Morning. My name is Michelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp first quarter 2022 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star and the number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the number two. Thank you. Mr. Scott Kirker, you may begin your conference.
Thank you, Michelle, and welcome everyone to our discussion of Topaz Energy Corp.'s results as at and for the three months ending March 31, 2022 and 2021. My name is 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&A available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz's President and Chief Executive Officer, and Cheree Stephenson, Vice President of Finance and Chief Financial Officer. We will start by speaking to some of the highlights of the last quarter and our year so far, and after these opening remarks, we will be open for questions.
Marty, Cheree, go ahead.
Yeah, thanks, Scott. Good morning, and thank you for attending the Q1 conference call for Topaz Energy. What a great start to 2022. Topaz's financial results through the last two years have demonstrated a successful business strategy. We're pleased to see investors generating returns and being rewarded with a strong, sustainable dividend that we have increased 30% to date alongside Topaz's growth. Q1 was an exciting quarter for Topaz. During the quarter, we continued to see strong production results and generated material liquids weighted royalty production growth. Our first quarter total liquids royalty production of approximately 3,600 barrels a day was a 277% increase relative to the prior year. Our royalty acquisition strategy has been focused on low decline, highly economic oil plays to complement our best-in-class, liquids-rich, natural gas-focused assets.
Average first quarter royalty production of 16,122 BOE per day was stronger than our expectations and the production profiles we've underwritten in our economics. We continue to see our operators delivering industry-leading results among area top wells. In the Q1 news release, we provided a breakdown of the production by reserve focus and a snapshot of the returns demonstrated by our Q1 results. Topaz shareholders have truly benefited by the recent commodity price strength, as the majority of our royalty transactions were completed at an opportune time in the commodity price cycle at significantly lower prices. During Q1 2022, 137 gross wells, approximately 6 net wells, were spudded on our royalty acreage, 65 of which were brought on production. The remaining wells are expected to be brought on production subsequent to the first quarter.
During Q1 2022, a total of 140 gross wells were brought on production, which is consistent with the prior quarter, with 142 gross wells. Spring breakup conditions have reduced drilling activity. However, eight drilling rigs currently remain active on our royalty acreage, and we expect that four to five of these will remain active through breakup. We expect to have 20-24 rigs active on our royalty acreage following breakup. During Q1 2022, average daily utilization of Topaz's net natural gas processing capacity was 99%, slightly higher than the prior quarter. During Q1 2022, Topaz generated CAD 15.6 million of total infrastructure income, which was consistent with the prior quarter.
Our record Q1 cash flow of CAD 74.2 million is over two times higher than the prior year, and on a per share basis is 6% higher than last quarter. The exceptional financial performance is attributed to successful execution of the company's acquisition growth strategy and the strength of the partnerships we've established. In Q1, Topaz generated a 91% free cash flow margin, which was 2% higher than Q4 2021, and demonstrates our insulation from direct cost inflation. In addition to not being responsible for the capital costs attributed to the exploration and drilling, Topaz has superior inflationary protection as our infrastructure capital expenditures are limited to modest levels of maintenance expenditures only. Certain infrastructure contracts have inflation adjustment mechanisms in them, and we will have limited exposure to rising interest costs due to the moderate leverage position Topaz holds.
Topaz closed the Keystone Royalty interest acquisition on April 29, 2022. Topaz now owns 400,000 acres of fee mineral title land, over 70% undeveloped, which provides incremental exposure to higher drilling activity and complements the high quality additional GORR acreage that is over 50% undeveloped we have established through strategic partnerships and committed operator capital. Many of the top Saskatchewan wells drilled in April were on or near Keystone land, and we have seen strong recent drilling and leasing activity on acquired lands. We've increased our 2022 guidance to reflect the Keystone acquisition and higher commodity prices. Our guidance is estimated using pricing of CAD 5 per Mcf AECO and $90 US per barrel WTI.
