Earnings Transcript for TRMLF - Q4 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Tourmaline Oil Corp., Fourth Quarter Results 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions], the conference over to your speaker today Mr. Scott Kirker, thank you. Please go ahead, sir.

Scott Kirker: Thank you, Stacy. 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, and I'm the Secretary and General Counsel for Tourmaline. Before we get started, I would 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. Just 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 open for questions. Go ahead, Mike.

Mike Rose: 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 [technical difficulty] $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 [technical difficulty] 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 [indiscernible]. And we added 250.7 million BOEs of 2P reserves after adding back our annual production of 106 million BOEs. 2P FD&A '19 was $4.26 a BOE, including FDC. Total proved FD&A was $6.15 and BOE including FDC. And our PDP 2019 by 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 two 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 [indiscernible]. So obviously, extremely strong metrics in all regards there. Just moving a little more detail on 2019 reserves. Our year-end PDP reserved balances is now 527.4 million BOEs and that was up 34% over a year-end '18 adding back '19 production. Total proved reserves [indiscernible] 1.294 BOEs and that's up 16% over 2018 adding back production and similarly with 2 peak closing balances 2.6 billion BOEs in the top 10% including '19 production. PDP F&D costs were 7.06 a BOE including changes in SEC and that's a record low for us in corporate history. [Audio Gap] total proved F&D was 4.94 a BOE and 2P FD&A was 4.26 a BOE including changes in FDC and that yield and FD&A recycle ratio on 2P of 2.7, so very strong. The company replaced 236% of production in 2019, 251 million BOEs of 2P reserves we added, we're added even though two-thirds of locations that we drilled at '19 were converting previously booked locations. Our 2P reserved value now equates to 55.69 per share. Our total proved reserve value is 30.42 per share and our PDP reserve value is [Audio Gap]. After 11 years of operation, the company has 12.3 TCF, 2P nat gas reserves, and 553 million barrels of 2P oil condensate and NGL reserves. And also of note for the 7th consecutive year, we enjoy positive 2P technical revisions in the reserve report. Moving to production, Q4 '19 averaged approximately 300,000 [Audio Gap] 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 up to 310,500 BOEs per day and that is not including the production impact from the Polar Star acquisition, which closed in [Audio Gap]. 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 325,000 BOEs [Audio Gap] inclusive of this afore mentioned 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 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 [Audio Gap] 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 due [Indiscernible] on March 31, 2020. The five year EP development plan which we released in in mid-December remains unchanged. It's expected to generate approximately $1.75 billion of free cash flow over the next five years at strict pricing. And this cash has previously disclosed is expected to be deployed into dividend increases, debt reduction and [Indiscernible]. Looking at some marketing highlights and our marketing business. For a full year 2019, our realized gas price across the full portfolio was 259 and MCF. And that's a 46% Premium over the average April 5 A price for the year. For calendar year 2020. We have an average of 252 million per day hedged at a bases to NYMEX of minus $0.31 and an average of $410 million a day of incremental volume exposed to our export markets. They include Dawn, Chicago Ventura, Summa Smolin and PG&E and note that PG&E [Indiscernible] 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, 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 5000 barrels per day. Some comments on our '19 and '20 Capital programs. Full year EP capital spending in '19 was [Indiscernible] 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 two of our three core areas the Albert Deep basin, and Peace River higher already on maintenance capital. And now what 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 in the natural gas supply demand balance over the next few months as well as all the external factors that are in it [Indiscernible]. 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 backs 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 1.5 times at year-end '19. That ratio was 1.5 times if you annualize Q4 '19 cash flow, to about 1.3 times and our current targeted exit 2020 debt to cash flow is 1.2 times. 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 2022. Q4 '19 OpEx was $3.06 [indiscernible] then originally forecast and in BC in particular our OpEx in Q4 was $2.40 BOE. So we believe that's the lowest of the BC Montney producers. We have 10 rigs operating now that'll drop to three by break up and we'll run three through break up and assess the situation for the second half as mentioned. Our capital cost reduction and improvements continue to be achieved through them 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 horizontals completed well costs are now averaging CAD2.9 million, and that's to drill, execute a 35-stage completion and [indiscernible] 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 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 [indiscernible] 2013 we have accomplished near elimination of all freshwater and well stimulation operations in northeast BC. And we initiated the 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 [indiscernible] diesel per year. Going forward, we have hard legitimate environmental performance improvement targets. So continued emphasis on reducing corporate emissions intensity 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 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 fresh water throughout our core gas operations. The environmental performance improvements achieved the [Audio Gap] that we have do require 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 enhanced returns via the company's improved efficiencies. And as mentioned the dividend, we're pleased to announce that the board has declared the quarterly [Audio Gap] common shares $0.12 per common share, and that'll 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.

