When most investors think of Canadian stocks, they think of either financial, material, or oil and gas plays.
That is because the vast majority of our index here in Canada, 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.
In this article, I’m going to dive in to a few options that are without question cyclical, but are also some of the strongest companies in the oil and gas sector today, and that is 2 key natural gas players here in Canada.
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, Canadian Natural Resources and Imperial Oil have natural gas production, this article is specifically reserved for companies who’s primary revenue generation method is natural gas.
With that being said, lets get started.
Tourmaline Oil (TSE:TOU)
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.
In fact, in total oil makes up only 3% of the company’s overall production, with Natural Gas Liquids making up the vast majority of the remaining 17%.
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 primary reasons that Tourmaline Oil has struggled so much. In fact, this is a stock that has significantly underperformed the broader index over a 10 year period.
However, 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 65% in the last year, and is expected to continue to rise.
Prices are now reaching levels we haven’t witnessed since 2019, and the rising natural gas prices finally allowed Tourmaline to show what it really can do in 2020.
Tourmaline closed out the year with over $618 million in net income, which marks a near 100% increase over 2019 levels. The company also managed to boost its EBITDA by over 30%, and earnings per share came in at levels the company hadn’t witnessed since 2014.
And if we look forward to Fiscal 2021, analysts are estimating this company could turn it up another notch. In fact, they’re estimating revenue will grow to $3.53 billion from $2.14 billion in 2020, and that earnings will continue to grow with earnings per share of $2.85, which would mark a 25% increase from 2020 levels.
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 under 10 times forward earnings, well below their 3 year median average of 15.36.
Overall, this is a strong Canadian natural gas stock, but as a pure-play it is highly dependent on the price of the underlying commodity. So, expect significant volatility in either direction.
Tourmaline 10 year performance vs TSX Index
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 1575 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 primarily stated the move was 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 the month of March. And to add to this, the company had already underwent a significant price correction after it rebranded itself as Ovintiv.
Fast forward a year later however, and Ovintiv has increased over 900% in value since its bottom during the COVID crash.
The company underwent some significant operational changes in 2020, included special charges in excess of $7 billion, so net income looks disastrous with 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 posted diluted earnings per share of $4.36 in 2021, which would be a significant turnaround to 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 6.87 which is less than half the sector average of 13.15.
The company pays a 1.56% 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 considering Ovintiv has not even recovered to pre-COVID price levels, valuation wise it is definitely looking more attractive.
Ovintiv 10 year performance vs TSX Index
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 year in 2021?
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 like they have for the better part of a decade.