Q2 2020 Falcon Minerals Corp Earnings Call
Thank you for holding ladies and gentlemen, your online, but that's how can minerals. The second quarter earnings conference call. At this time, we are still got they're going to show participants I won't get started momentarily. We thank you for your patience Sonesta Es. Please continue to halt.
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Good day, ladies and gentlemen, and welcome to the Falcon minerals second quarter earnings Conference call. All lines have been placed on in listen only mode and the floor. We opened for your questions and comments following the presentation.
At this time and it's my pleasure to turn the floor, but your host Chief Financial Officer, Mr. brain I understand Sir the floor is yours.
Good morning, everyone and thanks for joining todays call disguise Falcon second quarter 2020 results.
Before we begin I'd like to remind everyone that during this call we will make certain forward looking statements that address our expected future business financial performance and financial conditions.
Actual results achieved by the company may differ materially from those made or implied any forward looking statements due to a wide range of risks and uncertainties, including those set forth in RCC filings.
I would also like to caution you not to place undue reliance on these forward looking statements, which reflect management's analysis.
The date here.
The company expressly disclaims any obligation to update or revise any forward looking statements.
Additionally, this presentation also include non-GAAP measures reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release, which is posted on our website.
Lastly, the company will be attending several virtual investor conferences in the coming weeks, including.
The minerals and royalties virtual conference the Simmons, Glenn Eagles starch walk on trends the Barclays CEO energy power Virtual conference and the credit Suisse royalty and mineral Investor day.
With that I'll turn the call Falcons, President and Chief Executive Officer, Daniel errors for his remarks Daniel.
Thanks, Brian welcome everyone and thank you for joining the Falcon Minerals Corporation second quarter 2020 earnings call.
Brian Gunderson or Chief Financial Officer, who you just heard from will give the financial reports following my remarks, and then we will take questions.
First it is nice to speak all of you I hope everyone is doing well through these challenging times, we certainly have come a long way over a short period in many respects.
Not sure there can be a better demonstration of the strength Falcons business, then the second quarter of 2020.
During the treacherous second quarter Falcon generated positive free cash flow of 3.3 cents reduced debt by approximately 10%.
Hi, cash DNA from the first quarter by 25% and increased our dividend quarter over quarter by 20%.
Furthermore, Falcon is extremely well positioned for the months in years to come down.
Falcon should benefit in this third quarter from production coming back on line that was voluntarily curtailed.
Remember operators and that production will be sold at substantially higher prices then existed in the second quarter.
In addition, when oil prices rebounded to approximately $40 per barrel, we hedged a substantial portion of our volumes through the first quarter of 2021, which should help provide for meaningful growth in free cash flow as compared to the second quarter.
In the future hedge prices represent almost twice the price realized oil during the second quarter.
Further with respect to our future our line of sight gross and net wells said increased quarter over quarter, providing further visibility over the next 12 months as those wells are brought on line.
And finally, our operators have continued to reaffirm their long term commitment to developing our core position in the Eagle Ford is conoco Phillips and yields you continue to permit drill and complete wells across our position and publicly discuss their tenure development plans.
Despite all of these favorable aspects our stock price remains undervalued by the market.
As Dodge management in the border considering all options as to how to create value for our equity holders over the short medium and long term.
I look forward to reporting back as we move forward.
Let's now getting to some of the specifics of the business.
During the second quarter operators averaged three rigs running across our position.
Today, there are currently two rigs running across our position and our operators are continuing to build docs.
We currently have 212 gross and two point Fived you net line of sight wells.
These line of sight Wells 1.62, net wells are docs or waiting to be turned in line.
These specific wells give us confidence in production over the next six to nine months.
In addition to these line of sight wells I'm optimistic that we will see further development sooner rather than later in our prized hooks ranch position, where we hold a 22.5% net revenue interest.
I would also note that Conoco Phillips is currently running four rigs and planning one to two frac crews running for the remainder of 2028 U G is running three rigs in Threeq Frac crews.
We averaged 4004 and 450 barrels of oil equivalent or be a week per day during the second quarter.
That production reflected voluntarily voluntary curtailments buyer operators.
25% during May and June.
Including a portion of our hooks ranch wells.
I'm pleased to report as of July all of our hooks Ranch wells were back on line and being sold at substantially higher prices then existed in May and June.
This is exactly why we were pleased that conoco Phillips and Yohji curtailed volumes, which allows us to bad if that are meaningfully higher prices.
