Home Month and Year August 2020 The Midas Touch

The Midas Touch

Mike Rose Has Tourmaline Oil Corp. on Track as his Third, Largest, Success

Mike Rose, Tourmaline Oil Corp.

There are few individuals in Calgary’s energy industry as well-respected as Mike Rose. Within his company, Tourmaline Oil Corp., the industry and with investors, Rose has earned the reputation of an astute and hard-working leader, who’s moves in the oilpatch generate immense value for many. A modest and down-to-earth guy with a knack for building lucrative oil and gas companies, Rose is difficult not to like.

Proof of Rose’s exceptional talent is at hand: Tourmaline, Canada’s largest natural gas producer, has continued through 2020’s oil price plummet and COVID-19 pandemic unusually well. “Tourmaline is doing fine,” Rose confirms from the company’s downtown Calgary offices. “We do not have any debt issues and we have plenty of available liquidity. Our dividend is fully funded from free cash flow, and our exploration and production program is also fully funded. We expect very modest growth of around five per cent this year. And every year for the next five years. And we haven’t laid any staff off like so many others and don’t ever plan to.”

Keeping debt low has been a key strategy for Rose, a geologist by trade. Over the last decade, Tourmaline, which he founded in 2008, has maintained a historical debt to cash flow ratio of approximately one and a half times. “Because we’ve never been egregious with our debt and balance sheet, it allowed us to survive this COVID crisis, market crisis, oil price crisis, probably better than anybody.”

With a planned spend of $800 million this year, the company has fully half ($400 million) to spend in the second-half of the year, and Rose plans to take advantage of lower overall service costs for the remainder of 2020. Seventy-five per cent of its 225 Calgary employees are now back working in the office; the plan for the rest of this year is right on track.

Tourmaline is the third oil and gas company Rose has founded and led. He launched Berkley Petroleum Corp. in 1993 and sold it in early 2001 to Anadarko. He started Duvernay Oil Corp. shortly thereafter, eventually selling it to Shell for $5.9 billion in 2008. Several members of the leadership team have been with Rose at all three companies. “One of the main keys to success is having a very strong staff in all the key disciplines, we’ve been fortunate to have enjoyed that at all three companies,” Rose says. “The staff at Tourmaline are the best yet.”

At 80 per cent gas and 20 per cent oil and liquids, Tourmaline is on course for continued strong growth. “When we started Tourmaline back in ’08 it was during the last financial crisis – and I would suggest we’re in one now – and we knew we had to be big and big quickly to get investor attention,” Rose explains. “We took advantage of the opportunity the ’08/’09 financial crisis provided to establish our initial positions in the Alberta Deep Basin and NEBC Montney gas condensate. We think those are Canada’s two best and most competitive natural gas plays, and they compete on a North American scale.”

Tourmaline continues to add to its already large positions in the two plays. Today it is the largest Deep Basin producer with 1.9 million acres producing 175,000 boe per day and the third-largest Montney producer. “But with the plans we have over the next five years we’ll end up being, we think, Canada’s largest Montney producer as well,” he adds.

Tourmaline is also a significant liquids producer too, producing over 65,000 bpd of oil, condensate, and ngls. “We’re the seventh largest liquids producer in the country, the second largest Canadian condensate producer, and the second largest NGL producer. The company is large from a production and reserve standpoint, but we’ve kept it well focused and with just the three expansive core resource plays, we’ve kept that close, small company atmosphere.”

Tourmaline has drilled over 1,600 wells to date hence the subsurface is completely de-risked. Over the last decade, it has built all of its own infrastructure, including gas plants and pipeline networks, and currently owns and operates 19 gas plants across the three core complexes. This allows for a simpler and better margin business going forward, since the large infrastructure spend is complete and is in the rearview mirror.

“We’ve had a huge focus on costs all the way along,” Rose says, “so we believe we are the lowest cost capital executer, our drill complete costs are trending ever lower on a completed per stage basis. We’ve figured out how to make money in very low gas price environments, because we’ve had to endure them for five years now. Our team manages every component of the cost equation so that we can remain profitable even when gas prices are below two bucks.”

Another key to Tourmaline’s success has been the diversification of its gas markets into the U.S. Today, the company ships over half a billion cubic feet per day to American markets, mostly on the west side of the country. “We’re one of the largest suppliers of natural gas in California,” Rose notes. “We took out long-term firm transport on the GTN system, so it goes west out of Alberta, to Oregon, then down to San Francisco City Gate, and we realize that stronger price. It’s been one of the best priced natural gas hubs over the last couple of years.”

“We’ve got a transportation strategy that moves our gas for reasonable tolls, so we can compete directly with the U.S. gas producers in their own markets,” Rose continues. “That’s really what the end game is. If we can get our gas there for the same price – which we can – and in some cases for less, then we win, as we are competing with our own lower development cost Western Canadian gas supply.”

