Montney And Deep Basin Expansions Will Lower Costs And Improve Future Performance

Key Takeaways

• Expansion in production capacity and strategic hedging are set to drive revenue growth and improve realized prices despite local market fluctuations.
  
• Planned infrastructure investments aim to increase condensate production and lower operational costs, enhancing net margins and financial performance.
  
• High capital investment in infrastructure and reliance on volatile gas prices could strain cash flow, delaying growth and impacting financial flexibility due to limited reinvestment.

Catalysts

Engages in the acquisition, exploration, development, and production of petroleum and natural gas properties in the Western Canadian Sedimentary Basin.

• Tourmaline Oil anticipates significant free cash flow growth, with a forecast of $1.4 billion for 2025, based on improved strip pricing. This is expected to enhance revenue and earnings, contributing to a more favorable valuation.
  
• The company is increasing production capacity, with a forecast range of 635,000 to 665,000 BOE per day in 2025, which is projected to drive revenue growth through improved production efficiency and higher output.
  
• Expansion in the North Montney, West Doe-Groundbirch, South Montney, and North Deep Basin infrastructure projects is expected to significantly increase condensate and NGL production, thereby enhancing net margins due to higher margin production.
  
• Strategic hedging and market diversification, including increased exports to U.S. and Pacific markets, are likely to strengthen realized prices and improve revenue, positioning the company to mitigate local price fluctuations.
  
• Planned infrastructure build-outs in 2025, anticipated to culminate in 2026-2027, are expected to lower operational costs long-term, thus improving net margins and overall financial performance.

Tourmaline Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tourmaline Oil's revenue will grow by 27.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.1% today to 26.6% in 3 years time.
• Analysts expect earnings to reach CA$2.7 billion (and earnings per share of CA$7.24) by about March 2028, up from CA$1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, down from 19.6x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 6.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Tourmaline Oil Future Earnings Per Share Growth

Risks

• The infrastructure build-out in Northeast BC, which requires significant capital yet will not result in volume increases until 2026-2027, could strain cash flow and delay future revenue growth.
  
• The company's reliance on volatile natural gas prices, especially in a weak pricing environment, could impact net margins and earnings if gas prices do not recover as anticipated.
  
• Permitting delays in new surface disturbance areas in Northeast BC could hinder production increases, potentially affecting future revenue and production growth targets.
  
• The new tariffs on product exports could introduce additional costs, which might offset realizations and compress net margins if not passed on to consumers.
  
• A large portion of the free cash flow is committed to shareholder returns, which might limit available capital for reinvestment or debt reduction, potentially impacting future growth and financial flexibility.

Valuation

• The analysts have a consensus price target of CA$79.306 for Tourmaline Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$95.0, and the most bearish reporting a price target of just CA$74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$10.0 billion, earnings will come to CA$2.7 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$66.12, the analyst price target of CA$79.31 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.