TOPAZ ENERGY CORP. 2024 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three months and years ended December 31, 2024 and 2023
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2024 and 2023
Management's Discussion and Analysis
This Management's Discussion and Analysis ("MD&A") of Topaz Energy Corp. ("Topaz" or the "Company") for the three months and years ended December 31, 2024 and 2023, should be read in conjunction with the audited consolidated financial statements as at December 31, 2024, and for the years ended December 31, 2024 and 2023, together with the accompanying notes ("Consolidated Financial Statements"). This MD&A is dated February 24, 2025.
The Consolidated Financial Statements have been prepared in accordance with IFRS Accounting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
Certain financial terms and measures contained in this MD&A are "specified financial measures" (as such term is defined in National Instrument 52-112 - Non-GAAPand Other Financial Measures Disclosure ("NI 52-112")). The specified financial measures referred to in this MD&A are comprised of "non-GAAP financial measures", "capital management measures" and "supplementary financial measures" (as such terms are defined in NI 52-112). These measures are defined, qualified, and where required, reconciled with the nearest GAAP measure in the "Non-GAAPand Other Financial Measures" section of this MD&A.
The non-GAAP financial measures used herein do not have a standardized meaning prescribed by GAAP. Accordingly, the Company's use of these terms may not be comparable to similarly defined measures presented by other companies. Investors are cautioned that the non-GAAP financial measures should not be considered in isolation nor as an alternative to net income or other financial information determined in accordance with GAAP, as an indication of the Company's performance.
The following volumetric measures may be abbreviated throughout this MD&A: barrel ("bbl") per day ("bbl/d"); barrel of oil equivalent ("boe") per day ("boe/d"); thousand cubic feet ("mcf") per day ("mcf/d"); and million cubic feet ("mmcf") per day ("mmcf/d"). Barrel of oil equivalent is an industry measurement to summarize the amount of energy equivalent found in a barrel of crude oil. Further information including energy conversions, forward-looking statements and certain other abbreviations, can be found in the "Advisories and Forward-LookingStatements" section of this MD&A.
The Common Shares of the Company trade on the Toronto Stock Exchange under the symbol "TPZ".
MANAGEMENT'S DISCUSSION AND ANALYSIS | 2
Highlights
Highlights of Topaz's financial results for the three months and year ended December 31, 2024, as compared to the three months and year ended December 31, 2023 ("Q4 2024", "2024", "Q4 2023" and "2023", respectively) are presented below:
Royalty activity update
- Topaz's Q4 2024 average royalty production(3) of 20,279 boe/d (31% total liquids) increased 4% from 19,555 boe/d (31% total liquids) during Q4 2023.
- Topaz's 2024 average royalty production(3) of 19,227 boe/d (31% total liquids) increased 2% from 18,853 boe/d (30% total liquids) during 2023.
- Royalty production revenue of $60.2 million generated during Q4 2024 was lower than $64.3 million generated during Q4 2023, attributed to 36% and 5% lower natural gas pricing (AECO 5A) and crude oil (Edmonton par) pricing, respectively, offset by 4% higher quarterly average royalty production. 2024 royalty production revenue of $233.4 million was lower than 2023 $250.5 million generated during 2023, attributed to 45% lower natural gas pricing (AECO 5A) and 3% lower crude oil pricing (Edmonton par), offset by 2% higher annual average royalty production.
- During Q4 2024, 175 gross wells(4) were spud on Topaz's royalty acreage (Q4 2023 - 147 gross wells). Including wells drilled during prior periods, 231 gross wells(2) were brought on production during Q4 2024, a 37% increase from the prior year (Q4 2023 - 169 gross wells).
- During 2024, 630 gross wells(4) were spud on Topaz's royalty acreage (2023 - 577 gross wells). Including wells drilled during prior periods, 646 gross wells(2) were brought on production during 2024, a 4% increase from 2023 (623 gross wells(2)).
Infrastructure activity update
- During Q4 2024, Topaz generated $18.8 million of processing revenue attributed to its non-operated ownership in processing facilities, 27% higher than Q4 2023 ($14.9 million). Average daily utilization of Topaz's net natural gas processing capacity was 100% for both Q4 2024 and Q4 2023 (81% and 81%, respectively, of which was contracted under long-term fixed take-or-pay).
- During 2024, Topaz generated $66.4 million of processing revenue attributed to its non-operated ownership in processing facilities, 18% higher than 2023 ($56.2 million). During 2024 and 2023, average daily utilization of Topaz's net natural gas processing capacity was 100% and 99%, respectively (82% and 81%, respectively, of which was contracted under long-term fixed take-or-pay).
