Quarterly / Earnings Reports | Third Quarter (3Q) Update | Capital Markets | Capital Expenditure - 2020 | 2020 Guidance

Tourmaline Spending Slightly Less in 2020; Production Unchanged

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   |    Wednesday,November 06,2019

Tourmaline Oil Corp. reported financial and operating results for the third quarter of 2019.

2020 Capital Program

The Company has approved a 2020 EP capital program of $900 – 925 million which will result in 2020 average production of 315,000 – 322,500 boepd, unchanged from prior 2020 production guidance. 

The 2020 EP capital program is $100 – $125 million less than previous capital guidance, reflecting the continually-improving capital efficiencies realized by the Company.  The Company expects a step change increase in 2020 free cash flow generation based on natural gas strip pricing.  2020 EP maintenance capital is estimated to be $800 – 825 million, much lower than previous estimates.  The Company will provide a full five-year plan update with finalized 2020 guidance and five-year commodity price assumptions in early December.

Highlights:

• Record average Q3 oil, condensate and NGL production of 55,833 bpd, up 23% from the same quarter in 2018 and 7% from Q2 2019. Average September total liquids production of 60,138 bpd is on track with the full-year average.
• Q3 average production of 289,578 boepd, including impact of Q3 natural gas storage injections and natural gas price-related deferrals, up 3% from Q2 average production and 14% from Q3 2018.
• Generated Q3 free cash flow⁽¹⁾ of $14.1 million even with weak AECO natural gas prices, including E&P capital spending of $201.1 million.
• Q4 2019 free cash flow is expected to be approximately $50 million based on strip pricing.
• The Company has bought back a total of 863,000 common shares under its NCIB for $10.4 million at an average of $12.10/share.
• Tourmaline acquired an incremental working interest in the Peace River High oil/gas complex for $175 million including 5,600 boepd, 50% oil and $40 – $45 million of incremental annual cash flow⁽²⁾.
• Tourmaline continues to reduce operating costs averaging $3.11/boe in Q3, down 10% from Q2 2019.
• Tourmaline has also entered into a significant long-haul transportation agreement that will increase exposure to the North West U.S., growing current deliveries of 300 mmcfpd up to 450 mmcfpd by 2023, approximately 67% of which is sold at PG&E Citygate.
• 2019 estimated EP capital spending has been further reduced by $90.0 million.

Production Update

Third quarter 2019 production averaged 289,578 boepd, up 3% from the previous quarter and a 14% increase over Q3 2018.  As with Q2 2019, the Company deferred select dry natural gas completion activities due to low natural gas prices, reducing Q3 2019 production by 3,500 boepd.  The majority of these wells are being stimulated during the fourth quarter to be brought on-production into a much-improved AECO price environment.

The Company expects to average 295,000 – 300,000 boepd for full-year 2019, essentially within original guidance.  Tourmaline will bring approximately 75 wells on-production during the fourth quarter, including the DUC inventory created by the natural gas price-related deferrals during the summer.  Dawn and California storage positions built during Q2/Q3 2019 will be sold during the winter.  If these incremental volumes are sold during the fourth quarter, they will add approximately 3,500 boe/d to fourth quarter production.  Tourmaline expects to exit 2019 at production levels of between 315,000 and 320,000 boepd.

September corporate liquids production was 60,138 bpd (oil, condensate, NGLs) – a record, and on-track with the 2019 anticipated full-year average.  Tourmaline expects exit 2019 total liquids production of 68,000 bpd.  The Q4 2019 liquids production growth is being driven by the ability to produce the new Gundy deep-cut plant at full volume; incremental natural gas/condensate volumes from three new pads delivered to third-party processing options at Gundy; start-up of 12 new oil wells on the Peace River High complex, including the new high-rate 11-2 pad; the impact of the Peace River High acquisition for a full quarter; and strong liquids production from the new Cardium and Falher D plays in the Alberta Deep Basin complex.

Q3 2019 Financials

Third quarter 2019 earnings were $15.8 million or $0.06/diluted share (YTD Q3 earnings were $258.4 million or $0.95/diluted share) underscoring the inherent profitability of the ongoing EP business, even in an extremely low natural gas and NGL price environment.

Third quarter 2019 cash flow was $224.0 million ($0.82/diluted share) with a Q3 2019 AECO natural gas price of $0.92/mcf.  Continued weaker-than-forecast NGL pricing also reduced Q3 2019 cash flow.  Nine-month 2019 cash flow was $869.7 million compared to nine-month EP capital spending of $766.4 million.

Q4 2019 and winter AECO natural gas prices have improved dramatically which is expected to drive a material increase in fourth quarter cash flow.  The Company has between 375 and 400 mmcfpd exposed to Winter AECO pricing.  Tourmaline’s long-term natural gas volumes on the GTN/PG&E system will increase from 200 mmcfpd to 300 mmcfpd in November 2019.  San Francisco City Gate prices have remained one of the premium priced US hubs during 2019 (October average of $3.15/mmbtu US).  This additional transport will further enhance Q4 2019 cash flow.  The change in NGTL system protocol during summer maintenance periods (that Tourmaline helped develop and implement) is expected to yield stronger and less-volatile summer 2020 AECO natural gas prices.

