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Good morning. My name is Ellis and I'll be your conference operator today. At this time, I would like to welcome everyone to the Topaz Energy Corp. Fourth Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. Mr. Scott Kirker, you may begin your conference.
Thank you, operator, and welcome, everyone, to our discussion of Topaz Energy Corp.'s results as at and for the year's ended December 31, 2021 and 2020. 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 am here with Marty Staples, Topaz's President and Chief Executive Officer; and Cheree Stephenson, Vice President-Finance and Chief Financial Officer. We will start by speaking to some of the highlights of the last quarter and of the year so far. After their remarks, we will be open for questions.
Marty, Cheree, please go ahead.
Thank you, Scott. Good morning and thank you for attending the Q4 conference call for Topaz Energy. First off, I'd like to thank all of our management, staff, directors, shareholders, partners, analysts, advisors and all the others who have supported Topaz.
Cheree and I are closing in on our second year at Topaz which, as you know, was at the beginning of a world pandemic. We're encouraged that this chapter is looking like it is well behind all of us. With the beginning of another major macro event, we hope that the conflict can be settled peacefully and quickly.
Now, jumping into Q4, it was another busy and exciting quarter for Topaz, and we're pleased to look back on the growth we've accomplished through 2021, which we believe was at the right stage in the commodity price cycle.
In the fourth quarter, we generated record cash flow of CAD 68 million. For the full year, we generated cash flow per share of CAD 1.54, which was 57% higher than 2020 at CAD 0.99 per share. We're also pleased to announce our third dividend increase to-date to CAD 1.04 per share, which represents a 30% cumulative increase since our initial dividend was set at CAD 0.80 per share.
The dividend is consistent with our messaging that we aim to provide modest and sustainable dividend increases alongside growth. During the past few months, we've opportunistically layered on some hedging with a focus on summer gas price protection. We have hedged approximately 30% of our summer 2022 gas production at an average price of CAD 3.94 per mcf. When you combine our stable infrastructure income and moderate hedging, our 2022 dividend is fully covered even at ultra-low commodity pricing.
Our royalty acquisition strategy isn't focused on low decline, highly economic oil plays to complement our [ph] best-in-class (00:03:09) natural gas exposure. In the fourth quarter, we realized better-than-anticipated production results and 48% liquids weighted royalty production growth.
When we released our November 2021 guidance update, we estimate estimated fourth quarter royalty production of 16.7 thousand BOE per day and Q4 actuals came in at 17.2 thousand BOE per day. We saw higher production from a number of our partners, including Headwater, Tourmaline and Reserve Royalty counterparties, while our other operators continue to meet or exceed initial forecasts.
We estimate a minimum of CAD 1.5 billion in capital deployment on our royalty acreage in 2022. Through Q1, we expect there will be between 21 and 24 rigs active on our royalty lands. For the fourth quarter – so for the quarter there were 143 gross wells spud on our acreage and 142 gross wells were brought on production. A number of wells that were brought on stream in Q4 were Q3 drills, and there are significant Q4 drills, which are scheduled to be brought on production in Q1.
We have maintained our 2022 production guidance range at 16,100 to 16,300 boe per day. Assuming commodity prices of CAD 4 AECO and $75 WTI, we estimate 2022 EBITDA of CAD 270 million, which represents a 39% increase to 2021 EBITDA of CAD 194 million. After payment of our increased dividend, we estimate we'll have CAD 115 million of excess free cash flow, which we plan to direct towards M&A growth as we continue to identify new 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.
During Q4 2021, average daily utilization of Topaz's net natural gas processing capacity was 97%, consistent with the prior quarter. During Q4 2021, Topaz generated CAD 16 million of total infrastructure income, compared to CAD 16.6 million generated in the prior quarter.
In 2021, we invested a total of CAD 945 million in royalty and infrastructure acquisitions, which increased our royalty acreage 77% and natural gas processing capacity by 23%. In addition, we diversified our infrastructure portfolio through the acquisition of a water conservation facility under a fixed take or pay contract, and doubled our corporate tax pools to CAD 1.8 billion.
