May 3, 2022
Topaz Energy Corp. Q1/22 – Getting Better with Age
Our view: Topaz posted solid Q1/22 results underscored by meaningful free cash generation alongside increased guidance following the Keystone Royalty acquisition. Management remains constructive on potential acquisitions, which could provide incremental upside to our updated estimates. We reiterate our Outperform rating and have bumped our price target to $28/share.
Key points:
• Q1/22 results in-line. Q1/22 royalty volumes of 16.1 kboe/d (78% gas) were in-line with RBC/Consensus expectations (16.0/16.2 kboe/ d). Q1/22 EBITDA came in at $76.0 million, slightly ahead of RBC/ Consensus of $74.1/$75.7 million (Visible Alpha), with total processing/ other revenue of $15.6 million. CFPS of $0.53 came in just above RBC/ Consensus expectations of $0.52/$0.52 with key netback variances and estimate changes noted in Exhibit 1.
•2022 guidance increased to incorporate Keystone acquisition. Management increased 2022 royalty production guidance to 16.5-16.7 kboe/d, 76% gas (previously 16.1-16.3 kboe/d, 78% gas) to incorporate the recent Keystone Royalty acquisition (note here). This includes a scheduled GORR adjustment with Tourmaline whereby the company's base gas GORR stepped down while their Deep Basin gas GORR stepped up (each by 1%). At our updated outlook we expect Topaz will generate $326 million in EBITDA in 2022, with the payout ratio mapping to 46%.
• M&A: management constructive on continued deal flow. Management left the current $1.04 annual dividend unchanged, acknowledging the payout remains below long-term guidance of 60-90% in order to free up cash for potential M&A. The company continues to actively evaluate acquisitions (both royalty and infrastructure), noting a robust market within Canada and no immediate plans to open up to the US.
• Plenty of dry powder to support M&A. We forecast Topaz will have roughly $636/$816 million in available liquidity at year-end 2022E/23E on the $700 million bank line (expandable from $500 million base with approval, note here). We believe this positions the company well to execute incremental deals with management noting M&A remains a key facet of the strategy. We forecast net debt (cash) of $64/($116) million at year-end 2022E/23E, mapping to 0.2x 2022E D/CF; NAm royalty peers are estimated to carry 0.7x D/CF in 2022E (consensus), with the majority of peers reaching net cash balances by 2023E (Exhibit 4).
• Reiterate Outperform. We maintain our Outperform rating and have increased our price target to $28/share (previously $27.50/share). Our favourable view of the stock is backstopped by the company's exposure to growing resource plays, limited downside risk associated with the infrastructure portfolio, and a high likelihood of additional deal flow. Topaz is trading at 10.5x/9.1x 2022E/23E EV/DACF, which compares to royalty peers at 8.3x/7.6x, and midstream peers at 9.0x/8.3x. Management will host a conference call tomorrow at 11am ET. 1-888-664-6392. ID: 13611719.