Topaz Energy Corp. ($TPZ)

_Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. First Quarter 2026 Results Conference Call. [Operator Instructions] Mr. Staples, you may begin your conference.

Thank you, John. Good morning, everyone, and welcome to our discussion of Topaz Energy Corp.'s results as at and for the period ended March 31, 2026. My name is Marty Staples, and I'm the 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 will start this morning by speaking to some recent and first quarter 2026 highlights. After these opening remarks, we will open for questions. Topaz had a strong first quarter marked by record royalty production on our acreage and our Board has approved a 3% dividend increase to $0.35 per share or $1.40 per share annualized, marking our tenth quarterly dividend increase and a 75% dividend per share growth since inception. Topaz's first quarter royalty production was 24,609 boe per day and increased 10% over the prior year. Q1 2026 relative production included record natural gas production of 105.7 million cubic feet per day, 11% higher than prior year and record total liquids production of 6,998 barrels per day, 7% higher than the prior year. Topaz generated total first quarter revenue and other income of $94.6 million, 55% from total liquids royalties, 20% from natural gas royalties and 25% from our infrastructure portfolio. Processing revenue of $21 million increased 7% from Q1 2025, with total processing revenue and other income generated in the quarter of $23.4 million. The infrastructure assets generated 98% utilization in the quarter, providing a 92% operating margin. During the quarter, Topaz also invested $2.4 million of modification projects on 2 jointly owned natural gas processing facilities in exchange for a proportionate increase to take-or-pay fixed fee processing arrangements. Drilling activity on our acreage remains strong with 138 gross wells drilled and 4 gross wells reactivated, with 55% of drilling activity directed into oil-focused plays. Activity was diversified across our portfolio with 48 wells in the Clearwater, 31 in Northeast BC in Alberta Montney, 23 in the Deep Basin, 13 in Central Alberta, 11 in Southeast Saskatchewan and 8 in the Peace River. During Q1 2026, 130 total gross wells were brought on production. And as at March 31, another 86 gross wells were drilled, but not yet completed. Based on operator drilling plans, we expect 15 to 18 rigs will remain active across our royalty acreage through spring breakup, following which activity expected to resume to 22 to 27 drilling rigs. Topaz generated first quarter total revenue and other income of $94.6 million, cash flow of $80.1 million or $0.52 per share and free cash flow of $78.7 million or $0.51 per share. Topaz distributed $52.6 million in quarterly dividends, $0.34 per share during Q1, representing a 4.6% trailing annualized dividend yield to the first quarter average share price and generated $26.1 million of excess free cash flow, which was allocated primarily to debt reduction. Topaz exited the first quarter with $492 million of net debt, representing a 5% reduction from December 31, 2025. We have continued our strategy to grow the dividend along in sustainable revenue growth within the business. Our quarterly dividend has been increased $0.35 per share, representing $1.40 per share on an annualized basis or a 4.5% yield to our current share price. Since inception, we have returned approximately $1 billion in dividends, which represents over 20% of our current market capitalization. We have reconfirmed our previously announced 2026 guidance and do not expect annual average royalty production of 23,900 boe at the upper end of the range, driven by strong oil-focused activity, while allowing for prudent natural gas-focused capital discipline. Based on updated estimates, including the second quarter dividend increase, Topaz's 2026 exit net debt is now estimated at $407 million, which represents a 4% reduction from our prior guidance before consideration of incremental acquisitions. Topaz is expected to maintain a payout ratio at the lower end of the 60% to 90% long-term target range, providing financial flexibility for acquisition growth. Our 2026 dividend remained sustainable below $0.01 per Mcf of [indiscernible] and USD 55 WTI, attributed to the high-margin, stable infrastructure revenue, which represents 43% of the 2026 increased dividend. Our hedging strategy and financial derivative contracts in place lower decline royalty production supported by secondary recovery and our diversification between oil and natural gas focused undeveloped royalty acreage. As a reminder, our 2026 Annual Shareholder Meeting will be held this Friday, May 8, at 9:00 a.m. at the Calgary Petroleum Club. At this time, we're pleased to answer any questions. Back to you, operator.

[Operator Instructions] We now have our first question, and this comes from the line of Michael Harvey from RBC Capital Markets.

So a couple of questions. I guess the first one, just any takeaways on the types of newer, just kind of more exploration style plays as we kind of go through the second half from your counterparties usually when you get higher prices, folks will step out a bit more in terms of exploration. You kind of mentioned the Belly River, but anything else worth mentioning there would be good. And then second one, maybe just for Cheree, just on hedging. The book looks pretty late for 2027. Lots of moving parts in there, obviously. Just wondering kind of what the strategy is as we move into the back half.

