Are natural gas prices finally setting up for a sustained rally? If so, which TSX stocks should we buy as a result?
In the last four months, the price of natural gas has rallied more than 80%. This is due to rising demand from the artificial intelligence (AI) boom as well as the continued global move away from coal to natural gas.
Natural gas and artificial intelligence
A growing number of artificial intelligence data centres are emerging as this new technological advancement takes hold in many different industries. Natural gas is expected to supply 60% of the power demand growth from these AI data centres. This demand growth is expected to be meaningful — according to analyst estimates, it could increase electricity demand by as much as 20% by 2030.
Here are two TSX stocks that will benefit from this.
Tourmaline: Canada’s largest producer
Tourmaline Oil (TSX: TOU) is Canada’s largest natural gas producer. It is dedicated to full-cycle profitability and returns, which means that even when prices are low, Tourmaline is a viable business.
The most important way to achieve this is through running a low-cost business, which is what Tourmaline is doing. In fact, the company is one of the lowest-cost producers, with strong free cash flow and dividend growth.
In Tourmaline’s latest quarter, the first quarter of 2024, the company reported free cash flow of $309.8 million or $0.87 per share. While these numbers are below last year’s, as natural gas prices were softer, they were better than expected. This is due to improved demand, which is sending prices higher, and this has resulted in improved forecasts.
For example, cash flow forecasts have improved by $200 million to $500 million in each year of the company’s five-year plan. In fact, over the next five years, the company estimates that it will generate $8.6 billion in free cash flow (approximately 38% of the company’s current market capitalization).
Rising natural gas prices are paving the way for increasing dividends at Tourmaline. This has already been happening and can be expected to continue as natural gas prices continue to rise. After the company’s strong first-quarter report, management increased the annual dividend by 7% to $1.28 per share. They also announced a special dividend of $0.50 per share.
Peyto
Peyto Exploration and Development (TSX: PEY). Peyto is the fifth-largest Canadian natural gas producer, with production of 124,000 barrels of oil equivalent per day (boe/d). Peyto is focused on some of the most prolific basins of Alberta’s deep basin lands.
This basin is characterized by a high return production profile, with high recoveries and predictability. This has enabled Peyto to remain one of the lowest-cost natural gas producers, with a consistent, growing dividend.
In the first quarter of 2024, production increased 21%, and funds from operations increased 14% to $204.6 million. The company’s history of cash flow generation and dividend growth over different cycles has been a reflection of its strong operational performance. This strong performance has supported 450% dividend growth since 2019.
The bottom line
Increased demand from AI, as well as from the continued buildout of liquified natural gas exports, will support natural gas demand going forward. Tourmaline and Peyto will be big beneficiaries of this.
