From RBC
May 5, 2020TORC Oil & Gas Ltd.Q1/20 – Pulling all the leversOur view: We view management's austerity measures positively, resultingin a net decrease in debt balances through the back half of the year.While liquidity has certainly tightened, we believe the company is wellpositioned to wait out near term volatility and withstand a likely bank linereduction.Key points:Strong start to 2020. Q1/20 production volumes of 28,515 boe/d (89%liquids) compared to our 28,307 boe/d estimate (Street: 28,412 boe/d).CFPS of $0.21 was a penny higher than the RBC/Street estimate of $0.20;key netback variances are noted in Exhibit 2. The company took an $853million write down during the quarter on depressed commodity pricing.Capital expenditures effectively halted for the balance of the year.The company provided updated capital guidance contemplating annualspending of $75 million. Given the $65 million spent on drilling duringQ1, the balance of the year is effectively reduced to maintenance items.In addition, production guidance has been suspended given the potentialfor further shut-ins. Approximately 4,000 boe/d is currently offline, withmanagement noting the potential/readiness to take up to 15,000 boe/doffline if pricing declines further.Dividend suspended until pricing normalizes. Management hassuspended the dividend until pricing normalizes in order to protect thebalance sheet, resulting in annual savings of roughly $13 million. Thiscomes off the back of the 80% reduction announced in March (note here).We view the move favourably, as liquidity is now the primary focus.Bank line review extended. The company's line review was extended toMay 29, from April 30 previously, as lenders continue to monitor marketconditions and evaluate the merits of government support programs(note here). We expect a reduction to the current line, though magnituderemains uncertain.Framing the downside, liquidity in check. We have run a liquiditysensitivity at various commodity prices and production levels (inclusiveof potential shut-ins), outlined in Exhibit 3. At the current cost structureand our base production assumptions, we estimate the company hassufficient liquidity to weather pricing down to sub-US$25/bbl WTI. Weforecast elevated D/CF of 5.0x in 2020 vs peers at 5.2x, decreasing to 2.0xvs peers at 5.2x in 2021. Available liquidity at the end of 2020E maps toapproximately $131 million, assuming the $500 million bank line is intact.Recommendation unchanged. Our Outperform recommendation and$1.75/share price target are unchanged. TOG shares currently trade at3.4x 2021E EV/DACF vs peers at 5.3x; a good entry point for investors witha higher risk profile and long term view, given TORC's asset quality and aseasoned management team that has endured prior commodity cycles.