Topaz Energy Corp.

Good morning. My name is Lara, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp's second 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 resolve your question, please press star, followed by the number 2. Thank you. Mr. Staples, you may begin your conference.

Thank you, Lara, and welcome to our discussion of Topaz Energy Corp. results as at and for the period ended June 30, 2024. My name is Marty Staples, and I am President and CEO of Topaz. With me today is Cherie Stevenson, CFO and VP, Finance. Before we get started, I refer you to the advisories on forward-looking statements contained in the news release, as well on the advisories contained in the TOCA's annual information forum and within 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 second quarter of 2024. After these opening remarks, we'll be open for questions. Total has had a very strong second quarter marked by cash flow of $70.6 million or $0.49 per diluted share, representing a 4% per share increase over both the prior quarter and prior year. Second quarter cash flow growth from the last year was driven by 12% higher crude oil and 20% higher heavy oil royalty production, in addition to higher realized oil pricing. The Alberta Marney infrastructure acquisition that was completed during the second quarter marks Tolkhouse's third infrastructure acquisition over the top 12 months, and is expected to provide $13 to $14 million of annualized contracted revenue. Following our strategy to provide dividend growth alongside sustainable revenue growth, we are pleased to announce that our board has approved a second dividend increase for 2024, which marks our eighth dividend increase to date. The annualized dividend of $1.32 per share represents 65% share growth since TOPA's inception. Our infrastructure asset portfolio provides stable, high-margin revenue that covers 45% of our dividend. Combined with our hedging strategy, our dividend is sustainable to commodity prices of $0.01 per mcf natural gas and $50 U.S. per barrel crude oil. For the remainder of 2024, 18% of natural gas is hedged at a weighted average price of $3.17 Canadian for MCF, and 40% of oil and total liquid is hedged at a weighted average floor price of $102.54 Canadian per barrel, using collar structures to maintain upside participation. SoCal has a second quarter average royalty reduction of 18.7 thousand BOE per day, with 32% total liquids, as light and heavy oil rail construction achieved a new record exceeding 5,000 DOE per day. The value of our royalty portfolio continues to be demonstrated through the strong, reliable level of operator development activity and investment in enhanced recovery techniques across our acreage. During the second quarter, 94 growth wells were drilled on our undeveloped loyalty labs, representing 15% of the total wells drilled across the western Canadian sedimentary basin, which increased from 12% during the first quarter of 2024. Operators split 94 growth wells and reactivated 7 growth wells on our acreage during the second quarter. Drilling was diversified across the royalty portfolio as follows. 32 Clearwater, 33 Northeast BC, 13 East Basin, 7 Southeast Saskatchewan, 6 Central Alberta, and 1 East River. We estimate the operator spent approximately $0.4 billion in development capital across our acreage during the quarter. Based on operator drilling activity, we expect the current 28 to 31 active rigs on Toll Passage acreage will be maintained through the third quarter of 24. Based on operator disclosure, we estimate that 20% of TOPA's third water heavy oil is now supported by water flood, which is demonstrating positive response for improved recovery and stabilized production rates. TOPA's second quarter royalty revenue of $60.2 million represented 77% of total revenue and generated a 99% operating margin. Q2 2024 royalty revenue increased by 4% over Q2 2023. Second quarter processing, another income of $18.2 million, represented 23% of Q2 total revenue and was 7% higher the prior year. Our infrastructure assets realized 100% capacity utilization in the quarter and generated a 91% operating margin. Topaz generated total second quarter revenue and other income of $78.4 million and free cash flow of $69.5 million, which increased 5% from the prior year and represents an 89% free cash flow margin. Second quarter earnings per share was two times higher than the prior year due to higher royalty production and processing revenue and lower operating finance and amortization expenses. SOFAP is serving 46.4 million in dividends during the quarter, resulting in a 66% payout ratio and generated 23.1 million in excess free cash flow, which is allocated to acquisition growth. We have reconfirmed our 2024 guidance ranges of 18.8 to 19.5 thousand BOM per day of royalty production and 75.5 to 78 million of infrastructure, processing revenue, and other income. Based on current commodity pricing, And before any additional acquisitions, Topaz expects to end 2024 with net debt ranging between $345 and $355 million, or 1.1 times net debt to even dust. The 2024 dividend represents a 66% payout ratio based on recent commodity price forecasts, which maintains financial flexibility to allocate excess free cash flow to acquisition growth or further dividend increases.

