We're pleased to have Marty Staples, President and CEO, and Cheree Stephenson, CFO, with us today to discuss the company. As a quick reminder, if you have a question, please type it into the Q&A section at the bottom of your screen, and we'll try and get to as many questions as we can at the end of the presentation. With that, I'll turn it over to Marty and Cheree, so please go ahead.
Thanks, Kyle, and appreciate joining the Sidoti conference. First time we've joined the conference, so hope to get some good traction out of this platform. As mentioned, my name is Marty Staples, with me today is Cheree Stephenson. We're going to spend a little bit of time, about 15, 20 minutes, going over Topaz Energy, why Topaz was formed, and what we've done since we did kind of start the company. So in 2019, we saw an opportunity inside the Canadian space. We were a spinoff of Canada's largest natural gas company called Tourmaline Oil. If you recall, in 2019, there was a pretty significant ESG movement where a lot of private equity, particularly from the U.S., was moving out of the Canadian space. Institutions weren't as willing to invest in fossil fuel businesses.
What we saw setting up at Tourmaline was a generational opportunity to acquire assets at a very low multiple. The big driver of that, though, was trying to find access to capital. What we did in 2019 is spun out a royalty infrastructure business, so 2 million acres of royalty land, 2 gas plants under long-term take-or-pay contracts, and really started acquiring assets immediately after that. Tourmaline was part of that idea. At the time, Tourmaline owned 74% of Topaz, and they now own 31%, so diluted down through secondary sales and through us doing different equity raises to participate alongside Tourmaline in their acquisition strategy. One of the questions we got when we IPO'd the company in 2020, and that was, if you recall, oil prices were negative and the world shut down because of COVID.
So we were one of 77 IPOs in Canada that year, the only energy IPO that existed that had a successful platform, did diversify our portfolio. And the question that we did get is, why invest in Topaz when I already own a company like Tourmaline? We started getting calls from other operators, so we really did diversify our portfolio, added high-quality public names like Advantage, Tamarack Valley, Headwater, NuVista, Strathcona, and Whitecap to our portfolio. That allowed us to grow our business significantly. And alongside the growth, we were able to increase our dividend by 7x , so a 60% increase to the dividend, seven separate dividend increases. We have a very easy-to-understand business. We believe we're tied to some of the highest growth areas inside Western Canada, and in fact, the largest disclosed growth program in Western Canada being the Conroy Northeast BC Tourmaline project.
It's going to grow 2x faster than Topaz and very high revenue margin streams. We are about a 90% free cash flow margin business. You'll see through the presentation how we kind of allocate capital as well. So kind of to give you a platform on the next slide of what Topaz is, and this is kind of our Topaz 101 slide. As I mentioned, we were 2 million acres when we started the business in 2019. We're now sitting around 6 million acres of royalty lands. We've gone from 2 gas plants to 6 gas plants, 2 water infrastructure pieces of business, and currently building a gas pipeline right now. That becomes very important for us. We've increased our infrastructure business by 60%. It makes up 22% of our revenue right now but covers 40% of our dividend.
We're one of two royalty companies in North America that hedge our volumes. And because we do, we're exposed to gas, we think our dividend policy is very well insulated. We are in the largest position as a royalty owner in Northeast BC, so the largest contiguous land base in Northeast BC, and that's tied to plays you've heard of probably before, the Montney, which is really in the first inning of a nine-inning game. So pretty excited about the resource we have in place there. Largest contiguous royalty owner in the Deep Basin, the Peace River High, have the largest royalty production inside the Clearwater, which is the most economic oil play in North America, and a significant position through West Central Alberta and into Southeast Saskatchewan. 99% operating margin in our infrastructure business. We contract our infrastructure under long-term take-or-pay contracts.
