Tourmaline Oil Corp (Alberta) T.TOU

RBC

[retiredcf]

October 16, 2024

Tourmaline Oil Corp.
Desk Presentation Highlights

TSX: TOU | CAD 63.26 | Outperform | Price Target CAD 78.00

Sentiment: Neutral

We hosted a desk presentation featuring Tourmaline Oil Corp, which was headlined by Mike Rose (President & Chief Executive Officer), Brian Robinson (Chief Financial Officer) and Jamie Heard (Vice President, Capital Markets). Discussions mainly revolved around the company's recent acquisition of Crew Energy (see more here), current operations, North American natural gas, LNG initiatives and M&A. Please see below for several broad takeaways from the session:

Crew Acquisition. Tourmaline's acquisiton of Crew Energy fits the corporate playbook of adding resource at low points in the cycle, with this deal adding 473 mmboe (2P reserves). The transaction includes roughly 30,000 boe/d of production (28% liquids) and an estimated 700 Tier 1 locations across Crew's 220,000 acre land base, which continues to build TOU's NE BC Montney fairway while positioning for higher prices. Crew's infrastructure components fits well within the TOU portfolio while also being expandable (upwards of 250 mmcf/d and 200 mmcf/d at the Groundbirch and Septimus/Tower gas plants), with opportunities to optimize production and cost where the company believes growth in volumes being in the 2026-2028 timeframe.

2025 FCF Outlook - Positioned to Generate $1.4 billion (~$3.70 per share). Based on our estimates we see TOU generating $1.4 billion in FCF during 2025 corresponding to a roughly 6% FCF yield at the RBC price deck (or roughly $1.5 billion/$4.06 per share, an 6% FCF at current strip pricing). We forecast the majority of FCF being allocated to dividends (both special and common), while also noting the company's NCIB which allows the company to repurchase and cancel up to 17.6 million TOU shares (zero repurchased to date). We expect the NCIB to be used defensively in times of significant share price dislocations to the downside. The magnitude of 2025 specials remains flexible, with our outlook calling for $2.00/$1.75 per share (futures strip/RBC price deck) and the 2025 base dividend increasing by 12% y/y to $1.48/sh (from $1.32/sh in 2024).

Operational Update - Low AECO pricing. The company noted its diversified marketing strategy, with (combined with hedging) has supported the company through dynamic pricing periods. Additionally, the company flagged ongoing management of production volumes (for instance waiting on completions or throttling volumes) to optimize pricing. Of note, TOU highlighted key operational effiencies which include 6-day drilling times in the North Montney and frac'ing an 8-well pad in 2 weeks. Overall, Tourmalnie highlighted that it pivot quickly if pricing improves or degrades further.

North American LNG. Discussions revolved around North American gas demand going forward, a market which the company believes will see improved strength through the decade. Tourmaline believes the WCSB stands out as a key area supplying the growth for the North American LNG business which it expects LNG export capacity to increase to ~24 bcf/d (from ~12 bcf/d currently) by the end of the decade. TOU noted that it believes the WCSB's breadth of inventory and improving well productivity will be an important piece to the North American gas puzzle versus other North American basin peers. As TOU continues to grow its LNG portfolio, the company noted that it would make sense to supply LNG Canada Phase 2 in some fashion (either directly or indirectly).

2024/2025 Guidance - Reiterated. TOU reiterated its 2024/25 E&P capital budget of $2.05/2.6 billion to drive volumes of 587.5/650 mboe/ d, implying H2/24 volumes of ~598 mboe/d to be achieved at the midpoint of guidance for YE24.