Topaz Energy Corp. (TPZ) (“Topaz”) is pleased to announce financial results
for the second quarter of 2021 and increased 2021 guidance estimates incorporating acquisition activity. Capital allocation strategy
- Topaz’s hybrid royalty and infrastructure business provides transparent, embedded & self-funded growth and balanced
commodity exposure. Through execution of the Company’s acquisition growth strategy, Topaz has doubled its second
quarter total revenue and other income(1) from the prior year with a corresponding increase of over 2.0 times on both
EBITDA(2) and FCF(2). On a per share basis, Topaz’s FCF(2) increased 52% from $0.21 per share in Q2 2020 to $0.32
per share in Q2 2021 and Topaz estimates it will generate 2021 FCF(2)(5) of $1.41 per share which represents 45%
growth from 2020 ($0.97 per share).
- Since its first quarter of full operations (Q1 2020) Topaz has paid a stable quarterly dividend of $0.20 per share which
was recently increased by 5% to $0.21 per share. Topaz’s increased 2021 guidance provides for approximately $173.0
million of FCF(2)(5), and Topaz’s indicative 2021 dividend of $102.0 million is supported through stable infrastructure
FCF(2) (53%(5)) with the balance supported at commodity prices of C$1.50/mcf AECO and US$45/bbl WTI. Topaz
estimates it will generate $71.0 million in excess FCF(2)(5) in 2021. Given the continued opportunity-rich M&A
environment, Topaz’s primary capital allocation focus is to pursue accretive growth acquisitions and Topaz will continue to review its dividend with a targeted payout range of 60 – 90%.
Acquisition strategy
- Since January 1, 2020 Topaz has invested approximately $878.0 million in cumulative royalty and infrastructure
acquisitions which Topaz estimates will generate $95.0 million of FCF(2)(5) in 2022, representing an 11% FCF yield(2)(5).
Topaz’s royalty acquisitions are underpinned by committed operator capital and combined with its formative royalty
assets, Topaz estimates its 2020 to 2023 compound annual royalty production growth rate to be 17%(5) which provides
embedded future growth with no further capital investment required by Topaz.
- Following the August 1, 2021 close of Topaz’s recently announced NEBC Montney royalty acquisition comprised of 296,000 gross acres of developed and undeveloped land and approximately 50,000 boe/d of liquids-rich natural gas production, Topaz will own royalty interests on substantially all of Tourmaline’s acreage. Topaz is well poised for growth as Tourmaline has shifted its focus to optimization of organic growth opportunities given its significant
consolidation initiatives have been completed.
- Topaz will focus on accretive acquisitions with third parties operating high quality, economically resilient growth assets
as well as continue to evaluate other opportunities in order to further diversify its investment portfolio. Topaz’s acquisition growth strategy is to utilize its excess FCF(2) as well as available borrowing capacity through its $300.0
million syndicated credit facility while maintaining a net debt (cash) to EBITDA (2)(5) ratio approximating 1.0 times.
Highlights of Topaz’s financial results as at and for the three and six months ended June 30, 2021 as compared to the three
and six months ended June 30, 2020 (“Q2 2021,” “YTD 2021,” “Q2 2020” and “YTD 2020,” respectively), as well as significant
transactions completed subsequent to June 30, 2021 (“Subsequent Period”) are presented below:
Financial performance
- Total revenue and other income(1) of $41.0 million for Q2 2021 was double the $20.0 million generated in Q2 2020.
The significant increase was driven by 24% royalty production volume growth, 99% higher processing revenue and a
56% increase in natural gas (AECO) pricing.
- Generated 84% higher total revenue and other income(1) in YTD 2021 ($78.7 million) compared to YTD 2020 ($42.8
million) which was driven by 18% royalty production volume growth, 87% higher processing revenue and a 55%
increase in natural gas (AECO) pricing.
- Generated more than 2.0 times higher EBITDA(2) and FCF(2) in Q2 2021 ($37.3 million and $37.2 million respectively)
compared to Q2 2020 ($17.4 million and $17.2 million respectively) which represented an EBITDA margin(2) of 91%
and 87% during the respective periods. On a per share basis, second quarter FCF(2) grew 52% from 2020 to 2021.
For the six month periods ended June 30, EBITDA(2) and FCF(2) both grew 88%, from $38.3 million and $37.9 million
respectively in 2020 to $71.9 million and $71.2 million, respectively in 2021.
Royalty activity update
- Topaz’s average royalty production(4) of 12,265 boe/d during Q2 2021 grew 24% from 9,891 boe/d during Q2 2020.
Royalty production revenue of $27.4 million during Q2 2021 was 2.3 times higher than the $11.9 million generated
during Q2 2020.
- Topaz’s average royalty production(4) of 12,005 boe/d YTD 2021 grew 18% from 10,134 boe/d during YTD 2020.
Royalty production revenue of $51.6 million YTD 2021 grew 95% from $26.4 million YTD 2020. The increased production volume and royalty production revenues are attributed to gross overriding royalty acquisitions, volume growth attributed to Topaz’s existing royalty assets and improved commodity pricing (55% increase in natural gas (AECO) and 70% increase in crude oil (NYMEX WTI)).
- During Q2 2021, 70 gross wells(6) were spud on Topaz’s royalty acreage (42 gross wells on acreage operated by Tourmaline and 28 gross wells on acreage operated by other Topaz counterparties) and 50 gross wells were brought
on production(3) which represents a 2.7 times increase in drilling activity relative to Q2 2020, when 26 gross wells were
spud on Topaz’s royalty acreage (all operated by Tourmaline).