We are pleased to answer any questions at this time.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. Should you risk a decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift your hands up before pressing any key. Again, should you have a question, please press star followed by the number one.

One moment, please, for your first question. Our first question comes from the line of Yosef Shakhtar from Shakhtar Energy.

Go ahead.

Good morning, Marty and Sherry, and congratulations on the quarter and the dividend increase. The market likes its new record high for the stock today, so congratulations. Congratulations on all that. My question is two of them. One relates to the Muzzlewack deal with Whitecap. What is the utilization of that facility right now, now that it's come on stream? And do you have, if they continue to grow that area, which from the Whitecap call, you know, Grant was talking about that, if they do an expansion or a new facility, would you be involved in that as well?

Yeah, sure. So, yeah, thanks, Joseph, for the nice words today. Nice to talk to you again. The Musgrove deal right now, under this order from Whitecap, is producing 14,000 BOE per day out of the 20,000 BOE per day nameplate capacity. So, about 70% utilized. They do anticipate they will be fully utilized by the end of 2024. This was commissioned in March of 24, so it is their newest facility. fully utilized by the end of the year. Saying that the way our contract exists right now, they only need 60% utilization to fill our priority fill. And so our contract is completely full right now down to 60% utilization. So we don't anticipate any issues with that through the length of the 10-year term. And then after that, we have a seven-year pro rata fill following the 10-year pay-per-pay commitment. Saying that, yeah, we do think that this is a growth area for Whitechap. They do have a line of sight, I think, for some acreage or trying to get some more acreage into this battery. So from our side, we do think them building a fit-for-purpose facility right in Muswell, where they're developing some of their best, Mining wells right now in the D2 and D3 formation is a big benefit for 12,000 infrastructure we're participating alongside like Catholic.

One more comment, Joseph. This is Sheree, obviously. This expands since if they were to expand that we do have the right but not the obligation to participate alongside. So we would be willing to participate alongside in the growth projects within that.

Okay, super. Yeah, that's good. That's what I was hoping. Second question on the M&A side. With the low price of natural gas, we're hearing, you know, of course, this deal was done. We hear from Varon in their conference call that they want to knock down their debt even more. They did the sale to Saturn of Saskatchewan assets. They mentioned at the end of the call in the Q&A that they were also looking at selling infrastructure. Are you seeing a lot more traffic on the infrastructure side and Between now and year end, do you think that there's chances for doing more deals?

Yeah, I mean, we're seeing opportunities on both sides. I think this is something I've echoed before on other conversations. It's about the quality that we're willing to put inside this organization. We don't want to be dilutive to the existing asset base that we have in place already. So from our side, we are seeing opportunities. We're going to be picky and choosy about which opportunities we participate in, though, and with which operators. I think... Yeah, into the latter part of this year, there probably is a need for capital, and Topaz does want to be there to assist in that need for capital for select partners.

In terms of deal flow, is it more active now than it was a year ago, just to get a feel for that?

I would say it's pretty balanced. We spend a lot of time pitching ideas and don't wait for just an opportunity to come to us, and so... We're always busy with something. We continue to kind of focus and kind of adhere to our strategy. And, yeah, we want to be participants in any type of M&A that's out there and generate our own ideas. So I would say it's similar to what we saw last year, and we're being patient on what we want to contract on.

Super. That's it for me. Thanks very much, and, again, congratulations.

Thanks very much, Joseph.

Thank you. Our next question comes from the line of Jamie Kubik from CLDC.

Go ahead, Jamie.

Yeah, good morning. Thanks for taking my question. I'm just curious if you can elaborate a little bit on what you're seeing on the light oil side of your business with respect to activity. We did note some pretty good performance in light-medium oil volumes in your quarter. I'm just curious on what else you can tell us on that front and what it might be for the rest of 2024. Thanks.

Hi, Jamie. Thanks for the question. We definitely saw stronger performance even than we were expecting across some of the southeast Saskatchewan fee title leasing and activity, and also particularly in the waiver unit from White Cat. So lots of good surprises and incremental activity.

In addition to that, we did see some of the top wells on our portfolio in the Charlie Lake, Uphill, Archer, Tamarack Valley, and termly and continue to deliver some very strong results into the Charlie Lake, which is added to the lighter oil mix for us.

Okay, thank you for that.

