Topaz Energy Corp.

Good morning. My name is Ludi and I'll be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. 4th 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 would like to ask a question during this time, simply press the star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. Thank you. I would now like to hand the conference over to Marty Staples, President and CEO. You may begin your conference.

Thank you, Ludi, and welcome everyone to our discussion of Topaz Energy Corp's results as at and for the three months and year ended December 31st, 2023 and 2022. My name is Marty Staples and I am the President and CEO of Topaz. With me today is Sri Stevenson. and VP Finance. 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 within our MD&A, available on CDAR and on 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 2023 overall. After these opening remarks, we'll be open for questions. That's Julie Scott-Kirker's part, so I think I did okay. Topaz's fourth quarter average royalty production of 19.6,000 BOE per day set a new record for Topaz and exceeded our previous record, set in the first quarter of 2023 by 4%. 2023 average royalty production of 18.9,000 BOE per day also set a new annual record and exceeded the high end of our 2023 guidance range, which we established last January. Year over year, Topaz's production grew 10%. Operators spud 577 gross wells in our acreage over the year, a 2% increase from 2022, representing 14% of the 2023 total rig releases across the WCSB. In 2023, our royalty growth was primarily from operated funded development, as our acquisitions completed were infrastructure focused. The operator funded development was demonstrated through our annual reserve report, which evaluates Topaz's proved developed producing and probable developed reserves. Topaz does not record future probable undeveloped locations, given royalty entities do not control or record the capital. For approved plus probable developed reserves, operators generate 8.7 million BOE of drilling extensions and improve recovery. Relative to the 6.9 million BOE produced in 2023, this represents production replacement of 1.3 times at no cost to Topaz. During the fourth quarter, operators spot 147 gross wells, which was diversified across our portfolio with 42 in the Clearwater, 38 drilled in Northeast BC, Montney, 38 in Deep Basin, 10 in Peace River, 5 across Central Alberta, and 13 through Southeast Saskatchewan and 1 in Manitoba. Fourth quarter royalty revenue of $64.3 million represented 78% of Q4 total revenue and generated a 99% operating margin. Topaz's total realized Royalty price for the fourth quarter was $35.72 per BOE compared to $39.61 per BOE in the prior quarter. During Q4, Topaz realized the hedging gain of $300,000, and for the full year, Topaz realized a $9.3 million hedging gain. Topaz's total realized royalty price of 2023 was $36.40 per barrel before hedging. Topaz hedges a portion of its commodity exposure opportunistically. in order to ensure the dividend and the company's financial flexibility is maintained in periods of lower commodity prices. For 2024, 18% of our estimated natural gas production is hedged at a fixed price of $3.17 per MCF, which is over 40% higher than the current 2024 strip for ACO. And approximately 30% of our estimated oil and liquids production is hedged at a weighted average floor price of $103.25 Canadian per barrel. with collar structures in place to provide for upside price participation. In addition, we have approximately 7% of our 2024 summer natural gas production directed to NYMEX, pricing through a fixed price eco basis swap at a narrow differential of 42 cents US per MMBTU. Overall, our dividend and all our corporate costs are covered down to very low commodity prices of 50 cents per MCF for natural gas and $55 US WTI. This demonstrates the flexibility Topaz has to continue to reinvest excess free cash flow and continue to increase the dividend. The remaining 22% of Topaz's Q4 revenue is generated from our infrastructure assets that generated $18.5 million in processing revenue and other income, realizing 100% capacity utilization. Topaz's infrastructure business is unique where the contractual arrangements limit our exposure to operating and capital costs, 80% of capacity is under fixed long-term take-for-pay contracts. And we own a contracted interest in fee revenue with no associated costs. During the fourth quarter, we generated a 95% operating margin on our infrastructure and only incurred $1 million of maintenance capital expenditures. Our Q4 infrastructure revenue and other income represented 41% of our quarterly dividend. Topaz generated cash flow of $72.4 million or $0.50 per basic and diluted share in the fourth quarter, and we distributed 62% of cash flow to shareholders through a $0.31 per share Q4 dividend. Topaz announced a dividend increase to $0.32 per share or $1.28 per share annualized. This marks the seventh dividend increase over the past four years or 60% dividend growth since the first quarter of 2020. For Q4, we generated $26.8 million of excess free cash flow. And in total for 23, we generated $105 million of excess free cash flow. Through 2023, we've remained disciplined on our investment strategy. And while we evaluated a number of opportunities, we entered into only three transactions for a total consideration paid of $46.4 million. We also entered into agreement for the purchase of a Clearwater natural gas gathering infrastructure, which is currently under construction. We've recorded work-in-progress costs of $3.6 million. However, the full construction and the construction consideration will not be paid until the infrastructure is commissioned, which is targeted for late 2024. The infrastructure is expected to gather natural gas on our existing royalty acreage, in addition, generate long-term fixed processing fees. We exited 2023 with $342.7 million of net debt, or 1.1 times debt to EBITDA. We reduced net debt by 63.1 million, or 16% from 2022. We will continue to be disciplined on our acquisition strategy, focusing on high-quality infrastructure assets with strategic partners. We have confirmed our previously disclosed 2024 guidance of 18.8 to 19.6 thousand VOE per day of royalty production and 69 to 71 million of infrastructure processing revenue and other income. Our royalty production guidance includes the impact of contractually scheduled royalty rate change on January 1st from 4% to 3% on approximately 300 million cubic feet per day of natural gas processing. This resulted in approximately 500 BOE per day of lower royalty production to TOPHAS and marks the last scheduled royalty rate change. The royalty guidance remains flexible and allows for operators to adjust capital in order to appropriately manage near-term supply demand and resulting commodity price factors across the WCSB, as the Basin anticipates two significant egress projects to come on stream in the near term. Based on our current commodity pricing and before acquisitions, Topaz expects to exit 2024 with net debt between $245 and $255 million, or approximately 0.8 times net debt to EBITDA. The increased dividend represents approximately 65% payout for 2024 based on current commodity prices. We look forward to discussing the first quarter on the next call. We're pleased to answer any questions at this time. Over to you, operator.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your telephone keypad. 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 the star followed by the number two. And if you're using a speakerphone, please take the handset before pressing any keys. One moment, please, for your first question. And your first question comes from the line of Joseph Schochster from Schochster Energy Research. Your line is open.

