DBRS Morningstar Confirms the Ratings on Tourmaline Oil Corp. at BBB (high), All Trends Remain Stable

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 525,916 barrels of oil equivalent per day in Q1 2023), (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 ratings are constrained by its high exposure to lower-priced North American natural gas, asset concentration in Western Canada, and lower proved developed reserve life index.

Tourmaline earnings and cash flow were materially higher in 2022 and Q1 2023 because of significantly higher commodity prices and an increase in production. While inflationary pressures increased the Company's operating and capital costs, the Company continues to have one of the lowest cost structures among its peers. Despite a material slowdown in acquisitions, the Company was able to replace 173% of its annual production primarily through its development program. The increase in production, coupled with higher realized crude oil and natural gas prices, allowed Tourmaline to generate a meaningful free cash flow surplus (FCF; cash flow after capital expenditures (capex) and common dividends) in 2022 and Q1 2023, despite an increase in capex and common dividends. Given that the Company had already achieved its net debt target of $1.0 billion in 2021, Tourmaline used the surplus mainly for shareholder distributions in the form of special dividends ($2,350.6 million), with a modest amount directed toward debt repayment. Consequently, Tourmaline's total debt at the end of Q1 2023 ($0.45 billion) was lower compared with YE2021 ($0.87 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 (2023: USD 65/barrel, 2024: USD 60/barrel), AECO spot natural gas price (2023: $3.00/thousand cubic feet (mcf), 2024: $3.00/mcf), and New York Mercantile Exchange Henry Hub spot natural gas price (2023: USD 3.50/mcf, 2024: USD 3.00/mcf)—combined with a disciplined capex allocation (2023: $1.9 billion, 2024: $2.1 billion), FCF surpluses are likely to continue over the next two years. The recent wildfires in Alberta are not expected to have a material impact on annual production. While Tourmaline is experiencing inflationary pressure 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 less than 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.

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, GOVERNANCE (ESG) CONSIDERATIONS
Environmental Factors
DBRS Morningstar considered carbon and greenhouse gas (GHG) emission costs as a relevant Environmental factor to Tourmaline's ratings. This factor is relevant because 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 ratings.

There were no Social/Governance factor(s) 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/416784 (July 4, 2023).

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022), https://www.dbrsmorningstar.com/research/402196

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, managements, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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