Tourmaline Oil Corp. is pleased to release its operating and financial results for the third quarter of 2020.
• Two strategic corporate acquisitions, Modern Resources Inc. (“Modern”) and Jupiter Resources Inc. (“Jupiter”), providing an additional 76,000 boepd of current production, significant accretive cash flow(1) and free cash flow(2).
• Follow-on sale of a gross overriding royalty ("GORR") on the Modern and Jupiter lands to Topaz Energy Corp. "Topaz") for cash proceeds of $130 million.
• 2021 forecasted average production of approximately 400,000 boepd, cash flow of $2 billion and free cash flow on strip(3) of $856 million.
• Achieved 2020 production exit guidance of 322,500 - 327,500 boepd during October, prior to the new acquisitions.
• Dividend increased 17% ($0.02/share) to $0.14/share quarterly, effective December 2020.
• Strong Q3 results with cash flow of $279.9 million ($1.03/diluted share), total capital spending, excluding acquisitions, of $241.2 million and average production of 298,202 boepd.
NORTH DEEP BASIN TRANSACTIONS
• Tourmaline announces two strategic corporate acquisitions, Modern and Jupiter, boosting full-year 2021 average annual production to approximately 400,000 boepd, an increase of 25% from prior 2021 guidance of 320,000 boepd.
The acquisitions also include over 900 net sections of prospective land and over 445 mmboe of 2P reserves(4) in the most prolific and economic area of the Alberta Deep Basin, along with meaningful facilities and infrastructure.
• Tourmaline plans very modest growth (3-5%) from the Modern and Jupiter assets in 2021-2022 to optimize efficiency and cost, and then migrate to a maintenance capital/production model similar to the balance of the Deep Basin complex. Production from the combined Modern/Jupiter assets is expected to increase from the current 76,000 boepd to 85,000 boepd over the next two years.
• There are considerable operational, capital, land and facility synergies between the Jupiter and Modern asset bases. The acquisitions are expected to add over $300 million in annual cash flow and yield $130 - $150 million per annum of free cash flow in 2022 and beyond – sufficient to fund Tourmaline’s existing dividend.
• Tourmaline has agreed to sell Topaz a GORR on the Modern and Jupiter lands effective January 1, 2021 for $130 million (2% on natural gas in 2021 and 3% in 2022 and thereafter, 2.5% on crude oil and condensate). Net of GORR proceeds, combined acquisition metrics are 2.6x 2021 cash flow (compared to 3.0x gross of Topaz proceeds) and free cash flow yields(5) of 13% in 2021 and 20% in 2022, with related 2P reserve acquisition costs of $1.44/boe.
• Tourmaline acquired Modern effective November 2, 2020, for total consideration of approximately $144 million ($73.75 million cash and 1.5 million Tourmaline common shares, and the assumption of current net debt(6) of approximately $44 million).
• The Modern assets, located in the Alberta Deep Basin, include current average production of 9,000 boepd, 2P reserves of 88 mmboe, over 400 sections of land, the 100% owned-and-operated Route natural gas processing plant, and a future drilling inventory of over 200 locations.
• The Modern assets are low emission, efficiently operated and generated free cash flow in 2020. Tourmaline expects to increase the free cash flow yield from the Modern properties through the Company’s lower operating cost structure and a capital structure with costs expected to be 30–40% lower per well, with similar EURs.
• Tourmaline is pleased to announce that it has entered into a definitive agreement to acquire Jupiter for 24.2 million Tourmaline common shares, representing a total consideration of approximately $626 million(7) , inclusive of net debt estimated at approximately $200 million. All of the major shareholders of Jupiter have entered into irrevocable support agreements with Tourmaline and have agreed to vote an aggregate of approximately 92% of the outstanding Jupiter common shares in favor of the transaction, subject to the provisions of such support agreements. The transaction is expected to close on December 16, 2020, subject to receipt of customary regulatory approvals, including TSX approval.
• The Jupiter assets, located in the Alberta Deep Basin and adjacent to the Modern assets, include current average production of 67,000 boepd, estimated 2P reserves of 357 mmboe, over 500 net sections of land (average working interest 84%), and working interests in gas plants in the Resthaven and Kakwa areas. Current production was acquired for approximately $9,300/boepd, 2P reserves for $1.75 boe.
• The greater Musreau-Resthaven-Kakwa portion of the Deep Basin, where the Jupiter and Modern assets are located, provides amongst the highest EUR wells and liquid yields in the entire Deep Basin complex. Similar to the Modern lands, Tourmaline has been delivering completed horizontals for 30-40% lower cost on immediately offsetting acreage, with similar EURs.
• The Jupiter production base has an estimated decline rate of 25% for the 2021-2022 timeframe. Tourmaline estimates annual maintenance capital of approximately $130 million (20-22 wells per year) to yield annual cash flow of approximately $250 - 260 million on production of 70,000-75,000 boepd in 2022. The Tier 1 drilling inventory alone will support this level of drilling activity for an estimated 13-15 years.
