Earnings call transcript: Topaz Energy Q2 2025 earnings beat expectations

Topaz Energy Corp reported its Q2 2025 earnings on July 28, surprising analysts with a significant earnings per share (EPS) beat. The company posted an EPS of $0.18, surpassing the forecast of $0.077 by 133.77%. Despite this, revenue fell short of expectations, coming in at $81.19 million against a forecast of $86 million, a 5.59% shortfall. The company, which has raised its dividend for 5 consecutive years and currently offers a 3.97% yield, saw its stock increase 0.27% in after-hours trading, reflecting investor optimism about the earnings beat.

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Key Takeaways

• Topaz Energy’s EPS significantly exceeded expectations, with a 133.77% surprise.
• Revenue fell short of forecasts, highlighting challenges despite strong earnings.
• The company’s stock price increased by 0.27% in after-hours trading.
• Notable increases in production and new play discoveries were reported.
• The company maintains a strong dividend yield and free cash flow margin.

Company Performance

Topaz Energy demonstrated robust performance in Q2 2025, achieving a net income of $28.2 million, a 50% increase from the previous year. The company also reported a substantial cash flow of $75.6 million, translating to $0.49 per share, and maintained a high free cash flow margin of 91%. This performance underscores the company’s operational efficiency and strong market position.

Financial Highlights

• Revenue: $81.19 million, below the forecast of $86 million.
• Earnings per share: $0.18, surpassing the forecast of $0.077.
• Net income: $28.2 million, a 50% increase year-over-year.
• Free cash flow: $74 million, with a 91% margin.
• Quarterly dividends: $52.3 million, with a 5.5% trailing annualized yield.

Earnings vs. Forecast

Topaz Energy’s Q2 2025 EPS of $0.18 significantly exceeded analyst expectations of $0.077, resulting in a 133.77% surprise. This strong performance contrasts with the revenue shortfall of 5.59%, as actual revenue was $81.19 million compared to the forecasted $86 million. The EPS beat highlights the company’s effective cost management and operational efficiencies.

Market Reaction

Following the earnings release, Topaz Energy’s stock experienced a slight increase of 0.27% in after-hours trading. This movement reflects investor confidence in the company’s ability to deliver strong earnings despite revenue challenges. The stock has demonstrated impressive performance with a 33.8% return over the past year, trading between its 52-week range of $15.69 to $22.30, with the current price at $20.70.

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Outlook & Guidance

Topaz Energy projects to exit 2025 with a net debt to EBITDA ratio of 1.2 times and aims to maintain a payout ratio at the lower end of its 60-90% target range. The company anticipates annual production growth of 3-5%, with potential scenarios reaching 7%. Notably, the dividend is sustainable even at low commodity prices, with over 30% of Q2 2025 natural gas production hedged at $2.88 per Mcf.

Executive Commentary

President Marty Staples highlighted the company’s strategic positioning, stating, "We see lots of landfight to that operator capital, and we have good coverage across their entire land basis." He further emphasized, "There’s no shortage of opportunities... we continue to be active," indicating a proactive approach to exploration and development.

Risks and Challenges

• Revenue shortfall: Continued revenue misses could impact investor confidence.
• Commodity price volatility: Fluctuations in oil and gas prices may affect margins.
• Market competition: Intense competition in the energy sector could pressure market share.
• Regulatory changes: Potential changes in environmental regulations may impact operations.
• Exploration risks: Uncertainties in new play discoveries could affect future growth.

Q&A

During the earnings call, analysts inquired about Topaz Energy’s exploration potential and M&A strategy. The company anticipates at least one transaction in 2025, reflecting its commitment to growth through strategic acquisitions. Additionally, discussions covered the hedging strategy for natural gas and oil, emphasizing risk management in volatile markets.

Full transcript - Topaz Energy Corp (TPZ) Q2 2025:

Jenny, Conference Operator: Good morning.

My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Covance Energy Corp Second Quarter twenty twenty five Results Conference 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. Thank you.

