Tourmaline Soars as Reserves Spark Merger Talk

Tourmaline Oil Corp. is the best performing Canadian energy stock over the past year as a surge in natural gas reserves fuels speculation Chief Executive Officer Mike Rose has created another takeover target.

Tourmaline, based in Calgary, has risen 39 percent in the 12 months through yesterday and 10 percent this year after it announced on Feb. 12 reserves soared 61 percent in 2012. The stores of gas may attract bids from companies behind proposals for liquefied natural gas exports from Canada’s Pacific coast, said investors such as John O’Connell, chief executive officer of Davis Rea Ltd.

“There’s no question Shell or other major international players would be definitely interested in buying the company,” said O’Connell, who helps manage C$600 million ($589 million) including Tourmaline shares at Davis Rea. LNG backers such as Royal Dutch Shell Plc need decades of gas to supply terminals, O’Connell said by phone on Feb. 15 from Toronto.

Rose “has a track record of having been acquired, not because he puts the company up for sale, but because people realize he’s created wonderful assets that are meaningful and he owns the infrastructure,” O’Connell said.

Tourmaline’s stock performance tops Canadian energy companies valued at more than $5 billion, according to data compiled by Bloomberg. Rose, who is Tourmaline’s third-largest shareholder with a 6 percent stake, previously sold two companies for premiums above 30 percent.

Previous Deals

Shell paid C$5.27 billion in 2008 for Duvernay Oil Corp., a company Rose founded, the C$83-a-share price amounting to a 42 percent premium to the stock before the deal was announced. Berkley Petroleum Corp., another company run by Rose, was acquired by Anadarko Petroleum Corp. for $777 million in 2001.

Chevron Corp. and Shell proposed projects near Kitimat, British Columbia, to liquefy gas for export to Asia, where buyers pay about five times North American gas prices, according to figures compiled by Bloomberg. Exxon Mobil Corp., which has said it’s considering a liquid natural gas terminal, would need more reserves than it will acquire by buying Celtic Exploration Ltd., O’Connell said. That deal is slated to close Feb. 26.

Kirsten Smart, a spokeswoman for Shell, declined to comment in a phone interview yesterday on Tourmaline being a possible takeover target for the company. Kimberly Brasington, a spokeswoman for Exxon, and Lloyd Avram, a Chevron spokesman, also declined in e-mails to comment yesterday.

Sustainable Reserves

Scott Kirker, Tourmaline’s secretary and general counsel, declined to comment yesterday when reached by phone, citing restrictions communicating with media while the company markets an equity financing deal. Tourmaline announced a bought-deal financing of about C$203 million yesterday, to temporarily pay down debt and fund its capital spending for 2013.

“When you look at what Exxon’s been doing, what Shell’s been doing, what Chevron’s talking about, overall the sustainable big reserves companies have been bid up as this news has come out,” including Tourmaline, said Brandon Snow, who helps manage about C$6 billion at CI Investments Inc. in Toronto, including Tourmaline shares. Rose’s past company sales are lifting Tourmaline’s stock, Snow said by phone on Feb. 15.

Tourmaline reported proved and probable reserves of the equivalent of 438 million barrels of oil at the end of 2012, a 61 percent increase from a year earlier. The reserves are worth C$4.3 billion at future prices, Tourmaline said on Feb. 12. That sent the stock to a record close of C$36.35 on Feb. 13.

Bought Bargain

The company beat its output target of the equivalent of 70,000 barrels a day to end 2012, and yesterday boosted its target for 2013 by 6 percent to average 80,000 barrels a day, lifting its capital budget to C$740 million from C$650 million.

“Their updates on reserves and production are exceeding the market, consistently,” David Neuhauser, who helps oversee $100 million at Livermore Partners Inc. in Northbrook, Illinois, including Tourmaline shares, said by phone on Feb. 15.

Rose formed Tourmaline in 2008, as North American gas prices were plummeting from a high of $13.577 per million British thermal units. Tourmaline, whose energy production is 88 percent gas, grew as the heating and power-plant fuel fell to a decade low of $1.907 in April before rising to $3.276 on Feb. 19.

Tourmaline bought low-cost acreage for a bargain, while others struggled with high-cost “legacy” output, Snow said.

“In half the time, they’ve gotten to twice the size of Duvernay and it’s the exact same management,” said Jeffrey Fiell, an analyst at Integral Wealth Securities Ltd. in Calgary. Tourmaline plans to grow output to the equivalent of 130,636 barrels a day by 2017, according to its website.

Largest Landowner

The company is the largest landowner, with 1.1 million acres, in the Deep Basin area, a stretch in west-central Alberta where Tourmaline can drill into as many as 15 layers of gas-soaked rock to increase production, the website says. The company says it controls operating costs by owning pipelines and gas processing plants.

For every dollar spent on finding, developing and acquiring gas, Tourmaline will generate 2.25 times the cash flow, according to forecasts from the company’s Feb. 12 statement.

The so-called recycle ratio, an industry measure of efficiency, is “probably in the top 10 percent” of lowest-cost Canadian producers, Fiell said in a phone interview yesterday.

At the company’s northeast British Columbia Montney Shale development, its break-even gas price is C$1.12 per thousand cubic feet for new wells, according to Tourmaline’s website. Tourmaline forecast C$3.86 gas at the western Canadian hub, AECO, for 2013.

Premium Valuation

“They’ve been preparing for this type of market and building the company to survive in a $3 gas world,” Snow said.

Companies proposing LNG terminals are planning pipelines to the coast to connect with gas supply from shale fields, including the Montney.

Tourmaline rose 1.3 percent to C$34.84 at 4.20 p.m. today in Toronto, giving it a market value of C$6.09 billion.

Tourmaline’s premium stock price may limit bidders to Exxon or Shell, Fiell said. “When you get to Tourmaline’s size, $6 billion plus, it’s going to take a very large company and if they want to do that on an accretive basis, they would have to pay cash,” he said.

Tourmaline is the most expensive energy stock after Talisman Energy Inc., relative to its earnings, trading at 344 times its trailing 12-month average per-share profit, according to figures compiled by Bloomberg. It’s trading at 22 times the benchmark Standard & Poor’s/TSX Composite Index on a price-earnings basis and 16 times the energy sub-index, data compiled by Bloomberg show.

Debt Increase

The company, which went public with a C$228 million initial public offering in 2010, has always appeared expensive, Snow said. The company’s delivery of production ahead of schedule means “it wasn’t as expensive as everyone thought,” he said.

The stock may fall if Tourmaline’s debt rises and “spending gets out of control,” Fiell said. Tourmaline ended 2012 with total debt at 1.7 times its forecast 2013 cash flow, according to Fiell’s estimates, higher than the company’s policy to limit debt to one times cash flow. Yesterday’s equity financing, greater than the boost to 2013 spending, should allow Tourmaline to reduce its debt levels, Fiell said.

A rise in gas prices may boost Tourmaline further, Neuhauser said. “They’re doing everything right and if they can get help on the commodity front, I think the stock could break $40 and keep breaking out to new highs.”

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