Q3 2019 Earnings Call

All participants please standby your conference is now ready to begin.

Good morning, ladies and gentleman and welcome to the Freehold royalties limited third quarter conference call.

Please be advised that certain statements on this call constitute forward looking information.

These statements relate to future events.

Or our expectation for future performance.

All statements other than those of historical facts, maybe forward looking and we caution to listener.

I'll now pass the call over to tell me Lane, Chief Executive Officer of Freehold. Please go ahead miserably.

Thank you and a good morning.

Also joining me for Freeholder David's Baker, Chief operating Officer, Bob Live on our Vice President of asset development, along with your Chief Financial Officer, not Donahue, our manager Investor Relations in capital markets.

And myself of course.

We will summarize your third quarter results and then we'll be happy to answer questions.

Some quarterly highlights include funds from operations totaled $28 million or 24 cents a share down slightly from the previous quarter.

The key drivers behind it varies included modest reductions in commodity prices and a slight decline in production volumes.

Based on our share price at quarter end, we estimate our free cash flow yield approximately 12%.

Dividends were 67% of funds from operations for the quarter. This compares to 62% in Q2.

101% in Q4 2018.

At current commodity price levels and with our dividend current levels, we continue to generate significant free cash flow.

We will continue to elevate our payout.

We are payable quarterly, but given the volatility associated with clean energy producers activity levels, we have chosen to maintain or given in at current levels.

2019, we are forecasting a payout of approximately 65%.

We would fail or 2020 guidance in March 2020, as part of our Q4 2018 results.

On the operations from Q3 2019 with production averaged 10140, Ninebc day down 2% versus the previous quarter and the same period last year.

The decrease in royalty volumes quarter over quarter was driven by reduced third party drilling during the second quarter, which impacted volumes.

The third quarters typically the weakest period for production volumes during the year as third party activity is reduced during Canadian spring break up.

Oil volumes grew 4% year over year in the fourth and 4% portable quarter, indicating or oil portfolio strength.

Royalty interest accounted for 97% of production at 100% of operating income in Q3 thousand 19.

We completed a Canadian royalty transaction late in Q2.

In our first U.S. royalty transaction during Q3 four.

$9.8 million U.S.

Expected volumes associated with our U.S. deal to ramp up into year end and into 2020.

While we are happy with the development and production volumes associated with our Canadian acquisition completed.

The previous quarter.

Based on broader uncertainty in Canada associated with drilling activity, we're maintaining our 2018 production guidance 10 between 10000 and 10500 be Liza day.

Within Canada Freehold saw continued strength connectivity on a royalty lands during the first nine months of 2019 in total we had 455 gross.

15.3, net wells drilled in our royalty lands during the period.

These 481 Rose 6.1, net wells were drilled during the third quarter 2018. This represents a 3% improvement on a gross measure in a 3% decrease on a net measure over the same period 2018.

Together Scantron in Manitoba represented approximately 60% of our gross drilling in 2019, 77% when the net basis.

Drilling continues to be weighted towards the Viking in west Central scattered with 116 Rose 9.7, net wells drilled year to date.

We're currently forecasting 20 net wells as part of our 2018 guidance.

Both the Canadian Association of way well drilling contractors in petroleum services Associates of Canada are forecasting material reductions in drilling activity in 2019.

Greater than 25% drop year over year, whereas really levels, our plans have been essentially flat.

I'll now pass the call to Alan.

Walk through our financials.

Thank you Tom good morning, everyone.

This quarter, we continued to demonstrate strong financial flexibility approval.

Tom mentioned during the third quarter 2019, freehold generated funds from operations of $28 million were 24 cents per share.

Revenue from oil and NGL production represented 92% total revenue in the third quarter up from 89% during the same period 2018.

Retreat in natural gas prices during the quarter, along with oil production in oil weighted acquisition growth within our royalty portfolio was the driver behind this increase.

Continuing a multiyear trend three holds royalty production the mountains, 97% of total production and all of the operating income in the third quarter.

Is up from 93% of total production and 99% of operating income in the third quarter.

We will declare dividends of $18.7 million.

For 15, and three quarter cents per share in the third quarter 2019, implying a 67% payout ratio well within the targeted payout range.

Our results, we updated our Wi Fi inhibiting oil price assumptions and are estimating a 65% payout ratio expectation, which is at the low end of our targeted range for the full year 2019.

