If you are looking for beaten-down names in the Canadian energy space, natural gas giant Tourmaline Oil (TSX: TOU) is an appealing bet. After returning a massive 80% in 2022, it has been on a downtrend and has lost 30% since last November. But it seems to have already hit bottom and could change course soon. Here are some of the reasons why this is a great deal.
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Tourmaline Oil: Strong operational and financial performance
Tourmaline Oil expects to report $2 billion in free cash flows this year. Of which, 50-90% will be allocated to shareholder returns. The company has already stated that special dividends will be its preferred way to distribute its excess cash. So, investors can again expect a flurry of special dividends from Tourmaline this year.
In my view, Tourmaline’s specials will be lower than last year, considering its recent March cash flow guidance and lower gas prices. However, it is still in a handsome position to drive higher shareholder returns.
Tourmaline has already overachieved its debt target and has a very strong balance sheet position. Its leverage ratio currently stands at 0.1, which is lower than the industry average. So, this will allow it to allocate higher cash to shareholder returns.
On the operational front, Tourmaline runs an economical combination of product and asset mix. It derives 80% of its revenues from natural gas, and the rest comes from condensate and natural gas liquids. While it operates low-cost assets in Canada, it sells a large chunk of its production in premium markets like California. This substantially helps its margins and differentiates from peers.
In 2022, Tourmaline Oil reported free cash flows of $2.7 billion — an increase of 217% year over year. Of which, it issued dividends of $2.6 billion, including both common and specials.
Strong insider buying activity
Tourmaline Oil Chair Mike Rose has been on a buying spree lately, as TOU shares bottomed in March. According to CanadianInsider, he has bought more than 40,000 shares of TOU since March 2023. His activity shows skin in the game and conveys conviction for his company.
Natural gas prices
Natural gas prices have declined 80%, while TOU stock has dropped 30% since November 2022. TOU’s outperformance to the energy commodity speaks for its fundamental strength. Though gas prices succumbed to oversupply and milder weather, this could be the time when it changes course.
Many expect gas prices to turn higher again, given the improving demand. The upcoming winter will be a crucial driver for gas prices. Higher gas could notably benefit gas producers like Tourmaline Oil to boost their financials.
Valuation
TOU stock is currently trading 10 times its 2023 free cash flows. This indicates a premium valuation compared to peers. However, its dominating market position and strong growth expectations warrant a premium valuation. It will likely continue to outperform, despite its richly valued stock.
Investor takeaway
Despite the recent gas price weakness, Tourmaline Oil stock is a fundamentally strong bet. Its low-cost assets and access to high-priced markets make it less vulnerable in the low-price environment. Its superior balance sheet and decent financial growth visibility will likely drive shareholder returns in 2023 and beyond.
