Operational Timing And Expansion Will Capitalize On Higher Gas Prices

Key Takeaways

• Strategic timing of operations to coincide with potential higher gas prices could boost revenue and earnings significantly.
  
• Expansion and investment in production capacity and low-emission technologies are aimed at optimizing cash flow and enhancing profitability.
  
• Dependence on hedging and rising debt in a volatile market risks impacting financial flexibility, revenue, and profitability amidst operational challenges.

Catalysts

Explores for and develops oil and natural gas properties in the Western Canadian Sedimentary Basin.

• Tourmaline's strategic timing of frac operations and well startups to Q1 2025 is expected to capitalize on anticipated higher natural gas pricing, potentially boosting revenue and earnings.
  
• Expansion of production capacity, with expected averages between 635,000 to 665,000 BOEs per day in 2025, is aligned to optimize free cash flow and support revenue growth.
  
• Strong well productivity in the Deep Basin, with significant improvements in gas and condensate output compared to previous years, indicates potential for enhanced net margins and profitability.
  
• Planned investments in new developments, including the North Montney Phase 1 project and other facilities, are projected to add substantial production volumes over the next few years, likely increasing revenue.
  
• The launch of CNG fueling stations and the focus on lower-emission initiatives can enhance operational efficiency and contribute to long-term growth in earnings and net margins through increased demand for natural gas.

Tourmaline Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tourmaline Oil's revenue will grow by 26.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.7% today to 28.5% in 3 years time.
• Analysts expect earnings to reach CA$2.6 billion (and earnings per share of CA$7.8) by about December 2027, up from CA$1.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2027 earnings, down from 15.3x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 3.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Tourmaline Oil Future Earnings Per Share Growth

Risks

• The current weak natural gas pricing environment has already led to production deferrals and could negatively impact future revenues and profits by limiting growth opportunities.
  
• The company's substantial planned capital expenditures in 2025, such as those related to facility expansion and exploration, may not yield immediate returns, potentially affecting near-term free cash flow.
  
• High dependence on hedging strategies to manage price volatility implies underlying risks if these hedges do not align with market prices, potentially impacting net margins and earnings if not well-managed.
  
• The rising net debt of $1.7 billion, with a target reduction to $1.5 billion, may place pressure on financial flexibility and cash flows, especially in the context of ongoing market volatility.
  
• Continued operational issues, such as unplanned third-party outages, can pose risks to consistent production levels, adversely affecting revenue stability and profitability.

Valuation

• The analysts have a consensus price target of CA$77.71 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$93.0, and the most bearish reporting a price target of just CA$72.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$9.1 billion, earnings will come to CA$2.6 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 6.7%.
• Given the current share price of CA$63.6, the analyst's price target of CA$77.71 is 18.2% 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.