TOPAZ CONTINUES TO DELIVER RELIABLE, HIGH-MARGIN REVENUE & SIGNIFICANT OPERATOR-FUNDED RESERVE REPLACEMENT AND ANNOUNCES DIVIDEND INCREASE

CALGARY, AB, March 4, 2024 /CNW/ – Topaz Energy Corp. (TSX:TPZ) (“Topaz” or the “Company”) is pleased to provide fourth quarter and annual 2023 financial results and confirm the Company’s 2024 guidance estimates.  Select financial information is outlined below and should be read in conjunction with Topaz’s consolidated financial statements and related management’s discussion and analysis (“MD&A”) as at and for the year ended December 31, 2023, which are available on SEDAR+ at www.sedarplus.ca and on Topaz’s website at www.topazenergy.ca.

Generated Q4 2023 cash flow of $72.4 million or $0.50 per diluted share (2), and free cash flow (FCF)(1) of $71.7 million or $0.49 per diluted share(2), providing an 87% FCF margin(1). During 2023, Topaz generated cash flow and FCF(1) of $286.3 million and $281.7 million, $1.97 and $1.94 on a per diluted share, respectively(1)(2), and an 88% FCF margin(1).

Q4 2023 royalty production averaged 19,555 boe/d(4), 5% higher than Q3 2023 and 7% higher than Q4 2022. 2023 royalty production averaged 18,853 boe/d(4), an 11% increase from 2022, and exceeded Topaz’s 2023 midpoint guidance estimate by 2% despite certain production curtailments during 2023 due to wildfires.

During the year, operators spud 577 gross wells (21.5 net)(8) across Topaz’s royalty acreage, a 2% increase from 2022, which represents approximately 14% of the 2023 total rig releases across the WCSB(10). Topaz estimates that operators invested $2.4 billion of development capital across the Company’s royalty acreage in 2023.

Generated royalty production revenue of $64.3 million ($35.72 per boe) during Q4 2023 and $250.5 million ($36.40 per boe) during 2023 which represented 78% of Topaz’s total revenue and other income.

Topaz’s infrastructure assets contributed 22% of total revenue and other income in Q4 2023 and 2023. During Q4 2023, Topaz generated $18.5 million in processing revenue and other income, realizing 100% utilization and a 95% operating margin(1). During 2023, Topaz generated $70.9 million in processing revenue and other income (realizing 99% utilization and a 90% operating margin(1)) providing 8% revenue growth from 2022.

Paid a $0.31 per share dividend during Q4 2023 ($1.24 per share annualized(13)) which represents a 62% payout ratio(1) and a 6.1% trailing annualized yield to the fourth quarter average share price(11). To December 31, 2023, Topaz has paid $3.97 per share in dividends to its shareholders since the inaugural dividend during the first quarter of 2020. On March 4, 2024, Topaz’s Board approved a 3.2% dividend increase and declared the 2024 first quarter dividend at $0.32 per share. This marks the Company’s seventh dividend increase since inception, and 7% per share growth since the first quarter of 2023.

Topaz confirms its 2024 royalty production guidance at 18,800 – 19,600 boe/d(3)(4) and estimates 2024 processing revenue and other income between $69.0 and $71.0 million(3). Topaz’s 2024 estimated dividend is sustainable down to low commodity prices ($0.50 per mcf natural gas and US$55.00 per bbl crude oil(4)) due to the Company’s high-margin, stable infrastructure income and hedging contracts in place. Based on Topaz’s 2024 midpoint royalty production estimate, 18% of natural gas is hedged at a weighted average fixed price of C$3.17 per mcf and 30% of oil and total liquids is hedged at a weighted average floor price of C$103.25 per bbl, with collar structures in place to provide upside price participation(14).

During 2023, Topaz allocated FCF(1) to dividend payments of $176.3 million, acquisitions of $46.4 million, and debt repayment of $63.1 million (16% net debt(1) reduction from YE 2022).

During 2023 Topaz generated 10% production per share growth from the prior year.  Operator-funded development across Topaz’s royalty acreage added 8.7 mmboe of proved plus probable developed reserves(7) (excluding technical revisions or pricing factors), which represents 1.3 times replacement of Topaz’s 6.9 mmboe of royalty reserves produced in 2023.  At December 31, 2023, the before-tax net present value of total proved plus probable developed reserves, discounted at 10%(7), was $1.5 billion, consistent with 2022 despite lower forecast commodity price assumptions.

Released Topaz’s 2022 Sustainability Report which highlights the Company’s commitment to deliver superior, sustainable investment returns to shareholders through its sustainable investment strategy and by fostering a strong and committed workforce, mitigating climate-related risk and upholding strong corporate governance and ethics.

Financial Overview

During Q4 2023, Topaz generated $82.8 million total revenue and other income, 78% from royalty production revenue that generated a 99% operating margin(1) and 22% from its infrastructure assets that generated a 95% operating margin(1). 

