Q4 2024 Topaz Energy Corp Earnings Call and Business Update
Ina: Good morning. My name is Ina and I will be your conference operator today. At this time I would like to welcome everyone to the Topaz Energy Corp. 4th Quarter 2024 Results Conference Call.
We will start this morning by speaking to some of the recent and fourth quarter 2024 highlights. After these opening remarks, we will be open for questions.
Speaker Change: 'twenty 'twenty four marked another Europe transformational growth for topaz during the year $436 million of royalty and infrastructure acquisitions.
Were completed which contributed to a 38% increase.
Speaker Change: Annualized processing revenue loss and an 11%.
Speaker Change: Percent increase to year end 2024 royalty production and a 52% increase to our year end royalty acreage.
Speaker Change: Topaz is fourth quarter royalty production averaged 23000 Boe per day, 8% higher than Q3 2024.
Speaker Change: While you're in 2024 royalty production of 21.4 thousand BOE per day increased 14% over 2023 annual production driven by 13% higher liquids royalty production and 14% higher natural gas royalty production from our recent acquisitions.
Speaker Change: Because it's fourth quarter royalty revenue of $60 2 million represented 73% of total revenue and generated a 99% operating margin.
Speaker Change: Fourth quarter processing revenue and other income achieved a new company record of $21 9 million, which was 19% higher than Q4 2023.
Speaker Change: Our infrastructure portfolio generated 100% utilization and a 93% operating margin in the quarter.
Speaker Change: Our full year 2020 for profitability was driven by record liquids production, 18% higher processing revenue and $11 5 million natural gas hedging gain or 40 cents an mcf.
In 2024 operators spud a record 630 gross wells 23.2 net across our royalty acreage.
Speaker Change: Which increased 9% from 2023 and represents 15% of the total rig releases across the western Canadian sedimentary basin during the year.
In 2024 operators spent approximately $2 5 billion of capital.
Speaker Change: A 4% increase from the prior year.
Speaker Change: This operator funded development was demonstrated through our annual reserve report, which evaluates topaz proved developed producing.
Speaker Change: And probable developed reserves before any future undeveloped locations.
Speaker Change: Topaz as year end 2024, total proved plus probable reserves of $59 5 million Boe increase.
Speaker Change: Increased 23% from year end 2023.
Speaker Change: Which includes the impact of 2024 royalty production volume of 7 million Boe.
Speaker Change: <unk> grew plus probable developed reserves operators generated $10 5 million Boe.
Speaker Change: Drilling extensions and improved recovery relative to relative to the 7 million BOE produced in 2024. This represents a new company record production replacement of one five times at no cost to us.
Speaker Change: During the fourth quarter operators about 175 gross wells on our acreage, which was diversified across our portfolio with 57 in the Clearwater 33 in northeast BC Montney 42 in deep Basin 16 in Peace River six across central Alberta in 'twenty, one in southeast, Saskatchewan and Manitoba.
Speaker Change: In 2024, 55% of the gross wells spud across 12, so padgett royalty acreage where in the Clearwater in northeast B C.
Speaker Change: <unk> has high growth era royalty areas.
Speaker Change: Since the beginning of 2023, 44% of all new wells drilled across the Clearwater area in Alberta, and 26% of all new wells drilled across northeast BC Montney area.
Speaker Change: We're we're on top as a royalty acreage where topaz average royalty production has increased 34%.
Speaker Change: 11% respectively.
Speaker Change: Based on our plant operator drilling activity, we expect the current.
Speaker Change: 30% to 32 active rigs on our acreage will be maintained through the first quarter of 2025.
Speaker Change: So Pat generated Q4 total revenue and other income of 82 point million cash flow of $73 9 million and an 87% free cash flow margin, providing $71 4 million of free cash flow cash.
Speaker Change: Cash flow of 49 cents per diluted share and free cash flow of 47 cents per diluted share both increased 7% from Q3 2024.
