Earnings call transcript: Topaz Energy sees strong Q2 2025 revenue growth

Topaz Energy Corp reported a robust financial performance for Q2 2025, with significant year-over-year increases in revenue and net income. The company’s stock experienced a modest increase of 0.16% following the announcement, reflecting investor confidence in its strategic direction and operational growth.

Key Takeaways

• Topaz Energy’s Q2 2025 revenue reached $81.2 million, showcasing strong operational performance.
• Net income surged by 50% year-over-year, amounting to $28.2 million or $0.18 per share.
• The company increased its royalty production by 19%, driven by significant growth in natural gas and liquids output.
• Topaz maintained a high free cash flow margin of 91%, supporting its dividend strategy.

Company Performance

Topaz Energy demonstrated a strong performance in Q2 2025, with revenue and net income showing substantial growth compared to the same period last year. The company capitalized on increased production from its royalty assets, contributing to a 19% rise in royalty production. This growth was further supported by a 23% increase in natural gas and liquids production, highlighting the company’s effective operational strategies.

Financial Highlights

• Revenue: $81.2 million, reflecting solid operational results.
• Net income: $28.2 million, a 50% increase year-over-year.
• Cash flow: $75.6 million, or $0.49 per share.
• Free cash flow: $74 million, maintaining a 91% margin.
• Quarterly dividends: $52.3 million, with a current dividend yield of 3.86%. InvestingPro data reveals that Topaz has consistently raised its dividend for 5 consecutive years, while maintaining strong liquidity with assets exceeding short-term obligations. The company’s comprehensive dividend sustainability analysis is available in the Pro Research Report, which offers detailed insights for over 1,400 US stocks.

Outlook & Guidance

Looking ahead, Topaz Energy expects to exit 2025 with a net debt to EBITDA ratio of 1.2 times. The company aims for a payout ratio at the lower end of its 60-90% long-term target range. InvestingPro analysis indicates that Topaz operates with a moderate level of debt and has maintained profitability over the last twelve months, though it currently trades at high earnings and revenue multiples relative to peers. For detailed valuation metrics and comprehensive financial health analysis, investors can access the full Pro Research Report. Additionally, Topaz projects a 3-5% annual production growth, with potential for cash flow per share to double by 2030. The dividend remains sustainable even at lower commodity prices, reflecting the company’s robust financial health.

Executive Commentary

Marty Staples, President of Topaz Energy, emphasized the company’s strategic focus: "We don’t ever count on a lot of these plays, don’t underwrite them when we do our deals, but it is the optionality and upside that we have being a royalty company." He also highlighted the competitive advantage, stating, "When you have the best of the basin in one high margin package, it really flows through into where the capital is allocated."

Risks and Challenges

• Market volatility: Fluctuations in oil and gas prices could impact revenue.
• Regulatory changes: Potential shifts in environmental policies may affect operations.
• Competition: Increasing activity in the Western Canadian Sedimentary Basin (WCSB) could intensify competitive pressures.
• Exploration risks: Uncertainties in new play discoveries may pose operational challenges.

Q&A

During the earnings call, analysts inquired about the new Grand Rapids play discovery and its potential impact. The company also addressed questions on merger and acquisition opportunities and capital allocation strategies. Additionally, Topaz discussed its hedging strategy for natural gas and the potential implications of the LNG Canada project on future operations.

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 Topaz Energy Corp. second quarter 2025 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you, Mr. Scott Kirker. You may begin your conference.

Scott Kirker, General Counsel, Topaz Energy Corp: Thank you, Jenny, and welcome everyone to our discussion of Topaz Energy Corp’s results as of June 30, 2025, and for the three and six months ended June 30, 2025, and 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 MDA available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in these advisories. I am here with Marty Staples, Topaz’s President, and Cherie Stephenson, 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 will 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’s second quarter royalty production was 22.3 thousand boe/d and increased 19% from the prior year. Q2 2025 royalty production included crude and heavy oil production of 5.4 thousand barrels per day that increased 9%, and natural gas and liquids production of 16.9 thousand barrels of oil equivalent per day that increased 23% over Q2 2024.

Topaz generated total second quarter revenue of $81.2 million, 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 $22.8 million, which increased 25% over the prior year. Topaz’s year-to-date 2025 annualized processing revenue and other income of $92.6 million represents the high end of 2025 guidance estimates. Drilling 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 $1.3 to $1.5 billion, 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 ROFI 8 bridge will be maintained through the third quarter of 2025. Topaz generated second quarter total revenue of $81.2 million and cash flow of $75.6 million or $0.49 per share. Topaz generated free cash flow of $74 million, 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 $28.2 million of net income or $0.18 per share, which increased 50% from the prior year.

Topaz distributed $52.3 million in quarterly dividends, $0.34 per share, during Q2, which reflects Topaz’s dividend increase that was announced 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 $21.7 million was allocated towards the previously announced Alberta Montney infrastructure acquisition, which closed at the end of May for a total acquisition cost of $26 million. 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 $55 U.S.

