DBRS Morningstar Assigns Issuer Rating of BBB with a Stable Trend to Tourmaline Oil Corp.

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB with a Stable trend to Tourmaline Oil Corp. (Tourmaline or the Company). DBRS Morningstar notes that the Company previously had a private Issuer Rating of BBB with a Stable trend. The Company’s Issuer Rating is supported by its (1) size (production of 304,000 barrels of oil equivalent (boe) per day (boe/d)) for the first six months of 2020 (H1 2020), (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 ability to flex capital expenditures (capex) for a volatile price environment. Tourmaline’s rating is constrained by its high exposure to lower-priced North American natural gas (approximately 80% of the H1 2020 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. The Stable trend reflects DBRS Morningstar's expectation that despite lower crude oil prices, the Company's overall financial risk profile supports the rating over the medium term as natural gas prices in North America have been more stable through the Coronavirus Disease (COVID-19) pandemic and DBRS Morningstar expects the prices to trend higher over the medium term.

The Company has grown rapidly by focusing on developing three core areas in Western Canada: (1) natural gas and liquids-rich natural gas in the Alberta Deep Basin, (2) liquids-rich natural gas in the Northeastern British Columbia Montney resource play, and (3) light oil at the Peace River High Charlie Lake play in northern Alberta. By operating virtually all its production, combined with the ownership of associated natural gas-processing facilities and related transportation infrastructure, Tourmaline has been able to drive down unit operating and capital costs to among the lowest within its peer group. Tourmaline’s capital program is flexible and can be ramped up or down on short notice based on the prevailing commodity price environment. The Company reduced its budgeted exploration and production capex in 2020 to $800 million (as the global spread of the coronavirus pandemic had a material negative impact on crude oil and liquids prices) compared with total capex of $1.28 billion in 2019. Despite the reduction in capex, the Company expects overall production to grow by approximately 6% in 2020 to 308,000 boe/d.

DBRS Morningstar expects the Company’s earnings and cash flow in 2020 to be lower compared with 2019 based on DBRS Morningstar’s base-case West Texas Intermediate oil price forecast of USD 32.00/barrel, AECO spot natural gas price of CAD 2.00/thousand cubic feet (mcf), and New York Mercantile Exchange Henry Hub spot natural gas price of USD 1.75/mcf. However, DBRS Morningstar expects the Company to remain largely free cash flow (cash flow after capex and dividends) neutral as the impact of lower cash flow is expected to be offset by the reduction in capex. Consequently, DBRS Morningstar expects overall debt levels to remain relatively unchanged compared with YE2019.

Tourmaline had strong credit metrics heading into the current downturn brought on by coronavirus, and despite weakening in H1 2020, the overall financial risk profile remains supportive of the current rating. DBRS Morningstar expects the Company to maintain its lease-adjusted debt-to-cash flow ratio in the BBB range and its lease-adjusted debt-to-capital ratio in the AA range over the medium term. While the lease-adjusted EBIT interest coverage may weaken in 2020, DBRS Morningstar expects the ratio to improve in 2021 and 2022 on the assumption of higher commodity prices. DBRS Morningstar notes that current spot and future natural gas prices are trending ahead of the DBRS Morningstar's base-case assumptions as the demand-supply balance in North America is tightening. If the improvement in natural gas prices persists, Tourmaline's overall financial risk profile could strengthen. Tourmaline has sufficient liquidity. As at June 30, 2020, the Company had $1.1 billion available under its $1.8 billion bank revolving credit facility and a cash balance of $149.7 million.

In 2019, Tourmaline created a new subsidiary, Topaz Energy Corp. (Topaz), which purchased certain royalty revenue generating oil and gas and midstream assets from Tourmaline. To date, Topaz has raised $354 million through a number of private placements. Tourmaline currently holds a 63.5% interest in Topaz. Tourmaline expects an initial public offering in the H2 2020 and if successful, could improve the Company's liquidity profile and financial flexibility.

A rating upgrade would require a material improvement in the Company's business risk and/or financial risk profile. Conversely, a sustained material deterioration in the Company's financial risk profile could lead to a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
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 17, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577