Topaz Announces 2nd Quarter 2023 Financial Results

Source: www.gulfoilandgas.com 7/31/2023, Location: North America

Topaz Energy Corp. is pleased to announce financial results for the second quarter of 2023 as well as a $0.04 per share increase to its annual dividend which is attributed to the sustainable growth of the Company's revenue streams. Select financial information is outlined below and should be read in conjunction with Topaz's interim consolidated financial statements and related management's discussion and analysis ("MD&A") as at and for the three and six months ended June 30, 2023, which are available on SEDAR+ at www.sedarplus.ca and on Topaz's website at www.topazenergy.ca.

Second Quarter 2023 Highlights
Generated Q2 2023 revenue and other income of $74.7 million ($0.52 per basic and diluted share(2)), comprised of $57.7 million (77%) of royalty production revenue and $17.0 million (23%) of infrastructure processing revenue and other income.
Generated cash flow of $67.5 million ($0.47 per basic and diluted share(2)), free cash flow (FCF)(1) of $66.4 million ($0.46 per basic and diluted share(2)) and an 89% FCF Margin(1).
Royalty production averaged 18,411 boe/d(4) in Q2 2023 and 18,647 boe/d(3)(4)(12) YTD 2023 despite production curtailments during the second quarter attributed to planned maintenance and unplanned shut-ins due to wildfires in Alberta and British Columbia.
Topaz's full-year 2023 royalty production guidance of 18,300 18,800 boe/d(4) remains unchanged and Topaz estimates its 2023e processing revenue and other income will increase 6%(3) from its previous annual estimate of $65.0 million.
Paid a $0.30 per share dividend during the second quarter ($1.20 per share annualized) which represents a 6.0% trailing annualized yield to the second quarter average share price. On July 31, 2023, Topaz's Board approved a quarterly dividend increase to $0.31 per share, effective for the third quarter dividend payment.
Reduced net debt(1) $53.5 million (13%) during the first half of 2023.
On July 31, 2023, Topaz completed a $39.5 million tuck-in acquisition of infrastructure and royalty assets in its core Charlie Lake and Clearwater operating areas which is expected to provide $6.0 million of annual revenue(3) before consideration of future royalty acreage development.

Second Quarter 2023 Update

Alberta and British Columbia Wildfire Impacts
Intermittently during the second quarter, wildfires throughout Alberta and British Columbia required certain Topaz and third-party infrastructure to be shut-in, and also restricted completion operations of certain operator development activity. Topaz estimates the wildfire-related issues reduced second quarter average royalty production of 18,411 boe/d(4) by 300 to 350 boe/d (approximately 2%), reduced Topaz's infrastructure throughput utilization from 99% to 98% resulting in $0.2 million lower Q2 2023 processing revenue, and contributed to fewer gross wells brought on production following drilling operations. However, no significant asset damage, production loss or injuries were reported due to strong safety protocols, exemplary personnel effort and risk-mitigating design of the respective operations. Topaz will continue to monitor wildfire impacts as wildfires and planned facility maintenance may continue to impact Topaz through the third quarter.

2023 Guidance Update
Topaz's 2023 annual royalty production guidance estimate between 18,300 and 18,800 boe/d(3)(4)(12) remains unchanged and Topaz's 2023 estimated processing revenue and other income is expected to increase 6% from $65.0 million to $69.0 million(3)(12), based on year-to-date financial results, certain inflationary processing fee increases, higher estimated third party fees and recent acquisition activity. Based on current commodity pricing, Topaz expects to exit 2023 with net debt(1) of approximately $340.0 million(3)(12), a 16% decrease from exit 2022.

Financial Overview
During Q2 2023, Topaz generated cash flow of $67.5 million ($0.47 per basic and diluted share(2)). Relative to the prior quarter, Q2 2023 AECO (5A) pricing was 24% lower and NYMEX WTI was 3% lower.
During the second quarter Topaz paid $43.4 million in dividends, a 64% payout ratio(1) and generated $23.0 million of Excess FCF(1) ($0.16 per basic and diluted share(2)) which was used to replenish credit capacity.
Topaz exited Q2 2023 with $352.4 million of net debt(1), $24.1 million (6%) lower than Q1 2023 and $53.5 million (13%) lower than YE 2022. As at July 31, 2023, Topaz has approximately $600.0 million of available credit capacity(5) which provides financial flexibility for strategic growth opportunities.

