Topaz Energy Corp.

Good morning. My name is Operator Roussel, and I will be your conference operator today. At this time, I would like to welcome everyone to the TULPAS Energy Corp. 3rd 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 the star, followed by the number two. This call is being recorded on November 5th. I would now like to turn the call over to Mr. Staples, President and CEO. Please go ahead.

Thank you, Razelle, and welcome everyone to our discussion of Topaz Energy Corp's results as at and for the period ended September 30th, 2024. My name is Marty Staples, and I'm the President and CEO of Topaz. With me today is Cherie Stevenson, CFO and BP 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 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 recent and third quarter 2024 highlights. After these opening remarks, we will be open for questions. Topaz completed the previously announced acquisition from Termini Oil Corp. November 1st, which added royalty interest over 3 million gross acres across our existing northeast BC Montney, Alberta Deep Basin, and Peace River High core royalty areas for a total consideration of $278.2 million. This strategic acquisition increased Topaz's royalty acreage by 50%, including a 38% increase to Topaz's premium money rights acreage, and provides 100% alignment to Tourmaline's future identified growth projects. Notably, we saw our Tourmaline-operated drilling rigs across our acreage increase from 13 rigs in Q3 2024 to 16 dedicated rigs in Q4 2024, driven by our expanded acreage position. On October 22nd, we closed the previously announced bought deal equity finance and concurrent private placement. Topaz issued a total of 8.26 million shares at $25.05 per share. The financing proceeds were used to fund the tourmaline royalty acquisition, in addition to approximately $80 million funded through our existing credit facilities. Popad's third quarter and year-to-date 2024 average royalty production was 18.7 and 18.9 thousand BOE per day, which includes 9% and 11% growth in crude and heavy oil royalty production, respectively. Beginning in November, the tourmaline royalty acquisition is estimated to provide 12% immediate royalty production growth with additional growth potential as tourmaline continues to develop the acquired acreage. The value of our royalty portfolio continues to be demonstrated through the strong, reliable level of operator activity and investment in enhanced recovery techniques across our acreage. During the third quarter, a record 216 gross wells were drilled on our undeveloped royalty lands, representing 17% of the total wells drilled across the WCSB, which increased from 15% during the prior quarter. In addition, approximately 20% of our clearwater production is currently under water flood, where we're seeing both lower decline rates and enhanced recovery rates. Operators split 216 gross wells and reactivated one gross well in our acreage during the third quarter, with drilling diversified across the royalty portfolio as follows. 59 Clearwater, 46 Northeast BC Montney, 39 Deep Basin, 31 Peace River, 26 Central Alberta, and 15 Southeast Saskatchewan. 49% of Topaz's third quarter drilling activity was in Topaz's high growth royalty areas, Northeast BC and the Clearwater. Since the beginning of 2023, 43% of all Clearwater new wells drilled and 25% of all Northeast BC Montney new wells drilled were on Topaz royalty acreage. Based on operator drilling activity, we expect that 29 to 31 active drilling rigs on Topaz acreage will be maintained through the fourth quarter of 2024. At the end of the third quarter, 60% of the 216 total new wells drilled in Q3 were not yet brought on production. We expect strong activity in Q4, particularly the new natural gas focus drills, which are scheduled to be completed and or tied in during the winter season, in anticipation of egress improvements with the plan commissioning of LNG Canada Phase 1 during 2025. HOPEZ's third quarter royalty revenue of $52.7 million represented 72% of total revenue and generated a 99% operating margin. Third quarter processing revenue and other income of $20.9 million from our infrastructure assets represented 28% of Q3 total revenue and was 15% higher than both the prior quarter and the prior year attributed to our 2024 Alberta money infrastructure acquisitions. Our infrastructure assets realized 100% capacity utilization in the quarter and generated an 89% operating market. The previously announced Clearwater Natural Gas Gathering infrastructure project is nearly complete with an anticipated on-street date during December 2024, upon which Topaz will fund the $26 million estimated construction cost. Topaz expects to generate 4.3 million higher process revenue and incremental natural gas royalty revenue beginning in January 2025, following the project completion. Topaz generated Q3 total revenue and other income of 73.6 million, cash flow of 67.0 million, and free cash flow of 64.8 million. Topaz distributed 47.8 million in quarterly dividends, 33 cents per share, during Q3 representing a 5.2% dividend yield on an annualized basis and generated $17 million of excess free cash flow, which was allocated to debt repayment. Third quarter earnings per share was approximately two times higher than the prior year due to higher realized and unrealized hedging gains and lower marketing interest and amortization expenses. We have updated our 2024 guidance estimates, which include the previously announced royalty production range of 19.1 to 20,000 BOE per day and processing revenue and other income range of 75.5 to 78 million. Based on current commodity pricing and before any additional acquisitions, TOPA is expected to end 2024 with net debt ranging between 460 and 470 million or 1.5 times net debt to EBITDA. which includes the net debt attributed to funding the remainder of the Tourmaline Royalty acquisition, as well as the Clearwater Natural Gas gathering infrastructure. The 2024 dividend represents a 69% payout ratio and remains sustainable through the end of 2025 at $0 ECO and $55 US WTI, attributed to the fixed revenue provided by our infrastructure portfolio and our hedging contracts in place, which are available in our most recently filed MD&A. We're pleased to answer any questions at this time.

