CALGARY, AB, March 1, 2022 /CNW/ – Topaz Energy Corp. (TSX: TPZ) (“Topaz” or the “Company”) is pleased to provide fourth quarter and annual 2021 financial results, announce an 8% increase to its quarterly dividend and affirm the Company’s 2022 guidance estimates. Select financial information is outlined below and should be read in conjunction with Topaz’s consolidated financial statements and related management’s discussion and analysis (“MD&A”) as at and for the year ended December 31, 2021, which are available on SEDAR at www.sedar.com and on Topaz’s website at www.topazenergy.ca.
Fourth Quarter 2021 Highlights
- In Q4 2021, Topaz’s assets generated record cash flow and free cash flow (FCF)(1) of $68 million and $67 million, respectively. Cash flow and FCF(1) were 34% and 35%, respectively, higher than the prior quarter; and each 153% higher than the prior year. On a per share basis, Q4 2021 FCF(1) of $0.49 per share(1)(2) increased 96% from Q4 2020 ($0.25 per share).
- Topaz’s Board has approved an 8% increase to the Company’s quarterly dividend which increases the annual dividend from $0.96 to $1.04 per share, and represents the third dividend increase since the inaugural quarterly dividend was set at $0.20 per share in Q1 2020; representing a 30% cumulative increase to date.
- Record Q4 2021 average royalty production of 17,213 boe/d(4) was 14% higher than the prior quarter and 67% higher than Q4 2020. Topaz’s oil-focused royalty acquisition strategy has generated Q4 2021 total liquids royalty production of 3,143 bbl/d(4), a 48% increase relative to the prior quarter and a 329% increase relative to Q4 2020.
- Topaz closed the acquisition of a newly-created 5% gross overriding royalty interest on Whitecap Resources’ working interest in the Weyburn Unit for $188 million in cash, which Topaz estimates will provide a return on invested capital(1) of 14% in 2022, based on estimated 2022 FCF(1) of $26 million(11).
- Topaz was added to the S&P/TSX Composite Index, the headline index for Canada represented by the largest companies on the Toronto Stock Exchange, in December 2021.
- Expanded the Company’s credit facility from $400 million to $700 million(5) and extended the term to December 2025. At December 31, 2021 Topaz had net debt(1) of $234 million, or 0.8x net debt to Q4 2021 annualized cash flow(1).
2021 Annual Highlights
- 2021 cash flow and FCF(1) of $191 million and $188 million, respectively, were each 114% higher than 2020 ($89 million and $88 million, respectively). On a per share basis(1)(2), 2021 FCF(1) of $1.52 per share was 57% higher than 2020 ($0.97 per share).
- Topaz’s 2021 total annual average royalty production of 14,103 boe/d(4) increased 39% relative to 2020, which includes a 157% increase, to 1,892 bbl/d(4) of total liquids annual average royalty production.
- Topaz invested $945 million in royalty and infrastructure acquisitions, excluding decommissioning obligations(1) during 2021 which increased Topaz’s gross royalty acreage 77% and natural gas processing capacity 23%; diversified the Company’s infrastructure portfolio through the acquisition of water conservation facilities under a 15 year 100% fixed take or pay, and doubled its corporate tax pools to $1.8 billion which extends the Company’s long-term cash tax coverage(3). On current strip pricing(3), the cumulative 2021 acquisitions, excluding decommissioning obligations(1) are estimated to generate a return on invested capital(1) of 16% in 2022 based on the acquired assets’ estimated FCF(1) of $149 million(12).
- At December 31, 2021, the before-tax net present value of total proved plus probable reserves, discounted at 10 per cent(6), increased 92% to $1.1 billion (2020 – $592 million).
- Through strategic partnerships, Topaz has enhanced or established material royalty positions and reliable infrastructure revenue streams in the most economic plays across the WCSB. Topaz’s asset portfolio provides embedded organic growth which requires no additional capital by Topaz, as well as significant Excess FCF(1) for self-funded M&A growth after distributions of $1.04 per share (2022 estimated payout ratio(1) 55%).
Fourth Quarter 2021 Update
Royalty Production, Revenue & Activity Growth
- Topaz’s acquisitions have added strategic partnerships with prominent Canadian public E&P operators including Headwater Exploration, NuVista Energy and Whitecap Resources to the Company’s existing portfolio which includes Tourmaline, Tamarack Valley and Advantage Energy. Topaz has additional upside optionality through private operators and its diversified royalty portfolio acquired via the Reserve Royalty acquisition.