- Topaz earned $3.1 million and $12.6 million of other income during Q4 2024 and 2024, respectively, which is attributable to its contracted interest in third-party infrastructure income (Q4 2023 and 2023 - $3.7 million and $14.7 million, respectively).
Financial performance
- During Q4 2024, Topaz generated cash flow of $73.9 million, which was 2% higher than Q4 2023 ($72.4 million) and FCF(1) of $71.4 million, consistent with Q4 2023 ($71.7 million). Topaz generated a FCF margin(1) of 87% during both Q4 2024 and Q4 2023.
- Topaz generated cash flow and FCF(1) of $279.3 million and $272.0 million, respectively, during 2024, which was 2% and 3% lower than 2023 ($286.3 million and $281.7 million, respectively), driven by lower commodity prices, offset by higher royalty production volumes, higher processing revenue and higher realized gains on financial derivatives. Topaz generated FCF margin(1) of 87% during 2024, compared to 88% during 2023.
Dividend
- In Q4 2024 and 2024, Topaz paid dividends of $50.6 million ($0.33 per common share) and $191.2 million ($1.30 per common share), representing a payout ratio(1) of 69% and 68%, respectively, (Q4 2023 and 2023 - $44.8 million ($0.31 per share) and $176.3 million ($1.22 per common share), representing a payout ratio(1) of 62%).
MANAGEMENT'S DISCUSSION AND ANALYSIS | 3
Acquisitions
- During 2024, Topaz completed $430.6 million of acquisitions, excluding decommissioning obligations(1), including:
- $99.4 million to acquire a 50% working interest in a natural gas processing and associated condensate handling facility, supported by a 10-year fixed take-or-pay commitment and preferential capacity dedication for a subsequent 7-year term;
- $29.1 million to acquire a 99% working interest in a natural gas gathering system commissioned in December 2024 that is supported by a long-term fixed take-or-pay commitment; and
- $302.1 million cash consideration for gross overriding royalty interests on approximately 3.1 million gross acres (over 50% undeveloped), across Topaz's NEBC Montney, Alberta Deep Basin and Peace River High core royalty areas.
Capital resources
- On October 22, 2024, Topaz completed a bought-deal equity financing, at $25.05 per share, whereby Topaz issued 8,050,000 common shares, which includes common shares issued upon the exercise in full of the over-allotment option granted to the underwriters, for gross proceeds of $201.7 million (the "Equity Financing"). Concurrent with the closing of the Equity Financing, certain directors, officers, employees and their associates of the Company, purchased a total of 209,177 common shares on a private placement basis, at $25.05 per share, for proceeds of $5.2 million. The $206.9 million aggregate gross proceeds from the Equity Financing and concurrent private placement were used to fund acquisitions.
- As at December 31, 2024, Topaz had 153.5 million common shares outstanding. As at February 24, 2025, Topaz had 153.8 million common shares outstanding, of which Tourmaline owned 21.3%.
- Topaz ended 2024 with net debt(1) of $492.0 million, which increased from $342.7 million at December 31, 2023 attributed to acquisitions completed during the year.
Subsequent event
- On January 31, 2025, the Company acquired a gross overriding royalty interest across approximately 0.1 million gross acres (over 60% undeveloped) in the Alberta Montney, and entered into a definitive agreement to acquire a 35% working interest in an Alberta Montney natural gas processing facility which is supported by a 15-year take-or-pay commitment (the 'Facility Interest'), for total cash consideration of $43.0 million before customary closing adjustments. The purchase price for the Facility Interest will be funded by the Company upon the final commissioning of the Facility Interest (targeted for completion mid-2025), and the satisfaction of customary closing conditions.
- Refer to "Non-GAAP and Other Financial Measures".
- Includes wells drilled during the current and previous periods on Topaz royalty acreage.
- Refer to "Supplemental Information Regarding Product Types".
- May include non-producing injection wells.
