Bull List Report – Tourmaline Oil – TSE:TOU

Tourmaline Oil – TOU.TO

Tourmaline Oil Corp is a Canadian energy company engaged in natural gas and crude oil acquisition, exploration, development, and production in the Western Canada Sedimentary Basin. It includes the Alberta Deep Basin, the Northeast British Columbia Montney, and the Peace River Triassic Oil complex.

Focus area	Score
Valuation	47
Profitability	51
Risk	50
Returns	42
Dividend	41
Outlook	95
Debt	55
Growth	74
Overall	59

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Pros

Acquisition of Bonavista is working out well
The company aims to return 100% of excess free cash flow to investors via special dividends
Due to these special dividends, the company’s forward yield (in the high 1% range) is underrepresented. If the company hits 2025 cash flow expectations, its yield will be north of 6% at today’s prices with special dividends
Practically debt-free (debt makes up only 20% of annual free cash flow generation)
The company is the largest and lowest-cost natural gas producer in the country
Production is expected to grow at a 6% annual rate over the next 5 years
The base dividend is sustainable even in sub $2 natural gas pricing
If the company hits cash flow targets for next year, it is trading at attractive valuations
The company has one of the highest-quality asset bases and reserves on the planet
Despite the volatility in natural gas prices, LNG (Liquified Natural Gas) has a strong future in Canada

Cons

The negative stigma associated with the oil and gas sector results in lower investments in the industry, and as a result, valuations tend to not reflect the true quality of the company
Natural gas pricing has been extremely volatile as of late. Although prices have been coming back up, I expect volatility will continue into 2025

I have been a big fan of Tourmaline Oil for years here at Stocktrades. I typically shy away from cyclical-based companies on the Bull List. However, with the bullish environment in terms of both natural gas and NGLs, coupled with the fact that the company made what I feel is an outstanding acquisition at an attractive price in 2023, I couldn’t resist putting Tourmaline on the Bull List.

The thesis is relatively simple when it comes to a company like Tourmaline. You’re buying one of the best natural gas producers on the planet, one that can generate positive cash flows even in challenging pricing environments. In return, Tourmaline has stated it will return 100% of its free cash flows to investors, which are simply cash flows after capital expenditures plus any additional acquisition activity. As a result, its small yield on a forward basis is deceiving. I will speak on that in the dividend portion of this report.

The company holds North America’s highest-quality reserves and inventories, enabling it to achieve lower costs and, ultimately, elevated profitability. It will also allow it to weather any downturns in pricing. When times are good with Tourmaline, investors should receive hefty special dividends. When times are bad, the company should be able to sustain and grow its base dividend until conditions improve.

The company’s extensive cash flow generation should also allow it to continue to make strategic bolt-on acquisitions like Bonavista in October of 2023. With Bonavista being a natural gas producer and operating in the same area where Tourmaline is already the largest producer, it has been a relatively seamless transition. With the discounted valuations in the sector unlikely to improve due to sentiment, it should enable Tourmaline to continue making cheap, strategic plays like this and grow production and cash flows.

With the consistently increasing demand for natural gas, NGLs, and oil, it’s hard not to be bullish on what I feel is the best-quality producer in the country. Its balance sheet is pristine, its valuation is attractive, and its yield is much higher than it looks.

Beta	0.4
Best monthly return	34%
Worst monthly return	-16%
Max drawdown	60%

Tourmaline is practically a pure-play natural gas operation (~80% of production), so the company depends on the price of natural gas. Although the company can hedge against wildly fluctuating prices, there is no doubt that falling natural gas prices can impact Tourmaline’s ability to generate the cash flows it needs to pay the dividend, acquire companies, buy back shares, or issue special dividends, all of which are core to my investment thesis for the company right now.

There are also additional risks regarding outside investments in the oil and gas industry. As we transition to a greener future, natural gas is undoubtedly part of that future. However, it often gets lumped in with other inefficient hydrocarbons that many environmental activists and governments are trying to eliminate.

