Topaz Energy Corp. (TSX—TPZ) is going full steam ahead, says Scotiabank analyst Cameron Bean on May 3. He continues to consider TPZ a must-own royalty/income stream name.
1 must-own name to earn oil-and-gas royalties
Due to TPZ’s: top-tier free cash flow (FCF) conversion profile and dividend growth potential; strong asset base/counterparty roster; position as the financial partner of choice for quality explorers and producers in a capital constrained market; and insulation from cost inflation due to minimal capital expense requirements, the analyst gives it “sector outperform” recommendation
Meanwhile Topaz shone bright in another quarter with adjusted funds flow (AFF) and EBITDA (earnings before interest, tax, depreciation and amortization) moderately ahead of Street expectations on higher-than-expected liquids production and about 99 per cent processing capacity utilization. The company’s updated 2022 guidance is largely in line with expectations and anticipates material growth from the Clearwater royalty assets.
Finances/production levels are steady
During the first quarter of 2022, production attributable to Topaz reached 16,100 barrels of oil equivalent (BOE) per day, which was in line with Street expectations. Liquids volumes of about 3,600 barrels per day came in eight per cent above consensus and four per cent ahead of Mr. Bean’s forecast. EBITDA and AFF per share of $76.1 million and $0.53, respectively, were three per cent ahead of consensus expectations.
TPZ spent just $400,000 on maintenance capex during the quarter, resulting in about $73.8 million of FCF and a FCF conversion ratio of 91 per cent. The company allocated about 54 per cent of its FCF to dividend payments ($0.26 per share) during the quarter, one per cent to acquisitions, and the balance toward debt reduction (net debt was down about $39.8 million quarter-over-quarter to $193.9 million).
Looking ahead, Mr. Bean says the company is well positioned to continue growing its dividend. He estimates TPZ’s 2022 dividend payout ratio at less than 45 per cent (of FCF) on current oil-and-gas pricing. With a very manageable payout ratio, he expects another dividend bump in the second half of the year. He also expects additional mergers and acquisitions, using its excess FCF of over $150 million (post dividends).
Cameron Bean is a Toronto-based equity analyst for Scotiabank with a focus on oil and gas.
This is an edited version of an article that was originally published for subscribers in the June 17, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •8/7/22 •