Topaz Energy Q3 2024 Earnings Report

Topaz Energy EPS Results

• Actual EPS: C$0.12
• Consensus EPS: C$0.11
• Beat/Miss: Beat by +C$0.01
• One Year Ago EPS: C$0.07

Topaz Energy Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Topaz Energy Announcement Details

• Quarter: Q3 2024
• Date: 11/4/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, November 5, 2024
• Conference Call Time: 11:00AM ET

Topaz Energy (TSE:TPZ) Corp is a royalty and energy infrastructure company focused on generating free cash flow growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationship with Canada's natural gas producers, and leveraging industry relationships to execute complementary acquisitions from other high-quality energy companies, while maintaining its commitment to environmental, social and governance practices. It generates revenue from the Royalty Assets, which generate the company's Royalty Production Revenue; and the Infrastructure Assets, which generate the company's Processing Revenue and Other Income.

Topaz Energy Q3 2024 Earnings Call Transcript

Key Takeaways

• Topaz completed its $278.2M acquisition from Terminalling Oil Corp, adding royalty interests over 3M gross acres and boosting royalty acreage by 50%, including a 38% increase in premium Montney rates acres.
• Q3 2024 average royalty production reached 18,700 BOE/day, up 9% for crude and 11% for heavy oil, with the Tourmaline acquisition expected to deliver an immediate 12% production boost from November.
• Processing revenue from infrastructure assets hit $20.9M in Q3 (+15% QoQ), with 100% capacity utilization and an 89% operating margin; the Clearwater gas gathering project is on track for December start-up, adding an estimated $4.3M in annual revenue from January 2025.
• Topaz generated $73.6M in total revenue, $67M in cash flow, and $64.8M in free cash flow in Q3, paid a $0.33/share dividend (5.2% yield) and allocated $17M of excess cash flow to debt repayment.
• 2024 guidance was updated to 19,100–20,000 BOE/day of royalty production and $75.5M–$78M in processing revenue, with forecast net debt of $460M–$470M (1.5× EBITDA) and a sustainable dividend through 2025 at AECO $3 and US$55 WTI.

Presentation

[Operator]

Good morning. My name is Operator Rochelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp third quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. This call is being recorded on November 5, 2024. I would now like to turn the call over to Mr. Staples, President and CEO. Please go ahead.

[Marty Staples, President and CEO at Topaz Energy Corp]

Thank you, Rochelle, and welcome everyone to our discussion of Topaz Energy Corp's results as at and for the period ended September 30, 2024. My name is Marty Staples, and I'm the President and CEO of Topaz. With me today is Cheree Stephenson, CFO and VP Finance. 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 within our MD&A available on SEDAR and our website. I also draw your attention to the material factors and assumptions in those advisories. We will start this morning by speaking to some of the recent and third quarter 2024 highlights. After these opening remarks, we will be open for questions.

[Marty Staples, President and CEO at Topaz Energy Corp]

Topaz completed the previously announced acquisition from Tourmaline Oil Corp on November 1, which added royalty interest over 3 million gross acres across our existing Northeast BC Montney, Alberta Deep Basin, and Peace River High core royalty areas for a total consideration of CAD 278.2 million. This strategic acquisition increased Topaz's royalty acreage by 50%, including a 38% increase to Topaz's premium Montney rights acreage, and provides 100% alignment to Tourmaline's future identified growth projects. Notably, we saw our Tourmaline-operated drilling rigs across our acreage increase from 13 rigs in Q3 2024 to 16 dedicated rigs in Q4 2024, driven by our expanded acreage position. On October 22, we closed the previously announced bought deal equity financing and concurrent priced private placement. Topaz issued a total of 8.26 million shares at CAD 25.05 per share.

[Marty Staples, President and CEO at Topaz Energy Corp]

The financing proceeds were used to fund the Tourmaline royalty acquisition, in addition to approximately CAD 80 million funded through our existing credit facilities. Topaz's third quarter and year-to-date 2024 average royalty production was 18.7 and 18.9 thousand BOE per day, which includes 9% and 11% growth in crude and heavy oil royalty production, respectively. Beginning in November, the Tourmaline royalty acquisition is estimated to provide 12% immediate royalty production growth with additional growth potential as Tourmaline continues to develop the acquired acreage. The value of our royalty portfolio continues to be demonstrated through the strong, reliable level of operator activity and investment in enhanced recovery techniques across our acreage. During the third quarter, a record 216 gross wells were drilled on our undeveloped royalty lands, representing 17% of the total wells drilled across the WCSB, which increased from 15% during the prior quarter.

