Topaz Energy Corp.

Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Second Quarter 2025 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 1 on your telephone keypad. If you would like to withdraw your question, please press star, followed by 2. Thank you. Mr. Scott Kirker, you may begin your conference.

Thank you, Jenny, and welcome everyone to our discussion of Topaz Energy Corps results as of June 30, 2025, and for the three and six months ended June 30, 2025, and 2024. I'm Scott Kirker, 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 our MD&A available on CDAR and on our website. I also draw your attention to the material factors and assumptions in these advisors. I am here with Marty Staples, Topaz's president, and Cherie Stevenson, vice president of finance and chief financial officer for Topaz. We will start by speaking to some of the highlights of the last quarter and our year so far. After these opening remarks, we will be open for questions.

Marty, go ahead. Thanks, Scott. Good morning, everyone. Topaz had a strong second quarter marked by significant increases in royalty production, infrastructure processing revenue, drilling activity, and wells brought on production. The acquisitions completed over the last year contributed 70% of our royalty production growth and led to a 37% increase in quarterly infrastructure processing revenue. Topaz second quarter royalty production was 22.3 thousand BOE per day and increased 19% from the prior year. Q2 2025 royalty production included crude and heavy oil production of 5.4 thousand barrels per day that increased 9% and natural gas and liquids production of 16.9 thousand barrels of oil equivalent per day that increased 23% over Q2 2024. Topaz generated total second quarter revenue of $81.2 million, 46% from crude and heavy oil royalties, 26% from natural gas and NGL royalties, and 28% from our infrastructure portfolio, with total processing revenue and other income of $22.8 million, which increased 25% over the prior year. OPAS's year-to-date 2025 annualized processing revenue and other income of $92.6 million represents the high end of 2025 guidance estimates. Drilling activity on our acreage remains strong with 125 gross wells drilled and as a result we achieved our previous record 21% share of total WCSB activity which increased significantly for 15% in Q2 of last year. We estimate operator spending across our acreage year to date has been $1.3 to $1.5 billion and we feel confident in continued allocation of capital to our acreage. Drilling activity was diversified across our portfolio with 50 in the Clearwater, 42 in the Montney, 23 in Deep Basin, 5 in Southeast Saskatchewan, and 5 in Peace River High. Based on our operator drilling plans, we expect that the current 28 to 32 active rigs on our royalty acreage will be maintained through the third quarter of 2025. Topaz generated second quarter total revenue of $81.2 million and cash flow of $75.6 million, or $0.49 per share. Topaz generated free cash flow of $74.74 million, generating a 91% free cash flow margin, which increased from 89% last year due to higher royalty production, infrastructure processing revenue, hedging gain, and lower interest expenses. During Q2, Topaz generated $20.2 $28.2 million of net income, or $0.18 per share, which increased 50% from the prior year. Topaz distributed $52.3 million in quarterly dividends, $0.34 per share, during Q2, which reflects Topaz's dividend increase that was announced with the Q1 results, and represents a 5.5% trailing annualized dividend yield to the second quarter average share price. Q2 excess free cash flow of 21.7M was allocated towards the previously announced Alberta-Monte infrastructure acquisition, which closed at the end of May for a total acquisition cost of 26M. We have reconfirmed our previously announced 2025 guidance ranges and expect to exit 2025 with net debt to EBITDA of 1.2 times, and generate a payout ratio at the lower end of the 60% to 90% long-term target range, which provides financial flexibility for acquisition growth. Our 2025 dividend remains sustainable down to $0 ACO and $55 US WTI attributed to the fixed revenue provided by our infrastructure portfolio and hedging contracts that include over 30% of second half 2025 natural gas production hedged at a weighted average price of $2.88 per MCF. We're pleased to answer any questions at this time. Back to you, Jenny.

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 a touch-tone phone. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift a handset before pressing any keys.

Once again, that is star one should you wish to ask a question. And our first question is from Jeremy McCrane from BML Capital Market.

Your line is now open.

So we've seen a lot of progressions here in the plays that you have between the water flood and this new Grand Rapids pool that Headwater has discovered. Just in your experience of looking at the whole basin, where do you see new emerging plays coming onto your line that we may be talking about six months from now here?

Yeah, good morning, Jeremy, and thanks for the question. Obviously, we found out about the Grand Rapids play last week, along with the rest of industry and investment world. So that was a significant discovery. It's 15 sections of land across the headwater acreage. We do think that it could potentially extend into some of the Tamarack acreage as well. And so quite satisfied with that. I think we saw headwater last week. Mention or kind of communicate that they thought that was 180M barrels of oil in place. So that really adds to a nice portfolio where we have inside and we see that across the complex. I think we mentioned in our analyst note that we saw it terminally do some step outs. The last quarter announced the significant discovery in the belly river of about 800 barrels a day. and so we continue to see these across our portfolio and i think that's the big advantage of topaz it's the optionality that exists inside of it where we don't spend any capital but we get the direct benefit of exploration technology and step outs that our operators continue to to participate in and so having a royalty across the majority of those portfolios being tamarack headwater and tourmaline is a direct benefit for Topaz. And so, you know, we don't ever count on a lot of these plays, don't underwrite them when we do our deals, but it is the optionality and upside that we have being a royalty company.