MANAGEMENT'S DISCUSSION AND ANALYSIS | 4
Selected Financial Information
For the periods ended | 2024 | 2023 | Q4 2024 | Q3 2024 | Q2 2024 | Q1 2024 | Q4 2023 | |||
($000s) except per share | ||||||||||
Royalty production revenue | 233,426 | 250,488 | 60,234 | 52,692 | 60,162 | 60,338 | 64,268 | |||
Processing revenue | 66,377 | 56,203 | 18,838 | 18,279 | 14,754 | 14,506 | 14,854 | |||
Other income(4) | 12,595 | 14,724 | 3,107 | 2,626 | 3,490 | 3,372 | 3,656 |
Total | 312,398 | 321,415 | 82,179 | 73,597 | 78,406 | 78,216 | 82,778 |
Cash expenses: | |||||||
Operating | (7,349) | (6,896) | (1,600) | (2,209) | (1,623) | (1,917) | (979) |
Marketing | (1,360) | (1,468) | (356) | (279) | (333) | (392) | (384) |
General and administrative | (8,220) | (6,910) | (2,894) | (1,730) | (1,626) | (1,970) | (2,028) |
Realized gain (loss) on financial instruments | 11,316 | 9,261 | 3,464 | 4,716 | 2,276 | 860 | 281 |
Interest expense | (27,466) | (29,099) | (6,940) | (7,123) | (6,544) | (6,859) | (7,279) |
Cash flow | 279,319 | 286,303 | 73,853 | 66,972 | 70,556 | 67,938 | 72,389 |
Per basic share(1)(2) | $1.91 | $1.98 | $0.49 | $0.46 | $0.49 | $0.47 | $0.50 |
Per diluted share(1)(2) | $1.90 | $1.97 | $0.49 | $0.46 | $0.49 | $0.47 | $0.50 |
Cash from operating activities | 276,271 | 300,576 | 64,930 | 71,253 | 68,805 | 71,283 | 76,423 |
Per basic share(1)(2) | $1.89 | $2.08 | $0.43 | $0.49 | $0.47 | $0.49 | $0.53 |
Per diluted share(1)(2) | $1.88 | $2.07 | $0.43 | $0.49 | $0.47 | $0.49 | $0.53 |
Net income | 46,386 | 47,644 | 4,426 | 18,040 | 17,724 | 6,196 | 19,635 |
Per basic share(2) | $0.32 | $0.33 | $0.03 | $0.12 | $0.12 | $0.04 | $0.14 |
Per diluted share(2) | $0.32 | $0.33 | $0.03 | $0.12 | $0.12 | $0.04 | $0.13 |
Adjusted, per diluted share(1)(8) | $0.37 | $0.30 | $0.12 | $0.06 | $0.10 | $0.10 | $0.06 |
EBITDA(7) | 306,027 | 314,811 | 80,504 | 73,984 | 76,885 | 74,654 | 79,552 |
Per basic share(1)(2) | $2.09 | $2.18 | $0.53 | $0.51 | $0.53 | $0.52 | $0.55 |
Per diluted share(1)(2) | $2.08 | $2.17 | $0.53 | $0.51 | $0.53 | $0.51 | $0.55 |
FCF(1) | 271,989 | 281,735 | 71,435 | 64,789 | 69,499 | 66,266 | 71,676 |
Per basic share(1)(2) | $1.86 | $1.95 | $0.47 | $0.45 | $0.48 | $0.46 | $0.50 |
Per diluted share(1)(2) | $1.85 | $1.94 | $0.47 | $0.44 | $0.48 | $0.46 | $0.49 |
FCF Margin(1) | 87% | 88% | 87% | 88% | 89% | 85% | 87% |
Dividends paid | 191,167 | 176,316 | 50,617 | 47,827 | 46,362 | 46,361 | 44,847 |
Per share(1)(6) | $1.30 | $1.22 | $0.33 | $0.33 | $0.32 | $0.32 | $0.31 |
Payout ratio(1) | 68% | 62% | 69% | 71% | 66% | 68% | 62% |
Excess FCF(1) | 80,822 | 105,419 | 20,818 | 16,962 | 23,137 | 19,905 | 26,829 |
Capital expenditures | 7,330 | 4,568 | 2,418 | 2,183 | 1,057 | 1,672 | 713 |
Work in progress capital costs | ─ | 3,581 | (21,295) | 5,585 | 4,035 | 11,675 | 3,581 |
Acquisitions, excl. decommissioning obligations(1) | 430,569 | 46,392 | 331,380 | ─ | 99,189 | ─ | 6,404 |
Weighted average shares - basic(3) | 146,521 | 144,493 | 151,423 | 144,909 | 144,878 | 144,839 | 144,657 |
Weighted average shares - diluted(3) | 147,131 | 145,370 | 152,149 | 145,622 | 145,491 | 145,337 | 145,536 |
Average Royalty Production(5) | |||||||
Natural gas (mcf/d) | 79,029 | 79,220 | 83,923 | 76,366 | 75,341 | 80,461 | 81,163 |
Light and medium crude oil (bbl/d) | 1,791 | 1,727 | 1,678 | 1,834 | 1,925 | 1,727 | 1,790 |
Heavy crude oil (bbl/d) | 3,083 | 2,740 | 3,266 | 3,093 | 3,093 | 2,877 | 3,016 |
