Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp First Quarter 2023 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 1 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the 2. 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 for the 3 months ended March 31, 2023 and 2022. 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 its MD&A available on SEDAR and on the Topaz website. I also draw your attention to the material factors and assumptions in those advisories. I'm here with Marty Staples, Topaz President and Chief Executive Officer, and Cheree Stevenson, Vice President, Finance, and Chief Financial Officer. They will start by speaking to some of the highlights of the last quarter and the year so far. After their remarks, we'll be open for questions. Marty, Cheree, go ahead.
Thanks, Scott. Good morning, everyone, thanks for attending the Q1 conference call for Topaz. First quarter production volume, 18.9 thousand BOE per day set a new record for Topaz. From Q1 last year, production grew 17%, driven by 50% higher total liquids royalty production, partly attributed to the Keystone and Deltastream acquisitions, in addition to operated funded development over the year. From the prior quarter, production grew 3%, driven by a 4% production increase in Northeast BC Montney. In addition to strong activity and production results across our fee title mineral position. Royalty production across our other core areas was generally consistent with the prior quarter and saw maintenance development activity. In Q1, 164 gross wells were spud, and 183 gross wells were brought on production.
First quarter drilling was diversified across Topaz's portfolio as follows: 30% Clearwater, 22% Northeast BC, 18% Deep Basin, 13% Peace River, 10% West Central Alberta, and 7% Southeast Saskatchewan. Of note, 36 gross wells were spud in Northeast BC Montney during the first quarter, which is a 71% increase from Q4 2022. In the Clearwater, operators continue to advance waterflood development. 10% of the 63 gross wells spud are injection wells. At March 31st, Topaz had 88 gross wells drilled but not yet brought on production, which is a 22% increase from Q1 2022. Topaz continued to see consistent development and top performing wells drilled across its royalty acreage in each core area, as well as strong activity from its fee title mineral portfolio.
Through the first quarter of 2023, the operator working interest production across Topaz's royalty acreage represented approximately 9% of total Western Canadian Sedimentary Basin production, and the 27-29 active drilling rigs across Topaz's acreage represents approximately 12% of the total active rig fleet across Western Canada. Based on planned operating drilling activity, Topaz expects to resume 27-29 drilling rigs active on its royalty acreage following spring breakup, with 3-4 rigs maintained active through breakup. Our Q1 royalty production revenue of CAD 60.9 million was 39% weighted to natural gas and 61% to total liquids, and we did realize sour and heavy crude oil differential pricing pressure in Q1, which has alleviated into Q2. Topaz realized pricing before hedging was CAD 3.23 per Mcf of natural gas and CAD 87.50 for oil. That is paid.
Topaz realized CAD 0.63 per Mcf hedging gain on gas and CAD 1.31 per barrel on hedging gain on oil. Our infrastructure business continues to provide stable, inflation protected income, which enables strong dividend support. Through Q1, we once again realized 99% utilization on our natural gas processing capacity and generated total processing revenue and other income of CAD 17.3 million. We improved CAD 1.9 million in operating expenses in Q1, resulting in an operating margin of 89%. Our Q1 annualized infrastructure operating income of CAD 62 million represents 36% of our annualized Q1 dividend. First quarter, Topaz generated CAD 71.3 million or CAD 0.50 per diluted share, we distributed 50% of capital to shareholders through dividends.
Our excess free cash flow was allocated to debt repayment, which resulted in 7% reduction to our year-end 2022 net debt. At March 31st, Topaz had CAD 376.5 million of net debt, which represents 1.1x net debt to cash flow and approximately CAD 600 million of available credit capacity, which provides financial flexibility for strategic growth opportunities. We have confirmed our previously announced 2023 guidance assumptions, including average annual royalty production ranging between 18.3-18.8 thousand BOE per day, the midpoint of which represents 10% growth over 2022 and approximately CAD 65 million in annual infrastructure revenue. Given the strong first quarter production, we may update our volume guidance in conjunction with second quarter results once we determine the impact of spring breakup on our Q2 production volume.
We hope to see you at 9:00 A.M. for our AGM, Calgary Petroleum Club on June 14th, and look forward to discussing Q2 with you on the next call. We're pleased to answer any questions at this time.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the 1 on your touch-tone phone. You will hear a 3-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. The first question comes from Matthew Weekes of iA Capital Markets. Please go ahead.
