Canada’s largest natural gas producer sees stock rocket nearly 200%, fuelled by rare boom in sector

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CALGARY — The deep freeze that swept across North America last month will provide a bumper year for Canada’s largest natural gas producer Tourmaline Oil Corp., a stock-market darling, that believes the outlook for gas is improving even in warmer weather.

Tourmaline took advantage of the Polar Vortex in February, which blew Arctic weather across Texas and other southern U.S. states, by selling huge volumes of natural gas it had stored near San Francisco and Toronto to earn what analysts termed a “windfall” in February.

The company disclosed last week that it had sold 4 billion cubic feet of natural gas it had squirrelled away at the The Pacific Gas and Electric Company storage hub in northern California and at the Dawn storage hub in southern Ontario ahead of the winter.

On a March 10 earnings call, the company said net earnings jumped $629.2 million in the three months ending on Dec. 31, a 926 per cent jump over the same period last year, on higher prices and strong demand. The company also raised its dividend 14 per cent to 16 cents.

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While Tourmaline president and CEO Mike Rose declined to say how much money the Calgary-based company earned by liquidating its gas in storage, average February prices from both hubs indicate the company earned over $18 million in additional revenues in the current quarter.

Tourmaline is part of a group of energy companies in the oilpatch that are raking in “excess cash flow,” a term that describes cash flow from operations after accounting for capital spending and dividends, according to Peters & Co. The investment broker previously expected this excess to amount to $10 billion, but in March raised it to $22 billion, on the back of higher prices and surging demand. Other notable members of the excess cash flow group are Canadian Natural Resources Ltd. (a major natural gas producer in addition to being the country’s largest oilsands producer), EOG Resources Inc., Whitecap Resources Inc, and PrairieSky Royalty Ltd.

In an interview with the Financial Post Tuesday, Rose said his company was able to “take advantage of the higher prices that transpired” because the company has diversified the markets to which it ships and stores its gas.

“Of the large-cap North American gas producers, probably we access the largest number of different markets and we do direct sales in all of them because the transport deals we have are long-term,” Rose said, adding that Tourmaline moves about 550 million cubic feet of natural gas per day to markets outside Alberta and B.C.

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More broadly, Canadian gas producers shipped 7.5 bcfd of gas to the U.S. in the middle of February, a 25 per cent increase over January, according to IHS Markit estimates, in order to take advantage of higher prices as demand for the heating fuel jumped as far south as Texas and Oklahoma.

As temperatures in southern U.S. states plunged below zero, natural gas prices in energy hubs like Oklahoma and Texas skyrocketed to new records, briefly exceeding $200 per mcf.

Spot natural gas prices were up 400 times above their average in Oklahoma, 50 times above their average in Texas and 60 times above their average in Chicago during the cold snap, Peyto Exploration and Development Ltd. president and CEO Darren Gee noted in a March 4 report to shareholders.

“I think we better prepare ourselves for the same experience,” Gee said, adding that he believes the push towards more renewable energy needs to be balanced with a focus on reliability across the energy system because the lack of reliability in the U.S. energy systems caused large commodity price spikes in February.

Asked whether or not Tourmaline would market more of its gas in southern U.S. markets where spot prices set new records, Rose said he believes the West Coast states and Western Canadian provinces offer the best supply and demand balance in North America.

“I think we’re going to the right markets,” Rose said, adding that about three-quarters of the company’s gas production is sold to markets on the U.S. West Coast including PG&E in San Francisco, Malin in Oregon, Sumas in Washington state and in Western Canada at Station 2 in British Columbia and AECO in Alberta.

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Rose believes those markets have the tightest supply-and-demand balance in North America and prices have improved in those markets over the course of the past year.

Benchmark AECO gas prices reached a seven-year high in February of $6.36 per mcf. The benchmark traded at $2.75 per mcf in the past week, still roughly 63 per cent higher compared to the same period a year earlier, according to Petroleum Services Association of Canada data.

In Alberta, the build out of TC Energy Corp.’s Nova Gas Transmission Ltd. system will add an additional 3.5 bcfd of pipeline capacity into the market. In addition, Rose said the switch from coal-fired electricity to natural gas is expanding gas demand in the province, which he believes will be a “strong hub for the foreseeable future.”

“Apart from February, we didn’t have a particularly cold winter, so I think the floor is a lot higher than where it was in previous years,” Rose said.

Shares in Tourmaline are up 196 per cent over the past 12 months to $24.25 on Wednesday. The Calgary-based producer’s equity performance beats an otherwise impressive 130 per cent rise in S&P/TSX Capped Energy Index over the same period. Stifel FirstEnergy believes Tourmaline’s stock could hit $35.75, still below it’s all-time high of $56.38 recorded in June 2014.

Despite two commodity recessions in less than a decade, Tourmaline has grown into Canada’s largest natural gas producer and, in recent months, deployed the cash it earned from spinning off assets in its Topaz Energy Corp. initial public offering valued at $230.5 million, to buy up competitors including Jupiter Resources and Modern Resources. All in, the company acquired four companies over the past year.

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Rose said the company is still considering more acquisitions but rising natural gas prices are lifting valuations for potential M&A targets, which could make some deals less enticing for the company. “We’re very selective on what we do pursue,” Rose said.

In a company presentation in March, the company said it will pursue organic production growth of around 5 per cent, “but continuing adding scale through accretive acquisitions and ultimately own a larger proportion of supply, at a higher margin, with more free cash flow, than would if rapidly drilling our own inventory.”

CIBC World Markets analyst David Popowich, who raised his price target for the company to $30, wrote in a note on Mar. 11 that he would “not be surprised” to see Tourmaline strike more deals this year as the company is poised to generate $2.2 billion in cash flow this year alone.

Financial Post

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