• The Jupiter assets generated free cash flow in 2020. Tourmaline’s lower operating and capital costs are expected to increase the estimated free cash flow to over $120 million/year at strip pricing beginning in 2022 on annual production of 70,000 – 75,000 boepd.
• Jupiter infrastructure includes working interests in three natural gas processing plants, two of which are operated by Jupiter; 2020 operating costs are estimated at $4.25/boe.
• A substantial portion of Jupiter’s existing gas production accesses deep cut facilities in Resthaven-Kakwa yielding strong overall liquid production. The Jupiter assets are currently producing approximately 20,000 bpd (condensate and NGLs).
• Q3 2020 average production was 298,202 boepd, within the Q3 guidance range of 295,000 - 300,000 boepd.
• Nine-month 2020 average production is 301,960 boepd.
• Achieved 2020 production exit guidance of 322,500 – 327,500 boepd during October, which included the impact of 2020 acquisitions completed at that time (Deep Basin, Polar Star, Chinook).
Stronger than forecast new well performance from post-breakup EP activities in the Alberta Deep Basin and NEBC complexes allowed the Company to achieve the 2020 exit production target almost a full quarter earlier than forecast.
• 2020 exit production is expected to exceed 400,000 boepd with successful completion of the Modern and Jupiter transactions.
• Tourmaline is now anticipating 2021 average production of 390,000 - 410,000 boepd (at the midpoint, approximately 1,880 mmcfpd of gas production and 87,000 bpd crude oil, condensate, and NGLs).
Q3 2020 FINANCIAL RESULTS
• Q3 2020 cash flow was $279.9 million ($1.03 per fully-diluted share) on total capital spending (excluding acquisitions) of $241.2 million, yielding free cash flow of $38.7 million in the quarter.
• Nine-month cash flow was $788.8 million on total capital spending (excluding acquisitions) of $659.7 million.
• Nine-month free cash flow of $129.1 million.
• Full-year 2020 cash flow is estimated to be $1.225 billion based on full-year average production of between 310,000 and 312,000 boepd, contingent upon the production levels of Jupiter at the time of closing.
• Q3 2020 earnings were $4.8 million ($0.02 per fully-diluted share).
• Q3 2020 operating costs of $3.26/boe and year-to-date operating costs of $3.10/boe remain amongst the lowest in the sector.
• The recent announcement of Tourmaline’s investment grade credit status, combined with low prevailing interest rates, contributed to an effective interest rate of 1.57% for Q3 2020.
• The 2020 EP capital program has been increased to $835.0 million from $800.0 million. The incremental spending relates to fourth quarter drilling on the Modern and Jupiter assets to maintain existing production levels, early mobilization of one rig for winter drilling to maintain production on the Chinook/Polar Star assets, and the initial facility progress payment on the Gundy Phase 2 expansion to maintain the 1H 2022 onstream schedule.
• The 2021 EP capital program is $1.1 billion vs anticipated 2021 cash flow of $2.0 billion, including $160 million to maintain/optimize production on the new Modern and Jupiter assets. The 2021 capital program also includes $100 million for Gundy Phase 2 deep cut plant progress payments (total completed Phase 2 plant cost estimate remains at $150 million; Phase 1 total cost was $180 million).
• Tourmaline remains on track for record 2020 EP capital efficiencies of $6,750/boepd, increasing modestly in 2021 to $7,000/boepd with the Gundy Phase 2 facility expenditures.
• Total annual maintenance capital, including production maintenance on the Polar Star, Chinook, Deep Basin, Modern and Jupiter assets is estimated at $900 million for 2021 and is expected to systematically decline in subsequent years.
• The 2021 capital program includes approximately 225 new wells (net) across the three Company-operated core complexes.
2H 2020 EP ACTIVITY
• Tourmaline is currently operating 11 drilling rigs and will increase the fleet to 12 rigs by year end to accommodate the increased Alberta Deep Basin activity.
• New well performance consistently exceeded expectation overall during Q3. Specific highlights included:
1) The first Lower Montney well on the 16 section block acquired in Q4 2019 at South Gundy, BC tested at a final rate of 9.4 mmcfpd of gas and 560 bbls per day of condensate on a 188.5-hour flow test. This is an important delineation well that may lead to a significant new liquid-rich Tier 1 inventory increase.
2) The 16-7-58-25W5 Wild River Falher D well in the Alberta Deep Basin tested at 29 mmcfpd at a FCP of 9MPa on a 79.5-hour test.
3) The 10-10-52-18W5M Edson well in the Alberta Deep Basin tested at 31.5 mmcfpd at a FCP 13.1 MPa on a 127-hour test from the Cretaceous Wilrich Formation.
4) The 2-3-49-19W5 Lambert Notikewin well in the Alberta Deep Basin tested at 50 mmcfpd at a FCP of 24 MPa on a 68-hour test.
• Tourmaline has an average of 475 mmcfpd hedged for Q4 2020 at a weighted-average fixed price of CAD $2.80/mcf; an average of 146 mmcfpd hedged at a basis to NYMEX of $ (0.15) USD/mcf; and an average of 379 mmcfpd incremental volume exposed to export markets, including Dawn, Empress, Chicago, Ventura, Sumas, Malin and PG&E.
