Tourmaline Oil: More Gas, Lower Capex

| About: Tourmaline Oil (TRMLF)


Tourmaline has invested quite a bit of money in its production facilities, and this will start to pay off from this year on.

The total production rate will increase by 30-40% compared to FY 2015, and the total capex will fall by almost 50%!

As the oil and gas price are still pretty low, this doesn't mean Tourmaline will be free cash flow positive this year.

Based on the net NPV10% of the proved and probable reserves, Tourmaline is relatively fairly valued on an after-tax basis.


Tourmaline Oil (OTCPK:TRMLF) is quite an interesting Canadian gas producer as the company didn't have to record an impairment charge in 2015. On top of that, Tourmaline was actually profitable last year and that's quite surprising as the majority of the oil and gas sector is hurting pretty badly. I wanted to find out if a) the 2015 net profit was a 'one time event' and b) if there would be an impact from cutting the capex guidance once again.

TOU Chart

TOU data by YCharts

Despite its size (the market capitalization is approximately $4.5B), Tourmaline still doesn't have a decent listing on an US stock exchange. As the average daily volume is much higher on the company's Canadian listing (the average daily dollar volume is approximately $17M), I would strongly recommend you to trade in the company's shares on the TSX. The ticker symbol is TOU.

No surprises in the FY 2015 results

As expected, Tourmaline's attributable oil and gas production increased rather tremendously in the final quarter of last year. The total gas production increased by 34% to almost 930,000 mcf/day whilst the oil and natural gas liquids production increased by a stunning 61% to 25,000 barrels per day. This resulted in an increase in the oil-equivalent production rate of 37%, to almost 180,000 barrels of oil-equivalent per day. That's great, but it won't end here as Tourmaline has been eyeing to reach the 'important' milestone of producing 200,000 barrels of oil-equivalent per day which would make it an important producer on the Canadian scene!

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Source: company presentation

Keep in mind Tourmaline has been increasing its production rate throughout the year, and even though it exited the year with an average oil-equivalent production of 180,000 barrels per day, the average daily production rate in FY 2015 was 'just' 154,000 barrels per day, so that's why you might be a little bit 'surprised' about the 'low' revenue. Tourmaline is just picking up steam here, and the FY 2016 production rate will be 30-35% higher compared to 2015.

The total revenue in FY 2015 was C$1.28B ($985M) and this was in line with the previous financial year due to two different things. First of all, the higher production volumes compensated for the lower oil and gas price, but on top of that, Tourmaline's hedge book was quite a bit 'in the money', and the company was able to add in excess of US$160M in 'technical' revenue from taking its hedge book into account.

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Source: financial statements

As I told you in the introduction, Tourmaline didn't have to report any impairment charges, so unlike a lot of the other oil and gas producers that had to reduce the value of their assets due to the lower commodity prices, Tourmaline's assets still seem to be correctly valued and the bottom line was showing a net profit. The net income attributable to Tourmaline's shareholders was approximately C$78.5M ($60M) and even though that's a substantially lower amount compared to FY 2014 when the net income was approximately US$375M, I don't think this result will disappoint its shareholders!

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Source: financial statements

The cash flow statements were not as good as the income statement as Tourmaline continued to invest in its properties (the production increase had to be caused by something, right?). The operating cash flow was US$625M but this wasn't sufficient to cover the US$1.1B in capital expenditures. Yes, sure, it sounds like a net cash outflow of US$500M ($675M if you'd exclude the benefit from the hedge book from the equation) is horrible, but you really should keep in mind a large part of the capital expenditures were aimed towards increasing the production rate to hit the 'sweet spot' Tourmaline is currently achieving.

2016 is going as planned, and the production seems to be slightly higher than expected

Indeed, approximately US$375M of the 2015 capex program was spent on 'facilities' which were the Brazeau gas plant and the Edson gas plant. The latter has already been commissioned whilst the Brazeau plant will be commissioned in the next few months. These expenses are obviously growth capex and not sustaining capex. That's why the negative free cash flow in 2015 didn't bother me too much. The capex bill was expected to fall in 2016 (as the construction of the Edson and Brazeau plants will be completed) whilst the higher production rate should allow the company to protect its operating cash flow and provide a platform for higher cash flows once the gas price starts to increase again.

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Source: press release

In a previous article I already told you I was quite happy with Tourmaline's reduced capex guidance (as the company said it would spend just US$650M on capital expenditures in 2016) as this would reduce the pressure on the cash flows. The Q1 production rate was also pretty good as Tourmaline said it produced an average of 190,000-205,000 boe/day in the first two months of the year and that's a little bit better than originally expected and anticipated.

On top of that, the company's PV10 results are also pretty good. The after-tax value of its proved reserves is approximately US$3.5B, and after deducting the US$1.2B in net debt, the NPV is approximately US$2.3B (on an after-tax basis, using an oil price of $54.47/barrel in 2017 and $61.5/barrel in 2018 and a gas price of $2.98 and $3.29, and I think both estimates are pretty reasonable). If you'd add the probable reserves to the equation, the NPV of the cash flows using the base case price deck would be US$5.2B (and thus US$4B after deducting Tourmaline's net debt position).

Investment thesis

This means the company is currently being priced at almost exactly the after-tax NPV10% of its proved and probable reserves, which is quite fine with me. If you'd for instance apply a lower discount rate of 5%, the total net fair value of Tourmaline (after deducting its net debt) would be US$6.45B or US$27.7/share.

Tourmaline has just raised in excess of US$200M in equity which was a good move to strengthen its balance sheet.

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