Natural gas liquids (bbl/d) | 1,180 | 1,181 | 1,346 | 1,057 | 1,141 | 1,176 | 1,221 |
Total (boe/d) | 19,227 | 18,853 | 20,279 | 18,712 | 18,717 | 19,192 | 19,555 |
Total royalty production (% total liquids) | 31% | 30% | 31% | 32% | 33% | 30% | 31% |
Natural gas liquids (% condensate) | 71% | 71% | 68% | 75% | 71% | 68% | 70% |
Realized Commodity Prices(5) | |||||||
Natural gas ($/mcf) | $1.42 | $2.61 | $1.41 | $0.63 | $1.09 | $2.51 | $2.28 |
Light and medium crude oil ($/bbl) | $92.57 | $94.55 | $90.73 | $94.14 | $101.24 | $83.06 | $96.51 |
Heavy crude oil ($/bbl) | $82.13 | $75.55 | $80.81 | $83.17 | $89.03 | $75.10 | $75.12 |
Natural gas liquids ($/bbl) | $90.11 | $92.66 | $89.10 | $89.73 | $95.28 | $86.63 | $93.46 |
Total ($/boe) | $33.17 | $36.40 | $32.29 | $30.61 | $35.32 | $34.55 | $35.72 |
Benchmark Pricing | |||||||
Natural Gas | |||||||
AECO 5A (CAD$/mcf) | $1.46 | $2.64 | $1.48 | $0.69 | $1.18 | $2.52 | $2.30 |
AECO 7A (CAD$/mcf) | $1.44 | $2.93 | $1.46 | $0.81 | $1.44 | $2.05 | $2.66 |
Westcoast station 2 (CAD$/mcf) | $1.19 | $2.26 | $0.90 | $0.50 | $0.77 | $2.62 | $2.05 |
Crude Oil, Heavy Oil and Natural Gas Liquids | |||||||
NYMEX WTI (USD$/bbl) | $75.72 | $77.62 | $70.27 | $75.16 | $80.55 | $76.97 | $78.32 |
Edmonton Par (CAD$/bbl) | $97.80 | $100.83 | $95.14 | $98.13 | $105.53 | $92.49 | $99.97 |
WCS differential (USD$/bbl) | $14.72 | $18.85 | $12.55 | $13.49 | $13.54 | $19.33 | $21.97 |
Edmonton Condensate (CAD$/bbl) | $98.88 | $101.62 | $97.90 | $93.95 | $101.27 | $85.11 | $102.05 |
CAD$/USD$ | $0.7301 | $0.7411 | $0.7149 | $0.7333 | $0.7308 | $0.7414 | $0.7344 |
Selected statement of financial position results | At Dec. 31, | At Sept. 30, | At Jun. 30, | At Mar 31, | At Dec. 31, | ||
($000s) except share amounts | 2024 | 2024 | 2024 | 2024 | 2023 | ||
Total assets | 1,894,614 | 1,623,841 | 1,660,645 | 1,600,415 | 1,647,147 | ||
Working capital | 51,758 | 27,520 | 29,309 | 31,594 | 53,295 | ||
Adjusted working capital(1) | 48,372 | 38,434 | 43,794 | 44,786 | 48,900 | ||
Net debt(1) | 492,024 | 381,084 | 398,461 | 322,273 | 342,738 | ||
Common shares outstanding(3) | 153,457 | 144,928 | 144,878 | 144,878 | 144,741 |
- Refer to "Non-GAAP and Other Financial Measures".
- Calculated using basic or diluted weighted average shares outstanding during the period.
- Shown in thousand shares outstanding.
- Includes interest income ($mm): Q4 2024: $0.3, Q3 2024: $0.1; Q2 2024: $0.2; Q1 2024: $0.1, Q4 2023: $0.1; 2024: $0.8; and 2023: $0.6.
- Refer to "Supplemental Information Regarding Product Types."
- Cumulative dividend paid as per the number of outstanding shares on the respective quarterly dividend dates.
- Defined term under the Company's Syndicated Credit Facility.
- Adjusted to exclude the impact of non-cash, unrealized gains or losses on financial instruments.
MANAGEMENT'S DISCUSSION AND ANALYSIS | 5
Business Overview
Strategy
Topaz is a unique royalty and infrastructure energy company focused on generating free cash flow(1) 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, an investment grade senior Canadian E&P company, and leveraging industry relationships to execute complementary acquisitions from other high-quality energy companies. 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 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. Topaz's SEDAR+ filings are available at www.sedarplus.ca.
