When stock markets are at an all-time high, it becomes difficult to understand what’s a value stock and which stock is just riding the wave of an uptrend. Canadian stocks are experiencing this phenomenon right now. During such times, it helps to look at sectors that are going through a rough patch and pick out good companies in a bad market.
Millennial investors need to identify value stocks and hold them over a long period of time to generate multifold returns. Here I have picked one such Canadian stock that has the potential to explode in 2020.
The natural gas market in Canada is going through a downturn. Natural gas prices are low, which means companies that produce natural gas are not going to have the best time around. If you look hard enough, you will find Tourmaline Oil (TSX:TOU), a stock that has the potential to give you upside of 47% in stock price alone. Add the roughly 4% dividend yield on this stock, and you can expect your investment to go up by over 50% in a year.
Tourmaline is a Canadian oil and natural gas company in the Western Canadian Sedimentary Basin. It is Canada’s largest natural gas producer, as per 2019 estimates, and 80% of the company’s production is natural gas.
The last five years have seen Tourmaline shares fall from $57.92 in June 2014 to $14 in December 2019. The stock has taken a hammering, even after its revenues went from $1.06 billion in 2015 to $1.69 billion in 2018, and earnings for the corresponding periods went from $80.09 million to $401.42 million. The stock simply can’t catch a break.
Compared to 2018, Tourmaline’s production numbers for the third quarter of 2019 are very impressive. Production is up 14% compared to the third quarter of 2018 and production for the first nine months of 2019 is up by 10% compared to the same period in 2018.
That said, total sales from production for the three months ended September 30, 2019, decreased 16% to $340.6 million from $407.2 million for the same quarter of 2018. The decrease can be attributed to lower benchmark prices across all commodities during the quarter. This resulted in total sales from production for the nine months ended September 30, 2019, decreasing 3% from $1.30 billion in 2018 to $1.26 billion in 2019.
Focus on capital efficiency
Tourmaline has increased capital efficiency to combat the fall in commodity prices. The operating cost fell 10% from the previous quarter. The company’s 2019 estimated exploration & production capital spending has been reduced by a further $90 million adding on to the $180 million that was reduced until this point. Cash flow for 2019 is expected to be at $1.35 billion.
The 13 analysts looking at this stock have given it a low target of $16 and a high target of $27.5 for the next 12 months. The average price target stands at $20.89, which will give investors the 47% upswing that was mentioned earlier. The stock is trading at a forward price-to-earnings multiple of 19. Its estimated five-year growth stands at a healthy 16% and this includes the 22% decline in 2019 and the 37.4% decline in 2020.
With a dividend-payout ratio of 26.7%, the company has enough room to increase its dividend payments once its cash flows stabilize. The stock offers a great opportunity for value investors to profit off it.