About 80% is under fixed take-or-pay for anywhere from 10-15 years. That generates about CAD 71 million of revenue for the company. We have a billion-dollar credit facility in place right now, drawn about CAD 300 million, so about 1x debt to cash flow. As you see in that bottom right-hand side, we've been able to step up the dividend quite significantly, we think, since 2020, seven dividend increases, which has been a function of the growth in the corporation. After we've paid out the dividend, we have anywhere from CAD 100 million-CAD 150 million of excess free cash flow. What we like to do with that is either redeploy it into new M&A, which we've done. We've done CAD 2.2 billion in acquisitions over the last 4 years, the majority of those between 2020 and 2022.
While we kind of sit back and wait and try to get countercyclical, we've been able to pay down a significant amount of debt. We paid down over CAD 100 million of debt to replenish the balance sheet for what we see as the next M&A cycle. An important component for us is the tax coverage we have inside the corporation. We have CAD 1.6 billion in tax pools, so we are non-taxable till the end of 2025. After that, for about 10 years, we pay a reduced tax rate. It's about 50% of what the tax rate is, so about 13%. Payout ratio is sitting around 65% at today's commodity cycle, and so lots of optionality to increase the dividend, but we always want to increase it alongside growth. I mentioned the diversification since IPO in 2020. We now sit around 20% infrastructure.
We did increase the infrastructure business by 60%, but we were able to access parts of the basin that have never been accessible because of things like COVID and negative oil prices. It really required a need for capital for companies to grow their businesses. Went from 7% liquids in our portfolio to 31%. Why that's important with the high commodity price, particularly on oil and liquids right now, it makes up about 60% of our revenue in 2023. And then I talked about before the question of why I own Topaz when I already own Tourmaline. As you can see, we've really diversified our portfolio. Tourmaline's only 52% of the revenue versus the 94% they were at inception. Do you want to go ahead and show the slide?
For sure. So this slide sort of captures the growth we've talked about. So the top left demonstrates the royalty growth. Obviously, there's a commodity price element at play, but also our royalty production. So over the last four years, we have essentially doubled our royalty production. And given our differentiation as a royalty company in aligning with strategic and high-quality counterparties and having a royalty on all or majority of their land, we essentially can provide a more transparent outlook because we can attribute the capital that they're developing their acreage with right to our royalty acreage. So it shows the tremendous growth we've achieved on the royalty side. And on the top right is the infrastructure asset growth Marty's mentioned. We have CAD 225 million a day of natural gas processing capacity, but we'll explain in a few slides how that's really different from a typical midstream peer.
This is kind of our why-own-Topaz slide. One of the questions we get all the time is about inventory. Because we're attached to Canada's largest gas producer, being Tourmaline, they're now fourth largest in North America. We have unmatched inventory. We have 21,000 locations alone on our portfolio on the 6 million acres of land. To put that into perspective, Tourmaline's been around about 15 years. They've drilled 3,000 wells, so this is decades of resource. And in fact, in their corporate deck, they talk about 75 years of inventory. So lots of line of sight to exactly what Topaz can be for a very long time. In addition to that, we see 30%-40% growth inside our portfolio organically, and that's without doing any additional M&A.
What that translates to is CAD 100 million minimum of EBITDA into Topaz without spending any additional capital, and that's at today's current strip price right now. Very inflation-proof business, though, and we think on days where E&Ps might see a lot of torque, we see a smaller amount of torque, but on the downside days, we see a lower amount of downside as well. So as you can see from our dividend growth, we've talked about that a number of times. We do think there's room for growth going forward as the company grows at that 4%-7%. And let's talk about those growth areas. So I talked about the Northeast BC being tied to the largest project in Western Canada. That is going to grow 2x faster than Topaz does. So significant growth inside that complex.
In addition to that, we're part of a Clearwater play, the most economic oil play in North America. That is the biggest wedge of our growth, about 8%-10%. Inside that, we've got a very flat portfolio. Inside the green bar that you're kind of looking at right now, it's about a 2% growth, and that's going to be our Deep Basin assets, our Peace River High, our Central Alberta, and Southeast Saskatchewan. And then I talked about our fixed stable revenue on the infrastructure business, and that's something that we really like. That 22% of our revenue covers 40% of our dividend. All in all, that translates to that 4%-7% growth inside the complex and 30%-40% over the next five years, seeing CAD 100 million come into this system at no additional cost to Topaz is a very envious spot to be.
