Topaz Energy Corp. (OTCPK:TPZEF) Q2 2024 Earnings Conference Call July 30, 2024 11:00 AM ET
Company Participants
Marty Staples – President and CEO
Cheree Stephenson – CFO and VP, Finance
Conference Call Participants
Josef Schachter – Schachter Energy
Jamie Kubik – CIBC
Nolan Akins – ATB
Operator
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. Second Quarter 2024 Results Conference Call. [Operator Instructions] Thank you.
Mr. Staples, you may begin your conference.
Marty Staples
Thank you Lara, and welcome everyone 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 Cheree Stephenson, 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 Topaz annual information form and within our MD&A available on SEDAR 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.
Topaz had a very strong second quarter marked by cash flow of CAD70.6 million or CAD0.49 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 Montney infrastructure acquisition that was completed during the second quarter marks Topaz’s third infrastructure acquisition over the past 12 months and is expected to provide CAD13 million to CAD14 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 CAD1.32 per share represents 65% share growth since Topaz 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 CAD0.01 per Mcf natural gas and US$50 per barrel of crude oil.
For the remainder of 2024, 18% of natural gas is hedged at a weighted average price of CAD3.17 per Mcf and 40% of oil and total liquids is hedged at a weighted average floor price of CAD102.54 per barrel using collar structures to maintain upside participation.
Topaz’s second quarter average royalty production of 18,700 BOE per day was 33% total liquids as light and oil — heavy oil royalty production achieved a new record exceeding 5,000 BOE 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 gross wells were drilled on our undeveloped royalty lands, representing 15% of the total wells drilled across the Western Canadian Sedimentary Basin, which increased from 12% during the first quarter of 2024. Operators spud 94 gross wells and reactivated seven gross wells on our acreage during the second quarter.
Drilling was diversified across the royalty portfolio as follows; 32 Clearwater, 33 Northeast BC, 13 Deep Basin, 7 Southeast Saskatchewan; 6 Central Alberta, and 1 Peace River. We estimate that operators spent approximately CAD0.4 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 Topaz’s acreage will be maintained through the third quarter of ’24. Based on operator disclosure, we estimate that 20% of Topaz Clearwater heavy oil is now supported by waterflood, which is demonstrating positive response to improve recovery and stabilize production rates.
Topaz’s second quarter royalty revenue of CAD60.2 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 CAD18.2 million, represented 23% of Q2 total revenue and was 7% higher than 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 CAD78.4 million and free cash flow of CAD69.5 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. Topaz distributed CAD46.4 million in dividends during the quarter, resulting in a 66% payout ratio and generated CAD23.1 million in excess free cash flow, which was allocated to acquisition growth.
We have reconfirmed our 2024 guidance ranges of 18,800 to 19,600 BOE per day of royalty production and CAD75.5 million to CAD78 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 CAD345 million and CAD355 million or 1.1 times net debt to EBITDA. The 2024 dividend represents a 66% payout ratio based on recent commodity price forecast, 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Josef Schachter from Schachter Energy. Go ahead, please.
Josef Schachter
Good morning, Marty and Cheree and congratulations on the quarter and the dividend increase. The market likes its new record high for the stock today. So congratulations on all that. My questions, two of them. One relates to the Musreau deal with Whitecap. What is the utilization of that facility right now that it’s come on stream? And do you have, if they continue to grow that area, which from the Whitecap call, Grant was talking about that, would they — if they do an expansion or a new facility, would you be involved in that as well?
Marty Staples
Yes, sure. So yes, thanks, Josef, for the nice words today. Nice to talk to you again. The Musreau deal right now, from disclosure from Whitecap, it’s 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. They did build it for purpose. So we do anticipate it will be utilized, 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 take or pay commitment.
Saying that, yes, we do think that this is a growth area for Whitecap. They do have a line of sight, I think, to 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 Musreau where they’re developing some of their best Montney wells right now in the D2 and D3 formation is a big benefit for Topaz and the infrastructure we are participating alongside Whitecap with.