Our royalty production ranging between 16.5-16.7 thousand BOE per day to provide for CAD 318 million of EBITDA, which is CAD 370 million on a recent strip price forecast. For our full- year guidance, we've allowed CAD 160 million of total dividends, which follows through on our strategy of continuing to provide dividend increases alongside future growth. On our guidance pricing, we would retain CAD 145 million of excess free cash flow, which will be directed towards M&A growth as we continue to see an ample number of strong investment opportunities. Consistent with our IPO messaging, we believe we can continue to repeat transactions with existing counterparties as well as add new high quality partners.
Based on these estimates, our year-end 2022 net debt to cash flow will be approximately 0.3 times before any further acquisitions, and we have up to CAD 700 million of credit capacity. Plenty of financial flexibility for the right growth opportunities. Happy Mother's Day weekend to everyone and please feel free to ask any questions at this time.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the number two. Please, one moment for your first question. Your first question comes from Aaron Bilkoski, TD Cowen. Please go ahead.
Hi, good morning. You talked a little bit about free cash flow-based acquisitions in your comments, but could you talk a little bit about what you're seeing in the M&A market? I guess I'd be curious, are you seeing more opportunity on upstream royalties or in the infrastructure side of the business?
Yeah. Good morning, Aaron, and thanks for the question. Obviously, I think everyone's pretty aware of all the opportunities that are available inside the basin right now. We're seeing a mixture of both royalty and infrastructure opportunity. That's why we didn't choose to increase the dividend at this point in time. I do think that there's an opportunity, some of this excess free cash flow to participate in some of these growth opportunities. We do think that the infrastructure component, we're aiming to have a deal or two completed by the end of this year. They just take a little bit of time to kind of get done.
I think we need to wait and see what happens with some of these opportunities available with the operators that we're trying to align with.
Perfect. Thanks, guys.
Your next question comes from Josef Schachter Energy Research. Please go ahead.
Good morning, Scott, Marty, and Cheree. Congratulations again on the great results. Two questions for me. First, in the quarter, your liquids volumes of course went up from Q4 and significantly above Q1 of last year, but your natural gas volumes were 75 million a day, down from 84.4 in Q4. Were there any facilities issues during the quarter? Do you expect any turnarounds during Q2, Q3 that will affect your natural gas production data?
Hey, Josef, it's Cheree. We did not have any restrictions or facility constraints or anything, but what we did have is the scheduled Tourmaline contractual GORR changes. Essentially from the formation deal from November 2019, that gas GORR stepped down from 4% to 3%. That was always scheduled in. Offsetting that was the Deep Basin GORR, which was the acquisition related to Modern and Jupiter. That stepped up from 2% to 3%. Now essentially, the vast majority of our GORR on Tourmaline acreage is at 3%. There's no significant other step changes, but we did know that was coming. The total net effect was about 1,600 BOE per day that it was offset by that 600 BOE per day of growth from other operators.
We did expect that gas volume to come down, and that was the only reason for that.
Pardon me, Cheree.
Should we model in kind of flat numbers from here?
You know what? For Tourmaline, we see for the balance of the year, them growing about 3%-5%. I think our guidance has about 3.6%. That sort of, you know, consistent with our five-year plan.
The second part of your question was just around turnarounds. The facilities we're in, majority of the turnarounds have already been done, so we do not expect any downtime on the facilities that we're a part of. I think that was reflected in the 99% utilization we saw through the last quarter. There will be some NGPL maintenance that gets done through the summer, but we do anticipate that it'll be normal course business with our facilities. Because we have the long-term take or pay contracts associated with them, whether the plants are running or not, we still see volumes or the revenue from the volumes being attributed back to the Topaz balance sheet.
Okay, super. Following on Aaron's question about opportunities on the M&A side. In the past you've kind of given comments about the number of data rooms that are available for you to go into. Are you seeing more of those, less of those? Are the deals bigger that you're looking at now? As you mentioned, the reason for holding off on the dividend move. Would you give any, Cheree, any light to that? That'd be of interest.
