Topaz Energy Announces 2020 Financial, Operating and Reserve Results

Source: www.gulfoilandgas.com 3/17/2021, Location: North America

Topaz Energy Corp. is pleased to announce financial results for the three months and year ended December 31, 2020.

Despite the challenging backdrop of COVID-19, Topaz achieved the strategic objectives it established for 2020 demonstrating the resiliency of its business model. During 2020, Topaz established an independent management team, expanded its board of directors, delivered a reliable and sustainable $0.20 per share quarterly dividend and completed its initial public offering, raising $250.1 million and listing its common shares on the Toronto Stock Exchange in October.

During the year, Topaz invested $171.5 million of capital on additional high free cash flow margin assets which contributed annualized 2020 EBITDA(2) of $19.5 million. To date, Topaz has assembled a material royalty position in the Cretaceous Clearwater play in Alberta with royalty interests on over 190,000 gross acres of developed and undeveloped land which are supported by cumulative capital development commitments of $143.0 million. The Company has also significantly expanded its royalty interests in the WCSB's largest natural gas complex, the Alberta Deep Basin ("Deep Basin"). On January 1, 2021, Topaz acquired royalty interests on 720,000 gross acres of land which Topaz estimates will provide free cash flow(2) growth on a per share basis, of 8%(5) and 12%(5) in 2021 and 2022, respectively.

In 2020, Topaz generated total EBITDA(2) of $89.3 million and paid $73.1 million in dividends. Topaz is a unique, premium energy investment vehicle which is underpinned by its strategic partners' continued focus and commitment to developing Topaz's royalty acreage which enables Topaz to provide a reliable and predictable outcome. Topaz is well funded for growth with cash on hand and a recently expanded, undrawn $300.0 million credit facility.

Topaz commenced its current operations on November 14, 2019. Highlights of Topaz's financial results for the three months ended December 31, 2020 ("Q4 2020"), for the year ended December 31, 2020 ("2020"); as well as significant transactions completed subsequent to December 31, 2020 ("Subsequent Period") and updated guidance estimates for 2021 ("2021") are presented below:

Financial performance
- Generated total revenue and other income(1) of $30.7 million and $99.9 million in Q4 2020 and 2020, respectively.
- Generated EBITDA(2) of $27.1 million and $89.3 million, realizing an EBITDA margin(2) of 88% and 89% in Q4 2020 and 2020, respectively. Royalty activity update
- Topaz's average royalty production(6) for Q4 2020 and 2020 was 10,335 boe/d and 10,144 boe/d, which generated royalty production revenue of $17.6 million and $58.9 million, respectively.
- During Q4 2020, 42 gross wells were spud on Topaz's royalty acreage (36 gross wells on acreage operated by Tourmaline Oil Corp. ("Tourmaline") and 6 gross wells on Topaz's greater Clearwater acreage); 7 of which were brought on production(3) by December 31, 2020. In 2020, 173 gross wells were spud on Topaz's royalty acreage (167 gross wells on acreage operated by Tourmaline and 6 gross wells on Topaz's greater Clearwater acreage); 112 of which were brought on production(3) by December 31, 2020. Topaz expects the additional wells drilled but not completed by December 31, 2020 will be brought on production during 2021. Through February 2021 there were 14 drilling rigs active on Topaz's royalty acreage; activity is expected to reduce to accommodate spring breakup.

Infrastructure activity update
During Q4 2020 and 2020, Topaz generated $10.3 million and $30.8 million, respectively of processing revenue attributed to its non-operated ownership in processing facilities. During Q4 2020 and 2020, average daily utilization of Topaz's net natural gas processing capacity was 100% as Topaz's net processing capacity (71% of which is contracted under fixed take-or-pay) was fully utilized.

During Q4 2020 and 2020, Topaz generated $2.8 million and $10.2 million, respectively, of other income which includes $2.5 million and $9.8 million attributed to its contracted interest in third party infrastructure income and $0.3 million and $0.4 million attributed to interest income, respectively.