The Company's dynamic and scalable business model combines the best attributes from each of the royalty and infrastructure energy segments and is designed to provide investors with sustainable long-term shareholder returns by:
- focussing on disciplined capital allocation to capture best-in class assets having high-margin income streams with strong partners which includes: royalty production revenue generated from gross overriding royalty interests and fee mineral title royalty interests, which are underpinned by operator capital development commitments in order to provide a transparent growth outlook and do not require Topaz to incur operating or capital costs or require day-to-day operational decisions, development execution or abandonments; processing revenue generated through its non-operated ownership interests in infrastructure assets whereby the Company has long-term fixed take-or-pay arrangements with high-quality counterparties and is only responsible for certain operating, capital and future abandonment costs; and other income which is generated by way of a contracted interest in third-party revenue generated through fee-for-service processing contracts with no underlying facility ownership and therefore no associated operating or capital costs;
- integrating ESG considerations into the Company's investment strategy;
- having modest corporate overhead costs;
- having a transparent outlook to the Company's opportunistic growth projects; and
- providing our strategic partners with innovative non-dilutive financing alternatives to enhance their financial flexibility.
Topaz intends to use the majority of its free cash flow (FCF)(1) to pay dividends to shareholders and the Company has a long- term payout ratio target of 60-90%. The Board has established a dividend policy pursuant to which the Company intends to pay an annual dividend in the amount of $1.32 per Common Share ($0.33 per share on a quarterly basis).
- Refer to "Non-GAAP and Other Financial Measures".
Asset Overview
The Company's high-quality assets and associated income streams are comprised of:
- gross overriding and fee mineral title royalty interests ("the Royalty Assets") on approximately nine million gross acres (approximately 60% of which are undeveloped) from which the Company receives royalty production revenue based on the associated natural gas, crude oil, heavy oil and natural gas liquids gross production revenue (the "Royalty Production Revenue"); and
- non-operatedownership interests in eight natural gas processing facilities with cumulative natural gas processing capacity of approximately 255 mmcf/d and associated crude oil and condensate handling facilities, and certain water management infrastructure from which the Company is entitled to receive processing revenue from processing services provided to customers on a fee-for-service basis, the majority of which is contracted under long-term fixed fee take-or-pay agreements (the "Processing Revenue"); and a contracted interest in a portion of third-party revenue generated from facilities owned and operated by Tourmaline through fee-for-service agreements with third parties (the "Other Income") (collectively, the "Infrastructure Assets").
MANAGEMENT'S DISCUSSION AND ANALYSIS | 6
Topaz remains committed to its business plan which is focused on generating sustainable long-term shareholder returns.
Additional Information
Additional information about Topaz, including the Annual Consolidated Financial Statements for the years ended December 31, 2024 and 2023 and the Company's 2024 Annual Information Form are available electronically under the Company's profile on SEDAR+, www.sedarplus.caand on Topaz's website, www.topazenergy.ca.
Climate Change
Emissions, carbon, and other regulations impacting climate and climate-related matters are constantly evolving. With respect to Environmental, Social and Governance ("ESG") and climate reporting, the International Sustainability Standards Board ('ISSB') has issued an IFRS Sustainability Disclosure Standard with the aim to develop sustainability disclosure standards that are globally consistent, comparable, and reliable. On June 26, 2023 the ISSB released two standards: IFRS S1 General Requirements for Disclosure of Sustainability-relatedFinancial Information; and IFRS S2 Climate-relatedDisclosures. The Canadian Sustainability Standards Board ('CSSB') has been formed to support the adoption of international sustainability standards in Canada, which includes decisions about adoption and effective dates of IFRS S1 and IFRS S2 in Canada. In addition, the Canadian Securities Administrators ('CSA') have issued a proposed National Instrument 51-107 Disclosure of Climate-relatedMatters.
On December 6, 2024, the CSSB announced the finalization of CSDS 1 'General Requirements for Disclosure of Sustainability-relatedFinancial Information' and CSDS 2 'Climate-relatedDisclosures', which will be effective for annual reporting periods beginning on or after January 1, 2025, on a voluntary basis in Canada. CSDS 1 and CSDS 2 are substantially aligned with the ISSB global baseline disclosure standards, however, provide for additional transition relief regarding the timing of reporting, comparative information, non-climate related risks and opportunities and Scope 3 GHG emissions. Canada's security regulators will determine whether CSDS 1 and CSDS 2 should be mandated, and if so, who will need to apply the standards and over what time frame. The CSA has communicated that they were working towards a revised climate-related disclosure rule that will consider the CSSB Standards and may include modifications considered appropriate for the Canadian capital markets.
