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.