Within these two charts, we try to demonstrate the difference between our royalty structure and our infrastructure to the relative peer. On the far left is a typical E&P free cash flow margin. An E&P drilling the wells would have full exposure to the capital costs, operating costs, et cetera. Whereas as a royalty entity, essentially we're taking a royalty on the gross commodity revenue. We do pay a small marketing fee, and then our G&A is within that. We do generate a 91% free cash flow margin on the royalty side relative to a typical E&P, which would be about 22%.
And then on the right-hand side of the page, from an infrastructure perspective, we are really differentiated from a true midstream company, which would endeavor to own a facility and attract volumes in, but they'd be exposed to operating costs, maybe commodity margins, et cetera. Whereas for us, we've really devised financial structures. So 80% is fixed under long-term take-or-pay, and then we have a priority fill on our variable capacity plus some additional revenue that does not attract any operating costs. So wrap that all together, we have a 77% cash flow margin versus the six largest Canadian oil and gas midstream peers at 20%. So on the left-hand side of this chart, we show our progression and our EBITDA growth over time and how the royalty volumes and infrastructure has contributed to those.
Over the last 4 years, we've generated 3.5x EBITDA growth, and what's really important is the profitability within that. The CAD 1.3 billion of EBITDA we've generated cumulative to date, we've generated CAD 1.2 billion of that was free cash flow. It really is that high-margin business that gives us the financial flexibility for either new acquisitions or the dividend strategy. And on the right-hand side, we show the commodity sensitivity and how resilient we are given the infrastructure revenue and the hedging. At a CAD 0 AECO and $55 WTI, with our hedge contracts in place, in addition to the infrastructure revenue, we essentially generate an 86% payout ratio, so really sustainable dividend. At current strip prices is where you see the midsection at that 64%, obviously with further compression with higher commodity prices.
Why we think this is so important, I talked about being tied to Northeast BC plays. We always take a look at plays across North America, U.S., and Canada. 85% of the wells drilled on our royalty acreage last year were in areas that pay out in less than a year and have over a 75% IRR. Last year, there was CAD 26.4 billion of capital deployed in Western Canada. Topaz acreage saw CAD 2.4 billion of that. So roughly 9% of the capital spent in Western Canada was deployed on Topaz royalty lands. And it really was a moment in time for us to access, like I said before, parts of the basin that were not accessible. In lower commodity cycles in 2020 and 2021, there is around 230-240 rigs active on the Canadian acreage right now.
We saw about 25% of that fleet being deployed on our royalty lands. But on average, it's about 13%-14% of activity on our royalty lands. We see consistently 27%-30% rigs active on our royalty lands, and out of that 30%-40%, that makes up about 13%. And so once again, like a spot that we wanted to focus on, plays we wanted to focus on based on the economic kind of nature of those plays. I talked about the Montney and how that is a significant position for Canada. LNG Canada comes on stream at the end of 2024, early into 2025. That's very important. Tourmaline right now is developing 17% of Northeast BC production. We have a royalty on virtually all of their Northeast BC acreage. Right now, we believe LNG Canada is about $500 million a day short on supply.
The big companies that supply that right now would be obviously Petronas, Shell, and then three smaller partners of theirs. But as you can see, Tourmaline has the most permits. They've had the most wells drilled and continue to be the most active operator inside Northeast BC. In addition to that, Tourmaline also diversifies to 15 different hubs. They're the biggest supplier into Northern California. They transport almost a BCF, if not over a BCF now. They deliver over $140 million a day to the Gulf Coast. They're the first Canadian company to deliver to Cheniere. So we do believe that's a benefit for us. Although we don't get the same pricing that they do, we do benefit from the activity and the long transport arrangements that they have in place. So we can ensure that there's going to continue to be activity on our lands.
