Topaz Energy Corp. (TPZ) Earnings Call Transcript & Summary

Good morning, everybody. My name is Kelsey, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Topaz Energy Corp. First Quarter 2025 Results Conference Call. [Operator Instructions] Thank you. Mr. Staples, you may begin your conference.

Thank you, and welcome, everyone, to our discussion of Topaz Energy Corp.'s results as at and for the period ended March 31, 2025. 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 as 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'll start this morning by speaking to some recent and first quarter 2025 highlights. After these opening remarks, we'll be open for questions. Topaz had a strong first quarter marked by several new records achieved, including royalty production, quarterly drilling activity and our lands and infrastructure revenue. Our Board has approved a 3% quarterly dividend increase to $0.34 per share, marking our ninth dividend increase and 70% dividend per share growth since inception. Topaz's first quarter royalty production was 22,400 BOE per day and increased 10% from the prior quarter and 17% higher than the prior year. Natural gas production increased 13% and total liquids production increased 4% from the prior quarter. Topaz's first quarter royalty revenue of $68.7 million represented 75% of total revenue and generated a 99% operating margin, while first quarter processing revenue and other income achieved a new company record of $23.5 million, which was 7% higher than the prior quarter. During the first quarter, operators spud a new quarterly record of 218 gross wells, 7.3 net across our royalty acreage, representing 19% of the Western Canadian Sedimentary Basin drilling activity, which increased significantly from 12% in the first quarter of last year. Drilling activity was diversified across our portfolio with 50 in the Deep Basin, 49 in the Montney, 46 in the Clearwater, 37 in Southeast Saskatchewan and Manitoba, 27 in Peace River and 9 across Central Alberta. During the quarter, 191 total gross wells were brought on production, which increased 57% from the prior year. We remain extremely confident in the price resiliency of the plays and the quality of the operators that make up our portfolio with approximately 93% of our current royalty production volumes generated from 5 well-capitalized operators. Based on operator drilling plans, 14 to 16 rigs will remain active across our royalty acreage through spring breakup, a record level for Topaz and expect this will increase to 28 to 30 rigs through the second quarter. Topaz generated first quarter total revenue of $92.2 million, cash flow of $81.7 million and free cash flow of $80.8 million. Our free cash flow margin increased from 85% to 88% for the first quarter. Cash flow of $0.53 per share and free cash flow of $0.52 per share both increased 13% from prior year. Topaz distributed $50.7 million in quarterly dividends during Q1, representing a 5.2% trailing annualized dividend yield to the first quarter average share price and generated $30.1 million of excess free cash flow, part of which was allocated to fund the Alberta Montney royalty acquisition, which was completed in January. Based on our revenue growth, our dividend has been increased, which represents $1.36 per share on an annualized basis or a 5.9% yield to our current share price. We have reconfirmed our 2025 guidance ranges for 21,000 to 23,000 BOE per day of average royalty production and $88 million to $92 million of processing revenue and other income. Topaz expects to exit 2025 with net debt to EBITDA of 1.2x and generate a 66% payout ratio. As a reminder, our 2025 dividend remains sustainable down to $0 AECO and USD 55 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. Back to you, operator.

[Operator Instructions] Your first question comes from Michael Harvey from RBC Capital Markets.

Just a couple of, I guess, more broader questions. First, I think you did reiterate the guide, of course, but just be interested in your personal views on how you think activity levels could change throughout the balance of the year and kind of into early next, just given that oil and gas are doing 2 different things on the commodity level. And then the second one, just any broader thoughts on the E&D market, availability of deals and just bid-ask spreads? And any just broad thoughts on how you see that market playing out through the balance of the year as it relates to Topaz would be helpful.

Yes. Thanks, Mike. Appreciate that. I mentioned in the release that we saw record drilling through breakup of 14 to 16 rigs, currently sitting at 16 rigs through breakup. Last year, we kind of peaked out around 9, 10 rigs, so this is kind of very increased activity from what we would have seen last year. We haven't seen any operator direct different drilling plans to the land. So we do, without any guidance from, I guess, the biggest operator being Tourmaline, see any change to that. It looks like the drilling is going to continue. End of Q4 last year, we did see some drilling and some DUCs kind of created. But through Q1, we saw a lot of those DUCs actually convert to completions. So we did see some inventory build happen. Probably too soon to tell if maintenance programs do get cut, although, I mean, tough oil prices usually make good gas prices, and we do see a gas thesis building here. So I think that's the benefit to our portfolio, the diversification, the quality. And when we've historically seen lower activity, we seem to attract capital back to our royalty land. So like I said, too soon to tell. From an A&D perspective, we have been active looking at things. Nothing has really caught our eye to try to acquire at this point in time. Saying that, I mean, we did do the Logan deal in January. We do expect the facility that we purchased 35% on to be on stream this quarter. They're doing a great job out there right now Logan finalizing that facility. But we're okay to sit back and wait for the right thing to come along. If there is some weakness inside market, I think our capital becomes more precious and more needed by operators. So being patient for a quarter or 2. And if this price commodity stays light, I think it's actually a benefit for an entity like Topaz.

