The energy sector is quite volatile due to fluctuating prices of commodities such as oil, natural gas, and natural gas liquids. So, investing in energy infrastructure companies might seem better than gaining exposure to traditional oil and gas upstream entities.
First, infrastructure companies typically generate revenue from service fees and equipment sales, shielding them from direct exposure to commodity prices. Moreover, infrastructure companies often generate higher returns on invested capital since they don’t own depleting assets like oil reserves.
One such TSX energy stock is TerraVest Industries (TSX:TVK). Valued at a market cap of $2.25 billion, TerraVest stock went public in July 2004 and has since returned a monstrous 8,940% to shareholders in dividend-adjusted gains.
Despite these market-thumping returns, the TSX stock trades at a compelling valuation, making it an enticing pick in December 2024. Let’s see why TVK is the best energy stock to invest $2,000 in right now.
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The bull case of investing in the TSX energy stock
TerraVest Industries manufactures residential and commercial heating products, propane and natural gas liquid storage and distribution equipment, and oil and gas processing equipment and services. Its product lines include home heating products, processing tanks, pressure vessels, and specialized transportation equipment for the energy sector.
Over the years, TerraVest has grown through strategic acquisitions and operates multiple manufacturing facilities across Canada and the United States, serving both residential and industrial customers in the energy and heating sectors.
As TerraVest serves multiple sectors, it provides investors with natural diversification. Moreover, it is better positioned to adapt to energy transition trends as the company’s expertise in pressure vessels and storage equipment can be applied to renewable natural gas or hydrogen infrastructure.
In fiscal Q4 of 2024 (ended in September), TerraVest industries reported revenue of $238.1 million, up 58% year over year. TerraVest attributed top-line growth to strategic acquisitions and organic expansion, with base portfolio growth of 14%.
While net income rose 50% to $14.4 million, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) more than doubled to $49 million in the September quarter. Its gross margins expanded from 22.2% to 29% over the past year, resulting in strong operating cash flow growth of 146%. Moreover, the cash available for distribution rose 141% to $32 million, allowing it to maintain a conservative dividend-payout ratio of 9%, down from 17% in the year-ago period.
TerraVest’s strategic initiatives are centred on accretive acquisitions and operational improvements. Its acquisitions of AEPL, Highland Tank, and LV Energy Services over the last 12 months have allowed it to gain traction in multiple verticals, such as tank trailer manufacturing, water management, and storage tanks.
Is the TSX energy stock undervalued?
TerraVest’s management remains optimistic about future growth, which should help it increase earnings, cash flow, and dividends over time. In the last 10 years, TerraVest has raised dividends from $0.4 per share to $0.7 per share.
A low payout ratio and a growing cash flow base give TerraVest the flexibility to be aggressive with dividend hikes. Moreover, the company’s debt-free balance sheet shields it from elevated interest rates.
Analysts tracking the TSX stock expect adjusted earnings to rise by $3.3 per share in fiscal 2024 to $5.2 per share in 2026. So, priced at 22 times forward earnings, TVK stock trades at a reasonable valuation and is priced at a discount of 14% to consensus target estimates.
