Markets have started 2023 on a positive note with easing inflation and rate-hikes woes. While the TSX Index has soared 7% so far, last year’s star commodity — natural gas — has notably lost steam. So, this price action was mimicked in gas-weighed TSX energy stocks of late, making them some of the TSX’s biggest losers of 2023. Canada’s largest natural gas producer, Tourmaline Oil (TSX:TOU) stock, has dropped 13%, while the third-largest, ARC Resources (TSX:ARX), has lost 17% of its market value so far in 2023.
Why are natural gas prices falling in 2023?
Natural gas prices were close to US$10/Btu (British thermal units) in August last year, which have now come down to US$2.4/Btu. Warmer weather in the U.S. and Europe has largely been behind natural gas’s muted demand this winter season. People use gas for heating homes. So, demand for natural gas goes up in the later part of the year.
Moreover, the U.S. EIA (Energy Information Administration) forecasts an oversupply of gas in 2023 due to record-high production and lower demand. Thus, natural gas prices seem unlikely to revive anytime soon.
Natural gas surged last year, as the war in Ukraine risked energy supplies from Russia. However, Europe has managed to fill its reserves to multi-year highs lately, which will be enough to cater to its winter demand. Plus, milder weather has further lowered the demand, making the current storage plentiful for longer.
Tourmaline Oil is a $20 billion energy production company with almost 80% gas-weighted production. While natural gas prices have declined 75% in the last six months, TOU stock has dropped only 25%.
And that’s because of Tourmaline’s strong balance sheet and special dividends. It also paid a special dividend of $2 per share on January 12, highlighting its cash flow visibility and sound financial position. Last year, TOU stock returned 80%, including dividends, remarkably outperforming its peers.
Tourmaline stands tall among peer energy stocks due to its low-production costs and exposure to premium markets in California. It sells a significant portion of its production in Sumas, Citygate, and Malin, where gas prices trade much higher than local AECO prices.
Tourmaline Oil is an appealing name in the Canadian energy space because of its scale and strong balance sheet. A less leveraged balance sheet makes a company less vulnerable in a low-price environment. TOU stock looks attractive from a valuation perspective as well. So, if gas prices recover later in the year, TOU stock could once again climb higher.
ARC Resources is Canada’s third-biggest natural gas producer. It also produces oil and condensate, which compensate for ARC’s natural gas exposure and make it relatively less susceptible to some extent.
ARC plans to produce 350,000 barrels of oil equivalent per day this year, nearly 3% higher than last year. Its high-quality Montney assets and owned infrastructure facilitate lower costs and help obtain relatively higher margins.
As is the case with Tourmaline, ARC has also repaid millions of debt in the last few quarters. Its lower leverage put it on a much stronger footing than it has been historically. This has been the theme across the energy sector since the pandemic. Energy producers have held back on production growth and used excess cash to improve their balance sheet strength.
These leading gas producers might have a limited downside from here due to their solid financials and ongoing share buybacks. However, a large correlation with natural gas prices makes them relatively riskier.