Yeah, it's a real unique mix right now. Anywhere from quite small to quite large. We are seeing a big quantum of different opportunities available both on the royalty and infrastructure side. Yeah, the data rooms are continuing to be, and we're not going into every single data room either. Yeah, it seems like it's quite plentiful right now.
Good. That's it for me. Thanks very much, and again, congratulations on the good quarter.
Yeah. Thank you, Josef. Have a great day.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one on your touchtone phone. Your next question comes from Patrick O'Rourke, ATB Capital Markets. Please go ahead.
Morning. You know, you sort of have already answered this question a couple of times, and I was gonna ask with respect to the dividend payout ratio being sort of below the target range. Sounds like the focus remains on M&A. I'm just curious, you're talking about upstream, you're talking about infrastructure. Now that we have a bit of a line of sight in terms of some of the carbon capture Investment Tax Credit, and knowing the next components to come will be with respect to Clean Fuel Standard, how active are the opportunity sets in terms of carbon capture and call it new energy or transition opportunities out there for you right now in the pipeline?
Yeah, we're definitely starting to see more of those opportunities. The issue that we're having to participate right now is there's still a little bit of idea flow, not pure businesses yet. We're trying to invest in businesses, not ideas. Something we're walking into, not running into. I think there's some more knowledge gained. I get the investment tax, the ITC, the new rules and regulations around that is very ad. Well, it is advantageous for some of these projects to get built out. You know, I think we need to understand what inflation or costs need to be built into some of these projects when actual true commissioning is on some of these projects, and that's still a little bit of a question mark.
you know, stay tuned. We do hope to facilitate or participate in some of these types of projects, but we really need to understand timing and costs before we sign up to a full-scale opportunity.
Okay. As you kind of sit here with free cash flow often and, you know, whittle away at the debt, you're increasing the liquidity. Does that mean that the scale and the scope of, you know, the potential upside or larger transactions is continuing to increase so far this year?
I think we're in an opportunity now or in a position now where we can participate in larger transactions. You know, at current strip, we mentioned we have CAD 370 million of EBITDA. Keep in mind, October 2020 when we IPOed this company, it was CAD 89 million of EBITDA. We've grown it by four times, and it's a different company than it was in October 2020. I think we can look a little bit above the snack bracket we used to look in. Saying that, we're not shying away from smaller transactions though either.
You know, you think about how a lot of the core business we built, particularly through the Clearwater, was built by smaller transactions, but it was just adding a bunch of the sums of all parts together to get to a larger scale size. You know, last year this time we were 50 barrels a day of royalty production in the Clearwater. Now we're sitting at close to 1,100 barrels a day of royalty production in the Clearwater.
Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from Scott Hawker, Pembroke Management. Please go ahead.
Yes, good morning. From the outside, it's kind of puzzling that there's so much to look at, given that the prices for oil and gas are so good. Is there any way you can just expand on why companies have these data rooms going? Is it principally that they wanna reduce their bank exposure debt, or are there some other general factors that you could comment on that would give us a little better understanding as to why there are so many potential opportunities?
Yeah. I think number one, there's some consolidation that still needs to happen in the basin, and so you're seeing different entities exit the space and certain companies wanting to get larger. The second part of that is private equity has been sitting in this space for quite some time, some of them up to 10 years. At these prices they're looking at an exit strategy, and I think it's a good time to do that. On the flip side, particularly on the producer side, I think they're still looking for forms of capital. The multiple expansion has not happened inside this sector yet. You know, you look at the multiples that some of the companies are trading at are 2.5-3x in Canada in some cases.
I think they're not in a position where they wanna go raise a bunch of equity. Debt is still relatively expensive, and so they're using us as another form of capital to help facilitate some of these transactions.
Fine. Thank you very much.
Thanks, Scott. Good talking to you.
There are no further questions at this time. I will now turn it back to Mr. Staples. Please go ahead.
All right. Well, thank you everyone, and I look forward to catching up with all of you next quarter.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Thank you.