Tourmaline Oil Corp.

Thank you, operator and welcome everyone to our discussion of Tourmaline's results for the three and nine months ended September 30, 2020. My name is Scott Kirker and I'm General Counsel for Tourmaline.

Before we get started, I refer you to the advisories on forward-looking statements contained in the news release as well as the advisories in the Tourmaline Annual Information Form and our MD&A available on SEDAR and 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; and Brian Robinson, Vice President of Finance and Chief Financial Officer; and Jamie Heard, Tourmaline Senior Capital Markets Analyst. We will start by speaking to some of the highlights of the last quarter and our year so far.

After Mr. Rose's remarks, we'll be open for questions.

Mike, go ahead.

Thanks, Scott. Good morning, everybody and thanks for dialing in.

we had a very busy quarter with material acquisitions in the Alberta Deep Basin and very strong Q3 operating and financial results. So, firstly, the highlights.

We announced two strategic corporate acquisitions: Modern Resources Inc. and Jupiter Resources Inc.

yesterday and they provide an additional 76,000 BOEs per day of current production, significant accretive cash flow and free cash flow. The Modern transaction is closed and Jupiter is scheduled to close on December 16.

We do plan follow-on sale of a GORR, or gross overriding royalty, on the Modern and Jupiter lands to Topaz Energy for cash proceeds of $130 million. 2021 looks very strong with forecasted average production of approximately 400,000 BOEs per day, cash flow of $2 billion and free cash flow on strip of $856 million.

Importantly, the ongoing EP program was a pretty -- sorry -- proceeding ahead of schedule and we actually achieved our 2020 production exit guidance early. Our dividend will be increased by 17% or $0.02 per share to $0.14 per share quarterly, effective December 2020.

And we had strong Q3 results with cash flow of $1.03 per diluted share, total capital spending, excluding acquisitions, of $241 million and average production of 298,000 BOEs per day. A little bit more detail on the Deep Basin transactions in aggregate.

The two corporate acquisitions will boost our full year 2021 average annual production estimate to 400,000 BOEs per day at the midpoint, so that’s an increase of 25% from our previous 2021 guidance of 320,000 BOEs per day. The acquisitions in aggregate include over 900 sections of prospective land in the North Deep Basin, 445 million BOEs of 2P reserves and both assets or companies are in the most -- one of the most prolific and economic sub areas of the Alberta Deep Basin and both come with meaningful facilities and related infrastructure.

We plan modest growth in the 3% to 5% range from the Modern and Jupiter assets in 2021/2022 timeframe, basically to optimize efficiency and cost, and then will migrate to a maintenance capital/production model similar to what we are running in the balance of the Alberta Deep Basin complex after that. So production from the combined Modern/Jupiter assets is expected to increase from the current 76,000 BOEs per day to approximately 85,000 BOEs per day over those next two years and then we'll keep it essentially flat after that in the current model.

There are considerable operational, capital, land and facility synergies that we have been identified between the Jupiter and Modern asset base and the existing Tourmaline land in the area. We expect the Jupiter and Modern asset to cash flow approximately $300 million annually and provide free cash flow between $130 million and $150 million per annum in 2022 and beyond and anecdotally, that's actually sufficient to fund the vast majority of the current increased dividend.

As mentioned, we've agreed to sell Topaz a GORR on the Modern and Jupiter lands. That will be effective January 1, 2021 for $130 million.

It will consist of a 2% GORR on natural gas in 2021, that’s steps up to 3% in 2022 and thereafter, and it will be 2.5% on crude oil and condensate. Net of GORR proceeds, combined acquisition metrics are 2.6 times 2021 cash flow and the free cash flow yields is 13% in 2021 and 20% in 2022.

A little bit more detail on Modern specifically. We acquired it effective November 2, 2020.

Total consideration including debt $144 million, so $73.75 million of cash and 1.5 million Tourmaline common shares and the net debt was approximately $44 million. Those assets are located in the north part of the Deep Basin, current average production of 9,000 BOEs per day, 2P reserves of 88 million BOE, that’s a Tourmaline estimate, over 400 sections of land and a 100% owned-and-operated route natural gas plant which has a fully loaded capacity of approximately 120 million per day and a future minimum drilling inventory of over 200 locations.

Moving to the Jupiter acquisition. We have entered into a definitive agreement to acquire Jupiter for 24.2 million Tourmaline common shares and that represents a total consideration for the transaction of $626 million and that’s inclusive of net debt estimated at approximately $200 million.