Third quarter 2019 operating costs were $3.11/boe, well below average full-year guidance of $3.45/boe.  September 2019 operating costs were $3.00/boe.  These sustained lower costs are expected to enhance overall 2020 realized cash flow.  Each 10¢/boe operating cost reduction increases 2020 cash flow by approximately $12 million.

Net debt⁽³⁾ at September 30, 2019 is $1.9 billion ($1.7 billion after accounting for the expected proceeds from the Topaz transaction scheduled to close on November 14, 2019).

The quarterly dividend for Q4 2019 will remain at $0.12/common share.

2019 Capital Program

Third quarter 2019 EP capital spending was $201.1 million, down 50% from Q3 2018.  The Company continues to ensure that EP capital spending is less than cash flow, and even with record-low natural gas prices in the quarter reducing cash flow to $224.0 million, program deferrals kept capital spending below cash flow.

Continuously-improving capital efficiencies, primarily through reduced drilling and completion capital costs, has allowed Tourmaline to systematically reduce original 2019 EP capital spending by $180.0 million, year-to-date.  In addition, a further $90.0 million capital reduction is forecast in Q4, bringing full-year 2019 EP capital spending down to $1,035.0 million.  Full-year capital efficiencies of approximately $8,000/boepd will be delivered by the EP program in 2019 – a record low for the Company.

The Company estimates Q4 2019 free cash flow to be approximately $50.0 million (based on strip pricing) due to the combination of stronger natural gas prices and continued capital discipline on the Q4 E&P program.

Peace River Asset Acquisition

Tourmaline is pleased to report that it re-acquired the 25% working interest in the Peace River High complex for $175 million (Cdn).  The acquisition adds approximately 5,600 boepd of oil and natural gas production currently operated by Tourmaline and net 2P reserves of approximately 62.0 mmboe.  The acquired asset was originally sold by Tourmaline in Q4 2014 and was producing approximately 3,000 boepd with 2P reserves of 24.0 mmboe at that time.  Tourmaline also consolidated the facility working interests back to 100% and acquired an additional net 125 booked drilling locations (GLJ Jan. 1, 2019) and 328 currently unbooked locations.

Tourmaline estimates that the acquired asset will add $40 – 45 million of incremental cash flow in 2020, providing a net free cash flow yield of 14% for the acquisition.  The acquired assets contributed to September 2019 full-month production and financial results.

The acquisition in the Peace River High complex is being financed by reduced 2019/2020 EP capital spending.

Topaz Update

The previously-announced purchase by Topaz Energy Corp. (“Topaz”) of certain assets of the Company, and the financing of Topaz, remain on schedule to close November 14, 2019.  At closing, Tourmaline will receive from Topaz approximately $200 million in cash and Topaz common shares representing approximately 75% equity interest.

EP Update

Gundy BC Project

The Gundy c-60-A deep cut plant was ramped to full volume of 200 mmcfpd in September with total liquids production increasing to 12,500 bpd.  A further three new multi-well pads will be brought on-production during the fourth quarter maintaining the plant at full capacity as well as growing volumes that are accessing third-party processing options.  An incremental 3,000 bpd of liquids is expected from the Gundy complex during Q4.  Very strong new well performance continues at Gundy; sustained liquid rates of 90 – 100 bbls/mmcf are being realized from the wells in the southern half of the property.  Repeatable sustained drill, complete and equip capital costs of less than $3.0 million continue; current Gundy complex operating costs are less than $2.25/boe.  The Gundy Phase 2 expansion at c-60-A to 400 mmcfpd is planned for late 2021/early 2022.  Tourmaline has secured an additional 150 mmcfpd of firm, long-term transport on the GTN/PG&E system that accesses the lucrative Pacific NW and California markets with these new volumes.  Total Tourmaline natural gas volumes accessing these markets are expected to reach 450 mmcfpd in the 2022/2023 time-frame.

Alberta Deep Basin

Successful exploitation of new liquid-rich horizons continues in the Alberta Deep Basin.  Total liquids production in the Deep Basin complex is now in excess of 27,000 bpd (condensate and NGLs).   The Anderson 7-11 Cardium well was producing 24.1 mmcfpd and 724 bbls/day of condensate at the end of a five-day test in October.  The initial Anderson Cardium development block, a small subset of the identified natural gas/condensate play trend, is currently producing 86 mmcfpd and 2,033 bbls/day of condensate and NGLs from a total of 17 Cardium wells.  The block has produced 44.7 bcf and 1.01 mmbbls since initiation of horizontal development approximately 18 months ago.

The Wroe 15-8 three Falher D pad came on-production in October and after two weeks is producing at a combined rate of 27.0 mmcfpd with 536 bbls/day of condensate and 2,145 bbls/day of NGLs.  The Company plans to drill and complete eight additional Falher D wells during Q4 2019/Q1 2020 as part of the overall Deep Basin development program.

The Company plans to maintain Deep Basin production at the 170,000 boepd level in 2020.

Peace River High

The new 11-2-79-7 W6 four-well Upper Charlie Lake pad came on-production in late October and is currently producing 2,850 bbls/day of oil and 2.3 mmcfpd of gas.