CIBCEQUITY RESEARCH
September 12, 2022 Earnings Update
TOURMALINE OIL CORP.
Free Cash Flow Appeal On Display As Revised 2023 Cash Flow
Guidance Reflects LNG Pricing Upside
Our Conclusion
Tourmaline’s updated cash flow guidance for 2023 highlights the meaningful
free cash flow potential next year, which has been reflected in our strip
forecasts following the surge in JKM pricing over recent months. The
company quoted potential free cash flow in 2023 that exceeds $14.50/sh and
a target return of 50%-75% to shareholders. Assuming the shareholder
returns are in the form of a base and special dividend, potential cash returns
could be $7.25/sh to $11/sh in 2023. The production revisions for H2/22 are
directionally negative for Q3/22 and positive for Q4/22, but we see the impact
as being immaterial to our 2022 estimates. Our estimate changes are
minimal and our $100 price target is based on a 4.7x EV/DACF multiple in
2023 on strip pricing.
Key Points
Additional hedge positions disclosed to secure future cash flow, while
retaining ample flexibility to participate in the upside potential of gas
pricing. TOU disclosed that currently ~26% of 2023E production is now
hedged at a fixed price of C$5.26/Mcf, along with an additional 20 MMcf/d
hedges for its JKM exposure since its Q2 disclosures. We see the increased
hedge position as being prudent towards protecting cash flow downside in
the event of a pricing pullback, and we are modelling TOU with a net cash
position in 2023.
Near-term guidance noise immaterial to our 2022 estimates. TOU’s
updated guidance implies ~2% downside for Q3/22 Street numbers at 492
MBoe/d prior to this update, as the company decreased its Q3/22 production
expectation from 485-495 MBoe/d to 480-485 MBoe/d. The decrease is
owing to a combination of factors, including the collapse at AECO and
Station 2, which forced the company to shut in 100 MMcf/d of existing
production, and delayed the start-up of several new pads from August to
September/October. Volumes were also impacted by an unplanned outage at
the Pembina Resthaven deep cut facility. We expect minimal change to
Street numbers for Q4/22 on the back of the update, as TOU increased
Q4/22 production guidance from 520-525 MBoe/d to 525-530 MBoe/d. The
net impact to our estimates is immaterial overall.