And next question, you did note a decent carryout of drill bit uncompleted wells on the National Gap by the business. Can you just talk about how you expect that to phase over the second half of 2024 as those wells come on?

Thanks. Yeah, I think we've got a real great inventory of drilled and completed wells right now, and we saw that with the 15% of activity through Q2. We do anticipate that completions will happen into the latter part of this year. I think operators are doing a really good job of watching what gas prices are doing and trying to put – volume on when the price kind of demands it. And so we do anticipate that there is a demand situation setting up into the latter part of 24 into 25. And so we think operators are kind of following that. Keep in mind, some of these paths are super paths. They can take anywhere up to three months to complete. And so this isn't like just flipping a light switch that you take time to get into completion.

Okay, that's all for me. Thanks. Thank you, Jamie. Have a great day.

Thank you.

Ladies and gentlemen, just a reminder, if you have a question, please put a star followed by the number one on your touchstone phone. Our next question comes from the line of Patrick O'Rourke from APB.

Go ahead, please.

Hi. Good morning. Thanks for taking my question.

This is Nolan 187 for Patrick here. So my first question, your liquid volumes in the quarter were impressive. You know, they're ahead of midpoint of your full-year guide to liquids. Can I touch on it a little bit? Maybe you can elaborate a little bit more. What's been the driver of the outperformance here? And based on what you know so far at this point in the year, what's your outlook for liquid volumes through the balance of the year?

Yeah, so, you know, the outperformance definitely –

impressed us. I know that some of the clear water volumes for Q1 were held back waiting for QMX to come on, so there was a bit of excess that came through in Q2. In addition, I just think it's quick cycle time projects in response to strong WTI pricing. We do have a range within our guide because we don't control the capital, so we estimate about 30% total liquid. We saw that drop up in Q2, but we would estimate somewhere between, you know, around 30% for the whole year average.

And we do expect the gas to kind of catch up in 2024. So I think our estimate, the range, will be something we hold on.

Thanks for the follow-up on that. For my second question, I guess I just want to say congratulations on both the dividend raise and the Muslim infrastructure deal, the white cap. You kind of touched on this a little bit already as well, but maybe I can frame the question in a slightly different way. Can you walk us through the current pipeline that you're seeing for deal flow relative to the past and how things have kind of evolved in terms of both resource and infrastructure opportunities?

Yeah, I think from 21 to 21, kind of end of 22. It was the busiest we'd ever seen. We were kind of looking at opportunities twice a week. That's obviously slowed down a little bit. What we've witnessed, I think, over the last year is cost of capital is still tough to achieve. I mean, we think equity has been a little bit expensive for operators. Debt, with interest rates being higher, has been a more expensive cost of capital and And then from our standpoint, I think we offer another alternative. We're still seeing a lot of inbounds on opportunities. I would say this year we probably have looked at a dozen opportunities. If you want to break that down into percentage, 80% probably is related to royalty. The other 20% would be infrastructure-related. We've got to be pretty selective about which opportunities we want to pursue. Obviously, I talked about this on the first question from Joseph, that we don't want to dilute our existing business. If something is out there that an operator requires funding for, but we don't view it as the same tier, when I think we have a very great portfolio of tier one assets, it's going to have to be at a discount. There might be a better opportunity for these operators to go out and invest access debt or raise equity and not use our form of capital. We continue to be very aggressive on pitching ideas and idea generation inside our organization. We've got a great BD team that that's pretty much what they spend their weeks and evenings and weekends doing. So, yeah, I think from our side, we want to be reactive to opportunities in the market, but be proactive on idea generation inside the organization. I do expect them to the latter part of this year. There's still some consolidation we think that needs to happen in the basin, and where we can be helpful, we will try to be with operators. Our preference is to do repeat business with existing operators. I think having partnerships that do one to three to six deals shows the kind of virtuous cycle that we can create with partners inside organizations.

Awesome.

Thank you very much for the color there. I'll turn the call back. Thank you.

Thank you. Just to remind the ladies and gentlemen, should you have a question, please press star, followed by the number one on your touchstone phone. There are no further questions at this time.

I'd now like to turn the call back over to Mr. Staples for any final closing comments.

Yeah, thanks, everyone, for their support.

And, yeah, hopefully everybody gets a chance to enjoy the rest of the summer. We'll talk to you in Q3.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect your line. Have a lovely day.