Tourmalines Cocaine - RoyaltiesRoyalities represent quick cash in the door, but the pain never goes away.
Imagine making royality deal with 2 dollar gas and 40 dollar condensate, then having condensate prices increase double and gas triple.
Royalities
- Value of those royality agreements have doubled (Oil) and trippled (Natural Gas)
- These royalities never go away.
- The are top line costs.
- They reduce real returns by 4-7 percent.
What kind of funds would the company have the ability to finance at 2 percent and would be cheaper long term than these royality streams?
92% of TOU production is NGL's and Gas (4% royality)
8% of TOU production oil and Condensate (2.5% royality)
Useing Q2 production numbers for illustration purposes.
91.5% * 410,000 boe/day * $36 boe ($6 gas) * 365 days* 4% royality = 197.2 million (yearly)
.085% * 410,000 boe/day * 100 boe($100 oil) * 365 * 2.5% = 32 million (yearly)
So potentially with these royalities on all their properties they could be paying 230 million dollars a year to Topaz.
The amount of debt that could be carried with 230 million dollar yearly payments is 11.5 billion dollars at 2% which is what TOU can borrow money for.
In Q2 the operting netback for TOU production was roughly 15 dollars a boe, the royalities consume the equalivent of 42 thousand boe/day of TOU production going forward.
(230,000,000 / 15) / 365 days = 42000 boe/day of production that the cost forever of the royalites TOU put on their production.
If the netbacks go up it will has a reduced impact, but with 326 million share outstanding to cost to TOU shareholder could be 70 cents a share in Cash Flow.
Royalities are an oil companies DRUG a temporary fix, and when high oil prices settle in and the cost of these royalities are realized, they will come crashing to the ground.
IMHO