Pursuant to the Royalty Acquisition, Topaz will acquire a newly created gross overriding royalty interest on natural gas, crude oil, and condensate production on over 720,000 gross acres of Tourmaline’s developed and undeveloped lands in the Alberta Deep Basin (“Deep Basin”), which is contiguous with Topaz’s existing Deep Basin royalty interest acreage, for total cash consideration of $130 million. Topaz will fund the Royalty Acquisition from its available cash on hand.
The Royalty Acquisition is expected to close on January 1, 2021, subject to satisfaction of customary closing conditions including Tourmaline completing a corporate acquisition it announced today.
In the Deep Basin, Tourmaline is the largest producer with 2020 average production estimated at approximately 163,000-168,000 boe/d and since inception, has drilled over 800 gross natural gas wells, with six drilling rigs currently active. Topaz currently owns gross overriding royalty interests on all of Tourmaline’s Deep Basin acreage and the Royalty Acquisition provides a 31% increase to Topaz’s total gross royalty interest acreage and a meaningful expansion of drilling location inventory on its royalty lands. The Deep Basin has well defined, prolific economic resources which provide high quality, long life, liquids rich natural gas reserves with strong estimated ultimate reserve recoveries. In the Deep Basin, an active development program, expansive infrastructure network combined with extensive management and technical experience, have enabled Tourmaline to achieve industry leading cost efficiency and a strong track record of free cash flow generation. Current production from the Royalty Acquisition lands is estimated at 76,000 boe/d which Tourmaline expects will increase to 85,000 boe/d over the next two years in conjunction with an estimated $300 million expansion of its capital plan over the next two years.
Topaz Acquisition Benefits
Pursuant to the Royalty Acquisition, Topaz will acquire a 2% gross overriding royalty interest on natural gas production until December 31, 2021; with a 3% gross overriding royalty interest on natural gas thereafter; and a 2.5% gross overriding royalty interest on crude oil and condensate production from the lands. Topaz estimates that, based on Tourmaline’s estimated capital plan attributable to the Royalty Acquisition lands, the Royalty Acquisition will provide royalty production growth of 12% in 2021, and 24% in 2022. Topaz estimates that, based on current forward commodity prices and Tourmaline’s estimated capital plan attributable to the Royalty Acquisition lands, the Royalty Acquisition will generate royalty production revenue of approximately $9.3 million and $13.0 million in 2021 and 2022, respectively, and free cash flow growth on a per share basis, of over 7% and 12% in 2021 and 2022, respectively. The Royalty Acquisition enhances Topaz’s future growth outlook and is consistent with its strategy to acquire value-enhancing assets that are accretive on a per share basis.
ABOUT THE COMPANY
Topaz is a unique royalty and energy infrastructure company focused on generating free cash flow growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationship with one of Canada’s largest natural gas producers, 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.
This news release contains forward-looking statements and forward-looking information (collectively, “forward-looking statements”) that relate to the Company’s current expectations and views of future events. These forward-looking statements relate to future events or the Company’s future performance. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely result”, “are expected to”, “expects”, “will continue”, “is anticipated”, “anticipates”, “believes”, “estimated”, “intends”, “plans”, “forecast”, “projection”, “strategy”, “objective” and “outlook”) are not historical facts and may be forward-looking statements and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon. These statements speak only as of the date of this news release. In particular and without limitation, this news release contains forward-looking statements pertaining to the following: planned funding for the Royalty Acquisition; expected increases in production from the Royalty Acquisition lands and expansion of Tourmaline’s capital plan over the next two years; estimated royalty production, royalty production revenue and free cash flow per share growth from the Royalty Acquisition lands in 2021 and 2022; expected closing date of the Royalty Acquisition; other expected benefits from the Royalty Acquisition including enhancing Topaz’s future growth outlook and providing value enhancing assets that are accretive on a per share basis; and the Company’s business as described under the heading “About the Company” above. Forward–looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those that are disclosed in or implied by such forward–looking information. Such risks and uncertainties include, but are not limited to, the failure to complete the Royalty Acquisition on the terms or on the timing announced or at all and the failure to realize some or all of the anticipated benefits of the Royalty Acquisition including estimated royalty production, royalty production revenue and free cash flow per share growth, and the factors discussed under “Notice to Investors – Forward-Looking Information” and “Risk Factors” in the supplemented PREP prospectus dated October 19, 2020. Topaz does not undertake any obligation to update such forward–looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable law.
Also included in this news release are estimates of the royalty production revenue and free cash flow per share growth to be generated from the Royalty Acquisition in 2021 and 2022, respectively, which are based on, among other things, the various assumptions as to production levels and capital expenditures and other assumptions disclosed in this news release including the following assumptions: a natural gas price of $2.99/mcf in 2021 and $2.68/mcf in 2022; an average light oil (MSW and PSO) price of $46.53CAD/bbl in 2021 and $46.15CAD/bbl in 2022; a condensate price of $52.10CAD/bbl in 2021 and $50.93CAD/bbl in 2022; a currency exchange rate of $0.76 (US/CAD) in 2021 and 2022; and 109,939,296 Company common shares outstanding. To the extent such estimates constitute financial outlooks, they were approved by management and the board of directors of Topaz on November 4, 2020 and are included to provide readers with an understanding of the royalty production revenue and free cash flow per share growth to be generated from the Royalty Acquisition in 2021 and 2022 based on the assumptions described herein and readers are cautioned that the information may not be appropriate for other purposes.
Non-GAAP Financial Measures
In addition to using financial measures prescribed by International Financial Reporting Standards (“IFRS” or “GAAP”), references are made in this news release to “free cash flow”, which is a measure that does not have any standardized meaning as prescribed by IFRS. Management uses this term for its own performance measures and to provide shareholders and potential investors with a measurement of the Company’s efficiency and its ability to generate the cash necessary to fund dividends and a portion of its future growth expenditures or to repay debt. Accordingly, investors are cautioned that this non-GAAP financial measure may not be comparable to similarly defined measures presented by other entities and should not be considered in isolation nor as an alternative to net income (loss) from continuing operations or other financial information determined in accordance with GAAP as an indication of the Company’s performance. References to “free cash flow” are to the amount of cash estimated to be available for dividends to shareholders in accordance with the Company’s dividend policy and is defined as cash flow less capital expenditures, where “cash flow” is defined as cash from (used in) operations before changes in non-cash working capital.
Per barrel of oil equivalent amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent (6:1). Barrel of oil equivalents (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, as the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
SOURCE Topaz Energy Corp
For further information: Topaz Energy Corp., Marty Staples, President and Chief Executive Officer, (587) 747-4830; Cheree Stephenson, VP Finance and CFO, (587) 747-4830