Base Dividend Increase Our Conclusion
Tourmaline reported a solid Q2/24 update which featured better-than-
expected free cash flow, a 3% increase to the base dividend, and a special
dividend of $0.50/sh. Tourmaline trimmed its annual production guidance
with the deferral of select gas-weighted wells from Q3/24 into Q4/24;
however, we do not see the adjustment as being a surprise, and it drives
minimal impact to our 2024 cash flow expectations. Capital spending
guidance for 2024 was maintained, with management noting drilling
efficiency wins which could translate into production upside for 2025. We
estimate the company will generate ~$4.25/sh in free cash flow in 2025,
which should allow for continued special dividends, potential increases to the
base dividend, and further debt reduction. We remain bullish on natural gas
pricing relative to the forward strip and see the current valuation as offering
an appealing entry point into the shares. With minor changes to our 2025
cash flow expectations, we maintain our $80/sh price target and
Outperformer rating on the stock.
Key Points
Modest cash flow beat and lighter capital spending drove free cash
flow outperformance in Q2. Production of 561.8 MBoe/d was shy of our
estimate of 567.4 MBoe/d and consensus of 564.6 MBoe/d. Production
volumes for the quarter were negatively impacted by gas injections into
California and Dawn storage hubs of 4.8 MBoe/d along with 3.5 MBoe/d of
unplanned infrastructure outages that have since returned to service. Cash
flow (prior to ARO spending) of $2.15/sh was slightly above our estimate of
$2.12/sh and consensus of $2.09/sh. Capital spending of $294MM (net of
dispositions) was well below our estimate of $380MM and consensus of
$366MM.
Production guided lower for 2024 with some completion deferrals into
Q4/24. Management shifted the on-stream date of certain gas-weighted wells
from Q3/24 to Q4/24 to benefit from an expected higher gas price
environment this fall. As a result, 2024 total production guidance was
lowered by 5 MBoe/d to a 580 MBoe/d midpoint and liquids production was
guided lower by 1 MBbl/d to 143 MBbl/d. Total G&A expenses were guided
higher to $0.75/Boe from $0.70/Boe prior.
NCIB renewed but we expect cash distributions will continue to be the
preferred method of returning capital to shareholders. Tourmaline
increased the quarterly base dividend by ~3% to $0.33/sh and announced a
special dividend of $0.50/sh for the quarter. The company also announced
the renewal of its NCIB program to purchase up to 5% of its outstanding
shares. We believe the NCIB renewal provides Tourmaline with an option to
repurchase shares; however, we expect cash distributions will remain the
key method of returning cash to shareholders.