The Company continues to monitor the evolving regulations and the potential impact on the Company's results of operations, access to capital and/or financial condition.
Geopolitical uncertainty
Over the past few years, the market has experienced volatile supply and demand changes, ranging from excess supply to significant supply and demand volatility attributed to the global health crisis and the current geopolitical environment, including recent uncertainties surrounding tariffs. In 2024 and 2023, geopolitical events continue to have an impact on the global economy which can lead to fluctuations in global trade, economies and financial markets.
These political changes create uncertainty about future government policies, regulations and trade relationships between major global economies which may result in broad-based volatility in energy markets. Adverse changes to trade relations, including tariffs, between the governments of the United States, Canada and Mexico, may have a long-term impact on the Company's results of operations, access to capital and/or financial position. The Company continues to monitor the effects of current events on operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS | 7
Financial Results of Operations
Cash from Operating Activities, Cash Flow, FCF, Excess FCF and Net Income
Topaz generated $64.9 million and $76.4 million of cash from operating activities during Q4 2024 and Q4 2023, respectively. Cash flow during the periods was $73.9 million and $72.4 million, respectively. The Company generated FCF(1) of $71.4 million and $71.7 million, realizing a FCF margin(1) of 87% during both Q4 2024 and Q4 2023. After dividend payments, Topaz generated Excess FCF(1) of $20.8 million during Q4 2024 and $26.8 million during Q4 2023 which was used to repay debt and fund acquisitions. The Company generated net income of $4.4 million during Q4 2024 compared to $19.6 million during Q4 2023. The decrease is primarily attributed to a $13.2 million unrealized loss on financial derivatives recognized during Q4 2024, compared to a $11.3 million unrealized gain during Q4 2023. Adjusted net income increased to $17.6 million in Q4 2024, compared to $8.3 million in Q4 2023. Overall, Q4 2024 cash flow increased 2% compared to Q4 2023 attributed to higher royalty production, processing revenue, and realized gains on financial derivatives, offset by lower commodity pricing. Q4 2024 FCF(1) was consistent relative to Q4 2023, and Excess FCF(1) was lower primarily due to $5.8 million higher dividends paid during Q4 2024.
During 2024 and 2023, Topaz generated $276.3 million and $300.6 million, respectively, of cash from operating activities. Cash flow during the periods was $279.3 million and $286.3 million, respectively. The Company generated FCF(1) of $272.0 million and $281.7 million, realizing a FCF margin(1) of 87% and 88% during 2024 and 2023, respectively. After dividend payments, Topaz generated Excess FCF(1) of $80.8 million during 2024 and $105.4 million during 2023 which was used to repay debt and fund acquisitions. The Company generated net income of $46.4 million and $47.6 million in 2024 and 2023, respectively, and adjusted net income of $54.7 million and $43.6 million in 2023, respectively. Overall, 2024 cash flow, FCF(1), and Excess FCF(1) decreased relative to 2023 primarily attributed to lower commodity pricing (natural gas (AECO 5A) was 45% lower and crude oil (Edmonton par) was 3% lower), offset by higher royalty production, processing revenue and realized gains on financial derivatives.
Three months ended | Year ended | |||
($000s) except per share amounts | Dec. 31, 2024 | Dec. 31, 2023 | Dec. 31, 2024 | Dec. 31, 2023 |
Cash from operating activities | 64,930 | 76,423 | 276,271 | 300,576 |
Per basic share(1)(2) | $0.43 | $0.53 | $1.89 | $2.08 |
Per diluted share(1)(2) | $0.43 | $0.53 | $1.88 | $2.07 |
Cash flow | 73,853 | 72,389 | 279,319 | 286,303 |
Per basic share(1)(2) | $0.49 | $0.50 | $1.91 | $1.98 |
Per diluted share(1)(2) | $0.49 | $0.50 | $1.90 | $1.97 |
FCF(1) | 71,435 | 71,676 | 271,989 | 281,735 |
Per basic share(1)(2) | $0.47 | $0.50 | $1.86 | $1.95 |
Per diluted share(1)(2) | $0.47 | $0.49 | $1.85 | $1.94 |
FCF margin(1) | 87% | 87% | 87% | 88% |
Excess FCF(1) | 20,818 | 26,829 | 80,822 | 105,419 |
Net income | 4,426 | 19,635 | 46,386 | 47,644 |
Per basic share(2) | $0.03 | $0.14 | $0.32 | $0.33 |
Per diluted share(2) | $0.03 | $0.13 | $0.32 | $0.33 |
Adjusted net income(1) | 17,581 | 8,327 | 54,652 | 43,577 |
Per basic share(1)(2) | $0.12 | $0.06 | $0.37 | $0.30 |
Per diluted share(1)(2) | $0.12 | $0.06 | $0.37 | $0.30 |
- Refer to "Non-GAAP and Other Financial Measures".
