Topaz Energy Corp

TSX:TPZ

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. First Quarter 2024 Results Conference Call. [Operator Instructions] Thank you. Mr. Kirker, you may begin your conference.

[W. Kirker, executive]

Thank you, operator, and welcome, everyone, to our discussion of Topaz Energy Corp's results as of March 31, 2024, and for the 3 months ended March 31, 2024, and 2023. My name is Scott Kirker, and I'm the General Counsel for Topaz. 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 the Topaz MD&A available on SEDAR and on our website.

I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz's President and Chief Executive Officer; and Cheree Stephenson, Vice President, Finance and Chief Financial Officer. We'll start by speaking to some of the highlights of the last quarter and the year so far and after their remarks, we open for questions. Marty, Cheree, go ahead, please.

[Marty Staples, executive]

Thank you, Scott. Good day, everyone. Topaz had a strong first quarter marked by royalty production that achieved the midpoint of our 2024 guidance range and infrastructure revenue that is on track to achieve the high end of our 2024 guidance range.

Royalty portfolio continues to be demonstrated through the strong, reliable level of operator development drilling across our acreage. During the first quarter, 145 gross wells were drilled on our undeveloped royalty lands, which represents 12% of the total wells drilled across the WCSB.

During Q1 of last year, our royalty acreage saw the same level of activity, 12% of wells spud across the WCSB. The total wells drilled across Topaz's royalty acreage from Q1 2021 to Q1 2024, represents 13% of total drilling activity across the Western Canadian Sedimentary Basin. Over that same time, through operator funded development and strategic diversification, Topaz's heavy oil royalty production has increased significantly from 50 barrels a day to 2,877 barrels a day, predominantly through our Clearwater royalty assets, and Topaz's total oil and liquids royalty production has increased sixfold from 955 barrels a day to 5,780 barrels per day.

Based on operator drilling plans, 9 to 11 rigs will remain active across the royalty acreage through spring breakup, a record level for Topaz as spring conditions typically limit development activity, 25 to 29 drilling rigs are expected to be active across the royalty acreage following spring breakup.

From a financial perspective, Topaz generated first quarter revenue and other income of $78.2 million. In Q1, 54% of our revenue was from oil and liquids royalty revenue, 23% from natural gas royalty revenue and 23% from Topaz's infrastructure outset. First quarter cash flow was $67.9 million or $0.47 per basic and diluted share. We distributed 68% of cash flow to shareholders through our dividend, which represented a 6.4% trailing yield to the average share price during the first quarter.

Our first quarter dividend was 3% higher than the prior quarter and represents the company's seventh dividend increase or 60% dividend growth to date. For Q1, we generated $19.9 million of excess free cash flow and reduced debt by 6%. We remain disciplined on our investment strategy and continue to evaluate a number of opportunities.

The operator of our Clearwater natural gas gathering infrastructure has completed approximately half of the constructions. Topaz will fund the project once the infrastructure is commissioned, which is targeted for late 2024. This infrastructure is expected to gather natural gas on our existing royalty acreage in addition to generate long-term fixed processing fees.

Topaz first quarter average royalty production of 19,200 BOE per day was 30% oil and liquids and increased 2% from Q1 2023. Operators spud 145 gross wells and reactivated 6 gross wells on our acreage during the first quarter.

Drilling was diversified across the portfolio as follows: 53 Clearwater, 35 Northeast B.C. Montney, 25 Deep Basin, 15 Peace River, 6 Central Alberta and 11 Southeast Saskatchewan/Manitoba.

We estimate that our operators spent between $0.5 billion and $0.6 billion in development capital across our acreage during this quarter. First quarter royalty revenue of $60.3 million represented 77% of Q1 total revenue and generated a 99% operating margin.

First quarter infrastructure revenue of $17.9 million represented 23% of Q1 revenue, our infrastructure assets realized 99% capacity utilization and generated an 89% operating margin.

During Q1 2024, Topaz's total realized growth production price was $34.55 per BOE. For Q1 2024, Topaz's realized natural gas price represents 100% of the AECO 5A benchmark and Topaz realized heavy crude oil price represents 97% of the WCS crude oil benchmark price.

Topaz's 2024 dividend is supported by Topaz's infrastructure revenue and hedging strategy and is sustainable to commodity prices of $0.01 per Mcf natural gas and USD 50 per barrel crude oil.

For 2024, 18% of natural gas is hedged at a weighted average price of CAD 3.17 per Mcf and 40% of oil and liquids is hedged at a weighted average floor price of CAD 102.54 per barrel using collar structures to maintain upside participation.

We reconfirm our 2024 guidance ranges of 18,800 to 19,600 BOE per day of royalty production and $69 million to $71 million of infrastructure processing revenue and other income. Based on current commodity pricing and before acquisitions, Topaz expects to end 2024 with net debt of 0.8x net debt to EBITDA, the 2024 dividend represents a 64% payout ratio based on recent commodity price forecast, which maintains financial flexibility to allocate excess free cash flow growth or further dividend increases.

