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Morningstar | Lowering Our FVE for Tourmaline; Stock Still Fairly Valued. See Updated Analyst Note from 08 Nov 2018

Tourmaline Oil reported third-quarter results that were below our previously lowered expectations. Production averaged 254.2 thousand barrels of oil equivalent per day, up 7% from the year-ago period but down 3% sequentially for the second quarter in a row. Lower production was driven by rescheduled maintenance activities, transportation disruptions, and a third-party turnaround at the Saturn complex in the Deep Basin. Management also expects headwinds from Enbridge’s October pipeline disruption and lowered its fourth-quarter target production range to 281-287 mboe/d from 285-295 mboe/d. We expect production to come in at the low end of the range. Management also lowered its full-year production target for the second straight quarter to 265-270 mboe/d from 267-275 mboe/d. We expect production to track the lower end of this range as well.

Conversely, Tourmaline expects a higher 2018 exit production of 300 mboe/d, up from its previous target of 297.5 mboe/d. Management expects 2019 production to average 300 mboe/d. We remain skeptical of both targets, given the decline in Western Canadian gas prices. Natural gas prices continue to weigh on the company’s results. Price realizations before realized hedging gains came in at CAD 1.51 a barrel, a 6% increase from the second quarter despite a 12% increase 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 NGTL System.

We are lowering our fair value estimate to CAD 17 per share from CAD 18 to reflect our lower price realization forecasts. Tourmaline’s stock has tumbled nearly 20% over the past six months and is converging to our fair value estimate. Accordingly, it is now trading in 3-star territory. We are maintaining our no-moat rating.

Although the recent acquisition from Shell Canada provides additional high-quality resources for Tourmaline, full-cycle break-even prices approximate $4 per thousand cubic feet Henry Hub. In comparison, our midcycle Henry Hub forecast is $3/mcf.

The company maintained its dividend increase, announcing a CAD 0.10 quarterly 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 dividend approximates a 2.1% yield.