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Morningstar | Tourmaline Continues to Rely on Pipeline Expansion

Tourmaline Oil is a Canadian energy company engaged in natural gas and crude oil acquisition, exploration, development, and production in the Western Canada Sedimentary Basin. The majority of Tourmaline’s production comes from the Alberta Deep Basin and Montney resource areas. Cash break-even prices on Tourmaline’s natural gas production approximate $2.50 per thousand cubic feet Henry Hub, which allows the company to compete with production from the fast-growing U.S. Marcellus and Utica regions. However, high finding and development costs dilute the economic structure. As such, full-cycle break-even prices approximate $4/mcf Henry Hub, compared with our midcycle forecast of $3/mcf. Tourmaline’s growth is focused on its Alberta Deep Basin and Montney resource plays, which possess break-even prices similar to the firm’s current production. As such, we forecast Tourmaline will add approximately 20 thousand barrels oil equivalent per day of incremental production by the end of 2018.With the current resources in place, we expect Tourmaline’s acreage to support approximately 15 years of production, including the impact of natural production declines. The company has been successful in replacing production with additional resources. Its proved and probable reserve replacement ratio averaged 130% over the past three years, indicating that Tourmaline is increasing its reserve levels while expanding production. Nevertheless, the company will need to increase its capital spending to acquire and/or develop new resources to sustain our forecast activity levels.The company continues to strengthen its resource base through acquisitions without significantly deteriorating the balance sheet. Nonetheless, Tourmaline will need to increase its resource base to supplant its production levels, resulting in an unfavorable economic structure. Accordingly, we believe the stock looks fairly valued and suggest that investors remain on the sidelines for the time being.