And as mentioned, that transaction is expected to close on December 16, 2020. And we provide some detail on 92% of the share lockups that we have in place.

The Jupiter assets are immediately adjacent to the Modern assets, includes average working production currently is 67,000 BOEs per day, 2P reserves of 357 million BOEs, 500 net sections of land with an average working interest 84%, and working interest in several gas plants in the Resthaven and Kakwa areas. The greater Musreau-Resthaven-Kakwa portion of the Deep Basin, where the Jupiter and Modern assets are located, yield amongst the highest EUR wells and liquid yields in the entire Deep Basin complex.

And on both asset bases, we believe we will be able to deliver completed horizontals for 30% to 40% less capital cost and we've done that on immediately offsetting acreage already in the Musreau-Kakwa area. The Jupiter production base has an estimated decline rate of 25% in the 2021/2022 timeframe.

We estimates annual maintenance capital of approximately $130 million or 20 to 22 wells per year to yield annual cash flow of $250 million to $260 million on production of 70,000 to 75,000 BOEs per day in 2022 and that’s a strip pricing. We believe the Tier 1 drilling inventory alone will support this level of drilling activity for an estimated 13 to 15 years.

Jupiter did generate free cash flow in 2020. We believe Tourmaline's lower operating and capital costs will increase that estimated free cash flow to approximately $120 million per year at strip beginning in 2022.

The Jupiter infrastructure includes working interest in three gas plants, two of which are operated by Jupiter and their current OpEx is estimated at $4.25 per BOE. So, a little higher than ours, but we will realize some of the field synergies that we see and drop that OpEx.

And a substantial portion of the current and Jupiter gas production accesses deep cut facilities in Resthaven-Kakwa yielding strong overall liquid production. The assets are currently producing approximately 20,000 barrels per day of condensate and NGL.

Looking at our third quarter results. They were in fact strong.

Our Q3 production was 298,202 BOEs per day, so right in the middle of the Q3 guidance range of 295,000 to 300,000 BOEs per day. And that's net production, we were actually injecting in July in California.

So actual operated production was higher than 298,202. Our nine-month 2020 average production now sits at approximately 302,000 BOEs per day.

As mentioned we did achieve our exit guidance between 322,500 and 327,500 BOEs per day during October and that includes the impact of the acquisitions that were completed at that time, so the aggregated small Deep Basin and acquisitions, not Jupiter and Modern and the Polar Star and Chinook acquisitions from February and March of this year. And it's really stronger than forecast new well performance from our post breakup EP primarily in the Alberta Deep Basin and that allows the company to achieve that exit production guidance early.

So, our revised exit production assuming Jupiter closes on scheduled December 16 is now 400,000 BOEs per day. And as mentioned, we're averaging 2021 average -- or expecting 2021 average production between 390,000 and 410,000 BOEs a day.

So, midpoint is 400,000 and that will be constituted by 1.9 Bcf per day of gas and 87,000 barrels per day of crude oil condensate, and NGLs. Looking at our financial results for Q3 and a little bit more detail.

As mentioned, cash flow was essentially $280 million or ($1.03 per fully diluted share on total CapEx excluding acquisitions of $241.2 million and free cash flow for the quarter was $38.7 million. So, nine-month cash flow was now at $788.8 million.

Nine-month free cash flow is $129.1 million. Our revised 2020 cash flow is now estimated to be $1.225 billion, that's based on full year average production of between 310,000 and 312,000 BOEs per day, and that's controlled by production levels at the time that we closed Jupiter -- the Jupiter acquisition in mid-December Q3 OpEx was $3.26 per BOE and year-to-date operating costs are $3.10 per BOE.

So, those remain amongst the lowest in the sector. We also announced our investment grade credit status during Q3, which combined with low prevailing interest rates contributed to an effective interest rate of 1.57% for Q3 of 2020.

So, we're certainly proud of that. Turning to our 2020 and 2021 capital programs.

We have increased the 2020 EP capital program to $835 million from $800 million. The incremental spending relates to fourth quarter drilling on the Modern and Jupiter assets to maintain existing production levels, early mobilization of one drilling rig in BC to main maintain production on the Chinook and Polar Star assets and the small initial facility progress payment on Gundy Phase 2 that expansion is scheduled for first half of 2022.

