Tourmaline Oil Corp. Does a $1 Billion Deal With Royal Dutch Shell plc

After a deal with Royal Dutch Shell plc (NYSE:RDS.A)(NYSE:RDS.B), is Tourmaline Oil Corp. (TSX:TOU) one of the best energy plays in North America?

| More on:

Recently, Royal Dutch Shell plc (NYSE:RDS.A)(NYSE:RDS.B) agreed to sell over 206,000 acres in western Canada to Tourmaline Oil Corp. (TSX:TOU) for roughly $1 billion.

The deal included many oil and gas properties such as 61,000 acres in the Gundy area of British Columbia and 145,000 net acres in the Deep Basin area of Alberta. These currently produce 24,850 barrels a day of dry gas and liquids. The deal will be paid for with a combination of stock ($279 million) and cash ($758 million).

Some are now calling Tourmaline one of the best energy plays in North America. Should you be a buyer?

Making all the right moves

Tourmaline is executing every energy investors dream: it’s rapidly growing production while persistently lowering costs.

In 2009 production was about 20,000 barrels per day. That’s grown every single year to over 250,000 barrels per day. Reserves have also grown by over 800% over the same period. Meanwhile, operating costs have dropped consistently from $6.50 per barrel in 2009 to about $4 today.

Natural gas is still the future

Tourmaline is still predominantly a natural gas company. With prices back near $3 per mcf, shares have popped nearly 100%.

Upside may still be in the cards, however, considering the company’s massive leverage to rising prices.

For example, a $1 per mcf rise in natural gas prices translates into a $365 million increase in Tourmaline cash flow. Natural gas prices have risen by over $1 per mcf in the past 12 months, so the stock has deservedly experienced a strong run.

With natural gas drilling still near historic lows–the gas rig count is down more than 90% from its highs–prices have continued to strengthen. Until they do, Tourmaline should have no problem beating its competitors on most profitability metrics.

Natural gas prices have averaged just $2.50 since 2015 began, spending extended periods below $2. This has forced many companies with high production costs out of business.

However, Tourmaline is so lean that it can generate profits even if natural gas prices plunge below $2. Estimates show that Tourmaline can remain profitable at $1.49 per mcf, the second lowest in the industry.

“You got to chip away at all of those and try to be profitable and one of the key for us is to finance, build and control our own infrastructure–that’s what gives you the low op cost, and you can survive these low prices,” said Michael Rose, CEO of Tourmaline.

When prices rebound, low costs will allow Tourmaline to enjoy outsized profit margins.

“If gas got to $4, we will have tremendous earnings–it’s been painful with various oversupply scenarios. In the long term, we truly believe gas is going to get there,” Michael Rose commented.

As long as natural gas prices rise over the long term, Tourmaline investors should profit.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

1 Energy Stock I Bought This Year — and 1 I Sold

I bought and sold Suncor Energy (TSX:SU)(NYSE:SU) stock this year. There is one other energy stock I bought and held.

Read more »

Solar panels and windmills
Energy Stocks

This Stock Has Delivered a Gain of 85.3% Over 3 Years – Should You Buy It?

A dividend aristocrat that delivered massive gains in the last 3 years is a strong buy for its exceptional financial…

Read more »

A close up image of Canadian $20 Dollar bills
Energy Stocks

3 Top TSX Stocks to Buy for Monthly Passive Income

Here are three of the best TSX dividend stocks Canadian investors can buy right now to earn reliable monthly passive…

Read more »

green power renewable energy
Energy Stocks

Why Fortis (TSX:FTS) Stock Tumbled to 18-Month Lows Last Week

Even the stable utility sector has felt the market correction. Here's why Fortis stock is still a top defensive bet.

Read more »

A stock price graph showing declines
Dividend Stocks

Here’s Why I’m Confident About Investing Through the Down Market

There is no bear market in history that has not been followed by a bull cycle. Rather than fret over…

Read more »

Glass piggy bank
Dividend Stocks

How to Make $165 per Month in Passive Income Right Now

These two monthly passive income stocks are offering ultra-high dividends for investors right now.

Read more »

Oil pumps against sunset
Energy Stocks

Why Did Cenovus (TSX:CVE) Drop 15.7% in September?

Cenovus (TSX:CVE)(NYSE:CVE) stock fell 15% as oil prices weakened in September. Is this Canadian energy major a value buy?

Read more »

oil and natural gas
Energy Stocks

2 Canadian Energy Stocks (With Monthly Dividends) I’d Buy and Hold Forever

Fundamentally strong energy stocks such as Pembina Pipeline and Keyera pay investors monthly dividends.

Read more »