Topaz Announces Strategic Acquisitions of Royalty & Infrastructure Assets

Source: www.gulfoilandgas.com 5/18/2021, Location: North America

Topaz Energy Corp. is pleased to announce that in furtherance of its growth strategy of acquiring low-risk, premium growth royalty interests complemented by stable infrastructure revenue to generate free cash flow(1) growth, it has entered into definitive agreements with Tourmaline Oil Corp. (“Tourmaline”) for the purchase of gross overriding royalty interests on approximately 535,000 gross acres in the NEBC Montney and working interest ownership in Tourmaline’s Gundy infrastructure which is supported by a ten year fixed take-or-pay commitment, for total cash consideration of $245.0 million (the "NEBC Montney Acquisition"); and purchased from Cenovus Energy Inc. (“Cenovus”), its existing gross overriding royalty interests on approximately 192,000 gross acres in the Marten Hills Clearwater area of Alberta operated by Headwater Exploration Inc. (“Headwater”) for total cash consideration of $102.0 million (the “Clearwater Acquisition”). The NEBC Montney Acquisition and the Clearwater Acquisition are, together, the "Strategic Acquisitions".

The aggregate cash consideration payable in connection with the Strategic Acquisitions of $347.0 million will be funded through a $175.0 million bought deal equity financing (“Equity Financing”) and Topaz’s existing cash on hand and credit facilities.

Acquisition Highlights
• Increased royalty position in amongst the fastest growing, most economic crude oil and natural gas plays in North America
o 134% increase to Topaz’s NEBC Montney royalty lands (Montney rights) to 503,000 gross acres
o 89% increase to Clearwater royalty lands (Clearwater rights) to 366,800 gross acres

• Well capitalized, amongst the best-in-class industry operators positioned to deliver long-term growth
o Tourmaline’s production from the NEBC Montney Acquisition lands is expected to grow from approximately 22,600 boe/d(2) currently to over 100,000 boe/d by 2030(9)
o Headwater’s production from the Clearwater Acquisition lands is expected to grow from approximately 4,600 bbl/d(2) of crude oil currently to a sustainable production base of 13,000 – 14,000 bbl/d(5)

• Expanded long-term contracted infrastructure portfolio with a new take-or-pay contract
o Non-operated 10% working interest in Tourmaline’s newly built, leading-edge, anchor Montney infrastructure in Gundy at which capacity is currently being doubled to 400 MMcf/d(6) (the “Gundy Facility Complex”)
o $10.2 million fixed annual infrastructure EBITDA(1) pursuant to a ten-year fixed take-or-pay from an investment grade senior Canadian E&P company which provides 32% growth to Topaz’s existing long-term fixed take-or-pay revenue portfolio

• Enhanced EBITDA,(1) long-term free cash flow(1) growth profile and increased dividend
o Before consideration of Tourmaline and Headwater’s remaining 2021 capital development activity, the Strategic Acquisitions provide $24.9 million March 2021 annualized EBITDA(3)(4); which represents 18% growth to Topaz Q1 2021 annualized EBITDA(3)(4) and together with the Equity Financing, provide 6% free cash flow per share growth(3)(4)
o 5% dividend increase to $0.84 per share annually with a 2021 estimated payout ratio(1) within the lower end of Topaz’s targeted range of 60-90%

• Strong pro forma balance sheet provides financial flexibility to continue acquisition strategy
o Q1 2021 proforma net debt(4) of $77.4 million (0.5x pro forma net debt(4) to 2021 annualized adjusted pro forma EBITDA(3)(4))
o Over $200 million in liquidity available on existing $300 million credit facility

• Complementary to Topaz’s ESG-integrated investment strategy
o Tourmaline has amongst the lowest net emissions of senior Canadian producers
o Headwater has a high-quality Clearwater acreage position and expects to minimize its environmental footprint with pipeline connected multi-well pad development

Topaz Acquisition Benefits
Topaz believes the Strategic Acquisitions provide a strategic opportunity to partner with Tourmaline and Headwater, each of whom are well capitalized and proven, amongst the best-in-class, industry operators. The Strategic Acquisitions are expected to deliver near and long-term growth for Topaz consisting of fixed annual infrastructure EBITDA(1) of $10.2 million for ten years and no capital expenditure requirements beyond Topaz’s working interest share of maintenance capital; royalty production revenue from current production of approximately 27,200 boe/d(2) (38% crude oil and natural gas liquids); and long-term growth in conjunction with the acceleration of Tourmaline and Headwater’s future capital development. The Strategic Acquisitions are expected to provide Topaz with $24.9 million March 2021 annualized EBITDA(3)(4) which represents 18% growth to Topaz Q1 2021 annualized EBITDA(3)(4); and together with the Equity Financing, provide 6% free cash flow per share growth(3)(4). Topaz estimates it will derive further acquisition benefits as Tourmaline and Headwater execute their planned future capital development activities.