WTI, attributed to the fixed revenue provided by our infrastructure portfolio and hedging contracts that include over 30% of second half 2025 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 have a question, please press the star followed by the one on your touchtone phone. Should you wish to cancel your request, please press the star followed by the two. If you’re using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Our first question is from Jeremy McCrea from BMO Capital Markets. Your line is now open.

Scott Kirker, General Counsel, Topaz Energy Corp: Hey Marty, we’ve seen a lot of progression here in the play 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 basin, 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 found out about the Grand Rapids play last week along with the rest of the industry and investment world. That was a significant discovery. Fifteen sections of land across the Headwater acreage. We do think that it could potentially extend into some of the Tamarack acreage as well, and quite satisfied with that. I think we saw Headwater last week mention or kind of communicate that they thought that was 180 million barrels of oil in place.

That really adds to a nice portfolio we have inside, and we see that across the complex. I think we mentioned in our analyst note that we saw Tourmaline do some step-outs last quarter, announced a significant discovery in the Belly River of about 800 barrels a day. We continue to see these across our portfolio. I think that’s the big advantage of Topaz. It’s 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 participate in. Having a royalty across the majority of those portfolios, being Tamarack, Headwater, and Tourmaline, is a direct benefit for Topaz. We don’t ever count on a lot of these plays, don’t underwrite them when we do our deals, but it is the optionality and upside that we have being a royalty company.

Maybe just a follow-up on that. I know 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 pre-option upside here? Potentially, yeah. I mean, because we don’t control the capital, it’s always tough to include exploration, the unknown, in your guidance. I think we like to go off what our base level of what we see growth in production is. You can see on our new deck on slide 20, we talk about a 3%, a 5%, and a 7% growth scenario over the next five years and the impact and illustrative impact that has to Topaz.

I think just to be safe, we kind of look to 3% to 5% growth per year and the 7% is a nice win. Overall, you can’t really budget when you don’t control the capital for any of this exploration. In 2023, when gas prices were better, oil prices were quite high, we saw one of our main producers, Tourmaline, spend $100 million on exploration. I think they went 18 for 19 on success rates. When there’s more capital in the system and kind of a more strong commodity price, we do expect to see more exploration. Not to just point Tourmaline out, but Headwater did discover two new sands in the Grand Rapids pool in West Martin Hills. We’re getting direct benefit of that as well.

When you look at companies like Tamarack that are going from a 14% waterflood to 40% waterflood in their new five-year plan, it’s a direct benefit to us as well. Perfect. Okay, thanks Marty. Thanks, Jeremy.

Jenny, Conference Operator: Thank you. Our next question is from Jeremy McCrea from CIBC. Your line is now open.

Good morning.

Scott Kirker, General Counsel, Topaz Energy Corp: Thanks for taking my question. Just on production during the quarter, light oil volumes have been outperforming guidance considerably to start the year. Heavy oil volumes are more trending in line with guidance, I suppose. Can you just talk about some of the reasons for the contributors to the outperformance on the light and medium crude versus expectation, and if you think it could extend into the second half as well. Thanks.

Jenny, Conference Operator: Thanks, Jamie. We definitely saw outperformance relative to our expectation across the portfolio. I wouldn’t say it was one big driver. You look at it by acquisition still and really everything set up between 4% and 6%. 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 to operate our capital plan. We definitely saw some catch up from wells that were drilled basically at the very end of Q1. There was a bit extra bump into Q2. It’s hard to say if we see that exact cadence into the second half of the year, but definitely strong activity. We would probably forecast it more so to the Q1 volume that came in, but definitely.

Scott Kirker, General Counsel, Topaz Energy Corp: Okay, thank you.

In the slide deck you.

Have an illustrative five-year outlook and demonstrate the potential for cash flow per share potentially doubling by 2030. How should we think about capital allocation priorities there over that time span with respect to the dividend, M&A, buybacks, things like that? Thanks.

Jenny, Conference Operator: Yeah, for sure. We sketched that out. It’s not changed materially from the last version. What we did is impart the historical performance to kind of, you know, gives the point for why we think that that transparency of organic growth is there. The five year example basically allocates our excess free cash flow to acquisitions. We tagged it as $150 million of acquisitions per year, generating that 10% to 18% rate return. We have not imparted a dividend increase to that five year outlook because even the acquisitions could fluctuate. There could be incremental debt or there could be lower acquisitions in one year. Overall, the strategy is to pair that dividend increased cadence to sustainable growth, whether that be from acquisitions, infrastructure, or royalty production, and not be exposed to commodity price.

The takeaway is we see lots of line of sight to that operator capital and we have good coverage across their entire land basis of our key operators. The 3% to 5% is that output from that incremental capital that may come if it’s generally incorruptible and at no cost to us. That dividend cadence should match the overall annual cadence that we see through that demonstration.

