Topaz Energy Inc

Topaz Energy Inc...

Business Overview

---------------------------------------------------------------------------

Strategy

Topaz is a unique royalty and infrastructure energy company focused on generating free cash flow(1) growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationships including one of Canada's largest natural gas producers, Tourmaline Oil Corp. ("Tourmaline"), an investment grade senior Canadian E&P company, and leveraging industry relationships to strategically invest in additional income generating assets to provide growth. Topaz focuses on top quartile energy resources best positioned to attract capital in order to generate sustainable long-term growth and profitability.

The Company's business model is designed to provide investors with exposure to the best attributes from each of the royalty and infrastructure energy segments: (i) royalty production revenue generated from gross overriding royalty (“GORR”) production whereby the Company receives market indexed pricing (net of a 1% marketing fee) with no associated operating or capital costs and underpinned by a transparent growth outlook; (ii) processing revenue generated through its non-operated ownership interests in infrastructure assets whereby the Company has fixed take-or-pay arrangements with high-quality counterparties under long-term commercial arrangements with minimal associated operating and capital costs; (iii) other income which is generated by way of a contracted interest in third party revenue generated through fee-for-service natural gas processing contracts with no underlying facility ownership and therefore no associated operating or capital costs; (iv) modest corporate overhead costs; (v) long-term horizon before income tax would be payable; and (vi) transparent outlook to the Company's opportunistic growth prospects.

Topaz intends to use the majority of its free cash flow(1) to pay dividends to shareholders and the Company has a long-term payout ratio(1) target of 60-90%. The Company’s Board of Directors (the “Board”) has established a dividend policy pursuant to which the Company intends to pay an annual dividend in the amount of $0.80 per Common Share on a quarterly ($0.20 per share) basis, which represented a payout ratio(1) of approximately 65% for the three months ended March 31, 2021. 

Asset Overview

Topaz’s income streams are generated primarily from Canadian natural gas which has among the lowest emissions in the world, and Topaz’s capital facilitates growth of clean Canadian natural gas. Topaz’s investment criteria is focused on high quality, long life assets, strong risk-adjusted economic returns and investments that facilitate cost-optimizing environmental performance improvements.

The Company's high-quality assets and associated income streams are comprised of:

(i) gross overriding royalty interests (“the Royalty Assets”) on approximately 3.0 million gross acres of developed and undeveloped lands from which the Company receives royalty production revenue based on the associated natural gas, crude oil and natural gas liquids production and market indexed pricing (the "Royalty Production Revenue"); and

(ii) non-operated ownership interests in four natural gas processing plants and pipeline connected water management and conservation facilities from which the Company is entitled to receive processing revenue from processing services provided to customers on a fee-for-service basis, the majority of which is subject to long-term fixed fee take-or-pay agreements (the "Processing Revenue"); and a contracted interest in a portion of third-party revenue generated from facilities owned by Tourmaline through fee-for-service agreements with third parties to which Tourmaline is a party for the processing and handling of petroleum and related operations (the "Other Income") (collectively, the "Infrastructure Assets").

The Company's dynamic and scalable business model is designed to provide investors with exposure to sustainable long-term returns:

(i) the Company’s management does not handle day to day operational decisions relating to the development of its assets, they are able to focus their resources on carrying out the Company’s growth strategy of identifying and executing on energy investment opportunities;

(ii) economic returns are focused on income streams; Topaz has limited exposure to operating and capital costs, development timing and execution;

(iii) infrastructure fixed income that provides confident return of capital;

(iv) gross royalties that capture embedded upside at no incremental cost; and

(v) innovative financing solutions of non-dilutive capital which is strongly aligned with enhancing sustainability

Background

Topaz was reorganized in November 2019 to acquire certain royalty and infrastructure ownership and revenue interests. Pursuant to an asset purchase and sale agreement dated November 14, 2019, Topaz acquired its formative assets from Tourmaline Oil Corp. for total cash and share consideration with an assigned value of $637.0 million (the “Initial Acquisition”). The assets acquired pursuant to the Initial Acquisition included: (i) a newly created gross overriding royalty interest on natural gas, crude oil, and natural gas liquids production on 100% of Tourmaline's existing developed and undeveloped lands; (ii) a nonoperated 45% jointly owned interest in two of Tourmaline's existing natural gas processing facilities, supported by newly created long-term take-or-pay commitments from Tourmaline in relation to the two facilities; and (iii) a newly created contracted interest in a portion of certain third-party revenues generated by natural gas processing and handling agreements to which Tourmaline is a party. The cash portion of the consideration for the Initial Acquisition was funded by an equity financing in November 2019 of 20.9 million Topaz common shares at a price of $10.00 per share.

On June 29, 2020 (tranche one) and July 6, 2020 (tranche two), Topaz completed a private placement of an aggregate of 13.2 million common shares of the Company for total gross proceeds of $145.3 million. On October 26, 2020 Topaz completed its initial public offering consisting of a treasury offering by the Company and a secondary offering by its majority shareholder, Tourmaline. Inclusive of the full exercise of the underwriters’ over-allotment option (on November 9, 2020), an aggregate of 20.2 million Common Shares at a price of $13.00 per Common Share were raised, for gross proceeds to the Company and Tourmaline of approximately $250.1 million and $13.0 million, respectively.

As at May 6, 2021 there were 112,607,280 Common Shares outstanding, of which Tourmaline held 51.6%. The Common Shares trade on the Toronto Stock Exchange under the symbol "TPZ".

------------------------------------------------------------------------------------

Sources

https://topazwebsite.cdn.prismic.io/topazwebsite/5a95ad41-b174-4158-9426-033dee416846_Topaz+Q1+2021+Report+-+May+6+2021+Final.pdf

https://topazenergy.ca/investors/