Q1 2024 Topaz Energy Corp Earnings Call
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two.
Speaker Change: Mr. Kroeker, you may begin your conference.
Mr. Kroeker: Thank you operator, and welcome everyone to our discussion of Topaz Entergy Corp results as of March 31, 2024 and for the three months ended March 31, 2024 and 2023.
Speaker Change: My name is Scott Cougar, and I'm, the general counsel for Topaz.
Before we get started I refer you to the advisory on forward looking statements contained in the news release as well as the advisory is contained to the Topaz annual information form and the Topaz MD&A available on SEDAR and on our website.
Speaker Change: I also draw your attention to the material factors and assumptions in those advisories I'm here with Martin Staples, <unk>, President and Chief Executive Officer, and Sri Stevenson, Vice President Finance and Chief Financial Officer.
Speaker Change: I'll start by speaking to some of the highlights of the last quarter and the year, so far and after their remarks.
Speaker Change: Two questions are <unk> go ahead. Please thank you Scott and good day, everyone Topaz had a strong first quarter marked by relative reduction that achieved the midpoint of our 2024 guidance range and infrastructure revenue that is on track to achieve the high end of our 2024 guidance range.
Speaker Change: The value of our royalty portfolio continues to be demonstrated through the strong reliable level of operator development drilling across our acreage.
Speaker Change: During the first quarter of 145 gross wells were drilled on our undeveloped royalty lands, which represents 12% of the total wells drilled across the WCS B <unk>.
Speaker Change: During Q1 of last year, our royalty acreage saw the same level of activity, 12% of wells, but across the WCS b.
Speaker Change: The total wells drilled across Topaz royalty acreage from Q1 2021 to Q1 2024 represents 13% of total drilling activity across the western Canadian sedimentary basin.
Speaker Change: Over that same time through operator funded development and strategic diversification Topaz is heavy oil royalty production has increased significantly from 50 barrels a day to $28 77 barrels a day.
Speaker Change: Predominantly through our Clearwater royalty assets and Topaz is total oil and liquids royalty reduction has increased six fold from 955 barrels a day to 5780 barrels per day.
Speaker Change: Based on operator drilling plans, 9% to 11 rigs will remain active across the royalty acreage through spring breakup a record level for topaz spring conditions typically limit development activity.
Speaker Change: 25% to 29 drilling rigs are expected to be active across the royalty acreage following spring breakup.
Speaker Change: From a financial perspective, Topaz generated first quarter revenue and other income of $78 2 million.
Speaker Change: In Q1, 54% of our revenue was from oil and liquids royalty revenue, 23% from natural gas royalty revenue and 23% from topaz its infrastructure asset.
Speaker Change: First quarter cash flow was $67 9 million or <unk> 47 per basic and diluted share.
Speaker Change: We distributed 68% of cash flow to shareholders through our dividend, which represented a six 4% trailing yield to the average share price during the first quarter.
Speaker Change: Our first quarter dividend was 3% higher than the prior quarter and represents the companys seventh dividend increase or 60% dividend growth to date for.
Speaker Change: For Q1, we generated $19 $9 million of excess free cash flow and reduced debt by 6%.
Speaker Change: We remain disciplined on our investment strategy and continue to evaluate a number of opportunities.
Speaker Change: Operator of our Clearwater natural gas gathering infrastructure has completed approximately half of the construction.
Speaker Change: <unk> will fund the project once the infrastructure is commissioned which is targeted for late 2024.
Speaker Change: This infrastructure is expected to gather natural gas on our existing royalty acreage. In addition to generate long term fixed processing fees.
Speaker Change: Topaz is first quarter average royalty reduction of $19 2000 Boe per day was 30% oil and liquids and increased 2% from Q1 2023.
Speaker Change: Operators about a 145 gross wells and reactivated six gross wells on our acreage during the first quarter.
Speaker Change: Alien was diversified across the portfolio as follows 53, Clearwater 35, northeast BC Montney 'twenty.
Speaker Change: 25 deep basin.
Speaker Change: Peace River, six central Berta 11, southeast Saskatchewan Slash Manitoba.
