On Thursday, UBS initiated coverage on Tourmaline Oil Corp. (TOU:CN) (OTC: TRMLF) with a Neutral rating and a stock price target of C$77.00. The firm recognized the oil company's robust production growth outlook and its commitment to returning a significant portion of its free cash flow (FCF) to shareholders.
Tourmaline Oil is expected to see an average production growth of 5% annually from 2024 to 2028. Moreover, new projects are anticipated to contribute an additional 26 million barrels of oil equivalent per day (mbopd) in liquid volumes.
Tourmaline Oil's strategy to increase its exposure to higher-priced natural gas markets was also highlighted. The company is poised to distribute more than 90% of its FCF through a combination of increasing base and variable dividends, supported by a strong balance sheet. This shareholder-friendly approach is deemed a positive aspect of the company's financial strategy.
Despite these favorable factors, UBS noted that the limited valuation upside, based on their $3.50 per million British thermal units (mmbtu) 2025 Henry Hub (HH) natural gas price deck, tempers the outlook.
The price target is derived from a 5.75 times target 2025 estimated enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple. This valuation is near the upper end of Tourmaline Oil's historical range and surpasses that of its U.S. gas-weighted peers.
The setting of the price target at C$77.00 reflects a balanced view of Tourmaline Oil's growth prospects and capital return potential against the backdrop of UBS's natural gas price assumptions. The company's financial health and strategic initiatives are recognized, while also accounting for market conditions and comparative industry metrics.
InvestingPro Insights
For investors seeking a nuanced understanding of Tourmaline Oil Corp's financial health, InvestingPro offers a deeper dive into the company's performance metrics. With a market capitalization of $16.1 billion USD, Tourmaline Oil exhibits a P/E ratio of 12.47, which adjusts slightly higher to 13.37 when accounting for the last twelve months as of Q1 2024.
This indicates a reasonable valuation compared to earnings, especially when considering the company's ability to cover interest payments with cash flows and its seven-year streak of dividend payments. Furthermore, the dividend yield stands at a substantial 6.71%, although it's worth noting there has been a significant dividend growth reduction of -53.04% in the same period.
InvestingPro Tips highlight that while the company operates with a moderate level of debt, its short-term obligations do surpass its liquid assets. Nevertheless, analysts predict profitability for the current year, a trend that is supported by the company's performance over the last twelve months. The stock's low price volatility, paired with a strong return over the last five years, could appeal to investors looking for stability and consistent growth.
For those interested in further analysis, there are additional InvestingPro Tips available, which can be accessed through the InvestingPro platform. As a special offer, readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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