Topaz Energy Corp.
(TPZ-T) C$23.18
Q1/22 Results in Line; Nudges Up Royalty Production Guidance
Event
Reports Q1/22 Results, Nudges 2022 Production Guidance Higher
Impact: SLIGHTLY POSITIVE
TD Quick Take: Q1/22 results were as expected. We anticipate steady growth from Tourmaline and capex/production bumps from key strategic counterparties such as TVE. Topaz raised its 2022 production guidance, but maintained its current dividend. We see future upside to our production/CF estimates through accretive M&A and potential increases to the dividend in 2022.
Q1/22 Results as Expected by TD/Street: Topaz reported Q1/22 production of 16.1 mBOE/d, which was in line with both TD (15.9 mBOE/d) and consensus (16.2 mBOE/ d). CFPS of $0.53 was also in line with TD/consensus ($0.52).
2022 Guidance Raised; We Believe there Could be More: The company walked- up its 2022 production guidance to 16.5-16.7 mBOE/d (from 16.1-16.3 mBOE/ d). We continue to believe this represents a baseline that is predicated on 32% growth through year-end from the Clearwater, 4% growth from Tourmaline, and the remaining royalties flat. We continue to forecast 2022 volumes that are higher than guidance, as we believe the economics of its underlying oil plays will prompt capital spending (and modest growth expansions). Subsequent to TPZ's results last night, a major counterparty on Topaz' acreage announced a 3% increase in its full-year production guidance (on higher capital spending).
Dividend Unchanged, but Commentary Suggests Mid-year Bump Possible:
Although the company maintained its existing dividend of $0.26 per quarter (~$150mm/year), the commentary suggests that a $160mm/year dividend is contemplated. Specifically, the company stated: "Topaz’s estimated 2022 dividend of $160mm is well-supported".
Our View: Although ambiguous, this commentary suggests that a mid-year increase to $0.29-$0.30 is possible. We estimate that the current dividend represents only 48% of 2022 FCF under our $4.50/mcf HH natural-gas pricing assumption and 37% of FCF at strip. This leaves FCF of $161 million (TD deck) to $247 million (strip) for some combination of future dividend increases and accretive M&A.
TD Investment Conclusion
Topaz offers exposure to quality, growth-focused counterparties with nearly fully utilized infrastructure assets as ballast. We believe royalties offer investors energy exposure, while minimizing the risk of inflationary cost pressure.