We always kind of hear about the exploration plays after we release. I mean, terminalling holding the majority of our acreage we'll probably disclose some things later today. I know they've been working pretty aggressively on just different exploration ideas and not sure if they're ready to expose any of those yet as I think they're still trying to do some land acquisitions around that. But as you highlighted, the Belly River has been some big upside inside our portfolio. We saw 9 wells drilled on that this quarter. That's a combination of Highwood thermally and Obsidian. So a big surprise in some of those. We had some fairly high well rigged wells inside the Belly River complex that we never underwrote those ideas when we were buying a lot of this acreage. So a surprise to the upside for sure. I think we've talked at length of both the Grand Rapids and Headwater and bulk Tamrac, have highlighted how important that's been to their portfolio. We think that the Grand Rapids data could add up to 10,000 barrels a day of incremental gross production net production cost is pretty high and we have a 7% royalty on the Headwater lands, the 5% on the majority of the Tamrac land. So big upside there. And I think that's the big benefit is we see a lot of these producers through the portfolio that are out there doing exploration and it's no additional cost to Topaz. So always for the upside to us when they do exploration projects. I think 1 thing to note as well is some of the disclosure Tamrac put out this morning and Headwater put out last week is the injection rates in 2025 have tripled. They plan to double those injection rates in 26. Similarly, Headwater is targeting 60% of total oil production being supported by waterflood, and it's going to be 70% by 2028. So that's big upside for Topaz. And as I mentioned before, we did not underwrite a lot of that in our portfolio. So that's added upside to the overall complex.

And on the hedging, Mike, so we're about 70% hedged on both liquids and gas for 2027 currently. So definitely, we'll look to add more opportunistically. So the way we're thinking about it is maybe some wider costless collars on the oil side, and we kind of think of $3 gas as ideal. So we're not going to panic and for we're going to layer some in as we see opportunities arise. And basically target we're always looking towards is where can that dividend be fully funded at that [indiscernible] $55 WTI, that's kind of our threshold that we're trying to isolate.

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

Can you just talk a bit around the spud activity that you saw on your acreage during the quarter. It looked like it was down considerably year-on-year and how that might translate into what we see from a production perspective in future quarters?

Sure, Jamie. So I think the most important wells to look at is in that [indiscernible] activity. And keep in mind, this sudan not rig release, so there is some timing when you think about larger well pads. But the most important are definitely the Montney and Clearwater. We think those are the best resource, the best returns. And so when we look at those, they haven't changed nearly as much. In fact, I would say the trending slightly down with Clearwater is the sign of that improving capital efficiency, same thing for the Montney because we're still seeing great results out of both of those plays even with respectively lower count. And the other thing year-over-year, like the biggest 3 areas that we saw a reduction were the basin, Southeast Saskatchewan and Peace River [indiscernible] resin assets change hands. So that would have stalled some activity. Southeast Saskatchewan, those could be portions of wells, not necessarily owning the full [indiscernible] and so we're overall not too fuzz on the Deep Basin. There could be some dryer gas. The other thing to note is year-over-year, we had a 3.3% average royalty rate. last year, this quarter, 3.7%. So fewer wells but higher royalty rates. So overall, we're not too fuzz, especially with the strong performance in Q1. We do naturally expect our production to be sort of U-shaped through the year of Q1 to Q4 being the peak in Q2, Q3 being a function of spring breakup and then maybe some [indiscernible] activity or response to natural gas pricing. So overall, feel very strongly as we mentioned in the presses we're applying to the high end of our guidance range. So kind of hold the oil production at that high end based on pricing and Obviously, there's a bit of flex within the gas, but we kind of made up for it in Q1.

Yes, Jamie, we've been talking to a few shareholders. In fact, I was with this shareholder Mona last night, and she had mentioned that 1 of the comments just around natural gas-driven activity. And if certain producers are going to reduce activity. And I think it's a good sign for us overall, like if we can save those molecules for better prices, we don't mind seeing that. So I think it's a positive overall.

Okay. And can you talk a bit about the gas processing plant modifications that Topaz participated in during Q1? And sort of what does that mean for future revenue upside from these assets? And is there more things like this to do.

Yes. Good question, too. And so we have seen some acceleration in 2 of our Montney projects, one was in the [indiscernible] area, one in Musreau, participated in both those expansions. I think in the Musreau area, our producer white cap and operator wake-up has some wells that are just fantastic. They're outperforming type curve. And so they just needed more capacity in that facility. We have the option, not the obligation to participate and keep our pro rata share in place, and we did that. And so it will translate to locked-in fees from that participation. Similarly, same deal on the [indiscernible] facility where we participate alongside Logan, just have been drilling some fantastic wells up there, found a new zone in the Montney. And so -- this translates really well to us, not only do we increase capacity, but we also increase in the [indiscernible] area, for sure, our royalty production as well.

[Operator Instructions] It seems like there are no further questions that came through. I will now hand the call back over to Mr. Staples for any closing remarks. Please go ahead, sir.

I appreciate everyone joining the call today and look forward to hearing and seeing you guys for Q2. Thanks very much.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.