Valued at $24.7 billion by market cap, Tourmaline Oil (TSX: TOU) is among the largest companies in Canada. It acquires, explores for, develops, and produces oil and natural gas properties in the Western Canadian Sedimentary Basin.
Although the TSX composite index is trading at all-time highs, Tourmaline Oil stock trades 21% below record levels, allowing you to gain exposure to a quality company at a cheaper multiple.
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A strong Q2 performance
Tourmaline Oil reported a solid financial and operational performance in Q2 of 2024. Its daily production rose 13% year over year to an average of 562,000 barrels of oil equivalent per day (BoE/d). While natural gas prices ticked lower in Q2, Tourmaline still managed to maintain its production within the guidance range, which indicates strong operational efficiencies.
The company reported an operating cash flow of $755 million, or $2.12 per share. Comparatively, its free cash flow stood at $434 million, or $1.22 per share, which meant it spent $321 million in capital expenditures. Moreover, Tourmaline increased its base dividend by 3%, to $0.33 per share, leading to a payout ratio of less than 30%. It also declared a special dividend of $0.50 per share.
A low payout ratio allows Tourmaline to strengthen its balance sheet. In Q2 of 2024, the company reduced net debt by $137 million. It aims to further reduce long-term debt and eventually maintain a net debt target of $1.2 billion to $1.4 billion.
Tourmaline drilled 47 net wells and completed 38 wells in the June quarter, increasing its drilled-but-uncompleted inventory to 36 wells. It plans to add a 15th drilling rig in Q4 while capitalizing on improved drilling efficiencies and lower costs.
What’s next for TOU stock?
Due to lower natural gas prices and strategic deferrals, the Canadian energy giant adjusted its full-year production guidance to 575,000 and 585,000 BoE per day. The reduction puts the company in a favorable position because it expects higher natural gas prices in the next six months.
Management thinks natural gas prices will increase due to an undersupply of the commodity across North America. If prices are favorable, Tourmaline is positioned to increase production next year, which should drive future cash flow and earnings higher.
Notably, Tourmaline Oil’s diesel displacement initiative has allowed it to save $150 million as it has replaced 152 million liters of diesel with natural gas in the past seven years. Tourmaline is investing heavily in methane reduction technologies and shrinking its carbon footprint over time.
Is TOU stock a good buy?
TOU stock has risen less than 40% over the past decade. However, if we adjust for dividend reinvestments, the cumulative returns are much higher, at 103%. Since its initial public offering in November 2010, the TSX energy stock has returned 373% to shareholders in dividend-adjusted gains.
In addition to a quarterly dividend, Tourmaline pays shareholders a special dividend tied to its cash flow. In the last 12 months, its total dividend payout has stood at $3.78 per share, translating to a trailing yield of 5.7%.
Priced at 9.9 times forward earnings, TOU stock currently trades at a 20% discount to consensus price target estimates.