Dividends paid
The Company paid dividends of $73.1 million ($0.80 per share) in 2020 representing a payout ratio(2) of 82%. On March 1, 2021, Topaz's Board declared its 2021 first quarter dividend of $0.20 per share which is expected to be paid on March 31, 2021 to shareholders of record on March 15, 2021.

Equity financings
In 2020, Topaz raised total gross proceeds of $395.4 million through a private placement in June and July 2020 consisting of 13.2 million Common Shares for gross proceeds of $145.3 million; and completed its initial public offering in October 2020 ("IPO"). The IPO consisted of a treasury offering by the Company and a secondary offering by its majority shareholder, Tourmaline of an aggregate 20.2 million Common Shares for gross proceeds to the Company and Tourmaline of approximately $250.1 million and $13.0 million, respectively.

Accretive growth transactions
Topaz completed $171.5 million of acquisitions during 2020 including:
- two infrastructure acquisitions for $152.5 million which are supported by 15 year fixed take-or-pay commitments which contributed annualized 2020 EBITDA(2) of $18.5 million; and
- the acquisition of newly created gross overriding royalty interests on production from 149,000 gross acres of developed and undeveloped lands in the Clearwater area for $19.0 million which are supported by $83.0 million of capital development commitments.

Topaz completed $142.0 million of acquisitions during the Subsequent Period including:
- the acquisition, from Tourmaline, of a newly created gross overriding royalty interest from production on 720,000 gross acres of developed and undeveloped lands in the Deep Basin, for total cash consideration of $130.0 million ("Deep Basin Royalty Acquisition"). Tourmaline estimates it will direct approximately $150.0 million per year of its capital plan to the Deep Basin Royalty Acquisition which is expected to increase production by approximately 5% per year over the first two years; and
- the acquisition of a non-operated working interest in pipeline connected water management and conservation facilities for $12.0 million which is underpinned by a 15 year fixed take-or-pay commitment whereby Topaz will generate $27.8 million of processing fees over 15 years and is not responsible for operating costs.

On March 12, 2021, Topaz entered into definitive agreements for the acquisition of a 4% newly created gross overriding royalty on 45,000 acres of developed and undeveloped land in the greater Clearwater area, including a multi-year $60.0 million capital development commitment, for cash consideration of $13.7 million, prior to customary closing adjustments. The acquisition is scheduled to close March 25, 2021.

Funded for growth
Topaz's year end December 31, 2020 adjusted working capital(2) was $238.3 million and its $125.0 million credit facility was undrawn. On February 19, 2021, Topaz completed the syndication, expansion and extension of its undrawn credit facility, expanding to a syndicate of seven Canadian banks; increasing the available borrowing capacity from $125.0 million to $300.0 million; extending the maturity date from June 10, 2022 to February 19, 2024 and reducing the borrowing costs.

2020 Reserves
Proved developed producing ("PDP") net reserves(4) totaled 16.1 mmboe as at December 31, 2020, up from 15.5 mmboe as at December 31, 2019. PDP net reserve value before-tax, discounted at 10%(4) totaled $508.5 million at December 31, 2020, 29% higher than December 31, 2019 ($394.1 million) despite a decrease in the price forecast incorporated in the annual independent reserve evaluations from 2019 to 2020. The increase is primarily attributable to the infrastructure acquisitions Topaz completed during 2020. The Deep Basin Royalty Acquisition closed January 1, 2021 and is not included in Topaz's 2020 reserves. Effective January 1, 2021, the PDP net reserves(4) attributed to the Deep Basin Royalty Acquisition are 3.3 mmboe which represents a 20% increase relative to Topaz's December 31, 2020 PDP net reserves(4).

Social and Governance Initiatives
During the year, Topaz has continued to strengthen its corporate governance foundation including the appointment of a lead independent director; broadening its diversity from an expertise/experience and gender perspective (Topaz's Board is comprised of 75% independent directors, 33% of which are women); establishing its Audit, Reserves and Governance, Compensation & Sustainability Committees; each comprised of independent directors; implementing additional corporate governance policies (available on the Company's website); and implementing a performance based executive compensation plan strongly aligned with shareholders' interests.