Your next question comes from Jeremy McCrea from BMO.

Just a bit more on your A&D question here. When you're looking at these different transactions, are you more inclined to pick up more infrastructure here at these levels? Or is -- or do you believe for the rest of the year, you're probably going to see more oil and gas rights that come available?

Yes. I mean we get this question quite often, Jeremy, and thanks for it. I would say we're indifferent. We look at both infrastructure royalty. We look where we can to do a hybrid deal. I think that's what sets us apart from our competitors. But in the things we've been looking at, it's about half and half right now from an infrastructure royalty standpoint. So we are looking at both parts of that complex. And I would say we're pretty agnostic as to which one we do. It's just got to have the right return and the right quality for Topaz to transact on.

[Operator Instructions] And your next question comes from Jamie Kubik from CIBC.

Just curious on the performance in the portfolio through the quarter. Looked like some strong performance in your light oil volumes and then heavy oil volumes down a little bit. Can you just talk a little bit around the makeup of what the drivers were on this side from a portfolio perspective?

Yes. I'll maybe make a quick comment here and then Cheree can jump in. But one thing in particular, we saw in the Clearwater was a lot of producers shift into some injection wells. And so although we did see some of their volume up, I think they're trying to focus on NPV versus IRR, which is actually a benefit for us, there's areas like Headwater. That's a royalty that we've completely paid out already. So if we can get reserves for longer, that's a great news story. You're getting better recovery, more reserves and lower decline. It's exactly what we want to see in a recipe. But I think heavy oil volumes there at Tamarack and Headwater but both are doing a great job. I think Cheree can probably add some more color to those volumes, though.

Sure. So on the light oil side, we for sure saw some strong performance in the Charlie Lake that would have been coming from Tamarack and also some wells out in Southeast Saskatchewan on our land. So those are volumes we don't necessarily have as much line of sight on and as much reliance on within the guide. And then on the heavy oil side, we did see strong performance from both Tamarack and Headwater. They made up the vast majority of the Q1 heavy oil. There was some additional -- essentially some compliance revenue recovered in Q4 from other operators. So that's why it looks directionally like Q4 versus Q1 why it is lower, but the overall growth, Tamarack, Headwater from the last couple of quarters has been 5% and 6%, respectively. So still see really strong performance from those core operators and then just some additional sort of noise within the quarter-over-quarter analysis.

I see. Okay. That makes sense. And then maybe just a quick follow-on. You talked about 72% of new wells drilled at the end of Q1 '25 during the quarter were drilled but not yet completed. Can you just talk a bit about -- is this a sort of normal rate for you and how you expect volumes to trend on the back of something like that?

Yes. So we still see a good solid backlog of inventory from Tourmaline. So we saw them get through a lot of completions this quarter, but a lot of the wells they drilled through the quarter are still yet uncompleted. So we see a really strong inventory built up. We expect, given how it's shaping up this gas thesis and a bit weaker oil on the oil side, that Tourmaline will remain super active. And we can't predict precisely the cadence but do expect it would emulate like last year from a drilling rig perspective, and that 28 to 30 would be sort of an earmark for the remainder of the year. But as Marty had mentioned, maybe a bit too soon to say, but we do expect to see with this gas price environment, stronger, more consistent activity relative to last year as far as the completions go.

When you see some of the scale of these pads, that isn't uncommon though, Jamie. I mean they're drilling these multi-super pads right now. And so you're going to see all the drilling activity take place first and completions happen after. And so when you're talking about cycle time of 80% of your time is spent drilling and 20% of your time is spent completions and those aren't exact percentages, but just kind of use that as some high-level numbers, you are going to see some DUCs kind of build up over time. And so I think when we saw one of our main operators Tourmaline running 18 rigs on a lot of pad development, that is something that can be expected.

And there are no further questions at this time. Mr. Staples, you may continue.

Thanks, everyone, and I look forward to talking to you in Q2. Take care.

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.