After reporting record profits in 2022, several TSX energy stocks are trading significantly lower due to lower oil prices, sluggish consumer spending, and an uncertain macro environment. But the ongoing pullback allows you the opportunity to buy beaten-down dividend stocks and benefit from outsized gains when market sentiment recovers.
One such TSX dividend stock is Tourmaline Oil (TSX: TOU), which trades 34% below all-time highs, offering you a forward yield of 2%. However, if you account for the company’s special dividend, the effective yield is much higher. Let’s see how.
An overview of Tourmaline Oil
Valued at $19 billion by market cap, Tourmaline Oil is the largest natural gas producer in Canada. It has an aggressive exploration, development, production, and acquisition program in the Western Canadian Sedimentary Basin.
Tourmaline Oil began operations in 2008. In the last 16 years, it has grown cash flows and earnings through strategic acquisitions, farm-ins, and land acquisitions, in addition to its exploration and development program.
Over the years, Tourmaline Oil has assembled an extensive undeveloped land position with a multi-year drilling inventory and operating control of crucial natural gas processing and transportation infrastructure in core growth areas.
A look at the dividend yield for TOU stock
In the third quarter (Q3) of 2023, Tourmaline Oil reported a cash flow of $878.5 million or $2.55 per share. Its free cash flow stood at $332.3 million or $0.96 per share. Comparatively, it pays shareholders a quarterly dividend of $0.28 per share, indicating a payout ratio of less than 30%. A low payout ratio allows Tourmaline to reduce balance sheet debt, reinvest in capital expenditures, target accretive acquisitions, and raise dividends further.
In addition to a quarterly dividend, Tourmaline declared a special dividend of $1 per share. If we include its special dividends, the company has distributed $6.52 per share in total dividends in the last year, raising the trailing yield to almost 9%.
Tourmaline Oil expects a free cash flow of $1.9 billion in 2023, indicating the stock is priced at 10 times free cash flow, which is very cheap. It ended Q3 with $880 million in net debt, which is not too high given the company’s robust cash flows.
Recently, Tourmaline Oil announced it completed the acquisition of Bonavista Energy for $1.45 billion. After adjusting for Bonavista’s volumes, Tourmaline Oil should end 2023 with 600,000 barrels of oil equivalent per day. The acquisition should drive future cash flows and dividends higher.
What is the target price for TOU stock?
In addition to its base dividend of $0.28 per share, Tourmaline Oil plans to pay four quarterly special dividends in 2024 while maintaining a net debt-to-cash flow target between 0.25 and 0.35 times.
Tourmaline Oil also aims to sell the Duvernay assets acquired pursuant to the deal with Bonavista Energy, the proceeds of which can be used to strengthen the balance sheet. In the last decade, TOU stock has returned “just” 17.5%, trailing the broader markets by a wide margin. But if we adjust for its dividends, total returns are much higher at 65%.
Due to TOU’s strong financials and cheap valuation, analysts remain bullish and expect the stock to surge roughly 50% in the next 12 months.