Thank you very much. Good morning, Marty and Sherry, and thanks for taking my questions. In your guidance for 2024 of 19-2, The natural gas numbers are going down, natural gas liquids numbers are going up. Is that, again, companies focusing on your liquids rich plays and dropping off the drilling programs for dryer gas? Is that the assumption correct?

No, I would say, you know, the focus is similar to 2023. There are estimates for sure, and there's variability maybe within the overall production, but we would estimate total oil and liquids at about 29 to 31%, and gas being the remainder. And there might be some nuance between the shale gas and the dry gas, but overall, we would expect a similar proportion allocation to 2023. Okay.

And the comment about the high end being 19.6, Is that assuming a recovery in prices and then the guidance from the companies that they would be more active in Q4 or Q3 and Q4?

Yeah, so the higher end of the guidance is less focused on whether or not there's changes to capital budgets. It's more about higher activity on the acreage that we don't have as much transparency or line of sight to. So for Topaz, that is the Keystone Royalty and Reserve Royalty lands. where we saw significant activity through 2023, and we're a bit more conservative on what we estimate for future years, just not knowing for sure when and how much drilling activity would take place. But that would be more of the swing factor for the higher end of the guidance range.

And keep in mind, Joseph, we do have some major egress projects coming on, one quite soon being the TMX project. It looks like April, that might be actually flowing some volume. And then later in the year, we've got LNG Canada. So we do expect as these projects come on, there may be some wraps from our operators to facilitate the need for that volume.

And last one for me. Can you give us some, you mentioned that the M&A activity, there's been things you've looked at, but nothing that's really clicked on the larger size. Do you see from the traffic you're looking at now, that natural gas players are looking for bigger deals given the low commodity price and low stock prices that they have, and that there might be a potential in 2024 for something larger in terms of deal flow?

It typically takes a couple quarters of wheat gas prices to have operators react to it. So we have looked at a lot of opportunity through 23. We kind of earmarked $100 to $300 million of acquisition capital. And I think I mentioned in the release, we only did $46 million of that $100 to $366 if you include the infrastructure project that we paid for this year. Earmarked the same kind of dollar value. I think we're quite comfortable with that range. I mean, we could step up bigger if need be, but haven't seen anything that sits in our portfolio that we'd want to capitalize. The guys are busy inside our organization, though. We're spending a lot of time looking at opportunities, and I would say reaching out and trying to source new opportunities. So M&A, it's something you've got to be patient for. If gas prices are weak, I do think and continue to be weak, I do think there's some opportunity for us, but not everybody gets a royalty or infrastructure deal, and that's something that we remind operators all the time. I think you've got to have the quality inside your portfolio if it's something we're going to invest in.

Super. That's it for me, and thanks for taking my questions. I know there's a few people in my house that are going to be happier for the larger dividend.

Yeah, well, you're welcome. Thanks, Joseph. Take care.

Thanks, Joseph. Your next question comes from the line of Jamie Kubik from CIBC. Your line is open.

Yeah, good morning and thanks for taking my question. Maybe first one, can you just talk about the decision to increase the dividend at this juncture and I guess what you would look for in the future to increase it further? Thanks.

Yeah. Good morning, Jamie, and thanks for the question. You know, we wanted to represent inside the organization just the defensibility of the entity. We did have record production into the end of last year, and we've always messaged that it'll be an output of the business, the dividend increases, and we did have some growth and wanted to reward shareholders for that growth that we saw inside the complex. We do look to a dividend, and we do review the dividend policy every quarter with our board. We do think that there's probably more room down the road, but obviously we're paying attention to commodity pricing and the growth that we see inside our business, and we're not just going to increase the dividend to increase the dividend. If you've noticed over the last two to three dividends, they've been small, sustainable dividend increases, and that's by design. As the business grows, the dividend should grow alongside it. And so if we see 6% production growth in a year, you can anticipate that we're going to try and increase the dividend 6% in that year as well.

Got it. Okay. And then in your disclosures, Topaz mentions that the dividend is sustainable down to 50 cents in MCFA and $55 a barrel WTI. Can you talk about how that sustainability on commodity pricing moves with the lower end of the production guidance range? Does it change much? Just anything around that sort, Marty and Cherie.

Thanks. Yeah, for sure. I can speak to that. So it obviously would move slightly, but also in light of that, our hedging percentage would increase. So I would estimate at the lower end of the guidance range, it would be something around $1 ACO and a $55 WTI. Okay.

If you look at our corporate debt as well, Jamie, we do have some sensitivities on the capital allocation slide that just kind of talks about every 50 cent move in ACO is about a $15 million change for us. And every buck a barrel is about a $2 million change for us.

Okay. Thank you. Appreciate it. That's all for me.

Thanks, Jamie.

Thanks, Jamie.

Thank you. And once again, if you would like to ask a question, simply press the star followed by the number one on your telephone keypad. And there are no further questions at this time. I would like to turn it back to Marty Steeples, President and CEO, for closing comments.

Perfect. Yeah, just thanks everyone for tuning in. Obviously, a good year-end result for us, and we hope to keep on producing good results. So, look forward to talking to you on Q1 call.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.