Strategic Rationale

NEBC Montney
The NEBC Montney is well known as the most prolific liquids-rich natural gas resource in Western Canada due to its vast geographic coverage and significant reserve potential. According to Canada’s Energy Regulator, B.C. natural gas production continues to increase at a faster rate than other Canadian natural gas production; 2020 average annual B.C. natural gas production of 5.4 Bcf/d more than doubled from 2.6 Bcf/d in 2005; and development of tight gas in the Montney is the primary factor behind B.C.’s gas production doubling between 2006 and 2018(7). Topaz estimates that the B.C. Montney is expected to provide the largest natural gas production growth in the WCSB over the next decade.

In recent years, leading industry participants have made significant multi-year capital investments which continue to unlock the resource potential of the NEBC Montney including: (1) LNG Canada’s $40 billion LNG export project which is expected to come online by the mid-2020s; require approximately 1.9 Bcf/d of natural gas supply; and if expanded would require up to 4 Bcf/d of natural gas supply (“LNG Canada”); (2) TC Energy’s Coastal GasLink natural gas pipeline project which is anticipated to deliver natural gas across Northern B.C. to LNG Canada; (3) TC Energy’s recently completed North Montney Mainline, a $1.1 billion extension of the NGTL system in the North Montney; and (4) Enbridge’s significant pipeline expansion of the northern section of its critical pipeline infrastructure in B.C.

Alberta Clearwater
The Clearwater play in Alberta ranks amongst the most economic and fastest growing oil plays in the WCSB. It is characterized by strong economic and environmental characteristics including low well costs, moderate initial decline profiles, competitive netbacks, decreased land usage through the use of multi-leg drilling, and minimal water and no sand requirements as the completion operations do not require fracture stimulation. The total recoverable resource in the Alberta Clearwater continues to expand with success from exploration drilling and the play is well suited for future enhanced oil recovery projects.

Overview of the Acquired Assets

NEBC Montney Royalty Assets
Pursuant to the NEBC Montney Acquisition, Topaz will acquire a newly created gross overriding royalty interest on shale gas, crude oil, and condensate production on approximately 535,000 gross acres of developed and undeveloped lands (288,000 gross acres of Montney rights) which Tourmaline has acquired over the past year pursuant to its NEBC Montney consolidation strategy. The gross overriding royalty interest to be acquired by Topaz is: i) 4% on shale gas production until December 31, 2022 and 3% thereafter; and ii) 2.5% on crude oil and condensate production. Tourmaline has identified approximately 1,700 gross future drilling locations on the underlying lands. The NEBC Montney Acquisition Montney royalty lands will increase Topaz’s existing, 215,000 gross acres of contiguous NEBC Montney royalty lands by 134%.

NEBC Montney growth strategy
The NEBC Montney Acquisition assets’ current production is approximately 22,600 boe/d(2) (25% crude oil and natural gas liquids). Tourmaline expects that over the next five years, its North Montney growth will shift to the greater Conroy area where it envisages development of a separate new operated complex ultimately producing at similar levels to its Gundy core complex, which is currently producing over 60,000 boe/d(2) which Tourmaline has grown through development drilling.

During the winter of 2020, Tourmaline drilled a five-well pad in its 2020-acquired Laprise-Conroy area of NEBC, which tested at a combined final rate of 46 MMcf/d of shale gas and 3,970 bbl/d of natural gas liquids (primarily condensate) after three day per well flow tests(8).

NEBC Montney Infrastructure Assets
Topaz will also acquire a non-operated 10% working interest in the Gundy Facility Complex pursuant to the NEBC Montney Acquisition. The Gundy Facility Complex is Tourmaline’s newest natural gas plant; is situated in close proximity to both TC Energy’s North Montney Mainline and Enbridge’s recent T-North expansion; will be capable of 400 MMcf/d of natural gas processing capacity; and has an operating life in excess of 40 years well supported by underlying Montney reserves. Under the terms of the acquisition of the Gundy Facility Complex, Topaz will not be responsible for capital costs related to the expansion and has negotiated a ten-year fixed take-or-pay commitment, from Tourmaline, during which Topaz will earn a fixed fee of $0.70 per Mcf for 100% of its 40 MMcf/d working interest capacity which will generate $10.2 million of annual fixed infrastructure EBITDA(1) as Topaz will not be responsible for operating costs during the ten-year term. Topaz estimates its working interest share of maintenance capital expenditures related to the Gundy Facility Complex will not significantly change its current annual capital expenditure profile(10). Tourmaline anticipates its Gundy Facility Complex will continue to maintain the full utilization it has realized to date given its position as the anchor to Tourmaline’s North Montney infrastructure.

