Calculated Acquisitions And Clearwater Projects To Drive Significant Revenue Growth

Key Takeaways

• Acquisition from Tourmaline and high operator activity drive potential growth in royalty production, positively impacting revenue and margins.
  
• Strategic investments and buyout financing enhance operations and revenue without excessive debt, boosting long-term earnings and predictability.
  
• Extensive acquisition activities and reliance on operator production growth introduce financial risks, potentially affecting revenue, margins, and financial stability amid market uncertainties.

Catalysts

Operates as a royalty and energy infrastructure company in Canada.

• The acquisition from Tourmaline Oil Corp., expanding Topaz's royalty acreage by 50% and aligning with Tourmaline's growth projects, could drive significant royalty production growth. This is expected to positively impact revenue.
  
• The Clearwater Natural Gas Gathering Infrastructure project, nearing completion with expected on-stream date in December 2024, is anticipated to boost processing revenue and incremental natural gas royalty revenue from January 2025, potentially enhancing earnings.
  
• Strong operator activity, with a record 216 wells drilled in Q3 2024 and plans for high activity in Q4 2024, indicates continued growth in royalty production volumes, which could increase revenue and possibly improve net margins.
  
• The successful buyout deal equity finance and private placement, used to fund acquisitions, suggest a strategy to strengthen operations without excessive debt, potentially leading to improved earnings and revenue growth.
  
• Waterflood and pressure support initiatives in the Clearwater region, leading to lower decline rates and enhanced recovery, could double recovery factors, thereby significantly increasing long-term revenue potential and aiding in revenue predictability.

Topaz Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Topaz Energy's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.7% today to 14.4% in 3 years time.
• Analysts expect earnings to reach CA$64.8 million (and earnings per share of CA$0.46) by about January 2028, up from CA$61.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 84.2x on those 2028 earnings, up from 69.4x today. This future PE is greater than the current PE for the CA Oil and Gas industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 2.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.73%, as per the Simply Wall St company report.

Topaz Energy Future Earnings Per Share Growth

Risks

• The extensive acquisition activities, such as the recent $278.2 million Tourmaline acquisition, while expanding royalty acreage, also increase debt levels, potentially affecting Topaz's net margins and financial stability if revenue expectations are not met.
  
• The reliance on operator activity and associated production growth, particularly from Tourmaline, introduces execution risk. Should operator activity underperform, this could negatively impact expected revenue figures.
  
• The company's leverage strategy allows for up to 2x debt-to-cash-flow for growth opportunities, increasing financial risk if these opportunities do not yield expected increases in cash flow or revenue.
  
• Potential cash taxation starting in 2025 could reduce net margins and earnings, affecting overall profitability and financial flexibility in the future.
  
• Any fluctuations in commodity prices, especially natural gas, or changes in global market conditions could negatively impact Topaz's revenue projections and financial outcomes, given its significant royalty revenue dependency.

Valuation

• The analysts have a consensus price target of CA$32.05 for Topaz Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$451.2 million, earnings will come to CA$64.8 million, and it would be trading on a PE ratio of 84.2x, assuming you use a discount rate of 6.7%.
• Given the current share price of CA$27.85, the analyst's price target of CA$32.05 is 13.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.