Operator: [Operator Instructions]. Here comes from the line of Patrick O'Rourke from AltaCorp Capital.

Patrick O'Rourke : Just a quick question on NGLs here. I know it's a less meaningful part of the cash flow stream than say gas or condi 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 [Audio Gap] get some of those recontract on April 1st and how we should be thinking about modeling that out, it seems like it could have to 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?

Brian Robinson: Patrick, it's Brian. I can answer the question. [Audio Gap] We're certainly looking forward to delivering more propane into the Rupert facility and that facility has given us access to those for the Asian markets. And of course, the difference between this strip in Fort Saskatchewan and that Asian market when you even factor in all the cost structure differences still about $15 a barrel. When you're looking at the way we've modeled our 2020 NGL pricing for the whole complex though 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 butane side at 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 of [Audio Gap] numbers in 19% or about 18% of that total WTI number. So we're optimistic that there has been a somewhat of an improvement in that overall conflicts at Fort Saskatchewan. And then when you layer on the fact we're delivering bigger volumes into Asia through Rupert, I think we're pretty happy directionally where it's going here in 2020.

Brian Robinson: [Audio Gap] and other opportunities. We're looking at all and assessing all marketing diversification opportunities for all 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.

Operator: [Operator Instructions] Your next question comes from a line of Fai Lee with Odlum Brown.

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

Mike Rose: So well, we look at our, essentially, we looked at where we exited the year, and we applied the capital that's required to keep that exit volume intact and then we remove any incremental facilities dollars that would otherwise be dedicated toward the growth in the out years. So, we think our number is particularly when you look at the flow and 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 facility our maintenance capital number continues to improve. So, that's how we get the 8.25, we just run it out based on our declines and the knowledge that we don't have to build up any more facilities capital.

Fai Lee: And to be clear the maintenance capital, okay, so it won't reflect the, it won't be reflecting your current guidance and unless I'm mistaken here.

Mike Rose: Yes, our 925, another way obtain that the 925 has about 100 million of growth [indiscernible]

Fai Lee: 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 in the maintenance capital level?

Mike Rose: We'll, we'll assess that by 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 a, we think a very strong position on that front. Some are gas prices AECO anyway [indiscernible] that was organized in was organized in Q3 of last year. I mean, it protect 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 the last couple summers so that Q2 is going to be a lot stronger in 2020, than it was in 2019. So, take some solace in that.

Fai Lee: Okay. And we've seen some major write downs in the U.S., 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. Just wondering, sort of rule, SEC rule applied in Canada, would you still be booking reserve additions and differently if you have any thoughts around that?

Mike Rose: Well, I think we know we've shown consistently that what we're doing even at the current pricing strip is highly profitable on a full cycle basis. So we've never had a write down in our corporate history. And so we'll slow activity down when prices are low when 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 sometime gets ignored is our capital costs on drilling.

Operator: [Operator Instructions]. And you do have another question here from the line of Chris Geraint, please go ahead, your line is now open.

Unidentified Analyst : So Exshaw was a vehicle for Topaz because it has some sort of unrealized tax loss carry forwards or something, is that correct?

Brian Robinson: That's basically correct. And the opportunity to take advantage of those tax pool. 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.

Unidentified Analyst : And right now Tourmaline is consolidating all the Topaz, because they own the major of it, right?

Brian Robinson: To think about, this is our financial statements that we publish 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.

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

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

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