Topaz Energy Corp.

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp third quarter 2023 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'd like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw your question, you can press star followed by two. Thank you, Ian. I'll now hand the floor to Scott Kirker. Please begin.

Thank you, Mark, and good morning, everyone. Welcome to our discussion of Topaz Energy Corps' results as of September 30, 2023, and for the three and nine months ending September 30, 2023, and 2022. 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 CDAR 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 President and Chief Executive Officer, and Cherie Stevenson, 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 the remarks, we'll be open for questions. Bernie, should we go ahead?

Thanks, Scott. Good morning, everyone, and happy Halloween. Topaz's third quarter average royalty production of 18.6 thousand BOE per day includes another new record in total liquids royalty production of 5.7 thousand barrels per day. Third quarter production was 145 BOE per day higher than the prior quarter despite continued wildfire impacts that reduced production during the first half of the third quarter. Year-to-date 2023, average production of 18.6,000 BOE per day is just above the midpoint of our 2023 royalty production guidance of 18.3 to 18.8,000 BOE per day. Average royalty production is 13% higher than the prior year comparative period. Notably, since the completion of the DeltaStream royalty acquisition one year ago, Topaz's royalty production has increased 5% per basic and diluted share. The growth is entirely attributed to operator development at no cost to Topaz. During the third quarter, 160 gross wells were spread across our relative acreage, diversified as follows. 68 Clearwater, 37 Northeast BC Motney, 30 Deep Basin, 16 Peace River, 3 Central Alberta, and 6 Southeast Saskatchewan Manitoba. In 2023, 430 gross wells were spread, a 5% increase from the prior year. 63% of the 430 gross wells spud were in the Clearwater in northeast BC, Topaz's high-growth areas. Average 2023 royalty production from these combined areas has increased 34% since 2022. Topaz continues to see a reliable and meaningful share of WCSB production and drilling activity across its royalty portfolio. The operator working interest production across Topaz's royalty acreage represented approximately 8%, total WCSB production, and the 430 gross well spread across Topaz's acreage represents approximately 13% of the total rig count across the WCSB. Based on planned operating drilling activity, Topaz expects that the current 26 to 28 active drilling rigs on its royalty acreage will be maintained through the fourth quarter. Our Q3 royalty production revenue of $67.6 million was 27% weighted towards natural gas royalty revenue and 73% to total liquids royalty revenue. Topaz's realized pricing before hedging was $2.53 per MCF for natural gas, $103.58 Canadian for light oil, and $89.78 Canadian for heavy oil. Relative to benchmark pricing, Topaz's realized pricing differentials for natural gas and light oil were consistent with the prior quarter. For heavy oil, our realized pricing differential to the Canadian WCS benchmark tightened 37% due to revised pricing on certain heavy oil production. And in addition, the WCS benchmark differential tightened from U.S. 1507 to Q2 U.S. $12.91 in Q3. For the third quarter of 2023, Topaz's total realized pricing was $39.61 per BOE, a 15% increase from the prior quarter attributed to both higher commodity pricing and revised heavy oil royalty pricing. Our infrastructure business continues to deliver stable, inflation-protected income, and through Q3, we realized 99% utilization of our natural gas processing capacity, despite impacts related to wildfires during the first half of Q3. Topaz generated $14.4 million in processing revenue and $3.8 million in other income from third parties. Topaz incurred $1 million in operating expenses, which is lower than the prior quarter when higher maintenance and turnaround expenses were incurred. Overall, our infrastructure assets generated a 95% operating margin in the third quarter. COPAZ generated a cash flow of $74.7 million, or $0.52 per basic and diluted share in the third quarter, and we distributed 60% of our cash flow to shareholders through a $0.31 per share quarterly dividend. Our dividend is well supported by our stable infrastructure income, as it covers 40% of that dividend. Using a current oil strip price forecast, our 2024 payout ratio would be just over 70%, even at $0 ECO. This demonstrates the flexibility Topaz to continue to reinvest excess free cash flow and continue to increase the dividend. To date in 2023, we've generated $78.6 million of excess free cash flow, $40 million of which was invested in royalty and infrastructure and water assets in the Clearwater and Peace River areas, which generates just over $6 million per year in stable income. From Q3 of last year, Topaz's quarterly dividend has increased 11% and Topaz has reduced net debt by 76.7 million or 17%. We exited the third quarter of 2023 with 363.2 million of net debt and approximately $600 million of available credit capacity. Subsequent to the third quarter, Topaz entered into definitive agreements for an acquisition of a royalty and infrastructure assets from a Canadian energy producer in the Clearwater area. The royalty assets, adding 20,000 gross acres in the West Nipissi area, were acquired October 25th, 2023. The Martin Hill infrastructure assets are being built through 2024, and TOPEZ will acquire a 99% working interest upon completion and commissioning. The total consideration of $26.3 million for the royalty and infrastructure assets is estimated to generate $3.7 million of incremental infrastructure income once completed, half a million dollars of incremental natural gas, royalty production from existing royalty acreage, and Tollpad expects additional royalty revenue from the new Gore lands. The new royalty assets are supported by a capital commitment, and development on the acreage is expected to commence during the fourth quarter. From a guidance perspective, we continue to maintain our 2023 royalty production estimate between 18.3 and 18.8 thousand VOE per day. And for the fourth quarter, we estimate 18.8 to 19,000 VOE per day of royalty production and $17 to $18 million of infrastructure income. We've established a preliminary 2024 guidance estimate based on approximately 20 to 30 active rigs across our acres through 2024, subject to key operators' final 2024 operating budgets, capital budgets, and operational ideas. Weather or wildfire-related issues that may impact 2024 production. Topaz estimates 2024 average relative production of 18.8 to 19.6 thousand BOE per day in addition to 69 to 71 million dollars of infrastructure income. Based on current commodity pricing and before acquisition, Topaz expects to exit 2024 with net debt of approximately 200 million or around 0.6 times net debt to EBITDA. We look forward to discussing the fourth quarter on the next call and we're pleased to answer any questions at this time.

