Tourmaline inks $500-million joint venture

By Dan Healing, Calgary Herald, Nov. 06, 2014

Mike Rose, president and CEO of Tourmaline Oil. An oil and gas firm backed by financier Richard Grafton of Calgary is buying into a joint venture with Tourmaline to develop its Peace River High oil play.

An oil and gas company backed by financier Richard Grafton of Calgary is spending $500 million to buy into a joint venture with Tourmaline Oil Corp. to develop its Peace River High oil play in return for a 25 per cent stake.

Tourmaline announced the deal with Canadian Non-Operated Resources LP, created by Grafton Asset Management Inc. and other equity funds, in its third-quarter financial results news release late Wednesday. A Tourmaline spokesman was not immediately available for comment and a spokeswoman for Grafton declined to comment.

In its release, Tourmaline said the deal was signed last Wednesday and is expected to close in December. CNOR is to take a one-quarter interest in all lands, wells, production, reserves and facilities in the northern Alberta play and share all future development and acquisition costs.

“Tourmaline will accelerate the planned (exploration and development) program commencing in 2015, with both an accelerated drilling program and infrastructure build-out resulting in expenditures of at least $400 million per annum over the duration of the five-year plan,” it said in the release.

Analyst Robert Fitzmartyn of FirstEnergy Capital said the deal illustrates the role that private capital can have in funding growth as capital market investors dump oil and gas stocks in the wake of the recent 20 per cent decline in world oil prices.

“This $500 million will keep them at 20 rigs corporately, which is still pretty ambitious,” he said. “It validates their view and our view that the Peace River complex they have is worth $2 billion at minimum and probably accelerates the value of that as they can direct more capital to it faster.”

Tourmaline also announced it would budget for capital spending of $1.6 billion in 2015, a decrease of 14 per cent from $1.86 billion this year.

Grafton-managed funds have also invested $500 million in Calgary producer Bellatrix Exploration Ltd., with $250 million through Grafton Energy Co. I Ltd. as of last spring and another $250 made via CNOR last month.

CNOR was launched in August after securing $675 million in funding from New York-based Riverstone Holdings LLC, an undisclosed United Arab Emirates state-owned investor and Grafton Asset Management Inc.

Tourmaline, headed by president and CEO Mike Rose, released corporate production numbers two weeks ago, noting output that fell short of analyst expectations at 108,000 barrels of oil equivalent per day due to various third-party infrastructure outages and unplanned maintenance. It reduced its 2014 average production guidance by 5,000 boe/d to 115,000 boe/d.

In its release Wednesday, however, it said it expects to achieve year-end 2014 production of 150,000 to 155,000 boe/d, or greater, adding that it expects full-year 2015 average production of 164,500 boe/d.

It said it expects to be producing one billion cubic feet of natural gas per day by the fourth quarter of 2015 with total oil and liquids production of more than 40,000 barrels per day.

It noted net earnings of $67 million on revenue of $322 million in the three months ended Sept. 30, up from $9 million on $188 million in the same period of 2013.

Its average realized price for liquids fell 19 per cent to $74.61 per barrel in the quarter, while its gas price rose 32 per cent to $4.34 per thousand cubic feet.

“That is all coming from the emerging markets. This is not a new story, but it’s real and it does happen.”

He declined to talk about overweight and underweight positions in the fund, saying that he balances the risk of the 30 to 40 companies in the portfolio based on his own criteria.

That means he looks for companies that have reserves that are at least 20 percent proven and producing and that have experienced management teams.

Among Grafton’s holdings in the portfolio are Tourmaline Oil Corp. (TOU.TO), Athabasca Oil Sands Corp. (ATH.TO), and Surge Energy SGY.V, which represent conventional oil, oil-sands and natural-gas plays in the Western Canadian Sedimentary Basin, mainly Alberta.

In Colombia, a growing market, he favors Pacific Rubiales PRE.TO, Parex Resources PXT.V, and C&C Energia CZE.TO. The fund also has some exposure to Turkey and to some former Soviet republics. Twenty percent of the fund’s holdings are in private and pre-IPO companies.


During a career that has spanned more than 30 years, Grafton was one of the co-founders of independent energy-focused investment bank FirstEnergy Capital, and has completed more than C$22 billion of energy investment deals.

Just 58 now, he had contemplated retirement, but decided in 2009 to set up the fund instead.

“I had the option to play golf in Scottsdale or invest in high-growth early-stage oil and gas companies. Already a lot of my personal assets were invested in these companies.”

The Absolute Resource Energy Growth Fund has returned 53.31 percent since inception, far outpacing the broad S&P/TSX Composite Index, which was up 17.76 percent in the same period. It also outperformed its benchmark, the S&P/TSX Capped Energy TRI, which was up 19.18 percent.

It hit a few bumps in the second quarter, with a negative return of 9.83 percent though that was still good enough to beat the broader index, which fell 10.96 percent.

He is sanguine about the hit — perhaps owing to his enthusiasm for yoga — and explains that the second quarter is usually the softest period of the year for commodities as the winter drilling season is winding down and choppier stock prices seem to prevail among high-growth energy companies, which also tend to have little news to share.

Also, his philosophy is to try to hold investments until bigger companies want to buy them.

“I’m a long-term holder of securities. I know that the end buyer is out there. Someone will buy this company for a lot more money.”

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