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:

• Reduction of Debt: The company reported a reduction in the debt component at CAD 1,644 million in Q3FY20, from CAD 1,782 million in Q2FY20, which is a key positive. Continuation of the above trend is likely to result in lower finance expenses, which would further support the company’s bottom-line. Notably, finance costs for 9MFY20 stood at CAD 41.042 million, lowered from CAD 45.870 million a year ago.

• Robust Margins: The company reported a strong operating efficiency and posted gross margin and EBITDA margin at 98% and 48.8%, respectively in Q3FY20, significantly higher than the industry median of 55.6% and 38.1%, respectively. Moreover, the company’s pretax margin and net margin stood at 1.4% and 0.8%, respectively, compared to the industry median of 0.9% and (0.3%), respectively.

Q3FY20 Financial Highlights:

• TOU declared its quarterly results, wherein the company posted total revenue of CAD 472.891 million, increased marginally from CAD 462.276 million in the previous corresponding period (pcp). The increase was due to a higher income from commodity sales from production, while a loss on risk management activities amounting to CAD 38.180 million remained a drag. Moreover, unrealized loss on financial instruments stood at CAD 58.843 million, against an unrealized gain of CAD 14.117 million in Q3FY19.
• The group reported total expenses of CAD 454.642 million, increased from CAD 422.455 million in pcp. The higher expense was primarily attributable to an increased transportation cost (CAD 125.114 million versus CAD 102.173 million in Q3FY19, coupled with higher operating cost (CAD 89.370 million versus CAD 82.904 million in pcp. This was partially offset by lower depletion, depreciation, amortization and impairment expense (CAD 209.588 million versus CAD 212.177 million in pcp.)
• Income from operations stood at CAD 18.249 million, as compared to CAD 39.821 million in pcp.
• The group reported a net income of CAD 3.753 million versus CAD 15.691 million in Q3FY19.
• The company reported cash and cash equivalents at CAD 14.801 million, while total assets stood at CAD 11,246.517 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks:  Volatility in the oil and gas prices would dampen the company’s income and cash flow generation.

Valuation Methodology (Illustrative): Price to CF based 

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

Stock Recommendation:

Despite a lower net income, the company reported higher cash from operations for Q3FY20 at CAD 290.795 million, as compared to CAD 205.798 million a year ago, supported by better working capital management, which is encouraging. Moreover, the company reported a higher dividend payment of CAD 112.635 million in 9MFY20, compared to CAD 92.470 million, a year ago, despite the ongoing economic doldrums, wherein most of the companies are lowering its dividend distributions to retain the liquidity levels. Talking about the liquidity, the company reported ample liquidity of CAD 14.8 million of cash balance and CAD 1.3 billion of unutilized borrowing capacity under its credit facilities, which seems to be sufficient to support its working capital and capital investments requirements. We have valued the stock using 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 current market price of CAD 23.16 on February 26, 2021.

TOU Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Parkland Corporation

Parkland Corporation (TSX: PKI) is an independent supplier and marketer of fuel and petroleum products and a leading convenience store operator. Parkland services customers across Canada, the United States, the Caribbean region, through three channels: Retail, Commercial and Wholesale.

Key highlights

• Production guidance on low carbon fuel: Recently, the group announced that it co-processed approximately 44 million litres of Canadian-sourced canola and tallow bio-feedstocks in 2020 and aims to increase this to up to 100 million litres in 2021. The management also stated that they are growing a competitive advantage that would win new business and drive organic growth. 

• Developing a growth strategy: Recently, the group acquired two U.S companies and on a combined basis, the acquisitions include 13 quality company retail sites with a robust non-fuel contribution, approximately 40 retail dealers, and commercial fuel and lubricant distribution capabilities. The acquisitions are expected to add annual fuel and petroleum product volume of roughly 275 million litres to the USA segment.

• Boosted capex plans: The management feels optimistic on its diversified & resilient business model and has raised the capital expenditure guidance, by CAD 50 million to CAD 325 million for 2020, supported by the strong cash flow generation.

Source: Company

• Maintaining Healthy Liquidity:  In Q3 2020, the company reported total liquidity to CAD 1.63 billion, an increase of CAD 642 million, against CAD 992 million in 2019.

Source: Company

• Event update: The company will announce its 2020 fourth quarter and year-end results after markets close on Thursday March 4, 2021.

Financial Overview of Q3 2020

Source: Company

• In Q3 2020, the company reported revenue of CAD 3.5 billion, as compared to CAD 4.6 billion in the previous corresponding period, primarily due to volume declines because of lower product demand due to COVID-19 and lower oil and gas industry activity.

• Adjusted EBITDA stood at CAD 338 million, an increase of 12% in Q3 2020, compared to Q3 2019. Reasons behind the rise in Adjusted EBITDA were healthy cost controls, geographical diversification and the strong performance shown by convenience stores in Canada, achieving 10.7% same-store sales growth in the reported quarter.

• Net earnings reported by the company in Q3 2020 was CAD 91 million, an increase of CAD 65 million, as compared to CAD 26 million in the previous corresponding period. 

Risk associated with investments

The company is exposed to many risks, including general economic, market and business conditions, industry capacity, competitive action by the other companies, refining and marketing margins, and the ability of suppliers to meet commitments.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

Despite COVID-19 restrictions and the closure of the tourism industry, which significantly impacted aviation and retail volumes, International's performance was sustained by geographical diversification, executing profitable supply initiatives, and implementing healthy cost controls. Recently the group acquired two U.S companies which would scale the performance in retail segment as well as in oil & lubricants segment. The convenience stores in Canada have shown resilience by achieving 10.7% same-store sales growth in Q3 2020, which is key positive. Furthermore, the company is focusing on expanding margins across its fuel and non-fuel categories, which is admirable. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 40.44 on February 26, 2021. We have considered Superior Plus Corp, Alimentation Couche-Tard Inc, Metro Inc, etc. as the peer group for the comparison.

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.