The Lato Letter: Volume 3, Issue 6

The Lato Letter: Volume 3, Issue 6

On last night’s appearance on BNN’s Headline and the Top One segment, I featured Tourmaline Oil Corp. (TOU-TSX, $54.60) as my Top One in the Canadian market. Here’s a link to the segment in case you missed it.

Tourmaline Oil is a bit of a misnomer since 85% of its production is natural gas. The company was created in the fall of 2008 with equity capital of $300 million, went public in the fall of 2010 at an equity value of around $3.0B and is now valued at just over $11.0B; but the growth is far from over.

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Tourmaline has a tremendous management team led by Mike Rose, an incredible land base with the largest land position in the Deep Basin, thousands of drilling locations in its future and cash flow and free cash flow that is ready to explode.

The chart below shows a company estimate of 120,000 boe/day of production this year and cash flow of $5.30 per share growing to 189,000 boe/day and $8.36 of cash flow in 2016. If you would have looked at this chart two years ago, Tourmaline’s estimates for 2014 would have been 75,000 boe/day and cash flow of $4.87 and for 2016 they would have been 98,000 and $5.97. Clearly this is a company that in spite of showing aggressive growth targets in the past, has under-promised and over-delivered.

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While generating this growth in production Tourmaline has wisely employed the cash flow that they have generated into building a vast infrastructure of gas plants and transportation facilities that have allowed it to lower its operating costs per boe every year of its existence with plans and projects currently underway that should reduce costs even further.

As LNG becomes a reality over the next few years, Tourmaline is well positioned to supply the increased demand for natural gas and will soon find itself with cash flow that will be over and above its development and infrastructure needs. By the company’s current estimates, and remember their history of over-delivering, Tourmaline will have $1.5B in cash available to shareholders in 2018.

Tourmaline is a company that should be included in everyone’s oil and gas portfolio based not just on past growth but the future growth that this highly regarded management team is poised to deliver.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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