Topaz Power Corp. (OTCPK:TPZEF) This autumn 2022 Outcomes Convention Name March 1, 2023 11:00 AM ET
Firm Contributors
Scott Kirker – Normal Counsel
Marty Staples – President and CEO
Cheree Stephenson – VP, Finance and CFO
Convention Name Contributors
Aaron Bilkoski – TD Securities
Luke Davis – RBC
Josef Schachter – Schachter Power Analysis
Jamie Kubik – CIBC
Mike Dunn – Stifel First Power
Operator
Good morning. My title is Michelle, and I might be your convention operator right this moment. At the moment, I wish to welcome everybody to the Topaz Power Corp. Fourth Quarter 2022 Outcomes Convention Name. [Operator Instructions]
Thanks. Mr. Kirker, it’s possible you’ll start your convention.
Scott Kirker
Thanks, Michelle, and welcome, everybody, to our dialogue of Topaz Power Corp.’s outcomes for the three months and yr’s ended December 31, 2022, and 2021. My title is Scott Kirker, and I’m a Normal Counsel for Topaz.
Earlier than we get began, I refer you to the advisories on forward-looking statements contained within the information launch in addition to the advisories contained within the Topaz annual data type and its MD&A accessible on SEDAR and on the Topaz web site. I additionally draw your consideration to the fabric components and assumptions in these advisories.
I’m right here with Marty Staples, Topaz’ President and Chief Govt Officer; and Cheree Stephenson, Vice President of Finance and Chief Monetary Officer. They may begin by talking among the highlights of the final quarter and the yr to date. And after the remarks, then we’ll open for questions. Marty, Cheree, go forward.
Marty Staples
Good day. Thanks, Scott. Admire that, and thanks for everybody for attending. 2022 is an distinctive yr for Topaz. We achieved file manufacturing of 18.3000 BOE per day within the fourth quarter, and common manufacturing for the yr was just below 17,000 BOE per day.
Our common royalty manufacturing grew 20%, which incorporates the affect of the contractual Tourmaline gross overriding royalty adjustments, which got here into impact January 1, 2022. With out the GORR adjustments, our manufacturing progress was 26%. Fourth quarter manufacturing demonstrates the total affect of our acquisition and diversification technique because the Deltastream acquisition was efficient for the complete fourth quarter.
Most of our acquisitions have been liquids-focused to be able to diversify and complement our premium pure gasoline royalty portfolio. This autumn whole liquids quantity weighting was 29%, which has modified considerably from 7% whole liquids quantity and inception of the corporate. For the fourth quarter, 56% of our royalty income was from whole liquids and 44% of royalty income was pure gasoline. Our 2022 reserve report demonstrates the robust natural growth exercise for our strategic operators.
Yr-over-year, our whole proved plus possible developed reserve quantity elevated 13% to 47.5 million BOE. Drilling additions mixed with optimistic technical revisions added 9.1 million BOE of reserves, which represents 1.5x the alternative of 2022 royalty manufacturing of 6.2 million BOE. As well as, our acquisitions added 2.6 million BOE of reserves. Please word that as a royalty entity not accountable for the capital, we don’t ebook possible places or future growth capital. The possible and developed reserves attributed to our royalty acreage might be seen by way of our strategic operator reserve reviews, which can be found or might be accessible on SEDAR.
Our infrastructure enterprise continues to supply steady, inflation protected revenue, which allows robust dividend assist. Via 2022, we realized 99% utilization of our pure gasoline processing capability and generated whole processing income and different revenue of $65.8 million. Our publicity to working price is proscribed to roughly 50% of our infrastructure property as per the 10- to 15-year contract now we have in place. This, along with sure contractual inflation adjustment mechanisms present robust inflation projections for Topaz. We incurred $6.4 million in working bills in 2022, leading to infrastructure working revenue of $59.4 million, which represents 38% of our whole 2022 dividend.
