TSX Energy stocks at large have lost steam so far in 2023 despite the strong fundamentals. But who are the big buyers of these energy names this year? Energy companies themselves. That’s right. Oil and gas producers have been relentlessly buying back their own stock since last year thanks to their stellar free cash flow growth. Notably, even at current oil prices, energy producers are making a decent amount of free cash flows, which is expected to be distributed to shareholders via dividends and buybacks.
Canadian Natural Resources
This will be the big value driver for TSX energy stocks in 2023 and beyond. Consider the country’s biggest oil producer Canadian Natural Resources (TSX: CNQ). Like peers, it currently distributes 50% of its free cash flows to shareholders. But later this year or early next year, it aims to give away 100% of its excess cash to shareholders.
Free cash flows are cash flow from operations minus capital expenses. These can be used for debt repayments, acquisitions, and shareholder returns. When a company consistently grows its free cash flows, it typically generates decent shareholder value.
In case of energy companies, they have been seeing superior free cash flows due to relatively higher oil prices. They aggressively repaid debt last year and attained some of the best financial positions ever.
Canadian Natural repaid almost $11 billion of debt in the last two years. Its leverage ratio, around 3 times pre-pandemic levels, has now fallen to 0.6 times.
As the company is already on track meeting its debt target, shareholder returns will be the priority for the next few years. Its excess cash allocated toward shareholder returns will likely create significant value.
CNQ’s long life, low decline asset base plays well even with these oil prices. The stock has lost 6% in the last 12 months but has returned 275% in the last three years. The dividend yields a decent 4.5%. The oil giant’s operational efficiency, strong balance sheet, and earnings growth potential should drive value in the long term.
Tourmaline Oil
Canada’s biggest gas producer Tourmaline Oil (TSX: TOU) is another appealing pick in the TSX energy space. It produces natural gas from some of the prolific reserves in Canada and sells it to diversified markets like California. Moreover, it also owns key infrastructure like pipelines and storage tanks that improve its operational efficiency.
Like CNQ, Tourmaline also repaid billions of debt and strengthened the balance sheet in the last few years. Its leverage ratio improved from 1.5 times in 2020 to 0.08 times in Q1 2023. As the debt balance is reduced, the company’s interest expenses drop, which ultimately improves its profitability. We might see this materializing for many energy companies this year.
Tourmaline Oil is expected to report free cash flows of $2 billion this year, a large drop from last year. However, as debt repayments will not form a large chunk this year, dividends and buybacks will be its key priority. TOU paid total dividends of $7.90 per share last year, indicating a payout ratio of 60%. While it may not pay dividends like last year, Tourmaline still looks well-placed to reward shareholders.
Note that natural gas prices have fallen 70% in the last 12 months, but TOU stock has fallen by merely 20%. That’s because of its diversified product base, exposure to premium markets, and strong financials. It will likely create significant value in the medium to long term once gas prices shrug off the ongoing weakness.