Good morning. Thanks for taking my question. Just wondering if you could kinda comment on the outlook for potential acquisition activity, you know, and, you know, given the strong state of the balance sheet as of last week, the amount repaid in the quarter, and just kinda what you're seeing out there in terms of, you know, royalties versus infrastructure? Thanks.
Yeah. Thanks, Matt. It's been a mix between the two. We're seeing some royalty opportunity, some infrastructure opportunity. One thing we're very cautious of is just this year, I think with more cash on the balance sheet, as you indicated, we have seen some of the opportunities go down this year. you know, we've always kind of looked at this company, this portfolio as high quality assets. We're always very cautious to kind of proceed with M&A that doesn't keep that value inside our organization.
Okay, thanks. I appreciate the commentary on that. Just one more question from me. In terms of, you know, has Topaz looked at different ways to sort of diversify their gas price exposure, you know, over the long term to get different hubs, whether it's through sort of different hedging strategies or potentially, you know, different contract structures in the cores and with your payers? I'm just wondering if that's something that's sort of being looked at for the long term. Thanks.
Hi, Matt, sure. We definitely look at this all the time. You know, we don't hold or carry transport, and we don't take in kind at this point. We are, you know, for the Tourmaline gas production, we are paid on an AECO 5A basis. We've done financial contracts overlaying that, and we've done, you know, fixed swaps. We've also balanced the exposures to 5A and 7A. Recently we've done some diversion to NYMEX pricing for about 10% of our gas volume. In addition to that, we're, yeah, constantly looking, but, you know, if you don't hold transport, don't have access to the transport, you don't wanna do anything synthetically that, you know, would expose us to higher risk. One thing just to note, though, is we do not pay transport costs.
We just pay that 1% marketing fee. That does obviously vary with commodity price. In the quarter we paid CAD 369,000 in marketing fees due to the reduction in gas price. That's a lot lower, if you do the math, on about CAD 0.40 an Mcf average transport cost within the basis. You feel we are winning there. But we will continue to look to diversify if and where we can.
Okay. That makes sense. Thanks for the commentary. I'll send the call back.
Thanks, Matt.
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one at this time. The next question comes from Josef Schachter of Schachter Energy Research. Please go ahead.
Morning, everyone. Just to follow up on Matt's question about the M&A side. With as you mentioned in the call and in the notes as well, 61% liquids, 39% natural gas. If you wanna be considered a natural gas royalty income producing company, are you gonna be looking more towards natural gas deals going forward or natural gas condensate? How do you, how do you see the mix given the heavy oil has grown so much in the last couple of quarters?
Hi, Josef. Thanks for the question. You know, keep in mind that's a revenue number that we put out. In our portfolio right now, 70% of our royalty acreage is exposed to natural gas. 30% is oil, liquids weighted. We always do think we'll be predominantly weighted to natural gas. If you think about the complex that's setting up right now, particularly in Northeast BC with Tourmaline's Conroy build-out, that is the largest project we'll see in Western Canada over the next 2 years. They're gonna build a 400 million day facility. We already have a royalty on all of that acreage. Really the 400 million a day facility they build and all the drilling activity that takes place, we've already paid for that.
We are exposed to the biggest growth project in Western Canada. You know, what that translates to us is about CAD 100 million of EBITDA at forward strip pricing, without us spending any additional dollars. As much as liquids is now, we've got this Tourmaline company that's gonna come up from behind, and I think that'll fill the natural gas wedge that we've kind of gave a little bit. We do always expect we'll be 70%-75% exposed to natural gas overall in our portfolio. It's just with the big kind of gap in pricing between oil and natural gas right now, we are seeing some bigger revenue stream from the oil side. We do expect that gas wedge is gonna soon kind of expand.
We are bullish on gas going into the future, particularly with Conroy.
Yeah, one last one. When is Conroy coming on, and when does that start impacting, your financial statements?
They started ordering construction for the facility up Conroy already. We do anticipate by the end of 2024 that facility will be close to being built for sure by 2025. They wanted to time it around LNG Canada. We do think by 2025 we'll start seeing some results. You know, that production just doesn't all show up at once, so they've got to step up into filling that facility. We do think the latter part of 2024 we'll start seeing some activity to kind of get ready to fulfill the obligation of that 400 million a day facility. You know, in the meantime, I think that's gonna bode well for gas price dynamics.
