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Executives

Michael L. Rose - Chairman, President and CEO

Brian G. Robinson - VP, Finance and CFO

Scott Kirker - Secretary and General Counsel

Analysts

Robert Bellinski – Morningstar

Ray Kwan - Macquarie Securities

Tourmaline Oil Corp. (OTCPK:TRMLF) Q4 2013 Earnings Conference Call March 18, 2014 11:00 AM ET

Operator

Good morning ladies and gentlemen. Welcome to the Tourmaline Oil Corp 2013 Year-end Results Conference Call. I’d now like to turn the meeting over to Mr. Scott Kirker. Please go ahead.

Scott Kirker

Thanks, Wayne. Welcome everyone to our discussion of Tourmaline’s year-end and fourth quarter results for 2013. Before we get started, I’d like to refer you to the advisory on forward-looking statements contained in the news release as well as the advisory which contained in the Tourmaline annual information form available on CEDAR. I’d like to draw your attention in particular to the material factors and assumptions in those advisories.

I’m here with Mike Rose, our President and Chief Executive Officer and with Brian Robinson, our Vice President, Finance and Chief Financial Officer. Mike Rose will start by speaking to some of the highlights and after his remarks; both Mike and Brian will be available for questions. Go ahead Mike.

Michael L. Rose

Thanks, Scott. Good morning, everybody. 2013 was very strong year for Tourmaline both operationally and financially. We are very pleased with our 2013 earnings of $148 million, which was up over 850% over 2012. Q4 earnings were $56.8 million and both underscore the fundamental full cycle profitability of our natural gas business and as prices improve with our very low cost structure, things will continue to improve financially.

Our cash flow 2013 of $526 million was a record and up 88% over 2012. We had record quarterly cash flow in Q4 of $160 million and that’s where the 3.50 gas price. So these improvements will continue into 2014.

Our 2013 annual production growth, we were up 47% or 31% per diluted share in 2013 over 2012, and we’re forecasting 2014 production growth of 60%. On the reserve front we did release our reserves approximately three weeks ago.

Our total 2P additions of just under 180 million Boes in 2013 represented 41% growth over 2012, and that’s 30% per diluted share and very strong net additions in all three reserve categories. Our 2013 reserve replacement ratio was 6.6x of production that was approximately 27 million Boes.

Turning to the update both on EP and production and finance, starting with production. Our anticipated full-year 2014 average production is 120,000 Boes a day and as mentioned that will be a 60% increase over 2013. And we increased our guidance from 118,000 to 120,000 as we made the decision to run off 16 rigs for the balance of the year, to save the break-up period that were coming up to right now.

We will tie-in approximately 48 wells during the first quarter of 2014, and by break-up which will be in early April we expect to reach a production level of between 115,000 and 120,000 Boes a day. So either at or very close to what the full-year average is going to be. So we’re quite excited about that.

And then in the second half of 2014, we will see major growth as there is three relatively large facility projects, the plant expansion at Musreau and the Deep Basin the plant expansion at Doe in B.C. and the start-up of our sour gas injection plant at Spirit River and all three projects are currently on schedule.

Moving to the EP program itself, starting with the Alberta Deep Basin, Tourmaline is the most active operator. We were operating 12 drilling rigs over the past months. We will shutdown for break-up and recommence with those 12 rigs in the second half of 2014. We drilled 17 new Wilrich horizontals thus far in ’14 and expecting at minimum a total of 55 new Wilrich horizontals will be drilled and completed in full-year 2014 and expect to get all of those tied into our own facilities by the end of the year.

The winter program yielded five very strong Wilrich horizontals in the Smoky-Horse-Berland area and parts of that are a winter only areas. So we had five rigs working in there. Included in that mix is a Smoky 4-1 well that’s had a 30-day IP of 22.2 million and as far as we know that’s the best Wilrich well yet in the entire play.

Our Notikewin results continued to exceed our internal economic template the 30-day average IP from the 12-28 well at Wild River is 20.9 million and we know that’s the best Notikewin well to date in the basin. With that Musreau plant expansion late in Q3 of 2014, we will take production close to the half of Bcf a day production milestone and get there either late this year or early next year.

