Energy stocks are cyclical, making them high-risk bets for the average investor. But holding diversified energy companies can shield you from fluctuations in oil prices and lower downside potential.
One such TSX stock is Tourmaline Oil (TSX: TOU), which has more than doubled investor returns in the past decade after accounting for dividends. Here’s why Tourmaline Oil stock can be a winning investment for long-term shareholders.
The bull case for Tourmaline stock
Tourmaline is a Canada-based senior crude oil and natural gas exploration and production company. It has focused on long-term growth through an aggressive exploration, development, production, and acquisition program in the Western Canadian sedimentary basin.
Tourmaline began operations in 2008 and has since targeted a series of farm-ins and strategic land acquisitions combined with an active capital exploration and development program. In the last 15 years, the company has assembled an extensive undeveloped land position with a multi-year drilling inventory and operating control of natural gas processing and transportation infrastructure.
Valued at a market cap of $23.8 billion, Tourmaline Oil is the largest natural gas producer in Canada and the fourth-largest gas processing midstream operator. It claims to be the lowest capital cost operator in the basin, allowing Tourmaline to enjoy peer-lending cash flow growth and free cash flow generation.
Additionally, Tourmaline is the sixth-largest producer of conventional liquids and the second-largest condensate producer in Canada. It plans to grow this vertical aggressively with the advancement of the Conroy asset, which should add 24 mbpd (million barrels per day) of condensate and pentanes-rich liquids production.
Armed with an investment-grade balance sheet and a large insider ownership, it provides investors access to Canada’s premium gas plays due to a low-cost infrastructure.
Is TOU stock a buy right now?
Despite volatile commodity prices, TOU stock has increased dividends at an annual rate of 25% in the last five years. It pays shareholders an annual dividend of $1.04 per share, translating to a forward yield of 1.5%.
A sluggish macro environment is expected to weigh heavily on the energy stock in 2023. Analysts tracking TOU expect its adjusted earnings to narrow from $13.1 per share in 2022 to $5.4 per share in 2023. Due to a decline in cash flows, Tourmaline’s dividend-payout ratio is expected to be over 100% this year due to the special dividend it declared.
But as earnings are forecast to improve to $6.3 per share in 2024, its payout ratio will be much lower at 68% next year.
Priced at 11 times forward earnings, TOU stock trades at a cheap multiple, given its free cash flow yield of 8%. According to Enverus, it holds the largest tier-one inventory in North America, and its scale allows the company to lower its cost base while leveraging opportunities across the supply chain.
Tourmaline emphasized the majority of its cash flow will be returned to shareholders, and special dividends will be a preferred method of returns when commodity prices are high.
Analysts remain bullish on TOU stock and expect it to surge around 15% in the next 12 months.
