A wonderful company at a fair price.

Tourmaline Oil does not come to mind often. There is no need.

[Tourmaline is listed as TOU on the TSX, and I will refer to the stock by that symbol. It is also listed in the US, OTC, as TRMLF. Which you hold is an individual decision that may include a lot of factors. I hold TRMLF.]

Sometimes I wonder about selling off my holding and using those funds for something else. My total return over the past year is near zero, and the price has dropped a bit. But then I remember what the following reminds us of, and instead wonder about increasing the position.

So here we go with a revisit to this company.

Overview

This image from their investor presentation contains much relevant information:

The map shows Tourmaline properties in yellow, concentrated in three plays. To the right is the Alberta Deep Basin, where they are the largest producer. They also have significant production in the Montney and Peace River High, shown to the upper left.

Having drilled nearly 3,000 wells to date, they have both gained an understanding of the geography and built the supporting infrastructure necessary to process the gas.

That lets them claim 75 years of inventory at current drilling rates. Eat your heart out, US Producers.

CEO Mike Rose has steered their growth since founding the company in 2008. It is now the largest natural gas producer in Canada and fourth largest in North America.

Their approach to growth has been M&A. That works because Tourmaline has scale and is the most-efficient producer. So Tourmaline can pay a fair price to a smaller producer, based on their costs, and then profit from the purchase by improving the efficiency.

Mike Rose commented on the current M&A in the Q1 2025 earnings call:

The M&A we're doing right now is really ensuring we have a third decade of Tier 1. And I do point to what's happening in North America, particularly south of the border; there's less Tier 1 available than there used to be.

Because of their emphasis on low-cost inventory, Tourmaline can produce profits at lower natural gas prices than many competitors. Here is their cost curve:

The cost curve shows the break even gas price for each color-coded region. The locations are ordered by that price and the width of each bar shows the number of drilling locations there.

They now have 10 years of drilling inventory that will break even at no more than $CAD 1/GJ (about 75 cents in US$). And the next 10 years of inventory only doubles that.

To support their maintenance budget plus their base dividend, Tourmaline today needs to get prices a bit less than US$ 2.00/Mcf (about CAD $2.8 /GJ). The recent trading range, as of May 2025, is near US$ 3.50/Mcf.

At that price, Tourmaline can cover about $800M of growth capex, leaving $260M, give or take, for

• base dividend increases,

• special dividends,

• infrastructure investment,

• exploration, or

• buybacks.

Turning to the balance sheet, Tourmaline has about $700M of unsecured notes, maturing over the next 5 years. And as of the end of 2024 they had just below a $600M balance on their credit facility. Comparing those to their $3.5B of operating netback, one can see that debt is no issue.

The credit facility also has another $2B available, which will support cash that might be needed for future M&A or other costs. And in this overall context, their $121M of Finance Expenses is almost negligible.

This company is in a good place, financially.

Product Mix

Natural gas comes in flavors that span two limits. One is “dry gas” with minimal associated liquids. The other is “wet gas” with substantial condensate (so-called because it condenses out of the gas at room temperature, although the word is not used consistently across the industry).

All natural gas also contains NGLs, lighter hydrocarbons that do not condense at room temperature. The NGLs are condensed out at a gas processing plant and often transported by pipeline to a fractionization plant. There the “purity products” are separated out.

The story is told in terms of the number of carbon atoms per molecule. Methane of course has one. Ethane, or “C2”, has two. Propane has three. Here is the mix for Tourmaline:

The relative production looks like this:

But these comparisons are hard to interpret, considering differences in sales price. Here are sales amounts in CAD$:

The revenues from NGLs and Condensate together were above those from natural gas in 2024 but below them in 2023. This reflects realized natural gas prices, which went through a low in 2023. Oil revenues as such are always small.

A note here is that the price received for the natural gas is not just the local Canadian (AECO) price. Tourmaline has contracts to sell into several export markets, and also hedges some production.

The benchmark prices in their North American markets varied a factor of 6 in 2024. On net, Tourmaline realized CAD$ 3.48/mcf for that year. This is more than twice what the local, Canadian, AECO price was.

E&Ps often discuss “netback,” which is the cash remaining from revenues after subtracting all costs that scale with production. For Tourmaline, in the low year of 2024, netback was $3.5B.

There are also corporate costs, including but not limited to finance costs. The result for 2024 is that Cash from Operations (CfO) was $2.7B.

How Tourmaline Got Here

As they grew, Tourmaline went through two phases. These are most easily defined with reference to Free Cash Flow (FCF, the difference between Cash from Operations and all capex):

Before 2018 they were in an intense growth mode, issuing stock and adding debt to support additions they considered to be accretive to value per share.

Doing this drives FCF negative, considered a sin by some. The risk is this: if those growth additions turn out to be dilutive rather than accretive, they can cost shareholders a lot of capital or worse.

Across E&P’s, many of those growth projects did just that as oil and gas prices collapsed after 2014; bankruptcies abounded. In contrast, Tourmaline flourished.

Tourmaline uses dividends as the primary means of returning profits to shareholders, which I like. They do this with a base dividend, sized to last through pricing troughs, supplemented by special dividends.

They began paying a dividend (initially very small) in 2018. Then, as gas prices quadrupled from the 2020 trough to the peak in 2021, FCF exploded and Tourmaline paid it out:

Those spikes are the special dividends, on top of the base dividend. That base dividend was recently increased to CAD $0.50/qtr, a significant jump as you can see.

The current special, quarterly dividend is CAD $0.35. In combination this amounts to a yield just above 5%, with a likelihood of being much larger as natural gas prices pass through their next upcycle.

The results have been very strong cash returns to shareholders. The cumulative dividends from three companies I own and like are here:

Canadian Natural (CNQ) has a business model that can deliver more reliable growth but less maximum payout. Chevron (CVX) has a far larger and more diversified business and a commitment to growing the dividend. But when natural gas prices rise, the returns from TOU can be much larger.

Holders of TOU since 12/8/2020 did see price gains of 4.5x through late 2022 but that has since dropped to 3.5x. And since late 2020 the cumulative dividends have exceeded half that purchase price and are near 20% of the current price.

We can also compare total return over the same interval, because it is traditional:

Note that since mid-2022, there has not been much difference on net. But the next upward price cycle in natural gas may well pull the total return from TOU further ahead.

Takeaways

Tourmaline has such a compelling business model. They should continue to flourish and to benefit shareholders as long as Mike Rose is CEO, and perhaps long after.

For the past couple of years it has at times seemed to me like selling TOU might make sense. The dividend yield was OK but not great.

But on thinking about it, I realized that those dividends that were OK today would become spectacular again whenever the next spike in natural gas prices arrived. We may be there now, but at least we should see some benefits from the ongoing increase.

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