Freehold closed the quarter with net debt just over 105 million, representing one times net debt funds from operations.

The net debt figure increased by just over $7 million versus the prior quarter.

Electing acquisition activity that was closed during the period.

Acquisitions of just over $15 million.

Basically related to mineral titles acquired in North Dakota funded by this debt and by free cash flow generated in excess of dividends paid during the period.

For year end 2019 based on our forecast and assuming no additional acquisitions in the fourth quarter, we expect net debt to fund net debt funds from operations reduced towards 0.8 times.

For the three and nine months ended September 32019, there is a modest amount of current income tax expense compared to zero last year.

This is due to freehold activities in the United States also related to tax but in Canada Freehold does not have an update related to the proposal letter received from Canada revenue agency, where seery indicate its intention to reassess and denied for gold production of certain non capital losses clean and carried forward in the tax return.

Filed in 2015.

We hold is vigorously defending its tax filing position. However, we anticipate that proceedings with CRH could take considerable time to resolve.

Now I'll turn it back to Tom for his final remarks.

Thanks Alan.

In closing, we continue to execute the core aspects of our strategy.

We completed our first U.S. royalty transaction over the quarter utilizing free cash flow.

We reiterate to our shareholders the moved to the us will be measured with the goal of improving the quality of our road portfolio.

We see Williston basin is providing strong opportunities for our shareholders. In addition, given the broader industry weakness, we're very happy on how it should be levels have maintained themselves in our land.

Testament to the quality of the underlying royalty portfolio.

We expect with better than forecast activity levels acquisitions completed early in the year, our volumes will remain steady into year end.

Looking forward, we remain focused on maximizing shareholder value by investing our free cash flow the dividends value enhancing acquisitions and are paying down our debt.

Overall threefold offers investors a lower risk Royal investment vehicle.

Ill pass it over to the moderator for questions.

Thank you.

We will now take questions from the telephone lines. If you have a question and you are using the speaker phone.

Please lift your handset before making a selection.

Your next question. Please press star one on the telephone keypad.

If at any time Mr. Johnson your question. Please press the Thomson.

So please press star one at this time, if you have a question.

Brief pause while in the participants register.

Thank you for your patience.

The first question is from Dennis Fang from Canaccord Genuity.

Please go ahead.

Hi, good morning, and thanks for taking my questions I've I've got two here.

The first was I noticed that you guys had a little bit of current income tax and this quarter could you just make a bit of a comment as to how we should be thinking about.

Taxes going forward as well is providing a little bit of context around the U.S. component of your assets in that relation I've got a second follow up thanks.

Hi, This is Alan would be.

Us tax.

Is the current income tax for the period is from the United States operations.

We expect that the United States operations tax will Max out and about 8% for the purchase Oh for five years in terms of percentage of operating cash flow, but it isn't taxable operations intended to be a profitable and its and as the new entrant, but expect that.

In that 8% at a maximum and that's what he wants to.

The U.S. Castle Street, which is about 2% of are absolutely correct.

Okay. Okay. Thanks.

And then the second question is just.

Related to kind of.

The level of production you guys have been doing pretty good job maintaining kind of activity levels across your land base.

Can you just kind of talk a little bit more about some of the potential other initiatives that you're working on in addition to.

Providing a little bit of royalty incentive in exchange for activity here in your land that helping you off that.

Frankly, the significant decline, we're seeing in activity across the western Canadian sedimentary basin.

Hi, Def inside the spike or your I'll answer your question.

Really through a lot of our regional were we would have been focused on continuing to build a really high quality all portfolio and the most economic plays in Western Canada, and North Dakota.

So what we're doing now which taking our credit collaborative approach with our primary operators any oil plays.

Tell you get a better understanding of their development plans and ensure that the royalty structure and the quality of opportunities on the repo Lance.

Key compete with their other investment options.

So some of the things that we talked about a as we take the pharma rocky incentives for drilling commitments.

We're looking at potential royalty incentives for implementation of enhanced recovery schemes where that.

Waterfloods schemes or tertiary schemes.

Or recompletion or reactivation initiatives and these are these opportunities where we see that we can add additional value.

By prioritizing development on these assets and so that we did that that we could strengthen the NPV of or the portfolio with specific incentives or regarding these types of things.

Great. Thank you appreciate that.

