Earnings Transcript for TRMLF - Q3 Fiscal Year 2020

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Tourmaline Oil Corp. Q3 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] please be advised that today’s conference is being recorded. [Operator Instructions] I would like to hand the conference over to Mr. Scott Kirker. Please go ahead.

Scott Kirker: Thank you, operator and welcome everyone to our discussion of Tourmaline's results for the three and nine months ended September 30, 2020. My name is Scott Kirker and I'm 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 in the Tourmaline Annual Information Form and our MD&A available on SEDAR and our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Mike Rose, Tourmaline's President and Chief Executive Officer; and Brian Robinson, Vice President of Finance and Chief Financial Officer; and Jamie Heard, Tourmaline Senior Capital Markets Analyst. We will start by speaking to some of the highlights of the last quarter and our year so far. After Mr. Rose's remarks, we'll be open for questions. Mike, go ahead.

Michael Rose: Thanks, Scott. Good morning, everybody and thanks for dialing in. we had a very busy quarter with material acquisitions in the Alberta Deep Basin and very strong Q3 operating and financial results. So, firstly, the highlights. We announced two strategic corporate acquisitions

Operator: [Operator Instructions] First question comes from Michael Harvey with RBC Capital Markets.

Michael Harvey: Sure. Thanks. Good morning guys. So just a couple of questions. First one, and you did touch on this, but I guess any more color on how you could envision the allocation of free cash in 2021, if the strip holds? Obviously, I heard your comments, but the free cash flow numbers are quite large, obviously. Or maybe asked another way, are there any rough ranges or brackets for how you're thinking about allocation to M&A or are there any triggers at all that would lead you to executing any more drilling? And the second part, just wondering on capital allocation. Obviously, the kind of game plan has been grow a little bit in the Montney and stay flat in the Deep Basin. Sounds like that'll continue for some time here, but a sizeable investment in the Deep Basin. So just seeing if there's any change to that thinking or what would cause you to allocate a bit more to the Deep Basin?

Michael Rose : You bet. Thanks Mike. No change to the capital allocation at the current time. So the Montney in Northeast BC or Montney Gas/Condensate Complex will remain the growth complex. And I did reference that really the only significant growth project in the five-year plan is that, Gundy Phase 2 Deep Cut. There will be more net capital allocated to the Deep Basin simply because it's now a 250,000 BOE a day complex. And so there's a little bit of growth to optimize the Modern and Jupiter assets, and then they'll revert back to a maintenance capital level, which of course will be higher than it was before we did those two transactions. On free cash flow allocation, I mean, yes, it is a large number. We're not going to increase the dividend that much. And we're not going to take debt down to zero. So I think the best way to look at the significant amount of free cash flow in that plan is that we have another pool of capital available for M&A to go along with the capital pool that we've created with the Topaz vehicle. We do not plan to grow Basin supply other than the 3% to 5% per annum growth that we've outlined in the plan. So, we're not going to do that certainly through '21. If the strip improves from where it is now, '22 and '23 aren't backwardated, maybe we'll revisit that at some point, but right now we're going to maintain that capital discipline for the current future. That will help?

Michael Harvey: Got it. Thanks, Mike.

Michael Rose : You bet.

Operator: Next question comes from Patrick O'Rourke with ATB Capital.

Patrick O'Rourke: Hey, good morning guys. You touched on there being synergies with these assets that you've acquired here. Obviously, you're quite forthright with the 30% to 40% on the capital side. Just wondering on the operational side, and in terms of the cash flow numbers that you've put out there for the next couple of years, how much of that -- those synergies are already baked in? And is there a potential to go a little further than that?

Michael Rose : What we put in over the next two years, as far as dropping OpEx was approximately $0.50 per BOE. Yes, there is an opportunity to do better than that. But we left it there for now until we take over the assets and I'm sure we'll find more synergies than what we've already identified. And Jupiter has a significant processing spread on the ground. Modern has a very new and efficient plant at route that's not full and our Musreau 8.13, 9.13 complex sits right in the middle of both asset basis as well. So there'll be lots of opportunity to optimize and improve OpEx metrics.

Patrick O'Rourke: Great. And then, you guys have had a very defined strategy on the gas marketing side, having those molecules facing the Western side of the continent here. As you're becoming, very meaningful on the NGL side, I'm just wondering if there's any strategies or things that you're thinking about to extract a little bit more value from those NGLs?

Michael Rose: Well, yes, and that process has been in place for some time. I mean, our goal is to maximize the return from all of our hydrocarbon production streams. And so we were relatively large NGL producer prior to this deal. So we have -- really, what we're putting in place is a comparable marketing and transportation long-term strategy that we've already put in on the gas side, which we started kind of over seven years ago. So, some of those diversification efforts have included in Northeast BC participating in the RIPET system and moving the propane and getting the Far East index pricing. And we have another series of initiatives in place to optimize that whole NGL stream. Brian, anything you wanted to add to that?

Brian Robinson: The only other thing is, when we reset our contracts with the buyers of our NGL at Fort Saskatchewan, we did so in a manner that took some of the short term price risk out, which we hadn't done in the past, so I think that's helped our netback. And you start to see that in Q3 as well where you could see our NGL price popup a fair bit.

Patrick O'Rourke: So with a little bit more critical mass on the next reset here, does that put you in a bit of a better negotiating position? Or are those things, you think going to stay in kind of the same shape?

Michael Rose: I think we probably, potentially have a little bit more leverage.

Patrick O'Rourke: Okay. Thank you. Yes.

Operator: Next question comes from Jordan McNiven from Tudor, Pickering, Holt.