- As noted, calculated using the basic or diluted weighted average number of shares outstanding during the respective periods.
Royalty
Royalty production revenue
The Company's royalty production revenue is determined pursuant to the terms of its royalty agreements. The commodity prices for natural gas, crude oil, heavy oil and natural gas liquids are determined from market index prices in the month of production and the majority of Topaz's royalty contractual agreements do not permit deductions. Topaz's royalty production volumes are marketed with the respective royalty payors' production volume and revenue is generally received two months after the natural gas, crude oil, heavy oil and natural gas liquids volumes are produced. The Company can elect to take its share of royalty production volumes in kind, if desired.
Royalty production revenue generated during Q4 2024 was $60.2 million compared to $64.3 million during Q4 2023. 2024 royalty production revenue was $233.4 million, compared to $250.5 million during 2023. Lower Q4 2024 and 2024 royalty production revenue relative to Q4 2023 and 2023 is attributed to lower commodity pricing, offset by higher royalty production volumes.
MANAGEMENT'S DISCUSSION AND ANALYSIS | 8
Royalty production
Topaz's average royalty production(1) during Q4 2024 was 20,279 boe/d (69% natural gas weighted) compared to 19,555 boe/d (69% natural gas weighted) during Q4 2023. 2024 average royalty production(1) was 19,227 boe/d (69% natural gas weighted) compared to 18,853 boe/d (70% natural gas weighted) during 2023. Topaz generates royalty revenue from production on developed royalty acreage and expects to generate royalty revenue through the future development of its undeveloped acreage. Topaz's royalty production volume growth from 2023 to 2024 is attributed to royalty acquisitions and operator-funded development of Topaz's undeveloped royalty acreage, offset by 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.
Three months ended | Year ended | |||
Dec. 31, 2024 | Dec. 31, 2023 | Dec. 31, 2024 | Dec. 31, 2023 | |
Royalty production revenue | ||||
Natural gas | 10,919 | 17,036 | 41,165 | 75,366 |
Light and medium crude oil | 14,010 | 15,890 | 60,685 | 59,606 |
Heavy crude oil | 24,279 | 20,844 | 92,665 | 75,570 |
Natural gas liquids | 11,026 | 10,498 | 38,911 | 39,946 |
Total ($000s) | 60,234 | 64,268 | 233,426 | 250,488 |
Average royalty production(1) | ||||
Natural gas (mcf/d) | 83,923 | 81,163 | 79,029 | 79,220 |
Light and medium crude oil (bbl/d) | 1,678 | 1,790 | 1,791 | 1,727 |
Heavy crude oil (bbl/d) | 3,266 | 3,016 | 3,083 | 2,740 |
Natural gas liquids (bbl/d) | 1,346 | 1,221 | 1,180 | 1,181 |
Total (boe/d) | 20,279 | 19,555 | 19,227 | 18,853 |
Total royalty production (% total liquids) | 31% | 31% | 31% | 30% |
Natural gas liquids (% condensate) | 68% | 70% | 71% | 71% |
Realized royalty production prices | ||||
Natural gas (C$/mcf) | $1.41 | $2.28 | $1.42 | $2.61 |
Light and medium crude oil (C$/bbl) | $90.73 | $96.51 | $92.57 | $94.55 |
Heavy crude oil (C$/bbl) | $80.81 | $75.12 | $82.13 | $75.55 |
Natural gas liquids (C$/bbl) | $89.10 | $93.46 | $90.11 | $92.66 |
Total ($/boe) | $32.29 | $35.72 | $33.17 | $36.40 |
Benchmark Pricing | ||||
Natural gas | ||||
AECO 5A (CAD$/mcf) | $1.48 | $2.30 | $1.46 | $2.64 |
AECO 7A (CAD$/mcf) | $1.46 | $2.66 | $1.44 | $2.93 |
Westcoast station 2 (CAD$/mcf) | $0.90 | $2.05 | $1.19 | $2.26 |
Crude Oil, Heavy Oil and Natural Gas Liquids | ||||
NYMEX WTI (USD$/bbl) | $70.27 | $78.32 | $75.72 | $77.62 |
Edmonton Par (CAD$/bbl) | $95.14 | $99.97 | $97.80 | $100.83 |
WCS differential (USD$/bbl) | $12.55 | $21.97 | $14.72 | $18.85 |
Edmonton Condensate (CAD$/bbl) | $97.90 | $102.05 | $98.88 | $101.62 |
CAD$/USD$ | $0.71 | $0.73 | $0.73 | $0.74 |
- Refer to "Supplemental Information Regarding Product Types".
