs were $7.06 a BOE, including changes in FDC, and that's a record low for us in corporate history, and it generates the PDP reserve recycle ratio of 1.6. Total proved F&D was $4.94 a BOE and 2P FD&A was $4.26 a BOE including changes in FDC. And that yields an FD&A recycle ratio on 2P of 2.7, so very strong.

The company replaced 236% of production in 2019. Of note, the 251 million BOEs of 2P reserves, we added -- were added even though 2/3 of the locations that we drilled in '19 were converting previously booked locations. Our 2P reserve value now equates to $55.69 per share, our total proved reserve value is $32.42 per share and our PDP reserve value is $16.90 per share.

So after 11 years of operation, the company has 12.3 TCF of 2P nat gas reserves and 553 million barrels of 2P oil, condensate and NGL reserves. And also of note, for the seventh consecutive year, we enjoyed positive 2P technical revisions in the reserve report.

Moving to production. Q4 '19 averaged approximately 300,000 BOEs a day. And as announced in December, lengthy outages at our third-party Saturn deep-cut in order to provide multiple liquids in the deep basin. And on the Northeast BC Enbridge system reduced both our quarterly liquid volumes and overall production levels in the quarter.

Our current average production is up to 310,500 BOEs per day and that is not including the production impact from the Polar Star acquisition, which closed in mid-February. We have deferred a minimum of $25 million of planned EP capital expenditures from Q1 into the second half of 2020 due to the current lower commodity prices, and that will have a very modest impact on first half production of approximately 2,500 BOEs per day. We are on track to meet full year 2020 guidance of 315,000 to 320,000 BOEs per day, inclusive of this aforementioned capital deferral and the effects of weather-related freeze-offs for the 2 weeks of cold weather we actually had out here in January.

Closing of the recently announced acquisitions will be accretive to the production numbers we just mentioned, and they'll have an impact primarily in the second quarter. 2019 average liquids production was just over 55,000 barrels per day, and that's a 16% year-over-year increase over 2018. Current liquids production is just over 64,000 barrels per day. And we are targeting full year 2020 liquids production of approximately 68,000 barrels per day, and that will be a 22% year-over-year increase.

Moving to some financial highlights. As mentioned, full year 2019 after-tax earnings were just under $320 million or $1.18 per diluted share. Fourth quarter cash flow at $335.9 million or $1.24 per diluted share and overall cash flow for the year was $1.2 billion. We did generate significant free cash flow in the quarter of $67.1 million, and the first quarter 2020 dividend of $0.12 per share will be paid on March 31, 2020.

The 5-year EP development plan, which we released in mid-December remains unchanged. It's expected to generate approximately $1.75 billion of free cash flow over the next 5 years at strip pricing. And this cash, as previously disclosed, is expected to be deployed into dividend increases, debt reduction and share buybacks.

Looking at some marketing highlights and our marketing business. For full year 2019, our realized gas price across the whole portfolio was $2.59 an mcf, and that's a 46% premium over the average AECO 5A price for the year. For calendar year 2020, we have an average of 252 million per day hedged at a weighted average fixed price of CAD 2.44 per mcf. We have an average of 202 million per day hedged at a basis to NYMEX of minus USD 0.31 and an average of 410 million per day of incremental volume exposed to our export markets. They include Dawn, Chicago, Ventura, Sumas, Malin and PG&E. And note that the PG&E hub has been the strongest of any hub in North America over the last few months.

In the first quarter of 2020, as part of our gas marketing diversification strategy, we signed a long-haul transportation agreement for an incremental 25 million per day, delivering that gas to the U.S. Gulf Coast, which contract will commence on November 1, 2022.

For the second half of '19, we had over 4,000 barrels per day of propane exposed to the Argus Far East Index, or AFEI, and those realized wellhead prices were in excess of CAD 23 per barrel above Edmonton prices. For 2020, that volume grows to 5,000 barrels per day.

Some comments on our '19 and '20 capital programs. Full year EP capital spending in '19 was $1.033 billion. We reduced our originally planned program by approximately $270 million during the course of the year due to commodity prices. Continued per well capital cost improvements allowed us to largely achieve the original EP targets on the significantly reduced spending.

The 2020 EP capital program remains at $925 million. We do have the flexibility to reduce activity to a full maintenance capital budget. Recall that 2 of our 3 core areas, the Alberta Deep Basin and Peace River High are already on maintenance capital. And that would allow us, if we need to, to pull at minimum, an incremental $100 million out of the 2020 EP budget.

So we'll continue to monitor commodity prices and the natural gas supply-demand balance over the next few months as well as all the external factors that are affecting markets and commodity prices and reserve the right to revise the full year program. And our timing on that is more than likely when we release our Q1 2020 results in May of this year. And as mentioned, we've already deferred a minimum of $25 million out of Q1 2020. That's not removed from the budget. That's just deferred to the second half currently.