Speaker Change: Topaz distributed $56 million in quarterly dividends 33 cents per share during Q4, representing a four 8% trailing annualized dividend yield for the fourth quarter average share price and generated $20 8 million of excess free cash flow was allocated to acquisition growth.
Speaker Change: During the fall the full year 2020 for Topaz paid $191 2 million in dividends and 68% payout ratio, which included two dividend increases growing the dividend seven 7% since year end 2023.
Speaker Change: We've announced our 2025 guidance ranges of 21000, a 23000 BOE per day average royalty production and $88 million to $92 million of processing revenue and other income.
Speaker Change: Topaz expects to exit 2025, with net debt to EBITDA of one two times and generate a 63% payout ratio, which.
Speaker Change: Which remains sustainable through the end of 2025 at $0 Eco and $55 U S. W. Ti <unk>.
Speaker Change: Attributed to the fixed revenue provided by our infrastructure portfolio and our hedging contracts in place which are available in our most recently filed M. DNA.
Speaker Change: Additionally, through our recent acquisitions in 2020 for the incremental $400 million of tax pools of deferred topaz cash horizon further enhancing our expected 2025 profitability. Thanks.
Speaker Change: Thanks very much at this time, we're pleased to answer any questions.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your telephone keypad, you'll hear a prompt that Johan has been raised and should you wish to cancel your request. Please press star four parts to it.
Speaker Change: If you are using a speaker phone. Please please be handset before pressing any Keith one moment. Please for your first question.
Speaker Change: Your first question comes from the line of Patrick O'rourke from EQT capital markets. Please go ahead.
Patrick O'rourke: Oh, Hey, guys good morning, and congratulations on another solid quarter here.
Speaker Change: Just wondering.
Speaker Change: If you could touch on the reserve bookings are strong.
Speaker Change: The strong growth is that when you think about the process of that booking is there any discretion there is that simply a linear extract.
Extrapolation of the bookings are of your royalty payers.
Speaker Change: And just curious with respect to how aggressively the waterflood results youre seeing in the.
Speaker Change: Clearwater have been booked.
Speaker Change: Yes, I can take that for sure good morning, Patrick let sheree.
Speaker Change: So it really is the delineation of our operators reserves.
Speaker Change: It is just obviously the approved.
Speaker Change: Or is there just proved developed reserves there is a probable wedge, but there is obviously no teacher undeveloped locations, we want to always make that cleared but within the changes for this year. There were technical revisions of one 4 million barrel and that's inclusive of that overall 10 5 million barrels relative to the $7 million daily rate.
Speaker Change: Our <unk> daily <unk>.
Speaker Change: Action, but of that $1 4 million families of technical revisions. There was about 1.1 attributed to the enhanced recovery within the waterflood.
Speaker Change: So our view is.
Speaker Change: There is incremental value attributed to that recovery, but not the full value and it is an extension of an extrapolation of the primary operators reserves per share.
Speaker Change: Okay. Thanks, and maybe just a higher level strategic question thinking about where the balance sheet is now the payout ratio sort of being at the lower end here. How do you think about the priorities in terms of capital allocation today is it is it.
Speaker Change: Paying down debt is a potential dividend growth glide path.
Speaker Change: Or are you still seeing a significant opportunity set on the acquisition side.
Speaker Change: Yes. Good question Patrick So we we've been pretty I think focused on letting this last acquisition. We did in Q3 of 2024, which was the big AD that we have the terminally we wanted to so for a quarter or two before we thought about the dividend and just kind of see exactly operationally.
Speaker Change: What that asset was going to do and so.
Speaker Change: We do see M&A opportunities in the system right now and so I don't want to go out and just raise our dividend immediately I think you can expect at least one dividend raise this year end and we'll cut them out is that alongside what commodity and would say wonka with growth were seeing inside our complex.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you thanks Patrick.
Speaker Change: Thank you and once again just you have a question. Please press star followed by the one on your telephone keypad.
Speaker Change: Your next question comes from the line of Jeremy Mccrea from BMO capital markets. Please go ahead.
