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.