Mr. Scott Kurka, you may begin your conference.

Scott Kurka, General Counsel, Topaz Energy Corp: Thank you, Jenny, and welcome everyone to our discussion of Topaz Energy Corp. Results as of 06/30/2025, and for three and six months ended June 2024. I’m Scott Kirker, and I’m the General Counsel for Topaz. 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 our MD and A available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in these advisers.

I’m here with Marty Staples, Topaz’s President and Charisse, sorry, Charisse Stevenson, Vice President Finance and Chief Financial Officer for Topaz. We will start by speaking to some of the highlights of the last quarter and our year so far. After these opening remarks, we’ll be open for questions. Marty, go ahead. Thanks, Scott.

Good morning, everyone. Topaz had a strong second quarter marked by significant increases in royalty production, infrastructure processing revenue, drilling activity and wells brought on production. The acquisitions completed over the last year contributed 70% of our royalty production growth and led to a 37% increase in quarterly infrastructure processing revenue. Topaz second quarter royalty production was 22,300 BOE per day and increased 19% from the prior year. Q2 twenty twenty five royalty production included crude and heavy oil production of 5,400 barrels per day that increased 9% and natural gas and liquids production of 16,009 barrels of oil equivalent per day that increased 23% over Q2 twenty twenty four.

Topaz generated total second quarter revenue of $81,200,000 46% from crude and heavy oil royalties, 26% from natural gas and NGL royalties, and 28% from our infrastructure portfolio with total processing revenue and other income of $22,800,000 which increased 25% over the prior year. Hope as of year to date 2025 annualized processing revenue and other income of $92,600,000 represents the high end of 2025 guidance estimates. Joint activity on our acreage remains strong with 125 gross wells drilled, and as a result, we achieved our previous record 21% share of total WCSB activity, which increased significantly from 15% in Q2 of last year. We estimate operator spending across our acreage year to date has been $1,300,000,000 to $1,500,000,000 and we feel confident in continued allocation of capital to our acreage. Drilling activity was diversified across our portfolio with 50 in the Clearwater, 42 in the Montney, 23 in Deep Basin, five in Southeast Saskatchewan and five in Peace River High.

Based on our operator drilling plans, we expect that the current 28 to 32 active rigs on our Roper acreage will be maintained through the 2025. Topaz generated second quarter total revenue of $81,200,000 and cash flow of $75,600,000 or $0.49 per share. Topaz generated free cash flow of $74,000,000 generating a 91% free cash flow margin, which increased from 89% last year due to higher royalty production, infrastructure processing revenue, hedging gain and lower interest expenses. During Q2, Topaz generated $28,200,000 of net income or $0.18 per share, which increased 50% from the prior year. Topaz distributed $52,300,000 in quarterly dividends, dollars $0.03 4 per share during Q2, which reflects Topaz’s dividend increase that was announced in Q with the Q1 results and represents a 5.5% trailing annualized dividend yield for the second quarter average share price.

Q2 excess free cash flow of $21,700,000 was allocated towards the previously announced Alberta Monty infrastructure acquisition, which closed at the May for a total acquisition cost of $26,000,000 We have reconfirmed our previously announced 2025 guidance ranges and expect to exit 2025 with net debt to EBITDA of 1.2 times and generate a payout ratio at the lower end of the 60% to 90% long term target range, which provides financial flexibility for acquisition growth. Our 2025 dividend remains sustainable down to $0 AECO and US55 dollars WTI, attributed to the fixed revenue provided by our infrastructure portfolio and hedging contracts that include over 30% of second half twenty twenty five natural gas production hedged at a weighted average price of $2.88 per Mcf. We’re pleased to answer any questions at this time. Back to you, Jenny.

Jenny, Conference Operator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any case. Once again, that is star one should you wish to ask a question.

And our first question is from Jeremy McClain from BMO Capital Markets. Your line is now open.