Within the fourth quarter, Topaz generated money circulation of $86.3 million, 11% larger than the prior quarter. For 2022, Topaz generated money circulation of $370 million, which represents 75% progress over 2021. In 2022, we distributed 47% of our money circulation to shareholders by way of dividends, and we allotted $173 million of extra free money circulation and used simply over 1x leverage to — a mix of royalty and infrastructure acquisitions. In whole, we accomplished $436 million in our acquisitions throughout 2022. The royalty acquisitions are 80% liquids-weighted and elevated our royalty acreage 15%, that are estimated to supply 2,000 BOE per day of 2023 royalty manufacturing.
The infrastructure acquisition elevated our 2023 mounted income by 7%. Our hedging technique is designed to guard acquisition economics and dividend sustainability, which generated a $1.6 million achieve in This autumn and the mark-to-market achieve of all excellent contracts as of February 28 ahead pricing is roughly $11 million. Our 2023 pure gasoline mounted value hedging contracts represented roughly 16% of our 2023 estimated pure gasoline manufacturing and supply a mean of [indiscernible] per Mcf above present strip to Topaz’ 2023 steering.
Not too long ago, we financially diversified roughly 9% of our 2023 pure gasoline pricing publicity utilizing AECO foundation of $0.78 MMBtu, which is equal to the precise [indiscernible] prices to ship to U.S. markets. Throughout the fourth quarter, we expanded and prolonged our 4-year covenant-based credit score facility to $700 million, which has an accordion function offering $300 million of incremental credit score capability for which we don’t pay standby charges.
Throughout the quarter, Topaz diminished internet debt by $34 million; and subsequent to year-end, now we have repaid a further $55 million on our credit score facility. We’ve offered a 2023 steering vary of $308 million to $316 million, which relies on estimated common annual manufacturing vary between 18.3000 and 18.8000 BOE per day, the midpoint of which represents 10% progress over 2022.
Our steering relies on anticipated operator growth plans, commodity costs of $2.86 an Mcf for pure gasoline AECO based mostly and USD 75.55 barrels WTI for crude oil and incorporates excellent monetary by-product contracts. After fee of 2023 estimated dividends of $173 million, Topaz expects to generate between $114 million and $121 million of extra free money circulation, exiting 2023 with estimated internet debt under $290 million earlier than giving impact to any incremental acquisitions. We’re happy to share achievements — proceed to increase our buying and selling liquidity regardless of Topaz’ younger historical past as a public firm. Along with being added to the S&P TSX Composite Index in December 2021, Topaz was added to the FTSE Renaissance World IPO Index in December of 2022 and might be added to the FTSE small-cap index efficient March 2023.
We’ve continued to enhance our ESG profile and just lately achieved low-risk rankings from Morningstar sustainalytics, an institutional shareholder companies, which demonstrates Topaz’ distinctive power funding construction. I look ahead to discussing Q1 with you on the following name, and we’re happy to reply any questions right now.
Query-and-Reply Session
Operator
[Operator Instructions] First query comes from Aaron Bilkoski of TD Securities.
Aaron Bilkoski
I assume my first query is, how are you eager about the proportion of income coming from the infrastructure enterprise? Possibly stated one other approach, what’s the perfect weighting in your thoughts?
Marty Staples
Sure. So we’ve all the time sort of talked about it and thought of being 50-50. Proper now, we sit at 20% of our income is infrastructure weighted, covers 38% of our dividend. We had quite a lot of alternative during the last 2.5 years to get entangled within the royalty enterprise and actually increase that a part of our enterprise. We did — now we have grown our infrastructure enterprise fairly considerably. I simply — I believe we’ve simply grown the royalty enterprise that rather more. We’ve been energetic taking a look at totally different infrastructure alternatives, have closed some smaller alternatives as properly. However sure, I believe over time, we do anticipate to step up the infrastructure enterprise.