The 2021 EP capital program is now $1.1 billion versus anticipated 2021 cash flow of $2 billion. And this program includes $160 million to maintain and optimize production on the Modern and Jupiter assets.

It includes a $100 million facility progress payments for Gundy Phase 2 deep cut, that total estimated Phase 2 plant cost remains at $150 million, once fully installed and operational in the first half of 2022 and that compares to the Phase 1 Gundy deep cut cost of $180 million. And do remember the Gundy Phase 2 was the only significant facility and growth project in our entire current five-year plan.

We remain on track for record 2020 EP capital efficiencies of under $7,000 per flowing BOE and it will pick up modestly in 2021 to just around $7,000 per flowing BOE, primarily because of that initial progress payment on the Gundy Phase 2 deep cut facility. Our new go-forward maintenance capital is estimated at $900 million for 2021, including all acquisitions and is expected to systematically decline in subsequent years.

We plan to drill including the acquired assets 225 wells approximately in 2021. Looking very briefly at our second half EP activity.

New well performance consistently exceeded expectations during Q3. Highlights included the first Lower Montney well on the 16 section block acquired in Q4 of 2019 at South Gundy in BC, tested at a final rate in the Lower Montney of 9.4 million cubic feet per day and 560 barrels per day of condensate on 188.5-hour flow test.

And that’s an important delineation well that may lead to a significant new liquid-rich Tier 1 inventory increase in our greater Gundy complex. The next three wells I won't go through in detail.

They are spectacular wells. So, you can read them yourself.

Interestingly, they're all on the Deep Basin, which bodes well for the acquisitions that we announced yesterday. Briefly on the marketing front.

We have an average of $475 million per day hedged for Q4 2020 at a weighted average fixed price CAD $2.80 per Mcf an average 146 million per day hedged at a basis to NYMEX of minus US$0.15 per Mcf, and an average 379 million cubic feet per day of incremental volume exposed to export markets, which include Dawn, Empress, Chicago, Ventura, Sumas, Malin and PG&E. Nat gas fundamentals for 2021 are steadily improving.

Remember that approximately 72% of Tourmaline's natural gas volumes are exposed to markets on the western half of the continent. So that includes PG&E, Malin, Sumas, Station 2, AECO.

That's where the 2021 gas supply diminishment is anticipated to be the greatest and hence, the prices the strongest. Tourmaline has diversification to the U.S.

and other hubs aggregating to 620 million cubic feet per day by exit 2022 and 665 million cubic feet per day by exit 2023. We also have 4 Bcf of natural gas in storage facilities at Dawn, Ontario and PG&E, San Francisco, which we plan to draw out through the winter months at very strong and attractive prices.

During Q3, we actually injected 0.97, or just about 1 Bcf of natural gas in the storage when the prices were lower than they are today. We did provide a new five-year plan in our updated CoV and investor materials.

Our anticipated 2021 cash flow, including the impact of the new acquisitions as mentioned is $2 billion at current strip pricing. And that will yield free cash flow of just over $850 million on CapEx of $1.1 billion.

And that 2021 free cash flow will be utilized to fund modest, sustainable dividend increases, further reduce debt and potential tactical share buybacks. We do intend to continue to reduce our debt cash flow to well less than one times during 2021 and maintain that debt at that levels, which will be somewhere in the $1 billion range.

We are maintaining the same modest EP growth profile as in the previous five-year plan that equates to 3% to 5% per annum production growth. And our plan, as we've consistently stated for an extended period of time, is to not grow overall based on gas supply, but do attempt to capture more of it.

Of note in the five-year plan now at strip, the free cash flow over the five years is CAD $3.5 billion. We did increase the dividend due to the company's continued growth and sustainable free cash flow.

So, we've gone from $0.12 to $0.14 per share quarterly or $0.56 per share on a full year basis. And it's the fourth time we've increased the dividend since we instituted it in Q3 of 2018.

On the Topaz front, the Topaz IPO was successfully completed on October 26 of this year. And Topaz's common shares now trade on the Toronto Stock Exchange under the symbol TPZ.

Tourmaline owns 58.1 million Topaz shares, which had a market value of just under $850 million as of today. And I think that's probably enough commentary, and we're happy to move into the Q&A phase of this conference call.

So, thank you for listening.

Sure. Thanks.

Good morning guys. So just a couple of questions.

