Why Tourmaline Oil Stock Plunged 13% in January 2023

Despite the recent plunge, Tourmaline Oil stock is an appealing bet.

| More on:
Arrow descending on a graph

Image source: Getty Images.

Canada’s largest natural gas producer Tourmaline Oil (TSX:TOU) had a terrific last year. It fired on all cylinders last year, be it the operational or financial growth or shareholder returns. However, it has changed course this year. It lost 13% of its market value in January and 25% in the last two months.

Why is TOU stock falling in 2023?

Its underperformance is quite noteworthy as almost entire markets have been upbeat so far in 2023. A weakness in natural gas prices has mainly caused the reversal in TOU stock. Almost 80% of its total production is focused on natural gas. The rest is crude oil and condensate.

The sudden drop in natural gas prices has largely been due to warmer weather and record production in the United States. It seems unlikely that gas prices will see a quick rebound soon due to oversupplied markets. However, they might again head higher later in the year, driven by an expected higher demand in Europe. So, gas-producing names like Tourmaline Oil could trade weakly in the short term.

But that does not make Tourmaline Oil a poor investment!

Should you buy TOU stock now?

Even if gas prices are lower this year, TOU could see a limited drawdown. To be precise, natural gas prices have tumbled 75% in the last six months, but TOU stock has fallen only 25% in the same period. It might continue to outperform relative to gas due to its exposure to condensate and fundamental strength.

Moreover, the company differentiates itself from the TSX energy peers on its low-production costs and sells its gas in some of the high-priced markets in the United States. This makes it less susceptible to Canadian gas prices, which usually trade at a large discount.

Tourmaline Oil saw substantial financial growth last year. It generated a boatload of cash last year, even after allocating capital for production growth. Hence, it repaid massive amounts of debt last year, also distributing the leftover cash to shareholders as special dividends. That made TOU stock investors’ darling, explaining its outperformance in 2022.

Tourmaline oil and its dividends

Now, the company is well capitalized with significantly low leverage. That makes it relatively well placed even in the low-price environment. Also, Tourmaline has kept its special dividend streak intact, at least at the start of 2023. It paid a special dividend of $2 per share on January 12, even when gas prices are making new lows. This sends out a positive message to shareholders and speaks about its balance sheet strength.

And this is not a short-term thing, where the management has done a great job only by maintaining capital discipline and rewarding shareholders. This is Tourmaline’s years of strong execution that’s reaping the benefits now. Its several well-timed acquisitions over the years gave it a crucial scale that played out very well in the strong price environment.


TOU stock is currently trading at a free cash flow yield of 13% and looks appealing after the recent correction. It is trading 4.6 times its 2023 cash flows. The current valuation implies a premium compared to peers. However, the stretched valuation is justified because of its some of the strongest balance sheets in the sector and handsome dividends.

Tourmaline stock remains a risky bet due to its positive correlation with natural gas prices and cyclicality. However, its solid execution and free cash flow visibility make it an appealing bet.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Energy Stocks

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

potted green plant grows up in arrow shape
Energy Stocks

1 Ridiculously Undervalued Growth Stock Down 40% to Buy Hand Over Fist

Don’t miss your chance to load up on this high-yielding, renewable energy growth stock.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

1 Renewable Energy Stock to Buy and Hold

Here's why Brookfield Renewable (TSX:BEP.UN) is a top renewable energy stock long-term investors should consider.

Read more »

financial freedom sign
Energy Stocks

Could Investing $10,000 in Enbridge Make You a Millionaire?

A top-tier dividend stock can help you accumulate wealth or become a millionaire over time.

Read more »

Aerial view of a wind farm
Energy Stocks

Brookfield Renewable Stock Climbs Higher: Time to Buy?

Brookfield Renewable stock (TSX:BEP.UN) continues to climb, but remains below the $40 mark. But that share price looks in view.

Read more »

Nuclear power station cooling tower
Energy Stocks

Up 35%, Is Cameco Stock a Buy in June 2024?

When a stock is bullish, and you have missed the starting point of the trend, it can be challenging to…

Read more »

Oil pumps against sunset
Energy Stocks

4 Top Energy Stocks (With Dividends) to Buy and Hold Forever

These four energy stocks are the best way to get in on long-term income from both growth and dividends.

Read more »

Man considering whether to sell or buy
Energy Stocks

Cameco Stock: Buy, Sell, or Hold?

Cameco stock (TSX:CCO) has risen by above 80% in the last year alone, and 14% in the last month. Will…

Read more »