Aaron Bilkoski
So perhaps a associated query, how a lot leverage would you be comfy with placing on the stability sheet to accumulate infrastructure property, perhaps relative to upstream property?
Cheree Stephenson
Sure, I believe max might be 2x, and that will undoubtedly be infrastructure targeted, however I believe we’d be most comfy general company leverage between 1 and 1.5x. However sure, undoubtedly prepared to push a bit farther from an infrastructure perspective.
Aaron Bilkoski
If I can ask perhaps 1 or 2 extra questions. In your launch, you talked concerning the variety of wells drilled in your royalty acreage in 2022. When you apply a capital price to every a kind of wells, how a lot gross third-party capital do you suppose was spent in your land final yr?
Cheree Stephenson
Properly, we haven’t finished the precise math, however I might say there may be over $2 billion of capital deployed throughout our acreage. And we might anticipate someplace within the neighborhood of $2 billion to $2.3 billion in 2023.
Marty Staples
Sure. I believe we [indiscernible] final yr at 32 rigs on our royalty acreage. Proper now, we’re sitting round 29. So even with diminished exercise within the basin, I believe we nonetheless see quite a lot of exercise simply based mostly on the standard of our acreage that we personal.
Aaron Bilkoski
All proper. Yet one more kind of detailed drilling query for you. What does that 564 gross wells drilled in 2022 equate to on a internet foundation?
Cheree Stephenson
It’s — I don’t have that proper in entrance of me, however I do have that quantity, so I can circle that again to you after the decision.
Operator
The subsequent query comes from Luke Davis of RBC.
Luke Davis
Simply questioning in the event you guys can body out among the exercise assumptions which might be implicit within the high and low finish of your steering. Simply making an attempt to get a way for the place the largest swing components are.
Cheree Stephenson
Sure, for positive. So the steering, the midpoint, primarily follows the midpoint of our most strategic operators’ capital plan. So we sort of ebb and circulation inside our steering vary to the place their steering ranges are. And the midpoint would assume our different properties, name it our charge title mineral acreage, issues just like the Weyburn asset, a few of our actually decrease decline and resilient property keep flat. So just lately, we’ve seen quite a lot of exercise decide up throughout the reserve and Keystone acreage.
So I’d say the midpoint is perhaps a bit conservative to the place we’ve seen current exercise. However these are the sort of properties we wouldn’t financial institution on progress as a result of we will’t see the transparency of the capital deployment. So there’s some modest swings there, however it’s much less materials to the portfolio. After which the general steering vary would sort of ebb and circulation between the sort of key operators, public steering ranges.
Luke Davis
That’s useful. Additionally questioning the place you’ll see probably the most potential upside exercise smart in your royalty lands if pricing tendencies above the place your deck is at the moment?
Cheree Stephenson
It’s completely all the time going to be pushed by Tourmaline simply due to the magnitude of the acreage we personal and simply the dimensions inside our portfolio. Clearly, Clearwater has excessive progress charges, however it’s a smaller wedge relative to the Tourmaline piece. So I believe market supply-demand, pricing, availability to companies, all these sort of issues will sort of dictate the Tourmaline gauge throughout the steering ranges.
Marty Staples
Sure. And one factor I’ll say about that as properly, Luke, is we do see 13 to 14 rigs on Tourmaline’s acreage, and so they haven’t communicated by way of their 5-year plan that they might speed up any kind of drilling exercise. So I believe that’s fairly sound, that 13 to 14 rigs, and that sort of grows Tourmaline at 3% to five% per yr. I believe the aim for Tourmaline proper now, and I’m not talking for them, however they’ve stated this publicly is that they don’t need to disrupt supply-demand imbalance proper now, and I believe that’s why they’re monitoring their progress. So the larger wedge, I believe, finally finally ends up occurring sort of what Cheree talked about earlier than on a few of this charge land that we’ve seen sort of extra exercise on for the final sort of 8 months, whereas oil value is larger.
