Tourmaline Posts Impressive Quarter Despite Challenges

Tourmaline Oil reported second-quarter results after the market closed on Friday. Despite weatherrelated setbacks, the company still increased production, and has now set the stage to deliver phenomenal growth in the second half of the year.

Results for the quarter lined up with expectations. Production averaged 70.1 thousand barrels of oil equivalent per day versus our forecast of 70.9 mboe/d. Earnings per share was spot-on consensus estimates of CAD 0.16, and cash flow (operating cash flow before working capital changes) was CAD 129 million versus our estimate of CAD 123 million.

Management expects production to grow 40% over the next two quarters, and an additional 40% in 2014. Tourmaline has expanded its drilling program and rig fleet for the second half of the year, and expects to exit the year at about 100 mboe/d. Recent well results have also improved–the company drilled two Wilrich formation wells that both tested at production rates more than double our type-curve assumptions. Organic production growth of this magnitude is rare, and is one of the primary reasons we believe that the firm is a strong candidate for acquisition.

Tourmaline’s favorable economics are still intact, despite the recent dip in AECO gas prices. Shares gave up recent gains as the price of AECO gas fell to an average of about CAD 2.20/Mcf in August. Price realizations are not facing an eminent threat, however. Currently, Tourmaline has about 50% of production hedged at an average price of $3.50/Mcf.

The company also garners a premium of about 8% versus AECO pricing due to the high heat content of its gas. The firm’s low-cost structure will help it retain favorable economics. The firm’s all-in cash costs before taxes were CAD 1.26/Mcf this quarter, providing sufficient margin to maintain capital spending and production growth, even at current prices.



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