Thank you. If you wish to ask a question, please dial star one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial star two to cancel. So once again, that's star one to ask a question or star two if you need to cancel. Our first question comes from the line of Luke Davis from RBC. Please go ahead. Your line is open.

Yeah, thanks. Good morning. I'm wondering if you can just frame up some of the modeling assumptions that go into your 2024 guidance. Fairly wide range there and understand that several producers don't have guidance on it. So maybe some conservatism built in, but what are the primary swing factors on that range?

Hello, good morning. So I can kind of frame that out for you. So essentially, you know, we wanted to set some parameters for the year as we see it from existing five-year plans and The real differentiator for Topaz has been that we have these strategic partnerships with certain operators. And so, you know, barring any material changes with their more granular 2024 budget, we do see this range as kind of, you know, maintaining a term lane at about 3% year-over-year growth, about 10% year-over-year growth in the clear water from our key operators, Tamarack and Headwater. And then beyond that, you know, we've never... had 100% certainty over our non-core or fee-based acres. And so that can be a swing factor. It is only 10% of our portfolio. Within that non-core piece would be the waiver and asset, which we see as very reliable in flat production. So there's about 200 barrels for sure of swing factor in that non-core stuff that we don't want to rely on, but we've definitely seen very positive results through 2023. So, you know, and the other thing to keep in mind is the impact of wildfires and what we saw happen through 2023. So the wider range is there to capture all of that. We do see the midpoint plus or minus that 200 barrels or, you know, upside of that 200 barrels from the non-core stuff being, you know, our ideal situation.

That's really helpful. Thanks. Thanks, Luke. Thank you. Just a reminder, if you do wish to ask a question, please dial star 1 now. Our next question comes from the line of Jamie Cubitt at CIBC. Please go ahead. Your line is open.

Yep. Good morning. Thanks for taking my question. So we've seen some recent royalty acquisitions from topaz that are mostly focused on oil and recognizing that the infrastructure acquisitions lately and focused on natural gas. How are you thinking about natural gas-weighted royalty acquisitions in the current commodity environment, though? Can you outline opportunities for that and how you're thinking about it moving forward?

Yeah, good morning, Jamie, and thanks for the question. We always like to be counter-cyclical in our acquisitions, and so with our recent oil acquisitions, they were mainly undeveloped acreage, and so we did think there was an opportunity to acquire oil assets at a lower price because we weren't paying for PDP. From a gas perspective, we do continue to examine different natural gas areas where we can be useful. So I do think that if we're able to acquire natural gas at the right price, we would look to do that. So we're not kind of, I guess, looking to add either, but we're open to business on either one as well. And you did mention kind of we did some natural gas gas plant and pipeline acquisitions. We'll continue to do different acquisitions along that line. We're pretty open for business on both oil and gas, and I think that's been very evident in the acquisitions we've made over the last year. And the other one I would include in that is the water acquisition we did early in January, so a 15-year take-or-pay contract, our second deal like that on water handling.

Okay, great. Thank you. And then Maybe just to clarify on the West Nipissi 7% royalty, there's no current production attached to that asset. And given the size of the acreage, where do you think the potential royalty could move to in the coming years on that acquisition?

Yeah. And so it is completely undeveloped at this point in time. And that's why it was important for us to add a capital commitment to it. And as I mentioned in the call, we're going to see some development start into the latter part of Q4 and into Q1, and so we do hope to see a well on. You know, really want to see the result of that first and second well before we comment on the absolute growing room of that, but, you know, we did map it pretty closely. This is something we identified early on once we found out who the owner was. We did approach them first to try and get a royalty on this acreage, and so do think there's some qualities that we can map to some other of the high-quality plays inside the Clearwater area. Okay, great. Thank you. That's it for me. Thanks, Jamie.

Thank you. Once again, any further questions, please dial star 1 on your telephone keypad now. Okay, there seems to be no further questions coming through at this time, so I'll hand the floor back to our speakers for the closing comments.

Thanks, everyone. Enjoy Halloween today, and we'll see you next quarter.

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your line.