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

Good morning. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Second Quarter 2026 Results Conference Call. [Operator Instructions] Thank you. Mr. Scott Kirker, you may begin your conference.

Thank you, Hannah, and welcome, everyone, to our discussion of Topaz Energy Corp.'s results as of June 30, 2026. My name is 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 AIF and its MD&A available on SEDAR and on the Topaz website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz President and Chief Executive Officer; and Cheree Stephenson, Vice President, Finance and Chief Financial Officer. They will start by speaking to some of the highlights of the last quarter and the year so far. After the remarks, we will be open for questions. Marty, Cheree, go ahead.

Thank you, Scott. Good morning, everyone. Topaz had a strong second quarter, marked by a record share of quarterly drilling activity in the WCSB, record liquids royalty production and a core area tuck-in acquisition. Topaz's second quarter royalty production was 24,233 BOE per day and increased 9% over the prior year. Q2 2026 royalty production included record total liquids production of 7,178 barrels per day, 6% higher than prior year, driven by strong operator drilling activity on our Clearwater royalty acreage. Topaz generated total second quarter revenue and other income of $111.2 million, 66% from total liquids royalties, 13% from natural gas royalties and 21% from our infrastructure portfolio. Processing revenue of $20.7 million increased 3% from Q2 2025 with total processing revenue and other income of $22.3 million, while the infrastructure assets generated 96% utilization in the quarter, providing a 92% operating margin. Drilling activity on our acreage was strong with 160 gross wells or 6.6 net wells drilled in Q2, representing the highest quarterly share of WCSB drilling activity in the company's history at 22%. Activity was diversified across our portfolio with 78 wells in the Clearwater, 40 in Northeast BC and Alberta Montney, 22 in the Deep Basin, 7 in Peace River, 9 in Southeast Saskatchewan and 4 in Central Alberta. Our growth plays in the Clearwater and Northeast BC continue to attract a meaningful share of activity with 69% and 45% of the total spuds in each respective area occurring on the royalty lands. During Q2 2026, 126 total gross wells were brought on production, and based on operator drilling plans, we expect that 26 to 31 drilling rigs will remain active across our royalty acreage through the third quarter. Topaz generated second quarter total revenue and other income of $111.2 million. Cash flow of $88.4 million or $0.57 per share increased 9% over the prior year, while free cash flow of $86.6 million or $0.56 per share increased 17% over the prior year. Topaz distributed $54.2 million in quarterly dividends at $0.35 per share during Q2, representing a 4.5% trailing annualized dividend yield to the second quarter average share price and generated $32.4 million of excess free cash flow, which was allocated to our core area tuck-in royalty acquisition during the quarter. On June 30, 2026, Topaz completed a $38.7 million acquisition of 300,000 gross acres across Topaz's Northeast BC Montney and Deep Basin core royalty areas. The acquisition lands featured acquired royalty interest in over 500 gross future drilling locations, multi-zone liquid-rich natural gas and oil-focused exploration upside optionality and incremental royalty production. After the acquisition, Topaz exited the second quarter with $497.4 million of net debt, equating to 1.2x net debt to Q2 2026 annualized EBITDA. Reflecting the strong performance and increased activity we've seen through the first half of 2026, Topaz has increased its annual average royalty production guidance to a range of 23,900 BOE per day to 24,300 BOE per day. Based on updated estimates, including the second quarter royalty acquisition, Topaz's 2026 exit net debt is now estimated between $435 million and $440 million before consideration of incremental acquisition. Topaz expects to maintain a payout ratio at the lower end of the 60% to 90% long-term targeted range, providing financial flexibility for future acquisition growth. We're pleased to answer any questions at this time. Operator, back to you.

[Operator Instructions] Your first question comes from Patrick O'Rourke of ATB Cormark.

I guess just first on the improvement to guidance. How much of that is sort of predicated on outperformance year-to-date? And how much of that would you say is sort of evaluating a bit of a strategic shift from some of the underlying royalty payers to what seems like higher growth rates and better capital structures here?

Patrick, it's Cheree. So I'd say it's probably a mix of both. We definitely saw outperformance. And I would say the surprise was partially from some of our noncore areas where we don't have as much transparency into growth. And so those sort of outperformed. And the Clearwater continues to outperform our expectations. And so through the second half, we see sustained gas production, whereas we probably had some more risking baked into the model previously, and then we are seeing outperformance on those Clearwater volumes. So it's a bit of a mix of both.

And just to add to that, Patrick, we did see that disposition of the Charlie Lake by both Tourmaline and Tamarack Valley. And I think from Tamarack's release, one of the benefits you would have seen out of that is they're redirecting $75 million of that disposition in the Charlie Lake back to the Clearwater. And so that's an added benefit to our overall portfolio. Although we probably won't see all of the $75 million, we do expect about 85% to 90% of that directed capital go back into the Clearwater lands we have a royalty on.

And I guess next week, we might get a sort of a better view on Canadian Natural strategy on those Charlie Lake assets.

Yes. I think we kind of model it at worst-case scenario as maintenance capital right now. And we have -- we do think that there's probably 20 to 25 wells across that part of the basin where CNRL operates. I'm not saying that we'll see all of that capital, but we will see a portion of it.

Yes. And just moving over to sort of the acquisition strategy. Maybe how you see the landscape right now. We've had a lot of volatility here, obviously, with crude prices. We've got backwardation. I'm assuming sellers want the front end and buyers want the back end of the curve. But where do you sort of see the opportunities right now for the stated acquisition strategy?

Yes. We've been very proactive throughout the last 12 months from an acquisition strategy. So we have been putting ideas out there for different operators. And some of these ideas take 12 to 18 months to transpire. Start of the year, we would have felt it was a little frozen, but it feels like that's opened up a little bit. There is some capital needs for some of these operators. Think about our goal. It's always to be countercyclical on acquisition strategies, and that was why -- a big reason why we added these 300,000 acres to the portfolio. We thought we could be countercyclical on liquids-weighted natural gas, and that's exactly what we did.

Your next question comes from Jeremy McCrea of BMO Capital Markets.