For this reason, growing cash flows by Tourmaline may not be reflected in higher share prices if industry valuations continue to decline. Companies generating the cash flows that Tourmaline does in other industries would trade at significantly higher pricing multiples. However, the average multiple that the market is willing to pay for an oil and gas company continues to fall. This is why the return of 100% of free cash flows back to investors is an attractive proposition when looking at oil and gas companies.

There is also a high likelihood of further mergers and acquisitions in the space. Generally, wise management can make moves that will benefit shareholders. However, there is always the added risk of synergies not materializing and capital being ill-spent on acquisitions. In this case, shareholders would be negatively impacted.

	TTM	Historical average	Forward numbers
P/E	14.5	9.4	9.3
EV/EBITDA	6.5	5.4	–
Free cash flow yield	2.5%	–	–
P/FCF	39	–	–
PEG ratio	0.19	–	–

When you look above, you will likely see Tourmaline trading at what looks to be steep premiums to its averages. This would be an accurate observation, but this is mainly due to a pretty rough natural gas pricing environment we went through from late 2023 to about midway through 2024. In addition to this, the company made numerous notable acquisitions on the year. Natural gas is now much higher than it was in 2024, and we’re likely going to see these valuations normalize. You can see this reflected in the 9x~ expected earnings.

Oil and gas valuations are certainly interesting. With free cash flow (FCF) yields expected to be north of 6% for Tourmaline for the foreseeable future (the numbers in the table are trailing, not forward), you would think the company would command high double-digit price-to-earnings and price-to-FCF multiples. However, at this point, on a forward basis, they sit in the high single-digit range.

Tourmaline is trading at a premium valuation relative to other natural gas producers. However, I feel this valuation is more than justified due to the blue-chip nature of Tourmaline. The situation was similar when I added Canadian Natural Resources to the Foundational Stock List despite the company trading at premium valuations relative to other producers.

Canadian Natural Resources has been one of the best-performing oil and gas companies over the long term, and this just goes to show you that buying quality is often the better path to go down rather than attempting to chase bargains or speculative plays.

Tourmaline is expected to generate around $3.80 in free cash flows in Fiscal 2025. This puts the company at a 16x FCF multiple at today’s prices. Considering that 100% of those cash flows will be returned to investors over the next 5-6 years, this makes Tourmaline an attractive proposition from a valuation standpoint.

Tourmaline is a company that I would deem to be fairly valued. I don’t expect to see any multiple expansion (the company is currently trading above its current price-to-earnings multiple). So, for the underlying share price to grow, it will need to increase earnings itself, which is heavily dependent on the price of natural gas, and that has been going nowhere but up recently.

	Tourmaline (TOU)	Ovintiv (OVV)	ARC Resources (ARX)
Operating margins	20.8%	22.5%	21.7%
5-year revenue growth	21.5%	7%	34%
5-year FCF Growth	642%	780%	-4%
5-year annualized return	42.1%	39%	35.8%
P/FCF	49	7.5	28

If you look to the chart above, you’ll notice one thing. All 3 of these major natural gas players here in Canada over the last 5 years have demonstrated exceptional returns. However, despite softer margins and slower revenue growth, Tourmaline has edged out ARC in terms of total returns, primarily due to much stronger free cash flow generation.

Although trailing valuations are relatively difficult to go off of because of the weaker natural gas environment we were in last year, we can clearly see that the market is favoring Tourmaline over a company like ARC. Both of these companies have a 100% free cash flow back to shareholder policy. However, Tourmaline has simply been the better FCF generator. ARC has a lot more crude oil production than Tourmaline, around 40% of the business, whereas Tourmaline is around 20%, so this may be factoring into the situation as well.

Overall, I feel that both Tourmaline and ARC are exceptional operators in the industry, but I prefer TOU.

