Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp third 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 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. Cheree Stephenson, you may begin your conference.
Thank you, Operator, and welcome everyone to our discussion of Topaz Energy Corp.'s results as at September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021. My name is Cheree Stephenson. I am the Vice President, Finance, and Chief Financial Officer 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 today with Marty Staples, Topaz's President and CEO. 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, please go ahead.
Good morning, and thank you for attending the Q3 conference call for Topaz Energy. Nothing better than starting a Q3 call with a blizzard in Calgary. Topaz has had another active Q3. We continue to see active operator development on our royalty acreage, reliable infrastructure income, and have added some meaningful, high-quality assets to our portfolio. Topaz's unique business strategy, which generates high margin inflation-protected income streams from top quartile resource plays, remains our continued focus as we evaluate further M&A growth opportunities. Q3 marks two years since our IPO, which we've demonstrated year-to-date annual cash flow and royalty production growth. Q3 year-to-date results represent 2 x cash flow and 1.3 x average royalty production growth since year-to-date Q3 2020.
We are pleased to officially declare our fifth dividend increase 50% to date to CAD 0.30 (Canadian Dollar) per share, which represents over a 5% dividend yield at our current share price. The dividend increase reflects a balanced approach where we maintain financial flexibility to reduce debt and continue our acquisition growth strategy to provide further sustainable increases to our dividend. During the third quarter, Topaz generated cash flow of CAD 77.9 million (Canadian Dollar), free cash flow of CAD 77 million (Canadian Dollar), and a record free cash flow margin of 94%. Q3 cash flow and free cash flow were 53% and 55% higher than the prior year. On a fully diluted share basis, third quarter 2022 free cash flow was 39% higher than the prior year.
Our hedging strategy, which is focused on protecting summer gas volatility and acquisition metrics at higher commodity prices, resulted in a gain in Q3. Topaz's average natural gas price realized during the quarter was 43% lower than the prior quarter as Western Canadian Sedimentary Basin natural gas prices experienced significant volatility during the period due to maintenance and expansion activities on mainline natural gas transmission infrastructure. Topaz realized a CAD 3.5 million (Canadian Dollar) natural gas hedging gain during the quarter, which represents CAD 0.50/MCF, a 12% increase to Topaz's third quarter natural gas price.
Average third quarter royalty production of 16,485 BOE per day grew 9% and total liquids royalty production grew 83% from the prior year, driven by 71% organic growth from our Clearwater royalty interests that were acquired prior to Q3 2021. Third quarter Clearwater royalty production averaged 1,146 BOE per day and is expected to average over 2,400 BOE per day during the fourth quarter, which includes the recent Deltastream acquisition. Our third quarter royalty production was slightly below Q2 due to planned and unplanned maintenance activities that limit certain natural gas and NGL processing capability. Also, in response to natural gas price volatility, certain natural gas production was temporarily shut in and start-up of certain new production was deferred to the fourth quarter to receive higher pricing.
At the end of the third quarter, 118 gross wells spud on Topaz's royalty acreage in 2022 had not yet been brought on production. Topaz invested CAD 316 million (Canadian Dollar) in royalty acquisitions for previously announced royalty interests across 300,000 acres in the Clearwater, Peace River, and Deep Basin areas of Alberta. These acquisitions are expected to provide incremental fourth quarter average royalty production of approximately 1,200 BOE per day and CAD 9 million (Canadian Dollar) in revenue on current strip. The working interest operators on Topaz's royalty acreage spud 169 gross wells. Drilling activity increased 65% from the prior quarter when 102 gross wells were spud.
During the third quarter, 169 gross wells were brought on production, which includes 144 new gross wells spud, a 29% increase from the prior quarter, and 25 gross wells were reactivated in response to strong commodity pricing. To date in 2022, the working interest operators across Topaz's 6.1 million gross acres have spud 408 gross wells, which is a 42% increase from the prior year when Topaz owned 15% less acreage. Therefore, we saw increased activity from existing operators in addition to acquisition-related growth. In addition, year-to-date in 2022, 92 gross wells have been reactivated that were not on production when Topaz acquired the underlying royalty interests.
Throughout the third quarter, Topaz had between 20 and 28 drilling rates active across its royalty acreage, and drilling activity is expected to increase through the fourth quarter. Topaz estimates its fourth quarter royalty production will range between 18,400 and 18,600 BOE per day based on operator planned activity levels and incorporating the royalty acquisitions which closed at the end of the third quarter. Topaz invested CAD 12 million (Canadian Dollar) in infrastructure assets with long-term fixed take-or-pay contracts that provide approximately CAD 1.5 million (Canadian Dollar) in incremental annual fixed revenue. In addition, Topaz has entered into agreements to invest up to CAD 8 million (Canadian Dollar) during the fourth quarter of 2022, and the option to invest up to CAD 25 million (Canadian Dollar) in 2023 for final completion and future expansion of its water management assets.
