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Here are five Foolish stocks we think are smart buys today and will shine into the future.
“Best Buys Now” Pick #1:
Tourmaline Oil (TSX: TOU)
Oil is in the name, but Tourmaline Oil (TSX: TOU) is much more about natural gas and natural gas liquids. So it doesn’t always quite move in sync with its oilier peers in the energy patch, and it is more tied to the swings of the natural gas market.
Natural gas is currently in the doldrums, and Tourmaline is particularly out of favour with investors because of the production expansion plan it recently announced to take advantage of export opportunities on the West Coast. It is an expensive plan, but Tourmaline, which has a sparkling balance sheet, can afford it, and the long-term benefits look worth the cost and effort.
Tourmaline’s plan calls for its production to increase to 850,000 BOEPD (barrels of oil equivalent per day) by 2031 from its current production level of 640,000. The cost of the expansion is capital expenditures of $2.6 to $2.9 billion per year from now through 2031. When complete, maintenance capital expenditures are expected to be roughly $2.5 billion annually.
Free cash flow under the expansion program is expected to also increase from $755 million this year to nearly $3 billion by 2031. Under the expansion program, its debt would decrease from $2.1 billion at year end 2025 and become a $5.9 billion cash surplus at the end. Of course, that assumes no special dividends, which seems unlikely given the company currently has a long history of paying special dividends and just $1.6 billion of debt today.
Here’s the best part: All these assumptions are based on current strip pricing through 2026 and then US$3 AECO natural gas pricing and $65 oil from there forward. In other words, there’s no assumption that pricing will improve in the next five years or beyond.
I think that’s a conservative plan. I think that’s also exactly how a five-year plan should be built. Recent history says that there is likely to be a period (or maybe two) of higher pricing, but that the price will likely fall back to this level. So, when looking at the total period and beyond, it seems likely Tourmaline will generate more cash flow at some point. We just don’t know when.
Tourmaline’s current market cap is $22.8 billion, which puts it at nearly 30 times this year’s expected free cash flow, about 14 times its average free cash flow of the last four years, and 7.6 times its projected 2031 free cash flow.
To me, it looks like investors are overweighting the next year or two of results and ignoring that Tourmaline is the gold-star company in the industry and the long-term cash flow generation from the plan. Investors are also seemingly ignoring the possibility of higher energy prices at some undetermined time in the future. I’m more than happy to take the other side of that bet.