[Marty Staples, President and CEO at Topaz Energy Corp]

In addition, approximately 20% of our Clearwater production is currently under waterflood, where we're seeing both lower decline rates and enhanced recovery rates. Operators spudded 216 gross wells and reactivated one gross well on our acreage during the third quarter, with drilling diversified across the royalty portfolio as follows: 59 Clearwater, 46 Northeast BC Montney, 39 Deep Basin, 31 Peace River, 26 Central Alberta, and 15 Southeast Saskatchewan. 49% of Topaz's third quarter drilling activity was in Topaz's high-growth royalty areas, Northeast BC and the Clearwater. Since the beginning of 2023, 43% of all Clearwater new wells drilled and 25% of all Northeast BC Montney new wells drilled were on Topaz royalty acreage. Based on operator drilling activity, we expect that 29 to 31 active drilling rigs on Topaz acreage will be maintained through the fourth quarter of 2024.

[Marty Staples, President and CEO at Topaz Energy Corp]

At the end of the third quarter, 60% of the 216 total new wells drilled in Q3 were not yet brought on production. We expect strong activity in Q4, particularly the new natural gas-focused drills, which are scheduled to be completed and/or tied in during the winter season in anticipation of egress improvements with the planned commissioning of LNG Canada phase one during 2025. Topaz's third quarter royalty revenue of CAD 52.7 million represented 72% of total revenue and generated a 99% operating margin. Third quarter processing revenue and other income of CAD 20.9 million from our infrastructure assets represented 28% of Q3 total revenue and was 15% higher than both the prior quarter and the prior year attributed to our 2024 Alberta Montney infrastructure acquisitions. Our infrastructure assets realized 100% capacity utilization in the quarter and generated an 89% operating margin.

[Marty Staples, President and CEO at Topaz Energy Corp]

The previously announced Clearwater natural gas gathering infrastructure project is nearly complete, with an anticipated on-stream date during December 2024, upon which Topaz will fund the CAD 26 million estimated construction cost. Topaz expects to generate CAD 4.3 million higher process revenue and incremental natural gas royalty revenue beginning in January 2025 following the project completion. Topaz generated Q3 total revenue and other income of CAD 73.6 million, cash flow of CAD 67.0 million, and free cash flow of CAD 64.8 million. Topaz distributed CAD 47.8 million in quarterly dividends, CAD 0.33 per share during Q3, representing a 5.2% dividend yield on an annualized basis, and generated CAD 17 million of excess free cash flow, which was allocated to debt repayment. Third quarter earnings per share was approximately two times higher than the prior year due to higher realized and unrealized hedging gains and lower marketing interest and amortization expenses.

[Marty Staples, President and CEO at Topaz Energy Corp]

We have updated our 2024 guidance estimates, which include the previously announced royalty production range of 19.1-20,000 BOE per day and processing revenue and other income range of $75.5-$78 million. Based on current commodity pricing and before any additional acquisitions, Topaz expects to end 2024 with net debt ranging between $460 and $470 million, or 1.5 times net debt to EBITDA, which includes the net debt attributed to funding the remainder of the Tourmaline royalty acquisition as well as the Clearwater natural gas gathering infrastructure. The 2024 dividend represents a 69% payout ratio and remains sustainable through the end of 2025 at $0 AECO and $55 USD WTI attributed to the fixed revenue provided by our infrastructure portfolio and our hedging contracts in place, which are available in our most recently filed MD&A. We're pleased to answer any questions at this time. Over to you, Operator.

[Operator]

Thank you, Mr. Marty Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Our first question is from Michael Harvey from RBC Capital Markets. Please go ahead.

[Michael Harvey, MD, Canadian Exploration & Production Analyst at RBC Capital Markets]

Yeah, sure. Good morning. Thanks for taking the questions. I guess just kind of two higher-level ones. Just any broader comments on future additions to the infrastructure portfolio. Obviously, some recent wins with the Whitecap deal, et cetera, but just wanted to get a sense for the level of competition in the marketplace and anything that differentiates Topaz as you kind of compete with other folks. And then just on the second part, just on the dividend, maybe you can just refresh us on your order of operations for future increases. By our numbers, it kind of looks like you're pretty well positioned to make another increase maybe mid-year 2025, but any color on how you kind of think through those processes would be appreciated. Thanks.

