In a research note titled 3 Reasons to Buy Heading into YE, Raymond James analyst Jeremy McCrea said Topaz Energy Corp.’s  share price “should finally catch up with fundamentals,” expecting the Calgary-based company to be added to the TSX Composite this quarter.

“Despite over $1.1-billion in accretive acquisitions and a strong management team that continues to structure/find A&D opportunities, Topaz’s share price is up only 29 per cent (XEG: 77 per cent),” he said. “Momentum has clearly been with ‘risk-on’ E&P names this year but as the recent pull-back has shown, it seems investors are getting a quick reminder of the sector’s volatility.”

Mr. McCrea pointed to three themes that he thinks “investors may not fully appreciate with Topaz” and why he expects Topaz’s share price to “perform quite strong,” adding: “Overall, there is meaningfully less risk vs. traditional E&Ps, especially when considering the top plays the company has royalty interest in. Combine this with stable infrastructure cashflow and spending commitments that remain off balance sheet and there is much more value to the name than what current trading metrics suggest.”

They are:

* The quality of the asset base.

“For TPZ, we believe its royalty assets belong in the top plays within Canada. Overall, TPZ has royalty agreements in 3 of the top 6 plays and most remaining royalty activity within the top quartile. If we were to see commodity prices drop, it is likely that drilling activity would be more durable in these plays versus the comparable universe,” he said.

* A valuation “mismatch”

“There is a lot of noise and assumptions used in valuing E&P companies and a good first step is to remove these distortions. What is generally missed with royalty operators is the consistency in their profitability and the ‘multiple’ that should be applied to these businesses given the lower risk,” he said.

* Interest from institutional investors is “still low (but quickly changing)”

“The name is well held by Energy focus funds with TPZ also seeing existing shareholders adding to positions more heavily than peers. Unfortunately, low interest by new shareholders has likely contributed to the small share price increase this year (and low valuation still). We think when(if) TPZ is added to the TSX Composite Index this quarter, it likely is put on the radar screen with many more institutional investors,” he said.

Keeping a “strong buy” rating for Topaz shares, he raised his target to $25 from $24.50. The average is $22.92.