In a market in which Canadian energy rarely dazzles any more, after years of rough financial results and the current ESG investing push, Calgary’s Tourmaline Oil Corp . is showing some rare star power – and its latest earnings have the potential to amplify the recent hype.
Despite its name, Tourmaline is one of Canada’s largest natural gas producers, and the company is known for its low-cost operations. This reputation, coupled with stronger North American natural gas prices recently, have helped Tourmaline’s shares double this year, soaring 102 per cent since the start of January – better than some names even in the hot tech sector.
Those strong natural gas prices have been a boon to the many producers, but Tourmaline’s performance is on another level. Rival Arc Resources Ltd., for one, has gained 60 per cent over the same time frame.
Tourmaline’s strength is even more impressive over the past five years, with the stock now slightly in the black since mid-2016. It’s a paltry return relative to the Nasdaq Composite’s stellar gains, but Arc is down 58 per cent over the same period, and smaller gas producer Birchcliff Energy Ltd. has lost roughly half its value.
Tourmaline’s five-year return puts it roughly on par with Canadian Natural Resources Ltd. – and Canadian Natural is often treated like Alberta royalty. The energy giant’s shares are up 2 per cent over the same period.
Oddly enough, Tourmaline is winning investors back even though it is on an acquisition spree. Since the most recent commodity supercycle crashed in 2014, many resource companies have been punished for pursuing deals instead of debt repayment, but Tourmaline has pulled off a disciplined acquisition strategy. The resulting cash flows are making some shareholders salivate over the potential for dividend hikes.
“We now see Tourmaline generating roughly $1.8-billion in free cash flow during 2022, corresponding to an approximately 17 per cent free cash flow yield,” RBC Capital Markets analyst Michael Harvey wrote in a note to clients Thursday. “We forecast continued debt repayment and an additional dividend increase later this year.”
Even though Tourmaline is on a buying spree in Alberta’s Deep Basin and northeastern British Columbia’s Montney Formation – with recent purchases including Jupiter Resources Ltd., Modern Resources Inc. and, most recently, Black Swan Energy Ltd. – rating agency DBRS Morningstar upgraded the company’s credit rating to BBB (high) this month.
DBRS attributes its optimism to Tourmaline growing into a bigger company, with mid-2022 production expected to be 60 per cent higher than it was at the end of 2020, making Tourmaline Canada’s largest natural gas producer. Such sudden expansion sometimes scares analysts and investors, especially when companies acquire simply to show some revenue growth. But Tourmaline has a history of low costs, and it is buying assets near its current production, so it can apply expertise it has already developed.
Because Tourmaline has kept its debt in check lately – even after the recent acquisitions, its $1.6-billion of debt is roughly the same amount it had on its balance sheet at the end of 2019 – new deals don’t spook investors, whereas many Canadian energy companies have struggled to convince their shareholders they can manage their debt loads. DBRS expects Tourmaline’s debt-to-cash flow ratio to remain around – or below – 1 for some time.
The type of assets Tourmaline is acquiring is also a major boon. “Most importantly, they’re growing by acquiring existing production,” DBRS Morningstar analyst Ravikanth Rai said in an interview. “They’re not increasing [undeveloped] supply.”
At the moment, strong oil and gas prices are boosting cash flows. Historically, though, hot markets have convinced companies to produce more, creating a race to the bottom as more supply oversaturates the market and prices fall.
But by acquiring existing production, if anything, Tourmaline gains some pricing power, because it controls a larger asset base and can turn off the taps if prices fall.
While Tourmaline’s production has yet to hit its potential, the company’s growing cash flows are already noticeable. On Thursday, Tourmaline reported $1.89 of cash flow per share, beating analyst estimates of $1.77 a share. The stock rose 2.5 per cent to close at $34.74 on the TSX.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.