Tourmaline Oil is a natural gas powerhouse

Investors can sleep well with this holding

Tourmaline Oil (TOU.TO) is Canada’s largest natural gas producer with average annual production of over 500,000 Barrel of Oil Equivalent (BOE) per day. Reserve life is not issue, since the company has 75 years of drilling inventory at its current output rate. The company’s acreage is concentrated in the prolific Montney and Deep Basis reservoirs where competitors like Peyto Exploration (PEY.TO) Birchcliff (BIR.TO) and ARC Resources (ARX.TO) have demonstrated low costs comparable to Tourmaline. The completion of Kitimat LNG Project and the Coastal Gas Link now under construction will give Tourmaline access to deep water from Canada and the company will be a major supplier to that LNG terminal.

With a market capitalization of ~CAD$20 billion, the company expects to generate free cash flow of CAD$15 billion over the next five years. Management’s plan is to distribute most of that cash flow to shareholders. Buying a stock for CAD$80 a share and facing the prospect of getting about CAD$60 a share back through shareholder distributions in the next five years makes the investment proposition pretty simple.

Tourmaline has done a great job of creating differing markets for its natural gas, recently signing an LNG deal with Cheniere that will see about 6% of its revenue come from JKM priced gas, a price more than double the price it receives for its North American sales. The company sells natural gas to a diversified set of has hubs in Canada and the United States as well.

Future growth is fueled by an industry leading capital efficiency estimated at CAD$6,500 per BOE/Day. With natural gas prices anywhere above CAD$3.00 per Gigajoule, new wells pay out in less than a year and become a long term annuity until they are capped and closed at the end of their lives. At today’s natural gas price of ~CAD$10 per Gigajoule, Tourmaline is a cash flow machine.

The company not only pays a base dividend of CAD$0.90 per share per year (paid quarterly) but also pays regular quarterly special dividends that comprise a substantial portion of the quarter’s free cash flow. I estimate annual dividends will approximate CAD$7.00 per share giving the company an effective yield of 8.75% if you can buy the stock at CAD$80 or less. It is trading today at CAD$78.50 more or less.

I own 2,000 shares of Tourmaline. I will likely add more and expect the holding to be a long term source of dividend income.