Topaz Energy Corp.

Good morning. My name is Joanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp First Quarter 2024 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 star followed by two. Thank you, Mr. Kruger. You may begin your conference.

Thank you, operator, and welcome everyone to our discussion of Topaz Energy Corps results as of March 31, 2024, and for the three months ended March 31, 2024, and 2023. My name is Scott Kruger, 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 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's President and Chief Executive Officer, and Sheree Stevenson, Vice President, Finance, and Chief Financial Officer. We'll start by speaking to some of the highlights of the last quarter in the year so far, and after their remarks, we'll open to questions. Marty, Sheree, go ahead, please.

Thank you, Scott. Good day, everyone. Topaz had a strong first quarter marked by royalty production that achieved the midpoint of our 2024 guidance range and infrastructure revenue that is on track to achieve the high end of our 2024 guidance range. The value of our royalty portfolio continues to be demonstrated through the strong, reliable level of operator development drilling across our acreage. During the first quarter, 145 gross wells were drilled on our undeveloped royalty lands. which represents 12% of the total wells drilled across the WCSB. During Q1 of last year, our Royalty acreage saw the same level of activity, 12% of wells spud across the WCSB. The total wells drilled across Topaz's Royalty acreage from Q1 2021 to Q1 2024 represents 13% of total drilling activity across the Western Canadian Sedimentary Basin. Over that same time, through operator-funded development and strategic diversification, Topaz's heavy oil royalty production has increased significantly from 50 barrels a day to 2,877 barrels a day, predominantly through our clearwater royalty assets. And Topaz's total oil and liquid royalty production has increased six-fold from 955 barrels a day to 5,780 barrels per day. Based on operator drilling plans, 9 to 11 rigs will remain active across the Royalty Acreage through spring breakup, a record level for Topaz as spring conditions typically limit development activity. 25 to 29 drilling rigs are expected to be active across the Royalty Acreage following spring breakup. From a financial perspective, Topaz generated first quarter revenue and other income of $78.2 million. In Q1, 54% of our revenue was from oil and liquids royalty revenue, 23% from natural gas royalty revenue, and 23% from Topaz's infrastructure asset. First quarter cash flow was $67.9 million, or $0.47 per basic and diluted share. We distributed 68% of cash flow to shareholders through our dividend, which represented a 6.4% trailing yield to the average share price during the first quarter. Our first quarter dividend was 3% higher than the prior quarter and represents the company's seventh dividend increase or 60% dividend growth to date. For Q1, we generated $19.9 million of excess free cash flow and reduced debt by 6%. We remain disciplined on our investment strategy and continue to evaluate a number of opportunities. The operator of our Clearwater natural gas gathering infrastructure has completed approximately half of the construction. Topaz will fund the project once the infrastructure is commissioned, which is targeted for late 2024. This infrastructure is expected to gather natural gas on our existing royalty acreage in addition to generate long-term fixed processing fees. Topaz's first quarter average royalty reduction of 19.2 thousand B.O.E. per day was 30% oil and liquids and increased 2% from Q1 2023. Operators spot 145 gross wells and reactivated six gross wells on our acreage during the first quarter. Drilling was diversified across the portfolio as follows. 53 Clearwater, 35 Northeast BC Montney, 25 Deep Basin, 15 Peace River, 6 Central Alberta, and 11 Southeast Saskatchewan slash Manitoba. We estimate that our operators spent between half a billion and 0.6 billion in development capital across our acreage during this quarter. First quarter royalty revenue of 60.3 million represented 77% of Q1 total revenue and generated a 99% operating margin. First quarter infrastructure revenue of 17.9 million represented 23% of Q1 revenue. Our infrastructure assets realized 99% capacity utilization and generated an 89% operating margin. During Q1 2024, Topaz's total realized relative production price was $34.55 per BOE. For Q1 2024, Topaz realized natural gas price represents 100% of the AECO 5A benchmark and Topaz realized heavy crude oil price represents 97% of the WCS crude oil benchmark price. Topaz's 2024 dividend is supported by Topaz's infrastructure revenue and hedging strategy and is sustainable to commodity prices of $0.01 per mcf natural gas and $50 US per barrel crude oil. For 2024, 18% of natural gas is hedged at a weighted average price of $3.17 per mcf Canadian. And 40% of oil and liquid is hedged at a weighted average floor price of $102.54 Canadian per barrel, using collar structures to maintain upside participation. We reconfirmed our 2024 guidance ranges of 18.8 to 19.6 thousand BOE per day of royalty production and 69 to 71 million of infrastructure processing revenue and other income. Based on current commodity pricing and before acquisitions, Topaz expects to end 2024 with net debt of 0.8 times net debt to EBITDA. The 2024 dividend represents a 64% payout ratio based on recent commodity price forecast, which maintains financial flexibility to allocate excess free cash flow growth or further dividend increases. I'm pleased to answer any questions at this time. Back to you, operator.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

Hey guys, good morning and thank you for taking my question. I guess it's sort of more of a broad capital allocation philosophical question here, but just wondering, your debt's below one turn here, your payout ratio ticked down a notch in the quarter to 64%. Wondering how you're thinking about the capital allocation decision today between the opportunity set for M&A further debt reduction and potential for increased dividends going forward here?