? During YTD 2021, 149 gross wells(6) were spud on Topaz’s royalty acreage (110 gross wells on acreage operated by
Tourmaline and 39 gross wells on acreage operated by other Topaz counterparties) and 120 gross wells were brought
on production(3) which represents a 2.2 times increase in drilling activity relative to YTD 2020, when 67 gross wells
were spud on Topaz’s royalty acreage (all operated by Tourmaline).
Infrastructure activity update
- During Q2 2021, Topaz generated $10.6 million processing revenue attributed to its non-operated ownership in
processing facilities which is 2.0 times higher than Q2 2020 ($5.3 million). During Q2 2021 and Q2 2020, average
daily utilization of Topaz’s net natural gas processing capacity was 98% and 100%, respectively (75% and 58% of
which is contracted under fixed take-or-pay, respectively).
- During YTD 2021, Topaz generated $21.0 million processing revenue attributed to its non-operated ownership in
processing facilities which is 1.9 times higher than YTD 2020 ($11.3 million). During YTD 2021 and YTD 2020, average
daily utilization of Topaz’s net natural gas processing capacity was 98% and 100%, respectively (74% and 58% of
which was contracted under fixed take-or-pay, respectively).
- During Q2 2021, Topaz earned $2.9 million, or 4% higher other income ($2.8 million attributed to its contracted interest
in third party infrastructure income and $0.1 million of interest income) compared to Q2 2020 ($2.8 million attributed
to contracted interest in third party infrastructure income and $nil of interest income).
- During YTD 2021, Topaz earned $6.1 million, or 20% higher other income ($5.8 million attributed to its contracted
interest in third party infrastructure income and $0.3 million of interest income) compared to YTD 2020 ($5.1 million
and $nil, respectively).
Dividends paid
- The Company paid dividends of $25.7 million ($0.20 per share) in Q2 2021 representing a payout ratio(2) of 69%
compared to $16.0 million dividends paid in Q2 2020 representing a payout ratio(2) of 92%. On July 29, 2021, Topaz’s
Board declared its 2021 third quarter dividend of $0.21 per share which is expected to be paid on September 30, 2021
to shareholders of record on September 15, 2021. This quarterly cash dividend is designated as an “eligible dividend”
for Canadian income tax purposes.
Accretive growth transactions
- During the six months ended June 30, 2021, Topaz completed $316.5 million of acquisitions (all of which were
previously announced):
- cumulative acquisitions of gross overriding royalty interests on developed and undeveloped land as follows:
- 720,000 gross acres in the Alberta Deep Basin, for total cash consideration of $130.0 million;
- 237,600 gross acres in the greater Clearwater area for total cash consideration of $116.5 million
which includes multi-year cumulative capital development commitments of $122.5 million; and
- 300,000 gross acres in the Peace River High area (focused on Charlie Lake rights) for total cash
consideration of $32.0 million which includes a multi-year capital development commitment of $60.0 million;
- the acquisition of a non-operated working interest in pipeline connected water management and conservation
facilities for cash consideration of $12.0 million which is underpinned by a 15-year fixed take-or-pay
commitment; and
- the corporate acquisition of Reserve Royalty Commercial Trust, and its subsidiaries, which hold the Reserve
Royalty assets, for total consideration of $27.3 million which was payable through the issuance of 1,794,886
common shares of Topaz, valued at $14.485 per common share and a working capital adjustment of $1.3 million which was paid in cash.
- During the Subsequent Period, Topaz completed a royalty and infrastructure acquisition and entered into definitive
agreements to acquire additional royalty assets (both of which were previously announced), for cumulative proceeds
of $390.0 million:
- on July 1, 2021 Topaz closed the acquisition from Tourmaline of a newly created gross overriding royalty on
approximately 535,000 gross acres of developed and undeveloped lands in the NEBC Montney play area and
working interest ownership in Tourmaline’s Gundy infrastructure (“NEBC Montney Royalty and Infrastructure
Acquisition”), which is supported by a ten year fixed take-or-pay commitment, for total cash consideration of
$245.0 million; and
- on July 15, 2021 Topaz entered into definitive agreements to acquire a newly created gross overriding royalty
from Tourmaline on approximately 296,000 gross acres of developed and undeveloped land in the NEBC
Montney play area, for total cash consideration of $145.0 million, before closing adjustments (“NEBC Montney Black Swan/Birch Royalty Acquisition”). The acquisition is scheduled to close on August 1, 2021, subject to
satisfaction of customary closing conditions.
Capital resources
- On June 8, 2021, Topaz completed a bought deal equity financing (the “Equity Financing’) and concurrent private
placement whereby Topaz issued a total of 14.3 million common shares at a price of $14.25 per common share which
includes the exercise in full of the over-allotment option granted to the underwriters. Aggregate gross proceeds to the
Company of $203.8 million were used to fund acquisitions. The Equity Financing resulted in Tourmaline’s equity
ownership in Topaz reducing from 51% to 45%.
- Topaz ended Q2 2021 with net debt (cash)(2) of ($167.5) million. On July 1, 2021 Topaz paid $245.0 million cash
pursuant to the NEBC Montney Royalty and Infrastructure Acquisition following which Topaz had net debt (cash)(2) of $77.4 million.
Increased 2021 Guidance Estimates
- Topaz’s 2021 outlook is supported by a significant amount of committed operator capital attributed to Topaz’s royalty
lands and its stable infrastructure revenue portfolio.
- Topaz’s 2021 guidance estimates to incorporate the NEBC Montney Black Swan/Birch Royalty Acquisition scheduled
to close August 1, 2021 provides for an 11% increase in 2021 estimated EBITDA. Topaz’s estimates exclude any
future acquisitions or deployment of capital pursuant to its growth strategy.