First one, and you did touch on this, but I guess any more color on how you could envision the allocation of free cash in 2021, if the strip holds? Obviously, I heard your comments, but the free cash flow numbers are quite large, obviously.

Or maybe asked another way, are there any rough ranges or brackets for how you're thinking about allocation to M&A or are there any triggers at all that would lead you to executing any more drilling? And the second part, just wondering on capital allocation.

Obviously, the kind of game plan has been grow a little bit in the Montney and stay flat in the Deep Basin. Sounds like that'll continue for some time here, but a sizeable investment in the Deep Basin.

So just seeing if there's any change to that thinking or what would cause you to allocate a bit more to the Deep Basin?

You bet. Thanks Mike.

No change to the capital allocation at the current time. So the Montney in Northeast BC or Montney Gas/Condensate Complex will remain the growth complex.

And I did reference that really the only significant growth project in the five-year plan is that, Gundy Phase 2 Deep Cut. There will be more net capital allocated to the Deep Basin simply because it's now a 250,000 BOE a day complex.

And so there's a little bit of growth to optimize the Modern and Jupiter assets, and then they'll revert back to a maintenance capital level, which of course will be higher than it was before we did those two transactions. On free cash flow allocation, I mean, yes, it is a large number.

We're not going to increase the dividend that much. And we're not going to take debt down to zero.

So I think the best way to look at the significant amount of free cash flow in that plan is that we have another pool of capital available for M&A to go along with the capital pool that we've created with the Topaz vehicle. We do not plan to grow Basin supply other than the 3% to 5% per annum growth that we've outlined in the plan.

So, we're not going to do that certainly through '21. If the strip improves from where it is now, '22 and '23 aren't backwardated, maybe we'll revisit that at some point, but right now we're going to maintain that capital discipline for the current future.

That will help?

Got it. Thanks, Mike.

You bet.

Hey, good morning guys. You touched on there being synergies with these assets that you've acquired here.

Obviously, you're quite forthright with the 30% to 40% on the capital side. Just wondering on the operational side, and in terms of the cash flow numbers that you've put out there for the next couple of years, how much of that -- those synergies are already baked in?

And is there a potential to go a little further than that?

What we put in over the next two years, as far as dropping OpEx was approximately $0.50 per BOE. Yes, there is an opportunity to do better than that.

But we left it there for now until we take over the assets and I'm sure we'll find more synergies than what we've already identified. And Jupiter has a significant processing spread on the ground.

Modern has a very new and efficient plant at route that's not full and our Musreau 8.13, 9.13 complex sits right in the middle of both asset basis as well. So there'll be lots of opportunity to optimize and improve OpEx metrics.

Great. And then, you guys have had a very defined strategy on the gas marketing side, having those molecules facing the Western side of the continent here.

As you're becoming, very meaningful on the NGL side, I'm just wondering if there's any strategies or things that you're thinking about to extract a little bit more value from those NGLs?

Well, yes, and that process has been in place for some time. I mean, our goal is to maximize the return from all of our hydrocarbon production streams.

And so we were relatively large NGL producer prior to this deal. So we have -- really, what we're putting in place is a comparable marketing and transportation long-term strategy that we've already put in on the gas side, which we started kind of over seven years ago.

So, some of those diversification efforts have included in Northeast BC participating in the RIPET system and moving the propane and getting the Far East index pricing. And we have another series of initiatives in place to optimize that whole NGL stream.

Brian, anything you wanted to add to that?

The only other thing is, when we reset our contracts with the buyers of our NGL at Fort Saskatchewan, we did so in a manner that took some of the short term price risk out, which we hadn't done in the past, so I think that's helped our netback. And you start to see that in Q3 as well where you could see our NGL price popup a fair bit.

So with a little bit more critical mass on the next reset here, does that put you in a bit of a better negotiating position? Or are those things, you think going to stay in kind of the same shape?

I think we probably, potentially have a little bit more leverage.

Okay. Thank you.

Yes.

Good morning, guys. Just kind of piggyback on some of the earlier questions and earlier comments here.

I mean, you guys talked about not wanting to take debt to zero. And so just wanted to think through that.

You all talked about the dividend, not wanting to grow it necessarily too much, which I think makes sense in a cyclical commodity business. So just wanted to further dig in on that and get your thoughts on how you would feel about potentially doing special dividends temporarily to supplement the common one when things are going well and not pushing up the common dividend too much along the way.