Good morning, Patrick. Thanks for the question. We've been pretty, I think, active paying down debt over the last 18 months in excess of over $100 million. We'll continue to pay down debt. We do continue to see opportunity inside the M&A space, but obviously are being very disciplined in our approach going forward. on what we want to acquire and what price we want to acquire. Our dividend policy has always been an output of the business. So as we grow, the dividend will continue to grow. I think we've achieved that over seven dividend raises since inception. And you've seen that kind of step up as we see growth inside the system. So allocation-wise, number one, it's going to be pay down some debt. Number two, it's going to use any excess free cash flow for M&A that we can We can source and then if we achieve that M&A, we will step up the dividend, but it's always going to be a function of growth.

Okay, and then maybe just kind of switching gears a little bit here. You guys are obviously a meaningful part of your business is in the Clearwater. Wondering if you can provide maybe just a little bit of insight, color, context with respect to Clearwater activity and trends in terms of spuds and spend that you're seeing and maybe trends within IP rates and the production profile there?

Yeah, for sure. I think we did highlight that we saw increased activity this quarter. We were up 26% on the drilling front, which was impactful to Topaz. We have seen some shift to injector wells for a water flood. And I think you've seen through some of our operators, public disclosure, both Headwater and Tamarack Valley are having some pretty significant impacts to that from a positive standpoint. I think what we saw Headwater release last quarter was 2,600 barrels of sustainable production through their water flood. And right now we think there's anywhere from 27 to 29 pilots in place through nipissi martin hills and and we have a big chunk of that so when you can take recovery factor and and double it martin hills is kind of that four to five percent recovery factor and nipissi is around seven to eight percent uh that's just added benefit from a royalty standpoint not only do you get bigger recovery but you get longer reserve life out of it so big win for us uh so yeah activity has been very consistent it's it's him uh stepped up a little bit and you know we did talk about in the quarter going from 50 barrels to almost 3 000 barrels a day of royalty production it's been quite impactful yeah so uh from an activity perspective on the quarter we did see a 26 increase in gross buds and and did see two private operators

come into play on some existing acreage we own and also some farm and acreage of some existing royalty acreage. So that's super positive for us to have that incremental activity. We did also see some cold weather related production impacts through January and also some production deferred from being sent down to sale. So we estimate that somewhere between 120 and 200 barrels that sort of reduced our Q1 production, so we'll look forward to getting all those wells upstream Q2 and forward.

And sorry, those private operators, would you consider those that spud activity in the more exploratory portion of the acreage space?

It's a split between the two, so we saw some on our northern acreage up in Evie Golden, and then we did see one kind of in Nipissi proper, and those are yielding really good results.

Okay, thank you very much. Thanks, Patrick.

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1. Next question comes from Jamie Kubik at CIBC. Please go ahead.

Yeah, good morning, and thank you for taking my question. I've got a couple of questions here. Can you just talk a little bit maybe about the wells that were reactivated the past couple quarters? You talked about six reactivated this quarter, ten last quarter. Just curious what the reason was for the reactivation. Was it operational or price sensitive or anything on that nature that you can talk about?

Yeah, for sure. They were predominantly oil wells. and just increased activity from a private operator on some of the central Alberta wells. That's the vast majority of them. So we have a lower royalty rate on those, but nice to see them brought back on. And I think they are older wells, but definitely stronger WTI pricing has helped that.

Got it. Okay. And then on the well spud during the quarter, but not on production, you disclosed that at 95 of the 145 wells spud but not on production out of 145 that were spud in the quarter. That does look to be a historic high for Tulpas. Can you just elaborate a little bit on some of the dynamics at play there and what's going on on that front and maybe the mix of wells in that 95 that are not yet on production?

Yeah, for sure. So there's about 25 between Clearwater and Peace River, and the vast majority, the delta, would be predominantly tourmaline-related wells, so deep basin and northeast PC Montney. And I think it's just timing, spring breakup, getting wells drilled and longer drill times with multi-well paths, et cetera. So it is higher than normal, but we're looking forward to those production results coming through the balance of the year.

Okay, got it. Those were just my questions. Thanks very much.

Thanks, Jamie.

Thank you. We have no further questions. I will turn the call back over for closing comments.

Thanks, everyone, and look forward to talking to you in Q2.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.