While equity markets have staged a remarkable recovery in the last 12 months, the rally was primarily driven by tech stocks. Several stocks across other sectors continue to trade below all-time highs due to macro headwinds such as geopolitical tensions, inflation, interest rate hikes, and slower consumer spending.
For instance, after reporting record profits in 2022, energy companies are trailing the broader markets due to lower oil prices and higher costs of debt. One such TSX energy stock down over 30% from all-time highs is Tourmaline Oil (TSX: TOU).
Valued at a market cap of almost $20 billion, Tourmaline Oil is among the largest energy companies in Canada. The recent pullback has increased its dividend yield to roughly 2%. Let’s see why I’m bullish on the TSX dividend stock right now.
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An overview of Tourmaline Oil
Tourmaline Oil is a senior crude oil and natural gas exploration and production company. It is focused on long-term growth through an aggressive exploration, development, production, and acquisition program in the Western Canadian Sedimentary Basin.
It began operations in 2008 and has gained traction on the back of strategic acquisitions, farm-ins, and land acquisitions combined with a robust capital development program.
Tourmaline Oil has assembled an extensive undeveloped land position with a large, multi-year drilling inventory and control of essential natural gas processing and transportation infrastructure.
How did Tourmaline Oil perform in Q3 of 2023?
In the third quarter (Q3) of 2023, Tourmaline Oil reported an operating cash flow of $878.5 million and a free cash flow of $332.3 million, or $0.96 per share. It expects to end 2023 with a free cash flow of $1.9 billion, down from $3.2 billion in 2022 due to lower commodity prices.
The company ended Q3 with a net debt of $880 million, which is not too high, given the company’s free cash flow forecast for the year. Further, its earnings in the September quarter stood at $275 million or $0.80 per share.
Last October, Tourmaline Oil entered an agreement to acquire Bonavista Energy for $1.45 billion, which includes 50% in stock and the rest in cash. Tourmaline Oil also allocated $565.4 million towards capital expenditures in Q3, which should drive future cash flows and earnings higher.
While Tourmaline Oil pays shareholders an annual dividend of $1.12 per share, it also allocates a portion of its free cash flow towards a special dividend. In the last four quarters, it has distributed $6.52 per share in total dividends, indicating a trailing yield of 9%, which is quite tasty.
In 2022, as oil prices touched record highs, the company paid close to $8 per share in total dividends. Additionally, Tourmaline has more than tripled its dividends in the last six years.
The Foolish takeaway
Tourmaline’s low-cost operations allow it to generate consistent profits even when oil prices are under pressure. In the last 10 years, the TSX stock has gained just 24% in market value. But after adjusting for dividends, total returns are closer to 90%.
Priced at 9.2 times forward earnings, Tourmaline Oil stock trades at a cheap valuation given its high yield.