So — and never simply on the oil aspect, however in addition to the gasoline aspect by way of the summer season as properly on among the reserve royalty strains that we had. So very good added surprises to the portfolio.
Operator
The subsequent query comes from Josef Schachter of Schachter Power Analysis.
Josef Schachter
Two questions for you. You make a remark in there concerning the Blueberry First Nations with the BC authorities and potential progress there. Do you see a lot occurring in 2023? Or is that this a 2024 potential upside for you as corporations begin work to get volumes prepared for the Coastal Gaslink pipeline?
Marty Staples
Sure. Good query, Josef. We’ve already seen permits begin to get launched. I do know there was a bunch within the queue and Tourmaline has been an enormous good thing about seeing a few of these permits — early permits launched within the Blueberry River First Nations settlement. So very optimistic from that standpoint. So it’s sort of my remark earlier than. I don’t suppose we’re going to see an enormous ramp inside 2023, however I do suppose it’s going to be much more financial to drill a few of these pads that they have been ready on permits for what they might have communicated early in January. So an enormous optimistic for us. The true ramp goes to return in decade when LNG Canada sort of comes on stream. And I believe that’s when quite a lot of the producers, significantly Tourmaline are constructing into this. And that’s for us the place we see the largest ramp in our portfolio over the following decade coming.
Josef Schachter
So would that basically begin in 2024 due to simply the time line?
Marty Staples
It’s going to step slowly 2023, 2024, after which an even bigger ramp in 2025. So be mindful, Conroy facility is deliberate for 2025. It’s a 400 million a day facility, the largest venture plan in Western Canada. We’ve a royalty on 99% of that acreage on the market. So we’re a direct good thing about the Conroy facility being constructed, however actually that’s commissioned sort of 2025 and that’s what we’re timing sort for the huge spherical for.
Josef Schachter
Okay. Sure, I do not forget that now. Final one for me. With the worth deck coming down and particularly pure gasoline aspect, liquids as properly, do you see extra alternative for offers? Is the deal circulation extra energetic now in order that we may see announcement someday Q2, Q3 of offers? Is it simpler to do offers now with the commodity value down and because the site visitors circulation larger?
Marty Staples
I believe the site visitors circulation is comparatively the identical for sort of the latter a part of This autumn, began Q1, the tier stepped down rather a lot. I believe that’s why you didn’t see us doing quite a lot of transactions. It’s simply the standard wasn’t there that we have been in search of. I wouldn’t say offers are ever straightforward. At this larger commodity cycle, we’re comfortable to sit down and wait and make — await decrease commodities to sort of come round.
Sure, there is perhaps some extra gas-weighted alternatives. I believe extra seemingly, you see quite a lot of these gasoline transactions that have been wanting like they have been going to transact, most likely stall just a little bit and await higher gasoline costs. There isn’t the identical urgency for producers, I believe, to do a disposition unexpectedly. They’re more healthy proper now. They’ve acquired higher stability sheets. However I believe there’s all the time alternative for the Topaz entity, whether or not it’s on the royalty or infrastructure aspect. And we’re going to proceed to watch, look at, quite a lot of these alternatives can be found.
Operator
The subsequent query comes from Jamie Kubik of CIBC.
Jamie Kubik
Slightly bit already answered maybe, however are you able to speak about among the drivers of accelerating the credit score facility on the present time? And perhaps on the again of Aaron’s earlier query, are you able to simply body out among the qualities {that a} potential acquisition may want to suit Topaz’ standards?
Cheree Stephenson
Sure. I can communicate to the credit score facility. So we undoubtedly weren’t able we would have liked to extend our credit score capability, however it was accessible to us. We preserve the identical pricing construction, have an opportune construction the place now we have M&A capital accessible to us with simply agent consent, and we don’t pay standby charges on that. So in a risky credit score kind of market and seeing some potential additional stress sooner or later coming from banks from a value construction perspective, we thought it was opportune for us to increase that capability to have the well-costed liquidity accessible to us, not essentially a full intention of utilizing that.
