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Good morning. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Fourth Quarter 2024 Results Conference Call. [Operator Instructions]

Thank you. Mr. Staples, you may begin your conference.

Thank you, Ina, and welcome, everyone, to our discussion of Topaz Energy Corp.'s results as at and for the period ended December 31, 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 Topaz annual information form 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 fourth quarter 2024 highlights. After these opening remarks, we will be open for questions.

2024 marked another year of transformational growth for Topaz. During the year, $430.6 million of royalty and infrastructure acquisitions were completed, which contributed to a 38% increase in annualized processing revenue, an 11% increase to year-end 2024 royalty production and a 52% increase to our year-end royalty acreage. Topaz's fourth quarter royalty production over 20,300 BOE per day, 8% higher than Q3 2024. While year-end 2024 royalty production of 21,400 BOE per day increased 14% over 2023 annual production, driven by 13% higher liquids royalty production and 14% higher natural gas royalty production from our recent acquisitions.

Topaz's fourth quarter royalty revenue of $60.2 million represented 73% of total revenue and generated a 99% operating margin, while fourth quarter processing revenue and other income achieved a new company record of $21.9 million, which was 19% higher than Q4 2023. Our infrastructure portfolio generated 100% utilization and a 93% operating margin in the quarter. Our full year 2024 profitability was driven by record liquids production, 18% higher processing revenue and $11.5 million natural gas hedging gain or $0.40 in mcf.

In 2024, operators spud a record 630 gross wells, 23.2 net across our royalty acreage, which increased 9% from 2023 and represents 15% of the total rig releases across the Western Canadian Sedimentary Basin during the year. In 2024, operators spent approximately $2.5 billion of capital, a 4% increase from the prior year. This operator-funded development was demonstrated through our annual reserve report, which evaluates Topaz proved developed producing and probable developed reserves before any future undeveloped locations. Topaz's year-end 2024 total proved plus probable reserves of 59.5 million BOE, increased 23% from year-end 2023, which includes the impact of 2024 royalty production volume of 7 million BOE.

For our proved plus probable developed reserves, operators generated 10.5 million BOE of drilling extensions and improved recovery. Relative to the 7 million BOE produced in 2024, this represents a new company record production replacement of 1.5x at no cost to Topaz. During the fourth quarter, operators spud 175 gross wells on our acreage, which was diversified across our portfolio with 57 in the Clearwater, 33 in Northeast BC Montney, 42 in Deep Basin, 16 in Peace River, 6 across Central Alberta and 21 in Southeast Saskatchewan and Manitoba. In 2024, 55% of the gross well spud across Topaz's royalty acreage were in the Clearwater and Northeast B.C. Topaz's high-growth royalty areas. Since the beginning of 2023, 44% of all new wells drilled across the Clearwater area in Alberta and 26% of all new wells drilled across Northeast BC Montney area, where we're on Topaz royalty acreage, where Topaz's average royalty production has increased 34% and 11%, respectively.

Based on our planned operator drilling activity, we expect the current 30 to 32 active rigs on our acreage will be maintained through the first quarter of 2025. Topaz generated Q4 total revenue and other income of $82 million, cash flow of $73.9 million and an 87% free cash flow margin, providing $71.4 million of free cash flow. Cash flow of $0.49 per diluted share and free cash flow of $0.47 per diluted share, both increased 7% from Q3 2024. Topaz distributed $50.6 million in quarterly dividends, $0.33 per share during Q4, representing a 4.8% trailing annualized dividend yield to the fourth quarter average share price and generated $20.8 million of excess free cash flow was allocated to acquisition growth.

During the fall, the full year of 2024, Topaz paid $191.2 million in dividends, a 68% payout ratio, which included 2 dividend increases, growing the dividend 7% since year-end 2023. We've announced our 2025 guidance ranges of 21,000 to 23,000 BOE per day average royalty production and $88 million to $92 million of processing revenue and other income. Topaz expects to exit 2025 with net debt-to-EBITDA of 1.2x and generate a 63% payout ratio, which remains sustainable through the end of 2025 at $0 AECO and USD 55 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.

