Topaz Energy Q3 2023 Earnings Call Transcript

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October 31, 2023

There are 5 speakers on the call.

Operator

Morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I'll now hand the floor to Scott Kurka. Please begin.

Speaker 1

Thank you, Mark, and good morning, everyone. Welcome to our discussion of Topaz Energy Corp. Results as of for September 30, 2023, and for the 3 9 months ended September 30, 2023, 2022. My name is Scott Kirker, and I'm the General Counsel for Topaz. Before we get started, I refer you to the advisories on forward looking statements contained in the news release as well as the advisories contained in the Topaz Annual Information Form and the Topaz MD and A available on SEDAR and on our website.

Speaker 1

I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz President and Chief Executive Officer and Sherry Stevenson, Vice President, Finance and Chief Financial Officer. We'll start by speaking to some of the highlights of the last quarter and the year so far. And after the remarks, we will be open for questions. Bernie, should we go ahead?

Speaker 1

Thanks, Scott.

Speaker 2

Good morning, everyone, and happy Halloween. Topaz's 3rd quarter average royalty production of 18,600 BOE per day Includes another new record of total liquids royalty production of 5,700 barrels per day. 3rd quarter production was 145 BOE per day higher than the prior quarter despite continued wildfire impacts reduced production during the first half of the third quarter. Year to date 2023, average production of 18,600 BOE per day is just above the midpoint of our 2023 royalty production guidance of 18,300,000 to 18,800 BOE per day. Average royalty production is 13% higher than the prior year comparative period.

Speaker 2

Notably, since the completion of the Delta Stream Royalty acquisition 1 year ago, Topaz's royalty production has increased 5% per basic and diluted share. The growth is entirely attributed to operator development at no cost to Topaz. During the Q3, one 160 gross wells were spud across our royalty acreage, diversified as follows: 68 Clearwater 37 Northeast BC Montney, 30 Deep Basin, 16 Peace River, 3 Central Alberta and 6 Southeast Saskatchewan Manitoba. In 2023, 430 gross wells were spud, a 5% increase from the prior year. 63% of the 4 30 gross wells spud were in the Clearwater in Northeast BC, Topaz's high growth areas.

Speaker 2

Average 2023 royalty production from these combined areas has increased 34% since 2022. Topaz continues to see a reliable and meaningful share of WCSB production and drilling activity across its royalty portfolio. The operator working interest production across Topaz's royalty acreage represented approximately 8% of total WCSP production And the 430 gross wells spud across Topaz's acreage represents approximately 13% of the total rig count across the WCSB. Based on planned operating drilling activity, Topaz expects that the current 26 to 28 active drilling rigs on its royalty acreage will be maintained through the Q4. Our Q3 royalty production revenue of $67,600,000 was 27% weighted towards natural gas royalty revenue and 73% of total liquids royalty revenue.

Speaker 2

Topaz's realized pricing before hedging It was CAD2.53 per Mcf for natural gas, CAD103.58 for light oil and CAD89.78 for heavy oil. Relative to benchmark pricing, Topaz's realized pricing differentials for natural gas and light oil were system with the prior quarter. For heavy oil, our realized pricing differential for the Canadian WCS benchmark tightened 37% due to revised pricing on certain heavy oil production. And in addition, the WCS benchmark differential tightened from U. S.

Speaker 2

15.07 to Q2 US12.91 dollars in Q3. For the Q3 of 2023, Topaz's total realized pricing was $39.61 per BOE, a 15% increase from the prior quarter attributed to both higher commodity pricing and revised heavy oil royalty pricing. Our infrastructure business continues to deliver stable inflation protected income and through Q3, we realized 99% utilization of our natural gas processing capacity despite impacts related to wildfires during the first half of Q3. Topaz generated $14,400,000 in processing revenue and $3,800,000 other income from third parties. Topaz incurred $1,000,000 in operating expenses, which is lower than the prior quarter when higher maintenance and turnaround expenses were incurred.

Speaker 2

Overall, our infrastructure assets generated a 95% operating margin in the 3rd quarter. Topaz generated cash flow of $74,700,000 or $0.52 per basic and diluted share in the 3rd quarter and we distributed 60% of our cash flow to shareholders through a CAD0.31 per share quarterly dividend. Our dividend is well supported by our stable infrastructure income as it covers 40% of that. Using our current oil strip price forecast, our 2024 payout ratio would be just over 70% even at $0 AECO. This demonstrates the flexibility of Topaz to continue to reinvest excess free cash flow and continue to increase the dividend.

Speaker 2

To date, in 2023, we've generated $78,600,000 of excess free cash flow, dollars 40,000,000 of which was invested in royalty and infrastructure and water assets in the Clearwater and Peace River areas, which generates just over CAD6 1,000,000 per year in stable income. From Q3 of last year, Topaz's quarterly dividend has increased 11% and Topaz has reduced net debt by CAD 76,700,000 CAD600,000,000 of available credit capacity. Subsequent to the Q3, Topaz entered into definitive agreements for an acquisition of a royalty and infrastructure assets from a Canadian energy producer in the Clearwater area. The royalty assets adding 20,000 gross acres in the West Nipissippi area were acquired October 25, 2023. The Martin Hill infrastructure assets are being built through 2024 and Topaz will acquire a 99% working interest Upon completion and commissioning, the total consideration of $26,300,000 for the royalty and infrastructure assets is estimated to generate $3,700,000 of incremental Infrastructure income once completed, dollars 500,000 of incremental natural gas royalty production from existing royalty acreage And Topaz expects additional royalty revenue from the new Gorr Labs.

