Earnings call transcript: Tourmaline Oil’s Q4 2024 highlights strong growth

Tourmaline Oil’s Q4 2024 earnings call revealed robust financial performance and strategic growth initiatives, though InvestingPro analysis indicates some financial challenges with a current Financial Health Score of 1.48, labeled as ’WEAK’. The company reported net earnings of 1.3 billion dollars for the full year 2024, translating to 3.51 dollars per diluted share. Tourmaline’s cash flow reached 3.2 billion dollars, with free cash flow at 1 billion dollars. The company forecasts a significant increase in cash flow for 2025, expecting it to reach 4.3 billion dollars.

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Key Takeaways

• Tourmaline Oil’s net earnings for 2024 stood at 1.3 billion dollars.
• The company plans to drill up to 365 net wells in 2025.
• Forecasted 2025 cash flow is 4.3 billion dollars, up from 3.2 billion in 2024.
• Production in Q4 2024 averaged 605,000 BOEs per day, a 9% increase year-over-year.
• The company is preparing for potential structural buybacks starting around 2027.

Company Performance

Tourmaline Oil demonstrated strong financial and operational performance in 2024, driven by increased production and strategic investments. The company drilled 286 gross wells and led the Canadian industry with over 1.4 million meters drilled. This performance is notable given the challenging pricing environment for natural gas.

Financial Highlights

• Revenue: Not specifically disclosed in the call.
• Earnings per share: 3.51 dollars for the full year 2024.
• Cash flow: 3.2 billion dollars in 2024, with a forecast of 4.3 billion for 2025.
• Free cash flow: 1 billion dollars in 2024, projected to rise to 1.4 billion in 2025.
• CapEx: 1.9 billion dollars for 2024.

Outlook & Guidance

Tourmaline Oil anticipates continued production growth, forecasting 635,000 to 665,000 BOEs per day in 2025. The company plans to maintain double-digit shareholder returns and expects 5-6% production growth over the next 4-5 years. The 2025 EP capital budget is set between 2.6 and 2.85 billion dollars.

Executive Commentary

CEO Mike Rose highlighted the company’s resilience, stating, "We delivered strong earnings and free cash flow in 2024 during what turned out to be the worst AECO full year pricing environment in the last twenty-five years." He also emphasized the potential for industry growth, saying, "We believe on the gas side... we can grow our overall industry natural gas production Canada by 50% by 02/1930."

Risks and Challenges

• Fluctuating natural gas prices could impact profitability.
• Potential impacts of U.S.-Canada tariffs on operations.
• The need for continuous infrastructure investment to support growth.
• Market saturation and competition in the natural gas sector.
• Dependence on favorable regulatory environments for expansion.

Tourmaline Oil’s strategic focus on growth and efficiency positions it well for a promising 2025, despite potential challenges in the broader market environment.

Full transcript - Tlou Energy Ltd (TOU) Q4 2024:

Lina, Conference Call Operator: Good morning, ladies and gentlemen, and welcome to the Tourmaline Q4 twenty twenty four Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, 03/06/2024. I would now like to turn the conference over to Scott Kerker.

Please go ahead.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Thank you, Lina, and welcome everyone to our discussion of Tourmaline’s financial operating results for the three months and years ended December ’4 and December ’3. My name is Scott Kirkert, and I’m Chief Legal Officer here at Terminalling 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 Terminalling annual information form in our MD and 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 Robson, our Chief Financial Officer and Jamie Hurd, Tourmaline’s Vice President of Capital Markets.

We’ll start by speaking to some of the highlights of the last year. And after Mike’s remarks, we will be open for questions.

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Go ahead, Mike. Thanks, Scott. Good morning. Thanks, everyone, for dialing in. We’re pleased to review our most recent results and provide the latest outlook and answer some questions.

First, a few highlights. 2025 forecast free cash flow is now $1,400,000,000 based on current strip pricing, and that’s up from previous guidance of $1,100,000,000 Full year 2024 net earnings were $1,300,000,000 or $3.51 per diluted share, and that underscores the profitability of the business even in a very weak gas price environment. And to that end, we delivered strong earnings and free cash flow in 2024 during what turned out to be the worst AECO full year pricing environment in the last twenty five years. We’re very pleased to announce a quarterly base dividend increase of 43% to $0.5 per share, that’s effective Q1 ’twenty five, and a special dividend of $0.35 per share. With continued growth in the base business and continued improvements in realized pricing, we’re well positioned to increase returns to shareholders in 2025 relative to 2024.

