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On today’s TSX Breakouts report, there are six stocks on the positive breakouts list (stocks with positive price momentum), and 56 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a company that may soon surface on the positive breakouts list – Topaz Energy Corp. (TPZ-T). The company provides both growth and income to its shareholders. The stock offers investors an attractive dividend yield topping 5 per cent. The stock has a unanimous buy recommendation from 14 analysts with an average target price of $30, implying a potential price return of nearly 40 per cent.

Year-to-date, the share price has rallied just over 20 per cent. Over the past three months, while the S&P/TSX composite index has been volatile and the price of gas has been falling, shares of Topaz have been trading sideways in a range largely between $20 and $22.

A brief outline on Topaz is provided below on the company that may serve as a springboard for further fundamental analysis when conducting your own due diligence.

The company

Calgary-based Topaz is a royalty and energy infrastructure company. For 2022, management expects approximately 75 per cent of royalty production to stem from natural gas.

Topaz was created in 2019 as a spin-off of Tourmaline Oil Corp. (TOU-T). According to Bloomberg, Tourmaline owns approximately 33 per cent of the shares outstanding.

Investment thesis

  • Seasoned leadership team. The chair of the board Mike Rose is the founder of Tourmaline Oil Corp. and was the former president and chief executive officer of Duvernay Oil Corp.
  • Hybrid model: 1) royalty production revenue, and 2) processing revenue from its natural gas processing plants. In the first half of 2022, approximately 83 per cent of total revenue was royalty production revenue.
  • Benefits from elevated commodity prices, levered to natural gas. In 2023, management anticipates 70 per cent of royalty production will stem from natural gas.
  • Hedges provide downside protection. In the third-quarter, approximately 40 per cent hedged on gas at $5.32/mcf and in the fourth-quarter, roughly 35 per cent hedged on gas at $5.43/mcf.
  • High quality assets (plays in the Montney, the Deep Basin, Charlie Lake and Clearwater) through its partnerships with established companies including Tourmaline Oil Corp., Advantage Energy Ltd. (AAV-T), NuVista Energy Ltd. (NVA-T), Tamarack Valley Energy Ltd. (TVE-T) and Whitecap Resources Inc. (WCP-T).
  • Stable revenue from its infrastructure assets (fixed long-term take-or-pay contracts).
  • Healthy balance sheet. Management anticipates exiting 2022 with a net debt-to-EBITDA ratio of roughly 0.9 times.
  • Active on the acquisition front. On Oct. 3, the company completed the Clearwater acquisition of a 5-per-cent gross overriding royalty interest (GORR) with Deltastream Energy Corp. at a cost of $265-million. During the second quarter, management spent $99.6-million on acquisitions.
  • Attractive dividend yield with multiple dividend increases announced.
  • Management has frequently raised its earnings outlook.

Quarterly earnings and outlook

On July 26, the company reported solid second-quarter financial results. Cash flow per share came in at 67 cents, just above the consensus estimate of 66 cents. During the quarter, average royalty production was 16,676 barrels of oil equivalent per day (boe/d), royalty production revenue was $94.8-million, processing revenue totaled $12.9-million, and earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $97.5-million.

In the company’s Oct. 2022 investor presentation, management estimates EBITDA will be $354-million in 2022, including the Clearwater GORR acquisition, rising 12 per cent to $397-million in 2023.

Dividend policy

Last month, Topaz paid its shareholders a dividend of 28 cents per share. However, on Sept. 12, management announced a 7 per cent dividend increase for its upcoming fourth-quarter dividend. The quarterly dividend will increase to 30 cents per share or $1.20 per share yearly, equating to a current annualized yield of 5.6 per cent.

Management has announced multiple dividend hikes. Between July 2021 and Sept. 2022, the company has announced five dividend hikes (July 2021, Nov. 2021, March 2022, July 2022 and Sept. 2022).

In the first half of 2022, the payout ratio stood at 43 per cent. Management targets a long-term payout ratio of between 60 per cent and 90 per cent. Management stated in the second-quarter earnings release, “Topaz’s estimated 2022 dividend payout ratio of 46 per cent remains below the company’s targeted long-term payout of 60 to 90 per cent in order to retain excess FCF [free cash flow] for self-funded M&A [mergers and acquisitions] growth given the broad range of opportunities Topaz continues to identify. Topaz is well positioned for further sustainable dividend increases in 2022 and 2023.”

Analysts’ recommendations

The stock has a unanimous buy recommendation from 14 analysts.

The firms providing research coverage on the company are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, iA Capital Markets, National Bank Financial, Peters & Co. Ltd, Raymond James, RBC Dominion Securities, Scotiabank, TD Securities and Tudor, Pickering, Holt & Co..

Revised recommendations

Since the beginning of September, eight analysts have made minor adjustments to their target prices.