Organic growth from Tourmaline’s large asset base of 15,000 locations and inventory is one half of its business plan. “It’s a self-funding program, where we can fund our annual organic E&P program and grow our dividend with the free cashflow as well as continue to reduce our debt,” Rose explains. “And now we currently have a second growth platform, which is participating in this compelling industry acquisition opportunity which we will fund with our Topaz Energy Corp. equity position.”

Last year, in reaction to what Rose views as the continued undervaluation of Tourmaline in the market, the company spun out Topaz, a private company with a royalty interest on 2.2 million acres of Tourmaline’s existing lands at the time, and a 45 per cent non-operated interest in two of Tourmaline’s natural gas plants.

“It was a way to crystallize a small portion of the value that isn’t recognized by the market for our shareholders,” Rose explains. “We crystallized potentially a billion dollars or more of value without impacting Tourmaline’s ongoing E&P business or cost structure.” Tourmaline is currently the major equity owner of Topaz.

Topaz effectively allows Tourmaline to utilize up to $1 billion to fund M&A activity, an area, Rose believes, holds compelling opportunities ahead: “Because the valuations [of energy companies] are so unrealistically low, we are in an environment that’s very attractive. Tourmaline is in a bit of a unique position in the Canadian space and we think setting up Topaz was a good move.”

“We’ll balance organic growth and M&A growth,” he says. “Bigger is better right now. Our goal at this point is to be the top one or two gas picks in the North American large cap gas space, and we’re not that far away from it. So we’ll continue to modestly grow and expand the EP business, in conjunction with that, we want to hire as many smart young people as possible. We think we’re one of the few companies that can provide a spot for young graduates with rewarding careers in this tremendously exciting business. When I started in this business 42 years ago, some people viewed it as a sunset industry even then; I think the sun is just rising for a growing, ever lower emission, Canadian natural gas business.”

A geology graduate himself from Queen’s, Rose got his start in the patch at Shell in Calgary in 1979. He had assignments in exploration, production, and eventually ran its exploration and production research between 1990 and 1993 before deciding to leave and pursue the independent route. He co-founded Berkley Petroleum with John Woods in May of 1993. “He was the money raiser and I was the technical guy,” he recalls, “we were the only staff at the start.”

He is married to Sue Riddell Rose, President and CEO of Perpetual Energy. They have three grown sons and, when not running their individual companies or watching baseball, devote much time and resources to charitable and advocacy efforts.

“On the charity side for us it’s all about youth; health, education and sports,” he says. We’ve made a lot of donations personally to medical, educational, and sports facilities across the country. Tourmaline follows a similar mantra but on a smaller scale. We run a long term charity golf tournament, this year would have been our 25th anniversary. We’ve raised over $7 million through that over the years, hopefully next year we can run it again. We’re also big United Way supporters and the staff really get behind that initiative.”

On the advocacy side, Rose has been heavily involved with many industry organizations and other initiatives. “We all know that fossil fuels are going to make up a large component of the energy mix for several decades going forward,” he offers. “We think that those hydrocarbon molecules should come from Canada, where we have the best emission profile. It’s very important to get that story out there, that as an industry we continue to improve our environmental performance and should be the supplier of choice.”

He points out that the oil and gas sector spends 50 per cent of all the dollars directed towards environmental performance improvement by all sectors of the Canadian economy every year, though it doesn’t get a lot of credit for it in some parts of the country.

At Tourmaline, environmental performance improvement is likewise a key priority. “Of the senior size producers, we have, by far, the lowest net emissions and emission intensity,” Rose says. “It comes in part by virtue of having much more natural gas in the production mix so our emissions profile is logically much lower. We have very detailed technical plans in place to continue to reduce our emissions going forward.”

Between 2013 and 2018, for example, Tourmaline was able to reduce its emissions intensity by 46 per cent. The plan is to reduce the intensity by another 25 per cent over the next five years.

“But it’s not just emissions, it’s air, land and water, and our industry has an impact on all three,” Rose continues. “We’re a leader in the Basin on eliminating fresh water use in our fracking operations. We recycle our frack water, through a series of facilities we have built across three large complexes.” Tourmaline has virtually eliminated fresh water use in their Montney complex, and eliminated approximately 70 per cent of it in the Alberta Deep Basin. It has also eliminated most of the diesel employed in its very active drilling and completions operations.

Indeed, Rose is bullish on the role natural gas will play in a greener future: “Gas is the place to be for fossil fuel companies in the medium and long-term, because it is the lowest emission source in the entire fossil fuel group. It is expected to be the number one energy source for the world within five to seven years. Some estimates have natural gas at up to 50 per cent of the overall world energy mix for an extended period of time.”

“If Canada has the cleanest methane molecule, which we do, the best thing we can do for the global atmosphere is provide as much of that natural gas as possible, and eliminate coal-fired electricity generation in Asia and India. That’s the game we can win. In the meantime, if we do that, we’ll provide an enormous number of badly needed jobs and significant capital investments in Canada. It’s a win/win for the whole country.”

An advocate for natural gas, for Calgary, for Canada, Rose has Tourmaline on a path to success, just as he did at his previous companies. He’s the leader, peer and advocate everyone wants.