Cheree Stephenson
And one more comment, Josef. This is Cheree obviously. With expansions, if they were to expand it, we do have the right, but not the obligation to participate alongside. So we would be willing to participate alongside any growth projects within that.
Josef Schachter
Okay, super. Yes, 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, of course, this deal was done, we hear from Veren 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?
Marty Staples
Yes. 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 into — 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, yes, 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.
Josef Schachter
In terms of deal flow, is it more active now than it was a year ago, just to get a feel for that?
Marty Staples
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 yes, 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 transact on.
Josef Schachter
Super. That’s it from me. Thanks very much, and again, congratulations.
Marty Staples
Thanks very much, Josef.
Operator
Thank you. Our next question comes from the line of Jamie Kubik from CIBC. Go ahead, please.
Jamie Kubik
Yes. 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 that 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 mean for the rest of 2024. Thanks.
Cheree Stephenson
Hi, Jamie. Thanks for the question. We definitely saw a stronger performance even than we were expecting across some of the Southeast Saskatchewan fee title leasing and activity, and also particularly in the Weyburn unit from Whitecap. So lots of good surprises and incremental activity.
Marty Staples
In addition to that, we did see some of the top wells on our portfolio in the Charlie Lake. Of note, Archer, Tamarack Valley and Tourmaline continue to deliver some very strong results into the Charlie Lake, which has added to that lighter oil mix for us.
Jamie Kubik
Okay. Thank you for that. And maybe a next question. You did note a decent carry-out of drilled, but uncompleted wells on the natural gas side of 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.
Marty Staples
Yes. I think we’ve got a real great inventory of drilled uncompleted 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 price is 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 pads are super pads. They can take anywhere up to three months to complete, and so this isn’t like just flipping a light switch. They do take time to get into completion.
Jamie Kubik
Okay. That’s all for me. Thanks.
Marty Staples
Thank you, Jamie. Have a great day.
Operator
[Operator Instructions] Our next question comes from the line of Patrick O’Rourke from ATB. Go ahead, please.
Nolan Akins
Hi. Good morning. Thanks for taking my question. This is Nolan Akins stepping in for Patrick here. So my first question, your liquids volumes in the quarter were impressive. They’re ahead of the midpoint of your full-year guide for liquids. You kind of touched on a little bit, but maybe you can elaborate a little bit more. What’s been the driver for 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?
Cheree Stephenson
Yes. So the outperformance definitely impressed us. I know that some of the Clearwater volumes for Q1 were held back waiting for TMX to come on. So there is 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. So we do have a range within our guide because we don’t control the capital.
So we estimate about 30% total liquids. We saw that jump up in Q2, but we would estimate somewhere between, around 30% for the whole year, average, and we do expect the gas to kind of catch up in Q3, Q4. So I think our estimate, the range will be something we hold on.
Nolan Akins
Thanks for the color on that. For my second question, I guess I first want to say congratulations on both the dividend raise and the Musreau infrastructure deal with Whitecap. An d 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?
Marty Staples
Yes. I think from ’21 to 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 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 got to be pretty selective about which opportunities we want to pursue. Obviously, I talked about this on the first question from Josef that we don’t want to dilute our existing business. If something is out there that 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 1 assets, it’s going to have to be at a discount and there might be a better opportunity for these operators to go out and 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’s pretty much what they spend their weeks and evenings and weekends doing. So yes, I think from our side, we want to be reactive to opportunities in the market, but be proactive on idea generation inside of the organization.
I do expect, 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 organization.
Nolan Akins
Awesome. Thank you very much for the color there. I’ll turn the call back.
Marty Staples
Thank you.
Operator
[Operator Instructions] 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.
Marty Staples
Yes. Thanks everyone for their support. And yes, hopefully everybody gets a chance to enjoy the rest of the summer. We’ll talk to you in Q3.
Operator
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.
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