Scott Kirker, General Counsel, Topaz Energy Corp: Yeah, Jamie, just to kind of add on to that, we’ve done nine dividend increases. It’s been a 7% increase to our dividend since 2020 IPO. It has followed kind of that cadence Cherie talked about. As we grow the dividend growth at this time, we’re not looking at share buybacks. I think we’ve communicated that over the last few years that our form of return of capital is going to be dividends for the time being. We do spend some time looking at share buybacks. Overall, I think our form of return of capital is going to continue to be increasing the dividend. Small sustainable dividend increases alongside growth.

Okay, good color.

Thanks. That’s all for me. Thanks, David.

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

Super. Thanks so much and good morning, Scott, Marty and Cherie. Two questions for me. First one, based on what we’re seeing, it’s a pretty tough market out there for gas. Of course, oil prices have been backing off into the $60s. Are you seeing any play areas where on positive you have the Grand Rapids and you have other positives with Headwater, 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 in the commodity price and companies not wanting to drill on economic wells?

Scott Kirker, General Counsel, Topaz Energy Corp: Yeah. 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. I think that goes to show you how the parts that we’ve invested in 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. For the most part, the bulk of our activity, which is mainly driven by the three operators, Tamarack, Headwater, and Tourmaline, they drive about 75% of our activity.

We haven’t seen anything kind of reduced from the overall plan that they put forward. 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 really flows through into where the capital is allocated.

Super.

Thank you.

Rushton, how does the M&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. There always seems to be opportunities. It’s just, are we willing to invest in those opportunities? We have participated in a few processes over the last quarter or two quarters. You saw us close the deal with Logan Energy in the early part of this year and finalized that deal into Q2 for the facility portion of that. We continue to be active. I mean, there’s no shortage of opportunities in front of us. I think that’s a big reason we got asked the question at a meeting yesterday: why wouldn’t we just increase the dividend? The reason for the higher part of our payout ratio is we still see M&A in the system. I think there was a little bit of a pause with tariff noise going on and government policy and government reelection.

I think that cleans into the latter part of this year where, you know, I do believe that Topaz is a useful part of the capital stack. Equity is an option, debt’s an option, and a company like Topaz is certainly an option for a lot of these producers. 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 replenish our balance sheet. That’s always kind of been the model at Topaz. When there’s not M&A in front of us, we’re happy to replenish the balance sheet and be ready for the next M&A cycle. Super.

Thanks for the information on the caller.

Thank you. Have a good day. You too.

Jenny, Conference Operator: Thank you. Once again, please press 1 should you wish to ask a question. Our next question is from Michael Harvey from RBC Capital Markets. Your line is now open.

Scott Kirker, General Counsel, Topaz Energy Corp: Yeah, sure. Thanks. Good morning. Maybe for Cherie or for Marty, I guess just a broader one on gas prices and hedging. You’re the only royalty that does do some hedging. What’s the house view, I guess, here on hedging at Topaz for the next couple 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. About six months ago, we definitely layered on some additional hedging pounds for summer 2025 so that the weighted average price is down from $3.30 to about $2.88. We are about 34% hedged for the full summer and through December of 2025. Beyond that, we have a book of about 18% of our gap hedged through the first quarter of 2027, and that sets at $3.32 in FDX price. That was what we foresee or believe as opportunistic. Now, given the dynamics that are happening with LNG Canada coming on and sort of ramping up, you know, on or above expectation, we’re hesitant early on tomorrow on 2026 until we see how that plays out. We don’t want to over hedge, but we do want to protect people as a seller’s overall acquisition economics. We’re in a bit of a wait and see pattern.

We think we have a good baseline built into the book and are ready to sort of hedge into some tighter differentials even when we see those because we see that as being a good way to layer our pricing to a different market without having that costly and unavailable transport. We’re kind of on a wait and see, but that’s a really good day for any sort of.

Scott Kirker, General Counsel, Topaz Energy Corp: I think, Mike, just to add on to that, we’ll always hedge a little bit of gas and a little bit of oil. We’ve been very acquisitive, so we do like to hedge a certain portion of our acquisitions and lock in a price there. We continue to be acquisitive, we’ll hedge a certain portion of that. In addition to that, we do have some oil hedges laid on till the end of this year, around $97 a barrel. I think that’s a very opportunistic hedge like Cheree talked about. We’ll look to 2026, 2027, even to 2028 if we can find the right price. I think as this LNG complex starts to build into Western Canada, we’ve seen August kind of have some narrative around 450 million a day out of the one BCF.

This is going to be a real prairie in Canada and it’s going to continue to expand and we’re going to 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 Mr. Marty Staples for the closing remarks.

Scott Kirker, General Counsel, Topaz Energy Corp: Yeah, thanks everyone. Look forward to speaking to you in Q3 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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