Alberta Clearwater Royalty Assets
Pursuant to the Clearwater Acquisition, Topaz will acquire Cenovus’ existing gross overriding royalty interest on conventional natural gas, crude oil, and natural gas liquids production on approximately 192,000 gross acres of developed and undeveloped lands in the Marten Hills Clearwater area of Alberta (172,800 gross acres of Clearwater rights) which are operated by Headwater. The Clearwater Acquisition royalty lands will increase Topaz’s existing, 194,000 gross acres of greater Clearwater royalty lands by 89%.

Alberta Clearwater growth strategy
In conjunction with the Q4 2020 acquisition of the Marten Hills assets from Cenovus, Headwater entered into a $100.0 million capital development commitment, of which approximately $37.5 million has been spent to March 31, 2021. Headwater’s crude oil production from the Clearwater Acquisition assets in March 2021 was approximately 4,600 bbl/d(2) of crude oil and Headwater estimates that its Clearwater crude oil production will grow to a sustainable production base of 13,000 – 14,000 bbl/d.(5) Headwater’s 2021 guidance includes capital spending of $105.0 to $110.0 million on these lands.

During Q1 2021, Headwater drilled 12, 8-leg multi-lateral producing wells, 5 horizontal water injection wells, 2 source water wells and 1 stratigraphic test; and commenced initial waterflood injection in April 2021. Headwater has also begun construction on a natural gas plant, jointly-owned with another area operator that is expected to be commissioned in July 2021 which will enable gas conservation from its production in the area.

The Clearwater Acquisition royalty lands include a significant amount of exploration lands. Prior to its divestiture to Headwater, Cenovus drilled seven exploration wells and recent industry activity continues to delineate the exploration lands with wells being drilled and licensed on offsetting lands. Headwater is currently planning to drill additional exploration wells in 2021 and 2022 to further delineate the exploration lands.

Dividend Increase
Topaz will be increasing its dividend 5% to $0.84 per share annually commencing with its third quarter 2021 dividend. This increased dividend represents a 2021 estimated payout ratio(1) within the lower end of Topaz’s targeted range of 60-90%.

Equity Financing
Topaz has entered into an agreement with a syndicate of underwriters co-led by Peters & Co. Limited and BMO Capital Markets (the "Underwriters"), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 12.3 million common shares ("Common Shares") of Topaz at a price of $14.25 per Common Share for gross proceeds of approximately $175.0 million. The Underwriters will have an option to purchase up to an additional 15% of the Common Shares issued under the Equity Financing at a price of $14.25 per Common Share to cover over-allotments exercisable and for market stabilization purposes in whole or in part at any time until 30 days after the closing.

The Common Shares issued pursuant to the Equity Financing will be distributed by way of a short form prospectus in all provinces of Canada and may also be placed privately in the United States to Qualified Institutional Buyers (as defined under Rule 144A under the United States Securities Act of 1933, as amended (the "U.S. Securities Act")) pursuant to the exemption provided by Rule 144A under the U.S. Securities Act, and may be distributed outside Canada and the United States on a basis which does not require the qualification or registration of any of the Company's securities under domestic or foreign securities laws. The Common Shares have not been and will not be registered under the U.S. Securities Act, and this news release does not constitute an offer of securities for sale in the United States. The Common Shares may not be offered or sold in the United States absent registration or an exemption from registration.

Completion of the Equity Financing is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange. Closing of the Equity Financing is expected to occur on June 8, 2021. Closing of the Equity Financing is not conditional on the closing of the Strategic Acquisitions. In the event that the Strategic Acquisitions do not close, the net proceeds from the Equity Financing will be used to fund future acquisitions and for internal working capital purposes.

In conjunction with the Equity Financing, certain officers, directors and employees of Topaz and their associates intend to purchase up to 0.2 million Common Shares at a price of $14.25 per Common Share on a private placement basis.

Topaz Acquisition Funding
Topaz will fund the Strategic Acquisitions through the $175.0 million Equity Financing and Topaz’s existing cash on hand and credit facilities. The Clearwater Acquisition closed May 18, 2021. The NEBC Montney Acquisition is expected to close on or about July 1, 2021 and is subject to customary closing conditions as set forth in the definitive agreements, including the accuracy of representations and warranties and the performance of covenants. Topaz estimates its Q1 2021 proforma net debt(4) will be $77.4 million which represents 0.5x pro forma net debt(4) to Q1 2021 annualized adjusted pro forma EBITDA(3)(4).

Advisors
Peters & Co. Limited is acting as financial advisor to Topaz with respect to the Clearwater Acquisition. Burnet, Duckworth & Palmer LLP is acting as counsel with respect to the NEBC Montney Acquisition, Clearwater Acquisition and the Equity Financing.


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