Canada’s biggest gas producer stock Tourmaline Oil (TSX: TOU) has been on a downtrend since November last year. As natural gas prices slumped on weaker demand, Tourmaline stock followed and lost 30% since November 2022. However, its recent quarterly earnings reiterated its fundamental strength and implied that the downside from here could be limited. It has returned a decent 210% in the last five years, notably beating TSX energy stocks.
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How Tourmaline Oil does it differently
Along with its scale in gas production, Tourmaline also is the second-biggest condensate producer in Canada. It aims to produce 530,000 barrels of oil equivalent in 2023, a marginal increase compared to 2022. In the first quarter (Q1) of 2023, it reported free cash flows of $525 million, marking a drop of 15% compared to Q1 2022. The drop was quite evident amid the lower gas prices in the quarter.
However, Tourmaline was still relatively well placed in this low-price environment due to its exposure to diversified markets. For example, its average realized prices were down only 10% during the quarter compared to Q4 2022, when gas prices were corrected by a much steeper 50-60%. That’s because it sells its production in premium-priced markets in the western U.S.
Moreover, Tourmaline has a gas storage capacity at Dawn and PG&E CityGate hubs. This allows it to inject gas when spot gas prices are low and withdraw when spot gas prices are high. California has been a historically very highly volatile market for gas, which Tourmaline has been strategically using for a long time.
It has also been supplying gas to the Sabine Pass LNG terminal since January 2023. Interestingly, the rate it receives on this contract is much higher than the Canadian benchmark. So, many such contracts in diversified markets have made it relatively less susceptible to gas price shocks.
Financial growth and balance sheet improvement
Tourmaline Oil’s free cash flows jumped from $864 million in 2021 to $2.7 billion last year. Thanks to such rapid growth, it’s repaid billions of dollars of debt since late 2021. At the end of Q1 2023, it had $709 million of net debt, down from about $1.7 billion in 2020.
Now that the debt target has mostly been achieved, the only way Tourmaline wants to go its excess cash is toward shareholder returns. As a result, it issued this year’s second special dividend last week. In the last 12 months, Tourmaline has paid a total dividend of $8.7 per share, implying an annual yield of 14%. Though the special dividends have decreased of late, they underline the company’s solid financial position.
For 2023, Tourmaline expects $2 billion in free cash flows. Of which, a majority will be distributed to shareholders via special dividends. The rest will be deployed for deleveraging.
TOU stock is trading 11 times its 2023 earnings and 10 times its free cash flows. This is a premium compared to its peers and indicates investors’ higher growth expectations. In fact, its superior balance sheet, dominating market position, and stellar growth prospects justify its premium valuation.
Investor takeaway
Natural gas prices seem to have already hit the bottom. Tourmaline’s decent performance in Q1 2023, even when gas prices were terribly low, speaks for its business strength. If we likely see a gas price recovery in the next few quarters, Tourmaline could see even higher free cash flow growth and considerable shareholder value creation.
