Topaz Energy Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 5, 2024

There are 5 speakers on the call.

Operator

Good morning. My name is Lidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. 4th 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. Mr. Marty Staples, you may begin your conference.

Speaker 1

Thank you, Lutte, and welcome everyone to our discussion of Topaz Energy Corp. Results as at and for the 3 months year ended December 31, 2023 2022. My name is Marty Staples, and I am the President and CEO of Topaz. With me today is Sherry Stevenson, 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 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. We will start this morning by speaking to some of the highlights of the last quarter in 2023 overall. After these opening remarks, we'll be open for questions. That's today's Scott Perker's part, so I think I did okay. Topaz 4th quarter average royalty production of 19,600 BOE per day set a new record for Topaz and exceeded our previous record set in the Q1 of 2023 by 4%.

Speaker 1

2023 average royalty production of 18,900 BOE per day also set a new annual record and exceeded the high end of our 2023 guidance range, which we established last January. Year over year, Topaz's production grew 10%. Operator spud 5 77 gross wells on our acreage over the year, a 2% increase from 2022, representing 14% of the 2023 total rig releases across the WCSB. In 2023, our royalty growth was primarily from operated funded development as our acquisitions completed were infrastructure focused. The operator funded development was demonstrated through our annual reserve report, which evaluates Topaz's proved developed producing and probable developed reserves.

Speaker 1

Topaz does not record future probable undeveloped locations given royalty entities do not control or record the capital. For our proved plus probable developed reserves, operator generated 8,700,000 BOE of drilling extensions and improved recovery Relative to the 6,900,000 BOE produced in 2023, this represents production replacement of 1.3x at no cost to Topaz. During the Q4, operators spud 147 gross wells, which was diversified across our portfolio with 42 in the Clearwater, 38 drilled in Northeast BC, Montney, 38 in Deep Basin, 10 in Peace River, 5 across Central Alberta and 13 through Southeast Saskatchewan and 1 in Manitoba. 4th quarter royalty revenue of $64,300,000 represented 78% of Q4 total revenue and generated a 99% operating margin. Topaz's total realized royalty price for the Q4 was $35.72 per BOE compared to $39.61 per BOE in the prior quarter.

Speaker 1

During Q4, Topaz realized a hedging gain of $300,000 and for the full year, Topaz realized a $9,300,000 heading gain. Topaz total realized royalty price of 2023 was $36.40 per barrel before hedging. Topaz hedges a portion of its commodity exposure opportunistically. In order to ensure the dividend and the company's financial flexibility is maintained in periods of lower commodity prices. For 2024, 18% of our estimated natural gas production is hedged at a fixed price of $3.17 per Mcf, which is over 40% higher than the current 2024 strip for AECO and approximately 30% of our estimated oil and liquids production is hedged at a weighted average floor price of CAD103.25 per barrel, with collar structures in place to provide for upside price participation.

Speaker 1

In addition, we have approximately 7% of our 2024 summer natural gas production directed to NYMEX, pricing through a fixed price April basis swap at a narrow differential of US0.42 dollars per MMBtu. Overall, our dividend and all our corporate costs are covered down to very low commodity prices of US0.50 dollars per Mcf for natural gas and US55 dollars WTI. This demonstrates the flexibility Topaz has to continue to reinvest excess free cash flow and continue to increase the dividend. The remaining 22 percent of Topaz's Q4 revenue was generated from our infrastructure assets that generated $18,500,000 of processing revenue and other income, realizing 100% capacity utilization. Topaz's infrastructure business is unique where the contractual arrangements limit our exposure to operating and capital costs.

Speaker 1

80% of capacity is under fixed long term take or pay contracts. And we own a contracted interest in fee revenue with no associated costs. During the Q4, we generated a 95% operating margin on our infrastructure and only incurred $1,000,000 of maintenance capital expenditures. Our Q4 infrastructure revenue and other income represented 41% of our quarterly dividend. Topaz generated cash flow of $72,400,000 or $0.50 per basic and diluted share in the 4th quarter, and we distributed 62 percent of cash flow to shareholders through a $0.31 per share Q4 dividend.