As I talked about before, Northeast BC is a very important piece of the growth profile for Topaz. As you can see in that chart in the middle on the left-hand side, this is where we see the biggest project inside Western Canada. It's a disclosed project by Tourmaline. It's going to grow 2 x faster than Topaz grows. And so in addition to that, we also have their marquee facility. It's called Gundy. We have a 10% working interest in that facility under a 10-year fixed take-or-pay contract. So you'll see this throughout the slides. Anywhere we have producing assets, we try to tie infrastructure to it as well. Second part of our business, the other growth area is the Clearwater. We are the largest royalty producer inside the Clearwater. Right now, we see a big change for the technology.
They have converted a lot of these wells into water flood. Water flood used to be the dirty word that everybody heard about where you do it at the end of the cycle. Companies are doing this at the start of the cycle now because of the recovery they're able to achieve. Marten Hills, for example, on the right-hand side of the map, it has a recovery factor of about 4%-5%. By doing water flood, you can double the size of that water flood. We believe we have over 7.5 billion barrels of oil in place in the water flood. So a significant portion of our royalty acreage would be Marten Hills and Nipisi. Nipisi recovery factor can go from 8%-16% through water flood. So we're basically getting this play again for free.
And so that's something as a royalty owner that you get pretty excited about. So lots of running room left, we believe, in the Clearwater and one of the significant growth projects inside our portfolio. I talked about the Deep Basin. This is really the gift that keeps on giving. We have over 13,000 locations inside the Deep Basin. As you can see, we have three gas plants tied to a lot of this facility, all owned by Tourmaline. Different working interests under there, but what I would like to highlight is long-term take-or-pay contracts with a tremendous amount of inventory attached to it. So lots of running room in the Deep Basin for Topaz and Tourmaline as well. Peace River High, it's an oily gas play, so about 70% oil mix, 30% natural gas.
Our two partners being Tourmaline Oil and Tamarack Valley on the royalty side of the business. On the infrastructure side, this is the water hub I talked about. We have long-term take-or-pay contracts of 15 years on water handling, supply, storage, and recycling. It doesn't matter what part of that business these producers use. We get a long-term contract on it, so they pay whether they use it or not. In addition to that, one of the first facilities we purchased was Advantage. We have a 15-year take-or-pay on their Glacier facility. It is their marquee CAD 400 million a day facility. I do believe there's 50 years of inventory attached to it, so we do think we can recontract it after the take-or-pay contract's done. And then most recently, we did another deal with Tamarack Valley on their Wembley facility. It's a 15-year, 100% fixed take-or-pay contract.
So not only are we getting a royalty on that part of the business, we're also winning twice because we participate in the infrastructure. So good piece of business for us. And then I'd like to kind of highlight our Southeast Saskatchewan and Central Alberta assets. Probably the biggest project there is in Southeast Saskatchewan. We have a Weyburn CO2. Whitecap operates that. So they inject CO2. They source it from North Dakota Coal Company and SaskPower Boundary Dam. Out the end comes a very carbon-negative oil. And so we have produced or created the first carbon-negative gross overriding royalty inside our portfolio. So good from an ESG standpoint as well. As I mentioned before, we're seeing about 13%-14% of spuds inside Western Canada. We track that on a year-by-year basis since almost inception.
I think the only difference here is 2020 would be pretty skewed because we saw up to 25% of the activity on our royalty lands because of things like negative oil prices and COVID. So we were really attracted strong operators that were going to continue to drill. The infrastructure I've highlighted that a number of times. We've grown that by 60%. Generates about CAD 71 million this year. We believe that'll increase to about 74%-75% next year. So we're doing small step-ups on the dividend policy or on the infrastructure policy every year. And in turn, that allows us to increase our dividend.
