Tourmaline Oil (TSX: TOU) is Canada’s largest natural gas producer. It is, in fact, one that also has one of the best outlooks. But natural gas prices have had a rough year. Down 68% at the time of writing, it may seem like all is lost. The drop in gas prices has taken Tourmaline’s stock price down 28% from its 2022 highs and left us to wonder what’s next.
Here’s what I think: Tourmaline stock is a high-quality natural gas stock with a bright future, and this is a great buying opportunity.
Natural gas price weakness takes Tourmaline stock down
To understand where we’re at right now, I’d like to take a look at natural gas prices. As I’ve mentioned earlier, they’ve been hit hard. There were many factors that led up to natural gas hitting highs of almost $10 in 2022, such as the end of covid restrictions and Russia’s invasion of Ukraine. But these factors are one-time events, and, therefore, they couldn’t support natural gas prices in the long run.
Today, natural gas is trading at a mere $2.21 at the time of writing. This is right back to 2021 levels. But even at these levels, Tourmaline has always made money. You see, this is not a natural gas company of the past, when commodity price weakness would wreak havoc. Tourmaline, however, is dedicated to full-cycle profitability and returns.
The proof is in the pudding: Tourmaline has grown cash flow per share by a 24% compound annual growth rate (CAGR) since its 2010 initial public offering. In fact, the company’s free cash flow break-even level is achieved at the low natural gas price of $1.50.
The global opportunity
So, natural gas prices are back down to 2021 levels, yet a lot has changed. The North American natural gas market has opened up to the globe in an increasingly big way. For example, the liquified natural gas (LNG) market is rapidly growing as the world is looking for cheap, abundant, and secure energy. In fact, U.S. LNG exports have risen from below two million tons in 2018 to over seven million tons currently.
So, while Tourmaline stock has been beaten down recently, the long-term outlook remains bright. This is partly due to the fact that the company has been working on gaining access to the strongest natural gas markets, which mean strong pricing.
As part of this strategy, Tourmaline has further diversified its gas marketing portfolio by establishing a U.S. Gulf Coast LNG pathway. Within this, Tourmaline entered a long-term arrangement with Cheniere Energy Inc. In 2023, Tourmaline is becoming the first Canadian energy company to participate in the LNG business with full exposure to JKM (Japan Korea Marker) pricing. This pricing is much higher than North American pricing.
Tourmaline is cleaning up its act
In the oil and gas space, the companies that will survive and thrive on a long-term basis are paying attention to the environment. On this front, Tourmaline is making good progress. For example, the company has reduced its carbon emissions by 41% between 2013 and 2021, with a target to reduce this by an additional 25% by 2027.
Tourmaline is also pursuing cleaner energy projects, such as compressed natural gas (CNG) projects. Compressed natural gas is a natural gas fuel that is a lower carbon alternative to gasoline and diesel. This month, Tourmaline announced a joint development agreement to build and operate a network of CNG stations along key highways across Western Canada.
This will not only provide environmental benefits, but it will also give Tourmaline another market for its natural gas — a win/win situation.
