In an Oct. 10 research note, CIBC analyst Dave Popowich reported that Tourmaline Oil Corp. (TOU:TSX) intends to spin out, into a new private royalty and infrastructure company called Topaz Energy, a gross over-riding royalty interest across its properties plus a nonoperated 45% working interest in two of its gas plants.
In exchange, Tourmaline will receive CA$135–185 million in cash and retain a 75–81% equity share of Topaz. Existing Tourmaline staff members will manage the new entity under a contract. "Topaz expects to seek a public liquidity event in H1/20," Popowich indicated. "The company will initially pay out about 75% of its expected $90 million of annual revenue."
Popowich commented that the "transaction allows Tourmaline to monetize a fairly low-risk portion of its cash flow base while retaining some upside in an investment vehicle that should value it at a higher multiple in the public market." Previously, management indicated several times that its infrastructure has consistently been undervalued in the past.
The expected changes to CIBC's estimates on Tourmaline as a result of the transaction are minimal, Popowich noted, and no major impacts to the investment thesis are predicted in the short term. However, that could change, he added, were Tourmaline "able to use Topaz as a platform to roll up additional royalty and/or facility interests in a basin that is clearly ripe for consolidation."
Looking to this winter, AECO and/or NYMEX prices should improve, thus benefitting this Canadian gas-weighted energy firm, the analyst wrote.
CIBC has an Outperformer rating and a CA$25 per share target price on Tourmaline, whose stock is currently trading at around CA$12.06 per share.[NLINSERT]
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Disclosures from CIBC, Tourmaline Oil Corp., October 10, 2019
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Important Disclosure Footnotes for Tourmaline Oil Corp. (TOU)
· CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from Tourmaline Oil Corp. in the next 3 months.