Jeremy Mccrea: Hey, Good morning, you just mentioned there.
Jeremy Mccrea: Acquisitions could you give maybe give a little bit more detail are you seeing the M&A landscape more.
Jeremy Mccrea: More interesting right now is there more opportunities.
Jeremy Mccrea: Close rates and competitiveness or some of these deals and then some of these operators looking for and maybe.
Jeremy Mccrea: One other question and then just part two if we were a year from now what's going to be like the surprise thing that we're going to be talking about on the conference.
Jeremy Mccrea: This conference call here a year from now just in terms of what was kind of a surprise development that wasn't really expected by a lot of investors are not.
Jeremy Mccrea: Yes, so from an M&A standpoint, obviously, we just announced the deal a month ago. So you can see we've been active into the early part of 2025 and that was with Logan energy, we did a hybrid infrastructure.
Jeremy Mccrea: Royalty deal in the Montney, Alberta Montney.
Jeremy Mccrea: I think there is more setup like that where it seems like it's competitive either on the royalty side or the infrastructure side, but nobody can really marry those two together and so that's where I think were completely unique in the M&A space is where we can do both sides of that equation.
Jeremy Mccrea: Yes, I mean.
Jeremy Mccrea: What we're feeling right now in the industry is there is a tremendous amount of uncertainty and I think when you hear noise like tariffs.
Jeremy Mccrea: And it changes every week it creates.
Jeremy Mccrea: Opportunity, we've been working on or unlocks opportunity, we haven't thought about yet so.
Jeremy Mccrea: I do believe that there's going to be opportunity. This year in 2024 similar to 2023.
Jeremy Mccrea: We saw about $2 billion of acquisition opportunity in both years in 'twenty three we did $60 million in acquisitions last year. We did 430. So it was one of our busiest years, we've had since inception of the company.
Jeremy Mccrea: We do see more opportunity kind of coming down the pipe right now, but I would say that there is a <unk>.
Jeremy Mccrea: Slight pause by everyone just kind of waiting to react to exactly what the new world or the new orders going to look like.
Jeremy Mccrea: From our standpoint, we think will be transactional we budgeted anywhere from $100 million to $300 million in acquisition dollars. This year will generate just over $100 million of excess free cash flow and so goal number one is to deploy that excess free cash flow into M&A.
Jeremy Mccrea: If we cannot will replenish the balance sheet as you kind of suggested we'll just pay down some debt.
Jeremy Mccrea: That's a good spot for us to be as well.
Jeremy Mccrea: Big surprises in the year I think are the biggest surprises we see every year.
Jeremy Mccrea: That's a technical technological changes and I think.
Jeremy Mccrea: We saw that with the response and <unk> put their press release out this morning.
Jeremy Mccrea: What they've been able to achieve through a waterflood and these are still early innings.
Jeremy Mccrea: I think we're 18 months to 224 months into kind of a real waterflood development and we're seeing very sustainable oil production started coming out of a number of our areas.
Jeremy Mccrea: Lots of running room from a reserve standpoint, I think an uplift there.
Jeremy Mccrea: Probably number one number two.
Jeremy Mccrea: Think we've seen terminally and start moving to a completion design that you're that's very popular with you.
Jeremy Mccrea: This is this is going from open Walter to cased wells and from our standpoint that is having some good response and so I think that's something that we're going to see some big surprise to the upside and.
Jeremy Mccrea: Think back to 2023.
Jeremy Mccrea: Terminalling did 19 exploration projects.
Jeremy Mccrea: We were able to book 750 locations based on the capital that they spent and so those are always tremendous surprises for us when we can add 750 locations to our portfolio at zero cost to Topaz those are big surprises, we like to talk about the street would you add anything to that.
Jeremy Mccrea: Not that we don't actually put those locations.
Jeremy Mccrea: That's great.
Jeremy Mccrea: No. We just I just think the value of the diversification of the portfolio really shone through in 'twenty, four and we see that continuing into 2025.
