Tourmaline Oil Corp (Alberta) T.TOU

TD

[retiredcf]

Tourmaline Oil Corp.

(TOU-T) C$41.10

From Speculation to Reality: FCF Raining Down on Shareholders Event

Tweaks 2021/2022 Guidance. Returns Significant FCF to Shareholders

Impact: POSITIVE

Base DPS Increased; Special Dividend Declared: TOU announced an increased quarterly base dividend of $0.18/share (from $0.17). More significantly, it also declared its first special cash dividend of $0.75/share (incremental 1.8% yield) to shareholders of record on October 1.

Our View

• We previously highlighted that TOU's low debt, capital restraint, and completion of its Montney/Deep Basin acquisition plans paved the way for high cash returns to shareholders. We had expected that TOU could return ~7% of its market cap to shareholders (beyond the previous base dividend) through variable/ special dividends or NCIB by YE-2022 [see here]. Yesterday's announcement has converted our expectation into reality. The magnitude of this special dividend generally tracks our previous (although not formally forecast) expectations.

• Tourmaline stopped short of a formulaic strategy to return FCF like some of its U.S. E&P peers (or larger-cap miners); however, its intentions are clear. TOU intends to "return the vast majority of FCF to shareholders on a go-forward basis" and will "continue to distribute special dividends". Although this leaves room for M&A and buybacks, we expect cash distributions to be a major theme in 2022.

  Small Capital Guidance Tweaks Drive Production Tailwinds into 2022: Like other producers, TOU will complete its upstream program early and intends to keep rigs running through Q4/21 by adding incremental wells (~21) to the 2021 budget. Combined with the previously discussed acceleration of infrastructure projects into 2021 (Gundy 2) and now accelerated Nig Creek expansion, this should provide a production tailwind into 2022 — despite modestly lower 2022E capex (see Exhibit 1). TOU now expects to reach 500 mBOE/d by YE-2021, rather than the previous target of Q2/22.

  TD Investment Conclusion

  Tourmaline is the prime example of the modernized E&P. It has demonstrated capital restraint and cost control, undertaken attractive strategic/tactical M&A, has negligible debt, is focused on FCF and, not only has it committed to returning the FCF to shareholders, but it has also begun doing so. Yet, it continues to trade near historically low valuations, even under significantly lower-than-current commodity price assumptions (Exhibit 3).