Earnings call transcript: Topaz Energy Q1 2025 sees strong revenue growth

Topaz Energy Corp reported robust financial results for the first quarter of 2025, with earnings per share (EPS) surpassing expectations and revenue showing significant growth. The company achieved an EPS of $0.14, exceeding the forecast of $0.1013. Total revenue for the quarter reached $92.2 million. Following these results, Topaz’s stock price rose by 1.55% in after-hours trading, reflecting positive investor sentiment. According to InvestingPro data, the company has maintained profitability over the last twelve months and currently operates with a moderate level of debt, with liquid assets exceeding short-term obligations.

Key Takeaways

• Topaz Energy’s EPS outperformed expectations, indicating strong financial health.
• The company reported a 17% year-over-year increase in royalty production.
• Quarterly dividends increased by 3%, marking the ninth increase since inception.
• The stock price increased by 1.55% following the earnings announcement.

Company Performance

Topaz Energy demonstrated solid performance in Q1 2025, with significant increases in both revenue and production. The company’s royalty production rose by 17% year-over-year, and natural gas production increased by 13%. This growth is indicative of Topaz’s strong operational capabilities and its competitive position in the energy sector.

Financial Highlights

• Revenue: $92.2 million, a notable increase from the prior year.
• EPS: $0.14, beating the forecast of $0.1013.
• Free cash flow: $80.8 million, with a free cash flow margin increase from 85% to 88%.
• Quarterly dividends distributed: $50.7 million, with a current dividend yield of 4.19% according to InvestingPro. Notably, Topaz has raised its dividend for 5 consecutive years, demonstrating strong commitment to shareholder returns. InvestingPro subscribers can access 8 additional key insights about Topaz’s financial health and growth prospects.

Earnings vs. Forecast

Topaz Energy’s EPS of $0.14 exceeded the forecast of $0.1013 by approximately 38%, signaling a strong quarter. This performance highlights the company’s effective cost management and operational efficiency.

Market Reaction

Following the earnings release, Topaz’s stock price increased by 1.55%. Currently trading at $19.42, the stock has shown strong momentum with a 34.91% return over the past year, according to InvestingPro data. The stock trades between its 52-week range of $15.10 to $22.30, and the positive market reaction suggests investor confidence in the company’s future prospects. With a market capitalization of $151.78 million, Topaz is currently trading at high earnings and revenue multiples, indicating premium valuation levels.

Outlook & Guidance

Topaz Energy has provided guidance for 2025, projecting production between 21,000 and 23,000 BOE per day and processing revenue between $88 million and $92 million. The company expects a year-end net debt to EBITDA ratio of 1.2x and a projected payout ratio of 66%.

Executive Commentary

CEO Marty Staples expressed confidence in the company’s strategic plays, stating, "We remain extremely confident in the price resiliency of the plays." CFO Shri Stevenson highlighted the positive outlook for gas prices, noting, "We expect to see, with this gas price environment, stronger, more consistent activity."

Risks and Challenges

• Potential volatility in commodity prices could impact revenue.
• Market saturation in key regions might limit growth opportunities.
• Macroeconomic pressures could affect overall industry performance.

Q&A

During the earnings call, analysts inquired about potential changes in drilling activity and exploration of acquisition opportunities. The company emphasized its strategic focus on infrastructure and royalty opportunities, particularly in the Clearwater and Southeast Saskatchewan regions.

Full transcript - Topaz Energy Corp (TPZ) Q1 2025:

Kelsey, Conference Operator: Good morning, everybody. My name is Kelsey, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Tophaz Energy Corp. First Quarter twenty twenty five Results Conference Call. All lines have been placed on mute to prevent any background noise.

And after the speakers’ remarks, there will be a question and answer session. Thank you. Mr. Staples, you may begin your conference.

Marty Staples, President and CEO, Topaz Energy Corp: Thank you, Kathy, and welcome everyone to our discussion of Topaz Energy Corp’s results as at and for the period ended 03/31/2025. My name is Marty Staples, and I am President and CEO of Topaz. With me today is Shri Stevenson, CFO and VP Finance. Before we get started, I refer you to the advisories on forward looking statements contained in the news release as well as the advisories contained in the Topaz annual information form and within our MD and A available on SEDAR and our website. I also draw your attention to the material factors and assumptions in those advisories.

We’ll start this morning by speaking to some recent and first quarter twenty twenty five highlights. After these opening remarks, we’ll be open for questions. Toltec had a strong first quarter marked by several new records achieved, including royalty production, quarterly drilling activity and our lands on our lands and infrastructure revenue. Our Board has approved a 3% quarterly dividend increase to $0.34 per share, marking our ninth dividend increase and 70% dividend per share growth since inception. Total gas’ first quarter royalty production was 22,004 BOE per day and increased 10% from the prior quarter and 17% higher than the prior year.

