Tourmaline Oil Corp. (TSX:TOU) (“Tourmaline“) is pleased to announce the formation of Topaz Energy Corp. (“Topaz“), a new private royalty and infrastructure energy company. Tourmaline will sell to Topaz: a royalty interest on Tourmaline lands, a non-operated interest in two of Tourmaline’s existing 19 natural gas processing plants, and a contracted interest in a portion of Tourmaline’s current third-party revenue for total cash and share consideration of $775 million.
Topaz will be a low-risk, high-distribution, hybrid royalty and infrastructure energy company with long-term growth plans. Topaz will be capitalized initially with a $150 to $200 million third-party equity private placement, with Tourmaline retaining a 75% to 81% equity ownership interest. Tourmaline intends to reduce a portion of its ownership as Topaz participates in future acquisition activities and an anticipated Topaz public liquidity event in 2020. The initial acquisition from Tourmaline is expected to generate approximately $90 million in revenue(1) in 2020, of which it is anticipated approximately 75% will be paid out in quarterly dividends ($0.80 per share annually, 8% yield).
The assets to be acquired from Tourmaline will consist of three components:
- A gross overriding royalty (“GORR”) on natural gas, oil, and condensate production on 100% of Tourmaline’s existing lands (approximately 2.2 million net acres).
- A non-operated 45% working interest in two natural gas processing plants underpinned by long-term take-or-pay commitments from Tourmaline.
- A contracted interest in a portion of certain third-party revenues generated by natural gas processing and handling agreements.
Upon completion of the transaction and private placement, Topaz will have a majority-independent Board of Directors and will be managed initially via a management contract with Tourmaline. The Topaz GORR will provide for an interest in Tourmaline lands and access to multiple, well-defined, future drilling and growth opportunities, including exposure to future Tourmaline production growth. Topaz will begin operations with zero debt and will have a scalable business model with the potential for additional transactions with Tourmaline and other industry participants.
The transaction with Topaz is expected to close in mid-November 2019 and is subject to customary closing conditions and regulatory approvals. Peters & Co. Limited is acting as exclusive financial advisor to Topaz.
The transaction with Topaz will monetize a portion of the currently-unrealized, substantial-intrinsic value in Tourmaline’s significant infrastructure complex and Tourmaline’s industry-leading low-cost profitable EP business.
This transaction has minimal impact on Tourmaline’s forecast 2020 cash flow and no impact on current EP plans.
- Tourmaline will utilize the gross cash proceeds of approximately $135 to $185 million for potential consolidation activities within the existing three operated core complexes, for debt reduction, and for share buybacks under its existing normal course issuer bid. The transaction will make a top-tier balance sheet even stronger.
- The transaction improves forecast 2020 cash flow per share (debt adjusted)(2) from $6.98 to $7.33, an increase of 5%, assuming the mid-range of the initial proceeds.
- Tourmaline retains an average working interest of approximately 95% in all of its processing infrastructure and will maintain its low operating and corporate cost structure.
- Tourmaline continues to maintain the strong capital discipline required for the free cash flow generation business plan; EP capital spending in Q3 2019 was fully funded by cash flow generated in the quarter. Much stronger anticipated Q4 2019/Q1 2020 AECO prices, coupled with oil/condensate production growth, is expected to continue to improve Tourmaline’s free cash flow.
- At Gundy Ck in the NEBC Montney gas condensate complex, Tourmaline was able to ramp up the new c-60A deep-cut gas plant to the full 200 mmcfpd capability in late August, prior to the start-up of the North Montney pipeline. The ramp up increased overall corporate liquids production (oil, condensate, NGL) to an average of 61,000 – 62,000 bbls/d in September.
(1) Based on Tourmaline’s current five-year plan as contained in Tourmaline’s Corporate Presentation dated September 2019 available on its website.
(2) Assumes a Tourmaline share price of $11 per share. 2020 cash flow per share based on assumptions in Tourmaline’s current five-year plan.