31 Jan The Lato Letter: Volume 1, Issue 2
It is another beautiful warm sunny January day in Toronto, which is great except if you are selling furs or natural gas. With more warm weather forecasted for February, chances are natural gas prices, currently at 10-year lows of approximately $2.50 per mcf, will continue to be soft through the rest of winter. That being said, I attended a Peters & Co. lunch presentation today by Tourmaline Oil Corp (which in spite of its name is 80% natural gas) and came away feeling very glad that I continue to hold it in clients’ portfolios in spite of the weak natural gas outlook.
Tourmaline has done most everything right since its creation just over three years ago and its initial public offering (IPO) in November 2010. Since the IPO, production has more than doubled and using very conservative company forecasts is expected to double again in 2016. There is not much management can do about the natural gas price but they are in the enviable position of having production costs of 50 cents per mcf. These industry-low production costs allow them to continue to profitably produce their gas without concerns over having to “shut-in” any production and deploy that cash in further exploration and development.
Natural gas prices are out of the company’s control, but what they can control is their exploration budget to ensure that their balance sheet can weather even the most adverse pricing scenarios and still produce future production growth. Tourmaline has cut back on their 2012 capital expenditure budget, but even with a reduced budget they have still recently increased their production growth forecast for 2012. One thing that is of concern to management is an “unwelcomed” suitor who could pay a premium to the current share price but in the long run, deprive current shareholders a spectacular growth story.
I should mention that I will be on BNN’s Market Call this Thursday (February 2nd) at 1:30pm, and it will be replayed at 8:30pm. Links to my TV appearances can be found in the Library section of this website.
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