Topaz’s Q4 2023 cash flow of $72.4 million ($0.50 per diluted share(2)) was 3% lower than Q3 2023 due to a 10% decrease in realized royalty production pricing offset by 3% higher processing revenue, 5% higher royalty production and 3% lower total cash costs.  During Q4 2023 Topaz generated an 87% FCF margin(1), compared to 84% during Q3 2023.

During the fourth quarter, Topaz paid $44.8 million in dividends, representing a 62% payout ratio(1) and generated $26.8 million of Excess FCF(1) which was allocated to acquisition growth and debt reduction.

Topaz exited 2023 with $342.7 million of net debt(1), $63.1 million (16%) lower than exit 2022.  As at March 4, 2024, Topaz has $650.0 million of available credit capacity(6) which provides financial flexibility for strategic growth opportunities.

Royalty Activity

Royalty production averaged 19,555 boe/d(4) in Q4 2023, 5% higher than Q3 2023 and 7% higher than Q4 2022. Topaz’s total oil and liquids royalty production achieved another record high in Q4 2023, averaging 6,027 bbl/d and Topaz generated $64.3 million of total royalty production revenue during the quarter. The estimated gross operator production across Topaz’s royalty acreage in Q4 2023 represented approximately 9% of total WCSB production(9).

During Q4 2023, Topaz’s total realized royalty production price was $35.72 per boe. A significant portion of Topaz’s production royalties receive benchmark market pricing, whereby no quality differentials, transportation or processing charges are deducted from the royalty price paid to Topaz, irrespective of actual costs incurred by the operator. During Q4 2023, Topaz’s natural gas realized price was $2.28 per mcf. For heavy oil, Topaz realized $75.12 per bbl. In Q4 2023, 70% of Topaz’s natural gas liquids royalty production was condensate, which attracts premium pricing and contributed to the Company’s natural gas liquids realized price of $93.46 per bbl.

During Q4 2023, operators spud 147 gross wells (5.0 net)(8), 87 of which (2.2 net) were not yet brought on production at the end of the quarter. Inclusive of wells drilled during previous periods, 169 gross wells (5.8 net)(8) were brought on production during Q4 2023.

Fourth quarter drilling activity (147 gross wells spud(8)) was diversified across Topaz’s portfolio as follows: 42 Clearwater, 38 NEBC Montney, 38 Deep Basin, 10 Peace River, 5 Central Alberta and 14 SE Saskatchewan/Manitoba.  In 2023, 352 of the 577 gross wells spud(8) (61%) across Topaz’s royalty acreage were in the Clearwater and NEBC Montney, Topaz’s high-growth areas.  Average 2023 royalty production from these two areas has increased 20% relative to 2022.

Based on planned operator drilling activity, Topaz expects that the current 24 to 28 active drilling rigs on its royalty acreage will be maintained through the first quarter of 2024(3).

Infrastructure Activity

During Q4 2023, Topaz generated $18.5 million in processing revenue and other income which was 2% higher than Q3 2023.  In Q4 2023, Topaz incurred $1.0 million in operating expenses resulting in a 95% operating margin(1).  During the quarter, the infrastructure assets generated 100% utilization and Topaz incurred $0.1 million in maintenance-related capital expenditures (before capitalized G&A). 

Acquisition Activity

As previously announced, Topaz entered into definitive agreements during Q4 2023 for a $26.3 million investment with a Canadian energy producer, for a new 7% gross overriding royalty and supporting capital commitment, on approximately 20,000 gross acres in the West Nipisi area (“New Clearwater Royalty Lands”); and a 99% working interest in a planned natural gas gathering system that is supported by a long-term fixed take-or-pay and cumulative volume commitment (“Clearwater Natural Gas Gathering Infrastructure”). The operator is currently drilling the commitment well on the New Clearwater Royalty Lands, and construction is underway on the new Clearwater Natural Gas Gathering Infrastructure which is expected to be completed late 2024(16). The Clearwater Natural Gas Gathering Infrastructure is designed to conserve natural gas across Topaz’s existing West Marten Hills royalty acreage and is expected to increase Topaz’s existing royalty production revenue up to $0.5 million in 2025, meaningfully reduce CO2 emissions in the area, and generate approximately $3.7 million in infrastructure processing revenue for Topaz in 2025(3)(16).

During the fourth quarter, Topaz invested $2.5 million for its working interest share of costs invested to expand the Glacier facility which increased Topaz’s natural gas processing capacity and provides incremental fixed take-or-pay fees to Topaz.

Dividend

Topaz’s Board has declared the first quarter 2024 dividend at $0.32 per share which is expected to be paid on March 28, 2024, to shareholders of record on March 15, 2024. The quarterly cash dividend is designated as an “eligible dividend” for Canadian income tax purposes and the annualized dividend of $1.28 per share(13) provides a 6.4% yield to Topaz’s current share price(12).