So just thoughts around potentially doing specials and where that might layer into the priority Q versus say buybacks or other uses?

Thanks Jordan. This is Brian speaking.

We favor the idea of a structured dividend, where we methodically increase it as we get more and more confidence about the tenure and a position of our free cash flow, including more hedge activity into '22 and '23. We're monitoring those companies that are using these various variable dividend algorithms.

So far we don't feel that it's something that's attractive to Tourmaline. We'd prefer to do it the way we're handling it right now.

Okay. So sounds like then a buyback was certainly ahead of that.

Is that fair?

Yes.

Okay. And then just another one.

Is there anything that you guys can share just in terms of third party fees associated with the acquired assets and potential tenure there, or ability to renegotiate and capture further synergies there?

I think, there's the potential to always reduce them. Jupiter had gone through a fee renegotiation process over the past couple of years and done -- had made significant headway from where they were prior to that, and so kind of see that as a ongoing continuum.

We did not feel any of that potential outside into the acquisition that we're doing, and so time will tell if we do even better. So we just built field OpEx reduction is in and nothing to do with the base processing fees.

But, we'll optimize, we'll increase the volume as mentioned kind of 5% per annum over the next two years, and there'll be some opportunities to do other things. Anything you want to add to that?

No, I think that's good.

Good.

Thanks guys.

Hi. Thanks Mike.

It's Fai here. I'm just wondering if you can comment a bit on the background on how the Modern and Jupiter deals came about?

Just curious as to whether you're specifically targeting assets you want to add into your portfolio, or if people are knocking on your door?

Well, there are assets that we've certainly paid attention to for an extended period of time. Both companies were in sales processes, and we just participated through those existing processes.

Okay. And in terms of the -- you just talked about little bit of improvements in gas prices, how is that affecting your opportunities set for acquisitions?

It hasn't it. If the questions, Fai, is has the run-up and price made it more difficult to do transactions, I would say no.

But -- I mean, time will tell, and Brian referenced the tenure to the gas price improvement. You have '22 and '23 move out of backwardation.

That may become an issue. I mean there are companies that have a significant amount of kind of balance sheet repair, for lack of a better term, to enact.

And so, there's still are opportunity sets available out there. That's really the best thing I can come up with right now to that question.

Okay. And just the last question, in terms of -- now that you're the largest natural gas producer and there's news in Alberta talking about potential negotiation to attract petrochemical producers to Alberta.

Have you given any thought -- I know it's longer term, but about potential offtake agreements with petrochemical producers in the Province, is that something you would consider?

Well, we've been looking at all sorts of opportunities for gas supply, including petrochemical for an extended period of time. And as we continue to grow our overall gas production, we're going to continue to diversify what we do with those gas molecules.

And -- I mean, I guess, currently we're the largest. Our real goal, though, is to be the most efficient, the most profitable and the cleanest nat gas producer in Canada.

Okay. Great.

Thank you.

Good morning, Mike.

Mike, just to follow-up. You mentioned that you want to be the cleanest gas producer.

I know that you're looking at electric rigs. And I'm just wondering along those lines, what other initiatives are you looking at or how -- where you see that going forward?

Well, we have a significant effort to ultimately eliminate diesel usage in all thrilling and completion operations, which provides a significant emissions reduction. We have hard five-year targets on CO2 emission intensity reduction and methane reduction.

And so we have some field trials on -- in various methane reduction projects and developing some of our own technology for both running drilling rigs off high line power and the continued elimination of diesel. Our water management businesses in both the Deep Basin and in Northeast BC.

In the instances in our larger complexes where we can deliver that water and remove that water by pipeline systems rather than trucking, there's a big emissions reduction associated with that as well. So we track it all, and as mentioned, have those hard five-year targets to continue producing a net cleaner methane molecule.

And don't forget Canada produces the cleanest methane molecule in the world.

Thank you.

Thanks Fai.

Thanks. Thanks so much.

Mike, can you tell us what the pro forma corporate decline is with all these acquisitions?

Currently, it's in that 34% to 35% range, and we see it dropping to 26% to 27% by year five of the five-year plan.

Okay. Thanks.

Thanks so much.

You bet.

Thank you, operator. Thanks everyone for calling in and listening.

And as always, if you have questions in the interim, please feel free to contact us offline.

Thanks everybody.

Thank you.