CDDRF - Topaz Energy: Significant Growth Potential

2024-01-14 22:47:18 ET

Summary

• Topaz Energy has expanded its interests beyond Tourmaline and has a significant presence in the Clearwater Play.
• The company operates as a hybrid company, collecting money without the typical upstream risks and providing financing through non-operated investments in midstream interests.
• TPZ:CA has low debt levels and has the potential to exceed typical royalty growth rates with its interests in the emerging Clearwater play.
• The Clearwater Play is likely the lowest-cost major play in North America. This provides some protection against commodity price fluctuations.
• Topaz Energy has more growth potential than many competitors do while offering a decent dividend for investors to wait.

Topaz Energy ( OTCPK:TPZEF ) (TPZ:CA) originally went public with Tourmaline ( OTCPK:TRMLF ) keeping a significant interest in the company. Since then, Topaz has gone onto expand its interests in some significant non-Tourmaline areas. Probably the most significant is the Clearwater Play. As an overriding royalty interest owner, investors have no exposure to exploration risk while collecting some production from currently producing wells on the acreage. This is a safer way to play Clearwater, which is one of the latest basins to begin production in North America.

Topaz Energy is a Canadian company that reports in Canadian dollars unless otherwise stated. The company is a hybrid company that holds both midstream interests as well as overriding royalty interests. The common theme of the business is to collect money without the typical upstream risks or to help provide needed financing through non-operated investments in midstream interests. The company is not an operator. Instead management has elected to be a non-operating investor.

That means that personnel costs are likely to remain low at the company because the company chooses to not operate any of its interests. It also means that cash flow is going to be somewhat similar to both the overriding royalty interest business and the midstream. The midstream interests should provide steady cash flow throughout the business cycle. The royalty interests could vary with upstream activity and commodity prices.

Map Of Operations

The primary locations of operations is Alberta and the neighboring Canadian provinces.

The interesting part o f this is that the company does have debt. Some investors do not like royalty companies to have debt. On the other hand, the debt levels are low for a company with significant non-operated midstream interests.

This company has the upside potential (pattern) of a typical royalty company with some advantages. The extensive interests in the emerging Clearwater play may well allow this company to exceed typical royalty growth rates.

The only warning to that rosy scenario would be that any company that recently goes public makes a big statement by management to its legacy shareholders that it is getting good value for the money. That could mean the stock price "treads water" for a while or even declines to have a "new company" discount until the public track record is built.

This company appears to have far more upside potential in the long-term to mitigate that risk. However, it is very possible that earnings and dividends "go up" while the stock price does not respond as the investor expects for a period of time in the near term.

Largest Material Interests

This company has a significant interest in rich natural gas plays that Tourmaline operates.

This company, like several of these I have either followed or currently follow has the ability to grow faster than the parent company Tourmaline. The growth rate is dependent upon the emphasis in the latest capital budget of Tourmaline.

Many natural gas companies, including Tourmaline have switched to rich gas production because oftentimes, the production stream results in greater well profitability. As a result, a newer company like Topaz Energy often focuses upon the latest area of interest rather than the full company operations. That latest area of interest often grows at the expense of less profitable older areas of production. Therefore, the area that Topaz Energy services through its interest can and likely will grow faster than Tourmaline for some time to come.

One the prime differentiators of the royalty industry compared to this company is the rather extensive interest in the Clearwater play. Long time readers may remember that Topaz Energy purchased the overriding royalt y interest that Cenovus Energy ( CVE ) held for the interests it sold to Headwater Exploration ( OTCPK:CDDRF ). Topaz later followed that up by purchasing an overriding royalty interest from Tamarack Valley ( OTCPK:TNEYF ) and Deltastream . These purchases and more began the start of a significant interest in one of the lowest cost basins in North America.

The significance of this is that many royalty companies purchase an interest over large tracts of land and then wait for any development on that land. Oftentimes, the purchase price includes good and poor acreage. This company has only purchased interest in a low cost basin with a far higher chances of acreage development sooner rather than later (or if at all).

This company is similar to Viper Energy ( VNOM ) in that management is taking an extra step to be "in the right place at the right time" so that the acreage is "sure" to be developed (or at least as sure as is possible in the industry). The tradeoff is of course a higher price for the interest in exchange for that certainty (or quality).

Stock Price

This is yet another company that went public "when no one goes public" because the perceived price received would not be as good as at market tops. But that usually means the quality of the issue is unusually high for investors.

Because the "going public" process usually favors legacy investors over the new investors, it is often a good idea for investors to wait until the stock price inevitably declines after the new issue.

This company went public in 2021. As the stock price action demonstrates, the stock price eventually traded for half the price (approximately) of the new issue price. Normally that happens with something like 95% of all new issues.

What is unusual is that the stock price has quickly rebounded and remained at decent price levels since that time.

Conclusion

The stock remains a strong buy for long term shareholders. The midstream interest is considered an interest in what is known as the utility part of the industry. It somewhat mutes the variability of the upstream overriding royalty interests.

On the other hand, the Clearwater interest is an interest in one of the lowest cost basins in North America. That means that this basin (operating activities) will be one of the least affected by commodity price variations compared to other upstream operating areas.

The dividend is growing rapidly from a low level. That dividend currently represents more than half of what most investors report for long term annual average profits. That makes this an unusual growth and income play that will likely attract many types of investors including risk averse.

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