TORC Oil & Gas Ltd. VREYD

RBC

[retiredcf]

Their upside scenario target is $10.00. GLTA

August 2, 2017

TORC Oil and Gas Ltd Q2/17 - Execution mode

Our view: We expect TORC Oil and Gas shares to respond positively to Q2 results which topped expectations with a low 47% total payout ratio to boot. We remain comfortable adding to existing positions given the execution track record, higher cash generation and above-average flexibility.

Key points:

• Execution mode. TORC's Q2/17 production volumes of 20,775 boe/d exceeded our estimate of 20,400 boe/d by 2%. CFPS of $0.28 came in above RBC and Street consensus of $0.24/$0.25. Key sources of variation to our estimate include 4% higher liquids production, 4% lower royalties, and 13% lower unit opex. TORC's cash flow netback stood at a healthy $27.75/boe vs our $24.47/boe estimate. Management indicated that the margin expansion partially reflects the impact of its budding Torquay/Three Forks program. TORC recently bought 7 gross (6.9 net) Torquay wells on-stream with 7 additional wells planned in H2/17, implying further upside to our revised estimates.

• Slight guidance bump with no change to capex. TORC increased its full year production guidance by 1% to 20,600 boe/d and also bumped up its liquids weighting from 87% to 88%. The company's 21,200 boe/d exit rate is unchanged as is the $130 million capital budget, with only about 40% spent through Q2. Consequently, we have raised our 2017 CFPS estimate up by 9% to $1.04.

• Above average financial flexibility. Based on our updated model, we peg TORC's 2017E cash generation at $194 million at our US$48.50/bbl WTI forecast vs. a $130 million capex program and net cash dividends of $29 million, resulting in a 82% post-DRIP total payout ratio. TORC remains unhedged and its balance sheet is sound with 2017E net-debt- to-trailing-cash-flow ratio of 1.3x vs the 3.5x oil-weighted peer group average.

• Attractive valuation despite strong track record and financial flexibility. At current levels, TORC is trading at 2017E and 2018E EV/ DACF multiples of 6.3x and 5.8x vs. oil-weighted peers at 7.3x and 6.1x and a P/NAV ratio of 1.2x vs. 1.1x for oil-weighted peers at RBC's price deck.

• Maintaining Outperform and $7.00 price target. Our 12-month price target reflects a 1.0x multiple of the sum of our adjusted base NAV of $4.35/share plus $2.41/share of risked upside from future development. Our 1.0x target multiple is in line with the producer average and reflects TORC’s established operational track record, solid financial outlook, and healthy unbooked resource exposure