(Idea) Tourmaline Oil
Note: Dollar references are to Canadian dollars unless otherwise specified.
Tourmaline Oil (TOU:CA) (OTCPK:TRMLF) is Canada’s largest natural gas producer, with production of 2.7 bcf/d expected in 2024. TOU was founded in 2008 by Mike Rose and his team minutes after they sold Duvernay Oil to Shell (SHEL), which they had founded seven and a half years prior. Rose is a luminary of the Canadian oil patch, and TOU is the fourth successful E&P he founded.
TOU’s success has come not from exploration but from acquiring large tracts of acreage known to contain hydrocarbons and developing the acreage in an efficient manner. The company aims to be a low-cost producer, so it maintains a lean, flat management structure and owns most of its infrastructure. Since the company’s founding, employee turnover has been extremely low.
Rose is a geologist by training who has specialized in the western margin of the Western Canadian Sedimentary Basin (WCSB). This region is gassier than the areas farther east. Rose is keen on sticking with his areas of specialization, so all the companies he has founded have focused on the western margin of the WCSB and have therefore been heavily weighted toward natural gas.
A Diversified, High-Margin Natural Gas E&P
Tourmaline operates in three main areas: the Deep Basin, Peace River High, and Northeast British Columbia Montney. Management’s overview of its operations is shown below.
Source: TOU January 2024 Investor Presentation.
TOU produces approximately 600,000 boe/d, which was comprised of 2.3% light crude oil, 6.5% condensate, 14.3% NGLs, and 76.9% natural gas in the third quarter of 2023.
TOU pays a base quarterly dividend set at $0.28 per share, or $1.12 annualized. The base dividend yields 2.0% on the current share price of $56. However, since 2021, TOU has paid special dividends each quarter in addition to the base dividend. In 2023, it paid out a total of $5.50 in special dividends. The $6.62 per share total of base and special dividends represents an 11.8% yield on the current stock price.
Source: TOU January 2024 Investor Presentation.
TOU plans to continue paying both base and special dividends in 2024. The payments will be facilitated by hedged production amounting to 724 MMcf/d, hedged at $5.28/mcf in 2024, which is equivalent to approximately 20% of total production on a boe basis.
The company generates its cash flow with a conservative balance sheet. Net debt of $1.2 billion at the end of the third quarter was a conservative 0.3-times cash flow generated over the previous twelve months. The company has operated with very little debt throughout its history, similar to the other E&Ps founded by Mike Rose.
TOU owns 31.2% of Topaz Energy (TPZ:CA), a Canadian royalty and infrastructure company. At TPZ’s $2.71 billion, TOU’s stake is worth $844 million.
TOU shares trade at a premium multiple. Its market cap is 5.5-times 2024 cash flow, while its enterprise value is 5.7-times cash flow. By contrast, lower-quality Canadian E&P peers trade in the 3-times to 4-times range.
Strategic Acquisition Program
Management has been highly strategic in its acquisitions. Most recently, it paid $1.45 billion for Bonavista Energy in November of 2023. Before that, it acquired Aitken Creek infrastructure assets for $235.3 million in April 2022 and Rising Star Resources for $191.1 million in August 2022.
The Bonavista acquisition was TOU’s largest since it acquired Montney operator Black Swan Energy in June 2021 for $1.1 billion. Consideration for Bonavista consisted of $727 million in TOU shares—representing approximately 10 million shares—and $725 million in cash. The acquisition was made at an attractive multiple of 3.2-times cash flow, a high 16% free cash flow yield, and a low $24,000 per flowing barrel. TOU offered its pricier shares as consideration, taking advantage of their premium valuation multiple. TOU will also benefit from Bonavista’s tax pools, which will shield $1.7 billion of future income from taxation.
Bonavista’s assets will complement TOU’s existing Deep Basin assets. The Deep Basin is the largest natural gas field in Alberta, and TOU was already the basin’s largest producer before the Bonavista deal. The acquired assets had a long reserve life spanning 21 years at their 2023 production rate. TOU plans to sell Bonavista’s Duvernay assets. TOU’s previous Deep Basin deal was its acquisition of Jupiter Resources for $630 million in December 2020.
The Black Swan Energy acquisition in 2021 was executed as part of TOU’s strategy of consolidating the North Montney sub-basin, which will play an important role in directly providing natural gas feedstock to LNG export facilities in British Columbia. Black Swan was the latest in a string of corporate acquisitions in the North Montney, including Polar Star, Chinook Energy, and Saguaro Resources. The acquisitions have made TOU the largest North Montney producer.
These corporate acquisitions, together with smaller acreage acquisitions, have increased TOU’s production from 336,000 boe/d at the end of 2020 to 605,000 boe/d in 2024, as per management’s guidance.