Topaz's average daily natural gas processing capacity in Q3 was 208.2 million cu ft a day, 80% of which is under long-term fixed take-or-pay contracts. During Q3 2022, Topaz's natural gas processing ownership was 99% utilized, generating CAD 13.1 million (Canadian Dollar) of processing revenue from Topaz ownership share of natural gas processing facilities and water management infrastructure. Topaz also generated CAD 3.1 million (Canadian Dollar) of other income in Q3 2022, attributed to its contractual interest in other Tourmaline-operated infrastructure. Topaz year-to-date processing revenue of CAD 39.1 million (Canadian Dollar) has increased 16% from the prior year, which is attributable to 1% higher year-to-date utilization, incremental investment, and certain fixed processing fees pursuant to the respective contractual arrangements. Topaz utilized a portion of our four-year CAD 700 million (Canadian Dollar) covenant-based credit facility to complete acquisitions.
Our estimated 2022 and 2023 dividend payout ratio remains below our targeted long-term payout ratio of 60%-90% and provides significant excess free cash flow to repay debt and replenish credit capacity in order to maintain financial flexibility to acquire assets countercyclically or focus on infrastructure acquisitions during periods of higher commodity prices. As of November 1st, 2022, Topaz has CAD 2,225 million (Canadian Dollar) of credit capacity and estimates its 2022 exit net debt to EBITDA at 1.1x, which is estimated to reduce approximately 0.6x at the end of 2023 before giving any effect to incremental acquisitions. We have increased our guidance estimates to incorporate our year-to-date financial results and acquisition activity, including CAD 8 million (Canadian Dollar) in additional infrastructure acquisitions in the fourth quarter.
Estimated 2022 annual average royalty production between 16,900 and 17,100 BOE per day and total infrastructure income between CAD 64 million (Canadian Dollar) and CAD 65 million (Canadian Dollar). Based on recent commodity price forecasts, our estimated 2022 EBITDA range has increased CAD 354 million- CAD 356 million (Canadian Dollar). After payment of 2022 estimated dividends of CAD 157 million (Canadian Dollar), Topaz expects to generate CAD 182 million- CAD 184 million (Canadian Dollar) of excess free cash flow exiting 2022, with estimated net debt between CAD 393 million (Canadian Dollar) and CAD 397 million (Canadian Dollar). Topaz recently published its 2021 Sustainability Report, which was enhanced from prior year through the adoption of TCFD disclosures and third-party verification of certain performance data. The report is available on our website.
We look forward to discussing Q4 with you on the next call and we're pleased to answer any questions at this time. Go ahead, operator.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by one. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Matthew Weekes at iA Capital Markets. Please go ahead.
Good morning. Thanks for taking my question. In the slide in your updated investor deck on the, you know, growth rate profile the next few years, it kind of projects a 10% average growth rate in the Clearwater there. Had some commentary from one of your competitors recently on significant, you know, discoveries in Nipisi and Marten Hills area, and then strong, you know, growth projections there. I'm wondering if there's any conservatism in your forecast for Clearwater growth over the medium term here.
Hi, Matthew. Yeah, there's a bit of conservatism only because we don't control the capital. We do kind of take into consideration different corporate strategies that may come into play or allocation of capital to waterflood or infrastructure. We're pretty sure that we'll see that 10%, but upwards would be great. You know, given we don't control the capital, we don't wanna fully count on it.
The other comment there, Matthew, too, is we haven't given a lot of upside to waterflood yet because I think right now there's 17 pilots and five actual producing waterflood outlets. You know, that's gonna be a big benefit to us long term, where it extends the economics of the play and the reservoir quality. We do see recovery factors increasing, but we haven't baked any of that into our numbers yet.
Okay, thanks. I appreciate the commentary on that. Maybe just a second question for me. You know, can you comment on how your enhanced oil recovery royalties going right now and how you're sort of seeing that production and recovery rates kind of trend maybe relative to initial expectations?
I think it's right in line with initial expectations. In fact, it's one of the assets we don't have to worry about. The decline, I think, when we modeled it, was about 3%, and it's actually not declining at all. It's stayed pretty flat. They continue to capitalize it at an appropriate level, and it's just easy like Sunday morning. We really enjoy that asset, and it is exactly what we thought it was gonna be. I think what we'll see go forward is some rollouts as far as projects go. Ultimately we'll probably see some better production results. Yeah, that's been a pretty flat profile for the Topaz story. Cheree, any comment on that as well?
No, that's great. Yeah.
Okay. Thank you. I appreciate that. I'll put in the call back. Thanks.
Thank you.
Thank you. Next question comes from Josef Schachter at Schachter Energy Research. Please go ahead.
