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Varcoe: As natural gas prices sizzle, Tourmaline buys Black Swan Energy in $1.1B deal

Calgary Herald logo Calgary Herald 2021-06-12 Chris Varcoe, Calgary Herald
a man wearing a suit and tie talking on a cell phone: Michael Rose, CEO of Tourmaline OIl Corp., speaks and participates during a group session at the 2018 Global Business Forum held at the Fairmount Banff Springs in Banff, Alberta on Friday, September 28, 2018. © Provided by Calgary Herald Michael Rose, CEO of Tourmaline OIl Corp., speaks and participates during a group session at the 2018 Global Business Forum held at the Fairmount Banff Springs in Banff, Alberta on Friday, September 28, 2018.

Canadian natural gas prices are heating up this spring and so is the pace of deal-making in the sector.

Tourmaline Oil Corp., already the country’s largest gas producer, announced Friday it acquired privately held Black Swan Energy Ltd. in a deal valued at $1.1 billion.

It’s another key purchase for Tourmaline as it continues to gobble up prime gas assets, and it comes while mergers and acquisitions have swept through the hard-hit sector.

By the middle of next year, Tourmaline CEO Mike Rose sees the company’s total production topping 500,000 barrels of oil equivalent (boe) per day, up from expectations of exiting this year at 430,000 boe per day.

“We’re well-positioned with a strong balance sheet and have done now six transactions through 18 months, either in the Alberta Deep Basin (play) or the B.C. Montney,” Rose said in an interview Friday.

“Those are Canada’s two best and most profitable gas plays and where our largest presence is.”

The all-stock deal for Black Swan, which is partly owned by the Canada Pension Plan Investment Board, Warburg Pincus LLC and Azimuth Capital Management, will see Tourmaline assume up to $350 million in debt.

It will add more than 50,000 boe per day to Tourmaline’s overall output, and it represents the Calgary-based company’s largest acquisition since it acquired shale oil and gas assets from Royal Dutch Shell almost five years ago for $1.4 billion.

More significantly, the new deal allows Tourmaline to continue consolidating assets in the north Montney region in northeast British Columbia.

Founded in 2008, Tourmaline snapped up 50 per cent of the north Montney assets of Saguaro Resources Ltd. in April for $205 million, while inking a joint venture agreement with the smaller company to develop the properties.

In the Black Swan transaction, Rose expects the acquired assets will grow by another 10,000 bpd in the first half of next year, helping propel Tourmaline’s total production to the half-a-million boe per day mark, cementing its position as one of Canada’s largest and fastest-growing petroleum producers.

“You are putting high-quality assets in the hands of what the market views as a consolidator,” said Robert Fitzmartyn, head of energy research at Stifel FirstEnergy.

“This doesn’t only reinforce Tourmaline Oil as a North American energy stock, but it’s emerging on a global scale now.”

Tourmaline expects the acquired assets to pump out $150 million to $200 million a year in free cash flow at current gas prices and it also announced Friday a dividend increase.

“We just keep growing efficiently (to) maintain that low cost,” added Rose.

“The reality is we figured out how to be profitable at $1.75 gas by having such a low-cost structure. So now, it’s a little nicer when gas is in the $2.75 to $3 range. That’s why we can generate so much free cash flow.”

Investors welcomed the news as Tourmaline stock, which has climbed 90 per cent this year, closed Friday at $33.25 on the Toronto Stock Exchange, up $2.55 on the day.

“It’s just the strong getting stronger,” said Jordan McNiven, a director with Tudor Pickering Holt & Co.

“It’s good for the resilience of the Canadian gas industry and good for Tourmaline.”

This is the latest takeover within the Canadian natural gas industry, highlighted by ARC Resources Ltd. buying Seven Generations Energy Ltd. in February, creating a much larger combined company with an enterprise value of $8.1 billion.

Last November, Tourmaline announced two separate takeovers on the same day, acquiring Jupiter Resources and Modern Resources in deals valued at more than $750 million.

The consolidation continues as the financial fortunes of natural gas producers have reversed over the past year, with higher commodity prices and growing demand for liquefied natural gas exports from the U.S.

Earlier this week, the U.S. Energy Information Administration projected benchmark natural gas prices will average US$3.07 per million British thermal units (mmBtu) in 2021, up from $2 last year.

In Western Canada, benchmark AECO spot prices sat at US$1.40 per mmBtu a year ago, but are projected to average about $2.50 for this summer, before heading higher to around $2.75 in the fall, according to energy consultancy IHS Markit.

U.S. natural gas prices increased Friday to close at $3.30 per mmBtu.

“These are the highest summer prices since 2014,” said Ian Archer,  associate director of North American natural gas for IHS Markit.

“This is essentially a big boon for those guys. They are finally seeing better prices and finally seeing better days … It’s a dramatic change.”

In recent years, the Canadian gas industry has been dogged by stubbornly low prices, competition from rising U.S. output and infrastructure bottlenecks.

Many of those headaches have subsided. The phasing out of coal in electricity generation has also increased demand for natural gas in Alberta.

While there remains some risk that improving pricing will coax North American gas producers to spend more on drilling and bump up production later this year, there’s also a chance a hot summer or cold winter will boost continental demand and push prices even higher, Archer added.

With improving industry economics, expect to see more M&A activity from producers with strong balance sheets that are looking to expand, said analyst Phil Skolnick with Eight Capital.

“It’s just the beginning. There is a good amount left to be done in the Montney,” Skolnick said.

“Part of the point of doing this M&A is to gain more relevancy. The bigger you get … the more attention you are going to get from investors.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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