  • ATB’s Patrick O’Rourke to $30 from $29.50.
  • Desjardins’ Chris MacCulloch to $30.50 from $29.50.
  • CIBC’s Jamie Kubik to $29 from $28.
  • iA Capital Markets’ Matthew Weekes to $26 (the low on the Street) from $25.50.
  • Peters’ Tyler Reardon to $36 (the high on the Street) from $35.
  • Raymond James’ Jeremy McCrea to $30 from $29.
  • Scotiabank’s Cameron Bean to $33 from $32.
  • TPH’s Matt Murphy to $28 from $29.

Financial forecasts

According to Bloomberg, the consensus cash flow per share (CFPS) estimate is $2.43 in 2022 and $2.62 in 2023.

Financial forecasts have been rising for next year. Three months ago, the consensus CFPS estimates were $2.43 for 2022 and $2.41 for 2023.

Valuation

Analysts commonly value the stock on an enterprise value-to-debt adjusted cash flow basis.

The average one-year target price is $30.02, suggesting the share price has 40 per cent upside potential. Individual target prices are: $26, $27, $28, two at $29, four at $30, $30.50, $30.75, $31, $33 and $36.

Insider transaction activity

So far in the second half of 2022, there has not been any trading activity in the public market reported by insiders.

Chart watch

Technical analysis is limited given that the stock just began trading on the Toronto Stock Exchange in October of 2020.

Year-to-date, the share price has rallied just over 20 per cent. The share price is up 65 per cent from its initial public offering price of $13 set in Oct. 2020.

Over the past three months, while the S&P/TSX composite index has been volatile, shares of Topaz have been trading sideways in a range largely between $20 and $22.

In terms of key resistance and support levels, the next major ceiling of resistance is between $24 and $24.50. Looking at the downside, the share price has strong technical support around $20, near its 200-day moving average (at $20.75).

ESG Risk Rating

According to risk provider Sustainalytics, Topaz has an ESG (environmental, social and governance) risk score of risk score of 11.1 as of Sept 23, 2022. A risk score of between 10 and 20 reflects a “low risk” rating.

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NEGATIVE BREAKOUTS
AT-TAcuityAds Holding Inc. $2.18
BOS-TAirBoss of America Corp $8.09
ADW-A-TAndrew Peller Ltd $5.43
AR-TArgonaut Gold Inc $0.39
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BLDP-TBallard Power Systems Inc $7.61
BDT-TBird Construction Inc $5.79
BB-TBlackBerry Ltd $5.54
BLX-TBoralex Inc $38.35
BRAG-TBragg Gaming Group Inc. $5.17
BAM-A-TBrookfield Asset Management Inc $52.64
BEPC-TBrookfield Renewable Corporation $40.48
BEP-UN-TBrookfield Renewable Energy Partners LP $38.81
CSH-UN-TChartwell Retirement Residences $8.60
CHW-TChesswood Group Ltd $11.26
CGG-TChina Gold International Resources Corp. $3.17
CIX-TCI Financial Corp $12.35
CCA-TCogeco Communications Inc $64.76
CSU-TConstellation Software Inc $1,829.77
CPLF-TCopperleaf Technologies Inc. $5.60
ECO-TEcoSynthetix Inc $3.77
EDV-TEndeavour Mining Corp. $23.06
EGLX-TEnthusiast Gaming Holdings Inc. $0.93
FFH-TFairfax Financial Holdings Ltd $619.26
GFL-TGFL Environmental Inc. $33.23
HAI-THaivision Systems Inc. $3.14
HDI-THardwoods Distribution Inc $23.28
HIVE-XHIVE Blockchain Technologies Ltd. $4.42
H-THydro One Ltd. $31.01
INE-TInnergex Renewable Energy Inc $14.53
LA-TLos Andes Copper Ltd. $13.00
MOZ-TMarathon Gold Corporation $0.84
MKP-TMCAN Mortgage Corp $14.06
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GRA-TNanoXplore Inc. $2.81
NFI-TNew Flyer Industries Inc $11.98
NVEI-TNuvei Corporation $35.88
OPS-TOpsens Inc. $2.25
ORE-TOrezone Gold Corp. $1.21
PLC-TPark Lawn Corp. $23.27
PKI-TParkland Fuel Corp $28.33
PPTA-TPerpetua Resources Corp. $2.42
PYR-TPyroGenesis Canada Inc. $1.15
QBR-B-TQuebecor Inc $23.87
REAL-TReal Matters Inc. $4.52
RUS-TRussel Metals Inc $25.12
SSL-TSandstorm Gold Ltd $6.42
SLS-TSolaris Resources Inc. $5.23
LEV-TThe Lion Electric Company $3.41
TRI-TThomson Reuters Corp $137.45
RNW-TTransAlta Renewables Inc $12.71
UNS-TUni-Select Inc $34.19
VLNS-TValens Company Inc. $0.85
WELL-TWell Health Technologies Corp. $2.76
WPRT-TWestport Fuel Systems Inc. $1.15
WTE-TWestshore Terminals Investment Corp $24.48

Source: Bloomberg and The Globe and Mail

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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