Natural gas production increased 13% and total liquids production increased 4% from the prior quarter. Topaz’s first quarter royalty revenue of $68,700,000 represented 75% of total revenue and generated a 99% operating margin, while first quarter processing revenue and other income achieved a new company record of $23,500,000 which was 7% higher than the prior quarter. During the first quarter, operators spud a new quarterly record of two eighteen gross wells, 7.3 net, across our royalty acreage, representing 19% of the Western Canadian Sedimentary Basin drilling activity, which increased significantly from 12% in the first quarter of last year. Drilling activity was diversified across our portfolio with 50 in the Deep Basin, 40 9 in Montney, Forty Six in the Clearwater, Thirty Seven in Southeast Saskatchewan and Manitoba, twenty seven in Peace River, and nine across Central Alberta. During the quarter, 191 total gross wells were brought on production, which increased 57% from the prior year.

We remain extremely confident in the price resiliency of the plays and the quality of the operators that make up our portfolio with approximately 93% of our current royalty production volumes generated from five well capitalized operators. Based on operator drilling plans, 14 to 16 rigs will remain active across our royalty acreage through spring breakup, a record level for Topaz, and expect this will increase to 20 to 30 rigs through the second quarter. Topaz generated first quarter total revenue of $92,200,000 cash flow of $81,700,000 and free cash flow of 80,800,000.0 Our free cash flow margin increased from 85% to 88 for the first quarter. Cash flow of $0.53 per share and free cash flow of $0.52 per share both increased 13% from prior year. Copas distributed $50,700,000 in quarterly dividends during Q1, representing a 5.2% trailing annualized dividend yield for the first quarter average share price and generated $30,100,000 of excess free cash flow, part of which was allocated to fund the Alberta Montney royalty acquisition, which was completed in January.

Based on our revenue growth, our dividend has been increased, which represents $1.36 per share on an annualized basis or a 5.9% yield to our current share price. We have reconfirmed our 2025 guidance ranges from 21,000 to 23,000 BOE per day of average well production and 88,000,000 to 92,000,000 of processing revenue and other income. Total expects to exit 2025 with net debt to EBITDA of 1.2 times and generate a 66% payout ratio. As a reminder, our 2025 dividend remains sustainable down to zero dollars AECO and $55 WTIUS, attributed to the fixed revenue provided by our infrastructure portfolio and our hedging contracts in place, which are available in our most recently filed MD and A. We’re pleased to answer any questions at this time.

Back to you, operator.

Kelsey, Conference Operator: Thank you. Ladies and gentlemen, we’ll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear prompt that your hand has been raised. One moment please for your first question.

Your first question comes from Michael Harvey from RBC Capital Markets.

Marty Staples, President and CEO, Topaz Energy Corp: Just a couple of, I guess, more broader questions. I think you did reiterate the guide, of course, but just interested in your personal views on how you think activity levels could change throughout the balance of the year and kind of into early next, just given that oil and gas are doing two different things on the commodity level. And then the second one, just any broader thoughts on the E and D market availability of deals and just bid ask spreads. And any just broad thoughts on how you see that market playing out through the balance of the year as it relates to topaz would be helpful. Yes.

Thanks, Mike. Appreciate that. I mentioned in the in the release that we saw record drilling through breakup of 14 to 16 rigs, currently sitting at 16 rigs through breakup. Last year, we’re kind of peaked out around nine channel rigs. So this is kind of very increased activity from what we would have seen last year.

We haven’t seen any operator direct different drilling plans to the the land. So we do, without any guidance from, I I guess, the biggest operator in terminalling, seeing a change to that. It looks like the drilling is gonna continue. End of q four last year, we did see some drilling and and some docks kind of created. But through q one, we saw a lot of those docks actually convert to completions.

So we did see some inventory build happen. Probably too too thin to tell if if maintenance programs do get cut. Although, I mean, tough oil prices usually make good gas prices, and we do see a gas thesis building here. So I think that’s the the benefit to our portfolio, the diversification, the quality. And when we’ve historically seen lower activity, we we seem to attract capital back to our our royalty land.

So, like I said, too soon to tell. From an a and d perspective, we have been active looking at things. Nothing’s really caught our eye to to to try to acquire at this point in time. Saying that, I mean, we did do the Logan deal in January. We do expect the facility that we purchased 35% on to be onstream this quarter.

They’re doing a great job out there right now, Logan, finalizing that facility. But we’re okay to sit back and wait for the right thing to come along. If there is some weakness inside market, I think our capital becomes more precious and more needed by operators. So be patient for a quarter or two. And if this price commodity stays light, I think it is actually a benefit for an entity like Topaz.

Appreciate it. Thanks, guys. Thanks, Mike.

Kelsey, Conference Operator: Thank you. And your next question comes from Jeremy McCree from BMO. Please go ahead.

