From Scotia:
Tourmaline GORR Acquisition Looks Like Another Great Deal
OUR TAKE: Positive. We are off restriction on TPZ following the close of its $207M equity offering (including over-allotment and private placement). Proceeds from the offering will help fund the company’s ~$278M acquisition of gross overriding royalty (GORR) interests on substantially all the Tourmaline Oil Corp. (TOU-T; SO) acreage and production not already covered by TPZ GORRs. The market liked the deal (TPZ is up ~8% vs.the offering price and ~4% vs. the pre-deal close) and we agree. The acquisition enhances TPZ’s alignment with the top natural gas producer in Canada, adds considerable resource and significant organic growth (including longer-term upside from exploration and delineation projects), and comes at accretive metrics. We continue to see TPZ as the top royalty / income stream name (akin to a top quality ETF on the basin). Our TP moves to $35/share on the accretion from the deal.
Acquisition improves alignment and bolsters long-term growth runway. The acquisition will add ~77 mboe/d of gross production or (~2.3 mboe/d [85% natural gas] of net royalty production) and ~3.0 million gross acres with ~2,250 gross TOU identified drilling locations (with considerable long-term inventory growth potential). TPZ expects the assets to deliver net royalty production of ~2.5 mboe/d to 2.7 mboe/d in 2025 (~13% growth from the 1H/24 average) and generate ~$26.5M of royalty revenue at US$70/bbl WTI and C$2.50/mcf AECO. We estimate ~$24.4M of royalty revenue on current strip (~$30M on the Scotiabank GBM price deck). The deal metrics check in at ~$109,000/boe/d and 11.5x net royalty cash flows (strip) on the 2025 expectations — both highly accretive to TPZ’s pre deal metrics (~$206,000/boe/d and ~13.1x, respectively). More importantly, the deal fills in the gaps for TPZ’s interest in TOU’s production and acreage, boosts TPZ’s gross royalty acreage by nearly 50% to ~8.9 million gross acres (including ~1.1 million gross Montney acres), and adds significant growth upside from the interests in the Bonavista assets (TOU has spoken to plans to grow the production in 2025), Crew Groundbirch project (see our August 12, 2024 note for more details on the project), and other longer-term delineation opportunities not included in our base economic estimates (see Exhibits 2 to 4).
Solid cash flow accretion, strong NAV accretion. The acquisition boosts our 2025 and 2026 CFPS estimates by ~2% and ~4%, respectively, on the Scotia price deck (adjusted for our recent deck change) and ~1% and ~3%, respectively, on strip. Our upstream royalty Sum of the Assets NAV increases by ~7% or ~$2.10/share based on our estimate of ~$457M total asset value for the deal and ~$328 net asset value (net of the purchase price, equity raise, and dilution versus our previous NAV estimate; see side panel. We see the NAV accretion provided by the mid- to long-term growth potential from the acquired assets as the key win from the deal.
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IN today's Globe and Mail:
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Seeing Topaz Energy Corp.’s (
) $278.2-million deal with Tourmaline Oil Corp. for a gross overriding royalty interest in recently acquired lands in Alberta and B.C. as “fair market value for a highly attractive asset,” Desjardins Securities analyst Chris MacCulloch sees the move “positively to the extent that it harmonizes royalty exposure to a premier producer on accretive terms while bolstering long-term visibility through future potential development of Groundbirch.:
“Through the transaction, TPZ adds a GORR on 3.0 million gross acres, thereby expanding corporate royalty acreage by 50 per cent, including a 38-per-cent increase in its Montney position which is expected to deliver 2,450–2,650 boe/d [barrels of oil equivalent per day] (85-per-cent natural gas) of incremental production,” he said. “Moreover, 50 per cent of the acquired rights are on undeveloped lands, offering significant future upside. The additional royalty acreage accounts for a significant portion of TOU’s five-year development plan, with more than 2,200 gross future drilling locations identified, 850 of which are located close to its existing Montney assets. Notably, TPZ also picks up a GORR at Groundbirch.”
Mr. MacCulloch was one of several equity analysts to resume coverage of Calgary-based Topaz following the close of the deal and subsequent equity financing. He sees the move as accretive to cash flow per share while “providing significant future upside.”
“Despite primarily funding the acquisition with equity, the transaction was notionally accretive to our 2025 CFPS estimate, which increased by 2 per cent following the transaction,” he said. “For context, the $278-million purchase price translates into a 10.5 times cash flow multiple, which is accretive vs the stock’s previous strip trading multiple of 12.5 times prior to the acquisition, albeit on the slightly more expensive side relative to recent Canadian royalty transactions, reflecting the relatively early-stage development of the northeast BC Montney assets. We view future development of Groundbirch as one of the key value drivers of the transaction for TPZ, which should support the company’s long-term growth visibility.”
Maintaining his “buy” recommendation for Topaz shares, he bumped his target to $31 from $30. The average is $30.58.
Others making changes include:
* National Bank’s Dan Payne to $33.50 from $32.50 with a “outperform” rating.
“Bottom line, on an absolute or relative value basis, we continue to hold a positive bias towards the quality & tangibility of its portfolio relative to the more indiscernible interests elsewhere within the peers,” said Mr. Payne.
* Canaccord Genuity’s Mike Mueller to $31 from $29.50 with a “buy” rating.
“With the acquisition and enhanced asset base capable of delivering growth alongside a strong partner in TOU, we continue to view the name as a core holding for investors seeking exposure to the sector,” he said.
* TD Cowen’s Aaron Bilkoski to $30 from $28 with a “buy” rating.
“The most recent acquisition with Tourmaline (announced Oct 1), provides Topaz with exposure to Tourmaline’s entire growth trajectory (fills the holes created through TOU’s recent M&A),” he said. “We estimate this transaction was accretive to key metrics while having minimal impact to financial leverage.”
* Scotia’s Cameron Bean to $35 from $34 with a “sector outperform” rating.
“The market liked the deal (TPZ is up 8 per cent vs. the offering price and 4 per cent vs. the pre-deal close) and we agree,” said Mr. Bean. “The acquisition enhances TPZ’s alignment with the top natural gas producer in Canada, adds considerable resource and significant organic growth (including longer-term upside from exploration and delineation projects), and comes at accretive metrics. We continue to see TPZ as the top royalty/income stream name (akin to a top quality ETF on the basin).”
* CIBC’s Jamie Kubik to $31 from $30 with an “outperformer” rating.
* ATB Capital Markets’ Patrick O’Rourke to $31 from $30 with an “outperform” rating.
Topaz Energy Corp
27.04+7.66 (39.53%)