Speaker 2

The new royalty assets are supported by a capital commitment and development on the acreage is expected to commence during the Q4. From a guidance perspective, we continue to maintain our 2023 royalty production between 18,300,000 18,800 BOE per day. And for the Q4, we estimate 18,800 BOE to 19,000 BOE day of royalty production and $17,000,000 to $18,000,000 of infrastructure income. We've established a preliminary 24 guidance estimate based on approximately 20 to 30 active rigs across our acres through 2024, subject key operators' final 2024 operating budgets, capital budgets and operational ideas. Weather or wildfire related issues that may impact 2024 production.

Speaker 2

Topaz estimates 2024 average royalty production of 18,800,000 to 19,600 BOE per day in addition to 69 to $71,000,000 of infrastructure income. Based on current commodity pricing and before acquisition, Topaz expects to exit 2024 with net debt of approximately $200,000,000 or around 0.6x net debt to EBITDA. We look forward to discussing the Q4 on the next call

Operator

to cancel. Our first question comes from the line of Luke Davis from RBC. Please go ahead. Your line is open.

Speaker 2

Yes, thanks. Good morning. I'm wondering if you can just frame up some of the modeling assumptions that go into your 2024 guidance, fairly Wide range there and understand that several producers don't have pen cells. So maybe some conservatism built in, but what are the primary swing factors on that range?

Speaker 3

Hello. Good morning.

Speaker 2

So I

Speaker 3

can kind of frame that out for you. So essentially, we wanted to set some parameters for the year as we see it From existing 5 year plans and the real differentiator for Topaz has been that we have these strategic partnerships with certain operators. And Barring any material changes with their more granular 2024 budget, we do see this range as kind of Maintaining a term lean at about 3% year over year growth, about 10% year over year growth in the Clearwater from our key operators, Tamarac and Headwater. And then beyond that, we've never had 100% certainty over our non core or fee based Acres. And so that can be a swing factor.

Speaker 3

It is only 10% of our portfolio. Within that non core piece would be the Weyburn asset, which we see as Very reliable and flat production. So there's about 200 barrels for sure of swing factor in that non core stuff that We don't want to rely on, but we've definitely seen very positive results through 2023. So and the other thing to Keep in mind is the impact of wildfires and what we saw happen through 2023. So the wider range is there To capture all of that, we do see the midpoint plus or minus that 200 barrels or upside of that 200 barrels from the non core stuff being You know our ideal situation.

Speaker 2

That's really helpful. Thanks. Thanks Luke.

Operator

Thank you. Our next question comes from the line of Jamie Cubitt at CIBC. Please go ahead. Your line is open.

Speaker 4

Yes. Good morning. Thanks for taking my question. So we've seen some recent royalty acquisition How are you thinking about natural gas weighted royalty acquisitions in the current commodity environment though? Can you Outline opportunities for that and how you're thinking about it moving forward.

Speaker 2

Yes. Good morning, Jamie, and thanks for the question. We always like to be countercyclical in our acquisitions. And so with our recent oil acquisitions, they were mainly undeveloped acreage. And so, we did think there is an opportunity to acquire oil assets at a lower price because we weren't paying for PDP.

Speaker 2

From a gas perspective, we do continue to examine different natural gas areas where we can be useful. So I do think that if we're able to acquire natural gas price, we would look to do that. So, we're not kind of, I guess, Looking to add either, but we're open to business on either one as well. And you did mention kind of we did some natural gas, Gas Plant and Pipeline Acquisitions. We'll continue to do different acquisitions along that line.

Speaker 2

We're pretty open to for business on both oil and gas. And I think that's been very evident in the acquisition we made over the last year. And the other one I would Included in that is the water acquisition we did early in January. So a 15 year take or pay contract, our second deal like that on water handling.

Speaker 4

Okay, great. Thank you. And then maybe just to clarify on the West Nipissippi 7% royalty. There's no current production attached to that asset. And given the size of the acreage, where do you think the potential royalty could move to in the coming years on that

Speaker 2

acquisition? Yes. And so it

Speaker 4

is completely undeveloped at this point in position.

Speaker 2

Yes. And so it is completely undeveloped at this point in time. And that's why it was important for us to add a capital commitment to it. And as I mentioned in the call, We're going to see some development start into latter part of Q4 and into Q1. And so, we do hope to see a well Really want to see the result of that first and second well before we comment on the absolute growing room of that.

Speaker 2

But We did map it pretty closely. This is something we identified early on once we found out who the owner was. We did approach them first to try and get a royalty on this acreage. And so, do you think there is some qualities that we can map to some other of the high quality plays inside the Clearwater.

Speaker 4

Okay, great. Thank you. That's it for me.

Speaker 2

Thanks, Jamie. Thank you.

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