Less than 15% of our 2020 CapEx is directed towards facility expenditures. So that will drive anticipated 2020 capital efficiencies to a record low of between 6,500 and 7,000 per flowing barrel. Tourmaline continues to target a debt to cash flow range of 1 to 1.5x. At year-end '19, that ratio was 1.5x. If you annualize Q4 '19 cash flow, it's about 1.3x and our current targeted exit 2020 debt to cash flow is 1.2x.

Some select EP highlights. Reiterate that our '19 capital efficiency of $86.50 per flowing barrel, excluding acquisitions and dispositions was certainly a record for the company. And as mentioned, we're going to set a new record in 2020.

Q4 '19 OpEx was $3.06 a BOE. So significantly less than originally forecast. And in BC, in particular, our OpEx in Q4 was $2.40 a BOE. So we believe that's the lowest of the BC Montney producers.

We have 10 rigs operating now, that will drop to 3 by breakup, and we'll run 3 through breakup and assess the situation for the second half, as mentioned.

Our capital cost reduction and improvements continue to be achieved through a number of different technologies. They include monobore trials in the Alberta Deep Basin, broader application of rotary steerable technology and some very novel pad equipping approaches amongst other technology-driven opportunities. Our BC Montney horizontal completed well costs are now averaging CAD 2.9 million, and that's to drill, execute a 35-stage completion and equip the wellsite. So those are the lowest in Western Canada for the Montney play.

Looking at our environmental improvement initiatives, as outlined in our sustainability report, which we released a couple of years ago -- or a couple of weeks ago, we've made major strides in reducing emissions and are continually improving our overall environmental performance. Some of the achievements to date include a 46% reduction in our CO2 emissions intensity since 2013. We have accomplished near elimination of all freshwater and well stimulation operations in Northeast BC. And we initiated a methane reduction retrofit compliance plan, which resulted in over 3,400 high-bleed devices being replaced in 2019. Tourmaline now operates 15 natural gas fuel substitution units and that's allowed for the displacement of just under 10 million liters of diesel per year.

Going forward, we have hard, legitimate environmental performance improvement targets. So continued emphasis on reducing corporate emissions intensity, we'll maintain our top-decile performance and are targeting a 25% reduction going forward in total methane emissions from 2018 levels by 2023. We are aiming to reduce corporate emissions intensity by 25% by 2027, and continuing to focus on overall efficiencies with the application of new innovative technologies, including the electrification of assets where and when feasible.

We'll continually improve our peer-leading performance on water usage and completion activities by reducing and eventually eliminating the usage of freshwater throughout our core gas operations. The environmental performance improvements achieved thus far and the myriad of future-planned initiatives that we have do require a significant capital investment. The vast majority of these initiatives, however, actually ultimately reduce our capital and operating cost structure.

So shareholders actually get a double win here. You'll get a cleaner environment via Tourmaline's net-cleanest hydrocarbon molecule and enhance returns via the company's improved efficiencies. And as mentioned, the dividend, we're pleased to announce that the Board has declared a quarterly cash dividend on its common shares of $0.12 (sic) [CAD 0.12] per common share, and that will be payable on March 31 of this year.

And so that's the end of the formal comments, and we're more than happy to entertain any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question here comes from the line of Patrick O'Rourke from AltaCorp Capital.

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Patrick Joseph O'Rourke, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Junior and Mid-Cap Exploration and Production [2]

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Just a quick question on NGLs here. I know it's a less meaningful part of the cash flow stream than, say, gas or conde or the oil here and just how we should be thinking about pricing and the outlook for the rest of the year. I know you have the 5,000 barrels a day on the Far East Index. It's our understanding that the barrels that are sold within the localized market, some of those recontract on April 1 and how we should be thinking about modeling that out? It seems like it could have the -- be the barrel with the potential for the biggest delta. And then maybe on kind of the more medium and longer-term side of the equation, how you see the outlook for these PDH/PP facilities? And what that might have on the market for your barrels?

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [3]

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Patrick, it's Brian that's going to answer the question on the NGL streams. We're certainly looking forward to delivering more propane into the RIPET facility, and that facility has given us access to those -- the Asian markets. And of course, the difference between the strip in Fort Saskatchewan and that Asian market when you even factor in all the cost structure differences is still about $15 a barrel. When you're looking at the way we've modeled our 2020 NGL pricing for the whole complex, so that would include propane, butane, pentane and ethane, we're being very conservative there. I mean, there has been improvements short term in both the -- certainly, the propane and the butane side of Fort Saskatchewan. But we're modeling it out at about in that -- as a percentage of WTI in that 23% to 24% range, Patrick, which is an improvement over '19. I think our realized numbers in '19 were about 18% of that total WTI number.

So we are optimistic that there has been somewhat of an improvement in that overall complex at Fort Saskatchewan. And then when you layer on the fact that we're delivering bigger volumes into Asia through RIPET, I think we're pretty happy directionally where it's going here in 2020.

