Topaz Energy Q2 2024 Earnings Call Transcript

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July 30, 2024

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
00:00 / 00:00

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Operator

Good morning. My name is Lara, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp second 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 star, followed by the number two. Thank you. Mr. Staples, you may begin your conference.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Thank you, Lara, and welcome everyone 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 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 on 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 highlights of the second quarter of 2024. After these opening remarks, we'll be open for questions.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Topaz had a very strong second quarter, marked by cash flow of CAD 70.6 million, or CAD 0.49 per diluted share, representing a 4% per share increase over both the prior quarter and prior year. Second quarter cash flow growth from the last year was driven by 12% higher crude oil and 20% higher heavy oil royalty production, in addition to higher realized oil pricing. The Alberta-Montney infrastructure acquisition that was completed during the second quarter marks Topaz's third infrastructure acquisition over the past 12 months and is expected to provide CAD 13 million-CAD 14 million 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 eighth dividend increase to date. The annualized dividend of CAD 1.32 per share represents 65% share growth since Topaz's inception.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

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 $50 per barrel crude oil. For the remainder of 2024, 18% of natural gas is hedged at a weighted average price of CAD 3.17 per MCF, and 40% of oil and total liquids is hedged at a weighted average floor price of CAD 102.54 per barrel, using collar structures to maintain upside participation. Topaz's second quarter average royalty production of 18,700 BOE per day was 33% total liquids, as light and 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.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

During the second quarter, 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 first quarter of 2024. Operators spud 94 gross wells and reactivated 7 gross wells on our acreage during the second quarter. 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 CAD 0.4 billion in development capital across our acreage during the quarter. Based on operator drilling activity, we expect the current 28-31 active rigs on Topaz's acreage will be maintained through the third quarter of 2024.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Based on operator disclosure, we estimate that 20% of Topaz Clearwater heavy oil is now supported by water flood, which is demonstrating positive response for improved recovery and stabilized production rates. Topaz's second quarter royalty revenue of CAD 60.2 million represented 77% of total revenue and generated a 99% operating margin. Q2 2024 royalty revenue increased by 4% over Q2 2023. Second quarter processing and other income of CAD 18.2 million 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 CAD 78.4 million and free cash flow of CAD 69.5 million, which increased 5% from the prior year and represents an 89% free cash flow margin.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Second quarter earnings per share was 2 times higher than the prior year due to higher royalty production and processing revenue and lower operating finance and amortization expenses. Topaz distributed CAD 46.4 million in dividends during the quarter, resulting in a 66% payout ratio and generated CAD 23.1 million in excess free cash flow, which was allocated to acquisition growth. We have reconfirmed our 2024 guidance ranges of 18.8-19.6 BOE per day of royalty production and CAD 75.5 million-CAD 78 million 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 CAD 345 million and CAD 355 million, or 1.1x net debt to EBITDA. The 2024 dividend represents a 66% payout ratio based on recent commodity price forecasts, which maintains financial flexibility to allocate excess free cash flow to acquisition growth or further dividend increases.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

We are pleased to answer any questions at this time.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the number one on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star, followed by the number two. If you're using a speakerphone, please lift your hands up before pressing any key. Again, should you have a question, please press star, followed by the number one. One moment, please, for your first question. Our first question comes from the line of Josef Schachter from Schachter Energy Research. Go ahead, please.

Josef Schachter
President at Schachter Energy Research

Good morning, Marty and Cheree, and congratulations on the quarter and the dividend increase. The market likes it. New record high for the stock today, so congratulations on all that. My questions, two of them. One relates to the Musreau asset deal with Whitecap. 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, Grant was talking about that, would they, if they do an expansion or a new facility, would you be involved in that as well?

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Yeah, sure. So yeah, thanks, Josef, for the nice words today. Nice to talk to you again. The Musreau 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. They do anticipate they will be fully utilized by the end of 2024. This was commissioned in March of 2024, 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. 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.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

And then after that, we have a 7-year pro rata fill following the 10-year take-or-pay commitment. Saying that, yeah, we do think that this is a growth area for Whitecap. They do have a 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 Musreau, 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.

Cheree Stephenson
Cheree Stephenson
CFO at Topaz Energy Corp

One more comment, Josef. This is Cheree, 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 any growth projects within that.

