In a recent survey of securities analysts’ advice on more than 1,000 Canadian stocks, Investor’s Digest of Canada featured two top-ten Canadian oil and gas stocks.
On Nov. 14, oil and gas stock Tourmaline Oil Corp. (TSX—TOU) and Topaz Energy Corp. (a new private royalty and infrastructure energy company) completed the previously-announced transaction creating Topaz. The new entity is a unique, private, hybrid royalty and infrastructure company with an $800 million capitalization and aggressive long-term growth plans.
The transaction includes the purchase by Topaz of interests in certain revenue generating assets from Tourmaline for consideration consisting of $194.5 million in cash and 59.1 million Topaz common shares. The cash portion of the purchase consideration was funded by a private placement to investors of 20.9 million common shares at $10 per share. Topaz is 74 per cent owned by Tourmaline.
Topaz has commenced operations with significant capitalization, meaningful forecast 2020 cash flow of over $1 per share, a stable strong dividend of $0.80 per share per year, low costs (under three per cent of 2020 forecast revenue) and no debt.
Winter outlook is improving
Before the Topaz agreement was closed, analyst Fai Lee of Odlum Brown said Tourmaline’s winter outlook is improving as its third-quarter 2019 results were in line with his expectations. He kept a “buy” recommendation and $20-per share target price as of Nov. 7. He elaborates further on his outlook:
“Looking ahead, natural gas prices for the upcoming winter recently increased. With the higher prices, Tourmaline expects free cash flow to significantly improve from $14.1 million ($0.05 per share) in the third quarter to approximately $50 million ($0.18 per share) in the fourth quarter.
“Third-quarter cash flow per share at $0.82 was down 23 per cent year-over-year. Tourmaline’s overall production still increased by three per cent from the previous quarter and is up by 14 per cent from last year.
“Over the long term, we expect natural gas producers in North America will be under pressure to curb their production due to low natural gas prices, which should also lead to higher natural gas prices.”
All seven analysts who cover Tourmaline Oil rate it as a “buy”. This puts it in a four-way tie with Organigram Holdings Inc., Birchcliff Energy Ltd. and Whitecap Resources Inc. for first on our top-10 “Time to Buy” list.
Analyst boosts Gibson Energy’s target price
Oil and gas stock Gibson Energy Inc. (TSX—GEI), manages to reaffirm Industrial Alliance Securities’ analyst Elias Foscolos’ “strong buy” thesis with its third-quarter 2019 performance. The midstream oilfield service company’s stock price is inching closer to his previous target price of $25 per share. Now with higher earnings estimates, the analyst elects to boost his target price by a toonie to $27.
GEI’s quarterly earnings before interest, tax, depreciation and amortization (EBITDA) of $121 million includes an $11-million adjustment for general and administrative costs. Even when stripping out the adjustment, the results still beat estimates and consensus of $96 million.
The analyst points to strong performance from the Marketing segment for the beat. The company increased its annual run-rate guidance from $80 million to the range of $80-to-$120 million. On a segmented basis, EBITDA contribution from Infrastructure was $82 million (the analyst expected $77 million).
Throughput capacity increased
The increase in Infrastructure (on path to generate $316 million in 2019 EBITDA; was $283 million in 2018) was driven largely by increased inbound volumes, higher customer contract tankage from the HURC Facility expansion in Alberta, and the Moose Jaw Facility expansion in Saskatchewan, the analyst states. The current Moose Jaw Expansion Project is expected to increase throughput capacity by approximately 25 per cent.
As a result of the increase in Marketing guidance, Mr. Foscolos raises his adjusted EBITDA estimates for 2019 to 2021 to $451 million, $456 million and $514 million from $424 million, $439 million and $485 million. For adjusted funds from operations per share, he moves it to $2.05, $2.09 and $2.44 from $1.83, $1.87, and $2.14, respectively.
Of the six analysts who cover Gibson Energy, five rate it a “buy” and one a “hold”. This puts it in a tie with TORC Oil & Gas Ltd. and Exchange Income Corp. for eighth place on our top-10 “buys” list.
This is an edited version of an article that was originally published for subscribers in the December 20, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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