RBC Global Energy Best Ideas ListJust saw their latest report this morning and pleased to say that TOU is one of 8 Canadian companies on the list. For those who are curious, the others are CNQ,TVE, CVE, SES, ALA, ARX and AQN. GLTA
Tourmaline Oil (TOU)
Michael Harvey, Analyst (403) 299-6998 michael.harvey@rbccm.com
Key beneficiary of an improved natural gas outlook. Strong commodity prices provide the firepower for Western Canada Sedimentary Basin (WCSB) natural gas producers to return meaningful capital to shareholders plus still grow modestly (+3- 5%), while being mindful that basin growth much beyond this figure could start to drive egress constraints. See our deep dive report here and recent gas price sensitivities here.
High quality asset base, with North Montney driving the growth. With Gundy P2 nearly on stream, we would anticipate future development dollars targeted at Conroy – both as it relates to bolt-ons and organic development. We’ve explored Tourmaline’s North Montney area in our recent work here, here and here. Tourmaline has a top- decile cost structure and industry-leading capital efficiencies. We now model Tourmaline’s 2021 capital efficiencies at approximately $7,500/boe/d. Ownership of facilities remains a key ingredient to the story, and could represent an additional avenue to surface value in the future.
Sizeable consolidation complete, focus on amalgamation and margin improvement. TOU has been active on the M&A front over the last year, highlighted by transactions involving Modern, Jupiter, Saguaro, and Black Swan. We expect that large-scale M&A is complete for now; that said, we do not factor out the possibility of bolt-ons in core focus areas where it makes sense. Focus shifts to amalgamation and initiatives that maximize cost savings and minimize environmental impact. The company estimates each $1/boe of margin improvement to yield roughly $180 million of annual cash flow in 2022 (staff reductions are not part of this initiative). See our recent note here.
Return of capital accelerates, with the vast majority of FCF to be returned. Our 2021 and 2022 outlook and forecast for FCF distribution continues to call 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 totaling ~$660 million.