Speaker 1

Topaz announced the dividend increase to $0.32 per share or $1.28 per share annualized. This marks the 7th dividend increase over the past 4 years or 60% dividend growth since the Q1 of 2020. For Q4, we generated $26,800,000 of excess free cash flow and in total for 2023, we generated $105,000,000 of excess free cash flow. Through 2023, we have remained disciplined on our investment strategy. And while we evaluated a number of opportunities, we entered into only 3 transactions for a total consideration paid of $46,400,000 We also entered into agreement for the purchase of a Clearwater natural gas gathering infrastructure, which is currently under construction.

Speaker 1

We recorded work in progress costs of $3,600,000 However, the full construction and the construction consideration will not be paid until the infrastructure is commissioned, which is targeted for late 2024. Infrastructure is expected to gather natural gas on our existing royalty acreage, in addition, generate long term fixed processing fees. We exited 2023 with $342,700,000 of net debt or 1.1 times debt to EBITDA. We've reduced net debt by $63,100,000 or 16 percent from 2022. We will continue to be disciplined on our acquisition strategy focusing on high flow assets with strategic partners.

Speaker 1

We have confirmed our previously disclosed 2024 guidance of 18,800,000 to 19,600 BOE per day of royalty production and $69,000,000 to 71,000,000 of infrastructure processing revenue and other income. Our royalty production guidance includes the impact of contractually scheduled royalty rate change on January 1 from 4% to 3% on approximately 300,000,000 cubic feet per day of natural gas processing. This resulted in approximately 500 BOE per day of lower royalty production to Topaz and marks the last scheduled royalty rate change. The royalty guidance remains flexible and allows for operators to adjust capital in order to appropriately manage near term supply demand and resulting commodity price factors across the WCSB, as the basin anticipates 2 significant egress projects to come on stream in the near term. Based on our current commodity pricing and before acquisitions, Topaz expects to exit 2024 with net debt between 245 dollars $255,000,000 or approximately 0.8 times net debt to EBITDA.

Speaker 1

The increased dividend represents approximately 65 percent payout for 2024 based on current commodity prices. We look forward to discussing the Q1 on the next call and we're pleased to answer any questions at this time. Over to you, operator.

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer And your first question comes from the line of Joseph Schachter from Schachter Energy Research. Your line is open.

Speaker 2

Thank you very much. Good morning, Marty and Sherry, and thanks for taking my questions. In your guidance for 2024 of 2019, too, the natural gas numbers are going down, natural gas liquids numbers are going up. Is that again companies focusing on your liquids rich plays and dropping off the drilling programs for dry gas? Is that the assumption correct?

Speaker 3

No, I would say either the focus is similar to 2023. There are estimates for sure, and there's variability maybe within the overall production, but we would estimate total oil and liquids of about 29% to 31% and gas being the remainder. And there might be some nuance between the shale gas and the dry gas. But overall, we would expect a similar proportion allocation to 2023.

Speaker 2

Okay. And just the comment about the high end being 19.6%, is that assuming a recovery in prices and then the guidance from the companies that they would be more active in Q4 or Q3 and Q4?

Speaker 3

Yes. So the higher end of the guidance is less focused on whether or not there's changes to capital budgets. It's more about higher activity on the acreage that we don't have as much transparency or line of sight to. So for Topaz, that is the Keystone Royalty and Reserve Royalty lands, where we saw significant activity through 2023. And we're a bit more conservative on what we estimate for future years, just not knowing for sure when and how much drilling activity would take place.

Speaker 3

But that would be more of the swing factor for the higher end of the guidance range.

Speaker 1

And keep in mind, Joseph, we do have some major egress projects coming on, one quite soon being the TMX project. It looks like April that might be actually flowing some volume. And then later in the year, we've got LNG Canada. So we do expect as these projects come on, there may be some ramps from our operators to facilitate the need for that volume.

Speaker 2

Okay. And last one for me. Can you give us some you mentioned that the M and A activity, there's been things you've looked at, but nothing that's really clicked on the larger size. Do you see from the traffic you're looking at now that natural gas players are looking for bigger deals given the low commodity price and low stock prices that they have and that there might be a potential in 2024 for something larger in terms of deal flow?

Speaker 1

It typically takes a couple of quarters of weak gas prices to have operators react to it. So we have looked at a lot of opportunity through 2023. We kind of earmarked $100,000,000 to $300,000,000 of acquisition capital. And I think I mentioned in the release, we only did $46,000,000 of that $100,000,000 to 3 $66,000,000 if you include the infrastructure project that we paid for this year. Earmark the same kind of dollar value.