Then when a then where our oil reserves would have been sold just a few months ago.
Honestly I was publicly stated that they expect that all of their curtailed volumes across our position will be back on line by the end of August.
Conoco Phillips has noted that they had seen no negative impacts from curtailed.
And in fact have observed flush production as wells have been brought back online.
Finally.
We announced last night it dividend of three cents per share, which represents a payout ratio 91%.
Its return to our targeted payout ratio a greater than 90% is the result of the strength of our balance sheet and the strong cash flow. We expect based on our current production and continued commitment and activity by our operators across our core position in the top returning shale play in the United.
It states.
With that I will turn the call over to Brian to walk through the financial results for the quarter.
Brian.
Thanks Daniel.
Our assets generated 6.3 million in royalty revenue during the period.
Okay net realized price for oil during the second quarter was $22.03 per barrel.
Average realized prices for natural gas was $1.71 cents per Mcf and our NGL realizations averaged $5.44 per barrel.
As Daniel mentioned during the quarter Falcon initiated a crude hedging program for volumes beginning in the third quarter 2020, and extending into the first quarter of 2021.
Oh volumes were hedged on June 10th 2020 at approximately $40 per barrel.
Exact volumes and pricing are laid out in the company's investor presentation is available on Falcons website.
Total cash operating costs were $3 million.
For the period looking at the component pieces Ags alarming production taxes were approximately <unk> point Sixmillion for the corridor. That's reflects a point 2 million dollar decrease compared to prior corridor, which is due to the lower production taxes, resulting from lower realized prices.
Marketing and transportation expense was point $6 million for the quarter or $1.50 per barrel. This expense represents an increase on a dollar per barrel bases from the 0.85.
The 85 cents per barrel.
<unk> expense that we reported in the first quarter 2020.
Cash <unk> expense was approximately 1.7 million for the second quarter as Daniel mentioned this represents a decrease of approximately 25% compared to the first quarter 2020, and as a result at the cost cutting measures that Falcon adopted in March of 2020.
She M&A excludes approximately $1 million of non cash stock compensation expense recognized in the period.
[noise] adjusted EBITDA for the second quarter was 3.4 million, which represents a decrease of 6.7 million from the 10.1 million recorded in the first quarter 2020.
The decrease was largely attributable to a 49% decrease in average realized price and a 14% decrease in production.
[noise], how can reported second quarter net loss <unk> point Sixmillion on a standalone basis, and 1.3 million net loss inclusive of non controlling interests.
Our GAAP income tax benefit <unk> point Threemillion for the quarter is mostly attributable to the Companys inquiry to the company incurring a taxable losses during the quarter, which increased our net operating loss and increased our church third tax assets.
You company incurred no amounts related to the current period income tax expense incurred no cash income taxes in the second quarter 2020.
This is primarily due to the tax benefit of a base of step but related to the assets how can acquired as part of the transaction with Royal resources in 2018.
Due to the stepped up basis in our assets, we expect it benefited from a cash tax perspective for the foreseeable future.
She ended the second quarter, So 40.6 million outstanding on its revolving credit facility and 1.8 million of cash on hand, resulting a net debt of approximately 38.8 million at the end of the second quarter.
Okay, not dead LTM EBITDA ratio as of the I know the second quarter was 1.12 times.
As I mentioned on the 2009 cheating fourth quarter call and the 2021st quarter call, 80% of the dividends paid to class a shareholders. During 2019 were classified as non dividend distributions and therefore, representing a reduction of basis rather than ordinary.
Gun.
Non dividend distributions are treated as a reduction of basis until such time that investors basis, it's fully recovered.
The reduced tax basis will increase shareholders' capital gain or.
Decrease shareholders' capital loss when the share holder sell their common shares.
Oh can generate non dividend distributions due to the company's high payout ratio, coupled with a step up in tax basis.
Oh against mineral interests.
He was received as part of the transaction, but resources in 2018.
So again expects the greater than 50% of dividends paid to class a shareholders. Turning 2020 will be classified as non dividend distributions in 2020.
This treatment will generally result, nontaxable reduction to the tax basis of shareholders common shares.
[noise] as Daniel mentioned yesterday Falcon declared a second quarter dividend three cents per share. This dividend is payable on September eight 2020 <unk>.
Shareholders of record as of August 25th 2020.
[noise] the three cents dividend payment reflects a payout ratio, 91% pro forma free cash flow.