[Marty Staples, President and CEO at Topaz Energy Corp]

Yeah, good morning, Mike, and thanks for the questions. Yeah, we've been very, I think, focused on both royalty and infrastructure this year. Obviously, you saw us close a deal in June of 2024 on the infrastructure side. To date, we've looked at about $1.8 billion in opportunity. We've transacted on $400 million-ish, $100 million of that being infrastructure. We continue to look at different forms of infrastructure. We saw an announcement yesterday on an emissions cap by the government. We do think that that's going to require some operators to fund certain infrastructure projects, and it probably comes at the bottom of their list for things that they want to do. And so I think that offers a unique opportunity for Topaz to participate in projects like that to not only help the environment but help some of the capital needs of producers out there.

[Marty Staples, President and CEO at Topaz Energy Corp]

We are very active. I would say out of that 1.8, probably 40% of that was infrastructure-based. We just want to make sure we're finding the right projects that are lower or, I would say, newer facilities and have lower emissions from an infrastructure standpoint. So that does make us very selective. The second part of that from dividend increases, we do look at our dividend every single quarter with the board and determine if it's time to increase it or remain flat. We did take a look at it this quarter and thought with just the recent acquisition, we're going to kind of absorb that for the next quarter or two and then look at what our growth looks like inside the corporate plan. If we're growing at 5%-6% per year, you can expect the dividend to grow alongside that.

[Marty Staples, President and CEO at Topaz Energy Corp]

Sheree, anything else you'd offer to that?

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

No. Good summary.

[Michael Harvey, MD, Canadian Exploration & Production Analyst at RBC Capital Markets]

Great. Appreciate it. Thanks.

[Marty Staples, President and CEO at Topaz Energy Corp]

Thanks, Mike.

[Operator]

Ladies and gentlemen, just a reminder, should you have a question, please press the star followed by the number one on your touch-tone phone. Our next question is from Josef Schachter from Schachter Energy Research. Please go ahead.

[Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.]

Good morning, guys. Sheree, I just wanted to get a little bit of guidance on, from this point on, rising cash flow. Do you want to take the debt down to the same kind of level you were of CAD 350 range? And at that point, would that be part of the trigger for thinking about dividend increases? What's your thought about the comfortable level of debt given the much substantial larger company you are today?

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

Yeah, thanks for the question, Josef, and good morning. So overall, from a leverage target perspective, we would look to maintain somewhere between one-time debt to cash flow and up to two times for an acquisition growth perspective, particularly if it's infrastructure-focused and particularly if our payout ratio remains somewhere at the lower end of our range, so call it 70% or lower, in order to have that quick debt compression. So as it stands right now, we see our debt compressing from about 1.5 times debt to EBITDA to 0.9 at the end of 2025. So we do see having room and flexibility to sort of maintain this level of debt go forward in order to fund other acquisition growth opportunities as they may arise.

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

The dividend is definitely a function of cash flow, credit capacity, but also just inherent growth in the business because we have that debt compression. I wouldn't say we have a strict debt target to get to before we would consider a debt dividend increase. It's a bit of an opportunity analysis. And we do have about CAD 0.5 billion of credit capacity currently available on our CAD 1 billion facility. Lots of room. We do think the larger organization and the infrastructure in particular supports some level of debt. Obviously, we want to maintain that modest strategy, but do have capacity for a bit of all. It's just what opportunity presents itself.

[Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.]

Okay. Next question. When do you expect to give guidance for 2025? Is that something that's going to happen before year-end? What's your thoughts there?

[Marty Staples, President and CEO at Topaz Energy Corp]

Good question, Josef. I think what we're going to do is push it into January. We want to see typically Tourmaline puts out a five-year plan with this quarter and then an operational update in January. So I think we want to see what gas prices do through the winter and look towards Tourmaline's operational update in January and then provide guidance update into early 2025.

[Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.]

Okay. Last one for me. If I'm giving guidance in my report, if I put in a number of $21,000-$21,500 for average production, would that be a number that would be in a good range?

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

For Q4 or 2025?

[Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.]

2025.

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

Yeah, I'd say that's a conservative range. We probably plan to build a range somewhere around the CAD 22,000 mark, but depending on operator capital plans and natural gas prices particularly.

[Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.]

Super. That does it for me. Thanks very much for taking my questions.