Speaker 1

I think we're quite comfortable with that range. I mean, we could step up bigger if need be, but haven't seen anything that sits in our portfolio that we want to capitalize. The guys are busy inside our organization, though. We're spending a lot of time looking at opportunities, and I would say reaching out and try to source new opportunities. So M and A is something you got to be patient for.

Speaker 1

If gas prices are weak, I do think and continue to be weak, I do think there's some opportunity for us, but not everybody gets a royalty or infrastructure deal and that's something that we remind operators all the time. I think you've got to have the quality inside your portfolio, it's something we're going to invest in.

Speaker 2

Super. That's it for me and thanks for taking my questions. And I know there's a few people in my house that are going to be happier for the larger dividend.

Speaker 1

Yes. Well, you're welcome. Thanks, Joseph. Take care.

Operator

Thank you. Your next question comes from the line of Jamie Kubik from CIBC. Your line is open.

Speaker 4

Yes. Good morning and thanks for taking my question. Maybe first one, can you just talk about the decision to increase the dividend at this juncture and I guess what you would look for in the future to increase it further? Thanks.

Speaker 1

Yes. Good morning, Jamie, and thanks for the question. We wanted to represent inside the organization just the defensibility of the entity. We did have record production into the end of last year, and we've always messaged that it will be an output of the business, the dividend increases and we did have some growth and wanted to reward shareholders for that growth that we saw inside the complex. We do look to a dividend and we do review the dividend policy every quarter with our Board.

Speaker 1

We do think that there's probably more room down the road, but obviously we're paying attention to commodity pricing and the growth that we see inside our business and we're not just going to increase the dividend to increase the dividend. If you've noticed over the last 2 to 3 dividends, they've been small, sustainable dividend increases and that's by design as the business grows, the dividend should grow alongside it. And so if we see 6% production growth in a year, we should you can anticipate that we're going to try and increase the dividend 6% in that year as well.

Speaker 4

Got it. Okay. And then in your disclosures, Topaz mentions that the dividend is sustainable down to $0.50 in MCFA and $55 a barrel WTI. Can you talk about how that sustainability on commodity pricing moves with the lower end of the production guidance range? Does it change much?

Speaker 4

Just anything around that sort, Marty and Sherry? Thanks.

Speaker 3

Yes, for sure. I can speak to that. So it obviously would move slightly, but also in light of that, our hedging percentage would increase. So I would estimate at the lower end of the guidance range, it would be something around $1 AECO $55 WTI.

Speaker 1

If you look at our corporate deck as well, Jamie, we do have some sensitivities on the capital allocation slide that just kind of talks about every $0.50 move in AECO is about a $15,000,000 change for us and every buck a barrel is about a $2,000,000 change for us.

Speaker 4

Okay. Thank you. Appreciate it. That's all for me. Perfect.

Speaker 1

Thanks, Jamie. Thanks, Jamie.

Operator

Thank you. And there are no further questions at this time. I would like to turn it back to Marty Steeples, President and CEO, for closing comments.

Speaker 1

Perfect. Yes, just thanks everyone for tuning in. Obviously, a good year end result for us, and we hope to keep on producing good results. So look forward to talking to you on Q1 call.

Operator

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Key Takeaways

  • Record royalty production of 19,600 BOE/d in 4Q and an annual average of 18,900 BOE/d in 2023, exceeding guidance and marking a 10% year-over-year growth.
  • Strong cash flow and dividends: 4Q cash flow of $72.4 M ($0.50/share) funded a $0.31/share dividend (62% payout) and 2023 produced $105 M of excess free cash flow, enabling a 7th dividend raise to $0.32/share.
  • Robust hedging strategy: 2024 hedges cover 18% of gas at $3.17/Mcf and 30% of oil at CAD103.25/bbl, supporting dividend sustainability down to $0.50/Mcf and $55 WTI.
  • High-margin infrastructure generated 22% of 4Q revenue with 100% utilization, a 95% operating margin, and only $1 M of maintenance capex, demonstrating low cost exposure.
  • Disciplined balance sheet and outlook: Net debt reduced to $342.7 M (1.1× EBITDA), 2024 guidance of 18,800–19,600 BOE/d and $69–71 M infrastructure revenue, with projected net debt at 0.8× EBITDA by year end.
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Earnings Conference Call
Topaz Energy Q4 2023
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