Jordan McNiven: Good morning, guys. Just kind of piggyback on some of the earlier questions and earlier comments here. I mean, you guys talked about not wanting to take debt to zero. And so just wanted to think through that. You all talked about the dividend, not wanting to grow it necessarily too much, which I think makes sense in a cyclical commodity business. So just wanted to further dig in on that and get your thoughts on how you would feel about potentially doing special dividends temporarily to supplement the common one when things are going well and not pushing up the common dividend too much along the way. So just thoughts around potentially doing specials and where that might layer into the priority Q versus say buybacks or other uses?

Brian Robinson : Thanks Jordan. This is Brian speaking. We favor the idea of a structured dividend, where we methodically increase it as we get more and more confidence about the tenure and a position of our free cash flow, including more hedge activity into '22 and '23. We're monitoring those companies that are using these various variable dividend algorithms. So far we don't feel that it's something that's attractive to Tourmaline. We'd prefer to do it the way we're handling it right now.

Jordan McNiven: Okay. So sounds like then a buyback was certainly ahead of that. Is that fair?

Michael Rose: Yes.

Jordan McNiven : Okay. And then just another one. Is there anything that you guys can share just in terms of third party fees associated with the acquired assets and potential tenure there, or ability to renegotiate and capture further synergies there?

Michael Rose: I think, there's the potential to always reduce them. Jupiter had gone through a fee renegotiation process over the past couple of years and done -- had made significant headway from where they were prior to that, and so kind of see that as a ongoing continuum. We did not feel any of that potential outside into the acquisition that we're doing, and so time will tell if we do even better. So we just built field OpEx reduction is in and nothing to do with the base processing fees. But, we'll optimize, we'll increase the volume as mentioned kind of 5% per annum over the next two years, and there'll be some opportunities to do other things. Anything you want to add to that?

Brian Robinson : No, I think that's good.

Michael Rose: Good.

Jordan McNiven : Thanks guys.

Operator: [Operator Instructions] Next question comes from Fai Lee with Odlum Brown.

Fai Lee: Hi. Thanks Mike. It's Fai here. I'm just wondering if you can comment a bit on the background on how the Modern and Jupiter deals came about? Just curious as to whether you're specifically targeting assets you want to add into your portfolio, or if people are knocking on your door?

Michael Rose : Well, there are assets that we've certainly paid attention to for an extended period of time. Both companies were in sales processes, and we just participated through those existing processes.

Fai Lee: Okay. And in terms of the -- you just talked about little bit of improvements in gas prices, how is that affecting your opportunities set for acquisitions?

Michael Rose: It hasn't it. If the questions, Fai, is has the run-up and price made it more difficult to do transactions, I would say no. But -- I mean, time will tell, and Brian referenced the tenure to the gas price improvement. You have '22 and '23 move out of backwardation. That may become an issue. I mean there are companies that have a significant amount of kind of balance sheet repair, for lack of a better term, to enact. And so, there's still are opportunity sets available out there. That's really the best thing I can come up with right now to that question.

Fai Lee : Okay. And just the last question, in terms of -- now that you're the largest natural gas producer and there's news in Alberta talking about potential negotiation to attract petrochemical producers to Alberta. Have you given any thought -- I know it's longer term, but about potential offtake agreements with petrochemical producers in the Province, is that something you would consider?

Michael Rose: Well, we've been looking at all sorts of opportunities for gas supply, including petrochemical for an extended period of time. And as we continue to grow our overall gas production, we're going to continue to diversify what we do with those gas molecules. And -- I mean, I guess, currently we're the largest. Our real goal, though, is to be the most efficient, the most profitable and the cleanest nat gas producer in Canada.

Fai Lee: Okay. Great. Thank you.

Operator: [Operator Instructions] Next question comes from Mike Shannon with Hill Park Holdings [ph].

Michael Rose: Good morning, Mike.

Operator: Mike, your line is open. Mike, your line is open. [Operator Instructions] We have a question from Fai Lee with Odlum Brown.

Fai Lee: Mike, just to follow-up. You mentioned that you want to be the cleanest gas producer. I know that you're looking at electric rigs. And I'm just wondering along those lines, what other initiatives are you looking at or how -- where you see that going forward?

Michael Rose : Well, we have a significant effort to ultimately eliminate diesel usage in all thrilling and completion operations, which provides a significant emissions reduction. We have hard five-year targets on CO2 emission intensity reduction and methane reduction. And so we have some field trials on -- in various methane reduction projects and developing some of our own technology for both running drilling rigs off high line power and the continued elimination of diesel. Our water management businesses in both the Deep Basin and in Northeast BC. In the instances in our larger complexes where we can deliver that water and remove that water by pipeline systems rather than trucking, there's a big emissions reduction associated with that as well. So we track it all, and as mentioned, have those hard five-year targets to continue producing a net cleaner methane molecule. And don't forget Canada produces the cleanest methane molecule in the world.

Fai Lee: Thank you.

Michael Rose: Thanks Fai.

Operator: [Operator Instructions] And we have a question from Mike Shannon with Hill Park Holdings [ph].

Unidentified Analyst: Thanks. Thanks so much. Mike, can you tell us what the pro forma corporate decline is with all these acquisitions?

Michael Rose : Currently, it's in that 34% to 35% range, and we see it dropping to 26% to 27% by year five of the five-year plan.

Unidentified Analyst: Okay. Thanks. Thanks so much.

Michael Rose : You bet.

Operator: [Operator Instructions] And we do not have any telephone questions at this time, Mr. Kirker I will turn the call over to you.

Scott Kirker: Thank you, operator. Thanks everyone for calling in and listening. And as always, if you have questions in the interim, please feel free to contact us offline.

Michael Rose: Thanks everybody.

Brian Robinson: Thank you.

Operator: This concludes today's conference call. You may now disconnect.