As I discussed, we undoubtedly have a modest leverage technique. So it’s to not go use that tomorrow as per se, however good construction, good time period, good financial institution assist and also you simply don’t know what the market goes to do. So good to have that inside our toolkit.
Marty Staples
Sure. And I believe it retains our liquidity very properly protected. The message right here is, hey, we’re working out to go do a transaction. The message right here is now we have the power to make use of some debt if want be if one thing actually good comes alongside. And so we’re prepared for that. The standards hasn’t modified since day 1, Jamie. I believe it all the time begins with the standard of the asset; quantity two, the standard of the proprietor; and quantity three, how accretive it’s again to Topaz and Topaz shareholders. In order that has not modified. That’s all the time our standards after we have a look at any asset on the infrastructure royalty aspect.
Jamie Kubik
Okay. That’s useful. After which perhaps a further query right here. Topaz maintains a dividend payout goal of 60% to 90% and — on our numbers, and as you indicated in your press launch as properly, the forecast appear like you’re trending under that this yr, even with a meaningfully decrease pure gasoline value than what we entered the yr at. What could be a driver to doubtlessly improve the dividend this yr in the event you have been to take action?
Marty Staples
We’ve all the time appeared on the dividend as an output of the enterprise. We’ve tried to time it alongside progress. If M&A is simply not accessible to us, I believe that is a chance for us to extend the dividend. It’s nonetheless on the market. We’re nonetheless in knowledge rooms, seeking to assist transactions or sort of put collectively our personal concept of producing GORR or streaming some kind of infrastructure parts.
So we all know some issues are coming to market. We wished to make it possible for we didn’t improve the dividend simply to extend it. And I imply we’re sitting above a 6% yield proper now. So I believe it’s fairly wholesome, the dividend, because it stands right this moment, even at that sort of 60% payout ratio.
Operator
The subsequent query comes from Mike Dunn of Stifel First Power.
Mike Dunn
I believe you’ve principally answered this query, however I do know you’ve been focusing your — at the very least your producer GORR acquisitions on oil in 2022. Did you’ve gotten a — I assume a goal you’d need to get to when it comes to the oil versus gasoline cut up. And simply wished to listen to your ideas. Are you continue to kind of actively taking a look at, I assume, extra gas-weighted GORR acquisitions too, simply to not shut off any alternatives that may come up?
Marty Staples
The necessary half for us during the last 2.5, 3 years was to diversify our enterprise. And I believe we’ve finished job of that, 30% of our income now liquid weighted, and that was necessary by way of the cycle. In the end, we’re massive gasoline [indiscernible]. I might add extra gasoline to the portfolio if it was in the correct a part of the basin. However be mindful, being tied to this large drill program that’s going to occur in Northeast BC with the event of Conroy, it’s the largest venture deliberate within the subsequent 10 years within the Western Canadian sedimentary basin.
We’re all the time going to get greater on the gasoline aspect simply by being connected to Tourmaline. So I believe we have been in a position to obtain and add superb property at an opportune time on the oil aspect being within the Clearwater, Charlie Lake, Southeast Saskatchewan, I imply, the CO2 venture that we’re concerned in with Whitecap is concerning the flattest venture I’ve ever seen. It solely declined to 2% a yr. it’s fairly regular enterprise, and so they do an amazing job working on the market. So if the correct venture comes alongside, I wouldn’t say we’d say no to an oil acquisition. However at $75, $80 WTI, it higher be the very best of high quality if we’re going to spend money on one thing like that.
Operator
There aren’t any additional questions. I’ll flip the decision again over to Mr. Staples for closing remarks.
Marty Staples
Okay. Thanks, everybody. Admire you tuning in, and look ahead to catching up in Q1.
Operator
Girls and gents, this does conclude the convention name for right this moment. We thanks in your participation and ask that you just please disconnect your strains.