Moving to North East BC, our Montney gas condensate complex, we’re continuing to operate two rigs, drilling multi well pads. We will drill through break-up in BC as most of the locations are accessed by roads that we own. And we will drill somewhere between 35 and 40 Montney horizontals during the course of 2014.

We are very excited about our late 2013 lower Montney high [rich] [ph] condensate discovery, the two wells from a production test and IP standpoint, the first one had a 30-day IP of 6.3 million a day with 634 barrels per day of condensate at the wellhead. So just over a 100 barrels per million and the second well had a 30-day IP of 5.6 million a day with just over 500 barrels per day of condensate at the wellhead or about 90 barrels per million at the wellhead. So that doesn’t include condensate at the plant or NGLs.

We drilled one follow-up on a regional basis and we will get that completed over the next month and then we’re drilling on an adjacent multi-well pad to 5-5 and that’s where drilling will continue through break-up. As previously disclosed, we also acquired considerable acreage prospective for this new horizon in December of 2013.

We have about 6,000 Boes a day behind pipe. Current production in BC is about 31,000 Boes a day. We have a plant expansion at Doe plant for Q3 as mentioned. It will add 55 million a day and that will put us right on schedule to exit 2014 at 250 million a day and 5,000 to 6,000 barrels per day of condensate from the BC Montney complex.

Moving to the Peace River High Charlie Lake Oil play, thus far in ’14 we drilled 14 new Charlie Lake horizontals along the trend. We will continue to operate three drilling rigs during the balance of the year who will be shutdown for break-up. And that should equate to about 45 wells full-year 2014.

We have now drilled 72 successful horizontal oil wells into that regional pool. It’s about 70 miles long and so we believe our mapping and interpretation is very solid as we have not drilled any dry holes to date.

We are in the process of completing two concurrently fracked well pairs, one at Spirit River and one up in Mulligan and should have those results here over the next couple of weeks. Production from the overall trend is in the 9,000 to 10,000 Boe per day range. We have an additional 6,000 Boes a day that remain shut-in at Spirit River and that will come on stream with our sour gas injection plant towards the end of Q3 of this year.

As part of the Company’s regional facility plan for this new play, we have two major 2014 projects, one is the just mentioned Spirit River sour gas injection plant and the second is our new battery at Mulligan, and that will give the two large oil processing batteries along the trend. So we’re currently targeting a ’14 exit volume of between 18,000 and 20,000 Boes a day from the overall complex.

On the true exploration program, our Paleozoic Exploration test at Sunset and BC was cased to total depth during the first quarter. It has three gas pay zones to complete. We know that two of them were very high pressure and the high pressure equipment necessary to safely conduct completion operations was not available in time for us to complete those operations prior to break-up. So we’ll do it in the June, July timeframe, but it looks quite encouraging.

Our first Montney horizontal in Resthaven-Kakwa, the emerging gas-condensate play is currently fracking and we should be flowing that back over the next week. And finally our deep test at Smoky 8-15 was drilled to the Cambrian. We cased to total depth, there are multiple deep gas zones to be completed in the Devonian and Deeper Horizon and again that will be after break-up. So, so far so good on the exploration program.

Briefly on the financial side, we’re forecasting full-year cash flow of $1 billion in 2014 using a $3.86 per Mcf AECO gas price and that will yield a 92% increase over our 2013 cash flow, which if you recall grew 88% over 2012. And that increase is being driven by a combination of a growth in production volumes and the steadily improving natural gas prices.

Our netbacks in 2013 were up by 25% and that trend will continue as gas prices appreciate in 2014 and we maintained our low overall cash cost by continuing to drive down unit operating cost, the average $4.35 per Boe in 2013. Our overall cost structure for 2013 including operating, transportation, G&A and financing was $7.72 per Boe amongst the best in industry and that is helping drive our profitability both full cycle and a very strong earnings we’re posting.

So with that I’ll stop and glad to answer questions anybody might have. Wayne, back to you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Robert Bellinski from Morningstar. Please go ahead.

Robert Bellinski - Morningstar

Good morning, gentlemen and thanks for taking my call. Over the last couple of quarters the spread on your realized liquids prices has widened which you noted in the release. I was wondering if you could comment a bit on what you’re expecting going forward as you bring these additional liquids volumes on stream, and could you give us any idea on how your realizations are trending for crude versus NGLs?