MANAGEMENT'S DISCUSSION AND ANALYSIS | 9
Royalty acreage activity
During Q4 2024, 175 gross wells(2) were spud on Topaz's royalty acreage and 231 gross wells were brought on production(4) (of which 69 gross wells drilled during Q4 2024 and 162 gross wells drilled during prior periods), compared to 147 gross wells spud and 169 gross wells brought on production during Q4 2023 (60 gross wells drilled during Q4 2023 and 109 gross wells drilled during prior periods).
During 2024, 630 gross wells(2) were spud on Topaz's royalty acreage and 646 gross wells were brought on production(4) (of which 470 gross wells drilled during 2024 and 176 gross wells drilled during prior periods), compared to 577 gross wells spud and 623 gross wells brought on production during 2023 (451 gross wells drilled during 2023 and 172 gross wells drilled during prior periods). Topaz expects that the 160 additional gross wells that were drilled during 2024 but not completed by December 31, 2024 will be brought on production during subsequent periods.
Three months ended | Year ended | |||
Dec. 31, 2024 | Dec. 31, 2023 | Dec. 31, 2024 | Dec. 31, 2023 | |
Royalty Acreage Activity(1) | ||||
Total gross wells spud during the period | 175 | 147 | 630 | 577 |
Gross wells spud and brought on production during the period(2) | 69 | 60 | 470 | 451 |
Other gross wells brought on production during the period(3) | 162 | 109 | 176 | 172 |
Total gross wells brought on production during the period | 231 | 169 | 646 | 623 |
Gross wells spud during the period but not yet completed ('DUCs') | 106 | 87 | 160 | 126 |
DUCs as a % of total gross wells spud during the period | 61% | 59% | 25% | 22% |
- Refers to the number of wells spud or brought on production, as indicated, by the working interest operators and may include injection wells. Topaz does not conduct upstream petroleum and natural gas exploration and development operations.
- Refers to wells brought on production which were spud within the respective period; does not take into consideration wells spud during previous periods.
- Refers to wells brought on production which were spud during previous periods.
Infrastructure
Processing revenue
The Company's processing revenue is generated through its non-operated ownership in eight natural gas processing and associated liquids handling facilities, and two water management facilities. The facilities provide processing services to customers on a fee-for-service basis, the majority of which are subject to long-term, fixed fee take-or-pay agreements.
During Q4 2024 and Q4 2023, Topaz generated $18.8 million and $14.9 million, respectively, of processing revenue. Average daily utilization of Topaz's net natural gas and crude oil processing capacity was 100% during both Q4 2024 and Q4 2023, which is attributed to the significant portion of Topaz's net processing capacity (81% and 81%, respectively) being contracted under long-term fixed take-or-pay.
Topaz generated $66.4 million and $56.2 million of processing revenue during 2024 and 2023, respectively. Average daily utilization of Topaz's processing capacity was 100% during 2024 compared to 99% during 2023, which is attributed to the significant portion of Topaz's processing capacity (82% and 81%, respectively) being contracted under long-term fixed take- or-pay.
Q4 2024 and 2024 processing revenue increased 27% and 18% relative to Q4 2023 and 2023, respectively, which is attributed to infrastructure acquisitions completed during Q4 2023 and 2024.
Other income
The Company generates income by way of a contracted interest in third-party revenue generated through fee-for-service processing contracts with no underlying facility ownership, including but not limited to, processing, compression, and water handling revenue, generated at multiple facilities owned and operated by Tourmaline. These facilities include natural gas processing plants, crude oil batteries, pipelines, water disposal facilities, compressor stations and other facilities associated with the handling of crude oil, natural gas and natural gas liquids. The facilities are located across Tourmaline's three core operating areas and Topaz does not have an ownership interest in the underlying assets.
During Q4 2024 and Q4 2023, Topaz generated other income of $3.1 million and $3.7 million, respectively. During 2024 and 2023, Topaz generated other income of $12.6 million and $14.7 million, respectively. Other income decreased during 2024 as compared to 2023, due to fluctuations in third party operator activity levels at the Tourmaline-owned facilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS | 10