Tourmaline Oil Corp.

Tourmaline Oil Corp. (TSX: TOU) is a Canadian energy company engaged in natural gas and crude oil acquisition, exploration, development, and production in the Western Canada Sedimentary Basin. The company produces light and medium crude, natural gas liquids, and conventional and shale natural gas.

Key Updates:

• Robust Margins supported by lower cost-metrics: For FY20, the company reported a strong operating efficiency and posted gross margin and EBITDA margin at 97.8% and 54.3%, respectively, significantly higher than the industry median of 56.1% and 35.1%, respectively. Moreover, the company’s net margin stood at 28.6% v/s, the industry median of negative 8.1%. Over the years, the company focused on lowering its operating costs and general administrative costs, which has led to enhanced margin scenario v/s the industry median.

Source: Company Presentation

• Strong Sequential Growth indicates demand revival: The company reported a strong performance in Q4FY20, wherein the group reported its revenue at CAD 675.4 million, higher than CAD 472.9 million and CAD 342.5 million in Q3FY20 and Q2FY20, respectively. Operating income soared to CAD 683.1 million in Q4FY20, higher than CAD 18.2 million and CAD 12.9 million, respectively in Q3FY20 and Q2FY20, respectively. However, Q4FY20 performance was supported by an unusual income amounting to CAD 498.2 million, but excluding the above income, the company’s operating income would be CAD 184.9 million, significantly higher than the preceding quarter. The above indicates a revival in the industry and is a key positive.

• Cash-flow and reserve growth driven by improved metrics: Over the years, the group has successfully increased its production and reserve profile while successfully reduced its operating costs, which has resulted in an impressive growth in cash flows. During 2010-2020 production growth per share grew at a CAGR of 25%, which is noteworthy.                     

Source: Company Presentation

FY20 Financial Highlights:

• TOU declared its full-year result, wherein the company posted total revenue of CAD 2,160.445 million, increased marginally from CAD 2,076.577 million in the previous corresponding period (pcp). The increase was due to a higher income from commodity sales from production (CAD 2,200.911 million v/s CAD 1,846.195 million in FY19), while a loss on risk management activities amounting to CAD 106.001 million remained a drag.
• The corporation reported total expenses of CAD 1,485.149 million, decreased from CAD 1,713.847 million in pcp.
• Income from operations stood at CAD 675.296 million, soared from CAD 362.730 million in pcp.
• The group reported a net income of CAD 618.553 million v/s CAD 320.028 million in FY19.
• The company reported cash and cash equivalents at CAD 220.168 million, while total assets stood at CAD 12,790.200 million.        

FY20 Income Statement Highlights (Source: Company Report)

Risks:  Volatility in the oil and gas prices would affect the company’s income and cash flow generation. Moreover, at the end of FY20, the group reported total debt of CAD 1,954 million, which is ~20% and ~32% higher than FY19 and FY18, respectively, which may hinder the overall financial flexibility.

Valuation Methodology (Illustrative): Price to CF 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The stock of TOU appreciated ~100% and 175% in the last nine months and one-year, respectively, due to the recent upsurge in international crude oil prices. For FY21, the company expects its production at 400,000 Boe/day, while cash flow and free cash flow is expected at CAD 2,205 million and CAD 1,098 million, respectively. Capital investment is anticipated at CAD 1,075 million. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Energy) median on NTM basis etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 23.92 on March 31, 2021.

One-Year Price Chart (as on March 31, 2021). Source: Refinitiv (Thomson Reuters)

Parkland Corporation

Parkland Corporation (TSX: PKI) distributes and markets fuels and lubricants. The group’s product offerings include refined fuels and other petroleum products. Apart from these, the company delivers to motorists, businesses, consumers, and wholesalers in the United States and Canada.

Key Updates:

• Issuance of Unsecured notes: The group recently announced the issuance of senior unsecured notes in two tranches of USD 800 million and CAD 600 million with an annualized interest rate of 4.5% and 4.375%, respectively, due October 1, 2029, and March 2029, respectively. As per the Management, the company would utilize the above funds for the redemption of its existing debts.

• Stable Dividend Payment: Over the years, the company has delivered consistent growth in its dividend payment, backed by a diversified and resilient business model coupled with decent growth in cash from operations. During FY20, the company paid a dividend of CAD 136 million higher than CAD 114 million in FY19. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.27%, which looks decent considering the current interest rate dynamics.

Source: Company Presentation

• Impressive Guidance: For FY21, the company expects its Adjusted EBITDA at around CAD 1,200 million, higher than CAD 1,057 million in FY20. The improvement is expected through several Cost savings synergies adopted by the company in the recent past. Refinery utilization is anticipated at ~85% of the total capacity, which looks impressive. The company is planning of total capital expenditure of CAD 400 million – CAD 550 million, which includes maintenance of CAD 225 million – CAD 275 million.

Q4FY20 Financial Highlights:

• PKI announced its quarterly result, wherein the group posted sales and operating revenue of CAD 3,474 million, v/s CAD 4,779 million in the previous corresponding period (pcp). The decline was primarily attributable to a lower fuel and petroleum product volume of 5,416 million litres v/s 5,850 million litres in pcp.
• Adjusted EBITDA including, non-controlling interest stood at CAD 271 million, down from CAD 327 million in pcp.
• The company reported net earnings of CAD 64 million v/s CAD 186 million in Q4FY19.     

Q4FY20 Financial Highlights (Source: Company Report)

Risks: Some of the key risks includes recessionary economic cycles and downturns in the business cycles of the industries, which might dampen the consumer confidence and might lead to lower demand.

Valuation Methodology (Illustrative): P/CF based valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The stock of PKI appreciated ~13% and ~53% in the last nine months and one-year, respectively. Notably, the Burnaby Refinery realized a strong utilization rate of 89.7% during Q4FY20, despite lower product demand associated with COVID-19. The above refinery produces low-carbon renewable fuels by co-processing renewable feedstock with crude feedstock, which helps the company to achieve output with a renewable component. We have valued the stock using the price to P/CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Superior Plus Corp, Alimentation Couche-Tard Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ stance on the stock of PKI at the closing market price of CAD 37.76 on March 31, 2021.

One-Year Price Chart (as on March 31, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.