Brian G. Robinson

It's Brian Robinson speaking. So, with respect to our full-year liquids prices you’ll see they were down marginally over 2012. Looking forward into ’14 we quote our oil prices being $97 and when I split that into the various components, our pentane price will follow roughly that $95, butane $50, propane $38 and we do now have a small ethane stream because we’re running gas into the -- a third-party system at Fort Saskatchewan we’re getting $16 a barrel for that through ’14 and that sort of is our component stream of the liquids that we produce in addition to our crude oil out of Spirit River.

Michael L. Rose

And our associated liquids on the gas side are typically two thirds condensate and then one third NGL mix and then Brian gave you the price breakdown for the main components of that NGL mix.

Robert Bellinski – Morningstar

That’s great. And then one more for me, just thinking about capital efficiency, amid the increase in gas prices we’ve seen this year how are costs trending in the Deep Basin and are you starting to see signs of inflation?

Michael L. Rose

We haven't seen signs of inflation; I wouldn’t say they’re going down. In our five-year outlook development plan that we put in our corporate updates, Robert, we build in 5% per year inflation in capital cost and I think that’s probably appropriate right now.

Robert Bellinski – Morningstar

Okay, that’s great. Thanks, guys.

Michael L. Rose

Thank you.

Operator

Thank you. (Operator Instructions) Our following question is from Ray Kwan from Macquarie Securities. Please go ahead.

Ray Kwan - Macquarie Securities

Hey, guys. Just a quick question on the North East BC Montney in terms of the condensate rich slower Montney discoveries and the IP 30-day rates associated with that. Just wondering in terms of the scale and the size in terms of the land position that you guys have, can you kind of further explain that or basically and go further detail on that. And the second question I was going to ask is in regards to the exit numbers of the 115,000 to 120,000 by late March, early April, the 48 wells to be tied-in, how many has been tied-in to date?

Michael L. Rose

Okay, on the Montney gas condensate in BC, we’re very pleased obviously with the 30-day IPs on the first two horizontals into this zone and what's particularly encouraging is the relatively high gas rates which over life will be critical to maintain those kind of liquid production numbers, and we did add a significant amount of land in December. We already have a lot of land in there.

I’d say that we need to drill some more wells to know if it's a major new horizon or whether that’s a little more local, but we’re very encouraged by what we see in the initial step out is not close to the first two wells which is encouraging the multi-well pad that we’re just starting on is about a mile and half from the first two high rate wells. So more EP information required, but looking good so far on that front.

As far as tying in the 48 wells, I’d say we’ve gotten about 30 of them tied-in or just about tied-in so far and we’ll get the full 48 on stream. That being said, 6,000 Boes a day, it's already tied-in in Spirit River and another 6,000 in BC. Those volumes won't be seen until the plant start-up, the plant expansions over the sour gas injection plant at Spirit River towards the end of Q3. So we’ve got a significant amount of production that will remain behind pipe in addition to getting to between 115,000 and 120,000 Boes a day. Does that help?

Ray Kwan - Macquarie Securities

Yes, it does. And just a follow-up to I guess the -- that lower Montney question. So out of the 35 wells that’s being drilled this year, so you just following up with this additional regional follow-up and there’s going to be anymore as part of this program here?

Michael L. Rose

Well, there is one regional follow-up that’s already drilled and going to be completed over the next two weeks and then there is the offsetting pad that will probably have three wells into that horizon and then of subsequent pads during the course of the year we will continue to test this new horizon. So of the 35 wells you could -- maybe estimate that seven or eight will be in this horizon during the course of the year, because we’re still developing the other three horizons and making sure we have enough volume to fill the expanded facilities as well.

Ray Kwan - Macquarie Securities

Great, thank you.

Michael L. Rose

You bet.

Operator

Thank you. There are no following questions registered at this time. I’d like to return the meeting to Mr. Kirker.

Scott Kirker

Well, thanks everybody for attending. If you have any further follow-up questions you can always get a hold of us individually at the office. Thanks again for coming. See you.

Operator

Thank you. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.

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