Topaz Energy Corp. is pleased to provide third quarter 2021 financial results and new guidance estimates.
Third Quarter 2021 Highlights
Third quarter 2021 FCF(1) of $49.8 million or $0.39 per share, was 21% higher than the prior quarter, driven by royalty production growth, increased benchmark commodity prices (16% natural gas (AECO) and 7% oil (NYMEX WTI)) and a 23% increase in infrastructure processing revenue and other income.
Record third quarter average royalty production(3) of 15,119 boe/d grew 23% from the prior quarter. Approximately 70% of the quarterly production increase is attributed to royalty acquisitions which closed subsequent to the second quarter.
Record royalty production revenue of $40.6 million, 48% higher than the prior quarter. Topaz's third quarter royalty production was 86% weighted to natural gas, the price of which has significantly increased in 2021 as Canadian natural gas storage deficiencies have created a tightened market. The average AECO (5A) benchmark for the third quarter was C$3.60 per mcf, up 60% from the prior year.
11% increase to Topaz's previous 2021 EBITDA(1) guidance estimate (increased from $176.0 million to $195.0 million), attributed to recent acquisition activity and an increased commodity price outlook. Topaz's Board has also approved its 2022 guidance estimates which provide for approximately $270.0 million of EBITDA(1) (38% growth over 2021) and $130.0 million of Excess FCF(1) which Topaz will allocate toward acquisition growth opportunities and further sustainable dividend increases.
During the third quarter and subsequent period, Topaz has completed $628.0 million of royalty and infrastructure acquisitions which were funded through an equity financing which closed October 26, 2021 as well as availability under Topaz's credit facility, which Topaz recently expanded to $400.0 million. In aggregate, Topaz acquired:
o Newly created gross overriding royalty interests on shale gas, crude oil, and condensate production on approximately 831,000 gross acres of developed and undeveloped lands in the NEBC Montney play area, which established Topaz as the largest Montney royalty holder in Canada;
o A non-operated 10% working interest in the Tourmaline's Oil Corp. ("Tourmaline") Gundy facility complex which is Tourmaline's newest natural gas plant; is situated in close proximity to both TC Energy's North Montney Mainline and Enbridge's 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 ("Gundy Infrastructure Acquisition"). Topaz 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 is only exposed to its working interest share of maintenance capital costs which are expected to be low given the facility was recently built.
o Complementary oil-weighted 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.
o A newly created gross overriding royalty on Whitecap Resources Inc.'s ("Whitecap") 65.3% working interest in the Weyburn, Saskatchewan conventional oil unit which is under carbon dioxide (CO2) enhanced recovery.
Second dividend increase (to $0.24 per share declared for the fourth quarter of 2021) which represents 20% year over year growth during Topaz's first year as a public company. During the same time period, Topaz's dividend payout ratio(1) has compressed from 78% in the third quarter of 2020 to 53% in 2021 as a result of significant high-margin revenue growth which provides enhanced financial flexibility.
Royalty Activity Update
During the third quarter, the working interest operators on Topaz's royalty acreage continued their active drilling operations; 139 gross wells were spud (87 gross wells on acreage operated by Tourmaline and 52 gross wells on acreage operated by other Topaz counterparties) and 111 gross wells were brought on production.(2) This represents 2.0 times higher capital activity relative to the prior quarter, when 70 gross wells 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). The drilling activity was focused in the Clearwater, Charlie Lake, Deep Basin, West Central and NEBC Montney play areas within the WCSB.
Approximately 90% of Topaz's third quarter royalty production was derived from royalty acreage operated by Tourmaline which continues to decrease (100% during the first quarter of 2020, Topaz's first full quarter of operations) as Topaz continues to diversify its asset portfolio with liquids production and other high quality counterparties.
Based on planned operator drilling actvity, Topaz expects to have 20 to 24 drilling rigs active on its royalty acreage during the fourth quarter of 2021.
Infrastructure Activity Update
During the third quarter, Topaz generated $16.6 million processing revenue and other income attributed to its infrastructure portfolio, 23% higher than the prior quarter ($13.5 million). The increase was driven by a 26% increase in Topaz's natural gas processing capacity ownership via its Gundy Infrastructure Acquisition which closed July 1, 2021, and a 29% increase in Topaz's other income, attributed to increased third party activity at non-Topaz owned facilities. During the third quarter, average daily utilization of Topaz's net natural gas processing capacity was 97% (78% of which was contracted under fixed take-or-pay).
Acquisition Growth Strategy Execution
To date during the Company's first two years of operation, Topaz has completed $1.1 billion in cumulative royalty and infrastructure acquisitions which Topaz estimates will contribute $160.3 million to Topaz's 2022 EBITDA,(1)(4) representing a 15% EV/EBITDA yield.(1)(4) The acquisitions have been funded through a combination of cash, debt and equity.
Topaz has completed two equity offerings since its IPO in October 2020 which have provided cumulative gross proceeds of $381.6 million. Combined with a secondary offering completed in September 2021, Topaz has achieved its strategic objective of expanding its free-trading share float and provided new and existing shareholders with enhanced trading liquidity. Tourmaline currently holds 37% ownership of Topaz.
2021-2022 Guidance and Capital Allocation Strategy
Topaz's 2021 2022 outlook is supported by a significant amount of operator capital committed to the development of Topaz's undeveloped royalty acreage in addition to the Company's stable infrastructure revenue portfolio. Topaz's estimates exclude any future acquisitions or deployment of capital pursuant to its growth strategy.
Topaz's 2022 EBITDA guidance of $270.0 million represents 38% growth over 2021, 23% on a per share basis, and includes 17% royalty production growth and 5% higher infrastructure revenue. Topaz estimates its year end 2021 net debt will be approximately $230.0 million (1.2x net debt / cash flow) which is expected to reduce to less than $100.0 million (0.4x net debt / cash flow) at year end 2022 before any further acquisition activity.
Topaz's 2022 guidance provides for $130.0 million of Excess FCF which Topaz estimates could provide 5-10% additional EBITDA growth. Topaz continues to identify and evaluate a meaningful number of M&A opportunities and plans to allocate capital toward accretive growth acquisitions and sustainable dividend increases.
Topaz recently published its inaugural Sustainability Report which discusses how Topaz integrates ESG throughout its investment strategy in order to generate solid risk-adjusted financial returns, and verifies Topaz as a high quality, low-emissions royalty and infrastructure energy investment. Topaz's most recently completed royalty acquisition in Whitecap's conventional oil unit which is estimated to sequester 2 million tonnes of CO2 annually, further demonstrates this strategy. Topaz believes it can provide its shareholders with access to the best attributes of the energy sector, providing lower risk, high margin commodity exposure underpinned by positive environmental impacts.
The Company paid dividends of $27.0 million ($0.21 per share) in the third quarter of 2021 representing a payout ratio(2) of 53%. Topaz's Board has approved a 14% increase to its quarterly dividend and declared its 2021 fourth quarter dividend of $0.24 per share which is expected to be paid on December 31, 2021 to shareholders of record on December 15, 2021. This quarterly cash dividend is designated as an "eligible dividend" for Canadian income tax purposes.
Topaz's 2022 dividend of $133.6 million is well supported by its estimated 2022 infrastructure FCF(2) of $56.0 million as 78% of Topaz's natural gas processing capacity is fixed under long term contract and its variable processing capacity continues to realize over 95% utilization. Combined with the stable infrastructure revenue, Topaz's dividend is covered at very low commodity prices of C$1.50/mcf AECO and US$45 WTI.