From a natural gas perspective, we touched on it quite a bit, but really the risk and the volatility that has basically affected gas prices within Canada and the WCSB has been a lack of egress. So when supply exceeds available egress capacity and it can't move, that's when we see the wide skew shown in the orange chart on the bottom right-hand side. So with LNG Canada phase I, we see that as a 10% increase to the available egress to the Canadian basin. Phase II would add another 10%. There's other projects in behind that in the next few years.
We really do see that expansion of egress, whether that be additional volumes flowing into the U.S. to feed their shortage for their LNG projects coming on, or Canadian volumes leaving the West Coast, going over to Asia, et cetera, helping to tighten that basis in order to provide more of a globalized gas price, which is really opportune for Topaz, particularly given we acquired the majority of our natural gas assets at sub-CAD 1.50 gas pricing in 2020, 2021.
I think with that, we've got a few other slides, but I see we're about 22 minutes in, and maybe we'll just kind of look to answer some questions at this point in time, Kyle.
Yeah, that sounds great. Marty and Cheree really appreciate the overview on Topaz. A lot of interesting developments. So we've got some questions already coming in, but for anybody else who's listening, feel free to submit questions using the Q&A button at the bottom, and we'll get through as many as we can. A lot of questions are on M&A. One, maybe to kind of get things started, you touched on improving the balance sheet in preparation for the next M&A cycle. Just kind of curious where you're seeing the most opportunities and what looks interesting for Topaz.
Yeah, maybe I'll start. So last year, we looked at CAD 2 billion in opportunity in our portfolio. Some of those were larger projects. We only did CAD 66 million in acquisitions. I think we needed to be very disciplined in our strategy. The bid-ask price was definitely disconnected, we thought, with more capital in the system for a lot of producers. And so we were selective. We passed on a lot of opportunities. Some of them went bid. Some of them went no bid. Some used a different form of capital to get their deal done. I think we were at a point in time, we talked about the lower commodity price, wanting to be countercyclical, where we could be disciplined. And if you look at some of the best royalty companies in the world, Franco-Nevada is somebody I like to highlight. They're always countercyclical on their M&A approach.
We could do a deal to do a deal today, and that's just not the way we're going to run our business. We're looking for things that fit well for purpose for Topaz. For example, we just finalized a deal in October of last year. We're building a gas pipeline for one of our producers called Headwater. They're emitting natural gas into the environment, and we're capturing that natural gas and putting it back into a gas plant right now. We went twice on that. Not only did we get a great deal on the gas pipeline, but that GOR that was going or that gas that was going into the emission into the atmosphere, we are able to achieve a 7% GOR on it. So it adds another CAD 500,000-CAD 750,000 of revenue to Topaz every year. So we're looking at a lot of opportunity right now.
There's no shortage of what we see from an M&A standpoint. The biggest question mark is, can we close that bid-ask price gap?
Got it. Got it. That makes sense. Maybe following on with that, when you're evaluating M&A opportunities, what are some of the factors that you're measuring? What are you looking for? Anything on returns?
Yeah, I'll maybe talk about where we start. So it always starts with the quality of the asset. We look at the rock. We look at the tenure. We look at the steel on the infrastructure. All of our infrastructure is less than 10 years old. And then it goes to the quality of the owner. We spend a lot of time examining management teams that we want to partner with, what their credit capacity is like, what type of liens they might have on their business, how they performed. Are they an experienced management team, or are they a new management team? That is going to be a discount if we're looking to a new team. And then number three, it's always how accretive is it back to Topaz and Topaz shareholders. So those are the big three criteria.
I would say if we're kind of looking at where we need to see metrics at, we're looking at mid-teens for a return standpoint. Cheree mentioned we did a lot of our transactions at sub-$50 oil, sub-$1.50 AECO. We're seeing kind of returns in the 20%+ IRR right now. So we were able to achieve significant results just based on commodity. So at the time, it looked like a 12%-14% IRR, but that's changed quite significantly. Anything you'd like to add to that?
