Tourmaline Oil (OTCPK:TRMLF) is a Canadian oil and gas producer that predominately focuses on the Alberta Deep Basin. Despite its name, it is mainly a natural gas producer (around 78% of total production), with oil accounting for only 8% of total production.

Tourmaline has been expanding production via acquisitions in a financially prudent manner, funding the acquisitions primarily with stock and royalty sales. Its most recent acquisitions should boost its production by over 20%, while increasing its net debt by less than 10% (including the effect of the royalty sale).

Tourmaline’s 2021 results may not be as strong as it previously anticipated, due to a significant decline in 2021 natural gas price expectations compared to late October/early November. That being said, Tourmaline can still keep production flat and generate close to $300 million in positive cash flow after dividends at current 2021 strip prices.

Tourmaline primarily trades under the ticker TOU on the Toronto Stock Exchange. An exchange rate of $1.30 CAD to $1.00 USD is used for this report.

Recent Transactions

Tourmaline made a couple recent acquisitions. It acquired Modern Resources for approximately $144 million CAD ($111 million). This included around $118 million CAD ($91 million) in cash and assumed net debt and 1.5 million Tourmaline common shares. Modern’s Alberta Deep Basin assets include 9,000 BOEPD of current production.

Tourmaline also acquired Jupiter Resources for approximately $626 million CAD ($482 million). This included the assumption of approximately $200 million CAD ($154 million) in net debt and 24.2 million Tourmaline common shares. Jupiter’s assets are adjacent to Modern’s assets in the Alberta Deep Basin and include current production of 67,000 BOEPD.

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These deals will increase Tourmaline’s outstanding share count to approximately 297 million.

Tourmaline’s royalty and energy infrastructure spinoff Topaz Energy IPOed on October 26 and now trades as TPZ on the Toronto Stock Exchange. Tourmaline sold 1 million Topaz common shares for gross proceeds of $13 million CAD ($10 million) and now owns 58.1 million Topaz shares (approximately 52% of Topaz’s outstanding shares).

Tourmaline is also selling a Gross Overriding Royalty on the Modern and Jupiter lands to Topaz for $130 million CAD ($100 million). This GORR is 2.5% on crude oil and condensate and 2% on natural gas for 2021 and 3% on natural gas for 2022 and beyond.

The net effect of all these transactions is that Tourmaline’s net debt will increase by around $135 million for now. Tourmaline expects that the Jupiter and Modern acquisitions will add $100+ million per year in positive cash flow (after capex) going forward.

Tourmaline’s 2021 Outlook

Tourmaline expects its production to average 400,000 BOEPD in 2021. This consists of approximately 78% natural gas, 13% NGLs and 8% light and medium crude oil. This is essentially flat production compared to its expected 2020 exit rate production (from Q3 2020 assets) of 325,000 BOEPD, plus its Jupiter and Modern acquisitions (current production of 76,000 BOEPD).

At current strip prices (mid-$40s WTI oil and $2.50 CAD ($1.92) AECO and $2.60 Henry Hub gas), Tourmaline is expected to generate $2.329 billion in revenues.

This includes a $50 million deduction to account for cash flow attributable to Topaz Energy, adjusted for the dividends (at current levels) Tourmaline receives from Topaz. This gives a better picture of Tourmaline’s results excluding Topaz.

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Type Units $/Unit $ Millions
Light & Medium Crude Oil 11,928,200 $38.00 $453
NGLs 19,643,935 $12.50 $246
Natural Gas 686,587,920 $2.40 $1,648
Hedge Value $2
Other Income $30
Net Topaz -$50
Total Revenue $2,329

Tourmaline is budgeting $1.1 billion CAD ($846 million) for capital expenditures in 2021. This leads to a projection that Tourmaline will have $295 million in positive cash flow after dividends (of $0.56 CAD or $0.43 per share) in 2021 at current strip prices.

Expenses $ Millions
Operating Expenses $350
Royalties $94
Transportation Expense $511
Cash G&A $75
Cash Interest $30
Dividends $128
Capital Expenditures $846
Total Expenses $2,034

While Tourmaline is still expected to generate a substantial amount of positive cash flow in 2021, AECO futures for 2021 have fallen a fair bit since late October/early November. Thus Tourmaline may generate around $250 million lower cash flow than what it forecasted with its Q3 2020 report (which involved AECO close to $3.00 CAD or $2.30 and Henry Hub at around $3.11). Current strip prices for both are around 50 cents lower (CAD for AECO and USD for Henry Hub) now.


Debt And Valuation

Tourmaline reported $1.375 billion in net debt at the end of Q3 2020. Between its various transactions and its positive cash flow, Tourmaline’s net debt is currently projected to be approximately $1.115 billion at the end of 2021. This is around 0.9x Tourmaline’s projected 2021 EBITDAX (excluding Topaz), which is a reasonable amount of debt.

A 4.0x EV/EBITDAX valuation would make Tourmaline worth approximately $15.35 per share, while a 5.0x EV/EBITDAX valuation would make it worth approximately $19.60 per share.

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Lower expectations for natural gas prices mean that Tourmaline may generate close to $300 million in positive cash flow after dividends in 2021 now compared to the over $500 million that it could have generated at late October/early November strip prices. Tourmaline is still in excellent shape with a limited debt load. It is also growing production substantially via solidly priced acquisitions that are funded with only a modest amount of additional net debt.

Despite lower natural gas prices, Tourmaline still appears to have some upside, with its estimated value in the mid-to-upper teens in USD.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.