First quarter ’20 ’20 ’5 production range of 630,000 to 635,000 BOE per day is currently anticipated. DDP reserves were increased 29% in 2024 after accounting for production and 2P reserves were increased 14% to 5,500,000,000.0 boes by the end of twenty twenty four. A few comments on production. Fourth quarter twenty twenty four average production was 605,000 BOEs per day, up 9% from the corresponding twenty twenty three quarter. ’20 ’4 average liquids production of 138,500 barrels per day was up 17% over 2023.

Condensate and NGL production volumes are expected to increase significantly over the next five years with our North Montney, West Dole Ground Burch, South Montney and North Deep Basin infrastructure projects. These projects will grow both our total volumes and materially improve our realized corporate margins. The ’25 forecast production range of 635,000 to 665,000 boes per day remains unchanged. And the Company expects to finalize the second half twenty five EP capital program during the second quarter, and we’ll see where gas prices are at over the next three months or so. As mentioned, first quarter twenty twenty five production of 630,000 to 635,000 BOEs per day is anticipated.

We have approximately 51 wells to bring on production in March, which is expected to result in first quarter exit volumes well in excess of 640,000 per day. Some select financial highlights. Improving strip prices have increased full year forecast 25 cash flow to $4,300,000,000 And as mentioned, full year forecast 25 free cash flow is now $1,400,000,000 Full year 2024 cash flow was $3,200,000,000 and full year 2024 free cash flow was $1,000,000,000 And as mentioned, given the strong growth in the base business over the past three years through a combination of high margin organic growth and accretive acquisitions, Tourmaline’s Board of Directors has elected to increase the base quarterly dividend from $0.35 per share to $0.5 per share, a 43% increase, and that’s effective in the first quarter of twenty twenty five. The Board also declared a special dividend of $0.35 per share to be paid on March 25 to shareholders of record on March 13. And we do intend to pay special dividends in all four quarters of this year, inclusive of this Q1 special dividend.

We paid $3.32 per share in combined base and special dividends in 2024, and that’s a 5.3% trailing yield. Full year 2024 CapEx was $1,900,000,000 and that includes Q4 CapEx of $460,000,000 Exa ’24 net debt was 1,700,000,000 and that’s approaching our long term net target of $1,500,000,000 which is approximately 0.3 times to 0.35 times forecast net debt to cash flow. And we’ve always believed maintaining balance sheet strength puts the company in a strong position to deal with any new macro challenges and to take advantage of new opportunities that might arise. Briefly on reserves, year end 2024 PDP reserves of 1,350,000,000.00 BOEs were up 29% after accounting for 24 annual production. Total proved reserves of 2,910,000,000 boes were up 19% and 2P reserves of 5,500,000,000 boes were up 14%.

So, after sixteen years of operations, Tourmaline now has essentially 25 Tcf of economic 2P natural gas reserves and 1,360,000,000 barrels of 2P oil condensate and NGL reserves, all of which are pipeline connected to markets across North America. And at year end 2024, ’80 percent of the current estimated drilling inventory of over 25,000 locations was not booked in the twenty four year end reserve report. Year end ’24 oil condensate and NGL 2P reserves of 1,360,000,000 barrels represent the second largest conventional liquids reserve base in Canada based on public disclosure. Of particular note, given our size, we replaced 330% of 24 annual production of two twelve million BOEs with 2P additions of 700,000,000 BOEs including 24 production. Our 24 PDP F and D costs were $8.45 per BOE including changes in FDC and that yielded a PDP reserve recycle ratio of 1.8 times, which is pretty good for a predominantly gas producer in the harsh 24 gas price environment.

2P FD and A costs in 24 were $7.28 per BOE, including changes in FDC, and that yielded a 2P recycle ratio of 2.1 times. And our 2P reserve value before taxes equates to $114 per diluted share. Revisiting the ’25 capital program, full year ’25 EP capital budget range remains unchanged at $2,600,000,000 to $2,850,000,000 The Company expects steadily improving natural gas prices in 2025. Should that price recovery materialize later in the year, the capital program will be sequenced accordingly. Facility and pipeline expenditures of approximately $300,000,000 dollars remain in the total 25 EP capital budget, and that includes ongoing Northeast BC, North Montney Phase one infrastructure build out components, electrification prebuilds for the 26, 20 seven West Stow and Ground Birch gas plant projects and certain long lead time facility preorders.

So, the majority of the 2025 growth capital is these facility expenditures. They don’t create volumes in 2025 as clearly this is a year in transition for gas prices. These volumes materialize in 2026 and 2027, a period when much improved gas prices are widely anticipated. We expect to finalize the sequencing of the entire future Northeast BC infrastructure build out during this year and that will include up to four new gas processing facilities. The Ground Burch development is now expected to consist of two separate $200,000,000 per day deep cut plants to be installed in the ’twenty seven to ’twenty nine timeframe, pretty much exactly what we put on the ground at Gundy C68.