Yeah, I'd say all of those things. The slide you mentioned on the North American plays, across North America, and how we focus on that left-hand side of the chart, that would be the number one criteria. It's what assets can attract capital no matter what the commodity price. That goes through the infrastructure as well because if it's an attractive asset to develop, it's going to feed infrastructure. So that's absolutely the most important. We have differentiated ourselves on the quality within our portfolio and the concentration amongst that quality. That is something we're not willing to dilute just to get bigger.
Got it. Got it. That's helpful. Actually following on with that, there was a question that came in. How do you think about growth opportunities on the royalty side that are maybe outside your existing asset base?
Yeah, we definitely look all the time. I'd say our BD strategy, our commercial development strategy, is just as much focused on responding to marketed bids as to approaching companies and planting seeds and giving them ideas of how we could invest our capital to help them fund their growth, whether that be M&A, repaying debt from a completed M&A transaction, et cetera. And it would be focused on that quality of counterpart and quality of underlying resource. So always sort of looking. We do like to think outside the box a bit from other types of projects. So it's not limited to just oil and gas royalties or oil and gas infrastructure. We've looked at different ways we could participate with CO2 technology, power, other types of pipelines, other types of road infrastructure.
For some of the CO2 stuff, we would be a little more hesitant until there's more firm political policy and defined structure so we can see line of sight to our returns, but definitely have a business model that is applicable to a lot of different types of things.
Because this is a U.S.-centric audience as well, I should mention, in the U.S., it's about 80% fee land, 20% state or federally owned. It's the complete opposite in Canada. 80% would be government-owned, 20% would be fee. So we do think there's opportunity to manufacture more royalties on existing government lands versus going out and just directing traffic at a fee opportunity. Fee is, I would say, mostly tied up by existing royalty companies already. There's only three public royalty companies inside the Canadian space and then one private that upscale. So it's a very small market from a royalty standpoint in Canada.
Okay, that's interesting. That's really helpful. Kind of on that same idea or same point, there was a question. Since we are more U.S. investor-based in the group today, how would you characterize the political climate in Canada and British Columbia for the oil and gas industry?
Yeah, that's a great question. I mean, if you would have talked to me 2 years ago, I would have been very nervous about it. I think the key highlight that we like to talk about is on slide 11, the amount of permitting that Tourmaline's been able to do. Northeast BC had some indigenous objections to a lot of the development out there. Tourmaline was the first producer to go out and work with this group. I think it's reflected in the amount of locations and permits they've been able to license versus the rest of the operators who maybe just didn't pay as much attention to that. So big believer in finding partners that want to work with the stakeholders, not work against them. So I think the climate's improved. We saw a 71% increase last year in well permits for Tourmaline alone.
They got the bulk of kind of industry's permits because of the relationships they have. I mean, federally, we're going into election next year. And I do think that there's going to be a change federally. Never bet on it. So we're going to try to work with whatever political regime is there and do the best of our ability to communicate and cooperate.
Great. Great. Well, it looks like we're getting close to the end of our time here. I know there's a number of questions we weren't able to get to, but just for anybody who's listening, feel free to reach out to me, and we'll try and coordinate questions for you. Marty, Cheree, want to thank you for your time today. It's really great getting an update on Topaz. But I want to give you the last couple of words if there's any closing remarks.
Yeah, I mean, I'd like to remind U.S. investors, if they're new to the Canadian space, I think this is a great place to start. We're tied to Canada's largest gas producer. We've got the highest quality names inside our portfolio. It's a good way to kind of learn the business through us because I think you're going to start seeing these names show up from time to time in a very meaningful way. You look at kind of a lot of the producers that we're tied to, the infrastructure projects we're tied to, they are in the best parts of the basin. They're seeing a lot of growth. They're seeing a lot of capital. We have a staff of 12 people here, so very lean. Everyone's an owner. We put our money where our mouth is, and we believe in being owners inside the company as well.
All right. Great. Well, Marty, Cheree.