On current strip pricing, the cumulative 2021 acquisitions are estimated to generate a return on capital of 16% in 2022, based on an estimated free cash flow of CAD 149 million. In 2021, our reserves increased significantly. 92% growth in our proved plus probable net present value discounted at 10% from CAD 592 million in 2020 to CAD 1.1 billion in 2021. This includes a 29% increase in the economic value attributed to our infrastructure cash flow.
Our proved plus probable reserves volumes increased 82% from last year. We added 18 million boe of proved plus probable reserves through our acquisitions and the operators on our royalty acreage generated 6 million boe volume additions. At no capital cost to Topaz, 118% of our 2021 production of 5.1 million boe was replaced with development drilling by our operators.
In the fourth quarter, we expect to – we expanded our credit facility from CAD 400 million to CAD 700 million and extended the term to December 2025. At year end, we had net debt of CAD 234 million or 0.8 times net debt to Q4 2021 annualized cash flow. We've set a number of corporate ESG commitments and targets, which we look forward to reporting in our 2021 sustainability report targeted for early fall 2022 release.
At this time, if there's any questions, please feel free.
Thank you. [Operator Instructions] Your first question comes from Aaron Bilkoski with TD Securities. Please go ahead.
Thanks. Good morning. My question is around production cadence through the year, given the royalty [indiscernible] (00:07:48) you talk about how you would expect production to trend on a quarterly basis through 2022?
Yeah. So, I'd say, we'd speak more to an annual rates. We see about 16,200 boe/d as our midpoint of our range for 2022. We definitely see cadence of growth through the year. But we do see very positive results from a number of our operators. But we have sort of maintained the forecast we've set previously.
Ultimately, we don't control the CapEx. We do as best as we can, but we don't have full disclosure of drilling plans. Also we don't have a [indiscernible] (00:08:31) on all acreage for all of our counterparties. So there are some factors built into our modeling to account for some of that other lands that they need direct capital to.
And also, we've accounted for water flood capital spending which, trades off near-term production growth with long-term and has economic value. So we're, we're very confident in the 16,200 boe/d we've presented and hope to have some upside to that, but I want to see how Q1 comes through and then we'll revise the guidance accordingly.
Yeah. And one comment there to Aaron is we are going to see some updated five year plans from a couple of operators this week being Tamarack Valley and Tourmaline. And so, we will adjust accordingly. We don't get that information beforehand, obviously. And so, we do kind of like Cheree mentioned, the capital costs and some of our capital commitments are actually fully spent as well that we've put in place. So they've accelerated those programs. The Tamarack Charlie Lake capital commitment has been finalized and the Headwater capital commitment has been finalized. So, well ahead on, on both of those capital commitments.
Perfect. Thanks, guys.
Thank you. Your next question comes from Patrick O'Rourke with ATB Capital. Please go ahead.
Oh, hey, guys. Good morning, thanks for taking my question. Results in the quarter tend to be pretty consistent, pretty solid and in line with our expectations. One thing that's obviously opaque and difficult to predict is the M&A or the acquisition environment for Topaz out there. I noticed you talked about 15% historical ROIC, which is well above what we gauge to be a cost, weighted average cost of capital around 9.5%. You're guiding to 10% to 13% for that sort of CAD 115 million you have to deploy in 2022. And just wondering how the nature of the acquisition landscape is changing and where the sort of most attractive deals are right now?
Yeah, and good question. So, we kind of thought with this higher commodity cycle, we wouldn't see as much opportunity in the M&A environment and it's been quite the opposite. It's been very active. We're in a number of data rooms right now. I think the big key to it is to maintain our discipline, though, and we don't want to go out and acquire at all costs. And so, that was one of the comments or in your question you asked is – there is a cost component that goes along with this where we've got to maintain discipline? Lots of good opportunity but that doesn't mean we have pay an egregious amount. It is at the high end of the cycle right now, we think. Anything else Cheree you'd like that?
