Tourmaline Oil Corp. TOU-T has been hit hard since the start of November, as natural gas prices tumbled at the prospect of an unusually warm winter. But if gas prices are now bottoming out at a time when energy stability is taking on a new-found importance, the stock could be a sound bet.
The past three months have been rough for investors in the Calgary-based oil and gas producer.
The share price has retreated 23 per cent over this period, following the path of the company’s most important energy commodity: natural gas futures on the New York Mercantile Exchange have fallen 38 per cent over the past 10 weeks, and are now down more than 70 per cent from spikey highs in 2022.
Though Tourmaline also produces crude oil, gas accounts for the largest share of the company’s production revenue. Gas sales fell 44 per cent in the first nine months of 2023; full year results will be reported on March 6.
Some of this volatility was inevitable. The Russian invasion of Ukraine upset global energy markets in 2022, causing natural gas prices – and crude oil – to soar before revamped trade networks restored stability.
More recently, gas prices succumbed to an unusually mild start to the winter, which reduced demand for heating. According to the U.S. Energy Information Administration, gas storage levels are more than 11 per cent above the five-year average and more than 12 per cent higher than a year ago, as of Jan. 12, despite the current cold snap.
Attribute this surplus energy to persistent climate change or the temporary effects of El Niño. But either way, gas is plentiful and cheap right now, which is weighing on investor sentiment toward Tourmaline and naturally raising questions about the sustainability of the company’s generous dividend policy, a key attraction for some shareholders.
The contrarian take? Though some analysts expect that natural gas prices will remain weak through the first half of this year, they believe that prices should pick up after that, bolstering the argument for investing in Tourmaline when the stock is out-of-favour.
“At the risk of sounding like a broken record, we expect natural gas markets are likely to remain oversupplied in 2024 but improve in 2025,” Dennis Fong, an analyst at CIBC Capital Markets, said in a report this week.
A warmer-than-usual summer, typical of the seasons that follow El Niño winters, could increase demand for energy at the start of the second half of the year, as homeowners and businesses crank up their air conditioning.
But the more compelling case for natural gas rests on a couple of longer-term factors.
For starters, natural gas is gaining support as a reliable energy source amid rising electricity demand, the retirement of coal-fired plants and cost-overruns associated with the development of renewable energy.
Natural gas-fired power plants, though hardly clean, offer an effective way to transition from dirtier coal, and are immune to the sort of intermittencies that might affect, say, wind turbines.
According to Mr. Fong, the amount of natural gas used to generate electricity in the United States has risen by about 25 per cent since 2020, driven by the retirement of coal plants and the underperformance of renewable energy.
Rising exports to energy-dependent Asia and Europe can also build a more diversified market for natural gas, potentially supporting prices in places where demand is high.
In 2023, Tourmaline began sending liquefied natural gas to an export terminal on the U.S. Gulf Coast. This week, it announced additional LNG agreements as part of its goal to double over the next few years the amount of gas – as a share of overall production – that is exported.
“These deals are incrementally positive steps toward diversifying Canada-produced gas to broader global markets,” Aaron Bilkoski, an analyst at TD Securities, said in a note.
In the meantime, even with U.S. natural gas prices drifting along three-year lows, Tourmaline remains confident it can generate sufficient cash – thanks in part to hedging and higher global prices – to support its quarterly dividend and distribute four special dividends in 2024.
Last year, these combined dividends added up to $6.55 a share. That translates to a trailing dividend yield of 11.5 per cent, based on the current share price, rewarding investors who didn’t become agitated when energy prices turned weaker.
Granted, special dividends might not be so special this year. But if natural gas consumption recovers in the second half of 2024, and if commodity prices start to improve next year, then Tourmaline could reward investors with something even better than dividends: a rebounding share price.
David Berman