Topaz Energy Corp.

Good morning, my name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp fourth quarter 2022 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 the star followed by the two. Thank you. Mr. Kirker, you may begin your conference.

Thank you, Michelle, and welcome everyone to our discussion of Topaz Energy Corps' results for the three months and years ended December 31, 2022, and 2021. 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 Forum and its MD&A available on CDAR and on the Topaz website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz President and Chief Executive Officer, and Cherie Stevenson, Vice President of Finance and Chief Financial Officer. They will start by speaking to some of the highlights of the last quarter and the year so far, and after the remarks, they will be open for questions. Marty, Cherie, go ahead.

Good day. Thanks, Scott. Appreciate that. Thanks for everyone for attending. 2022 was an exceptional year for Topaz. We achieved record production of 18.3,000 BOE per day in the fourth quarter, and average production for the year was just under 17,000 BOE per day. Our average royalty production grew 20%, which includes the impact of the contractual terminating gross overriding royalty changes, which came into effect January 1, 2022. Without the Gore changes, our production growth was 26%. Fourth quarter production demonstrates the full impact of our acquisition and diversification strategy as the Delta Stream acquisition was effective for the entire fourth quarter. Most of our acquisitions have been liquids focused in order to diversify and complement our premium natural gas royalty portfolio. Q4 total liquids volume weighting was 29%, which has changed significantly from 7% total liquids volume at inception of the company. For the fourth quarter, 56% of our royalty revenue was from total liquids and 44% of royalty revenue was natural gas. Our 2022 reserve report demonstrates the strong organic development activity by our strategic operators. Year over year, our total approved plus probable developed reserve volume increased 13% to 47.5 million BOE. Drilling additions combined with positive technical revisions out of 9.1 million BOE of reserves which represents 1.5 times the replacement of 2022 royalty production of 6.2 million BOE. In addition, our acquisitions added 2.6 million BOE of reserves. Please note that as a royalty entity not responsible for the capital, we do not book probable locations or future development capital. The probable and developed reserves attributed to our royalty acreage can be seen through our strategic operator reserve reports, which are available or will be available on CDAR. Our infrastructure business continues to provide stable, inflation-protected income, which enables strong dividend support. Through 2022, we realized 99% utilization of our natural gas processing capacity and generated total processing revenue and other income of $65.8 million. Our exposure to operating costs is limited to approximately 50% of our infrastructure assets, as per the 10 to 15-year contracts we have in place. in addition to certain contractual inflation adjustment mechanisms, provide strong inflation protection for Topaz. We incurred $6.4 million in operating expenses in 2022, resulting in infrastructure operating income of $59.4 million, which represents 38% of our total 2022 dividend. In the fourth quarter, Topaz generated cash flow of $86.3 million, 11% higher than the prior quarter. For 2022, Topaz generated cash flow of $370 million, which represents 75% growth over 2021. In 2022, we distributed 47% of our cash flow to shareholders through dividends, and we allocated $173 million of excess free cash flow and used just over one-time leverage to complete a combination of royalty and infrastructure acquisitions. In total, we completed $436 million in our acquisitions during 2022. The royalty acquisitions are 80% liquids weighted and increased our royalty acreage 15%, which are estimated to provide 2,000 BOE per day of 2023 royalty production. The infrastructure acquisition increased our 2023 fixed revenue by 7%. Our hedging strategy is designed to protect acquisition economics and dividend sustainability, which generated a $1.6 million gain in Q4 2020. and the mark-to-market gain of all outstanding contracts as of February 28th forward pricing is approximately $11 million. Our 2023 natural gas fixed price heading contracts represent approximately 16% of our 2023 estimated natural gas production and provide an average of $0.38 per MCF above current stripped to Topaz's 2023 guidance. Recently, we financially diversified approximately 9% of our 2023 natural gas pricing exposure using ACO basis of $0.78 per MBTU, which is equivalent to the actual transport cost to deliver to U.S. markets. During the fourth quarter, we expanded and extended our four-year covenant-based credit facility to $700 million, which has an accordion feature providing $300 million of incremental credit capacity for which we do not pay standby fees. During the quarter, Topaz reduced net debt by $34 million, and subsequent to year end, we have repaid an additional $55 million on our credit facility. We have provided a 2023 guidance range of $308 to $316 million, which is based on estimated average annual production range between 18.3 and 18.8 thousand BOE per day, the midpoint of which represents 10% growth over 2022. Our guidance is based on expected operator development plans, commodity prices of $2.86 an MCF for natural gas, eco-based, and U.S. $75.55 barrels WTI for crude oil, and incorporates outstanding financial derivative contracts. After payment of 2023 estimated dividends of $173 million, Topaz expects to generate between $114 and $121 million of excess free cash flow. exiting 2023 with estimated net debt below $290 million before giving effect to any incremental acquisitions. We're pleased to share achievements that continue to expand our trading liquidity despite Topaz's young history as a public company. In addition to being added to the S&P TSX Composite Index in December 2021, Topaz was added to the FTSE Renaissance Global IPO Index in December of 2022 and will be added to the FTSE Small Cap Index of effective March 2023. We have continued to improve our ESG profile and recently achieved low risk ratings from Morningstar Sustainalytics and Institutional Shareholder Services, which demonstrates Topaz's unique energy investment structure. I look forward to discussing Q1 with you on the next call and we're pleased to answer any questions at this time.