Scott Kurka, General Counsel, Topaz Energy Corp: Hey, Marty. So we’ve seen a lot of progression here in the place that you have between the water slide and this new Grand Rapids pool that Headwater has discovered. Just in your experience of looking at the whole base, where do you see new emerging plays coming onto your land that we may be talking about six months from now here? Yeah. Good morning, Jeremy, and thanks for the question.

Obviously, we saw notable at the Grand Rapids play last week along with the rest of industry and investment world. So that was a significant discovery, 15 secondtions of land across the Headwater acreage. We do think that it it could potentially extend into some of the Tamarac acreage as well. And so quite satisfied with that. I think we thought Headwater last week mentioned or kinda communicated they thought that was a 180,000,000 barrels of oil in place.

So that really adds to a nice portfolio we already have inside. And we see that across the complex. I think we mentioned in our analyst note that we saw a terminally decent step out last quarter, announced a significant discovery in the Belly River of about 800 barrels a day. And so we continue to see these across our portfolio. And I think that’s the big advantage of Topaz is the optionality that exists inside of it where we don’t spend any capital, but we get the direct benefit of exploration technology and step outs that our operators continue to to participate in.

And so having a royalty across the majority of those portfolios being Tamarac, Headwater and Tourmaline is a direct benefit for for Topaz. And you know, we don’t ever count on a lot of these plays, don’t underwrite them when we do our our deals, but it is the optionality and upside that we have being a royalty company. And maybe just a follow-up on that. So I know that you guys didn’t change your guidance here, but with a lot of these new exploration plays coming about, is this something to expect as we head into 2026, some potential higher production growth than maybe expected? Or how much of these new plays do you typically try and include in your guidance and other stuff is just preoption to upsize here potentially?

Yeah. I mean, because we don’t control the capital, it’s always tough to include exploration, the unknown in your guidance. And so I think we’d like to go off what our base level of what we see growth and production is. And you can see on our new deck on Slide 20, we talk about a 3% to 5% and a 7% growth scenario over the next five years and the impact and illustrative impact that has to Topaz. You know, I think just to be safe, we kind of look to 3% to 5% growth per year, and the 7% is is a nice win.

But overall, I mean, you can’t really budget when you don’t control the capital for any of this exploration. Saying that, I mean, 2023, when gas prices were better and oil prices were quite high, we saw one of our main producers, terminally, spend a $100,000,000 on exploration, and I think they went 18 for 19 on success rates. And so when there’s more capital in the system and and kind of a more strong commodity price, we do expect to see more exploration. Not not not to just point Tourmaline out, but Headwater did discover two new Sands and the Grand Rapids a pool in West Martin Hills. So we’re getting direct benefit of that as well.

And when you look at companies like Tamarac that are going from a 14% water flood to 40% water flood in their new five year plan, it’s a direct benefit to us as well. And

Jenny, Conference Operator: our next question is from Jamie Kibic from CIBC. Just

Scott Kurka, General Counsel, Topaz Energy Corp: on production during the quarter. Light oil volume has been outperforming guidance considerably to start the year. Heavy oil volumes more turning in line with guidance, I suppose. Can you just talk about some of the reasons for the or contributors to the outperformance on the light and medium crude versus expectation and if you think it could extend in the second half as well? Thanks.

Jenny, Conference Operator: We see. We definitely saw outperformance relative to our expectation across the portfolio. So I wouldn’t say it was one big driver. It was, you know, if you look at it by acquisition still and and really everything’s up between 46%. So incremental wells out in Southeast Saskatchewan, some incremental wells across the reserve royalty portfolio.

And those are ones we, for sure, don’t count on because you don’t have as transparent lines right to operate our capital plan. So we definitely saw some, you know, catch up from wells that were drilled, basically, very end of q one. So there was a bit extra bump into the q two. So hard to say if we see that exact cadence into the second half of the year, but definitely strong activity. So we would probably forecast it more so to ensure that the q one value that came in.

