Natural gas producer stocks have been on a significant downtrend lately and have corrected nearly 35% since November 2022. Among the bigwigs, investor-favourite Tourmaline Oil (TSX: TOU) has witnessed a similar weakness. It plans to release fourth-quarter (Q4) 2022 earnings on March 7. Whether its numbers ease or worsen the ongoing selling pressure remains to be seen.
TOU stock and natural gas prices
Gas-weighted TSX energy producers like Tourmaline Oil had an excellent 2022. Including dividends, TOU stock returned 80% last year and 620% since the pandemic, remarkably beating its peers. However, this year has started off a bit differently.
Natural gas prices have fallen almost 80% in the last few months, thanks to warmer weather and oversupplied markets. Unsurprisingly, this has driven weakness in gas-producing companies as well.
Tourmaline Oil has unique assets with low-cost infrastructure that drives the company’s profitability. Nearly 80% of its total production is focused on natural gas, while the rest is crude oil and condensate.
Tourmaline Oil ahead of its Q4 2022 earnings
According to the data compiled by Yahoo Finance, analysts expect Tourmaline Oil to earn $2.29 per share for the quarter that ended on December 31, 2022. This marks a 22% drop compared to Q4 2021. The lower earnings expectations have already seemed to have priced in the stock. How the management sees the future and commentary regarding dividends going forward will drive the stock in the short to medium term.
For the entire of 2023, Tourmaline Oil expects a free cash flow of $2.6 billion. In the last 12 months, it reported record free cash flows of $2.74 billion, mainly due to higher gas prices. Notably, higher free cash flows were enough to improve its balance sheet and reward shareholders.
At the end of 2020, Tourmaline Oil had a total debt of $1.9 billion and has recently dropped to $0.4 million. It will save on interest expenses in 2023, likely improving the bottom line.
Massive deleveraging and dividends
As a result, Tourmaline Oil has achieved some of the best leverage positions in years and across the industry. Moreover, it was quite aggressive with shareholder dividends as well and paid $7.9 per share dividend last year, including specials.
Tourmaline was among the few Canadian energy producers last year to delight shareholders with special dividends. In comparison, peers mainly focused on share buybacks to utilize their excess cash.
In 2023, even though Tourmaline’s guided free cash flows for 2023 are lower than 2022 — a major chunk of them will go toward shareholder returns. That’s because last year’s cash flow priority of deleveraging will not be there this year, as the debt target has already been overachieved. So, investors can expect dividends and share buybacks in 2023.
Conclusion
TOU stock dropped 35% since its 52-week highs. While gas prices might not recover in the short term, TOU stock continues to look attractive from a valuation standpoint. Its resilience in the low-price environment and strong balance sheet make it stand tall among its peers. Moreover, its free cash flow growth and allocation to shareholder returns will likely create shareholder value.