2024 Guidance Estimates Confirmed

Topaz confirms the Company’s previously announced 2024 guidance estimates, including average annual royalty production of 18,800 – 19,600 boe/d(3)(4) and processing revenue and other income between $69.0 and $71.0 million(3). Topaz’s royalty production guidance anticipates operator-funded capital development between $2.2 billion and $2.8 billion and incorporates the impact of a contractually scheduled royalty rate change from 4% to 3%, effective January 1, 2024, on approximately 300 MMcf/d of gross natural gas production (approximately 500 boe/d to Topaz)(15ii).

For 2024, the royalty production guidance range purposefully remains flexible and allows for operators to adjust capital spending in response to near-term supply/demand and resulting commodity price factors in the WCSB. Topaz’s asset portfolio is diversified amongst oil and liquids-rich, natural gas-focused plays and is concentrated on the most commodity price-resilient activity areas due in part to strategic partners’ infrastructure assets and low-cost structures, which further supports Topaz’s guidance estimates. Based on current commodity pricing(5), Topaz expects to exit 2024 with net debt(1) between $245.0 and $255.0 million, before consideration of incremental acquisitions or the Clearwater Natural Gas Gathering Infrastructure.

Dividend Sustainability and Capital Allocation 

Topaz’s 2024 estimated dividend is sustainable down to low commodity prices (C$0.50/mcf AECO and US$55 WTI(3)). The reliability of the dividend is attributable to: (i) high-margin, stable infrastructure revenue which represents approximately 38% of the 2024e dividend; (ii) hedging and natural gas price diversification strategy including financial derivative contracts in place that provide a fixed price of C$3.17 per mcf for 18%(14) of natural gas, 7%(14) of Topaz’s natural gas diversified to NYMEX pricing at an AECO basis differential of US$0.42 per mmbtu, and average crude oil floor pricing of C$103.25 per bbl for 30%(14) of total liquids; (iii) the quality and financial strength of Topaz’s asset portfolio and strategic partners which mitigates risk of reduced development activity; and (iv) the Company’s diversified commodity mix (69% natural gas and 31% total liquids) and resulting royalty revenue composition (approximately 35% natural gas and 65% total liquids(3)(5)).

Topaz’s estimated 2024 dividend payout ratio of 65%(3)(15) remains at the lower end of the Company’s targeted long-term payout of 60-90% to maintain financial flexibility for acquisition growth opportunities. Topaz’s strategy is to continue to provide further dividend increases alongside sustainable organic and acquisition growth.

Topaz estimates its year-end 2024 net debt to EBITDA(1) will be approximately 0.8 times(3)(15) before consideration of acquisition activity, or 0.9 times(3)(15) following the commissioning and estimated costs attributed to the Clearwater Natural Gas Gathering Infrastructure(16). The Company has a $700 million covenant-based unsecured credit facility, expandable to $1.0 billion, which provides financial flexibility and growth optionality(6).

Additional information about Topaz, including the consolidated financial statements and management’s discussion and analysis as at and for the three and twelve months ended December 31, 2023 are available on SEDAR+ at www.sedarplus.ca under the Company’s profile, and on Topaz’s website, www.topazenergy.ca.

Topaz will host a conference call tomorrow, Tuesday, March 5, 2024 starting at 9:00 a.m. MST (11:00 a.m. EST). To join the conference call without operator assistance, participants can register and enter their phone number at https://emportal.ink/4aRnNuJ to receive an instant automated call back. Alternatively, participants can join by calling a live operator at 416-764-8659 or 1-888-664-6392 (North American toll free).  The conference call ID is 66142057.

Topaz will host its annual shareholder meeting on Thursday, May 2, 2024 starting at 9:00 a.m. MST (11:00 a.m. EST) in the Forester Room at the Calgary Petroleum Club. If you are a shareholder on record of Topaz common shares at the close of business on April 18, 2024, you are entitled to receive notice of, participate in, and vote at this meeting. We encourage you to vote your common shares and participate in the meeting. 

Topaz is a unique royalty and infrastructure energy company focused on generating free cash flow growth and paying reliable and sustainable dividends to its shareholders, through its strategic relationship with Canada’s largest and most active natural gas producer, Tourmaline Oil Corp. (“Tourmaline”), an investment-grade senior Canadian E&P company, and leveraging industry relationships to execute complementary acquisitions from other high-quality energy companies, while maintaining its commitment to environmental, social and governance best practices. Topaz focuses on top-quartile energy resources and assets best positioned to attract capital in order to generate sustainable long-term growth and profitability.

The Topaz royalty and energy infrastructure revenue streams are generated primarily from assets operated by natural gas producers with some of the lowest greenhouse gas emissions intensity in the Canadian senior upstream sector, including Tourmaline, which has received awards for environmental sustainability and conservation efforts. Certain of these producers have set long-term emissions reduction targets and continue to invest in technology to improve environmental sustainability.

Topaz’s common shares are listed and posted for trading on the TSX under the trading symbol “TPZ” and it is included in the S&P/TSX Composite Index. This is the headline index for Canada and is the principal benchmark measure for the Canadian equity markets, represented by the largest companies on the TSX.

For further information, please visit the Company’s website at  www.topazenergy.ca.  Topaz’s SEDAR+ filings are available at www.sedarplus.ca.

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