Canada’s largest fuel producer inventory Tourmaline Oil (TSX:TOU) has been on a downtrend since November final yr. As pure fuel costs slumped on weaker demand, Tourmaline inventory adopted and misplaced 30% since November 2022. Nonetheless, its latest quarterly earnings reiterated its basic energy and implied that the draw back from right here could possibly be restricted. It has returned an honest 210% within the final 5 years, notably beating TSX vitality shares.

How Tourmaline Oil does it in another way

Together with its scale in fuel manufacturing, Tourmaline is also the second-biggest condensate producer in Canada. It goals to provide 530,000 barrels of oil equal in 2023, a marginal enhance in comparison with 2022. Within the first quarter (Q1) of 2023, it reported free money flows of $525 million, marking a drop of 15% in comparison with Q1 2022. The drop was fairly evident amid the decrease fuel costs within the quarter.

Nonetheless, Tourmaline was nonetheless comparatively effectively positioned on this low-price surroundings as a result of its publicity to diversified markets. For instance, its common realized costs had been down solely 10% throughout the quarter in comparison with This fall 2022, when fuel costs had been corrected by a a lot steeper 50-60%. That’s as a result of it sells its manufacturing in premium-priced markets within the western U.S.

Furthermore, Tourmaline has a fuel storage capability at Daybreak and PG&E CityGate hubs. This enables it to inject fuel when spot fuel costs are low and withdraw when spot fuel costs are excessive. California has been a traditionally very extremely unstable marketplace for fuel, which Tourmaline has been strategically utilizing for a very long time.

It has additionally been supplying fuel to the Sabine Cross LNG terminal since January 2023. Curiously, the speed it receives on this contract is far larger than the Canadian benchmark. So, many such contracts in diversified markets have made it comparatively much less prone to fuel worth shocks.

Monetary development and steadiness sheet enchancment

Tourmaline Oil’s free money flows jumped from $864 million in 2021 to $2.7 billion final yr. Due to such fast development, it’s repaid billions of {dollars} of debt since late 2021. On the finish of Q1 2023, it had $709 million of internet debt, down from about $1.7 billion in 2020.

Now that the debt goal has principally been achieved, the one means Tourmaline needs to go its extra money is towards shareholder returns. Because of this, it issued this yr’s second particular dividend final week. Within the final 12 months, Tourmaline has paid a complete dividend of $8.7 per share, implying an annual yield of 14%. Although the particular dividends have decreased of late, they underline the corporate’s strong monetary place.

For 2023, Tourmaline expects $2 billion in free money flows. Of which, a majority might be distributed to shareholders through particular dividends. The remaining might be deployed for deleveraging.  

TOU inventory is buying and selling 11 instances its 2023 earnings and 10 instances its free money flows. This can be a premium in comparison with its friends and signifies traders’ larger development expectations. In truth, its superior steadiness sheet, dominating market place, and stellar development prospects justify its premium valuation.

Investor takeaway

Pure fuel costs appear to have already hit the underside. Tourmaline’s first rate efficiency in Q1 2023, even when fuel costs had been terribly low, speaks for its enterprise energy. If we possible see a fuel worth restoration within the subsequent few quarters, Tourmaline might see even larger free money move development and appreciable shareholder worth creation.