And maybe just a follow-up on that. So I know this, you guys didn't change your guidance here, but with a lot of these new exploration plays coming about, is this something to expect as we head into 2026, some potential higher prices? production growth than maybe expected or how much of these new plays do you typically try and include in your guidance and other stuff is just pre-optioned upside here potentially?

Yeah, I mean, because we don't control the capital, it's always tough to include exploration, the unknown in your guidance. And so I think we like to go off what our base is. level of what we see growth and production is. And you can see in our new deck on slide 20, we talk about a 3%, a 5%, and a 7% growth scenario over the next five years and the impact and illustrative impact that has to Topaz. You know, I think just to be safe, we kind of up to 3% to 5% growth per year, and the 7% is a nice win. But overall, I mean, you can't really budget when you don't control the capital for any of this exploration. Saying that, I mean, in 2023, when gas prices were better and oil prices were quite high, we saw one of our main producers, Tourmaline, spend $100 million on exploration, and I think they went 18 for 19 on success rates. And so when there's more capital in the system and kind of a more – strong commodity price, we do expect to see more exploration. Not to just point Termaline out, but Headwater did discover two new sands and the Grand Rapids A pool in West Martin Hills. So we're getting direct benefit of that as well. And when you look at companies like Tamarack that are going from a 14% water flood to 40% water flood in their new five-year plan, it's a direct benefit to us as well.

Perfect. Okay. Thanks, Marty. Thanks, Jeremy.

Thank you. And our next question is from Jamie Kivick from CIBC.

Your line is now open.

Yeah, good morning. Thanks for taking my question just on production during the quarter. Light oil volumes have been outperforming guidance considerably to start the year. Heavy oil volumes more turning in line with guidance, I suppose. Can you just talk about some of the reasons for the contributors to the outperformance on the light and medium crude versus expectation, and if you think it could extend into the second half as well.

Thanks. Thanks, Jamie. We definitely saw outperformance relative to our expectation across the portfolio, so I wouldn't say it was one big driver. It was, you know, if you look at it by acquisition still, and really everything's up between 4% and 6%. So incremental wells out in southeast Saskatchewan, some incremental wells across the reserve royalty portfolio. And those are ones we for sure don't count on because you don't have as transparent line of sight to operate our capital plans. So we definitely saw some, you know, catch-up from wells that were drilled basically very end of Q1. So there was a bit extra bump into the Q2. So hard to say if we see that exact cadence into the second half of the year, but definitely strong activity. So we would probably forecast it more so to the Q1 volume that came in, but definitely, yeah, please. Okay.

Thank you. And then in the slide deck, you have an illustrative five-year outlook and demonstrate the potential for cash flow per share potentially doubling by 2030. How should we think about capital allocation priorities there over that time span with respect to the dividend, M&A, buybacks, things like that?

Thanks. Yeah, for sure. So we sketched that out. It's not changed materially from the last version. What we did is impart the historical performance to kind of, you know, give support to why we think that that transparency of organic growth is there. And so the five-year illustrated example basically allocates our excess free cash flow to acquisitions. So we tagged it as 150 million of acquisitions per year, generating that 10% to 18% rate of return. We have not imparted a dividend increase through that five-year outlook because even the acquisitions could fluctuate. There could be incremental debt or there could be lower acquisitions in one year. But overall, the strategy is to sort of pair that dividend increased cadence to sustainable growth, whether that be from acquisitions, infrastructure, or royalty production, and not be exposed to the commodity price. So, you know, the takeaway is we see lots of land site to that operator capital, and we have good coverage across their entire land basis of our key operators. And so the 3% to 5% is that output from that incremental capital that may come is definitely incremental to us and at no cost to us, and that dividend cadence should match the overall annual cadence that we see through that illustration.

Yeah, Jamie, just to kind of add on to that, we've done nine dividend increases. It's been a 70% increase to our dividends since 2020 IPO year. So it has followed kind of that cadence Sri talked about. As we grow, the dividend grows. At this time, we're not looking at share buybacks. I think we've communicated that over the last few years that our form of return of capital is going to be dividends for the time being. And, you know, we do spend some time looking at share buybacks. But overall, I think our form of return of capital is going to continue to be increasing the dividend, small sustainable dividend increases alongside growth.

Okay, good call. Thanks. That's all for me. Thanks, Jamie.

Thank you. And our next question is from Joseph Schachter from Schachter Energy Research. Your line is now open.

Super. Thanks very much. And good morning, Scott, Marty, and Sherry. Two questions for me. First one, based on, you know, well, we're seeing it's a pretty tough market out there for gas and And of course, oil prices have been backing off into the 60s. Are you seeing any play areas where on positive you have the Grand Rapids and you have other positives with heavy oil? But are you seeing on the other side of it some areas where you have land where the drilling activity programs that you're seeing are shrinking based on what's going on in the commodity price and companies not wanting to drill on economic wells?

