Topaz Energy Corp. has entered into a purchase and sale agreement with Whitecap Resources Inc. ("Whitecap") to acquire a newly-created 5% gross overriding royalty interest on Whitecap's working interest in the Weyburn Unit (the "Unit") for $188.0 million(2) in cash ("Weyburn Royalty Acquisition"). The Weyburn Royalty Acquisition will be funded through a $131.7 million bought deal equity financing ("Equity Financing") and Topaz's existing credit facilities.
Complementary Royalty Acquisitions
During the third quarter, Topaz completed complementary royalty acquisitions(5) for aggregate cash consideration of $49.9 million(2) (the "Complementary Royalty Acquisitions"). Pursuant to the Complementary Royalty Acquisitions, the Company has acquired newly-created gross overriding royalties on approximately 496,000 gross acres of developed and undeveloped acreage across the greater Clearwater, Provost, Lloydminster and West Central areas in Alberta which are supported by aggregate contractual capital development commitments of $70.0 million.
Topaz Acquisition Benefits
The total cash consideration paid and payable by Topaz pursuant to the Complementary Royalty Acquisitions and the Weyburn Royalty Acquisition (together, the "Strategic Acquisitions") is $237.9 million. Topaz believes the Strategic Acquisitions further enhance its royalty portfolio, providing commodity diversification, enhanced scale and embedded growth. The Strategic Acquisitions' current working interest production is approximately 29,600 boe/d(6) (95% crude oil and natural gas liquids) upon which Topaz acquired newly-created gross overriding royalties ranging from 2% to 5%. The Strategic Acquisitions further demonstrate Topaz's acquisition growth strategy and are expected to provide $30.8 million Estimated Annualized EBITDA(6) to Topaz.
14% Dividend Increase
Topaz has achieved significant free cash flow(1) growth since its inception in November 2019, and is pleased to announce that its Board has approved a 14% dividend increase which results in a $0.24 per share quarterly dividend commencing in the fourth quarter of 2021; the Company's second dividend increase to date in 2021.
Highlights of the Weyburn Royalty Acquisition
• Adds complementary low decline, reliable free cash flow(1) generating assets to enhance Topaz's existing high-quality royalty portfolio
o The Unit is a self-sustaining, low (3%) base decline rate operation that generates strong free cash flow(1) even in a low commodity price environment with production levels that can be maintained with relatively minimal capital investment
o To date, the Unit has produced approximately 540 million barrels out of an original oil in place estimate of 2.3 billion barrels(3). At current production levels, the Unit has a proved plus probable developed producing reserve life index of 17 years and a proved plus probable reserve life index of more than 24 years(3)
o The Unit has effectively captured over 36 million tonnes of CO2(4) over the past 20 years; the technical reliability of which has become internationally recognized
• Well capitalized, amongst the best-in-class, ESG-attentive operator positioned to deliver long-term value
o Whitecap is one of the largest, most active oil operators in the WCSB and sequesters more greenhouse gas emissions (CO2) than it produces which results in "negative" net corporate CO2 emissions(7)
o The Unit's strong capital efficiencies attract a reliable allocation of Whitecap's annual maintenance capital
• Strategic growth execution which illustrates Topaz's ESG-integrated investment strategy and provides an enhanced free cash flow per share(1) Topaz growth profile
o High-quality commodity and counterparty diversification enhances long-term value for Topaz shareholders
o Strong near-term, low-decline royalty production growth enables methodical, sustainable dividend increases and further shareholder returns
Overview of the Weyburn Royalty Acquisition
The Unit, discovered in the 1950's and currently operated by Whitecap (who holds a 65.33% working interest), is a conventional unitized oil field under carbon dioxide ("CO2") enhanced oil recovery encompassing approximately 53,360 acres located in southeast Saskatchewan. The Unit is the largest anthropogenic carbon capture, utilization and storage ("CCUS") project in the world; is expected to continue to sequester carbon at a rate of approximately 2 million tonnes per year; and is internationally recognized as one of the most successful developments of its kind from a technical, economic and environmental perspective. The captured CO2 acts like a solvent to enhance oil recoverability as it flushes otherwise unrecoverable oil from pores in the rock. Whitecap has long-term contracts in place whereby it acquires pipeline-connected CO2 from the coal-fired Boundary Dam Power Station in Estevan, Saskatchewan and a coal gasification project in North Dakota; which avoids the release of the majority of their CO2 generation. Significant expansion opportunities remain to expand the Weyburn CO2 flood and further mitigate a low (3%) base decline rate and low greenhouse gas ("GHG") emissions intensity.
Topaz has entered into an agreement with a syndicate of underwriters co-led by Peters & Co. Limited and National Bank Financial Inc. (the "Underwriters"), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 7.7 million common shares ("Common Shares") of Topaz at a price of $17.10 per Common Share for gross proceeds of approximately $131.7 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 $17.10 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.
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 or before October 26, 2021. Closing of the Equity Financing is not conditional on the closing of the Weyburn Royalty Acquisition. In the event that the Weyburn Royalty Acquisition does 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 a minimum of 145,000 Common Shares at a price of $17.10 per Common Share on a private placement basis.
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.
No securities regulatory authority has either approved or disapproved of the contents of this news release. This news release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful.
Topaz Acquisition Funding
Topaz will fund the Weyburn Royalty Acquisition through the $131.7 million Equity Financing and Topaz's existing credit facilities, which is expected to close concurrently with the Equity Financing on or before October 26, 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.