Additionally, through our recent acquisitions in 2024, the incremental $400 million of tax pools and deferred Topaz cash horizon, further enhancing our expected 2025 profitability. Thanks very much. And at this time, we're pleased to answer any questions.

[Operator Instructions] Your first question comes from the line of Patrick O'Rourke from ATB Capital Markets.

Congratulations on another solid quarter here. Just wondering if you could touch on the reserve bookings there, strong growth. Is that -- when you think about the process of that booking, is there any discretion there? Is that simply a linear extrapolation of the bookings of your royalty payers? And just curious with respect to how aggressively the waterflood results you're seeing in the Clearwater have been booked.

Yes, I can take that for sure. Patrick, it's Cheree. So it really is a delineation of our operators' reserves. And it is just obviously the proved reserves -- proved developed reserves, there's a probable wedge, but there's obviously no future undeveloped locations. We want to always make that clear. But within the changes for this year, there were technical revisions of 1.4 million barrels and that's inclusive of that overall 10.5 million barrels relative to the 7 million of BOE per day of -- or BOE of production. But of that 1.4 million BOEs of technical provisions, that's about 1.1 million attributed to the enhanced recovery within the waterflood. So our view is there's incremental value attributed to that improved recovery, but not the full value. And it is an extension and extrapolation of the primary operators' reserves for sure.

Okay. And maybe just a higher-level strategic question. Thinking about where the balance sheet is now, the payout ratio sort of being at the lower end here. How do you think about the priorities in terms of capital allocation today? Is it paying down debt? Is it potential dividend growth glide path? Or are you still seeing a significant opportunity set on the acquisition side?

Yes. Good question, Patrick. So we've been pretty, I think, focused on letting this last acquisition we did in Q3 of 2024, which was the big ad that we have with Tourmaline. We wanted to soak for a quarter or 2 before we thought about the dividend and just kind of see exactly operationally what that asset was going to do. And so we do see M&A opportunities in the system right now, and so I don't want to go out and just raise our dividend immediately. I think you can expect at least 1 dividend raise this year and we'll kind of manage that alongside with commodity and alongside with growth we're seeing inside our complex.

[Operator Instructions] Your next question comes from the line of Jeremy McCrea from BMO Capital Markets.

You just mentioned there acquisitions. Could you maybe give a little bit more detail? Are you seeing the M&A landscape more interesting right now? Is there more opportunities? What kind of rates and competitiveness are some of these deals and some of these operators are looking for? And maybe part one of the question. And then just part two, if we're a year from now, what's going to be like the surprise that we're going to be talking about on this conference call here a year from now just in terms of what was the kind of the surprise development that wasn't really being expected by a lot of the investors in that?

Yes. So from an M&A standpoint, obviously, we just announced the deal a month ago. So you can see we've been active into the early part of 2025, and that was with Logan Energy. We did a hybrid infrastructure royalty deal in the Montney Alberta Montney. I think there's more set up like that, where it seems like it's competitive either on the royalty side or the infrastructure side, but nobody can really marry those 2 together. And so that's where I think we're completely unique in the M&A space where we can do both sides of that equation.

Yes, I mean, what we're feeling right now in the industry is there's a tremendous amount of uncertainty. And I think when you hear noise like tariff and it changes every week, it creates opportunity we've been working on or unlocks opportunity we haven't thought about yet. So I do believe that there's going to be opportunity this year. In 2024, similar to 2023, we saw about $2 billion of acquisition opportunity in both years. In '23, we did $60 million in acquisitions. Last year, we did $430 million. So it was one of our busiest years we've had since inception of the company. We do see more opportunity kind of coming down the pipe right now, but I would say that there's a slight pause by everyone just kind of waiting to react to exactly what the new world or the new order is going to look like.

