(Note: This article was published in the September 12, 2022 Newsletter. This is a Canadian company and is reported in Canadian dollars unless otherwise noted.)
Topaz Energy (OTCPK:TPZEF) is a relatively new issue disclosed by Electric Oil (OTCPK:TRMLF). This support from established companies usually reduces the risk of new offerings significantly for many new public companies. The company further mitigate typical oil and gas risks by acquiring the vast majority of royalties and shares in the downstream industry in Canada. This particular market is not as developed in Canada as it is in the United States. Therefore, competition in such transactions is limited. This gives the company an advantage over US competitors.
The company has interests in many areas of the tourmaline business. But management also diversified the company away from tourmaline through a series of deals. The company is leveraging recent trends to rapidly reduce debt by offering first-priority royalties or by acquiring non-operating interests in midstream assets. Markets are more concerned about low or no debt than about the cost of other arrangements. Thus, this company is experiencing rapid growth in some very attractive areas.
This growth occurs without the usual initial risks. However, investors can participate in some of Canada’s hottest pools.
Topaz Energy Management spends a lot of time discussing tourmaline and Tamac Valley’s interests in this and nearby basins. However, one of the most significant assets was ORRI (principal royalty) purchased from Cenovus Energy (CVE) to sell assets to Headwater Exploration (OTCPK:CDDRF). Here’s another fast growing company that I’ve featured that offers yet another way to significantly increase royalties in the coming years.
The Clearwater region may be the fastest growing basin in North America. It definitely has one of the lowest average breakeven costs that I follow. The region benefited from the costs incurred due to the weakening of the Canadian dollar in the sale of goods pegged to the US dollar. Although production is mostly heavy oil, the unusually low costs have resulted in much higher than usual profitability. Thus, development in the region is expected to remain “accelerated” for the foreseeable future.
The company recently announced a major royalty agreement with Deltastream Energy (a privately held company). Tamarck Valley will merge with Deltastream, potentially becoming the largest public entity focused on Clearwater. This means that areas with predominant royalty interests will develop in one way or another.
The strategy here is similar to that of Viper Energy (VNOM) as the company focuses on Tier 1 producers that can lease. The difference is that Viper Energy has a lot of competition for such leases in the US. As a result, interest on purchases tends to cost more. (Off-topic: Another similarity is that Diamondback Energy (FANG) formed Viper Energy Partners, which deals only with royalties.)
On the other hand, Topaz has relatively little competition. As a result, management is free to select leases for earlier development opportunities without paying the US surcharge often seen in basins such as the Permian. Thus, cash flow per share is likely to grow even faster, at least in the near future.
Companies with royalties and shares in the middle of the flow tend to pay the majority of the cash flow. This makes this relatively new company suitable for investors who can accurately predict future cash flow at an acceptable level for the amount currently invested.
Revenues will be somewhat volatile as royalty income will depend on oil prices. Clearwater Play’s rapid growth will take a toll on these gains.
On the other hand, the income of the middle segment of the market is stabilizing. As a result, volatility will be lower than a typical licensed company, but higher than a typical mid-sized company. Valuing such a company would be uncharted territory, as such combinations are rare in the US and uncommon in Canada.
The company itself does not deal in real estate. Therefore, the choice of strong operators is very important. The parent company Tourmaline is known as a very good operator. This is important because development often stops if costs get out of hand.
Likewise, many other carriers are in good financial shape. Again, this is similar to the US Viper energy strategy. This is done in order to minimize the risk that the land will not be developed after paying huge royalties. This minimization, in my opinion, is very successful.
The importance of the Clearwater project in minimizing development risk cannot be overemphasized. The cost of this pool is low as reported by many of the companies I follow. Thus, development is likely to continue, albeit at a slower pace, even in the face of cyclical downturns in commodity prices.
A common royalty payment strategy is to offer a share in a large amount of land with a view to developing it. With current strategies and generally well-received operators, costs may be higher, but future cash flow will also come from growing production, that’s for sure.
It appears that the company is able to continue to sell shares, or at least use shares in transactions to control debt levels, while entering into value-added transactions. Earning royalties from reputed operators is a relatively low-risk way to participate in upstream growth in thermal pools like Clearwater.
Having some interest in the midstream will be a benchmark for cash flows during cyclical downturns in the industry. It is not yet known how the company manages the distribution of this range of products. In good years, special dividends are possible.
In the meantime, management increased the payout again to CAD 0.30 per share. Distribution is likely to continue to grow, at least in the near future.
As an emerging issue, the rising cost of value-added operations, combined with distribution, makes the risk relatively low, but still a decent income for teens. Profitability is likely to be above average as this type of collateral (and business) is relatively rare in Canada, while in the US E&P companies have multiple funding options. This seems to explain the speed with which various benefits are achieved.
The financial position remains stable. Investors who are comfortable with tourmaline’s support may find this question interesting as an investment idea. Others may want to wait until they decide the stock is past due.
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I analyze oil and gas companies and related companies like Topaz Energy in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I analyze oil and gas companies and related companies like Topaz Energy in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. Я анализирую нефтегазовые компании и связанные с ними компании, такие как Topaz Energy, в своей службе Oil & Gas Value Research, где я ищу недооцененные имена в нефтегазовой сфере. I analyze oil and gas companies and related companies such as Topaz Energy in my Oil & Gas Value Research service, where I look for undervalued names in the oil and gas industry. I analyze oil and gas companies and related companies such as Topaz Energy in my oil and gas cost research, where I look for undervalued names in the oil and gas industry. I will tell you everything you need to know about these companies: balance sheets, competitive positions and growth prospects. This post is an example of what I did. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Но участники исследования Oil & Gas Value Research получают его первыми и получают анализ некоторых компаний, который не публикуется на бесплатном сайте. But Oil & Gas Value Research participants get it first and get some company analysis that is not published on the free site. But oil and gas cost study participants get it first, and then they get some company analysis that isn’t posted on the free site. Interested in? Sign up here for a two week free trial.
From time to time writes about the high dividend opportunities of Rida Morwa https://seekingalpha.com/author/rida-morwa/research
Disclosure: I/we hold a profitable long position in CDDRF FANG VNOM CVE stock through equity holdings, options or other derivatives. I wrote this article myself and it expresses my own opinion. I have not received any compensation (other than Seeking Alpha). I have no business relationship with any of the companies listed in this article.
Additional Disclosure: Disclosure: I am not an investment advisor and this article is not intended to be a recommendation to buy or sell shares. Investors are advised to review all documents and press releases of the company to ensure that the company is suitable for them as an investment.
Post time: Oct-05-2022