Tourmaline Oil Q3 2024 Earnings Report

Tourmaline Oil EPS Results

• Actual EPS: C$1.00
• Consensus EPS: C$1.26
• Beat/Miss: Missed by -C$0.26
• One Year Ago EPS: N/A

Tourmaline Oil Revenue Results

• Actual Revenue: $1.47 billion
• Expected Revenue: $1.63 billion
• Beat/Miss: Missed by -$161.09 million
• YoY Revenue Growth: N/A

Tourmaline Oil Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: N/A
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 11:00AM ET

Tourmaline is Canada's largest and most active natural gas producer dedicated to producing the lowest-development-cost natural gas in North America. We are an investment grade exploration and production company providing strong and predictable operating and financial performance through the development of our three core areas in the Western Canadian Sedimentary Basin. With our existing large reserve base, decades-long drilling inventory, relentless focus on execution, cost management, safety and environmental performance improvement, we are excited to provide shareholders an excellent return on capital and an attractive source of income through our base dividend and surplus free cash flow distribution strategies.

Tourmaline Oil Q3 2024 Earnings Call Transcript

Key Takeaways

• Q3 cash flow of $742 M ($2.09/sh) and net earnings of $355 M ($1.00/sh) were underpinned by an average realized gas price of $3.19/Mcf.
• Declared a $0.50 per share special dividend, bringing 2024 distributions to $3.25 per share for an implied 5% trailing yield.
• Production rose 11% year-over-year to 557,000 BOE/d in Q3, met guidance, with Q4 forecast at 600,000–620,000 BOE/d and an exit rate of 630,000–640,000 BOE/d; 2025 average guidance is 635,000–665,000 BOE/d.
• 2025 capital budget of $2.6–2.85 B allows flexibility for price volatility, targeting ~365 wells drilled while optimizing free cash flow.
• Deep Basin IP90 well productivity in 2024 is up 20% for gas and 40% for condensate versus the 2020–23 average, expanding Tier 1/2 inventory.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the Tourmaline Q3 2024 Results Conference call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. This call is being recorded on Thursday, November 7th, 2024. I would now like to turn the conference over to Scott Kirker. Please go ahead.

[Scott Kirker, Chief Legal Officer at Tourmaline Oil]

Thank you, Operator, and welcome everyone to our discussion of Tourmaline's financial and operating results as of September 30, 2024, and for the three and nine months ending September 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 available on SEDAR and on 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, Brian Robinson, our Chief Financial Officer, and Jamie Heard, Tourmaline's Vice President of Capital Markets. We'll start with Mike speaking to some of the highlights of the last quarter and our year so far.

[Scott Kirker, Chief Legal Officer at Tourmaline Oil]

After Mike's remarks, we will be open for questions. Go ahead, Mike.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Thanks, Scott. Good morning, everybody. And we're pleased to update on a very busy and successful quarter. So a few of the highlights: third quarter cash flow was CAD 742 million, or CAD 209 per diluted share, and that was underpinned by average realized natural gas prices of CAD 319 per MCF Canadian. Q3 net earnings were CAD 355 million, or CAD 1.00 per diluted share. We've declared a special dividend of CAD 0.50 per common share to be paid on November 26th to holders of record on November 15th. And thus far this year, we've distributed dividends of CAD 3.25 per share. That includes this special dividend, and that's going back to December 1, 2023, so an implied 5% trailing yield. During the quarter, we closed the previously announced transaction with Topaz Energy Corp during this quarter, and we received CAD 278 million of proceeds.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We closed the corporate acquisition of Crew Energy on October 1st, and we're very excited about those assets, and as we outlined in the release, Deep Basin well productivity so far in 2024 is the best we've seen in the last five years. Looking at production, Q3 2024 average production was a little over 557,000 BOEs a day. That's an 11% increase over Q3 2023, and at the high end of our previously announced average production guidance for Q3 of 550,000-560,000 BOEs per day, and third quarter production was reduced by unplanned third-party outages, and we quantified that, as well as low gas price-related frac and production startup deferrals by the company. Fourth quarter average production of between 600,000 and 620,000 BOEs a day is currently anticipated.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Given the low pricing environment, we scheduled and have now completed an extensive turnaround of both phases of our large Gundy C-60 gas plant complex, and we've also concentrated frac activity into the latter half of this quarter so that unhedged gas volumes come online for exit in Q1 of 2025, where we're expecting higher pricing than we have today. We expect to exit with very strong production levels of between 630,000 and 640,000 BOEs per day, and we're right on track for that. We anticipate 25 average production. We're using a range of between 635,000 and 665,000 BOEs a day. It's 650,000 BOEs per day at the midpoint, and that range allows for both price-related EP activity deferrals or shut-ins in the event of lower than anticipated 25 net gas prices.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