- Topaz holds 5.3 million gross royalty acres (over 50% undeveloped) in the most economic plays in the WCSB including the NEBC Montney liquids-rich natural gas resource play and the oil-focused Clearwater, Charlie Lake, Provost and West Central areas in Alberta and Weyburn, Saskatchewan resource plays. The strategically acquired royalty interests provide organic growth as they are supported by committed operator-funded development capital.
- During the fourth quarter, the working interest operators on Topaz’s royalty acreage continued active development; 143 gross wells were spud(7) and 142 gross wells were brought on production(8). This represents a 3% increase in capital activity relative to the prior quarter, when 139 gross wells were spud on Topaz’s royalty acreage.
- Topaz’s Q4 2021 royalty production was 82% weighted to natural gas(4), the price of which has significantly increased over the course of 2021 due to moderated supply growth combined with increasing natural gas demand. The average AECO (5A) benchmark for Q4 2021 of C$4.66 per mcf was 76% higher than Q4 2020.
- Based on planned operator drilling actvity, Topaz expects to have 20 to 24 drilling rigs active on its royalty acreage for the balance of the first quarter of 2022, with activity to resume subsequent to spring break-up(3).
Infrastructure Revenue Stability
- Topaz’s processing revenue provides stable income which supports the Company’s dividend, as 78% of Topaz’s 215 MMcf/d net natural gas processing capacity is contracted under long term fixed take-or-pay and the Company’s variable processing capacity receives priority fill and services high-activity areas. During Q4 2021, average daily utilization of Topaz’s net natural gas processing capacity was 97%, consistent with the prior quarter. During Q4 2021, Topaz generated $16 million of processing revenue and other income compared to $17 million generated in the prior quarter.
Significant Reserves Growth
- At December 31, 2021, the before-tax net present value of total proved plus probable reserves, discounted at 10 per cent(6), increased 92% to $1.1 billion (2020 – $592 million); including $400 million attributed to Topaz’s infrastructure assets, which increased 29% from year end 2020 ($310 million). The increased infrastructure economic value is primarily attributed to the ownership interest acquisitions in the Gundy NEBC Montney facility and water infrastructure facilities for aggregate economic value (discounted at 10 percent) of $85 million.
- Proved plus probable reserve volume(6) totaled 42 mmboe as at December 31, 2021, up 81% from 23 mmboe as at December 31, 2020. As a royalty entity not responsible for capital development, Topaz’s reserve report only includes developed properties (developed producing and developed non-producing) and does not include any future development capital attributed to undeveloped royalty acreage. Topaz’s acquisition growth generated 18 mmboe of proved plus probable reserves, and operator development on Topaz’s royalty acreage generated 6 mmboe of additions which exceeded Topaz’s 5 mmboe of 2021 royalty production by 20%.
Reliable & Sustainable Dividend Increase
- Topaz’s Board has approved an 8% increase to the Company’s quarterly dividend and declared the first quarter 2022 dividend at $0.26 per share which is expected to be paid on March 31, 2022 to shareholders of record on March 15, 2022. The quarterly cash dividend is designated as an “eligible dividend” for Canadian income tax purposes.
- Topaz’s estimated 2022 dividend payout ratio(1) of 55%(3) remains below the Company’s targeted long-term payout of 60-90% in order to retain Excess FCF(1) for self-funded M&A growth given the broad range of opportunities Topaz continues to identify.
- Topaz’s estimated 2022 dividend of $145 million(9) is well supported whereby over 40% of the 2022 dividend is covered by the Company’s stable infrastructure income. To further insulate the Company’s dividend and Excess FCF(1) available for M&A growth opportunities, Topaz has entered into certain financial derivative contracts focused on mitigating natural gas price volatility during the summer months which historically have been more susceptible to pipeline maintenance interruptions. Topaz’s risk management contracts include 25,000 GJ/d contracted April to October 2022 at a weighted average price of $3.73/GJ ($3.94/mcf) which represents approximately 30%(3) of Topaz’s respective natural gas royalty production(10).
2021 EBITDA and Guidance Lookback
- In 2021, Topaz generated EBITDA(1) of $194 million which was 117% higher than 2020 EBITDA(1) of $89 million. Relative to Topaz’s November 2021 guidance update, Q4 2021 average royalty production was 3% higher than the midpoint Q4 estimate which contributed to 2021 average annual royalty production of 14,103 boe/d exceeding the 2021 guidance range of 13,800 – 14,000 boe/d; and Q4 2021 total processing revenue and other income was 4% higher than estimated due to higher third party processing activity.