Some comments on marketing. The Company’s average realized natural gas price in 2024 was $3.38 per Mcf, that’s $1.9 per Mcf above the average 24 AECO5A index price of $1.48 per Mcf. And our marketing diversification portfolio and strategic hedging program allow us to consistently outperform local hub pricing on a sustained basis. We expect to exit 2025 with over 1.3 Bcf per day in exports to targeted markets, including $9.00 $4,000,000 per day delivered to The U. S.

Gulf, JKM, TTF, Western U. S. Markets and Pacific Northwest premium markets. We also secured an additional $95,000,000 per day of ANR service to The U. S.

Gulf, and we did that during this quarter. We have an average of 1.06 Bcf per day hedged in 2025 at a weighted average fixed price of $5.07 per Mcf. We do remain encouraged by the very strong demand driven outlook for North American natural gas prices, which have improved in the majority of the sales hubs accessed by the company over Q4 twenty twenty four. Western Canadian gas prices have lagged this recovery despite winter natural gas storage withdrawals averaging approximately 1.43 Bcf per day versus a little over 0.7 Bcf per day last winter. So, we’ll continue to monitor the multiple local natural gas demand catalysts anticipated in ’twenty five, including the startup of LNG Canada.

We will manage our unhedged non export or local volumes accordingly. And in the event of very weak spring summer twenty five gas prices, the company will optimize the pace of well stimulation and production startup activities to shape the production profile to the highest cash flow outcome. Briefly on E and P, we drilled two eighty six gross wells in 2024 and led the Canadian industry with a total of 1,425,000 meters drilled during the year. We delivered our best overall well performance in the past five years in the Alberta Deep Basin Complex. And this outperformance has been across the full suite of Deep Basin assets.

We are currently planning to drill up to three sixty five net wells in 2025. As of 01/01/2025, the ongoing New Zone New Pole exploration program has added a little over two Tcf of 2P reserves of that total of 25 Tcf and ten sixty eight Tier one and Tier two drilling locations since the program was started. There are several potential high impact exploration wells in the 2025 program, so it will be an exciting year on that front. We continue to make select midstream investments to reduce costs and improve realized margins. Some material cost reductions realized already in the North Montney, and we expect similar improvements in the ex crew ground bridge assets as we execute the infrastructure plan there.

On EPI, our CleanTech engineering team continues to develop and implement new proprietary emission reduction technologies, execute on expanded water management initiatives and explore industry leading methane mitigation technologies at our ETC as well as manage related third party environmental research. And we’ve touched on the dividend already. So, I think we’ll turn it over for questions. Thank you. Thank

Lina, Conference Call Operator: Your first question comes from the line of Aaron Golkoski from TD Cowen. Please go ahead.

Aaron Golkoski, Analyst, TD Cowen: Good morning. Thanks for taking my question. I’m going to start with the tougher one, but I think it’s one that’s on the minds of investors. So just to frame it, if I use mid-twenty twenty three as the starting point, it appears that the production revisions to the five year plan haven’t quite kept pace with the volumes acquired through Bonavista and Crude. Meanwhile, over the same time period, organic E and D CapEx in

Scott Kerker, Chief Legal Officer, Tourmaline Oil: the plan has also increased.

Aaron Golkoski, Analyst, TD Cowen: So, I guess my question is, could you talk a little bit about some of the puts and takes in the five year plan over the past couple of years?

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Well, some of it is infrastructure build out. So, there was $200,000,000 approximately in ’twenty four and there’s the $300,000,000 outlined in 2025. So, in aggregate, about $500,000,000 that it’s very important to get this multiple faceted Northeast BC infrastructure build out underway. But as mentioned, we don’t really see the volume associated with that until ’twenty six and 2027. The other thing I’d mention, Aaron, is obviously when we were acquiring businesses in 2023 and 2022, strips were more buoyant.

Tourmaline actually took quite a bit of capital out of the plan in 2024 and effectively moved a large part of our completion activity towards the end of the year and still generated $1,000,000,000 of free cash flow in 2024. And now we’re back on the front foot here in the first quarter with activity again. So, I think in these gas price environments, you’re going to see that plan executed, but we always retain the flexibility to move things around if prices are different.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Okay. Thank you.

Lina, Conference Call Operator: Thank you. And your next question comes from the line of Saleh Akamini from Bank of America. Please go ahead.

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Hey, good morning guys. Mike, Brian, Jamie. My first question goes to the crew synergies. And I’m going to try to tie together two comments. So first, you signaled wanting to pull forward ground burch.

