Natural gas stocks have been in a slump lately. Particularly, in the last 12 months, the stock of Tourmaline Oil Corp. (TSX: TOU) has fallen as much as 34%, and the stock of Birchcliff Energy Ltd. (TSX: BIR) has fallen as much as 60%.
However, in the last month, both stocks have rallied strongly from their lows. Tourmaline stock has appreciated 19%, and Birchcliff is up +31%. Are the stocks turning around for real?
Technically
One way to tell if stocks are turning around is by looking at their technical charts. Here’s what I see from the charts of Tourmaline and Birchcliff: neither stock has broken out of their downtrends yet. When they do, it’ll be signaled by higher highs and higher lows.
Tourmaline stock has resistance at ~$26 per share, but first, it’ll need to break above its 50-day moving average, which is just under $24 per share. Even when the stock reaches ~$26 per share, it’ll still be a long way off from its two-year high of $38 per share.
Birchcliff stock has resistance at ~$4.50 per share. After that, it’ll need to break above its 50-day moving average, which is just under $5 per share. Even when the stock reaches ~$5 per share, it’ll still be halfway below its two-year high of $10 per share.
Recent results
Tourmaline is a natural gas weighted producer (~84% natural gas) and estimates its average production this year will be 270,000-280,000 barrels of oil equivalent per day (boepd). In 2017, its cash flow per diluted share increased 43% to $4.47.
Perhaps to instill confidence in the market, Tourmaline initiated a quarterly dividend of $0.08 per share in the first quarter, which implies a yield of ~1.3% based on its recent quotation of ~$23.70 per share. The company is only paying out ~6% of its cash flow as dividends. However, if you account for its capital investments, then its payout ratio is closer to ~107%.
Birchcliff is a natural gas weighted producer (~80% natural gas), and its average production for 2017 was nearly 68,000 boepd. It estimates that this year, its average production will be 76,000-78,000 boepd.
Birchcliff’s fourth-quarter cash flow per share was $0.36. So, it’s paying out ~7% of its cash flow as dividends. However, if you account for its capital investments, then its payout ratio is closer to ~73%. At the recent quotation of $4.33 per share, Birchcliff offers a ~2.3% yield.
Investor takeaway
Most investors buy Tourmaline or Birchcliff for their price-appreciation potential, not their dividends. The analyst consensus from Thomson Reuters thinks there’s double-digit upside for both stocks — ~18% for Tourmaline and ~38% for Birchcliff in the next 12 months.
The natural gas industry is a tough space to operate and invest in because of low natural gas prices. However, when the cycle turns, both stocks can trade much higher. Tourmaline stock could reach the $30s, and Birchcliff stock could reach $10. Investors just need to be patient.