Topaz supports a number of community endeavors focused on education and social issues including poverty, homelessness, community outreach and mental health. Organizations supported to date include the United Way, Lionheart Foundation, Inn from the Cold and Habitat for Humanity. Topaz has partnered with the University of Calgary's Haskayne School of Business to participate in its Bachelor of Commerce Co-operative Education Program and has provided a multi-year commitment to provide an annual bursary to a business student demonstrating interest in science, engineering and the Canadian energy sector.

2021 Guidance Update(5)
Topaz's 2021 outlook is supported by our confidence in Tourmaline's continued focus on developing Topaz's royalty acreage; and the strategic partnerships developed with operators in the Clearwater oil play which are underpinned by contractual capital commitments.

Topaz's 2021 guidance estimates are presented in the table below. Topaz's estimates exclude any future acquisitions or deployment of capital pursuant to its growth strategy.

Royalty Activity Update

Royalty production revenue
The Company's royalty production revenue is determined pursuant to the terms of its royalty agreements. The commodity prices for natural gas, light and medium crude oil and natural gas liquids (which are comprised of condensate as Topaz does not currently have any material royalty interests in other natural gas liquids) are based on market index prices in the month of production and Topaz's royalty contracts do not permit transportation or quality deductions. The royalty production volumes are currently marketed with the respective royalty payor's production volume and revenue is generally received two months after the natural gas, crude oil and natural gas liquids volumes are produced. The Company can elect to take its share of the royalty production volume in kind, if desired.

Royalty production revenue during Q4 2020 and 2020 was $17.6 and $58.9 million, respectively. Topaz realized commodity prices consistent with the respective market index for each commodity produced.

Royalty production
Topaz's average royalty production for Q4 2020 and 2020 was 10,335 boe/d and 10,144 boe/d, respectively. During partial Q4 2019 average royalty production was 10,455 boe/d. Topaz generates royalty revenue on existing production and may generate royalty revenue on future development of the royalty lands.

Royalty acreage activity
During Q4 2020, 42 gross wells were spud on Topaz's royalty acreage (36 gross wells on acreage operated by Tourmaline and 6 gross wells on Topaz's greater Clearwater acreage); 7 of which were brought on production(3) by December 31, 2020. In 2020, 173 gross wells were spud on Topaz's royalty acreage (167 gross wells on acreage operated by Tourmaline and 6 gross wells on Topaz's greater Clearwater acreage); 112 of which were brought on production(3) by December 31, 2020. Topaz expects the additional wells drilled but not completed by December 31, 2020 will be brought on production during 2021. Through February 2021 there were 14 drilling rigs active on Topaz's royalty acreage; Topaz expects activity will be reduced in the near term to accommodate spring breakup.

Infrastructure Activity Update
Processing revenue
The Company's processing revenue is generated through its non-operated ownership in processing facilities. The facilities provide processing services to customers on a fee-for-service basis Certain fees include fixed take-or-pay arrangements under long-term commercial arrangements.

During Q4 2020 and 2020, Topaz generated $10.3 million and $30.8 million, respectively of processing revenue attributed to its non-operated ownership in processing facilities. Average daily utilization during Q4 2020 and 2020 of Topaz's net natural gas processing capacity was 100% which is attributed to full utilization of Topaz's net processing capacity (71% of which is contracted under fixed take-or-pay).

Other income
The Company generates income by way of a contracted interest in third party revenue generated through fee-for-service processing contracts with no underlying facility ownership, including but not limited to, processing, compression and water handling revenue, generated at multiple facilities owned by Tourmaline pursuant to the respective third party fee handling agreements. These facilities include natural gas processing plants, crude oil batteries, pipelines, water disposal facilities, compressor stations and other miscellaneous facilities associated with the handling of crude oil, natural gas and natural gas liquids. The facilities are located across all three of Tourmaline's core operating areas and are operated by Tourmaline. Topaz does not have an ownership interest in the underlying assets.

During Q4 2020 and 2020, Topaz generated $2.8 million and $10.2 million, respectively, of other income which includes $2.5 million and $9.8 million attributed to its contracted interest in third party infrastructure income and $0.3 million and $0.4 million attributed to interest income, respectively.


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