Royalty Activity
Topaz's Q2 2023 royalty production increased 10% from the prior year to 18,411 boe/d(4) (including record total liquids royalty production of 5,484 bbl/d). During the second quarter, operators remained active across Topaz's royalty acreage and 106 gross wells (4.5 net) were spud(6), a 4% increase in gross wells spud from the prior year. YTD 2023, 270 gross wells (10.8 net) were spud(6) which represents a 13% increase in gross wells spud from the prior year. Through Q2 2023, completion activity was restricted by wildfires and seasonal conditions relative to the prior year. During Q2 2023, 68 gross wells (2.8 net) of the 106 gross wells spud(6) during the quarter were not yet brought on production (Q2 2022 - 48 gross wells (1.4 net) of 102 gross wells, respectively).
Average realized commodity prices (before hedging) for the second quarter were C$2.38/mcf for natural gas, C$90.61/bbl for crude oil and C$81.90 for total liquids, generating $57.7 million of royalty revenue. In addition, Topaz realized a $4.9 million gain on financial instruments in Q2 2023. On a royalty production basis, the realized hedging gain increased the Company's cash flow by $2.95/boe.
Second quarter drilling activity (106 gross wells spud(6)) was diversified across Topaz's portfolio as follows: 51 Clearwater, 31 NEBC Montney, 11 Peace River, 1 West Central Alberta, and 12 SE Saskatchewan/Manitoba. YTD 2023, 167 of the 270 gross wells spud(6) (62%) across Topaz's royalty acreage were in the Clearwater and NEBC Montney, Topaz's high-growth areas. Average YTD 2023 royalty production from these combined areas has increased 21% from YTD 2022.
Topaz continues to see a reliable and meaningful share of WCSB production and drilling activity across its royalty portfolio. Through the first half of 2023, the operator working interest production across Topaz's royalty acreage represented approximately 8% of total WCSB production(10), and during the first half of 2023, the 270 gross wells spud across Topaz's acreage represented approximately 14% of the total rig releases across the WCSB(11). Based on planned operator drilling activity, Topaz expects to maintain the current 26 to 28 active drilling rigs on its royalty acreage through the third quarter(3).

Infrastructure Activity
Generated $17.0 million in processing revenue and other income which was 2% lower than the prior quarter due to planned and unplanned (wildfire-related) downtime. The infrastructure assets generated 98% utilization and an 82% operating margin(9) during the second quarter. Processing revenue and other income was 5% higher than Q2 2022, attributed to higher third-party income and incremental fixed revenue generated from Topaz's water infrastructure assets.

Topaz's contractual arrangements only require Topaz to pay its working interest share of operating expenses on approximately 50% of its natural gas processing capacity ownership. In Q2 2023, Topaz incurred $3.0 million in operating expenses which increased $1.1 million from Q1 2023 due to planned facility turnaround maintenance and includes costs initially forecast as capital maintenance expenditures.

Acquisition Activity
During the second quarter, Topaz incurred $0.5 million in minor acquisition costs attributed to undeveloped royalty acreage. On July 31, 2023, Topaz completed its previously announced tuck-in royalty and infrastructure acquisition for total consideration of $39.5 million, before customary closing adjustments (the "Tuck-In Acquisition"). The Tuck-In Acquistion provides a 49.9% non-operated working interest in a newly constructed and commissioned 15 mmcf/d sweet natural gas processing facility and associated 1,500 bbl/d crude oil battery in the Wembley area (the "Facility Interests") in addition to certain gross overriding royalty interests on over 17,000 gross acres within the Charlie Lake and Clearwater operating areas in Alberta (the "Royalty Interests"). Topaz estimates the Facility Interests and Royalty Interests will provide approximately $6.0 million of annual revenue to Topaz(3), supported by 100%, 15-year fixed take-or-pay natural gas and crude oil processing agreements during which Topaz is not responsible for its ownership share of operating or maintenance costs. The Tuck-In Acquisition was funded through Topaz's existing credit facility.

Dividend
Topaz's Board has approved a $0.01 per share quarterly dividend increase and declared the third quarter 2023 dividend at $0.31 per share which is expected to be paid on September 29, 2023 to shareholders of record on September 15, 2023. The increased annual dividend of $1.24 per share(8) provides a 5.8% yield to Topaz's current share price(7) and the increase is attributed to the sustainable growth of the Company's revenue streams. The quarterly cash dividend is designated as an "eligible dividend" for Canadian income tax purposes.

Topaz's 2023e dividend(8) is sustainable down to low commodity prices due to the Company's low-cost, inflation-protected business structure as well as financial derivative contracts to mitigate price volatility. Topaz's estimated 2023 dividend payout ratio(1) of approximately 63%(3) remains at the low end of the Company's targeted long-term payout ratio of 60-90% in order to retain Excess FCF(1) for self-funded M&A growth and further dividend increases.


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