2022 Guidance Estimates
- Topaz affirms its 2022 EBITDA(1)(3) guidance range between $269 and $271 million, the midpoint of which represents 39% growth over 2021; which is based on internal estimates(13) including commodity prices of C$4.00/mcf for natural gas (AECO) and US$75.00/bbl WTI for crude oil; and average annual royalty production of 16,200 boe/d(4) (midpoint), which represents 15% growth over 2021.
2022 Guidance Estimates(3)(13) C$4.00/mcf AECO / US$75.00/bbl WTI / 0.785 US/CAD FX $mm except boe/d |
|
Annual average royalty production (boe/d)(4) |
16,100 – 16,300 |
Royalty production natural gas weighting(4) |
~78% |
EBITDA(1) |
$269 – $271 |
Capital expenditures (excluding acquisitions) |
$2 – $3 |
Excess FCF(1) (after dividend) |
$114 – $116 |
Dividend ($1.04 per share)(8) |
$145 |
Dividend payout ratio(1) |
55% |
Year end 2022 net debt(1) |
$110 – $115 |
Year end 2022 net debt to cash flow(1) |
0.4x |
2022 EBITDA Guidance Sensitivity(3)(13) |
|
5% annual average royalty production change |
+/- $10 million |
C$0.50/mcf change in natural gas price |
+/- $11 million |
US$5.00/bbl change in crude oil price |
+/- $7 million |
1% change in C$/US$ foreign exchange |
+/- $1 million |
Capital Allocation Strategy & Financial Flexibility
- Topaz continues to identify a number of acquisition growth opportunities and expects to allocate the majority of its 2022 Excess FCF(1) toward M&A growth and to provide future dividend increases alongside further sustainable growth. Topaz’s 2022 guidance estimate provides for $115 million of Excess FCF(1)(3) after paying its 2022 dividend of $145 million(3)(9).
- Topaz estimates its year end 2022 net debt to cash flow(1)(3) will be approximately 0.4x before any further acquisition activity and the Company has a $500 million covenant based unsecured credit facility, expandable to $700 million(1), which provides financial flexibility and growth optionality.
Sustainability Targets & Commitments
- Topaz looks forward to publishing its 2021 Sustainability Report which will include reporting on the Company’s progress toward multi-year sustainability commitments and targets established together with Topaz’s Board, in the areas of:
- Climate change management;
- Responsible water management;
- Corporate governance;
- Community investment;
- Diversity and inclusion;
- ESG integrated investing; and
- Executive compensation.
Additional information
Additional information about Topaz, including the consolidated financial statements and management’s discussion and analysis as at and for the year ended December 31, 2021 as well as the Company’s 2021 Annual Information Form are available on SEDAR at www.sedar.com under the Company’s profile, and on Topaz’s website, www.topazenergy.ca.
Q4 2021 CONFERENCE CALL
Topaz will host a conference call tomorrow, Wednesday, March 2, 2022 starting at 9:00 a.m. MST (11:00 a.m. EST). To participate in the conference call, please dial 1-888-664-6392 (North American toll free) a few minutes prior to the call. Conference ID is 40291211.
ABOUT THE COMPANY
Topaz is a unique royalty and infrastructure energy company focused on generating FCF(1) growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationship with Canada’s largest and most active natural gas producer, Tourmaline, an investment grade senior Canadian E&P company, and leveraging industry relationships to execute complementary acquisitions from other high-quality energy companies, while maintaining its commitment to environmental, social and governance best practices. Topaz focuses on top quartile energy resources and assets best positioned to attract capital in order to generate sustainable long-term growth and profitability.
The Topaz royalty and energy infrastructure revenue streams are generated primarily from assets operated by natural gas producers with some of the lowest greenhouse gas emissions intensity in the Canadian senior upstream sector, including Tourmaline, which has received awards for environmental sustainability and conservation efforts. Certain of these producers have set long-term emissions reduction targets and continue to invest in technology to improve environmental sustainability.
Topaz’s common shares are listed and posted for trading on the TSX under the trading symbol “TPZ” and it is included in the S&P/TSX Composite Index. This is the headline index for Canada and is the principal benchmark measure for the Canadian equity markets, represented by the largest companies on the TSX.