Okay. Thanks very much for answering my questions.
Thanks, Josef.
Thank you. The next question comes from Aaron Bilkoski of TD. Please go ahead.
Good morning. My question is on non-oil and gas royalties. In this last quarter or so, we saw Freehold talking about exploring non-oil and gas royalty opportunities, PrairieSky, highlighting potash revenue and water disposal revenue. I'd be interested to hear your thoughts on, A, your interest in non-oil and gas royalties, and B, what that market potentially looks like.
Yeah, for sure. You know, one of the added benefits of us increasing our fee exposure through reserve royalty and Keystone, tapping some of the ancillary leasing that we've seen on that acreage. Pot ash has been one of those products that we've seen some leasing activity on, lithium and helium being the other one. Although smaller in scale, it's been an added benefit, one that we didn't pay for when we were evaluating or purchasing these companies. A nice win for us alongside. You know, still some activity that needs to happen in its early stages, I think, from the lithium and helium side in particular, in southeast Saskatchewan. We're not looking to expand that business in any significant way. I think we're sticking to what we know best, and that's natural gas and oil.
Although, you know, from time to time we do explore opportunities in that part of the system, it just hasn't been something that we've been willing to invest in because have not been able to realize true returns there. Keep in mind, we do have one of the biggest CO2 EOR projects we're attached to, that's a carbon negative gross overriding royalty with Whitecap in southeast Saskatchewan. You know, it is kind of outside the box and we do like the revenue that we're able to achieve from what we call that carbon negative gross overriding royalty.
Thank you very much. I appreciate that.
Thanks, Aaron.
Thank you. The next question comes from Davis, RBC. Please go ahead.
Yes. Yeah, thanks. Good morning. Heard some good commentary on the gas side of the business. Just wondering if you can also speak to the organic growth profile on the oil side, and whether there's any limiting capital commitments to continue to drive that higher?
Yeah. We've got about CAD 40 million of capital commitments left in the Clearwater, which we are, you know, we're still seeing a lot of activity in there. When we talk about the 27 and 29 rigs, 13-14 of those rigs are with Tourmaline, the others would be kind of Tamarack, Headwater, and some other operators through southeast Saskatchewan and west central Alberta. You know, quite active there. We know the capital commitments. They should be completed by next spring of 2024. In good position there to keep activity kind of growing, and we do see growth inside of Clearwater. One of the big upsides we've seen inside the Clearwater is the waterflood. We were on project 5 or 10, grade now going to project 6. Those are not all on our royalty land.
a couple belong to Spur. The other ones belong to Tamarack Valley and Headwater. Headwater's had some big strides made forward and pretty flat production overall. doing exactly what they thought it was going to do. we're really pleased with kind of the steep, the steep flat curves that these waterflood projects have kind of, been able to achieve. Anything else, Cheree, you'd like to mention there?
Sure. For 2023 in total, we would expect about CAD 500 million to be spent on our lands, kind of via our key heavy oil operators, with about 25% of that having been spent, so about CAD 400 million for the balance of the year. That's not a formal capital commitment, but we do see, you know, the attractiveness of the asset market dynamics that, you know, being pretty resilient to any changes in capital spending. Through Q1, we saw roughly CAD 40 million allocated to sort of other areas or our fee mineral title acreage. You know, those dollars are maybe more a bit susceptible to, you know, changing commodity prices or volatility.
We kind of see somewhere, you know, north of CAD 20 million after the CAD 40 million on that type of acreage, as kind of a, you know, nice to have, not we're-not-counting-on-it type of capital. Key operators, we don't see any of those capital budgets changing. You know, it kind of just shows the strength of those key operators on our acreage.
Okay. Super helpful. Thank you.
Thank you.
Thank you. If there are no further questions, I will turn the call back to Scott Kirker for closing remarks.
Thanks, Michelle. On behalf of Marty and Cherie, thanks everyone for listening, and we look forward to speaking with you in the next quarter at the AGM on June 14th.
Thank you.
Thanks, everyone.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and now you can please disconnect your lines.