CIBCEQUITY RESEARCH
January 17, 2022 Earnings Update
TOURMALINE OIL CORP.
2022 Operational Update Dials In On Shareholder Returns
Our Conclusion
We take Tourmaline’s operations and dividend announcement as a favorable update, and relatively in line with expectations. The base dividend increase and special dividend are aligned with recent messaging, and provide a sweetener to start 2022. Our estimates see TOU carrying a FCF yield of 22% in 2022 on recent strip, and we expect to see additional special dividends throughout the year. Our estimate revisions are minor for 2021 and 2022, and we expect the stock to continue to perform favorably relative to peers. We reiterate our Outperformer rating and price target of $60.00.
Key Points
Free cash flow allocation strategy on display to start the new year. TOU increased its base dividend by 11%, moving to $0.20/share ($0.18/share prior) in Q1/22. Additionally, the company announced a special cash dividend of $1.25/share payable on February 1, 2022 for shareholders of record as of January 25, 2022. We believe the $1.25/share special dividend was aligned with most expectations given the free cash flow visibility for TOU.
Q4/21 volumes come in at the low end of guidance, but 500 MBoe/d exit rate achieved. Q4/21 production came in 485 MBoe/d, which is on the low end of prior guidance and a shade behind estimates (CIBCe 486.9 MBoe/d, consensus 489 MBoe/d). TOU also announced it accelerated drilling and completions activity into 2021, and we have adjusted our capital spending estimates higher for Q4/21 (CIBCe $410MM, consensus $388MM).
Q1/22 production volumes on track. Production for Q1/22 is anticipated
between 500-510 MBoe/d (CIBCe 508 MBoe/d, consensus 505 MBoe/d).
Payout ratio for 2022 remains very lean, and more special dividends
likely on the horizon. Inclusive of TOU’s new base dividend level of
$0.80/share (annually) and its Q1/22 special dividend ($1.25/share), our total payout ratio for 2022 maps to 46% on recent strip, moving to 44% in 2023. At current strip pricing, we estimate TOU could generate ~$8.40/share of free cash flow in 2022. With management remaining steadfast that the majority of free cash flow will be returned to shareholders, we see ample room to deliver additional special dividends, or execute share buybacks, throughout 2022.