Over to you, Operator. Thank you, Mr. Morty.

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 touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Our first question is from Michael Harvey from RBC Capital Markets. Please go ahead.

Yeah, sure. Good morning. Thanks for taking the questions. I guess just kind of two higher level ones. Just any broader comments on future additions to the infrastructure portfolio? Obviously, some recent wins with the Whitecap deal, et cetera, but just wanted to get a sense for the level of competition in the marketplace and anything that differentiates Topaz as you kind of compete with other folks. And then just on the second part, just on the dividend, maybe you can just refresh us on your order of operations for future increases. By our numbers, it kind of looks like you're Pretty well positioned to make another increase, maybe mid-year 25, but any color on how you kind of think through those processes would be appreciated. Thanks.

Yeah, good morning, Mike, and thanks for the questions. Yeah, we've been very, I think, focused on both royalty and infrastructure this year. Obviously, you saw us close a deal in June of 2024 on the infrastructure side. To date, we've looked at about $1.8 billion in opportunity. We've transacted on $400 million-ish, $100 million of that being infrastructure. We continue to look at different forms of infrastructure. We saw an announcement yesterday on an emissions cap by the government. We do think that that's going to require some operators. to fund certain infrastructure projects and it probably comes at the bottom of their list for things that they want to do. And so I think that offers a unique opportunity for Topaz to participate in projects like that to not only help the environment, but help some of the capital needs of producers out there. So we are very active. I would say out of that 1.8, probably 40% of that was infrastructure based. We just want to make sure we're finding the right projects that are lower or I would say newer facilities and have lower emissions from an infrastructure standpoint. So that does make us very selective. The second part of that from dividend increases, we do look at our dividend every single quarter with the board and determine if it's time to increase it or remain flat. We did take a look at it this quarter and thought with just the recent acquisition, we're going to kind of absorb that for the next quarter or two and then look at what our growth looks like inside the corporate plan. And if we're growing at 5% to 6% per year, you can expect the dividend to grow alongside that. Sri, anything else you'd offer to that?

No. Good summary. Great. Appreciate it. Thanks. Thanks, Mike.

Ladies and gentlemen, just a reminder, should you have a question, please press the star followed by the number one on your attached phone. Our next question is from Joseph Scutter from Scutter Energy Research. Please go ahead.

Good morning, guys. And Sherry, I just wanted to get a little bit of guidance on this. From this point on, rising cash flow, do you want to take the debt down to the same kind of level you were of, you know, 350 range? And at that point, would that be part of the trigger for thinking about dividend increases? What's your thought about the comfortable level of debt, given the much substantial larger company you are today?

Yeah, thanks for the question, Joseph, and good morning.

So, overall, from a leverage target perspective, you know, we would look to maintain somewhere between one time set to cash flow and up to two times for an acquisition growth perspective, particularly if it's infrastructure focused. And particularly if our payout ratio remains somewhere at the lower end of our range, so call it 70% or lower in order to have that quick debt compression. So, as it stands right now, we see our debt compressing from about 1.5 times debt to EBITDA to 0.9 at the end of 2025. So we do see having room and flexibility to sort of maintain this level of debt go forward in order to find other acquisition growth opportunities as they arise. So, you know, the dividend is definitely a function of cash flow, credit capacity, but also just inherent growth in the business because we have that debt compression. So I wouldn't say we have a strict debt target to get to before we would consider a debt dividend increase. It's a bit of an opportunity analysis. And we do have about $0.5 billion of credit capacity currently available on our $1 billion facility. So lots of room. We do think, you know, the larger organization and the infrastructure in particular supports some level of debt. Obviously, we want to maintain that modest strategy, but do have capacity for a bit of all. It's just what opportunity presents itself.

