Despite its name Tourmaline Oil is the ‘go-to name’ for natural gas exposure, analysts say.

Stock up 155% over same period last year

Tourmaline Oil Corp., Canada’s largest natural gas producer, reported a stunning second quarter last week, with net earnings soaring 1,993 per cent, compared to the same period last year, on a production increase of 47 per cent.

The company has been on an acquisition spree, having completed the purchase of Black Swan Energy Ltd., and Paramount Resources Ltd.’s land assets in North Montney.

Last year, the company, led by Michael Rose, made four acquisitions valued at a total of $795 million.

Tourmaline, named after the semi-precious stone, has also struck a long-term agreement with Cheniere Energy Inc., one of the largest liquefied natural gas producers in the U.S., to supply 140,000 mmbtu per day of natural gas to the company’s Corpus Christi liquefaction terminal in Texas for a 15-year term starting 2023. In 2019, Tourmaline spun out its royalty business Topaz Energy Corp., named after another gemstone, which listed on the Toronto Stock Exchange in a $230.5-million offering last year. Tourmaline still owns just over a 50-per-cent stake in Topaz.

Tourmaline’s Topaz equity ownership was valued at $939.7 million in mid-july, which the company says essentially offsets its estimated 2021 year-end net debt.

With its low-cost structure and diversified marketing exposure, CIBC Capital Market analysts say Tourmaline is well-positioned to generate “superior returns” at a range of natural gas price assumptions.

The company’s earnings in the first quarter were lifted on non-cash gains of $321 million, topping analyst expectations, and modestly raised its capex to $1.27 billion this year.

“We continue to see the stock as a go-to name for natural gas exposure through H2/21,” according to Jamie Kubik, analyst at CIBC Capital Markets. “We believe the recent pause in the shares represents an opportunity as we move into the fall of 2021. Under recent strip pricing, we see the stock continuing to screen attractive relative to its peers.”

The company’s updated five-year plan, at current prices, delivers $1.8 billion of free cash flow in 2022 and US$7 billion over the full fiveyear duration of the plan.

“Acquisition activity is looking prescient, least of which is a +22 per cent increase in the 2022e NYMEX natural gas futures strip since its prior print, though we suspect this will be aided by the application of the Tourmaline execution machine on acquired assets and overall exceptional cost structure synergies,” said Robert Fitzmartyn. “As such, the business plan remains strong from a strategic and tactical perspective.”

Tourmaline Toronto-traded shares were up 155-per-cent higher at the end of last week (they closed slightly higher on Tuesday at $34.22), compared to the same period last year, and nearly 205-per-cent higher compared to March 2020 when oil and gas stock prices began to slide. But over a fiveyear period, the stock has only edged up 0.15 per cent.

CIBC Capital Markets has a $47.50 price target for the stock with an outperform rating.

National Bank analyst Dan Payne calls the company stock “best in breed,” noting that the company has “structurally gapped away from the peers, which should continue to yield outsized returns and value.”

Out of 13 analysts who track the stock, one has a strong buy, 11 a buy and only one hold, according to Yahoo Finance, with an average analyst price target of $42.08 per share.

Is the stock too good to be true? CIBC analysts think the primary sector risks are lower commodity prices and rising industry costs.

“The company-specific risks to achieving its price target include infrastructure constraints that may limit Tourmaline’s ability to tie-in new production and changes to production deliverability assumptions (i.e., initial production rates and production declines) on Tourmaline’s undeveloped assets.”

WE SEE THE STOCK CONTINUING TO SCREEN ATTRACTIVE RELATIVE TO ITS PEERS.