Natural gas stocks can be punished and suffer for multiple years. The last peak was around 2014, and many of these stocks hit rock bottom in the pandemic market crash of 2020. The U.S. natural gas prices spiked this year, but the Canadian natural gas prices had already recovered significantly in 2021 and continued higher this year. Rising natural gas prices have driven a magnificent rally in natural gas stocks.
Some of the best natural gas stocks to invest in Canada include Tourmaline Oil (TSX: TOU) and TC Energy (TSX: TRP)(NYSE: TRP). Surely, more explanation is needed, because they are very different businesses, which have resulted in markedly different price appreciation year to date. So far, Tourmaline stock has appreciated about 93%, while TC Energy stock has climbed approximately 25%.
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Tourmaline stock
As an energy producer, which is weighted towards natural gas production (about 77%), Tourmaline stock logically experienced an exceptional rally versus TC Energy that we’ll discuss in the next section. On higher commodity prices, Tourmaline easily made more sales.
In fact, it was already a great year for Tourmaline in 2021. On a natural gas price recovery, the stock climbed 138% last year. Year over year (YOY), it more than doubled its revenue, while its gross profits appreciated by more than 500%! Meanwhile, its operating expenses only rose 37%. The result was the net income more than tripled to over $2 billion versus 2020.
Results have continued improving this year. In its first quarter, it produced 23% more natural gas YOY, while the natural gas price climbed 26%. Although the operating expense and transportation costs also increased from higher inflation, their growth rates were lower at 16% and 12%, respectively.
Additionally, management was able to reduce general and administrative expenses by 6%, which is commendable. At the end of the day, its cash flow jumped 51% versus Q1 2021 to $3.18 per share. Moreover, the excellent management took the opportunity during this high commodity price period to reduce its net debt by half YOY.
Tourmaline shared profits with shareholders, too. Thanks to generating significant free cash flows, it paid out a special dividend of $1.50 per share this quarter. The special dividend was almost double its annualized regular quarterly dividend, which it has increased periodically since June 2018.
TC Energy stock
TC Energy is clearly different from Tourmaline. It is a blue-chip Canadian Dividend Aristocrat. Changes in commodity prices doesn’t move it. That is, it generates highly stable cash flows through economic cycles regardless of commodity price volatility.
The company has one of the largest North American natural gas pipeline networks, which total more than 93,300 km in length. It’s an essential business that transports over 25% of the daily natural gas needs on the continent. Its natural gas assets contribute about 77% of its cash flow. Complementing its portfolio are liquids pipelines and power and storage assets — the latter of which will play a bigger role in the future, as the transition to renewables transpires.
The dividend stock has increased its dividend by two decades, which is quite an achievement. Currently, the stock yields 4.9%.
The Foolish investor takeaway
Commodity stocks are cyclical. Investors can try guessing the peak and trough of a cycle and aim to buy at lows, which should result in substantial gains for patient investors. Right now, the analyst consensus suggests these stocks are fully valued with some bullish analysts calling for about 20% and 9% upside, respectively, in Tourmaline stock and TC Energy stock. Surely, the easy money has been made, and investors need to tread carefully.