Jeremy Mccrea: Okay. Okay. Thank you.
Patrick O'rourke: Thanks, Jeremy.
Jeremy Mccrea: Thank you.
Speaker Change: And your next question comes from the line of Jamie Kubik from CIBC. Please go ahead.
Jamie Kubik: Yes. Good morning. Thanks for taking my question can you, maybe just talk a little bit about the guidance range you gave on industry spending on <unk> for 2025.
Speaker Change: You indicate.
Speaker Change: Scenario of potentially $2 2 billion versus.
Speaker Change: Upward range of $2 8 billion industry did do two five and 2024 can you just talk about what what sort of scenario you might see 2.2.
Speaker Change: Spent versus 2.8 spent and the impact that might have on on guidance. Thanks.
Jamie Kubik: Sure Hey, Jamie.
Jamie Kubik: So what's the overall production guide is that 'twenty, one to 'twenty three really when we think about guidance, we think about the midpoint to the higher end and so we are very optimistic that mid point is where our higher up to that 23 is it's more of a reality and so within that we would think about two five to $2 8 billion.
Operator spending really the lower end is more difficult to quantify it just it comes down to a different royalty rates and which lines has developed et cetera. So it's not as precise as it would be if we were an operator.
Jamie Kubik: In the lower end of the guide is just there.
Jamie Kubik: So to catch all given the macro uncertainty, but we definitely see good line of sight to that midpoint or high.
Jamie Kubik: 2.5 to even $3 billion of capital if.
Jamie Kubik: All goes well within the WCS b as far as egress.
Jamie Kubik: Gas market. So I think you can think about it as a.
Jamie Kubik: Similar year over year in that $2 5 billion of operator capital, but few different moving parts, obviously with teammates etc.
Jamie Kubik: Okay, that's fair and maybe just shifting to the M&A.
Jamie Kubik: M&A side of things I mean, you've talked about this a little bit already but can you just speak a little bit more to the recent montney deal.
Jamie Kubik: And you executed on earlier this month.
Jamie Kubik: The growth potential you see in that asset how it compares to previous transactions.
And some of the key events from that deal that we should look for in 2025.
Jamie Kubik: Yes for sure so Logan with a company that we are quite interested in they had to kind of main core areas, one and Simon at one in the <unk> Coupe area, we're pretty encouraged by the Montney development that was going on early stages <unk> copay.
Put a GOR on 100000 acres inside that with a $50 million capital commitment. So currently sitting on average about 2500 Boe per day, we see that asset doubling within year, one and probably another double on top of that by kind of end of year. Three so lots of activity that's going to take place inside that port.
Jamie Kubik: Folio, good running room from an inventory standpoint.
Jamie Kubik: Then to complement that Theyre building out of.
Jamie Kubik: Facility.
Jamie Kubik: Two main mainly use of purpose facility, we took a 35% ownership inside that facility under a 15 year long term take or pay contract. We do believe that that 15 years will be more than enough for them to satisfy the commitment they have with inventory there and potentially re contract that after for.
Jamie Kubik: And volume so it's well really.
Jamie Kubik: Really well for kind of the recipe that we're looking for number one quality of the asset number two quality of the owner and then it translate accretively back to to Topaz and I guess on a whole we would've paid about a seven five times multiple between the.
Jamie Kubik: The facility and the royalty.
Jamie Kubik: But it does with the capital commitment compressed very quickly and as I mentioned before that's a $50 million capital commitment.
Jamie Kubik: Okay. That's all for me thanks.
Jamie Kubik: Thanks, Jamie have a good day.
Speaker Change: Thank you and there are no further question at this time I will now hand, the call back to Mr. Sifford for any closing remarks.
Sifford: Yes, thanks, very much everyone and I appreciate the support through 2024 and will 2025 and another great year talk next quarter.
Sifford: This concludes today's call. Thank you for participating you may now disconnect.
Sifford: Okay.