Scotia Target Again Now $24.00TOU / TPZ Royalty Deal Closes the Loop; TOU Cheniere Arrangement Adds Global Price Exposure
OUR TAKE: Positive.
We view the latest TOU / TPZ royalty deal as a win / win. The deal brings TPZ back to a position of having a gross overriding royalty (GORR) interest on essentially all of TOU's production and inventory and boosts our royalty NAV and 2022 EBITDA estimates by ~6% and ~8%, respectively. For TOU, the proceeds from the disposition defray some of the costs of its recent acquisitions at a highly accretive multiple (we estimate ~10.5x 2022 DACF).
We also view TOU's additional announcements – the acquisition of the Paramount Resources Ltd. (POU-T) Birch Montney asset, the 15-year LNG supply deal with Cheniere Energy, Inc. (LNG-A), and the 5% NCIB – as positives for the stock. The Birch asset is a natural fit with TOU's existing Northern Montney position (see Exhibit 1) and the $88M purchase price is ~23% below the $114M we previously carried in our POU NAV. The LNG supply deal adds Asian gas price exposure to TOU's portfolio at competitive costs, with potential for material upside versus AECO based on the current JKM strip (~US$7.85/mmBtu in 2023).
Finally, the NCIB gives TOU another option for executing on shareholder returns as it winds down its consolidation program.
We maintain our SO rating on both stocks and are: • increasing our TOU target price to $59/share on the accretion from the transactions and gas price upside potential from the LNG supply deal. • increasing our TPZ target price to $24/share on the accretion from the acquisition. TOU HIGHLIGHTS Northern Montney consolidation update. TOU closed the previously announced acquisition of Black Swan Energy Ltd. (private) and announced the purchase of POU's Birch Montney assets. The Black Swan assets currently produce 50 mboe/d and TOU has confirmed that it will complete the Nig Creek plant expansion and increase production to ~60 mboe/d in Q2/22. The Birch assets complement TOU's existing Northern Montney asset base and add ~2.4 mboe/d and ~20,800 acres with ~105 TOU estimated Tier 1 drilling locations. Assuming ~$12,500/boe/d for the production, we estimate the deal value at ~$2,500/acre or ~$0.34M per Tier 1 drilling location. Notably, we previously carried the asset at ~$114M in our POU SOA NAV.
Entering the global gas market. TOU and LNG have agreed to a 15-year, ~140 mmcf/d marketing agreement whereby TOU will ship gas to the LNG Corpus Christi liquefaction terminal and gain exposure to JKM pricing (net of fixed shipping and liquefaction costs). TOU has signed a long-term deal with TC Energy Corporation (TRPT) to ship gas to Corpus Christi via the Mainline, GLGT, and ANR systems for tolls of ~US$0.86/mmBtu. The deal is set to commence in January 2023 and we estimate that TOU could realize a ~$4.00/mmBtu netback to AECO (versus the current strip at ~ $2.65/mmBtu) for the supply (~6% of our corporate production forecast) based on 2023 strip prices, with significant upside if the looming LNG supply gap provokes stronger JKM prices (see page 15 of Alonso Guerra-Garcia's June 2021 LNG: Around the World in 30 Days report and Exhibit 2 for recent JKM strip price performance).