The recent sell-off in energy confirmed that the sector does not just move on the demand-supply equation. The basics took a backseat this month amid the banking crisis, notably weighing on oil and gas prices. Banking stocks south of the border plunged 15% this month, and so have energy stocks. This indicates market participants’ fears that the banking crisis could lead to a recession and dent energy demand.
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TSX energy stocks see a notable decline
Natural gas prices have plunged a massive 82% since August last year. Milder weather and oversupplied markets weighed on gas prices recently. The weakness was aggravated last week when recession fears rose. Canadian natural gas giant Tourmaline Oil (TSX: TOU) stock fell close to its 52-week lows this week. It has lost 33% since October but has returned 15% in the last 12 months.
Tourmaline is Canada’s biggest natural gas and condensate producer. As gas prices saw an epic ascent last year, it was one of the biggest beneficiaries due to its scale.
Tourmaline reported free cash flows of $2.7 billion in 2022, a significant jump from $864 million in 2021. It delighted shareholders with a streak of special dividends last year, driving total returns of 80% last year. Tourmaline also paid millions in debt with its excess cash and notably improved its balance sheet. In fact, not only Tourmaline, but almost all energy producers saw massive debt repayments and balance sheet revivals.
Despite such fundamental improvements, energy is still perceived as a high-risk sector, which was clearly visible in the latest sell-off.
Should you buy TOU stock?
However, this could be the bottom for some oil and gas names. Tourmaline Oil is currently trading 4x its earnings and 10x its free cash flows. This looks discounted compared to its historical average and highlights appealing growth prospects.
Tourmaline Oil produces its gas in Canada but sells a large part of it in premium-priced markets in California. Such exposure, along with a stronger US dollar, has notably been beneficial for its financial growth since last year. Its recent LNG export contract also fetches much higher gas prices than the domestic benchmark prices. Moreover, its large condensate production also plays well when gas prices are low.
A stock ready to rebound?
Tourmaline Oil stock has been on a notable decline since mid-last year. But it remains a strong investment proposition in the Canadian energy space, mainly due to its sound balance sheet and strong execution over the years.
This year as well, the company intends to allocate a significant chunk of its free cash flows to shareholder returns. So, as gas prices are expected to recover later this year, Tourmaline Oil could change course and race toward its last year’s highs.
The recent correction could be an opportunity for discerned investors. Its correlation with gas prices indeed makes it a risky bet. However, considering Tourmaline’s fundamental strength and earnings growth prospects, the rewards look equally attractive.