Speaker Change: We estimate that our operators spend between <unk> 5 billion and $6 billion in development capital across our acreage during this quarter.
Speaker Change: First quarter royalty revenue of $60 3 million represented 77% of Q1 total revenue and generated a 99% operating margin.
Speaker Change: First quarter infrastructure revenue of $17 $9 million represented 23% of Q1 revenue our infrastructure assets realized 99% capacity utilization and generated an 89% operating margin.
Speaker Change: During Q1 2024, both out of the total realized relatively production price was $34 55 per Boe.
Speaker Change: For Q1, 2020 for Topaz realized natural gas price represent.
Speaker Change: Represents a 100% of the <unk> benchmark and Topaz realized heavy crude oil price represents 97% of the WCS crude oil benchmark price.
Speaker Change: <unk> 2024 dividend is supported by Topaz infrastructure revenue and hedging strategy is and is sustainable to commodity prices of <unk> <unk> per Mcf natural gas and $50 U S per barrel crude oil for.
Speaker Change: For 2024, 18% of natural gas is hedged at a weighted average price of $3 17 per Mcf Canadian and 40% of oil and liquids is hedged at a weighted average floor price of $102 54 Canadian per barrel using collars structures to maintain upside participation.
We reconfirm, our 2024 guidance ranges of 18, 8% to $19 6000 Boe per day of royalty production and 69% to $71 million of infrastructure processing revenue and other income.
Speaker Change: Based on current commodity pricing and before acquisitions <unk> expects to end 2024 with net debt of <unk> eight times net debt to EBITDA.
Speaker Change: 2024 dividend represents a 64% payout ratio based on recent commodity price forecast, which maintained finance financial flexibility to allocate excess free cash flow.
Speaker Change: To support further dividend increases.
Speaker Change: To answer any questions at this time back to operator.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Speaker Change: We will hear my somebody's home prompt acknowledging your request.
Speaker Change: If you are using a speaker phone please lift the handset before pressing.
Patrick: First question comes from Patrick.
Speaker Change: <unk> capital markets. Please go ahead.
Speaker Change: Hi, guys. Good morning, and thank you for taking my question I guess.
Speaker Change: Sort of a more of a broad capital allocation philosophical question here, but just wondering.
Speaker Change: Your debt below one turn here you.
Speaker Change: Your payout ratio ticked down a notch in the quarter to 64% I'm wondering how you're thinking about that capital allocation decision today between the opportunity set.
Speaker Change: For M&A.
Speaker Change: Further debt reduction and potential for increased dividends going forward here.
Patrick: Good morning, Patrick Thanks for the question.
Patrick: We've been pretty I think active paying down debt over the last 18 months in excess of over $100 million.
Patrick: We will continue to pay down debt, we do continue to see opportunity inside the M&A space, but obviously are being very disciplined in our approach to go forward on what we want to acquire and what price we want to acquire.
Patrick: Our dividend policy has always been an output of the business. So as we grow the dividend. We will continue to grow I think we have been.
Speaker Change: Chi without over seven dividend raises since.
Speaker Change: Since inception, and you've seen that kind of step up as we see growth inside the system. So allocation wise number one it's going to be pay down some debt number.
Speaker Change: Number two it's going to use any excess free cash flow for M&A that we can we can source and then if we achieve that M&A, we will step up the dividend, but it's always going to be a function of growth.
Speaker Change: Okay, and then maybe just kind of switching gears a little bit here you guys are obviously, meaning.
Speaker Change: Meaningful part of your business is in the Clearwater wondering if you can provide maybe just a little bit of insight color contacts with respect to Clearwater activity trends in terms of.
Speaker Change: Spuds and spend that youre, seeing and maybe trends within sort of IP rates.
Speaker Change: The production profile there.
Speaker Change: Yes for sure.
Speaker Change: I think we did highlight that we saw increased activity this quarter were up 26% on the drilling.
Speaker Change: On the drilling front, which was impactful to topaz.