And conversely, if stronger prices materialize, then we can increase EP activity, and it'll all be within that range that we outlined. 2025 forecast average liquids production is 162,000 barrels per day. So that's up a little bit from what we were expecting before, and we're slowly migrating our way to that 200,000 barrel per day level by the end of this decade. A little bit on the financial results: third quarter cash flow was CAD 742 million, as mentioned, on total CapEx of CAD 591 million. EP expenditures subset of that: CAD 575 million. And that generated free cash flow in the quarter of CAD 152.5 million. We had strong earnings, as mentioned, CAD 1 per share, and that underscores the profitability of the business, even in an extremely weak natural gas pricing environment. Our exit Q3 2024 net debt was CAD 1.7 billion, and we've adjusted our long-term net debt target to CAD 1.5 billion.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

And that represents between 0.3 and 0.4 times 2025 net debt to cash flow ratio. And that's because of the material growth in the underlying business over the past year. In addition, as at September 30, our 45 million shares of Topaz have a market value of a little over $1.2 billion. On 2025 capital budget planning, the board approved a full-year 2025 E&P capital budget range to match that production range of between $2.6 and $2.85 billion. And the range provides flexibility in this current volatile and uncertain commodity price environment. We do continue to expect steadily improving natural gas prices in 2025, but should the recovery materialize in the second half of the year, we can sequence the capital program to be back half biased. And we'll always optimize annual free cash flow, and that's our top priority.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We expect to drill approximately, in the mid case, 365 wells in 2025 across all three E&P complexes, and we'll save the incremental gas volumes for higher prices. Of note, the North Montney Phase One project is the only development project fully in the five-year plan, and it is still expected to add approximately 50,000 BOEs per day over the next three years. The Groundbirch, West Doe, and North Montney Phase Two development projects will be fully integrated into the five-year plan during the course of 2025. So they're not in there now, although some of the facility spending for both Groundbirch and West Doe are in the 2025 capital budget range that we quoted. On the marketing side, our average realized net gas price was $3.19 per MCF, so that was significantly higher than the AECO 5A benchmark of $0.70 per MCF.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We benefited, obviously, from our multi-year diversification portfolio and our hedging strategy. We expect to exit this year with total exports of 1.27 BCF per day out of the basin, and the majority of that is directed towards premium demand pull markets. For November and December of 2024, we have an average of just a little over a BCF a day hedged at a weighted average fixed price of CAD 401 per MCF Canadian. And in 2025, we have an average of 947 million cubic feet per day hedged at a weighted average price of CAD 458 per MCF Canadian. And we have a lot of volumes that we leave open or unhedged to our stronger price to export markets.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Briefly on the E&P program, we drilled 76.8 net wells and completed 75.9 wells during the third quarter of 2024, and we have an inventory of 38 DUCs entering the fourth quarter. Currently operating 16 drilling rigs across the three core E&P complexes and anticipate full-year 2024 E&P spending of about $2.1 billion. A big highlight for us is our Deep Basin well productivity. So far, on IP90s in 2024, we're up 20% on gas and 40% on condensate over the average of the previous four years, 2020 through 2023. And the performance is attributed to multiple Tier 1 plays across several strike areas within the Deep Basin. So it's not the result of a series of wells in just one sub-area; it's across the board. And as of September 30th of this year, the exploration program has added a little under 1,000 Tier 1 and Tier 2 drilling locations.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Due to the ongoing success of the exploration program, we do continue in 2025. We can spend up to CAD 150 million of free cash flow on exploration, but obviously, there's complete flexibility around that spending. On our EPI, or Environmental Performance Improvement efforts, as part of our ongoing joint venture with Clean Energy Fuels, we opened new CNG fueling stations for long-haul trucks, both in Calgary and Grande Prairie. The partnership expects to have seven of those stations operational by the end of 2025. That's a continuation of our multi-year diesel displacement initiative, utilizing abundant lower emission natural gas. This improves the environment and builds gas demand. In 2025 and 2026, in the budget, we have three new water facilities to be constructed, and that'll bring our total to nine as we slowly migrate all operations off any fresh water in our fracking business.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We're pleased to announce that Travis Toews has been appointed to our Board of Directors effective yesterday. I think that's it for going through the press release, and we're more than happy to answer questions.

