A number of the final 12 months’s prime gainer power shares have been on a decline just lately. Main pure fuel producer Tourmaline Oil (TSX:TOU) is one in all them. TOU inventory returned 80% final 12 months however has dropped 26% since October 2022. And never solely Tourmaline however nearly all gas-focused power producers noticed an analogous weak spot of late. That’s as a result of hotter climate and extra provide weighed on fuel costs, which have misplaced 75% since August 2022.

What’s subsequent for TOU inventory?

Notably, Tourmaline is an interesting identify even in a low-price atmosphere. It might not see beautiful worth creation like final 12 months. However the inventory will seemingly stay comparatively robust in comparison with friends and outperform.

Tourmaline is a $21 billion pure fuel producer that goals to provide 530,000 barrels of oil equal per day in 2023. It additionally produces oil, pure fuel liquids, and condensate and the manufacturing combine performs properly for diversification.

Tourmaline Oil noticed file monetary development final 12 months because of greater power costs. Its free money flows got here in at $2.7 billion within the final 12 months, representing a rise of 217% in comparison with 2021.

It plans to launch This autumn 2022 earnings on March 7. Aside from its stellar monetary development, traders can count on additional strengthening of its steadiness sheet. Whether or not it could possibly proceed paying particular dividends like final 12 months stays to be seen. Nonetheless, TOU presents good-looking complete return prospects in 2023 as properly, pushed by its good-looking free money circulation development potential.

What’s particular about Tourmaline Oil?

Tourmaline Oil stands tall amongst its friends primarily due to its high-quality belongings. It has a long time of low-cost drilling stock, which is worthwhile even in a low-price atmosphere.

Furthermore, it sells its manufacturing in premium markets like California, which obtains a a lot greater charge than within the Canadian fuel market. In consequence, TOU inventory has misplaced 25%, whereas pure fuel costs have corrected by 75% just lately.

For 2023, Tourmaline administration expects free money flows of $2.6 billion, decrease than in 2022. Nonetheless, a significant chunk of this money shall be used for shareholder dividends as the web debt goal has already been achieved. Free money circulation is the distinction between money circulation from operations and capital expenditure. Free money flows are used for dividends, mergers and acquisitions, and debt repayments.

Tourmaline has paid nearly $1.5 billion in debt repayments because the pandemic, which has considerably improved its steadiness sheet. Its low leverage and earnings visibility make it a robust identify within the Canadian power house.

TOU inventory additionally seems to be engaging from a valuation standpoint after its latest correction. It’s at present buying and selling at a free money circulation yield of 12% and appears discounted. On the price-to-earnings entrance, it’s buying and selling 4 occasions its 2023 earnings and signifies undervaluation. Even when some TSX power shares look cheaper than TOU, its monetary development prospects and dividends provide greater worth creation potential.

Silly takeaway

Even when pure fuel costs stay weak, TOU inventory might need a restricted draw back. Analysts have given it a worth goal of $92, indicating an upside potential of fifty%. Its This autumn 2022 earnings and administration commentary shall be important to look at. How administration sees its dividends shaping in 2023 amid low fuel costs shall be fascinating to see. TOU inventory is an interesting guess for the long run, given its high-quality belongings, sound steadiness sheet, and free money circulation development.