Topaz Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 6 speakers on the call.

Operator

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. 2nd Quarter 2024 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. Staples, you may begin your conference.

Speaker 1

Thank you, Lara, and while we're going to our discussion of Topaz Energy Corp. Results as at and for the period ended June 30, 2024. My name is Marty Staples, and I am 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 on the advisories contained in the TOEKA's annual information form and within our MD and A available on SEDAR and 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 Q2 of 2024. After these opening remarks, we will be open for questions. Topaz had a very strong 2nd quarter marked by cash flow of $70,600,000 or $0.49 per diluted share, representing a 4% per share increase over both the prior quarter and prior year. 2nd quarter cash flow growth from the last year was driven by 12 percent higher crude oil and 20% higher heavy oil royalty production, in addition to higher realized oil pricing.

Speaker 1

The Alberta Montney infrastructure acquisition that was completed during the Q2 marks Topaz's 3rd infrastructure acquisition for the past 12 months and is expected to provide $13,000,000 to $14,000,000 of annualized contracted revenue. Following our strategy to provide dividend growth alongside sustainable revenue growth, we are pleased to announce that our Board has approved a second dividend increase for 2024, which marks our 8th dividend increase to date. The annualized dividend of $1.32 per share represents 65% share growth since Topaz's inception. Our infrastructure asset portfolio provides stable high margin revenue that covers 45% of our dividend. Combined with our hedging strategy, our dividend is sustainable to commodity prices of $0.01 per Mcf natural gas and US50 dollars per barrel crude oil.

Speaker 1

For the remainder of 2024, 18 percent of natural gas is hedged at a weighted average price of CAD3.17 per Mcf and 40 percent of oil and total liquids is hedged at a weighted average floor price of CAD102.54 per barrel using collar structures to maintain upside participation. Copa's 2nd quarter average royalty production of 18,700 BOE per day was 33 percent total liquids as light and oil heavy oil royalty production achieved a new record exceeding 5,000 BOE per day. The value of our royalty portfolio continues to be demonstrated through the strong reliable level of operator development activity and investment in enhanced recovery techniques across our acreage. During the Q2, 94 gross wells were drilled on our undeveloped royalty lands, representing 15% of the total wells drilled across the Western Canadian Sedimentary Basin, which increased from 12% during the Q1 of 2024. Operators spud 94 gross wells and reactivated 7 gross wells on our acreage during the 2nd quarter.

Speaker 1

Drilling was diversified across the royalty portfolio as follows: 32 Clearwater, 33 Northeast BC, 13 Deep Basin, 7 Southeast Saskatchewan, 6 Central Alberta and 1 Peace River. We estimate that operators spent approximately $400,000,000 in development capital across our acreage during the quarter. Based on operator drilling activity, we expect the current 28 to 31 active rigs on Topaz's acreage will be maintained through the Q3 of 2024. Based on operator disclosure, we estimate that 20% of Topaz's Clearwater Heavy Oil is now supported by water flood, which is demonstrating positive response to improve recovery and stabilized production rates. Topaz's 2nd quarter royalty revenue of 60,200,000 represented 77 percent of total revenue and generated a 99% operating margin.

Speaker 1

Q2 twenty twenty four royalty revenue increased by 4% over Q2 2023. 2nd quarter processing and other income of $18,200,000 represented 23% of Q2 total revenue and was 7% higher than prior year. Our infrastructure assets realized 100% capacity utilization in the quarter and generated a 91% operating margin. Topaz generated total second quarter revenue and other income of $78,400,000 and free cash flow of $69,500,000 which increased 5% from the prior year and represents an 89% free cash flow margin. 2nd quarter earnings per share was 2x higher than the prior year due to higher royalty production and processing revenue and lower operating finance and amortization expenses.

Speaker 1

Towpath this year reached $46,400,000 in dividends during the quarter, resulting in a 66 percent payout ratio and generated $23,100,000 in excess free cash flow, which was allocated to acquisition growth. We have reconfirmed our 2024 guidance ranges of 18,800,000 to 19,600,000 BOE per day of royalty production and $75,500,000 to $78,000,000 of infrastructure processing revenue and other income. Based on current commodity pricing and before any additional acquisitions, Topaz expects to end 2024 with net debt ranging between $345,000,000 $355,000,000 or 1.1 times net debt to EBITDA. The 2024 dividend represents a 66 percent payout ratio based on recent commodity price forecast, which maintains financial flexibility to allocate excess free cash flow to acquisition growth or further dividend increases. We are pleased to answer any questions at this time.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Josef Schachter from Schachter Energy. Go ahead please.

Speaker 2

Good morning, Marty and Sherry, and congratulations on the quarter and dividend increase. The market likes it, new record high for the stock today. So congratulations on all that. My question is 2 of them. 1 relates to the Mazroak deal with Whitecap.

