Dividend Increase Our Conclusion
Tourmaline reported a solid Q1/24 update, with production volumes that
were in line with expectations and cash flow that topped estimates. Higher
realized gas pricing was the primary contributor to the cash flow beat against
our estimates. The company maintained its production and capital spending
guidance for 2024 but did release Q2/24 production guidance that is lighter
than expected. Tourmaline also announced a 7% dividend increase and a
special dividend of $0.50/sh, which we expect will be well received. We have
fine-tuned our model on the back of this update, which drives minor changes
to our estimates. The stock trades at 6.6x 2024E EV/DACF and an FCF yield
of 6%, versus peers at 5.5x and 2%, respectively. With the increase to our
2024E CFPS to $9.99 from $9.78 prior, we increase our price target to
$80.00 from $77.50 prior.
Key Points
First-quarter cash flow higher than expected due to strong realized gas
pricing. Production of 592 MBoe/d was in line with our estimate of 593
MBoe/d and consensus of 592 MBoe/d. Cash flow of $2.51/sh topped our
estimate of $2.28/sh and consensus of $2.39/sh. Capital spending of
$556MM (including A&D) was below our estimate of $630MM and consensus
of $623MM. Liquids production of 145 MBoe/d was in line with our estimate
of 147 MBoe/d and above consensus of 144 MBoe/d.
Special dividend of $0.50/sh as expected. The $0.50/sh special dividend
was within the range of our expectations, and we take the 7% increase to the
base dividend as a positive surprise. On our revised estimates, we see
Tourmaline generating ~$1,450MM in free cash flow in 2024 or ~$4.00/sh.
We therefore expect continued quarterly special dividends in the range of
$0.50/sh to $0.75/sh for the balance of the year.
Lower Q2/24 production guidance could be a slight drag on consensus
cash flow. Production for Q2/24 was guided to a range of 560 MBoe/d to
570 MBoe/d, which comes in below consensus of 573 MBoe/d. Management
intends to inject ~7 MBoe/d of natural gas during the quarter, owing to the
large difference between current and winter natural gas pricing.
Westerose Duvernay disposition completed for modest proceeds.
Tourmaline announced $53MM in disposition proceeds for its Duvernay
assets in the Westerose area that accompanied the Bonavista acquisition in
the fall of 2023. The Duvernay assets were producing ~1,700 Boe/d and
included ~32,000 acres of Duvernay rights, to our knowledge. The
disposition proceeds imply a sale metric of $31,175/Boe/d, which is below
Tourmaline’s 2024E EV/Boe/d of ~$40,000/Boe/d.