Mike Rose, head Tourmaline Oil Corp. – Canada’s second-largest natural gas producer – said both TransCanada and producers groused about the 77 cents a gigajoule price that eventually settled the deal.
Tourmaline Oil Corp. has an answer for investors wondering whether it’s worth joining a rally that has driven the energy company’s share price up about 150 per cent this year: Take a look at our dividends.
The Calgary-based natural gas producer – despite the name, its revenue from natural gas is about 10 times the revenue from oil production – has been delivering impressive returns this year, even without factoring in payouts. The stock is one of the top performers within the S&P/TSX Composite Index this year.
Natural gas prices have nearly doubled this year to multiyear highs, and are up nearly 17 per cent in the past month, amid a confluence of bullish factors for the commodity. Energy demand increased during a particularly hot summer, yet drilling activity in the United States has not risen significantly over the past six months. According to the latest weekly estimates from the U.S. Energy Information Administration, gas in storage is down 16 per cent from this time last year, suggesting natural gas prices could remain high.
Tourmaline has benefited tremendously from these upbeat fundamentals. In its second-quarter financial results, for the three-month period ended June 30, revenue from commodity sales more than doubled from last year. Net earnings surged to $1.40 a share, up from 7 cents a share last year.
The company is also increasing output: In its updated guidance, released Wednesday, Tourmaline said that by the end of this year it expects to produce more than 500,000 barrels of oil equivalent a day (a figure that combines gas and oil production). That’s up about 60 per cent from average daily output in 2020.
What does this have to do with dividends?
The strong financial performance translates to a lot of cash. According to its latest estimates, Tourmaline will generate free cash flow (cash after capital expenditures) of $1.6-billion in 2021, rising to $2.5-billion in 2022. Management said the “vast majority” of this cash is destined for investors.
Why Tourmaline is dazzling, even though Canadian energy is still so beaten down
Why Tourmaline is dazzling, even though Canadian energy is still so beaten down
Bullish on Tourmaline Oil Corp
So far this year, Tourmaline has raised its regular quarterly dividend twice, to 17 cents a share, or 68 cents a share annualized, for a yield of about 1.6 per cent. But this week, it announced it will pay an additional special dividend of 75 cents a share in October.
That might not look like much next to this year’s triple-digit gains for the share price. However, analysts expect bigger payouts are good news.
“Essentially with Tourmaline indicating it will return the vast majority of free cash flow to investors annually, the commentary should stoke new interest in the name,” Jeremy McCrea, an analyst at Raymond James, said in a research note.
For starters, he expects that significantly larger payouts are coming. Based on cash flow projections – and subtracting costs related to buybacks, regular dividends and small acquisitions – special dividends next year could come to a total of $1.5-billion, or $4.50 a share. That represents more than 10 per cent of the current share price.
Second, Mr. McCrea expects the larger payouts could broaden the stock’s shareholder base.
Right now, dividend-focused funds are not big holders of Tourmaline shares, the analyst said. However, the stock’s appeal to this group of income-oriented investors could rise as payouts pour in – especially if investors recognize the stock’s valuation is attractive relative to free cash flow.
On Thursday, the day after the company announced the special dividend, the share price jumped 4.3 per cent, to $42.87 in Toronto, suggesting there could be something to this thesis.
Still, special dividends are special for a reason: They are not based on regular, predictable income, but rather good times that might not last. In Tourmaline’s case, big dividends are a bet on strong natural gas prices. That may be a reasonable bet, but don’t mistake the energy producer for a utility.
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David Berman