Speaker 2

What is the utilization of that facility right now, now that it's come on stream? And do you have, if they continue to grow that area, which from the Whitecap call, I mean Grant was talking about that, would they if they do an expansion or a new facility, would you be involved in that as well?

Speaker 1

Yes, sure. So yes, thanks, Joseph, for the nice words today. Nice to talk to you again. The Musgrove deal right now from disclosure from Whitecap, it's producing 14,000 BOE per day out of the 20,000 BOE per day nameplate capacity. So about 70% utilized.

Speaker 1

They do anticipate they will be fully utilized by the end of 2024. This was commissioned in March of 'twenty four. So it is their newest facility. They did build it for purpose. So we do anticipate it will be utilized fully utilized by the end of the year.

Speaker 1

Saying that the way our contract exists right now, they only need 60% utilization to fill our priority fill. And so our contract is completely full right now, down to 60% utilization. So we don't anticipate any issues with that through the length of the 10 year term. And then after that, we have a 7 year pro rata fill, following the 10 year take or pay commitment. Saying that, yes, we do think that this is a growth area for Whitecap.

Speaker 1

They do have line of sight, I think, to some acreage or trying to get some more acreage into this battery. So from our side, we do think them building a fit for purpose facility right in Musgrove where they're developing some of their best Montney wells right now in the D2 and D3 formation is a big benefit for Topaz and the infrastructure we're participating alongside Whitecap with.

Speaker 3

And one more comment, Joseph. This is Sri, obviously. With expansions, if they were to expand it, we do have the right, but not the obligation to participate alongside. So we would be willing to participate alongside the new growth projects within that.

Speaker 2

Okay, super. Yes, that's good. That's what I was hoping. Second question on the M and A side, With the low price of natural gas, we're hearing, of course, this deal was done. We hear from Verint in their conference call that they want to knock down their debt even more.

Speaker 2

They did the sale to Saturn of Saskatchewan assets. They mentioned at the end of the call in the Q and A that they were also looking at selling infrastructure. Are you seeing a lot more traffic on the infrastructure side? And between now and year end, do you think that there's chances for doing more deals?

Speaker 1

Yes. I mean, we're seeing opportunities on both sides. I think this is something I've echoed before on other conversations. It's about the quality that we're willing to put inside this organization. We don't want to be dilutive to the existing asset base that we have in place already.

Speaker 1

So from our side, we are seeing opportunities. It's we're going to be picky and choosy about which opportunities we participate in though and with which operators. I think, yes, into the latter part of this year, there probably is a need for capital and Topaz does want to be there to assist in that need for capital for select partners.

Speaker 2

In terms of deal flow, are you is it more active now than it was a year ago? Just to get a feel for that.

Speaker 1

I would say it's pretty balanced. We spend a lot of time pitching ideas and don't wait for just an opportunity to come to us. And so we're always busy with something. We continue to kind of focus and kind of adhere to our strategy. And yes, we want to be participants in any type of M and A that's out there and generate our own ideas.

Speaker 1

So I would say it's similar to what we saw last year and we're being patient on what we want to transact on.

Speaker 2

Super. That's it for me. Thanks very much and again congratulations.

Operator

Our next question comes from the line of Jamie Kubik from CIBC. Go ahead please.

Speaker 4

Yes, good morning. Thanks for taking my question. I'm just curious if you can elaborate a little bit on what you're seeing on the light oil side of your business with respect to activity that we did note some pretty good performance in light medium oil volumes in your quarter and just curious on what else you can tell us on that front and what it might mean for the rest of 2024? Thanks.

Speaker 5

Hi, Jamie.

Speaker 3

Thanks for the question. We definitely saw stronger performance even than we were expecting across some of the Southeast Saskatchewan CP title leasing and activity and also particularly in the Weyburn unit from Whitecap. So, lots of good surprises and incremental activity.

Speaker 1

In addition to that, we did see some of the top wells on our portfolio in the Charlie Lake. Of note, Archer, Tamarac Valley and Tourmaline continue to deliver some very strong results into the Charlie Lake, which is added to that lighter oil mix for us. Okay. Thank you for that. And maybe

Speaker 4

next question, you did note a decent carryout of drill bit uncompleted wells on the natural gas side of the business. Can you just talk about how you expect that to phase over the second half of twenty twenty four as those wells come on? Thanks.

Speaker 1

Yes, I think we've got a real great inventory of drilled uncompleted wells right now and we saw that with the 15% of activity through Q2. We do anticipate that completions will happen into the latter part of this year. I think operators are doing a really good job of watching what gas price is doing and trying to put volume on when the price kind of demands it. And so we do anticipate that there is a demand situation setting up into the latter part of 'twenty four into 'twenty five. And so we think operators are kind of following that.

