Energy stocks have been enjoying a pretty sustained rally in the last few years. While they will always be cyclical stocks, there has been a growing consensus that oil and gas companies are a necessary part of the energy grid. And this is even more true for natural gas.
Here’s why Tourmaline Oil Corp. (TSX: TOU) is an energy stock to buy today.
Source: Getty Images
Full cycle profitability for this energy stock
Today, natural gas is trading at $3.64 at the time of writing. This is similar to summer 2021 levels and a far cry from 2022 prices, which almost hit $10. But even at these levels, Tourmaline makes money. You see, this is not a natural gas company of the past, when commodity price weakness would wreak havoc. Tourmaline, on the other hand, is dedicated to full cycle profitability and returns.
The proof is in the pudding – Tourmaline has grown cash flow per share by a 30% compound annual growth rate (CAGR) since its 2010 IPO. In fact, the company’s free cash flow break-even is achieved at the low natural gas price of $1.50.
The global opportunity
The North American natural gas market has opened up to the globe in an increasingly big way. For example, the liquified natural gas (LNG) market is rapidly growing as the world is looking for cheap, abundant, and secure energy. In fact, U.S. LNG exports have risen from 41,800 million cubic feet (MCF) in 2016 to over 360,000 mcf in September.
And Tourmaline is intent on taking a part of this action for itself. As a result, its long-term outlook is positive. This is partly due to the fact that the company has been working on gaining access to the strongest natural gas markets, which mean strong pricing.
As part of this strategy, Tourmaline has further diversified its gas marketing portfolio by establishing a US Gulf Coast LNG pathway. Within this, Tourmaline entered into a long-term arrangement with Cheniere Energy Inc. In 2023, Tourmaline is becoming the first Canadian energy company to participate in the liquified natural gas business with full exposure to JKM (Japan Korea Marker) pricing. This pricing is much higher than North American pricing.
LNG Canada
But the most exciting opportunity for Tourmaline stock is the upcoming start-up of LNG Canada, which is slated for mid-2025. This will drive strong demand for natural gas in the next few years. And Tourmaline is ready for this, as the company has many wells just waiting for the right time and price to be completed.
Finally, Tourmaline has been benefiting from increased productivity in the deep basin where it operates. This has resulted in efficiency gains of 20% on its gas production and 40% on its condensate production. This is driving up production and driving down costs. We should expect to see these efficiency gains reflected in Tourmaline’s financials in the upcoming years.
Tourmaline stock’s dividend
In the company’s latest quarter, results reflected weak natural gas prices. Despite this weak pricing, Tourmaline issued a special dividend of $0.50 per share. Also, the company continued to pursue growth opportunities by completing two acquisitions and continuing to develop its asset base. As a result, production growth is strong and expected to stay that way.
All of this supports future dividend growth at Tourmaline.
