Tourmaline Oil has announced two strategic corporate acquisitions, Modern Resources and Jupiter Resources, providing an additional 76,000 boepd of current production, significant accretive cash flow and free cash flow.

The acquisitions also include over 900 net sections of prospective land and over 445 mmboe of 2P reserves in the most prolific and economic area of the Alberta Deep Basin, along with meaningful facilities and infrastructure.

Tourmaline plans very modest growth (3-5%) from the Modern and Jupiter assets in 2021-2022 to optimize efficiency and cost, and then migrate to a maintenance capital/production model similar to the balance of the Deep Basin complex. Production from the combined Modern/Jupiter assets is expected to increase from the current 76,000 boepd to 85,000 boepd over the next two years.

There are considerable operational, capital, land and facility synergies between the Jupiter and Modern asset bases. The acquisitions are expected to add over $300 million in annual cash flow and yield $130 - $150 million per annum of free cash flow in 2022 and beyond – sufficient to fund Tourmaline’s existing dividend.

Tourmaline has agreed to sell Topaz a GORR on the Modern and Jupiter lands effective January 1, 2021 for $130 million (2% on natural gas in 2021 and 3% in 2022 and  thereafter, 2.5% on crude oil and condensate). Net of GORR proceeds, combined acquisition metrics are 2.6x 2021 cash flow (compared to 3.0x gross of Topaz proceeds) and free cash flow yields(5) of 13% in 2021 and 20% in 2022, with related 2P reserve acquisition costs of $1.44/boe.

MODERN ACQUISITION

Tourmaline acquired Modern effective November 2, 2020, for total consideration of approximately $144 million ($73.75 million cash and 1.5 million Tourmaline common shares, and the assumption of current net debt of approximately $44 million).

The Modern assets, located in the Alberta Deep Basin, include current average production of 9,000 boepd, 2P reserves of 88 mmboe, over 400 sections of land, the 100% owned-and-operated Route natural gas processing plant, and a future drilling inventory of over 200 locations.

The Modern assets are low emission, efficiently operated and generated free cash flow in 2020. Tourmaline expects to increase the free cash flow yield from the Modern properties through the Company’s lower operating cost structure and a capital structure with costs expected to be 30–40% lower per well, with similar EURs.

JUPITER ACQUISITION

Tourmaline has entered into a definitive agreement to acquire Jupiter for 24.2 million Tourmaline common shares, representing a total consideration of approximately $626 million, inclusive of net debt estimated at approximately $200 million. All of the major shareholders of Jupiter have entered into irrevocable support agreements with Tourmaline and have agreed to vote an aggregate of approximately 92% of the outstanding Jupiter common shares in favor of the transaction, subject to the provisions of such support agreements. The transaction is expected to close on December 16, 2020, subject to receipt of customary regulatory approvals, including TSX approval.

The Jupiter assets, located in the Alberta Deep Basin and adjacent to the Modern assets, include current average production of 67,000 boepd, estimated 2P reserves of 357 mmboe, over 500 net sections of land (average working interest 84%), and working interests in gas plants in the Resthaven and Kakwa areas. Current production was acquired for approximately $9,300/boepd, 2P reserves for $1.75 boe.

The greater Musreau-Resthaven-Kakwa portion of the Deep Basin, where the Jupiter and Modern assets are located, provides amongst the highest EUR wells and liquid yields in the entire Deep Basin complex. Similar to the Modern lands, Tourmaline has been delivering completed horizontals for 30-40% lower cost on immediately offsetting acreage, with similar EURs.

The Jupiter production base has an estimated decline rate of 25% for the 2021-2022 timeframe. Tourmaline estimates annual maintenance capital of approximately $130 million (20-22 wells per year) to yield annual cash flow of approximately $250 - 260 million on production of 70,000-75,000 boepd in 2022. The Tier 1 drilling inventory alone will support this level of drilling activity for an estimated 13-15 years.

The Jupiter assets generated free cash flow in 2020. Tourmaline’s lower operating and capital costs are expected to increase the estimated free cash flow to over $120 million/year at strip pricing beginning in 2022 on annual production of 70,000 – 75,000 boepd.

Jupiter infrastructure includes working interests in three natural gas processing plants, two of which are operated by Jupiter; 2020 operating costs are estimated at $4.25/boe.

A substantial portion of Jupiter’s existing gas production accesses deep cut facilities in Resthaven-Kakwa yielding strong overall liquid production. The Jupiter assets are currently producing approximately 20,000 bpd (condensate and NGLs).

2021 FINANCIAL OUTLOOK AND FIVE-YEAR PLAN

Anticipated 2021 cash flow, including the new acquisitions, is $2.0 billion at current strip pricing, yielding free cash flow of $856 million on capital spending of $1.1 billion (free cash flow yield of 19%). The 2021 free cash flow will be utilized to fund modest, sustainable dividend increases, debt reduction, and potential share buybacks.

Tourmaline intends to reduce overall debt to cash flow to less than one times during 2021 - and maintain net debt at approximately $1.0 – 1.5 billion.

Tourmaline is maintaining the same modest EP growth profile as the previous five-year plan, with 3-5% per annum production growth.

Free cash flow over the five years at strip in the revised plan has now grown to $3.5 billion. 

KeyFacts Energy: Tourmaline Canada country profile