Speaker Change: We have seen some shift two injector wells for waterflood, and I think <unk> seen through some of our operators public disclosure, both headwater and Tamarac Valley are having some pretty.
Speaker Change: Significant impacts to that from a positive standpoint, I think what we saw headwater release last quarter was 2600 barrels a sustainable production through their waterflood and right. Now we think there is anywhere from 27 to 29 pilots in place through Nipissing Marten Hills, and we have a big chunk of that so when you can take recovery factor in.
Speaker Change: And double it Marten hills is kind of that 4% to 5% recovery factor.
Speaker Change: <unk> is around 7% to 8%.
Speaker Change: That's just added benefit from a royalty standpoint, not only do you get bigger recovery, but you get longer reserve life out of it so a big win for us.
So yet activity has been very consistent.
Speaker Change: Stepped up a little bit and we did talk about in the quarter going from 50 barrels almost 3000 barrels a day of royalty production, it's been quite impactful.
Speaker Change: And now let me turn around.
Speaker Change: Yes, so from an activity perspective.
Speaker Change: On the quarter, we did see a 26% increase in gross spuds and chip private operators come into play.
Speaker Change: The existing acreage we own analysis of farm in acreage some existing royalty acreage and so thats a positive for us to have that incremental activity.
We did also see some cold weather related production impacts through January.
Speaker Change: And also some production deferred from being sent down to sales. So we estimate that somewhere between 120 in 200 barrels.
Speaker Change: And that.
Speaker Change: <unk> reduced our Q1 production so look forward to getting all those wells on stream Q2 and forward.
Speaker Change: And sorry, those thoughts private operators would you consider those that spud activity in the more exploratory portion of the acreage base.
Speaker Change: Hi, This is split between the two so we saw some on our northern acreage up in EV Golden.
And then we did see one kind of nip ESC proper and those are yielding really good results.
Speaker Change: Okay. Thank you very much.
Patrick: Thanks, Patrick.
Patrick: Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Speaker Change: Next question comes from Jamie Kubik at CIBC. Please go ahead.
Jamie Kubik: Yes, good morning, and thank you for taking my question I've got a couple of questions. Here can you just talk a little bit maybe about the wells that were reactivated the past couple of quarters, you talked about six reactivated this quarter 10 last quarter. Just curious what the reason was for the reactivation or is it operational or price.
Jamie Kubik: Sensitive or anything on that and ensure that you can talk about.
Jamie Kubik: Yeah appreciate it they were all.
Jamie Kubik: Predominantly oil wells.
Jamie Kubik: And just increased activity private operator, central Alberta, well to that.
Jamie Kubik: The majority of them.
Jamie Kubik: So at a lower royalty rate on those that nice to see that going.
Jamie Kubik: And I think they are older wells that definitely.
Jamie Kubik: Stronger debit yet pricing is has helped that.
Jamie Kubik: Got it Okay and then on the.
Jamie Kubik: Well spud during the quarter, but not on production you disclosed that at 95.
Jamie Kubik: 145 wells not on our 95 wells spud, but not on production out of 145 that were spud in the quarter that does look to be a historic high for Topaz can you just elaborate a little bit on some.
Jamie Kubik: Some of the dynamics at play there and what's going on on that front and maybe the mix of wells in that 95 that are not yet on production.
Jamie Kubik: Yeah for sure so theres about 25.
Jamie Kubik: Between Clearwater in Peace River and the vast majority of the Delta would be predominantly <unk> related wells the deep basin in northeast BC Montney and I think it is just timing of spring breakup.
Jamie Kubik: Getting wells drilled and longer dwell times with a multi well pads etcetera. So it is higher than the normal.
Jamie Kubik: We are looking forward to those traction that's coming through the balance of the year.
Speaker Change: Okay got it those were just my questions. Thanks very much.
Jamie Kubik: Thanks, Jamie.
Speaker Change: Thank you we have no further questions I will turn the call back over for closing comments.
Speaker Change: Thanks, everyone and look forward to talking to you in Q2.
Speaker Change: Ladies and gentlemen. This concludes your conference for today, we thank you for participating and we ask that you. Please disconnect your lines.