Globe Following its release of in-line third-quarter results and a dividend increase, National Bank Financial analyst Travis Wood called Tourmaline Oil Corp. (
) “a different breed,” believing “the strength of its model in consistently growing its cash returns continues to support momentum and establishment of material long value upside.”
After the bell on Wednesday, the Calgary-based company reported production of 481,897 barrels of oil equivalent per day, in line with the Street’s expectation and its guidance range. That led to cash flow per share of $3.06, exceeding Mr. Payne’s $2.94 estimate.
“During the quarter, the company maintained a solid margin in the face of contracting domestic gas prices (reflecting its liquids, costs, market diversification, hedge book), with a cash netback of $24/boe (down 20 per cent quarter-over-quarter; 63-per-cent margin vs. 52 per cent prior quarter), and which underpinned a payout ratio of 45 per cent and associated annualized FCF yield of 10 per cent,” said the analyst.
In a note titled Isn’t That Special, he said LNG tailwinds continue to drive Tourmaline’s growth.
“Its budget and operations remain on track with expectations, with capital spending expectations unchanged through 2023e to drive 5-10-per-cent sequential annual PPS growth within a 30-per-cent payout ratio (10-15-per-cent implied FCF yield),” he said. “Similarly, the company’s five-year outlook holds for 5-per-cent annualized growth within a 35-40-per-cent payout (15-per-cent implied FCF yield). Activity in support of that remains robust with tailwinds to capital efficiencies and complements from liquids growth (8-per-cent CAGR) in addition to expanding exposures to U.S. markets & LNG.”
Pointing to its pledge of returning the majority of its free cash flow to shareholders, Tourmaline raised his quarterly base dividend by 11 per cent to 25 cents per share.
“In addition to the announcement of its fifth special dividend announced ($2.25 per share) as its fourth consecutive increase, and the sum of which reflects a trailing 10-per-cent cash yield of returns to shareholders,” said Mr. Payne. “That context remains important, as it eclipses and extends its previously stated payout targets, and the application of which through the outlook supports potential for 20-per-cent dividend growth, and ultimately a value proposition towards $100 per share (assuming 10-per-cent yield).”
Keeping an “outperform” recommendation for Tourmaline shares, he hiked his target to $100 from $85. The average on the Street is $97.67.
“Tourmaline is a unique intermediate producer that provides investors exposure to one of the most compelling growth stories in our coverage universe. The company was founded in 2008 and entered the public market through an IPO in November 2010. Since TOU’s inception, management has executed a strategy of creating per share production and reserve growth. The management team has an exceptional track record,” he said.
Elsewhere, Raymond James’ Jeremy McCrea raised his target to $95 from $90 with a “strong buy” rating.
“TOU’s operations continue to reap the rewards from its well-timed acquisitions over the last few years with commodity (natgas) prices also still holding in,” he said. “As TOU has become the go-to name for gas exposure, its size also provides a number of advantages including better cost of debt/capital, preferential drilling/completion contracts and likely a logical provider of LNG gas supply. Combined with a geologic foothold in top basins through western Canada, there are very few companies that are as profitable as Tourmaline. This low-cost structure and its diversified marketing portfolio continues to allow TOU to pay attractive special dividends ($2.25 per share for3Q), while at the same time, reduce leverage, and modestly grow production. Overall, the key takeaway from 3Q includes another large special dividend, while also increasing its base dividend by 11 per cent. And while many operators have increased capex due to inflation, TOU has kept spending plans unchanged, which should alleviate some fears heading into the quarter.”