From our standpoint, we think we'll be transactional. We budget anywhere from $100 million to $300 million in acquisitions dollars this year. We'll generate just over $100 million of excess free cash flow. And so goal number one is to deploy that excess free cash flow into M&A. If we cannot, we'll replenish the balance sheet as you kind of suggest that, we'll just pay down some debt, and that's a good spot for us to be as well. Big surprises in the year. I think part of the biggest surprises we see every year, and that's technological changes. And I think we saw that with the response and Tamarack put their press release out this morning, look at what they've been able to achieve through a waterflood. And these are still early innings. I think we're 18 months to 24 months into kind of real waterflood development and we're seeing very sustainable oil production start coming out of a number of our areas. Lots of running room from a reserve standpoint, I think, an uplift there. That's probably number one.

Number two, I think we've seen Tourmaline start moving to a completion design that you're -- that's very popular with you. This is going from open oil to case wells. And from our standpoint, that is having some good response. And so I think that's something that we're going to see some big surprise to the upside. And think back to 2023, Tourmaline did 19 exploration projects. We were able to book 750 locations based on the capital that they spent. And so those are always tremendous surprises for us. When we can add 750 locations to our portfolio at 0 cost to Topaz, those are big surprises we like to talk about.

Cheree, would you add anything to that?

I would just add that we don't actually book those locations. [indiscernible]. No, we just -- I just think the value of the diversification of the portfolio really shone through in '24, and we see that continuing into 2025.

And your next question comes from the line of Jamie Kubik from CIBC.

Can you maybe just talk a little bit about the guidance range you gave on industry spending on Topaz lands for 2025. You indicate a scenario of potentially $2.2 billion versus upward range of $2.8 billion. Industry did do $2.5 billion in 2024. Can you just talk about what sort of scenario you might see $2.2 billion spent versus $2.8 billion spent and the impact that might have on guidance?

Sure, Jamie. So what's the overall production guide of that 21 to 23, really, when we think about guidance, we think about the midpoint back to the higher end. And so we are very optimistic. That midpoint is -- or higher up to that 23 is more a reality. And so within that, we would think about $2.5 billion to $2.8 billion of operator spending, really the lower end is more difficult to quantify. It just -- it comes down to different royalty rates and which lines is developed, et cetera. So it's not as precise as it would be if we were an operator.

And the lower end of the guide is just there as a sort of catchall given the macro uncertainty. But we definitely see good line of sight to that midpoint or high and $2.5 billion to even $3 billion of capital, if all goes well within the WCSB as far as egress and gas market goes. So I think you can think about it as a similar year-over-year in that $2.5 billion of operator capital, but few different moving parts, obviously, within the royalty rates, et cetera.

Okay. That's fair. And maybe just shifting to the M&A side of things, and you've talked about this a little bit already. But can you just speak a little bit more to the recent Montney deal that you executed on earlier this month, the growth potential you see in that asset, how it compares to previous transactions and some of the key events from that deal that we should look for in 2025?

Yes, for sure. And so Logan was a company that we were quite interested in. They had 2 kind of main core areas, one in Simonette, one in the Pouce Coupe area. We're pretty encouraged by the Montney development that was going on, early stages in Pouce Coupe. We put a GORR on 100,000 acres inside that with a $50 million capital commitment. So currently sitting on average about 2,500 BOE per day. We see that asset doubling within year 1 and probably another double on top of that by kind of end of year 3. So lots of activity that's going to take place inside that portfolio, good running room from an inventory standpoint.

And then to complement that, they're building a facility to mainly use of purpose facility. We took a 35% ownership inside that facility under a 15-year long-term take-or-pay contract. We do believe that, that 15 years will be more than enough for them to satisfy the commitment they have with the inventory there and potentially recontract that after for some volumes. So it's set up really well for kind of the recipe that we're looking for, number one, quality of the asset, number two, quality of the owner and then it translates accretively back to Topaz. And I guess on a whole, we would have paid about a 7.5x multiple between the facility and the royalty but it does with the capital commitment compress very quickly. And as I mentioned before, that's a $50 million capital commitment.

And there are no further questions at this time. I will now hand the call back to Mr. Staples for any closing remarks.

Yes. Thanks very much, everyone, and I appreciate the support through 2024 and hope 2025 is another great year. Talk next quarter.

This concludes today's call. Thank you for participating. You may now disconnect.