Topaz Energy Corp.

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Second Quarter 2023 Resolve 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 two. Thank you, Mr. Staples. You may begin your conference.

Good day. Thank you, Joelle. And good morning, everyone. Welcome to our discussion of Topaz Energy Corp's results as of June 30th, 2023, and for the three and six month ended June 30th, 2023 and 2022. My name is Marty Staples and I am president and CEO of Topaz. With me today is Sri Stevenson, CFO and VP Finance. Before we get started, I'll refer you to the advisories on forward-looking statements contained in the news release. as well as the advisories contained in the TOPEZ annual information form and our MD&A available on CDAR 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 last quarter and our year so far. After these opening remarks, we'll be open for questions. TOPEZ second quarter average royalty production of 18.4 thousand BOE per day includes a new record in total liquids royalty production 5.5,000 barrels per day. Second quarter production was approximately 2.5% lower than the prior quarter due to planned facility maintenance, spring breakup conditions, and unplanned impacts related to BC and Alberta wildfire situation. However, no significant asset damage or injuries have been reported. From Q2 of last year, production grew 10% driven by acquisition activity and operated funded drilling development across our acreage. Year over year, Topaz's second quarter total liquids royalty grew, production grew by 41%. During the second quarter, 106 gross wells were drilled on our acreage, a 4% increase from prior year. Of the new wells drilled, 38 were brought on production, leaving 68 gross wells that will be brought on production in subsequent periods. Second quarter drilling activity was diversified across Topaz's portfolio as follows. 51 Clearwater, 31 Northeast BC Montney, 11 Peace River, 1 West Central Alberta, and 12 Southeast Saskatchewan slash Manitoba. Year-to-date in 2023, 270 gross wells were spread across our royalty acreage, a 13% increase from the first half of 2022. Year-over-year, our acquisition activity increased our gross royalty acreage 3%. Of the 270 gross wells drilled, 167 gross wells, or 62%, were drilled in the Clearwater and Northeast BC Montane our high-growth areas. Average royalty production from these areas combined has increased 21%. There are currently 26 to 28 rigs active across our royalty acreage, and based on planned operator drilling activity, we expect this activity to continue through the third quarter. Our Q2 royalty production revenue of $57.7 million was 29% weighted towards natural gas royalty revenue and 71% to total liquids royalty revenue. Topaz's realized pricing before hedging was $2.38 per mcf for natural gas and $90.61 Canadian for light oil. Relative to benchmark pricing, ACO 5A and Canadian dollar Edmonton PAR, Topaz's differential for quality and transport were 7 cents per mcf for natural gas and $4.91 per barrel for light oil. In Q2, Topaz realized a $4.9 million hedging gain, which increased Topaz's total realized price on a per BOE basis by $2.95, or 9%. Our infrastructure business continues to deliver inflation-protected income, which further supports our dividend. Through Q2, we realized 98% utilization of our natural gas processing capacity, despite intermittent impacts related to the BC and Alberta wildfires. Topaz generated $13.4 million in processing revenue and $3.6 million in other income from third-party fees at non-owned infrastructure assets. Topaz incurred $3 million in operating expenses, which is higher than previous quarters due to planned facility turnaround maintenance and includes costs that were forecasted as capital maintenance expenditures. Overall, our infrastructure assets generated 82% operating margin in the second quarter. Topaz generated cash flow of $67.5 million or $0.47 per basic share and diluted share and we distributed 64% of cash flow to shareholders through a $0.30 per share quarterly dividend. On July 31st, our board approved a $0.01 per share increase to our quarterly dividend which translates to $1.24 per share on an annual basis and represents a 5.8% yield to our current share price. The dividend increase is consistent with our strategy to continue to provide dividend increases alongside revenue growth. Our dividend is sustainable to low commodity prices, and our estimated 2023 payout ratio remains at the lower end of our long-term range of 60 to 90% payout, which maintains flexibility for growth, strategic growth opportunities, or further dividend increases. In Q2, our access-free cash flow was allocated to debt repayment, and to date in 2023, we've reduced our net debt $53.5 million, or 13% from year-end 2022. We exited Q2 with $352.4 million of net debt and approximately $600 million of available credit capacity. Subsequent to the second quarter, TOPA has announced the tuck-in acquisition of royalty and infrastructure assets from an existing partner in the Charlie Lake and Clearwater operating areas, which closed on July 31st. Total consideration of $39.5 million was funded through our existing credit capacity, and the acquisition is estimated to provide $6 million of annual stable revenue before consideration of royalty acreage development attributed to the 17,000 gross acres of new royalty acreage added to the portfolio. From a guidance perspective, we've confirmed our previously announced 2023 royalty production estimate between 18.3 and 18.8 thousand VOE per day. We've increased our estimate of processing revenue and other income attributed to the infrastructure assets from $65 million previously to $69 million. The increase is attributed to higher year end to date financial results, certain inflationary processing fee increases, higher estimated third party fees and the recent infrastructure acquisition. No significant changes are expected to our overall cost estimates for 2023. And we estimate we'll exit 2023 with net debt of approximately $340 million, which represents a 16% reduction from year end 2022. We look forward to discussing the third quarter on our next call, and we're pleased to answer any questions at this time.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. Your first question comes from Jeremy McRae with Raymond James. Please go ahead.