Tourmaline Oil Corporation (TSX: TOU), is a Canadian energy company engaged in natural gas and crude oil acquisition, exploration, development, and production in the Western Canada Sedimentary Basin. The company produces light and medium crude, natural gas liquids, and conventional and shale natural gas. 

Key highlights

• Acquisitions started paying rewards:Recently, the company acquired Modern Resources Inc. (“Modern”) and Jupiter Resources Inc. (“Jupiter”). During Q3 2020, these acquisitions had provided an additional 76,000 boepd of current production and registered significant incremental growth to cash flow and free cash flow.

• Enhanced production guidance: The company is anticipating 2021 average production of 390,000 - 410,000 boepd, an increase of 25% from prior 2021 guidance of 320,000 boepd. As the company already achieved its FY20 production exit guidance of 322,500 – 327,500 boepd during October 2020, it is now expecting the production to exceed 400,000 boepd on the back of successful completion of the Modern and Jupiter transactions.

• Financial Guidance: the company expects to churn cash flow of CAD 2 billion and free cash flow of CAD 856 million after capital spending of CAD 1.1 billion in FY2021. 

• Increased Dividend distribution:The company has increased the quarterly dividend by 17% to CAD 0.14/share, effective December 2020. 

• Topaz Update: The Topaz came with its IPO on October 26, 2020, and its common shares now trade on the Toronto Stock Exchange. The company sold 1 million Topaz common shares in connection with the IPO at CAD 13.00 per share and encashed CAD 13.0 million from this. At present, the Tourmaline group owns 58.1 million Topaz shares which had a market value of CAD 809.4 million as of November 3, 2020.

Financial overview of Q3 2020 (Fig. in CAD)

Source: Company

• Total sales from production in Q3 2020, increased 60% to CAD 545.1 million as against CAD 340.6 million in the previous corresponding period. The rise was mainly attributed to higher AECO and Station 2 benchmark natural gas prices and increased sales volumes.
• The company booked an unrealized loss on financial instruments of CAD 59 million in Q3 2020, which dragged down the total revenue to CAD 473 million, still higher compared to CAD 462 million in Q3 2019.
• On the back of increased transportation cost, the total expenses in the reported quarter increased 8% to CAD 455 million as against CAD 422 million in Q3 2019.
• The net income clocked by the company in Q3 2020, stood at CAD 4.8 million, as against CAD 15.7 million in the previous corresponding period. 

Risks associated with investment

As the company is in exploration business of oil and gas, its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact the company’s financial performance include low demand for oil and gas, and financial risk on behalf of their hedged positions.

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company is focusing on the optimization of production by making many strategic investments in the form of acquisitions, which already started paying them cash flows. Recently, the company raised its guidance regarding production for FY21 and expects to garner cash flow of CAD 2 billion and free cash flow of CAD 856 million after capital spending of CAD 1.1 billion. Therefore, based on the above rationale and valuation done, we have given a ‘Hold’ rating at the closing price of CAD 16.55 on December 9, 2020. We have considered Advantage Oil & Gas Ltd, Birchcliff Energy Ltd, ARC Resources Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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