[Operator]

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You'll hear a prompt that your hand has been raised. Should you wish to remove your raised hand from the queue, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Michael Harvey with RBC Capital Markets. Please go ahead.

[Michael Harvey, Managing Director and Analyst at RBC Capital Markets]

Yeah, sure. Good morning, guys. Just a quick one on your '25 guide. You touched on this a bit in the comments. You got a pretty good wide range in there. But just wondering if you could put some goalposts on kind of what pricing might correspond to the bottom and the top for folks. For instance, it was gas at $1 at the bottom and $4 at the top or something like that. And then just additionally, on the capital range, it looks to be a bit tighter just in terms of the implied efficiency. Just wondering what projects you would do more of or less of within that range just to kind of manage those pricing dynamics as you get through the year.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Sure. Well, I think we're at the bottom end of the range if the current prices continue through the winter. We always have a chance to reset if need be in Q2. And the high end of the range, something north of $3 or $3.50 an MCF. We don't actually have formal numbers in there. I mean, remember that we actually make money at anything above a buck fifty, but we're always reticent to bring extra volumes into the market when it's weak. And so I think we've shown that discipline over the past couple of years. Lots of flexibility around the capital spend. We've got almost $300 million of facility spending, if you like, in the 2025 budget. That includes electrification projects, so the pre-builds for both Groundbirch and West Aitken in the South Montney. And we'd like to do those.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We also have pipelines at Groundbirch and in the North Montney Phase One up at Aitken, and so we'd like to knock off some of that in 2025, and that's in the budget, but we have full flexibility around whether we do those or not. If we have weak first half pricing, we'd probably carry on if it looks like the second half is going to be stronger because of the implied demand growth that we see from the startup of the four North American LNG projects that are in the hopper, but we'll always solve for optimizing free cash flow as we've demonstrated in the past. Anything you want to add, Jamie, or? I think the other thing that we can point to is there's quite a bit of capital in flight here. We're bringing in a good load of DUCs in the beginning of the year.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

And so if Tourmaline did choose to respond to lower prices at the lower range, we've got quite a bit of tailwind in terms of wells already in progress that could result in a very, very capital-efficient year. But we're thinking out a little bit longer here. We have a view of a very, very high demand for gas in both 2025 and then 2026 and 2027, and we're kind of preparing for that. And so getting this momentum going has been part of the strategy, and I think that's going to pay major dividends in 2025 and 2026 just to be able to respond because we look across the playing field here, especially in the U.S., and there's many, many businesses that are kind of flat to down. Perfect. Appreciate the color, guys. Thanks. Thank you.

[Operator]

Your next question comes from Josh Silverstein with UBS Financial. Please go ahead.

[Joshua Silverstein, Managing Director and Analyst at UBS]

Hey, thanks. Good morning, guys. Maybe just building on the DUC question, I think you had 36 entering the third quarter, 38 now. Where do you expect to be at the end of the year? I guess along the same lines, last quarter you had talked about going to a 15-rig. Why did you add to that in the fourth quarter given current gas prices?

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

I can grab DUCs, and we can all kind of chip in on rigs. So as the plan currently stands, we'll have roughly 35 DUCs carry out. We have moved more of our frac activity into the latter half of this quarter, and so we could have some move over the calendar year-end into January, and so that can move around a little bit. But in general, as you mentioned, we've been adding these rigs, and as you add rigs, you also add work in progress completions. And so in 2025, on currently contemplated activity, we're actually going to be carrying out, call it 40-50 DUCs. So that's a larger number that's reflective of the larger activity rate that we would be carrying through the year.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

And that is something that we could use as a form of efficiency or basically a toggle in terms of thinking about some of these capital numbers. Yeah. And we'd always plan to add that 16th rig at some point in the fourth quarter. And we talked to that with our Q2 release that we're going to get all the pads drilled out, and we can be flexible on when and if we frac them. And that's 60% of the capital associated with bringing a productive well in the Montney or Deep Basin on stream. So we retain that flexibility, but our drilling performance has been great. Our costs are actually down a little bit, and so we're quite comfortable getting the pads drilled out.

[Joshua Silverstein, Managing Director and Analyst at UBS]

Got to thank for the color there. As a follow-up, on the Q2 call, you had talked about lower costs coming in and volumes able to be kind of 3%-5% above the prior outlook that you had given on improving well performance. I'm just curious then, why isn't there a lower CapEx or higher volume showing up in the 2025 guide then?

