Post by
savyinvestor333 on Jun 09, 2021 7:27am
Scotia Upgrade as scheduled
Topaz Energy Corp.
Recent Deals Add Near- and Long-Term Value
OUR TAKE: Positive.
We are off restriction on TPZ following the close of the company's $204.3M equity offering (including over-allotment and private placement). The proceeds from the offering will be used to help fund TPZ's pending $245M acquisition of a Montney gross overriding royalty (GORR) and non-operated infrastructure interest from Tourmaline Oil Corp. (TOU-T; SO) and recently closed $102M acquisition of a GORR on the Headwater Exploration Inc. (HWX-T; Not Covered) Clearwater oil assets.
We see the deals as ~5% accretive to TPZ's near- and longterm per share metrics, with a line of sight to immediate production growth from the Clearwater assets and significant future upside from TOU's growth plans for the Montney assets. We believe that TPZ offers a compelling investment case given its: (1) strong upstream and midstream asset base; (2) top-tier free cash flow conversion profile and dividend growth potential (demonstrated by the recent 5% dividend bump); and (3) emerging position as the financial partner of choice for quality E&Ps in a capitalconstrained market. We maintain our Sector Outperform rating and are increasing our Target Price to $21.00 per share on the accretion from the acquisitions.
KEY POINTS Northern Montney deal bolsters the future. TPZ has agreed to acquire a GORR on 288,000 gross acres of TOU's NEBC Montney acreage (blocks at Conroy / Laprise and South Townsend, plus bolt-on acreage at Doe and Gundy; see Exhibit 4) and a 10% working interest (40 mmcf/d) in TOU's Gundy natural gas processing plant. The deals are expected to close on July 1, 2021. The GORR provides for a 4% royalty on natural gas production until YE22 and 3% thereafter and a 2.5% royalty on oil and condensate production. The assets currently produce ~22.6 mboe/d (~820 boe/d net to TPZ) and TOU plans to increase volumes through 25 mboe/d in 2021, before commencing a ramp to >100 mboe/d (~3,000 boe/d net to TPZ) during the second half of the decade. The Gundy plant deal is backed by a 10-year take-or-pay commitment for 40 mmcf/d at $0.70/mcf with no opex (~$10.2M annual EBITDA). We estimate the deal metric at ~12.0x Q4/21 annualized EBITDA; however, we view the long term royalty production growth potential from the Conroy Montney asset as a major win for TPZ. TOU has identified Conroy as its next major growth area and we believe the well results to date demonstrate the area's strong economic potential (see Exhibits 3 and 5). We have created economic scenarios for both the Montney upstream and Gundy infrastructure assets based on the deal details, TOU's growth plans, and our type curve estimates. On current strip prices (through 2025, with 2%/yr inflation through 2030 and flat pricing...