Tourmaline Oil Corp. is buying Black Swan Energy Ltd. for about $750-million in stock, marking the latest in a series of acquisitions to bulk up in British Columbia’s prolific Montney natural gas region.
Tourmaline, led by chief executive officer Mike Rose, sees the north part of the Montney region as a major supply source for future liquefied natural gas plants on Canada’s West Coast, and has been building up its dominance there.
Prices for natural-gas-producing assets have yet to fully recover from the pandemic-driven lows of 2020, which keeps generating opportunities to bolster the company’s position, Mr. Rose said.
“It’s been a strategy that we hatched a couple years ago – when things become available and if the prices are right and we can generate free cash flow, that’s the critical screening criteria,” he said in an interview.
The company’s shares jumped 8 per cent to $33.25 on the Toronto Stock Exchange on Friday. Tourmaline is up 175 per cent in the past year after deals that include the initial public offering of its royalty and midstream affiliate Topaz Energy Corp.
Investors recognize the Montney to be one of North America’s top regions for natural gas and condensate. They welcome the company’s growth there because of its vast resources and Tourmaline’s ability to operate efficiently, said Robert Fitzmartyn, analyst at Stifel FirstEnergy.
That is why Mr. Rose can issue stock to do deals and be rewarded, when many of his rivals would not find the market support. Black Swan is owned by the Canada Pension Plan Investment Board and private-equity managers Azimuth Capital Management and Warburg Pincus LLC.
“The bottom line is I think people – private equity management teams – want his paper because it’s good value. He’s a low-cost guy, so stewardship of the capital is amongst the best,” Mr. Fitzmartyn said.
The company is preparing for a new export market in the coming years. Royal Dutch Shell PLC-led LNG Canada is building an $18-billion LNG terminal in Kitimat, B.C., which would be fed by natural gas from the Montney. The goal is to complete the pipeline by late 2023, start testing the line in 2024 and have the new plant supercooling gas into liquid form in 2025 for export on Asia-bound tankers. Other projects could follow, increasing demand for the region’s gas.
Mr. Rose has described the acquisition environment as a “generational opportunity” to consolidate production in the Montney, as well as the Deep Basin area in Alberta, where the company has also bought up assets.
“If commodity prices keep going up, or even hold where they are, I think that [mergers and acquisitions] opportunity disappears,” he said.
Under the deal, Tourmaline will issue 26 million of its shares for Black Swan. It will also assume up to $350-million of debt, bringing the total value of the acquisition to $1.1-billion.
Black Swan produces about 50,000 barrels of oil equivalent a day, and that is expected to increase to 60,000 next year as part of an expansion project. Tourmaline said the acquisition adds to its own holdings in the region, which it increased earlier through deals to buy Polar Star Canadian Oil & Gas, Chinook Energy Inc. and Saguaro Resources Ltd.
It now expects to produce 500,000 barrels of oil equivalent a day by the middle of next year.
Meanwhile, it said it is boosting its quarterly dividend by 6.35 per cent as a result of the extra free cash flow it will generate by acquiring Black Swan.
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