But definitely, yeah, please, you know, probably in.

Scott Kurka, General Counsel, Topaz Energy Corp: Okay. And then in the slide deck, you have an illustrative five year outlook and demonstrate the potential for cash flow per share potentially doubling by 02/1930. How should we think about capital allocation priorities there over that time span with respect to the dividend, m and a, buybacks, things like that? Thanks.

Jenny, Conference Operator: Yeah. For sure. So we set that up. It’s not changed materially from the last version. What we did is, in part the historical performance to kinda, you know, get support to why we think that that transparency of organic growth is there.

And so the five year, I was just an example, basically, allocates our excess free cash flow to acquisitions. So we we pegged it as a 150,000,000 of acquisitions per year, generating that 10 to 18% greater return. We have not imparted a dividend increase through that five year outlook because the even the acquisitions could fluctuate. There could be, you know, incremental debt or, you know, there could be lower acquisitions in one year. But overall, the strategy is sorta carry that dividend increase cadence to sustainable growth, whether that be from acquisitions, infrastructure, or royalty production, and not be exposed to commodity price.

So, you know, the takeaway is we see lots of landfight to that that operator capital, and we have good coverage across their entire land basis of our key operators. And so the three to 5% is that output from that incremental capital that may come is is definitely in cost of and at no cost to us, and that dividend payment should match the overall, you know, annual payment that we see to that demonstration.

Scott Kurka, General Counsel, Topaz Energy Corp: Yeah. Jamie, just to kind of add on to that, we’ve we’ve done nine dividend increases. It’s been a 70 increase to our dividend since 2020 IPO. So it has followed kind of that cadence we talked about as we grow the dividend growth. At this time, we’re not looking at share buybacks.

I think we’ve we’ve communicated that over the last few years that our form of return of capital is gonna be dividends for the the the time being. And, you know, we do spend some time looking at share buybacks. But overall, I think our form of of return of capital is gonna continue to be increasing the dividend, small sustainable dividend increases alongside growth. Okay. Good color.

Thanks. That’s that’s all for me. Thanks, Steven.

Jenny, Conference Operator: Thank you. And our next question is from Joseph Schachter from Schachter Energy Research. Your line is now open.

Scott Kurka, General Counsel, Topaz Energy Corp: Thanks so much, and good morning, Scott, Marty and Chris, Sherry. Two questions for me. First one, based on what we’re seeing, it’s a pretty tough market out there for gas and of course, oil prices have been backing off into the 60s. Are you seeing any play areas where on positives, you have the Grand Rapids and you have other positives with heavy oil. But are you seeing on the other side of it some areas where you have land where the drilling activity programs that you’re seeing are shrinking based on what’s going on with the commodity price and companies not wanting to drill uneconomic wells?

Yes. Good morning, Joseph. Thanks for the question. We did kind of communicate inside our press release that we do anticipate 28 to 32 rigs continue to be active on our royalty lands. We were able to capture 21% of the Canadian fleet on our royalty lands through the quarter.

And I think that goes to show you how the parts that we’ve invested in the basin will continue to see capital allocated towards it even in lower commodity cycles. Where we maybe see a little bit of reduction for the short term basis is areas like Southeast Saskatchewan, some of the acreage that we have kind of through West Central. But for the most part, the the bulk of our activity, which is mainly driven by the three operators, Tamarac, Headwater, and Tourmaline, they drive about 75% of our activity. So we haven’t seen anything kind of reduced from the overall plans that they put forward. And I I think it’s just the economics of these plays are so fantastic when you have the best of the basin in one high margin package.

It it really flows through into where the capital is allocated. Super. Thank you, Christian. How does the M and A market look for you now, both for royalty and infrastructure deals? Is it the same as it’s been quarter to quarter?

Is it picking up because of low prices? Can you give us some color on how you see the potential for making acquisitions this year? Yeah. There’s no shortage of opportunities, and and there always seems to be opportunities. It’s just are we willing to invest in those opportunities?

