Alberta’s referendum supplied investors with a large political headline and a strong reminder to read the wording underneath it. Early reporting put support for remaining in Canada at roughly 76%.
Reduced political uncertainty can improve sentiment, but doesn’t change the selling price of natural gas or pay for a producer’s next processing facility. For Alberta energy stocks, the enduring investment case still rests on costs, market access, and cash left after spending.
Source: Getty Images
Giving commodities attention
Natural gas has its own complications. A strong global price doesn’t guarantee a strong price at a particular Canadian delivery point. Transportation constraints, weather, storage levels, and available export routes can leave producers receiving very different amounts for apparently similar output.
That makes diversification of sales markets valuable, especially for a company large enough to plan infrastructure and contract commitments over several years. Shareholders still need to examine the economics of those commitments. Growth that consumes cash without improving returns is an expensive hobby.
Tourmaline Oil (TSX: TOU) is a Calgary-based producer with a large Western Canadian operation. Its appeal comes from producing efficiently and expanding access to attractive markets, not simply from having Alberta on the address label.
TOU
Tourmaline reported second-quarter operating costs of $4.59 per barrel of oil equivalent (boe), down 10% year over year. That measure excludes other expenses, so it shouldn’t be mistaken for the company’s total cost of producing and delivering a barrel-equivalent of output.
Management has also approved a 5% increase in the quarterly base dividend, from $0.50 to $0.525, effective in the fourth quarter. The September announcement said the payment was expected to be declared in early December. Approval of the planned increase and the eventual dividend declaration are separate steps. At a recent closing price of $66.16, the planned $2.10 annualized base payout implies a yield of about 3.2%.
Considerations
The share price needs to make sense under an ordinary gas-price outlook. A producer can have good assets and still disappoint a buyer who assumes exceptional prices or unusually large special distributions will continue. A new political headline doesn’t increase the value of every future cubic foot.
The main risks are familiar ones. Gas prices can weaken, transport costs can rise, and infrastructure spending can exceed expectations. Market-access agreements help shape the revenue mix, but don’t remove commodity exposure. Investors buying Canadian stocks should keep an energy position proportionate to the losses they could tolerate.
For a dividend portfolio, I’d budget around a conservative base payment and regard any special payout as additional cash to allocate when it is actually declared. That avoids building grocery spending around a commodity cycle.
Bottom line
The base payout also gives a buyer a useful price discipline. Paying more for the shares lowers the starting yield unless the dividend rises as well. A good operating plan doesn’t make the purchase price irrelevant. At roughly 3.2% on the planned higher rate, I see Tourmaline as an income-and-growth energy holding, not a high-yield substitute for a fixed monthly payment.
All in all, Tourmaline interests me as a disciplined producer with an operating plan that can outlast the referendum coverage. I’d watch whether lower costs and new infrastructure improve cash generation per share. If they do, shareholders will have a reason to stay invested long after the political signs come down.
