By: Bruce Murray

We recently purchased shares in Tourmaline Oil Corp. in our Global Equity Growth Fund. Founded in 2008 by Mike Rose, one of Canada’s most astute energy entrepreneurs, Tourmaline (TOU.TO) has rapidly grown into Canada’s largest producer of natural gas and a leading owner of midstream gas processing facilities.

Over the last decade consumption of natural gas has increased substantially with the demand for electricity. In the next decade, much of the surge in power needed to support the rapid expansion of electrical infrastructure for Artificial Intelligence will be provided by natural gas fired power plants. Nuclear power plants may usurp natural gas as the main power source in the future, but this is at least a decade away.

We also have seen a significant increase in demand for LNG (Liquefied Natural Gas) exported to Europe and Asia, with 5 large facilities now operating on the Gulf of Mexico and 14 more approved for construction. Shell Canada has recently turned on the first LNG export terminal in British Columbia, where it plans to double its capacity, and a second group, Rockies LNG, plans a similar sized facility. When completed these two projects will export 24 million tonnes of LNG per annum. As seen in Figure 1 below, US Export Capacity will grow 30% from facilities currently under construction. Tourmaline has a 15-year contract to deliver 135 MCF per day to Sabine Pass, or about 1 LNG tanker load per month

 

Source: CIBC

Low cost resources are dwindling in the USA. Major gas fields, especially in Appalachia, are considered to have reached peak production although technology and higher prices will inevitably further production. The massive Permian basin, which is primarily an oil field, will also contribute to supply as the gas /oil ratio is increasing to hold oil production levels steady. Western Canada has very prolific gas resources, which has led to ample gas supplies and low prices. In our opinion, higher gas demand will lead to increasing demand for Canadian supplied gas in the US market. Currently, about 45% of Canadian production is exported to the USA.

Tourmaline, being the lowest cost producer with the largest reserves and the best net emissions profile, will be a long-term beneficiary of demand growth for natural gas. Tourmaline is also a growing producer of Natural Gas Liquids (NGLs). NGL are higher value-added hydrocarbons like propane and butane. Tourmaline expects 16% growth in NGL’s in 2025 with a further 5% in both 2026 and 2027 due to production growth in BC’s massive Montney formation. Total oil equivalent production will rise by 6.5% in 2026 and 2027,

Tourmaline has a flexible dividend policy, paying special dividends when natural gas prices are strong and cash flow are well above capital requirements. Currently the dividend is running at $0.50 with an extra of $0.35 in special dividends per quarter. With natural gas prices towards the low end of historical levels, we believe this annual rate of $3.40 is likely sustainable for a decent 5.5% yield. We think the improving outlook for natural gas demand could also see the stock move into the mid-$70 range for additional 25% upside.