Tourmaline Oil Corp. is pleased to announce a guidance update, the approved budget for 2022 and details on its free cash flow ("FCF")(1) allocation strategy, including the declaration of a special cash dividend and an increase in its regular quarterly cash dividend.
2H 2021/2022 EP CAPITAL BUDGET
The recently approved 2022 EP capital budget of $1.125 billion is expected to deliver average production of 500,000-510,000 boepd, $3.7 billion of cash flow ("CF")(2) and $2.5 billion of FCF on strip pricing(3). The 2022 EP capital budget, essentially a maintenance program, is $62 million less than previous estimates given specific facility projects and select drilling accelerated into 2H 2021. Production, CF, and FCF are all higher than previous 2022 guidance. The Company expects capital efficiencies to improve further in 2022 as a significant portion of the planned 2022 facility expenditures have been accelerated into 2H 2021.
The 2021 EP capital program has been increased to $1.375 billion with the 2H 2021 increase focused on liquids business/production increases and related liquids margin improvements, and the modest acceleration of drilling activities. Full-year 2021 average production is now expected to be 440,000-445,000 boepd and increased full-year CF of $3.0 billion is now anticipated along with $1.6 billion of FCF. The majority of the incremental facility capital is being expended in Q3, yielding estimated capital spending of $420 million in Q3 and $350 million in Q4. The updated 2H 2021/2022 EP capital program is consistent with previous guidance.
Material reduction in drilling times throughout 2021, particularly in NEBC, will result in completion of the originally planned full-year 2021 drilling program by November. BC Montney per-well drilling times have been reduced by approximately 20% in 2021 (two days less per well). As a result, the Company has elected to accelerate the drilling of approximately 21 wells from 2022 into Q4 2021 in order to maintain the existing top-tier, Company operated drilling fleet at full capacity, rather than release rigs at this time. The majority of these incremental wells will not be completed and brought on production until 2022.
The Company will monitor natural gas supply/demand balances and schedule new production startups appropriately through the course of winter and the balance of 2022. Tourmaline has incremental egress on the GTN system of 100 mmcfpd in 2022 and a further 50 mmcfpd in 2023, as well as 140 mmcfpd of egress to the Gulf Coast accessing international LNG commencing in 2023. Total volumes on the GTN system will grow from 330 mmcfpd currently to 480 mmcfpd by 2H 2023, with over 80% of these volumes accessing the California market. Incremental Company gas volumes in 2022/2023 will not be directed at AECO or Station 2.
Acceleration of both the Gundy Phase 2 and Nig Creek deep cut installations/expansions will add approximately 15,000 bpd of condensate and natural gas liquids ("NGLs") (including 5,000 bpd of propane) by exit 2021/Q1 2022. Liquids margins will also be improved through utilization of Company operated facilities rather than third party processing options. Margin improvement will also be realized through an increase in Ripet propane exports. 2022 average annual liquids production of approximately 115,000 bpd is now expected, up 2,000 bpd from previous estimates. Edmonton propane and butane prices are up over 200% and 40%, respectively, over the past 12 months.
2021 FREE CASH FLOW ALLOCATION TO DATE
FCF in 2021 to date has been consistently directed towards modest, sustainable base dividend increases and continued net debt(4) reduction until the long-term net debt target of $1.0 to $1.2 billion is achieved.
The base dividend has now been increased twice in 2021; in aggregate a 21% increase over the Q4 2020 dividend level. The net debt target is now anticipated to be achieved during Q4 2021.
FREE CASH FLOW ALLOCATION STRATEGY
Tourmaline intends to return the vast majority of FCF to shareholders on a go-forward basis.
This FCF return will be achieved through modest, sustainable base dividend increases, special dividends when appropriate, and tactical share buybacks.
Given stronger than anticipated 2021 commodity prices and production volumes, and early achievement of the long-term net debt target, Tourmaline is in a position to increase its base quarterly dividend by $0.01/share to $0.18/share payable on December 31, 2021, which represents an annualized payout of $0.72/share as well as declare a special cash dividend of $0.75/share, payable on October 7, 2021, to shareholders of record on October 1, 2021 with an ex-dividend date of September 29, 2021. Given the observance of Canada's new statutory holiday on September 30th, this day will be considered a non-settlement day and as such the TSX requires the ex-dividend date on dividends with an October 1, 2021 record date to be September 29, 2021. This special cash dividend is designated as an "eligible dividend" for Canadian income tax purposes.
Based on current strip pricing, the Company will be in a position to continue to distribute special dividends, the size of which will depend upon the magnitude of excess FCF generated by elevated commodity prices in 2022 and beyond, and the relative return offered by other FCF allocation opportunities.
On current strip, 2022 FCF is estimated to be $2.5 billion which represents over $7.50/diluted share and a 19% free cash yield based on a $40 share price.
FCF above the required maintenance capital and the long term 3-5% per annum growth embedded in the five-year EP program may also be allocated to modest asset acquisitions in existing core complexes and continued capital investments in liquids midstream opportunities.
The Company expects annual expenditures of up to $250 million for these 'bolt-on' style asset acquisitions and land sales, generally proximal to existing Tourmaline operated infrastructure. Future acquisitions will have similar FCF accretion metrics to the successful 2019-2021 acquisition program already completed. In Q3 2021, the Company closed one $9.0 million asset acquisition in the Peace River High complex (449 boepd, 5.4 mmboe 2P reserves, 12 gross (10.1 net) tier 1 Charlie Lake oil locations, associated minor facilities, based on internal estimates).
Liquids midstream expenditures are expected to continue over the next several years and the Company is evaluating a series of opportunities within existing core complexes. These are high return projects. The Nig Creek deep cut installation provides an estimated return of over 100% over the next four years. The Company intends to grow the corporate liquids midstream business segment and views these investments as a profitable allocation option for growing future FCF.
The Company expects exit 2021 net debt of approximately $960 million, after giving effect to the Q4 2021 special dividend. The Company intends to keep long term net debt in the $1.0-$1.2 billion range.
500,000 BOEPD 2021 EXIT
The Company expects to achieve the 500,000 boepd average production milestone by exit 2021, earlier than originally anticipated. The accelerated timing is driven by the impact of improved drilling efficiencies and acceleration of the aforementioned liquids midstream projects.
Tourmaline estimates annual maintenance EP capital of $1.0-$1.05 billion to maintain average production at the 500,000 boepd level.
Tourmaline renewed its NCIB effective July 20, 2021 and plans to utilize buybacks under the NCIB to complement the return to shareholders.
The Board has also approved the repurchase of up to $1.0 billion in common shares over the next two years through issuer bids, contingent upon share price performance, and subject to the terms of the issuer bid and receipt of necessary regulatory approvals, including the TSX.