Tourmaline Oil Corp (Alberta) T.TOU

RBC

[retiredcf]

Current and upside scenario targets are $36 and $40. GLTA

Tourmaline Oil Corp. Pole Position

Our view: RBC hosted Tourmaline senior management for a virtual NDR, with focal points revolving around recent activities in the NE BC Montney and the longer term outlook amid more favorable commodities. We came away with even more confidence in the story and sensed an enhanced focus on key longer-term (5-10 years) growth drivers - which we feel will continue to resonate well with investors.

Key points:

• North Montney - a long term value driver. What was clear to us is the next stage of potential growth will come from the North Montney (Conroy) area which has now been assembled, and we expect will be augmented. With Gundy P2 nearly on stream, we would anticipate future development dollars targeted at Conroy - both as it relates to bolt-ons and development dollars. We could envision a Gundy-sized project at Conroy in the future - in the snack bracket of 400 mmcf/d + 50,000 bbl/d - perhaps at a cost of $500 million or so ($300 facility + $200 initial drilling).

• Long-term decisions are being made with LNG exports in mind. Proximity to takeaway and LNG is a key factor for the North Montney and all gas assets - reflective of the likely 2025/2026 on-stream date for LNG Canada (2+ bcf/d). Whether TOU will ultimately directly supply a project or simply produce into the market remains unclear - but the broader strategy is to operate in regions where pricing can be optimized. With LNG only requiring the gas this impacts marketing of meaningful associated liquids - a topic in mind amid the recent acquisition of condensate pipe and liquids terminal at Aitken, a hub that supplies all the main distribution arteries.

• Acquisitions are still on the table, albeit with a high bar. Given the magnitude of FCF it seems likely future deals are in the cards, but come with a high hurdle rate and more potential bidders. That said, TOU is the 'only game in town' in many of its core areas and leveraging its facilities could provide incentive for competitors to sell. In our view NE BC Montney deals remain in focus, as do selective parts of the Deep Basin similar to what we detailed here.

• Heavy is the head that wears the crown. As the now-again-largest producer of natural gas in the WCSB at 2.0 bcf/d, TOU is taking a thoughtful approach to basin management and is mindful of its own ability to impact market pricing. This impacts the pace of new drilling and marketing decisions, for instance pointing roughly 75% of new Gundy expansion volumes (150 mmcf/d) to California (as opposed to AECO).

• Uses of free cash - plenty of levers. Tourmaline's FCF figure for 2021/2022 sums to $2.3 bn (on strip) and leaves multiple avenues for deployment which include dividend increases (we could see easily reaching $1/share by 2025), buybacks (TOU has an NCIB in place), debt repayment (our forecasts call for debt fully paid off in 2022) and M&A/A&D. TOU holds a considerable number of levers at its disposal - providing a number of avenues to deliver both return-on-capital or return-of-capital for shareholders.