I imagine that’s going to lift CapEx in ’twenty six and ’twenty seven, but I also think it’s going to pull forward the synergies. So the second comment kind of points to cost reductions at crude midstream. So, can you kind of talk through the capital impact, but also the path to synergy capture? What do you need to do and where the synergy is going to show up? Well, on the ground burch plant build out, when it’s completely done, we expect a greater than 80% per BOE cost reduction over where we’ll start from.

And as I mentioned, that’s the $200,000,000 2 hundred million dollars a day deep cuts. So, it will actually be an even bigger margin improvement than what we saw from our Gundy and Aitken infrastructure build outs and margin capture initiatives. There’s lots of synergies throughout the EP operations. I mean, we can drill and complete the wells for probably 20% to 30% less than what they were doing. We’ll build out the water infrastructure and that ultimately reduce costs and also improves your overall environmental performance.

The crude volumes right now was between 59,000 when we picked it up, 1,000 BOEs a day, and we’re doing sort of 31,000 to 32,000 in the latest production report over the last few days. So, yes, we’re super happy with it. It was a big component of the reserve increase on a 2P basis that we saw in the year end 2024 report. Anything else on the synergies, Brian, on the financial side?

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Well, I think, I mean, their cash operating costs were a little bit higher. And as we move forward here, we’ll be bringing those down as we’re controlling more of the liquid barrels as well as getting some of our pipe reoptimized so that we can drive down some of the upstream costs as well.

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: And then, we’re flagging that some of the investments we’re making here are going to help us drive higher margins to realization. So, getting some of these products to higher premium markets, more flexibility for our team, more taking kind rates. And that doesn’t really show up on the cost side of the ledger, that shows up on the realization side of the ledger. So, we’re really excited about that opportunity as well. Thanks for all the detail there.

My second question goes to signaling on the buyback. So, on Slide 23, you show that the buyback is growing as a part of your cash allocation. What is the significance of the timing? As you kind of show it creaking up from what looks like 2027 and that aligns with the tapering in your production wedge. So, why do you think that’s the right time to pivot and why not pivot harder into more specials?

Well, it’s partly a function of exactly how much free cash flow we have every year. Back it up a little bit, our plan is to maintain that double digit shareholder return and the composition of that return will change over time. We are entering four to five year period of growth that we’d always time to the startup of LNG Canada, which we believe will be very positive for local hub pricing AECO and Station two. So, there’ll be five plus percent per share growth to be a production over the next four to five years and will maintain that 5% to 6% dividend yield to gross up to over 10%. As we get to the end of that build out, we’ll be 750,000 boes a day plus.

It will be harder to grow at 5% to 6% per annum. So, we see the production growth tapering down to, call it, 2%. And we think that’s the appropriate time to bring in a material structural buyback, so that the per share growth is maintained at 5%. And then, by then, we’d expect a 6% plus yield, so that the total shareholder return maintains in that double digit range. So, that’s the thinking.

It is a bit diagrammatic on that slide, and I wouldn’t say that the timeframes are absolutely ironclad, but we do have a significant growth period ahead of us that we’re super excited about. Thank

Lina, Conference Call Operator: you. Your next question comes from the line of Jamie Cubic from CIBC. Please go ahead.

Jamie Cubic, Analyst, CIBC: Yes, good morning. I’ve got two questions for you guys here. So first one, your press release indicates delays in acquiring new surface disturbance permits in HB1 areas in Northeast BC that limited the ability to drill delineation pads and book 2P reserves. Can you talk about the changes that will see this improve in 2025?

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Yes. It’s been steadily improving over the past two years. And I think we secure the most drilling permits of actually any operator in Northeast BC. They’re just not always exactly where we want them. And I think the granting of permits and the finalizing of that process between BRFN and the BC government is scheduled to happen in 2025, so that we will get more permits in those HB1 areas.

So, I think, Scott, anything you wanted to add to that? No.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: I mean, the H2N plan has been approved and that’s moving forward. I think we’ll see real evidence of that here in the near future.

Jamie Cubic, Analyst, CIBC: And then second question, recognize that we’re in early days of U. S. And Canada tariffs happening and this might be a bit of a longer term question, but I’m wondering if you’ve seen any positive discussions emerging as it relates to additional LNG projects taking flight or pipeline construction or even project expansions in BC in particular to start here?

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Sure. I would say there have been positive discussions, nothing concrete yet. I think it is pretty clear that Canada needs to look after itself. And one of our best opportunities is growing oil and gas volumes and diversifying our markets. I think something like 75% of Canadians support building more pipeline.