Okay. Next question, when do you expect to give guidance for 2025? Is that something that's going to happen before year-end? What's your thoughts there?

Good question, Joseph. I think what we're going to do is push it into January. We want to see typically tourmaline puts out a five-year plan with this quarter and then an operational update in January. So I think we want to see what gas prices do through the winter and look towards Termaline's operational update in January and then provide guidance update into early 25.

Last one for me. If I'm giving guidance in my report, if I put in a number of 21,000 to 21,500 for average production, would that be a number that would be in a good range?

For Q4 or 2025? 2025.

2025.

I'd say that's a conservative range.

We probably plan to build a range somewhere around 22,000 mark, but, you know, depending on operator capital plans and natural gas prices particularly.

Super. That does it for me. Thanks very much for taking my questions.

Thank you. Thanks, Joseph.

Just a reminder, should you have a question, please press the star followed by the number one on your touchtone phone. Our next question is from Jamie Kubik from CIBC. Please go ahead.

Yeah, good morning. Thanks. I've got just two questions here. Just curious if you can talk a little bit more about some of the water flood and pressure support initiatives underway in the Clearwater area. and some of the results that Topaz is seeing across its asset base and what it might mean for future volumes?

Yeah, great question, Jamie. And I think you saw on our slide deck, we did highlight Clearwater's slide, just some of the recent improvements and enhancement we've seen. There's two things happening inside the Clearwater right now, both from Tamarack and Headwater. And Tamarack disclosed a lot of those ideas and updates last week in their quarter. I think the CSAND has been a very deliverable resource. sand for them that's expanded their inventory inside their portfolio. And Headwater last quarter talked about the ESAN adding a significant amount of locations to their portfolio. So, number one, we're seeing some exploration. We're seeing some step-outs. We're seeing some delineation. On the Clearwater lands, we think about 20% of our total acreage is under water flood right now inside the Clearwater. You've seen it, the results speak for themselves, lower decline and bigger recovery factor. Two things as a royalty company we're pretty pleased with. We do think that we pay out the headwater acquisition in early 2025. And so they're sitting right now at a 21 going to 24,000 barrel a day company. We've got a 7% royalty on about 90% of their company right now, 90 to 92%. And so the enhancement for us, number one, it doubles recovery factor. So we see Martin Hills going from a 4% to 5% to a Nipissi, we kind of see around 8% going to 16%. So it's like we're getting the entire play again for free. And so when you think about the oil in place and being able to access more of that resource, it's a massive benefit from us, not just from a reserve life standpoint, but from a recovery standpoint as well. So lots of checkboxes beside the Clearwater and what we're seeing. Sri, anything to add on the...

I would just add that there's a lot more technical data now available, and of the 20% of our clearwater production that's underwater flood, we see about 65% of that being the primary decline that's stabilizing, and the other 35% is through uplift that's being generated by that higher recovery rate on that production. So the other note would be the clearwater is a very identified oil resource, and we see 14.5 billion barrels of oil in place. Obviously, that's gross operated, and the additional sands that are being delineated and proven out are increments to that. So, it's truly a significant, very blanket-like resource, and we're really happy with our position within that and the advance that the operators continue to make on the water flood and enhanced recovery efforts.

Okay, thanks. And can you maybe just remind us when Topaz expects to be cash taxable in the future, just in terms of year?

Yeah, so there's a small amount of tax that will come into play in 2025. It's very small, about $5 million. And then from 2026 forward, we expect about 10 years of a 50% reduced corporate rate, so call it 12% or so. So A reduced rate, but cash taxes do come into effect for the most part in 2026.

Okay, great. Thank you. That's it for me.

Thanks, Jamie.

Thanks, Jamie.

There are no further questions at this time. I would now like to turn the call back over to Mr. Marty Staples for final closing remarks.

Yeah, thanks, everyone. Appreciate the support from all the shareholders, advisors. Busy quarter for Topaz and look forward to talking to everyone in 2025.

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