RESUMING COVERAGE FOLLOWING TPZ SHARE SECONDARY OFFERING
THE TD COWEN INSIGHT
Tourmaline is Canada's largest natural gas producer, has measured near-term growth (~7%/ yr through 2027), low balance sheet leverage (0.4x at YE-2025E) and is returning 4% of its market cap to shareholders in 2025E. We see underappreciated tailwinds from:
1) Recent strength in global LNG pricing (TOU sells ~6% of its gas at JKM /TTF) 2) Increased growth in the later years of the 5-year plan
Event: Resuming coverage following secondary offering of TPZ shares
We are resuming coverage of Tourmaline following the completion of the company's sale of TPZ shares in a secondary offering announced on November 25. The disposition of TPZ shares was not a surprise to us as the company had previously articulated its long-term plan to reduce its ownership in Topaz (TPZ-T, Buy, $26.80, $30.00 TP).
Impact: NEUTRAL
Secondary Offering of TPZ Shares Could Pave Way For Higher NEBC Volume Growth:
Tourmaline has completed the previously announced offering of 12.4mm Topaz (TPZ-T) shares at a price of $27.80/sh for total gross proceeds of $345mm. The sale represents 8% of TPZ's shares outstanding and reduces Tourmaline's ownership to 21.3% (from 29.4%).
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Our View: Tourmaline plans to direct the proceeds of the sale to NEBC infrastructure growth initiatives. Tourmaline's current 5-year plan has significant growth through 2027, then plateaus between 2027 and 2029. In our view, the back half of the plan is likely
to be augmented by incremental projects funded, in part, with the proceeds of this sell down. This could include acceleration of growth on the recently acquired Crew assets (see here).
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Our Tourmaline TP includes the value of TPZ shares held, which we value at our current TPZ TP of $30.00/sh. Although the TPZ shares were disposed at a modestly lower price, this has no impact on our Tourmaline TP or views on the equity.
Offering Has Only Minimal Impact to Our Financial Forecast. Tourmaline has a long-term net debt target of $1.5 bln and will continue to direct the majority of FCF to shareholders though the base dividend and incremental periodic special dividends.
Our View: We estimate the proceeds will reduce the company's ND/CF at 2025E to 0.4x (from 0.5x prior). Our CFPS estimates are largely unchanged as a result of the offering. We estimate the company will reach its net debt target of $1.5B by late-2025. We currently model 85% of FCF going back to shareholders. This equates to a base dividend of $1.40 (2% yield) and total special dividends of $1.26 (2% yield) in 2025E.