Morningstar | Lower Production and Gas Prices for Tourmaline
No-moat Tourmaline Oil reported second-quarter results that were below our expectations. Production averaged 260.9 thousand barrels of oil equivalent per day, an increase of 11% from the year-ago period, but down 3% sequentially. Production was also below management’s guidance, which targeted a range of 265-275 mboe/d. Lower production was driven by a sales compressor failure at the company’s Musreau plant in the Deep Basin; unplanned outages on third-party systems; and a forest fire. Accordingly, management lowered their full-year production target to 267.5-275 mboe/d from its previous range of 270-280 mboe/d. The new range is in line with our forecasts.Conversely, Tourmaline expects a higher 2018 exit production in the range of 290-297.5 mboe/d and a fourth-quarter average production target of 285-295 mboe/d. We remain skeptical of both targets given the decline in western Canadian gas prices. Natural gas realizations came in at CAD 2.25/bbl, a 25% decline from the first quarter despite only a 8% decline in Henry Hub prices. We expect gas realizations to remain low, while western Canada faces pipeline constraints. Unfortunately for Tourmaline, over 80% of its production comes from natural gas, which will continue to drag on the company until TransCanada can expand its NTGL system.
The company increased its dividend for the third quarter in a row, announcing a CAD 0.10 dividend per share. Tourmaline announced its first dividend in March and remains committed to returning capital to shareholders, evidenced by the increases. On an annualized basis, the new dividend approximates a 1.6% yield.
We intend to incorporate the company’s financial results into our valuation shortly. For now, our CAD 18 fair value estimate and no-moat rating are unchanged. The stock was down over 2% on the earnings release and is now trading near CAD 25 per share, which still represents a significant premium to our fair value estimate.
Tourmaline Oil is engaged in the acquisition, exploration, development and production of petroleum and natural gas properties in the Western Canadian Sedimentary Basin.
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