Marty Staples, President and CEO, Topaz Energy Corp: Yeah. Hey, Marty. Just a bit more on your a and d question here. When you’re looking at these different transactions, are you more inclined to pick up more infrastructure here at these levels? Or is and or do you believe, you know, for the rest of the year, you’re probably gonna see more, you know, oil and gas rights that come available?

Yeah. I mean, we get this question quite often, Jeremy, and and thanks for it. I I would say we’re we’re in different. We look at both infrastructure royalty. We look where we can to do a hybrid deal.

I think that’s a step up apart from our competitors. But, you know, in in the things we’ve been looking at, it’s about half and half right now from an infrastructure royalty standpoint. So we are looking at four both parts of that that complex, and I I would say we’re pretty agnostic as to which one we do. It’s just gotta have the right return and the right quality for both us to transact on. Okay.

Thanks. Thanks, Jeremy.

Kelsey, Conference Operator: Thank you. And, again, as a reminder, if you do have a question, please press 1. And your next question comes from Jamie Kubick from CIBC.

Marty Staples, President and CEO, Topaz Energy Corp: Just curious on the performance in the portfolio through quarter. Looked like some strong performance in your light oil volumes and then heavy oil volumes down a little bit. Can you just talk a little bit around the makeup of what the drivers were on this side from a portfolio perspective? Yeah. I’ll maybe make a quick comment here and then and then Shree can jump in.

But, you know, one thing in particular we saw in the Clearwater was a lot of producers shift into some injection wells. And so although we did see some of their volume up, I I think they’re trying to focus on NPV versus IRR, which is actually a benefit for us because areas like Headwater, that’s a a royalty that we’ve completely paid out already. So if we can get reserves for longer, that that’s a great news story. You’re getting better recovery, more reserves, and lower decline. It’s exactly what wanna see in a recipe.

But I think heavy oil volumes there, Tamarack and Headwater, but both are doing a great job. I think we can probably add some more color to those volumes, though.

Kelsey, Conference Operator: For sure. Hi, Jamie. So on the light oil side, we for sure saw some strong performance in the Chargers Lake that would have been coming from Tamarack and also some wells out in Southeast Saskatchewan on that. So those are volumes. We don’t necessarily have as much line of sight on and and as much reliance on within the guide.

And then on the heavy oil side, we did see strong performance from both Tamarac and Headwater. They made up the vast majority of the q one heavy oil. There was some additional essentially, some compliance revenue recovered in q four from other operators. So that’s why it looks directionally like q four versus q one is is lower, but the overall growth camera at Headwater from the last couple quarters has been 56% respectively. So still see really strong performance from those core operators and then just some additional sort of noise within the the quarter over quarter analysis.

Marty Staples, President and CEO, Topaz Energy Corp: I see. Okay. That makes sense. And then maybe just a a quick follow on. You talked about 72% of new wells drilled at the end of Q1 twenty five during the quarter were drilled but not yet completed.

Can you just talk a bit about, is this a sort of normal rate for you? And how you expect volumes to trend on the back of something like that? Yes.

Kelsey, Conference Operator: So we still see a a good solid backlog of inventory from terminalling. So we saw them get through a lot of completions this quarter, but, you know, a lot of the wells they drilled through the quarter are still yet uncompleted. So we see a really strong, you know, inventory buildup. We expect, you know, given how it’s shaping up this gas thesis and a bit weaker oil on the oil side, that’s certainly more remain super active. And, you know, we can’t predict precisely the cadence, but you expect it would end really, like, last year from a drilling rig perspective, and that 28 to 30 would be sort of an earmark for the remainder of the year.

But as Maria mentioned, maybe a bit too soon to say, but we do yeah. Expect to see, you know, with this gas price environment stronger, more consistent activity relative to last year as far as the completion goes.

Shri Stevenson, CFO and VP Finance, Topaz Energy Corp: When when you see some of

Marty Staples, President and CEO, Topaz Energy Corp: the scale of these pads, that isn’t uncommon, though, Jamie. I mean, they’re drilling these multi super pads right now, and so you’re gonna see all the drilling activity take place first and completions happen after. And so when you’re talking about cycle time of, you know, 80% of your time is spent drilling and 20% of your time is spent completions and those aren’t exact percentages, but you kinda use that as some high high level numbers, you are gonna see some ducts kinda build up over time. And so I think when we saw one of our main operators terminally running 18 rigs on on a lot of pad development, that is that is something that can be expected. K.

That’s good color. That’s all for me. Thank you. Thanks, Jamie.

Kelsey, Conference Operator: Thank you. And there are no further questions at this time. This is Staples. You may continue.

Marty Staples, President and CEO, Topaz Energy Corp: K. Thanks, everyone, and I look forward to talking to you in q two. Take care.

Kelsey, Conference Operator: Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.

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