Tourmaline – Analysis of Q2 Results

[Petroleum economist]

Tourmaline – Analysis of Q2 Results

Introduction
Tourmaline is a Canadian large cap (market value US$ 15.3 B) and the largest gas producer in Canada.

Summary
Tourmaline reported Q2 results slightly above expectation. Production and realized HC prices were higher than expected. Production has the potential for significant growth. The balance sheet is very solid. The profitability and the shareholder returns are decent.

Production
• Q2 production (571 K BoE/d) was above the outlook (560-570 K BoE/d).
• Q2 production was 5% below Q1 production (592 K BoE/d). The reduction was due to normal seasonality and because Tourmaline reduced gas exports with 4.6 K BoE/d due to low gas prices.
• With the export reductions continuing, Q3 production will be at Q2 levels. Tourmaline Q3 outlook is 560-570 K BoE/d.
• Production towards the end of 2024 should increase. I expect a Q4 production of 610-620 K BoE/d.
• Unsurprising, Tourmaline lowered the 2024 outlook from 580-590 K BoE/d. to 565-575 K BoE/d.
• In 2025 production should increase to 600-610 K BoE/d, as 10-15 K BoE/d extra from the new Conroy/North Montney facilities are added. Tourmaline targets a 2025 production of 620 K BoE/d.
• After 2025 production can grow with 3-4%/year to 660-670 K BoE/d in 2028.
• Tourmaline is targeting a 2028 production of 715 K BoE/d, but this looks like a stretch.
• Fluids are 8% oil, 17% NGL and 75% gas.

Balance sheet
• The balance sheet is extremely solid.
• Solvency improved from 69.7% (late 2023) to an excellent 70.6% (Q2).
• The sum of long-term debt plus unsecured senior note increased by C$ 111 M from C$ 1,300 M (late 2023) to C$ 1,411 M. Tourmaline is targeting a total of C$ 1.2-1.4 B.
• The 2024 debt/EBITDA ratio will be < 0.5 and is not a concern.
• The balance sheet allows shareholder returns

Profitability
• Royalties as share of revenues are a medium 10.5-11.5%.
• Unit costs are a low $ 2.30/MM Btu.
• Realized natural gas prices (C$ 3.03/MM Btu) were higher than expected, indicating a strong marketing.
• Despite Tourmaline being a gas producer, 51% of the revenues are liquid related and 49% come from gas.
• Q2 net profit was C$ 257 M (eps=C$ 0.72).
• For 2024, with WTI=$ 70-75/bbl, I expect a 2024 net profit (excluding non-cash hedging) of C$ 1,280-1,715 M (eps=C$ 3.61-3.71, PE=15.7-16.1).
• With increasing production and gas prices the eps can rise in 2025 to C$ 6.28-6.42 (PE=9.1-9.3, increasing to C$ 7.82-8.09 (PE=7.2-7.5) in 2028.
• Tourmaline is a profitable company, although it does not look cheap in 2024.

Shareholder returns
• Tourmaline paid in Q1 and Q2 a fixed plus variable quarterly dividend of C$ 0.82. Total dividend in 2024 should be C$ 3.28.
• Tourmaline has permission for share buy backs but did not buy back any shares in H1.
• Total returns in 2024 should be a reasonable 5.7%
• From 2025 onwards, with rising production and gas prices, returns can increase to 7-8%.

Conclusions
Tourmaline reported Q2 results slightly above expectation. Production and realized HC prices were higher than expected. Production has the potential for significant growth. The balance sheet is very solid. The profitability and the shareholder returns are decent.

Tourmaline ranks a good 26th (out of 80) in my oil and gas ranking and looks like a solid investment.