We're pleased to answer any questions at this time. Back to you, operator.

[Operator]

[Operator Instructions]

First question comes from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

[Patrick O'Rourke, analyst]

I guess it's sort of more of a broad capital allocation philosophical question here. But just wondering, your debt is below 1 turn here. Your payout ratio ticked down a notch in the quarter to 64%. Wondering how you're thinking about the capital allocation decision today between the opportunity set for M&A, further debt reduction and potential for increased dividends going forward here?

[Marty Staples, executive]

Patrick, thanks for the question. We've been pretty, I think, active paying down debt over the last 18 months in excess of over $100 million. We'll continue to pay down debt. We do continue to see opportunity inside the M&A space. But obviously are being very disciplined in our approach going forward on what we want to acquire and what price we want to acquire. Our dividend policy has always been an output of the business.

So as we grow the dividend we will continue to grow, I think we've achieved that over 7 dividend raises since inception, and you've seen that kind of step up as we see growth inside the system. So allocation-wise, number one, it's going to be paid down some debt. Number two, it's going to use any excess free cash flow for M&A that we can source. And then if we achieve that M&A, we will step up the dividend, but it's always going to be a function of growth.

[Patrick O'Rourke, analyst]

Okay. And then maybe just kind of switching gears a little bit here. You guys are obviously -- a meaningful part of your business is in the Clearwater. Wondering if you can provide maybe just a little bit of insight, color, context with respect to Clearwater activity trends in terms of spuds and spend that you're seeing and maybe trends within sort of IP rates and the production profile there.

[Marty Staples, executive]

Yes, for sure. I think we did highlight that we saw increased activity. This quarter, we were up 26% on the drilling front, which was impactful to Topaz. We have seen some shift to injector wells for water flood. And I think you've seen to produce some of our operators' public disclosure, both Headwater and Tamarack Valley are having some pretty significant impacts to that from a positive standpoint.

I think what we saw Headwater release last quarter was 2,600 barrels of sustainable production through their waterflood. And right now, we think there's anywhere from 27 to 29 pilots in place through Nipisi Martin Hills, and we have a big chunk of that. So when you can take recovery factor and double it, Martin Hills is kind of that 4% to 5% recovery factor, and Nipisi is around 7% to 8%. That's just added benefit from a royalty standpoint.

Not only do you get bigger recovery, but you get longer reserve life out of it. So a big win for us. So yes, activity has been very consistent. It's stepped up a little bit and we did talk about in the quarter went from 50 barrels to almost 3,000 barrels a day of royalty production. It's been quite impactful.

[Cheree Stephenson, executive]

I'd chime in on that, yes, so from an activity perspective, on the quarter, we did see a 26% increase in gross spreads and these 2 private operators come into play on some of the existing acreage we own and also some acreage of some existing royalty acreage. So that's super positive for us to have that incremental activity, we did also see some cold weather-related production impacts through January, and also some production deferred from being sent down to sales. So we estimate that somewhere between 120 and 200 barrels that sort of reduced our Q1 production. So we look forward to getting all those wells onstream Q2 and forward.

[Patrick O'Rourke, analyst]

And sorry, those private operators, would you consider those -- that spud activity in the more exploratory portion of the acreage base.

[Marty Staples, executive]

It's a split between the 2. So we saw some on our northern acreage up in EV Golden. And then we did see 1 kind of in Nipisi proper, and those are yielding really good results.

[Operator]

Next question comes from Jamie Kubik at CIBC.

[James Kubik, analyst]

I've got a couple of questions here. Can you just talk a little bit maybe about the wells that were reactivated the past couple of quarters? You talked about 6 reactivated this quarter, 10% last quarter. Just curious what the reason was for the reactivation? Or was it operational or price sensitive or anything on that nature that you can talk about?

[Cheree Stephenson, executive]

Yes, for sure. They were predominantly oil wells and just increased activity from a private operator on some of the central border wells, that's the vast majority of them. So we have a lower royalty rate on those, but nice to see they brought back on. And I think they are older wells, but definitely stronger WTI pricing has helped that.

[James Kubik, analyst]

Okay. And then on the well spud during the quarter, but not on production, you disclosed that at 95 of the 145 wells not on -- or 95 wells spud, but not on production out of 145 that were spud in the quarter. That does look to be a historic high for Topaz. Can you just elaborate a little bit on some of the dynamics at play there and what's going on, on that front and maybe the mix of wells in that 95 that are not yet on production.

[Cheree Stephenson, executive]

Yes, for sure. So there's about 25 between Clearwater and Peace River and there the vast majority of the delta would be predominantly terminaling-related wells to be based in the Northeast BC Montney. And I think it's just timing of spring breakup, getting wells drilled and longer drill times with a multi-well pad, et cetera. So it is higher than normal but we are looking forward to those production results coming through the balance of the year.

[Operator]

We have no further questions. I will turn the call back over for closing comments.

[Marty Staples, executive]

Thanks, everyone, and we look forward to talking to you in Q2 call.

[Operator]

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