Morningstar | Tourmaline’s Operating Cash Flow Surpasses Our Expectations
No-moat Tourmaline Oil reported fourth-quarter operating cash flow of CAD 392 million, which represents a 24% increase quarterly and was ahead of our expectations. The increased operating cash flow was driven by better-than-expected realized natural gas prices. Fourth-quarter realized prices averaged CAD 3.13/mcf, while the AECO benchmark price averaged CAD 1.57/mcf. Higher price realizations can be attributed to Tourmaline’s market access and hedging strategies, which offer much-needed relief in the market access constrained environment. However, price realizations compared unfavorably with U.S. natural gas pricing, which averaged CAD 5.20/mcf during the fourth quarter.Tourmaline’s fourth-quarter production of 276.6 mboe/d fell below our expectations, however; but represents 9% growth sequentially and 5% year over year. The lower-than-expected production was driven by rescheduled maintenance activities, transportation disruptions, and a third-party turnaround at the Saturn complex in the Deep Basin that plagued the company’s operations in the prior quarter.
Conversely, Tourmaline reiterated its 2019 full-year production target of 300 mboe/d. Thus far in 2019, the company has been producing in the 290-300 mboe/d range that it set out for the first half of 2019. Currently, the full-year target remains above our expectations. 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. 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 expect to incorporate the company’s fourth-quarter results into our model shortly, but for now we are maintaining our CAD 16 fair value estimate and no-moat rating.
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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