The Motley Fool

This Top TSX Energy Stock Looks Poised for Another Move Higher

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Oil prices reached dismal lows last year, with WTI crude plummeting nearly 300% last year. Indeed, oil trading at negative $37 was unprecedented. However, as the reopening thesis picks up steam, crude oil demand is slowly reviving to normalcy and is picking up momentum. Accordingly, now may be a great time for investors looking for an energy stock to add leverage to this trade to consider Tourmaline Oil (TSX:TOU).

Here’s why.

Big merger bullish for this energy stock

Tourmaline is Canada’s largest natural gas producer. Accordingly, the company’s recent acquisition of Black Swan Energy for $1.1 billion is a big deal.

Why?

Well, Black Swan provides Tourmaline with heating and power plant fuel operations from Canada’s west coast. This deal allows Tourmaline to boost its daily production by 2.3 billion cubic feet by 2022.

Now, given Tourmaline’s status as a price taker in the commodity space, the only real lever the company has to pull for profitability is production. Adding this amount of production to the company’s portfolio is bullish for those who think higher energy prices are here to stay.

Indeed, this all-stock transaction puts Tourmaline even further ahead of its competitors. Tourmaline is slowly building a massive moat around its business. Accordingly, long-term energy investors seem to like this move.

As part of the deal, Tourmaline is expected to further improve its cost structure. This deal provides Tourmaline with contiguous Montney acreage and existing infrastructure, which should provide synergies. Any sort of free cash flow boost will be welcomed by investors. Indeed, Tourmaline may use this free cash flow to raise its dividend once again. The company’s track record of dividend increases thus far has been solid, and another increase could tip the scales for many income investors.

I think the margin expansion potential resulting from this deal is massive. Accordingly, I think Tourmaline’s timing with this deal could prove to be impressive if commodity prices remain stable. For those seeking high leverage exposure to energy today, Tourmaline is a great choice.

Bottom line

Tourmaline’s recent acquisition comes on top of already strong numbers. The company posted earnings of $248 million this past quarter, beating analyst expectations. That increase is approximately 10 times last year’s result and could continue to grow over time, given the fundamentals of this recent transaction.

I think the Black Swan deal provides Tourmaline investors with a greater deal of operating leverage. Increased production over time should boost earnings. Accordingly, for long-term energy investors bullish on growth in this sector, Tourmaline remains a great pick right now.

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 Chris MacDonald has no position in any stocks mentioned in this article.

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