Unlocking Undervalued Royalty Assets: Topaz's Strategic NEBC Montney Acquisition in a Rising Commodity Price Environment

In the evolving landscape of North American energy markets, Topaz Energy Corp. (TSX: TPZ) has positioned itself as a strategic acquirer of high-potential royalty assets. Its recent $71.7 million acquisition of gross overriding royalty interests in the NEBC Montney region from Tourmaline Oil Corp. exemplifies a calculated move to capitalize on undervalued assets in a sector poised for a commodity price rebound. This analysis explores how Topaz's acquisition aligns with macroeconomic tailwinds and why the company's royalty portfolio is uniquely positioned to benefit from rising natural gas prices in 2025–2026.

Strategic Acquisition: Tier 1 Assets with Multi-Zone Upside

Topaz's acquisition of 134,000 gross acres in the NEBC Montney-over 65% of which remain undeveloped-grants access to approximately 410 Tier 1 drilling locations and multi-zone upside potential, as detailed in Topaz's acquisition announcement. This tuck-in acquisition is fully aligned with Tourmaline's multi-year development plan, which aims to unlock the Montney's vast reserves through advanced drilling and infrastructure projects. By securing royalty interests in this core area, Topaz ensures a direct financial stake in the region's future production growth without bearing the operational risks typically associated with exploration and development.

The Montney Formation, known for its high liquids content and low break-even costs (estimated at $2.50–$4.00/MMBtu, according to a Tourmaline snapshot), has historically been a resilient asset class even during periods of depressed commodity prices. However, 2025 has seen intra-basin prices in the NEBC region fall to as low as $0.56/MMBtu due to oversupply and weak regional demand, as noted in the Tourmaline snapshot. This creates an attractive entry point for investors like Topaz, who can acquire royalty assets at a discount while positioning for a recovery in pricing.

Valuation Metrics: A Discount to Intrinsic Value

Topaz's current valuation appears to understate the long-term potential of its royalty portfolio. As of September 2025, the company trades at a trailing P/E ratio of 63.71 and an EV/EBITDA ratio of 14.30 per Topaz Q2 2025 results, significantly below the industry average of 18.0. This discount reflects broader market skepticism about near-term commodity prices but overlooks the structural changes driving a near-term reversal.

The company's Q2 2025 results underscore its operational strength: royalty production rose 19% year-over-year to 22,290 boe/d, while free cash flow surged to $74.0 million (Topaz Q2 2025 results). These metrics highlight Topaz's ability to generate consistent cash flows even in a low-price environment, a critical advantage as natural gas prices begin to trend upward.

Commodity Price Projections: A Tailwind for Royalty Income

Natural gas prices are projected to rise sharply in 2025–2026, driven by surging U.S. LNG exports and tightening domestic supply. The U.S. Energy Information Administration forecasts the Henry Hub spot price to average $3.10/MMBtu in 2025 and climb to $4.00/MMBtu in 2026 (EIA forecast). For the NEBC Montney region, where prices have historically lagged due to oversupply, this represents a significant upside potential.

Several factors support this outlook:
1. LNG Export Growth: New terminals like Plaquemines LNG and Golden Pass are expected to add over 2 Bcf/d of demand, reducing Canadian exports to the U.S. Pacific Northwest and tightening regional pricing (EIA forecast).
2. Seasonal Demand: Cold winter weather in early 2025 has already driven spot prices higher, with projections showing winter storage draws to exceed normal levels (EIA forecast).
3. Production Constraints: U.S. production growth is slowing due to regulatory and capital constraints, creating a supply-demand imbalance that favors higher prices (EIA forecast).

For Topaz, these trends translate into a direct uplift in royalty revenue. As the Montney's production ramps up under Tourmaline's development plan, rising commodity prices will amplify the value of Topaz's fixed royalty rates, which are typically tied to a percentage of gross revenue rather than net production.

Investment Thesis: A High-Conviction Play on Commodity Repricing

Topaz's NEBC Montney acquisition is a masterclass in strategic royalty investing. By acquiring underpriced assets in a region with multi-year development plans and aligning with a high-growth operator like Tourmaline, Topaz has created a compounding mechanism: rising production + rising commodity prices = exponential growth in royalty income.

The company's financial discipline further strengthens this thesis. With a debt-to-equity ratio of 0.42 and a current ratio of 5.14 (Topaz Q2 2025 results), Topaz is well-positioned to fund future acquisitions and maintain its 69% payout ratio dividend (Topaz Q2 2025 results). As natural gas prices climb, the company's free cash flow margins are expected to expand, enabling it to reinvest in its portfolio or return capital to shareholders.

Conclusion: A Buy for Long-Term Investors

Topaz Energy's NEBC Montney acquisition is a rare combination of strategic foresight and financial prudence. In a market that has discounted the value of royalty assets due to short-term price volatility, Topaz has secured a position that will benefit from both production growth and commodity repricing. With EIA forecasts pointing to a $4.00/MMBtu average in 2026 and a valuation that remains below intrinsic value, the company offers a compelling entry point for investors seeking exposure to the next phase of North American energy growth.