And so we we have participated in a few processes over the last quarter or two quarters, and you saw us close the deal with Logan in the early part of this year and and finalize that deal into into q two for the facility portion of that. And, yeah, we continue to be active. I mean, there’s there’s no shortage of opportunities in front of us, and I think that’s a big reason we got asked the question at a meeting yesterday is is why wouldn’t we just increase the dividend? Well, the reason being for the higher part of our payout ratio, and the reason being is we still see m and a in the system. So I think there was a little bit of a pause with tariff noise going on and and government policy and government reelection.

And I I think that cleans into the latter part of this year where, you know, I I do believe that Topaz is a useful part of the capital stack. I mean, equity is an option, debt is an option, and a company like Topaz is certainly an option for a lot of these producers. So I do anticipate that we will see at least one more transaction done this year, maybe more. We’re being very selective. We’re happy to pay down debt while the right deal isn’t in front of us and and replenish our balance sheet.

So that’s always kind of been the the model at Topaz is when there’s not m and a in front of us, we’re happy to replenish balance sheet and and be ready for the next m and a cycle. Super. Thanks, Bill. Thanks for the information on the caller. Thanks, Joseph.

Have a good day. You too.

Jenny, Conference Operator: Thank you. And our next question is from Michael Harvey from RBC Capital Markets. Maybe

Scott Kurka, General Counsel, Topaz Energy Corp: for Shri or for Marty. I guess just a broader one on gas prices and hedging is the only royalty that does do some hedging. What’s the house view, if you have here on hedging AGO for the next couple of years? Do you plan to do more or less than historical or just kind of keep layering it on. But, obviously, lots of moving parts.

Just interested in how you folks think about that.

Jenny, Conference Operator: For sure. So about six months ago, we definitely layered on some additional hedging for summer twenty five. So that’s about the weighted average price down from $3.30 to about $2.88. And so we are about 34% hedged. We we are for the full summer and through to December 2025.

And beyond that, we have a book of about 18% of our debt is up to the 2027. And that’s at that $3.32 in FCS price. And so that was what we perceive or believe is opportunistic. Now given the dynamics that are happening with LNG going on and sort of ramping up, you know, on or above expectations, we’re it has been delayed on tomorrow on twenty sixth until we see how that plays out. So we we don’t wanna over hedge, but we do wanna, you know, check people out the summer’s overall acquisition economics.

So we’re in a bit of a wait and see pattern. We think they have a good baseline, built into the book and and ready to sort of head into some tighter differentials. If and when we see those, you could see that as being a good way to outlay our pricing to a different market without having that costly and and unavailable transport. So we’re we’re kind of on a wait and see it both sides right now, but that’s a really good baseline. So

Scott Kurka, General Counsel, Topaz Energy Corp: And I think, Mike, just to add on to that, we’ll always hedge a little bit of gas and a little bit of oil. I mean, we’ve been very acquisitive, so we do like to hedge a certain portion of our acquisitions and lock in a price there. And and if we continue to be acquisitive, we’ll we’ll hedge certain portion of that. In addition to that, I mean, we do have some oil hedges laid on till the end of this year of around $97 a barrel. And so that’s, I think, a very opportunistic hedge like Shree talked about.

And we’ll look to 26, 27, even to 28 if we can find the right price. And and I think as this LNG complex starts to build into Western Canada, we’ve seen August kind of have some narrative around 450,000,000 a day of of of other than one BCF. So, look, this is gonna be a real story in Canada, and it’s gonna continue to expand, and we’re gonna find the right way to be opportunistic alongside it. Got it. Thanks, guys.

Thanks, Mike.

Jenny, Conference Operator: Thank you. There are no further questions at this time. I will now hand the call back over to mister Marty Staples for the closing remarks.

Scott Kurka, General Counsel, Topaz Energy Corp: Yeah. Thanks, everyone. Look forward to speaking to you in Q3, and and we’ll see you then.

Jenny, Conference Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

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