DBRS Limited (DBRS Morningstar) confirmed Tourmaline Oil Corp.’s (Tourmaline or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB (high). All trends are Stable. Tourmaline's ratings are underpinned by its (1) size (production of 507,059 barrels of oil equivalent (boe) per day (boe/d) in Q1 2022), (2) highly integrated and efficient operations geared to natural gas resource play development in Western Canada, (3) successful track record of low-cost reserve additions, and (4) strong financial risk profile. Tourmaline’s rating is constrained by its high exposure to lower-priced North American natural gas (approximately 78% of the Q1 2022 boe production mix was gas), asset concentration in Western Canada, and lower proved developed reserve life index caused by the concentration on resource play developments that typically have higher initial decline rates.
Tourmaline's production in Q1 2022 was 63% higher compared with the full-year average production in 2020 as the Company has successfully integrated the assets it acquired in 2020 and 2021. The increase in production, coupled with a rebound in crude oil and natural gas prices, has allowed Tourmaline to generate a meaningful free cash flow surplus (FCF; cash flow after capital expenditures (capex) and dividends). The Company has used the surplus mainly to reduce total indebtedness and for shareholder distributions. Consequently, Tourmaline’s total debt at the end of Q1 2022 ($0.6 billion) was materially lower compared with YE2020 ($1.9 billion) and its key credit metrics are currently in the AA range.
Based on DBRS Morningstar’s price assumptions—the average of the West Texas Intermediate price (2022:USD 74/barrel, 2023:USD 60/barrel), AECO spot natural gas price (2022: $3.75/thousand cubic feet (mcf), 2023: $3.00/mcf), and New York Mercantile Exchange (NYMEX) Henry Hub spot natural gas price (2022: USD3.85/mcf, 2023: US$3.00/mcf)—combined with a disciplined capex allocation ($1.225 billion budgeted for 2022), FCF surpluses are likely over the next two years. While Tourmaline is experiencing inflationary pressures on unit operating and capital costs, DBRS Morningstar expects the Company’s costs will continue to be among the lowest within its peer group. Given that Tourmaline has achieved its net debt target of $1.0 billion, DBRS Morningstar expects the Company to direct the FCF surplus toward shareholder returns and/or growth initiatives. Nevertheless, DBRS Morningstar expects Tourmaline to maintain a strong financial risk profile with a lease-adjusted debt-to-cash flow ratio at or below 1.0 times. The Company’s financial risk profile is stronger compared with its business risk profile and is expected to continue to support the ratings even if crude oil and natural gas prices trend below DBRS Morningstar’s base-case assumptions, underscoring the Stable trends.
DBRS Morningstar notes that there have been regulatory delays, which persist, in the issuance of new permits in British Columbia. DBRS Morningstar does not expect the delays to have an impact on Tourmaline's budgeted production in 2022, and the Company retains the ability to redirect capital to its Alberta assets if required. DBRS Morningstar also notes that the introduction of the new royalty framework in British Columbia is not expected to have a material impact on Tourmaline’s financial risk profile.
Given Tourmaline’s strong financial risk profile, a positive rating action would require a material improvement in the Company’s business risk profile. While unlikely, a sustained material deterioration in the Company's financial risk profile could lead to a negative rating action.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
DBRS Morningstar considered carbon and greenhouse gas (GHG) emission costs as a relevant environmental factor to Tourmaline’s rating. This factor is relevant because the ever-increasing environmental regulations in Canada targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies in Canada, including Tourmaline. While the Company's strong balance sheet and predominant exposure to natural gas provide it with the flexibility to navigate the energy transition path, DBRS Morningstar considers this factor to be relevant to the rating.
There were no social or governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2021; https://www.dbrsmorningstar.com/research/383104), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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