It is a time we can focus more on infrastructure. We don't see those multiples changing as much. Some of the deals take a bit longer to do because we're a bit pickier to make sure that – it's within our strategy. And then I'd also comment that the enhanced environment and better commodity prices expanded our opportunity set where some more intermediate or smaller cap producers maybe are more in our line of sight as opposed to two years ago, and we probably wouldn't have ventured into that space with the Probably wouldn't have ventured into that space with the debt levels and the position some of those operators were in.
Does the sort of increasing interest rate cycle that we're heading into here – given, you know, the nature of infrastructure assets and the timing of cash flows there to make those deals sort of more attractive relative to core deals at this point in time.
It just depends on the asset. But – yeah, we – we would like to continue to have a balanced portfolio both and as long as it meets our strategy where there's a good contractual strength and newer quality high utilization, we're definitely willing to look at those.
Yeah, and interest rates are going to play into that a little bit. Obviously, I mean, we're going to see I think lending rates are probably going to be impacted by that. And so, we do think that, that might actually benefit our business because we're competing against some of these higher interest rate net debt type scenarios.
Yeah, that's sort of what I had in mind there, especially with the longer duration nature of those assets and the sensitivity and then just one more question, I think pro forma we're estimating the dividend payout ratio in and around 54% right now. And could you just remind us sort of what the guideposts for the target dividend range will be going forward? And sort of what are the levers or sensitivities that that kind of gravitate you towards upper end and lower end?
Yeah, 50% to 90% is what we've always guided towards. Like you mentioned, we are below that right now, even after the dividend increase.
Why we didn't go out and increase it more aggressively. Obviously, we've had a big run in commodity price that is this long-term or is it short term. I think we got to watch the macro environment and see if that is something that we don't want to be – react to it too quickly. In addition to that, as I mentioned like we are seeing a lot of opportunity right now and we have this excess free cash flow that we think growth is still a function of this company. And if we can grow in this environment, we want to use excess free cash flow to do some of that.
Okay. Thank you very much.
Thanks, Patrick.
Thank you. Your next question comes from Josef Schachter with the Schachter Energy Research. Please go ahead.
Good morning, guys, and Cheree, Scott and Marty, and Cheree, congratulations on the great year and the increase in the dividend. Two questions for me. One, do you guys have any kind of guideposts are you're looking at for the mix of business, as you, as you mentioned your 82% natural gas now and targeting, you know, 78% for next year. Do you have a minimum that you want to stay at and continue to be a natural gas focused royalty payout firm?
Yeah. We definitely want to be focused on natural gas. We think you look across the environment right now, it's setting up very nicely for natural gas and across North America, I think we're the only royalty company that is focused on natural gas and probably one of the larger royalty companies that are exposed to it with one of the best operators in North America. We've always targeted about 75% natural gas, 25% oil liquids. So that's ultimately where we want to be. So a significant component of this company will always be tied to natural gas.
Okay. Super. And my next question is, have you contemplated going across the border and looking at deals in the US as well as having your big exposure area, the large exposure in Canada?
Yeah. Absolutely, we've looked at some things in the US. I mean, it's a space that we haven't participated in as a management team, as an executive team. And so, a little cautious looking into that space.
Right now there's just a bunch of opportunity in Canada that we'd like to focus on. And from a royalty standpoint, there's three to four other royalty companies out there. So it's limited competition. You look in the US, there's 10s to 20s to hundreds of royalty companies if you go to the small cos. And from an infrastructure standpoint, I think we're doing a little bit of a different business here. And so, we do think we've got a competitive advantage in Canada. And like I said – a lots to do in Canada still.
Okay, super. Thanks very much. That's it for me and congratulations on another great year.
Yeah. Thanks, Josef. Good talking to you again.
Thank you. Your next question comes from Matthew Weekes with IA Capital Markets. Please go ahead.
