Dividend investors have a vast selection of dividend stocks to choose from. Yet it’s not always that easy to find the quality names that are backed by solid operational and financial performance.
Dividend stocks like Tourmaline Oil (TSX: TOU) pay a monthly dividend — one that’s backed by strong business fundamentals and a strong outlook. The last thing we want is to buy a dividend stock only to watch its dividend being cut. And with Tourmaline, it looks like we won’t have that problem. You see, the company is looking at a strong outlook, which we can expect will keep this dividend safe.
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Who is Tourmaline?
As a senior oil and natural gas company, Tourmaline is focused on long-term growth driven by exploration, production, and acquisitions. The company’s operations are focused on three lucrative plays in the Western Canadian Sedimentary Basin — the Alberta Deep Basin, North East British Columbia Montney, and the Peace River Triassic Oil resource.
Tourmaline is one of Canada’s largest and lowest-cost natural gas producers, and this has driven exceptional results. A few years ago, Tourmaline made a commitment to return 100% of its excess free cash flows to shareholders. The company has been true to its word.
In the last year, Tourmaline has paid out $3.40 in dividends. This included a regular dividend as well as special dividends. The stock traded at an average price of roughly $65 during this period. Therefore, this translates into a dividend yield of a very attractive 5.2% for the year.
Q3 results
The positive investment case for Tourmaline is based on two very important factors. The first is the company’s low-cost, low-risk business. It has enabled Tourmaline to generate profit and cash flows even in low commodity price markets.
The second is the positive fundamentals and outlook for the natural gas industry. LNG Canada is quickly ramping up and will drive an additional two billion cubic feet (bcf) a day of demand. Also, increased demand from power centres is supporting the natural gas demand outlook. And finally, demand from data centres is expected to increase significantly over the next few years.
Tourmaline reported lower cash flow in its latest quarter, down 3% to $719.6 million. This was due to weak natural gas prices in Canada. In fact, prices were at their lowest levels in over 30 years in the third quarter. Yet, Tourmaline was still able to generate significant cash flows.
This is the commodity part of the business — the part that no company has control over. On the bright side, Tourmaline continues to do well with the parts that it does have control over. Operating expenses declined 1% to $4.80 per barrel of equivalent oil (boe). And transportation costs fell 5% to $4.99 per boe. Further to this, Tourmaline’s Northwest BC development project is expected to provide both significant growth and margin expansion and cost savings over the next six years.
New LNG contracts and realized prices
Tourmaline is also gaining control of its business by diversifying its markets. Today, Tourmaline has exposure to LNG markets and U.S. markets in addition to its traditional Canadian markets. This has given the company exposure to higher pricing.
During the third quarter, Tourmaline entered one long-term LNG contract and two short-term LNG contracts. The company will have an average of 213,000 million British thermal units per day (mmbtu/d) exposed to international pricing. This will grow to 253,000 mmbtu/d in 2027 and 333,000 mmbtu/d in 2028. These are much higher-value natural gas markets, with pricing even exceeding $20.
The bottom line
Tourmaline has provided its shareholders with significant dividend income over the last few years. Looking ahead, we can expect this to continue as the natural gas industry and Tourmaline are set to benefit from significant new demand. This is expected to drive natural gas prices and Tourmaline’s fortunes much higher.