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

The higher CapEx is mostly facility-associated or expiration dollars that we may or may not spend, and so we don't associate volumes with those. You'll see those volumes in 2026 and 2027 with the major facility startups that we'll experience. That's why it's all facility spend. It's not going to add production. Josh, if you take a look at this year, I would say volumes we're really happy with, especially, for instance, third quarter volumes, and capital continues to come in under expectations. Our lived experience is exactly what you say, enjoying those efficiencies of the strong well performance and generally not seeing OFS inflation. 2025 is colored, as Mike said, by facilities. Yeah. I think we're having the exit stronger than what people were carrying previously for 2024.

[Joshua Silverstein, Managing Director and Analyst at UBS]

Got it. Thanks, guys.

[Operator]

Your next question comes from Kalei Akamine with Bank of America. Please go ahead.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America]

Hey, good morning, guys. Thanks for getting me on. I'm going to follow up on a couple of things here. I guess, firstly, our first question is on the '25 guide. From our perspective, production could have been a touch higher proportion to the spend when we consider the progress that you guys have made on the facilities capital side and the productivity side with Alberta Deep Basin kind of being the case in point. So my question is, what efficiencies have you realized recently? Are they underwritten in this budget, and why wouldn't there be upside to your '25 guide?

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Well, we have left some upside in the '25 guide, and we haven't carried through the well performance in the Deep Basin that we've experienced in '24 yet. So we're trying to tend to be a little bit more conservative, and we'll see how it plays out.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

I appreciate that, Mike. My second question is on the decision to build the DUCs in the first half of the year. I get wanting to be ready to respond to higher prices, but it seems that your peers are already taking that position. So maybe rather than push more molecules into the basin, why not save that drilling and frac capital for the second half and then come back when the market is more supportive?

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Yeah. I mean, that's a good point. We've decided to get the pads drilled out so that we can respond. Bear in mind that most of the gas growth that we've accomplished over the past two or three years, we've matched up to egress out of the basin so that we're not clogging up AECO and Station 2. And we do realize good prices with those volumes, particularly going to California or down to the Gulf Coast with our modest LNG volumes that began in January of 2023.

[Kalei Akamine, Senior Equity Research Analyst at Bank of America]

I appreciate it. Thanks, Mike.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Yeah, you bet. Thanks.

[Operator]

Your next question comes from Fai Lee with Odlum Brown. Please go ahead.

[Fai Lee, Equity Analyst at Odlum Brown]

Thank you. Mike, I'm just wondering, not looking for a forecast or prediction, but I'm just wondering if you have any thoughts on the AECO strip pricing that's reflecting your five-year plan, particularly past 2025, to be more upside with LNG Canada coming as they bring on more demand?

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Yeah. Yeah. Sorry. Keep going. Sorry.

[Fai Lee, Equity Analyst at Odlum Brown]

Yeah, yeah. No, I'm just wondering what your thoughts are on that. At $3 plus, it doesn't seem that exciting, but I'm just wondering if you have more.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

We agree with you. We think the AECO strip is understating what the impact of the ultimate startup of LNG Canada will do. We see almost all the volumes required for the initial two BCF a day in the system now. That gas is going to get pulled west, and we don't think that's reflected in the current differential at all. We expect that to snap back in when appreciable volumes are getting shipped west and that the AECO strip and the out years on the AECO strip will improve. For now, we always honor the strip in our guidance and our five-year plan. We'll live with it, but I think there's certainly upside there.

[Fai Lee, Equity Analyst at Odlum Brown]

Okay. I appreciate it. I know you use the strip, but I just was curious about that. Thanks.

[Michael Rose, Chairman, President and CEO at Tourmaline Oil]

Yeah. Sometimes we'd like not to.

[Operator]

There are no further questions at this time. I would like to turn the call back over to Scott Kirker.

[Scott Kirker, Chief Legal Officer at Tourmaline Oil]

Thanks, operator. Thanks, everyone, for your time today. We look forward to chatting with you at the end of next quarter.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Michael Rose, Chairman, President and CEO
• Scott Kirker, Chief Legal Officer

Analysts

• Michael Harvey, Managing Director and Analyst at RBC Capital Markets
• Kalei Akamine, Senior Equity Research Analyst at Bank of America
• Joshua Silverstein, Managing Director and Analyst at UBS
• Fai Lee, Equity Analyst at Odlum Brown