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

Thank you.

[Marty Staples, President and CEO at Topaz Energy Corp]

Thanks, Joseph.

[Operator]

Just a reminder, should you have a question, please press the star followed by the number one on your touch-tone phone. Our question is from Jamie Kubik from CIBC. Please go ahead.

[Jamie Kubik, Director, Institutional Equity Research Analyst at CIBC World Markets]

Yeah, good morning. Thanks. I've got just two questions here. Just curious if you can talk a little bit more about some of the water flood and pressure support initiatives underway in the Clearwater and some of the results that Topaz is seeing across its asset base and what it might mean for future volumes.

[Marty Staples, President and CEO at Topaz Energy Corp]

Yeah, great question, Jamie. And I think you saw on our slide deck, we did highlight Clearwater's slide just with some of the recent improvements and enhancement we've seen. There's two things happening inside the Clearwater right now, both from Tamarack and Headwater. And Tamarack disclosed a lot of those ideas and updates last week in their quarter. I think the C-Sand has been a very deliverable sand for them that's expanded their inventory inside their portfolio. And Headwater last quarter talked about the E-Sand adding a significant amount of locations to their portfolio. So number one, we're seeing some exploration. We're seeing some step-outs. We're seeing some delineation on the Clearwater lands. We think about 20% of our total acreage is under water flood right now inside the Clearwater. You've seen it, the results speak for themselves, lower decline and bigger recovery factor.

[Marty Staples, President and CEO at Topaz Energy Corp]

Two things as a royalty company we're pretty pleased with. We do think that we pay out the Headwater acquisition in early 2025. And so they're sitting right now at a 21,000 going to 24,000 barrel a day company. We've got a 7% royalty on about 90% of their company right now, 90%-92%. And so the enhancement for us, number one, it doubles recovery factor. So we see Marten Hills going from a 4%-5% to an 8%-10% recovery factor. Nipisi, we kind of see around 8% going to 16%. So it's like we're getting the entire play again for free. And so when you think about the oil in place and being able to access more of that resource, it's a massive benefit from us, not just from a reserve life standpoint, but from a recovery standpoint as well.

[Marty Staples, President and CEO at Topaz Energy Corp]

So lots of checkboxes beside the Clearwater and what we're seeing. Sheree, anything to add on the water flood?

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

I would just add that there's a lot more technical data now available, and of the 20% of our Clearwater production that's under water flood, we see about 65% of that being the primary decline that's stabilizing, and the other 35% is true uplift that's being generated by that higher recovery rate on that production. So the other note would be the Clearwater is a very identified oil resource, and we see 14.5 billion barrels of oil in place. Obviously, that's gross operated, and the additional sands that are being delineated and proven out are increments to that, so it's truly a significant, very blanket-like resource, and we're really happy with our position within that and the advancements the operators continue to make on the water flood and enhanced recovery efforts.

[Jamie Kubik, Director, Institutional Equity Research Analyst at CIBC World Markets]

Okay, thanks. And can you maybe just remind us when Topaz expects to be cash taxable in the future, just in terms of year?

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

Yeah, so there's a small amount of tax that will come into play in 2025. It's very small, about CAD 5 million. And then from 2026 forward, we expect about 10 years of a 50% reduced corporate rate, so call it 12% or so. So a reduced rate, but cash taxes do come into effect for the most part in 2026.

[Jamie Kubik, Director, Institutional Equity Research Analyst at CIBC World Markets]

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

[Cheree Stephenson, CFO and VP Finance at Topaz Energy Corp]

Thanks, Jamie.

[Marty Staples, President and CEO at Topaz Energy Corp]

Thanks, Jamie.

[Operator]

There are no further questions at this time. I would now like to turn the call back over to Mr. Marty Staples for final closing remarks.

[Marty Staples, President and CEO at Topaz Energy Corp]

Yeah, thanks, everyone. Appreciate the support from all the shareholders, advisors. Busy quarter for Topaz, and look forward to talking to everyone in 2025.

[Operator]

Thank you, Mr. Marty. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• Cheree Stephenson, CFO and VP Finance
• Marty Staples, President and CEO

Analysts

• Jamie Kubik, Director, Institutional Equity Research Analyst at CIBC World Markets
• Michael Harvey, MD, Canadian Exploration & Production Analyst at RBC Capital Markets
• Josef Schachter, President and Chief Investment Officer at Schachter Energy Research Services Inc.