Good morning, Cheree and Marty, and thanks for taking my calls and questions. Couple questions. One, I'm just wondering how you approach and perceive the Clearwater compared to the Montney. The Montney, you know, you have multi-stacked zones. You have, you've got everything from light amounts of liquids to, you know, big condensate numbers in the Grande Prairie area and then oil to the east. How do you see the Clearwater? Do you see multi-zones? Do you see sweet spots? You know, how do you approach that in terms of the way you decide to go after more land? How detailed do you get on it?
Do you just say the client we're working with knows the play well, and we're just gonna follow along with them? How detailed do you get involved on the G&G side?
Yeah. Thanks, Josef, and nice to talk to you again. Obviously very different plays. You know, Clearwater doesn't require any fracking. It's basically a, you know, we look at this play as a hedge on inflation. You've got a drill and drilling rig that goes in and gets these great results, and then on the back end, it's a truck. But no, we ultimately have our own technical team who is very strong geologist, engineer, and they spend a lot of time. In fact, our mapping a lot of times replicates what we see by the producer mapping. We always do independent mapping and reservoir work, and so that's been a function in all of our areas.
We've hired some expertise in both those areas, both those plays, and I would say all of the plays across the basin. We do a deep dive into the geological kind of ideas in front of us, that would be reflected in the Clearwater, the Montney, and then we have an in-depth look at the reservoir as well. In fact, you know, with the Deltastream deal in particular, we'd approached them about 20 months ago to try and acquire a royalty with all sorts of different ideas, and that was mainly the brainchild of our technical team. We do not rely on operators' mapping. We do confirm it with some of their mapping, but we absolutely do all of our own technical work.
From a near-term growth perspective, I think we're gonna see the most growth in our company out of the Clearwater over the next three years. It grows fastest in our portfolio. Mid-decade, when LNG Canada comes on, and I think if you look through our slide deck and look to kind of the Northeast BC slide on slide six, you can see the growth that we see inside BC. It grows two and a half times faster than Topaz essentially. It goes from 4,000 barrels to almost 10,000 barrels of production, and that's all based on Tourmaline's kinda five- to six-year plan. It is the largest growth project in Western Canada, and we have a royalty on all of it via Tourmaline already, and just the Tourmaline lands, not all of the play.
We like the Montney though, and I think, you know, you kinda hit the nail on the head where there is different parts and pods of the Montney. In Northeast BC, you go from a dry gas to a liquids rich gas all through BC with very efficient operating and CapEx costs. Where Alberta Montney, you know, has a very, kinda more liquid rich portfolio to it, and the costs are higher. We think we're in the red part of the Montney as well, and we do look to expand our Montney presence over time.
Just a little more on the Clearwater. Do you see sweet spots there, like, where there's more, you know, a certain amount in tier one than tier two? Have you guys kinda gone into that kind of detail and watched where your operators are or where the owners are drilling versus where you think tier one, tier two is?
Yeah, absolutely. I think, you know, if you look through our deck and look at where Nipisi and Marten Hills kind of rank, what we did as part of our in-depth look was an oil in place number. If you kinda take a peek at our deck, we looked at the pods or the areas that had the most oil in place, and that's where we focused a lot of our attention. I would, you know, say some of the other royalty companies did the same. Marten Hills, Nipisi, Peavine are kind of the top three plays.
We think there's the most running room though from an oil in place in Nipisi, Marten Hills, and that's where we identified a place that we wanted to be, and I think we've got a material position in that. From a bench standpoint, we've identified three benches inside the Clearwater. I mean, they are not the thickness that you would see in the Montney, but they are three benches that we think can be all easily exploited.
Okay. One more from me. Wanting to buy more, and getting more involved in the infrastructure area, the KAPS Pipeline is up, and of course, you have an operator with Keyera. Is that something that would fit your review and, if the price was right, fit the portfolio?
I think we'd have to understand what the final costs are on that project. I mean, we've seen through a few different press releases, they continue to escalate. I don't think we'd be in a position to take the full 50% that's available. If we could work with somebody, yes, maybe, but it would all have to be at the right return for us. You know, one thing I think you can see from the deals we did through the quarter, we're looking for, you know, return that has been similar to what we've been able to achieve prior to any other transactions.
The new water transaction we did with a public company called Pipestone, and we disclosed that in our corporate deck, is similar to the transaction we would've done with NuVista on our water handling. You know, kinda back to your point on the Montney, there's other things to do, not just capture a royalty on the Montney. It does require infrastructure, not just gas processing, but also water handling. That's an area we've been focusing on because we do think that these are plays that need to be capitalized.
Super. That's it for me. Thank you very much for answering my questions.
Yeah. Thanks, Josef. Good to talk to you.
Thank you. There are no further questions. You may proceed.
Okay. Thank you. I look forward to talking to everybody in Q4.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.