Good morning, thanks for taking my question. Just looking at the guidance and thinking about commodity prices where they are, at least in the short-term. I'm just wondering what some of the gives and takes are on the guidance. And if you see upside going forward here based on your hedging program, and I know you talked about the hedging as far as natural gas goes into the summer, but maybe if you could also provide a comment on your hedging program for crude oil.
Yes. So, we layered on a small amount of hedging in Q4 from a WTI perspective, so total liquids, we are about 15% in 2022 and the WTI just under $74. That was focused on Q4 acquisitions that at the time were done near the top of – the higher end of the Strip. So, just wanted to protect those economics.
Go forward, given the resiliency of the business, the infrastructure and the payout ratio, we are comfortable to remain unhedged on the balance of the production. We definitely want to provide that commodity exposure, but we want to do it in a really reliable, safe way. So, we've done about 30% of our estimated 22 summer gas production at an average price of CAD 3.94 in mcf, but do feel that's sufficient. And as Marty mentioned in the discussion earlier, our dividend even with the increase is protected down to I think about a CAD 1 AECO and $40 WTI, so we feel very, very protected. We never want to touch that dividend, but we want to provide the commodity exposure as well.
Okay. Thank you. And then my second question was just clarifying something made earlier. You said there were a couple sort of key operators on your lines that were expected to release updated five-year [ph] plans with this week (00:18:37). Could you just remind me who those were?
Yeah. Tourmaline and Tamarack Valley.
Okay. Thanks. Appreciate it. I'll turn the call back.
Okay. Thanks, Matthew.
Thank you. Your next question comes from Jeremy McCrea with Raymond James. Please go ahead.
Yeah. Hi. I just want to follow up on Patrick's question just on M&A. Just if you can put a little bit more numbers to what you're talking about in terms of your M&A strategy. I was just curious if there's an actual change in strategy and how you think you can get M&A done this year versus last year? Maybe number of data rooms that you're in today versus last year if you're looking at different size of packages, if it's 1,000 boe or if it's lower, if it's higher, just a few more numbers to kind of go back to what you were talking with Patrick about.
Yeah. So data room wise right now, probably around eight different packages that – they're not even just packages, some of them are – are kind of manufactured ideas that we've come up with. So, the flow is still there.
Last year, I think it was similar 8 to 12 kind of and there's some pretty quick answers on some of these packages, but we still look. And what's going to be very material to us is if there's a spread between bid ask price and like any time there's a high commodity cycle, there's lots for sale it seems like, but not as many buyers.
And so, what I'm going to reiterate again is this is a time to show discipline. And historically, if you look at how Tourmaline performed when – I used to work at Tourmaline, high commodity cycles are tougher to buy things at and sometimes you got to wait. But what I will reiterate as well is there's lots of good packages out there that are coming to market. And I think the valuations of some of these E&P companies, although they're healthier, they're still a unique form of funding that they're going to have to use and I don't think they want to use all equity. I don't think they want to use all debt. It's probably a balance between the two and maybe a royalty or infrastructure component can go along nicely with that.
Okay. And then do you guys still have a kind of a rough goal to get to about 60% of your revenue being from infrastructure or is that changed a bit here as well, too?
Yeah. That's the goal. We'll see if this next cycle provides some infrastructure opportunity, which we think it will. That's some of the items we've been working pretty hard on. So 50/50 is the ultimate goal. But like I've – I've said in the past to you, Jeremy, it's always written in pencil. We want to be opportunistic on assets and ideas that are in front of us. And over the last year, it was royalty based and maybe this year, it changes a little bit. But we're pretty open to either side of the business, and I think over time you'll see us get more balanced to 50/50.
One of the questions I didn't answer, you asked about size. I mean, yeah, we're looking at even from 1,000 boe to a lot larger than that and looking to fund high-quality names with high-quality assets.
Okay. That's great to hear. Well, thanks, guys. Talk soon.
Good talking to you again, Jeremy.
Thank you. There are no further questions at this time. You may proceed.
Thanks, everyone, for checking in, and we'll come back to you at the end of the next quarter.
Thanks, everyone.
Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.