Top Canadian Natural Gas Stocks To Buy in October 2022

Posted on October 3, 2022 by Dan Kent

When most investors think of Canadian stocks, they think of either financial, material, or oil and gas plays.

That is because if you’re looking to buy stocks in Canada the vast majority of our index, the Toronto Stock Exchange, is full of these types of companies.

It’s also why our index tends to underperform our US counterparts. The vast majority of these companies are either in mature, slow-growth sectors or are very cyclical, resulting in inconsistent returns and price volatility.

In this article, I’m going to dive into a few options that are without question cyclical but are also some of the strongest companies in the oil and gas sector today, that being 2 key natural gas players here in Canada.

But first, why natural gas?

It is important to understand that although natural gas is indeed a hydrocarbon, it is also the cleanest-burning hydrocarbon. The gas is extremely versatile, able to be shipped globally to energy-starved countries, and it is also very abundant, making it extremely affordable.

For the most part, we utilize natural gas for generating both heat and electricity, with the vast majority of the global population using natural gas on a daily basis. It is important to note that even though it is the cleanest hydrocarbon it is certainly not as clean, nor is it renewable.

Although commodities like crude oil are being targeted aggressively by countries whose goal is to reach net-zero, there is likely a much longer timeline when it comes to natural gas and its use in our everyday lives.

The top Canadian natural gas stocks to buy today

For the purposes of this article, I’m going to try and stick to pure-play Canadian natural gas companies.

Although many major producers like Suncor Energy, Cenovus Energy, Canadian Natural Resources Limited, and Imperial Oil have natural gas production, this article is specifically reserved for companies whose primary revenue generation method is natural gas. I will also skip over midstream companies like TC Energy and Enbridge.

With that being said, let's get started.

Tourmaline Oil (TSE:TOU)

Tourmaline Oil dividend

Tourmaline Oil (TSE:TOU) is about as close to a natural gas pure-play as you’re going to get here in Canada. In fact, over 80% of its total production comes from natural gas. Oil makes up low single digits in terms of the company’s overall production, with Natural Gas Liquids making up the rest.

The fact that Tourmaline has very little exposure to oil was one of the primary reasons why the company thrived while most oil and gas stocks in Canada collapsed in 2020.

The price of natural gas has taken an absolute beating over the years, and this is one of the reasons why Tourmaline Oil had struggled so much leading up to the recent energy bull market. In fact, prior to its recent meteoric rise in price, the company had lagged the broader index in terms of returns by significant margins. Now? It's nearly doubling up the returns of the TSX over the last decade.

Fortunes are looking like they’re changing, as natural gas is rebounding in a big way. At the time of writing, the price of natural gas has increased over 136% in the last year, and is expected to continue to rise. Prices are now reaching levels we haven’t witnessed in decades, and the rising natural gas prices finally allowed Tourmaline to show what it really can do.

The company now has free cash flow yields in excess of 18% and is expected to continue that FCF yield into 2023. It plans to generate over $15B in cumulative free cash flow over the next 5 years, which would work out to be over 75% of the company's current market capitalization.

If we look forward to Fiscal 2022, analysts are estimating this company could turn it up another notch. In fact, they’re estimating revenue will grow to $6.5 billion from $4.8 billion in 2021, and that earnings will continue to grow with earnings per share of $10.18, which would be more than double its Fiscal 2021 earnings.

Now, these are what they are, estimates. In order for Tourmaline to hit these numbers, natural gas will likely need to continue to rise. But at the time of writing it looks very attractive on a forward basis, trading at just 7.5X forward earnings, a near 40% discount from historical valuations.

Overall, this is a strong Canadian natural gas stock, but as a pure-play, it is highly dependent on commodity prices, particularly natural gas. So, expect significant volatility in either direction.

Ovintiv (TSE:OVV)

TSE:OVV Logo

Although Ovintiv (TSE:OVV) doesn’t have as much production tied up in natural gas as Tourmaline does, it is still a very heavy play on natural gas moving forward.

In fact, according to company guidance, it expects to produce 1400-1500 MMcf/d (million cubic feet) of natural gas in 2021.

Ovintiv, formerly Encana, is a popular Canadian natural gas company that ended up packing up its headquarters and moving to Denver Colorado from Calgary Alberta in mid-2020.

The company stated the move was primarily for a “clean slate” in a country less stringent on the oil and gas sector. The move was supposed to bring renewed interest, especially among US investors.

However, COVID-19 caused a catastrophic price collapse for Ovintiv that resulted in it losing 73% of its value in March 2020. And to add to this, the company had already undergone a significant price correction after it rebranded itself as Ovintiv.

Fast forward to 2022 however, and Ovintiv has rebounded nearly 1500% off those lows. The company underwent some significant operational changes in 2020, including special charges in excess of $7 billion, so net income looks disastrous with a diluted loss per share of over $30.

However, this is a company that is actively paying down debt and is in a strong position to benefit from the rising price of natural gas.

Analysts estimate that Ovintiv could post diluted earnings per share of $14.03 in 2022, which would be a significant turnaround from the company’s struggles over the last 5 years, and if it does end up hitting this mark, valuations on a forward basis are looking extremely cheap. In fact, this puts the company’s forward price to earnings ratio at 4 which is almost half the sector average of 7.26.

The company pays a low 2% dividend, one that is well covered by both earnings and free cash flows, and a dividend that was maintained despite catastrophic cuts across the oil and gas sector in 2020.

Overall, I do view Tourmaline as the better Canadian natural gas stock moving forward. But, this is still a very strong alternative for Canadians to look at.

Overall, both of these Canadian natural gas stocks provide solid exposure

I think the tale of these two stocks comes down primarily to valuation. Do you take what I feel is the best-in-class natural gas stock in the country in Tourmaline at a more expensive valuation, or do you take a flyer out on a company that is currently undergoing some changes, but is expected to have a large rebound over the next few years?

Ultimately, the choice is up to you and boils down to individual risk tolerances.

However, make no mistake about it, both of these companies will be heavily dependent on the price of natural gas. If the price of the commodity rises, expect companies like Tourmaline and Ovintiv to rise at an even faster rate.

However, if natural gas prices stall out or head downwards, it’s very likely these companies continue to underperform as they did for the better part of a decade before the current commodity boom.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

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