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Michael L. Rose, Tourmaline Oil Corp. - Chairman, President & CEO [4]

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Good. And Patrick, as far as PDH and other opportunities, we're looking at all and assessing all marketing diversification opportunities for all of our gas and NGLs. Nothing new on that front other than the Alberta Express project, which we are participating in. And then the step-up in the propane volumes that Brian referred to that gets the Far East Index pricing.

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Operator [5]

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(Operator Instructions) Your next question comes from the line of Fai Lee with Odlum Brown.

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Fai Lee, Odlum Brown Limited, Research Division - Equity Analyst [6]

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It's Fai here. Just a first question in terms of the maintenance capital budget. Could you please remind us of how you define a maintenance capital budget?

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [7]

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So -- well, we look at our -- essentially, we look at where we exited the year, and we apply the capital that's required to keep that exit volume intact, and then we remove out any incremental facilities dollars that would otherwise be dedicated towards the growth in the out years. So we think our number, particularly when you look at the flowing barrel metrics here for 2020, which is sub-7,000, and we're coming off a year in '19, where we had a little bit more facilities, our maintenance capital number continues to improve. So that's how we get the $825 million. We just run it out based on our declines and the knowledge that we don't have to build out any more facilities capital.

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Fai Lee, Odlum Brown Limited, Research Division - Equity Analyst [8]

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All right. And to be clear, the maintenance capital. Okay. So it won't reflect the -- it won't be reflecting your current guidance and unless some mistake in here?

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [9]

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Yes, our $925 million -- another way to think about the $925 million, it has about $100 million of growth capital in it.

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Fai Lee, Odlum Brown Limited, Research Division - Equity Analyst [10]

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Okay. Fine. And in terms of the maintenance capital, if gas prices continue to be low and you're not seeing returns, would you consider allowing the budget to fall even below the maintenance capital level?

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [11]

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We'll assess that, Fai, going forward. I mean, the first step would be to drop to maintenance capital, which will preserve our volumes at or near 2019 exit. And then, of course, recall that we have the acquisition line, if you like, that we created via the Topaz transaction. And so those volumes will add into the plan and be accretive, and then Tourmaline will receive the funds via the Topaz equity. So we're in, we think, a very strong position on that front. Summer gas prices, AECO anyway because of the NGTL protocol change that was organized in Q3 of last year. I mean, it protects the downside in prices -- gas prices locally. So we don't expect to see those -- the extreme volatility and extreme daily lows that we've experienced in the last couple of summers. So I think Q2 is going to be a lot stronger in 2020 than it was in 2019. So take some solace in that.

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Fai Lee, Odlum Brown Limited, Research Division - Equity Analyst [12]

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Okay. And we've seen some major write-downs in the U.S. related -- in the natural gas space, and part of it could be related to how the SEC requires people to use the last 12 months average pricing. I'm just wondering if that sort of rules -- SEC rule applied in Canada, would you still be booking reserve additions. I'm just wondering if you have any thoughts around that.

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Michael L. Rose, Tourmaline Oil Corp. - Chairman, President & CEO [13]

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Well, I think we've shown consistently that what we're doing even at the current pricing strip is highly profitable on a full cycle basis. So -- and we've never had a write-down in our corporate history. And so we'll slow activity down when prices are low and cut the growth, which is absolutely the right thing to do. But what we're doing is profitable, and it just relates to: one, our very low operating cost structure; and two, which sometimes gets ignored is our capital cost on drilling completion are lower than anybody else.

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Operator [14]

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(Operator Instructions) And you do have another question here from the line of [Chris Strand].

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Unidentified Analyst, [15]

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So Exshaw was a vehicle for Topaz because it had some sort of unrealized tax loss carryforwards or something. Is that correct?

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [16]

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Yes, that's basically correct. So we had the opportunity to take advantage of those tax pools. And they were tax pools that we felt very comfortable that would be -- we would be able to withstand any sort of challenges as to the accessibility of those pools.

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Unidentified Analyst, [17]

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Wonderful. And right now, Tourmaline is consolidating all of Topaz because they own the majority of it, right?

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Michael L. Rose, Tourmaline Oil Corp. - Chairman, President & CEO [18]

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That's correct.

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Brian G. Robinson, Tourmaline Oil Corp. - VP of Finance, CFO & Director [19]

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Yes. So a way to think about it is our financial statements that we published right now other than the fact that we reduced our debt by the equity raise are really unaffected by Topaz until such time as we drop that equity interest down.

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Operator [20]

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And I'm showing no further questions that are in the queue. I will turn the call back over to Mr. Scott Kirker for closing remarks.

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William Scott Kirker, Tourmaline Oil Corp. - Secretary & General Counsel [21]

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Well, thanks, everyone, for dialing in and for your questions, and we look forward to talking to you in the next quarter.

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Operator [22]

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And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.