Yeah, good morning, Joseph. Thanks for the question. We did kind of communicate inside our press release that we do anticipate 28 to 32 rigs continue to be active on our royalty lands. We were able to capture 21% of the Canadian fleet on our royalty lands through the quarter. And I think that goes to show you how the parts that we've invested in in the basin will continue to see capital allocated towards it, even in lower commodity cycles. Where we maybe see a little bit of reduction for the short-term basis is areas like southeast Saskatchewan, some of the acreage that we have kind of through west central. But for the most part, the bulk of our activity, which is mainly driven by the three operators, Tamarack, headwater and tourmaline, they drive about 75% of our activity. So we haven't seen anything kind of reduced from the overall plans that they've put forward. And I think it's just the economics of these plays. They're so fantastic. When you have the best of the basin in one high margin package, it really flows through into where the capital is allocated.

Super. Thank you, Christian. How does the M&A market look for you now? both for royalty and infrastructure deals? Is it the same as it's been quarter to quarter? Is it picking up because of low prices? Can you give us some color on how you see the potential for making acquisitions this year?

Yeah, there's no shortage of opportunities, and there always seems to be opportunities. It's just, are we willing to invest in those opportunities? And so we have... participated in a few processes over the last quarter or two quarters and you saw us close the deal with Logan in the early part of this year and finalize that deal into into Q2 for the facility portion of that. And, yeah, we continue to be active. I mean, there's no shortage of opportunities in front of us. And I think that's a big reason we got asked the question at a meeting yesterday is why wouldn't we just increase the dividend? Well, the reason being to the higher part of our payout ratio. And the reason being is we still see M&A in the system. So I think there was a little bit of a pause with tariff noise going on and government policy and government reelection. And I think that cleans into the latter part of this year where I do believe that Topaz is a useful part of the capital stock. I mean, equity is an option, debt's an option, and a company like Topaz is certainly an option for a lot of these producers. So I do anticipate that we will see at least one more transaction done this year, maybe more. We're being very selective. We're happy to pay down debt while the right deal isn't in front of us and replenish our balance sheet. So that's always kind of been the model at Topaz is when there's not M&A in front of us, We're happy to replenish balance sheet and be ready for the next M&A cycle.

Super. Thanks for the information on the caller.

Thanks, Joseph. Have a good day. You too.

Thank you. Once again, please press star 1 should you wish to ask a question.

And our next question is from Michael Harvey from RBC Capital Markets. Your line is now open.

Yeah, sure. Thanks. Good morning. Maybe for Sri or for Marty. I guess just a broader one on gas prices and hedging. You're the only royalty that does do some hedging. What's the house view, I guess, here on hedging AGO for the next couple of years? Do you plan to do more or less than historical or just kind of keep layering it on? But obviously lots of moving parts. Just interested in how you folks think about that.

For sure.

So about six months ago, we definitely layered on some additional hedging projects. for summer 25, so that brought the weighted average price down from 330 to about 288. And so we are about 34% hedged. We are for the full summer and through to December of 2025. And beyond that, we have a book of about 18% of our gas hedged up to the first quarter of 2027. And that's at that 332 in MCF price. And so that was what we perceive or believe is opportunistic. Now, given the dynamics that are happening with LNG coming on and sort of wrapping up, you know, on or above expectation, we're hesitant to layer on some more on 26 until we see how that plays out. So we don't want to over-hedge, but we do want to, you know, protect particularly the summers or overall acquisition economics. So we're in a bit of a wait-and-see pattern. We think we have a good baseline built into the book and ready to sort of hedge into some tighter differentials when we see those, because we see that as being a good way to relay our pricing to a different market without having that costly and unavailable transport. So we're kind of on a wait-and-see approach, I'd say now, but a really good baseline.

And I think, Mike, just to add on to that, we'll always hedge a little bit of gas and a little bit of oil. I mean, we've been very acquisitive, so we do like to hedge a certain portion of our acquisitions. and lock in a price there. And as we continue to be acquisitive, we'll hedge a certain portion of that. In addition to that, I mean, we do have some oil hedges laid on until the end of this year, around $97 a barrel. And so that's, I think, a very opportunistic hedge like Sri talked about. And we'll look to 26, 27, even to 28 if we can find the right price. And I think as this LNG complex starts to build into Western Canada, we've seen August kind of have some narrative around $450 million a day out of the one BCF. So, look, this is going to be a real story in Canada, and it's going to continue to expand, and we're going to find the right way to be opportunistic alongside it. Got it.

Thanks, guys. Thanks, Mike.

Thank you.

There are no further questions at this time. I will now hand the call back over to Mr. Marty Stables for the closing remarks.

Yeah, thanks, everyone. Look forward to speaking to you in Q3, and we'll see you then.

Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.