Topaz ResultsEQUITY RESEARCH
July 26, 2022 Earnings Update
TOPAZ ENERGY CORPORATION
Q2/22 Results Top Expectations And 8% Dividend Increase A
Sweetener
Our Conclusion
Topaz Energy posted a strong Q2 update, with operating and cash flow
metrics that topped our estimates and consensus. Better-than-expected
production was attributed to rising activity levels and the recently acquired
Keystone Royalty assets. The company also raised its dividend by 8% with
this release, and although our revised assumptions see room for additional
dividend growth in the next 12-18 months, we expect TPZ will also look to
preserve capital for select M&A. We believe the company’s exposure to large
growth projects in the WCSB, including the NEBC Montney, supports a
platform for continued dividend growth in the future. Guidance revisions for
2022 were minor compared to our previous estimates and we make minimal
estimate revisions, leaving our price target unchanged.
Key Points
Production and cash flow ahead of expectations. Production of 16.7
MBoe/d was ahead of our estimate of 16.3 MBoe/d and Street at 16.5
MBoe/d. Cash flow of $0.66/sh was ahead of our estimate of $0.63/sh and
Street at $0.65/sh. Royalty production revenues came in at $94.8MM versus
our estimate of $88.7MM, owing to stronger production volumes. Processing
revenues came in at $12.9MM versus our estimate of $12.8MM. Third-party
processing income came in at $3.3MM versus our estimate of $2.5MM.
Tamarack acquisition provides additional Clearwater and Charlie Lake
exposure. Topaz announced a $15MM acquisition of 129,000 acres of
GORR land, along with a $20MM drilling commitment, from Tamarack Valley
Energy, with a focus on Tamarack’s Southern Clearwater lands.
Dividend increase still drives payout levels that remain well below the
long-term target of 60%-90%, offering room for additional M&A or
further dividend increases. Topaz raised its dividend by 8% after paying off
$42MM in net debt during the quarter and our dividend payout ratio on recent
strip for 2023 is 45%. While there is clearly room for additional dividend
increases from TPZ, we believe that management will stay below its long-
term payout target in the near term in order to preserve financial capacity for
seizing opportunistic acquisitions. On strip pricing, we see TPZ exiting 2022
with $49MM in net debt and moving to net cash by Q1/23.
Guidance updates immaterial to our estimates. The company expects to
produce a midpoint of 16.6 MBoe/d in 2022 versus our estimate of 16.8
MBoe/d and the Street at 16.2 MBoe/d. EBITDA midpoint for 2022 is
expected to be $343MM, assuming $5/Mcf AECO and US$90/Bbl WTI
versus our EBITDA estimate of $364MM at $6/Mcf AECO and US$97.43/Bbl
WTI (consensus at $361MM).