Tourmaline Oil Corp (Alberta) T.TOU

RBC

[retiredcf]

Their upside scenario target is $54.00. GLTA

September 23, 2021

Outperform

Price Target CAD 46.00 ↑ 44.00

Tourmaline Oil Corp. Sunny Days Ahead

Our view: Tourmaline's highly-anticipated road map for its return of capital strategy supports a mix of dividend increases, special dividends, buybacks and strategic investments. As we previously outlined in Treasure Hunt, Tourmaline is well positioned to drive modest growth while also returning meaningful capital to shareholders. TOU remains on the RBC Global Energy Best Ideas List.

Key Points:

2022 capital budget unveiled. Tourmaline's formal 2022 capital budget maps to $1.125 billion (down $62mm from prelim) and is set to drive volumes of 500-510 mboe/d, positioning the company to deliver roughly $2 billion in FCF at the RBC price deck ($2.5 billion at strip), with the goal of distributing the vast majority back to shareholders in the form of dividends and buybacks. The company's 2021 program increases to $1.375 billion (previously $1.27 billion) alongside a modest guidance increase to 440-445 mboe/d as select drilling projects (21 wells, facilities) are pulled into 2021. Summing 2021 and 2022, the net effect is a minimal(+43$ million) increase in capex.

• Dividend increased by a penny, plus a $0.75/share special. Tourmaline's base dividend will be increased (December 31st dividend) to $0.18, which maps to an updated annualized yield of 1.8%. Additionally, the company announced a Q4 special dividend of $0.75 which was well above our $0.30/share expectation. The special dividend features an ex-dividend date of September 29th and payment date of October 7th - we anticipate regular special dividends continuing as we work through 2022.

• Operations and potential strategic investments. On the operational front, startup of Gundy Phase 2 approaches, which is positioned to add +200 mmcf/d and +15 mbbl/d by exit 2021. Our outlook calls for roughly $250 million in strategic investments in 2022, which could include bolt- ons or other strategic initiatives as TOU advances ESG initiatives. TOU did complete one small bolt-on during Q3 in the PRH ($9 million, 450 boe/d).

• Mapping out 2022 - tweaking our outlook. We have updated our 2021 and 2022 outlook and forecast for FCF distribution (Exhibit 1), which continues to calls for two additional dividend increases through 2022 (to $0.96 annualized by year end) plus roughly $3.00/share in additional special dividends. Incrementally, our outlook calls for the buybacks totalling ~$660 million, corresponding to the repurchase and cancellations of 16 million shares (at today's close price of $41.10).

• Reiterate Outperform. In our view, the effect of modest growth, meaningful dividends, and improving per-share metrics creates a compelling investment case for Tourmaline. On our outlook, TOU delivers per-share production growth (+15%/share), plus a 2022 dividend yield of ~9.3% (incl specials), at an attractive valuation of 4.4x EV/DACF. Our price target increases to $46 (from $44) on a higher multiple and estimates, after taking into account the effect of the 2021/22 budget adjustment and special dividends