Josef Schachter
President at Schachter Energy Research

Okay. Super. Yeah, that's good. That's what I was hoping. Second question on the M&A side. With the low price of natural gas, we're hearing, of course, this deal was done. We hear from Veren in their conference call that they want to knock down their debt even more. They did the sale to Saturn of Saskatchewan assets. They mentioned at the end of the call in the Q&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?

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Yeah. 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. So from our side, we are seeing opportunities. We're going to be picky and choosy about which opportunities we participate in, though, and with which operators. I think, yeah, 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.

Josef Schachter
President at Schachter Energy Research

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

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

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. So we're always busy with something. We continue to kind of focus and kind of adhere to our strategy. Yeah, we want to be participants in any type of M&A that's out there and generate our own ideas. 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.

Josef Schachter
President at Schachter Energy Research

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

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Thanks very much, Josef.

Operator

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

Jamie Kubik
Jamie Kubik
Director of Equity Research at CIBC

Yeah, 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. 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.

Cheree Stephenson
Cheree Stephenson
CFO at Topaz Energy Corp

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

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

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

Jamie Kubik
Jamie Kubik
Director of Equity Research at CIBC

Okay. Thank you for that. And maybe next question, you did note a decent carryover of drilled but uncompleted wells on the natural gas side of the business. Can you just talk about how you expect that to play out over the second half of 2024 as those wells come on? Thanks.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Yeah, 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 2024 into 2025. And so we think operators are kind of following that. Keep in mind, some of these pads are super pads. They can take anywhere up to three months to complete. And so this isn't like just flipping a light switch. They do take time to get into completion.

Jamie Kubik
Jamie Kubik
Director of Equity Research at CIBC

Okay. That's all for me. Thanks.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Thank you, Jamie. Have a great day.

Operator

Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press star, followed by the number one on your touch-tone phone. Our next question comes from the line of Patrick O'Rourke from ATB. Go ahead, please.

Nolan Akins
Equity Research Associate at ATB

Hi. Good morning. Thanks for taking my question. This is Nolan Aiken stepping in for Patrick here. So my first question, your liquid volumes in the quarter are impressive. They're ahead of midpoint of your full-year guide for liquids. Kind of touched on it a little bit, but maybe you can elaborate a little bit more. What's been the driver for the outperformance here? And based on what you know so far at this point in the year, what's your outlook for liquid volumes through the balance of the year?

Cheree Stephenson
Cheree Stephenson
CFO at Topaz Energy Corp

Yeah. 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 was a bit of an excess that came through in Q2. In addition, I just think it's quick cycle time projects in response to strong WTI pricing. 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 averaged. 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.

Nolan Akins
Equity Research Associate at ATB

Thanks for the color on that. For my second question, I guess I first want to say congratulations on both the dividend raise and the Musreau 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?

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Yeah. I think from 2021 to kind of end of 2022, it was the busiest we'd ever seen. We were kind of looking at opportunities twice a week. That's obviously slowed down a little bit. What we've witnessed, I think, over the last year is cost of capital is still tough to achieve. 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. We got to be pretty selective about which opportunities we want to pursue.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Obviously, I talked about this on the first question from Josef, that we don't want to dilute our existing business. If something is out there that an 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 one assets, it's going to have to be at a discount. 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.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

So yeah, I think from our side, we want to be reactive to opportunities that are in the market, but be proactive on idea generation inside of the organization. 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 one to three to six deals shows the kind of virtuous cycle that we can create with partners inside our organization.

Nolan Akins
Equity Research Associate at ATB

Awesome. Thank you very much for the color there. I'll turn the call back.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Thank you.

Operator

Thank you. Just a reminder, ladies and gentlemen, should you have a question, please press star, followed by the number one on your touch-tone phone. 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.

Marty Staples
Marty Staples
CEO at Topaz Energy Corp

Yeah. Thanks, everyone, for their support. Yeah, 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 line. Have a lovely day.

Executives
    • Cheree Stephenson
      Cheree Stephenson
      CFO
    • Marty Staples
      Marty Staples
      CEO
Analysts
    • Jamie Kubik
      Director of Equity Research at CIBC
    • Josef Schachter
      President at Schachter Energy Research
    • Nolan Akins
      Equity Research Associate at ATB
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