Speaker 1

Keep in mind, some of these pads are super pads. They can take anywhere up to 3 months to complete. And so this isn't like just flipping a light switch. They do take time to get into completion.

Operator

Thank you. Our next question comes from the line of Patrick O'Rourke from ATB.

Speaker 5

This is stepping in for Patrick here. So my first question, your liquids volumes in the quarter were impressive. They're ahead of the midpoint of your full year guide for liquids. Kind of touched on a little bit, but maybe you can elaborate a little bit more. What's been the driver of the outperformance here?

Speaker 5

And based on what you know so far this point in the year, what's your outlook for liquids volumes through the balance of the year?

Speaker 3

Yes. So, the outperformance definitely impressed us. I know that some of the Clearwater volumes for Q1 were held back waiting for TMX to come on. So there is a bit of excess that came through in Q2. In addition, I just think it's quick cycle time projects in response to strong WTI pricing.

Speaker 3

So we do have a range within our guide because we don't control the capital. So we estimate about 30% total liquids. We obviously saw that jump up in Q2, but we would estimate somewhere between around 30% for the whole year average. And we do expect the gas to kind of catch up in Q3, Q4. So, I think our estimates the range will be something we hold on.

Speaker 5

Thanks for the color on that. And for my second question, I guess I first want to say congratulations on both the dividend raise and the Mujeram infrastructure deal for Whitecap. You kind of touched on this a little bit already as well, but maybe I can frame the question in a slightly different way. Can you walk us through the current pipeline that you're seeing for deal flow relative to the past and how things have kind of evolved in terms of both resource and infrastructure opportunities?

Speaker 1

Yes. I think from 'twenty one to kind of end of 'twenty two, it was the busiest we'd ever seen. We're kind of looking at opportunities twice a week. That's obviously slowed down a little bit. What we witnessed, I think, over the last year is cost of capital is still tough to achieve.

Speaker 1

I mean, we think equity has been a little bit expensive for operators, debt with interest rates being higher has been a more expensive cost of capital. And then from our standpoint, I think we offer another alternative. We're still seeing a lot of inbounds on opportunities. I would say this year we probably have looked at a dozen opportunities. If you want to break that down into percentage, 80% probably is related to royalty, the other 20% would be infrastructure related.

Speaker 1

We got to be pretty selective about which opportunities we want to pursue. Obviously, I talked about this on the first question from Joseph that we don't want to dilute our existing business if something is out there that operator requires funding for, but we don't view it as the same tier, when I think we have a very great portfolio of Tier 1 assets, it's going to have to be at a discount and there might be a better opportunity for these operators to go out and access debt or raise equity and not use our form of capital. We continue to be very aggressive on pitching ideas and idea generation inside our organization. We've got a great BD team that's pretty much what they spend their weeks and evenings and weekends doing. So, yes, I think from our side, we want to be reactive to opportunities in the market, but be proactive on idea generation inside of the organization.

Speaker 1

I do expect to the latter part of this year, there's still some consolidation we think that needs to happen in the basin and where we can be helpful, we will try to be with operators. Our preference is to do repeat business with existing operators. I think having partnerships that do 1 to 3 to 6 deals shows that kind of virtuous cycle that we can create with partners inside organization.

Operator

Thank

Speaker 5

you.

Operator

There are no further questions at this time. I'd now like to turn the call back over to Mr. Staples for any final closing comments.

Speaker 1

Yes. Thanks, everyone, for their support. Yes, hopefully, everybody gets a chance to enjoy the rest of the summer. We'll talk to you in Q3.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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Key Takeaways

  • Q2 cash flow: $70.6 M ($0.49 per diluted share), up 4% per share versus both the prior quarter and Q2 2023, driven by 12% higher crude oil and 20% higher heavy oil royalty production plus stronger oil prices.
  • Alberta Montney acquisition: Completed in Q2, marking Topaz’s third infrastructure deal in 12 months and expected to add C$13–14 M of annualized contracted revenue.
  • Dividend growth: Board approved a second 2024 dividend increase to C$1.32 per share (65% total growth since inception); infrastructure revenue covers 45% of the dividend and hedges support sustainability down to C$0.01/Mcf gas and US$50/bbl oil.
  • Production & drilling activity: Q2 royalty volumes averaged 18,700 BOE/d (33% liquids) with heavy oil exceeding 5,000 BOE/d; operators spud 94 wells (15% of WCSB activity) and invested ~C$400 M on Topaz acreage.
  • Financial performance: Q2 revenue and other income of C$78.4 M and free cash flow of C$69.5 M (89% margin), up 5% y/y; infrastructure assets ran at 100% capacity with a 91% operating margin, and EPS doubled versus prior year.
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Earnings Conference Call
Topaz Energy Q2 2024
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