• Natural gas fundamentals for 2021 are steadily improving. Approximately 72% of Tourmaline’s natural gas volumes are exposed to the markets on the Western half of the continent (PG&E, Malin, Sumas, Station 2, AECO) where 2021 gas supply diminishment is anticipated to be the greatest.
• At PG&E, 95% of the total deliveries remain unhedged for 2021 at a market where forward prices continue to rally.
• Tourmaline has diversification to the US and other hubs amounting to 620 mmcfpd exit 2022 and 665 mmcfpd exit 2023.
• The Company will continue to hedge volumes related to 2021 and 2022 over the next several months.
• Tourmaline has 4 bcf of natural gas in storage facilities at Dawn, Ontario and PG&E, San Francisco which it
plans to draw out through the winter months at attractive prices. During Q3, the Company injected 0.97 bcf of
natural gas into storage.
2021 FINANCIAL OUTLOOK AND FIVE-YEAR PLAN
• Anticipated 2021 cash flow, including the new acquisitions, is $2.0 billion at current strip pricing, yielding free cash flow of $856 million on capital spending of $1.1 billion (free cash flow yield of 19%). The 2021 free cash flow will be utilized to fund modest, sustainable dividend increases, debt reduction, and potential share buybacks.
• Tourmaline intends to reduce overall debt to cash flow to less than one times during 2021 - and maintain net debt at approximately $1.0 – 1.5 billion.
• Tourmaline is maintaining the same modest EP growth profile as the previous five-year plan, with 3-5% per annum production growth.
• Free cash flow over the five years at strip in the revised plan has now grown to $3.5 billion.
• Given continued growth in the Company’s sustainable free cash flow, Tourmaline has elected to increase the quarterly dividend from 12 cents per share to 14 cents per share ($0.56/share per year).
• Tourmaline commenced paying a dividend in the first quarter of 2018. The current dividend increase represents the fourth time the dividend has been increased since then.
• The Topaz IPO was successfully completed on October 26, 2020 and Topaz's common shares now trade on the Toronto Stock Exchange (TSX:TPZ).
• Tourmaline sold 1.0 million Topaz common shares in connection with the IPO at a price of $13.00/share for total gross proceeds of $13.0 million.
• Tourmaline owns 58.1 million Topaz shares which had a market value of $809.4 million as of November 3, 2020. Tourmaline may fund future acquisition activity by monetizing a portion of this equity, or by the sale of additional GORR or infrastructure assets to Topaz, should the existing or future cost structure of the acquired assets allow for it.
• During Q3, Topaz closed the acquisition of 12.5% of Advantage Oil and Gas Ltd.’s Glacier natural gas plant and associated 15-year 50 mmcf/d take-or-pay contract, which will provide Topaz $12 million in annual income. Also, Tourmaline sold 25% of the Company’s Banshee gas plant in the Alberta Deep Basin to Topaz for cash proceeds of $52.5 million. The sale provides Topaz with a take-or-pay commitment of 25 mmcfpd at $0.60/mcf for a 15-year term. Topaz pays its share of operating costs and annual maintenance costs at the Banshee plant.
• Including the initial two non-operating working interest plant sales to Topaz in November 2019, Tourmaline has dropped down a total of 125 mmcfpd of processing capacity to Topaz. This represents 6.5% of current total Tourmaline processing capacity of 1,750 mmcfpd across 20 Tourmaline plants.
• Tourmaline has reached an agreement (2% on natural gas in 2021 and 3% in 2022 and thereafter, 2.5% on crude oil and condensate) with Topaz to sell a GORR on the Modern and Jupiter lands effective January 1, 2021 for $130 million.
OPERATING ENVIRONMENT AND THE COVID-19 PANDEMIC
• The COVID-19 pandemic has had a significantly negative impact on economic conditions around the world in 2020. During this period of uncertainty, the Company is committed to maintaining its strong balance sheet and financial liquidity. At September 30, 2020, the Company had $1.3 billion in unutilized borrowing capacity on its credit facilities. At September 30, 2020, the Company was in compliance with all of its covenants under its credit facilities and has room under those covenants to allow for further deterioration of commodity prices or an increase in future borrowings to navigate through these uncertain times, if required. The Company currently believes it has sufficient liquidity through cash flow to execute the remainder of the 2020 capital budget.
• In response to the COVID-19 pandemic, the Company is following all applicable rules and regulations as set out by the relevant health authorities and has implemented many health and safety protocols into its operations. Tourmaline and its staff have been able to adapt to the new work environment without significant disruptions at any operated facility or in day-to-day operations.
• For more details on how Tourmaline has responded to the COVID-19 pandemic please see ‘Operating Environment and the COVID-19 Pandemic’ in the Company’s Q3 2020 Management’s Discussion and Analysis available on Tourmaline’s website at www.tourmalineoil.com and on SEDAR at www.sedar.com.