Yield	3%
Payout ratio (EPS)	84%
5-year dividend growth %	23.5%
Money Spent/Received on Buybacks and Share Issuances	-$50M

In the table above, I have included Tourmaline’s base dividend, which is $0.50 per quarter. The company has increased this for 9 straight years at an impressive 20%+ annual pace.

With its current base dividend, the company’s forward yield, what most investment data platforms show, is 3%. This is low enough to possibly deter some investors who prioritize income from ever really looking into the company. However, when we look at the dividend, including special issues, this is a high-yielding company that should be able to provide high yields for the foreseeable future.

In Fiscal 2023, the company paid out north of $6.55 per share in dividends, the bulk of which were special issues. This works out to be a TTM yield of over 10%. In 2024, the environment for natural gas obviously wasn’t as good, and the company paid out around $3.40 in dividends. This still works out to be a 5.3% yield at today’s prices. If it can generate its expected 2025 free cash flow guidance, its yield should come in above 6%. The point I’m trying to make here is: don’t fall for the listed yield with this company. It strives to pay out much more than this.

When we consider the immense pressure natural gas has faced since the start of 2023, Tourmaline’s ability to continue to pay special dividends throughout this time is remarkable.

One word of caution is that these are special dividends. They’re by no means guaranteed. If natural gas prices dip, FCF will dip, and the company could return less to shareholders. Additionally, the company could see a major acquisition worth taking on, and, as a result, cash flows would come in lower. In this case, we’d have to trust management with the ability to integrate acquisitions that would ultimately lead to larger cash flows for shareholders in the future at the expense of cash flows today.

But, if everything goes to the company’s plan in 2025, investors should see solid dividends, making Tourmaline an attractive proposition for income investors right now.

Last quarter	EPS	Revenue
Expectations	$0.95	$1.52B
Reported	$0.41	$1.50B
Surprise	-55%	-1%

Annual estimates	EPS	Revenue
2025	$4.1	$6.7B
2026	$5.3	$8.03B
2027	$6.6	$8.58B

Despite summer gas pricing and some wildfire-related impacts, Tourmaline still posted strong earnings and free cash flow. Given the ongoing strength of pricing over the last while, it was still able to issue a $0.35/sh special dividend. This isn’t as big as we’ve normally witnessed over the last few years, but it’s still solid.

The company did defer some frac activity and drilling in both Q2 and now Q3, choosing to wait for improved pricing in Q4. As a result, average 2025 production guidance has been narrowed to 635,000–650,000 BOE/day, with a year-end exit rate expected between 680,000–690,000 BOE/day.

The company released an updated development plan out to 2031. It aims to grow production from ~650,000 BOE/day today to 850,000 BOE/day in the next 5–6 years. The best part about this? It plans to do so without utilizing debt or equity. This is a fully self-funded buildout that aims to double free cash flow to $2.5B–$3B annually, even if pricing stays the same.

Tourmaline continues to push aggressively into LNG. They’ve now signed their third Gulf Coast LNG agreement, this one with Uniper, beginning in late 2028 for 80,000 MMBtu/day. They also secured long-term firm transport to the Gulf via TC Energy, starting in late 2025, giving them flexibility to either supply LNG partners or tap into southern U.S. markets.

This should diversify Tourmaline’s pricing exposure, plus give them an easier path into the European markets.

While 2025 is shaping up as just an average year in terms of growth and pricing, management believes 2026 and 2027 could see a material tightening in the North American gas market, especially as LNG Canada ramps up.

It certainly wasn’t a headline-producing quarter for Tourmaline. Production was stable, free cash flow was healthy, and ultimately, they’re deferring a lot due to current pricing. But if you look to the next half-decade, the company is putting the foundation in place to really excel.

Management has executed well through tougher gas pricing environments. This is exactly why I have it on the Dividend Bull List. If we get even a modest recovery in AECO or LNG-linked pricing, Tourmaline is going to be well positioned heading into 2026 and beyond.

Return to Dividend Bull List

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