In a June 11 research note, analyst Jamie Kubik reported that CIBC raised its target price on Tourmaline Oil Corp. (TOU:TSX) to CA$40 per share from CA$35. In comparison, Tourmaline's current share price is about CA$31.91.
Kubik explained that CIBC raised its target for two reasons. One is that it expects Tourmaline's cash flow to increase in 2021 and 2022 due to the company's acquisition of Calgary-based Black Swan Energy. The other is to reflect the recent increase in strip commodity pricing.
The analyst discussed the Black Swan acquisition, pointing out the ways it benefits Tourmaline, also headquartered in Calgary. It affords the company high-quality assets. The transaction complements Tourmaline's operations and existing position in northern British Columbia's Montney formation, thereby providing synergies. Also, it solidifies Tourmaline's presence there.
"We expect the development formula from Tourmaline will enhance economic returns on the assets moving forward," Kubik added. "Management estimates current production of 50 MBoe/d from the assets, which computes to ~$22,000/Boe/d and an implied cash flow multiple of ~4.5x 2022E on strip."
Kubik also highlighted that Tourmaline is paying a reasonable price for Black Swan. The total consideration is $1.1 billion, including 26 million Tourmaline shares "and the assumption of $350MM (maximum) of net debt."
The "purchase price screens as being slightly accretive to our pre-deal metrics and provides material long-term runway in a key area of the basin," Kubik wrote.
As for Tourmaline's financial situation, Kubik noted, 2021 capital spending is expected to be $70 million higher than the original estimate of $1.19 billion, but debt is low.
"Although we do see the Black Swan hedge book weighing down cash flows somewhat in 2022, our cash flow expectation increases on the back of the transaction for 2021 and 2022, and we see the 6.25% dividend increase as being appropriate given Tourmaline’s superior financial position. Kubik, its 6.25% dividend increase is warranted," Kubik wrote.
CIBC has an Outperformer rating on Tourmaline.[NLINSERT]
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Disclosures from CIBC, Tourmaline Oil Corp., Earnings Update, June 11, 2021
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Important Disclosure Footnotes for Tourmaline Oil Corp. (TOU.TO)
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