So, this is the right time. Our federal and provincial governments need to move quickly to approve and support these new egress projects. I think they’re in the national interest. And the Canadian producers are amongst the most environmentally responsible producing group in the world and we continue to improve our emission performance. So, yes, you’re right, in this more insular and competitive world that we apparently have entered into, we need to take advantage of the extensive resources we’re blessed with.

We believe on the gas side, if you include LNG Canada Phase one and Phase two because it’s not quite on stream yet, and build one additional pipeline a little optimizing on existing pipelines, we can grow our overall industry natural gas production Canada by 50% by 02/1930. And that doesn’t include a whole bunch of other growth projects that you can dream about. So, we’re advocating on our front for build out on the natural gas side. And long and short of it, it’s apparent we need to look after ourselves and we have lots of ways to do it.

Jamie Cubic, Analyst, CIBC: Okay, good answer. Thank you. I’ll hand it back.

Lina, Conference Call Operator: Thank you. And your next question comes from the line of Josh Silverstein from UBS. Please go ahead.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Just looking at the balance sheet and thinking about the return of capital profile for this year, do you plan to use $200,000,000 of free cash flow to get to the $1,500,000,000 net debt target? Or will 100% of the free cash flow go back to shareholders in the form of the special dividends? I mean, I think the answer is we’ll slowly bring our debt down in small increments over the next twelve to eighteen months to that $1,500,000,000 level. Some of that might come about through a little bit stronger product prices. But in the end, we’re still committed to the vast majority of our free cash flow being distributed back to our shareholders.

Yes. The good news is

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: it looks like we have quite a bit more free cash flow in ’twenty five than ’twenty four, and we’ll see where that goes. And we just need to get these last two hubs doing a little better on the pricing front and we’re still optimistic that that’s going to occur over the balance of 2025. So, we’ll see where it goes.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: The other point I would add to year over year, our terminally net debt has actually come down. So we have been trending in the exact right direction, and I think you can expect a similar cadence going forward. Got it. Thanks for that. And then maybe just following up on your comment there on the hubs and pricing.

Last year, you guys ramped the rig activity. I think you’re up at 18 now. Is the game plan to stay at 18 and then basically just adjust DUCs till timing? Are you actually planning to add rigs this year? So, any more color there would be great.

Thanks.

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: We’re not going to add any more rigs than where we are now. One of the decisions we’ll make during Q2 during breakup when we certainly pare down operational activity is do we stay at 17% or 18%. And yes, you hit on it. If prices are slow to respond, then we have the ability to delay fracking. I think you know the math on it, 80% of the time to drill, just let’s pick a North Montney pad, 80% of the time required is drilling, but 60% of the cost is completions.

But, we can turn a pad around in two weeks. So, we can really match the production growth profile to the shape of the pricing curve, and that’s what we’re going to do.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Thank

Lina, Conference Call Operator: you. And your next question comes from the line of Fili Adlam Brown. Please go ahead.

Sai Adlam Brown, Analyst: Hi, Mike. It’s Sai. I just wonder about these tariffs. It sounds like they could be moved tomorrow, but who knows? But assuming the 10% is still in place, do you

Scott Kerker, Chief Legal Officer, Tourmaline Oil: have to do anything on your hedges or contracts? Or how does the mechanically, how does the tariffs work? How are you affected by it or are you affected at all?

Mike Rose, President and Chief Executive Officer, Tourmaline Oil: Well, we are affected. It’s manageable, but it’s not nothing. And it happens when our gas volumes cross the border. And then, I guess, our NGLs in some places cross the border as well. As you know, PHY, we have a mix on the NGL side.

Some goes via RIPET and gets the Far East Asia index price. So, that’s unaffected, but some of our volumes on the NGL side do head south. So, I think we’re all going to figure out the mechanics of how this works. We’ve done all our financial analysis. And as I said, it’s manageable at 10%, but we’d prefer to not have any tariffs.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Okay. Fair enough. Thank you. There are a couple of indirect impacts that we can’t really quantify, but certainly, currency could work in our favor here that would mitigate some of that. Also, just to amplify a little more on Mike’s point, although we do have a large export footprint, the vast majority of those volumes are going into markets where there are absolutely no other available supply sources for those customers.

So over time, I would think the pricing would pass through to the consumer.

Lina, Conference Call Operator: There are no further questions at this time. I will now hand the call back to Mr. Scott Krueger for any closing remarks.

Scott Kerker, Chief Legal Officer, Tourmaline Oil: Thanks everyone for attending and we look forward to talking to you after Q1.

Lina, Conference Call Operator: Thank you. And this concludes today’s call. Thank you for participating. You may all disconnect.

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