And just maybe the last bit is that that should frankly translates to obviously being in the reiterate your your 20 net well guidance this year and should we probably be expecting something relatively similar.

You guys are kind of looking into the 2020 timeframe.

Dennis is at Tom here.

As we were pretty comfortable with our 20 net wells for this year, we are giving our guidance for next year in March.

Once we gauge of what the activity levels will be for all of our producers.

Our drilling has been relatively consistent over the last couple of years.

Unless some of our big drillers have a major falloff I don't see any change in levels into next year.

Right.

Yes, well above them on pages that a tiny bit more color to that to our hope also for next year is to start reporting on a couple you asked net wells coming in and the production from those.

So I mean.

As that starts coming up on our on our number the value of the U.S. net well could be considerably higher than our Canadian that well, but the direction seems roughly the same.

Towards next year, but we'll have a.

Better numbers as the quarter goes up.

Right. Thank you.

Thank you.

The next question is from a.

Irene from Cormark Securities. Please go ahead.

Oh, thanks, So it's actually a fall to the comment that Bob just made here. If you can just give us a little more color in terms of the type of drilling that you do see in the U.S. on your lands relative to the average well that is drilled in the Canadian Lamb I'm guessing just keep being in the Bakken is probably a lot more productive higher rates relative to what you're seeing in the Viking and.

New conventional drilling on the Canadian.

Thanks for the question this problem and again, yes, we do in fact see that that large large uplift in productivity in the play like the Bakken slowly in places that net royalty interest can be somewhat lower the productivity from the wells is considerably higher.

Later, and so our exposure to that we're very excited about especially seeing is that some of our acreage is right offsetting a couple absolute record wells.

Recently.

Recently drilled so so currently we have no new net wells.

On our way into to report just yet but that will change in the future.

Okay. Thanks, Bob and then just the and can you give some color in terms of the U.S. steel floating I noticed the small additional tuck in acquisition of some minimal title ends there or is there a lot of little deal flow that you are seeing or is it.

So just relative to the Canadian side, if you can just give us some color on that.

Yes, Hi, Merritt said Tom.

We are finding that the deal flow up both.

You asked is relatively strong right now at any one time, we're looking at three to five acquisitions at level has dropped off.

Given the limited access to equity for a lot of producers we are finding that theres good deal flow, both in Canada and in the U.S. and.

And we are a little more attention to U.S. today than we are in Canada and given the.

Potential growth profile differences in the basin.

Okay sounds great. Thank you.

Thank you once again, please press star one on your telephone keypad.

Another question.

The next question is from Adam Gill from a capital. Please go ahead.

Hi, good morning gentleman.

Just looking for a little more color on the net wells drilled of the 6.1 that drilled in Q3 and the projected 20 for the year. How many of those wells are on the royalty lands ever acquired through Q2 in Q3. Thanks.

So as Bob Lamond, writing or calling the.

For acquisitions from Q2 Q3 very excited in this quarter one of the operators. We did do large deal. This is actually our second.

Largest thriller for the quarter.

We are especially excited about our liking.

Production and drilling around the.

Around the Alberta, Saskatchewan border, but this sparky zone and the drilling that's happened on that has been.

A new AD for us So we've had roughly 15 wells drilled Ah.

By this operator on that play in the area and the initial production is also very favorable.

With plans to continue.

If I could add a bit more tolerant again, so the making it remains very strong on both sides of the Alberta border. We're excited about this mannville.

Sparky in particular, but more of the heavy oil resurgence in just north of that Viking trend.

Also we have given some guidance before on our Clearwater acquisition, we had made.

Happy to report that drilling on that as a ahead of expectations. We've had more wells drilled on up and expected to to date and initial production actually very favorable in that Clearwater trend as well.

Also the duvernay or drilling on that remains that piece as well and while a small portion where we're excited by the results.

Great. Thank you.

Thank you there are no further questions registered at this time I will return to me back to Mr. modeling.

Well. Thank you everybody for joining us on this call. This morning.

Given the given our results for Q3, we're extremely happy with the drilling levels on our land and again, that's a testament to the quality of our lands.

We continue to be a lower risk investment in the energy space for investors and.

And we are.

Very and we're very happy of about our results in Q3 and look forward to next year.

Thank you.

The conference has now ended please disconnect your lines at this time.

And we thank you for your participation.