For the free cash flow per share it was approximately <unk> 0.33.
And per share for the period, we define pro forma free cash flow as adjusted EBITDA inclusive of non controlling interests less interest expense and pro forma cash income taxes.
Our estimate of pro forma free cash flow for the second quarter 2020 did not include an amount for pro forma cash income taxes.
And did not have taxable income in the second quarter due to a decrease in average realized prices.
Decreasing production and as mentioned previously utilization of the tax benefit from the stepped up assets basis, resulting from the Royal transaction in 2018.
With that so I'll now turn the call back over to Daniel.
Thanks, Brian well done just why don't we open the call up for questions.
Certainly ladies and gentlemen at a star one if you have a question or comment at this time again star one on your telephone.
Well go first to Brian Johnny with Citigroup.
Morning, gentlemen, hope, you're well and thanks for taking my questions I guess, starting off given the second quarter curtailments impacting production, particularly at hooks Ranch I'm curious if you could give us a sense for how you see your normalized production run rate now as volumes return at more to a normal level than not the back half year, maybe a July raider or however, you just thinking.
Not that there.
Sure. So I mean, I think you can look good.
You can look at the 25% curtailment for May and June and extrapolate out the impact during the second quarter and yeah. We're trying to take and are taking a conservative look at the remainder of here and we really look at the second quarter is that.
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And then a flattish third quarter.
And then.
Hopefully a stronger fourth quarter, depending on timing of wells turned in line.
Buyer operators, but in any case, we're certainly extremely well set up for a very strong 2021.
With the language site, we have then of course.
My optimism for additional near term development with respect to hooks ranch.
Got it and then yeah, along those lines admittedly a very similar question, though to what I asked last quarter, but with the bulk of your line of sight wells currently in the Ducks are waiting on completion bucket more specifically as you mentioned I'm curious if your sense on the completion cadence there from your vantage point has changed at all given where we've we've come from a commodity price.
Perspective from last quarter.
Sure I think a it has changed.
Not just because I think it's changed but ER Conoco Phillips has indicated they expect one to two completion crews running in the second half of this year, bringing on wells.
That certainly is a.
A shift forward to our benefit with respect to or as compared to where we were on her last earnings call and then of course, Oh Gee I think is continued to is on pace and you'll hear more tonight when they release, but no has a indicated 200 gross wells in the.
Eagleford turned in line this year in the first quarter. They had 82, so that left them with 118, the vast majority of which would occur as they said in the second half. So I think we're we're set up well, we've certainly seen a activity remain a across our position at a nice level as.
Compared to the the rest of the U.S. energy space and with the booing of ER, our curtailed volumes coming back on line that should provide a very stable third quarter and a the line of sight as you mentioned with the bulk in the waiting on completion and waiting to be turned.
In line category sets us up for what will hopefully be a strong fourth quarter and really a.
First half of 2021.
Great I appreciate it.
Thanks, Brian.
Well go next to TJ Schultz said RBC.
Hi, good morning.
Yeah first just on your comment about the intent as management and the board to evaluate all options and the short and long term is there anything.
To read into that or or can you expand I know that comment specifically related to where your stock is trading but do you feel like there'd be a market to monetize mass as to put some type of valuation marker out there or is there just anything more specific on what you're thinking that you can provide thanks.
Yeah, I don't want to speculate on where we're going to end up.
As we're looking at a really everything that one should look at to drive value to our equity holders in the short medium and the long term I do think we are and we believe we are meaningfully undervalued.
Across every metric so I'm not going to speculate on this call as to where we will end up but I do think we have a lot of options that can really drive a the value back to our equity holders a in the short medium and long term.
Okay understood.
Just on the payout ratio just for that absolute dollars in Twoq here, there's not a lot of impacts from change in the payout ratio, but how are you thinking about that longer term and and as the hedging strategy that you now have played any role and and how you think about payout levels.
So as far as the payout ratio since our inception, almost two years ago now our goal has been to set up a business that returns a free cash flow to its shareholders and and we'd stayed at 90% plus payout.
Ratio.
So that's our Ah that has been a are acting thesis and we think.
The market should value that acting thesis.
It certainly is what we see in the many analyst reports certainly TJ you right and others that are the market is looking for free cash flow and we certainly generate free cash flow and we ended all back two or nearly all of that back to our equity holders.
And so.
With respect to the hedges or the hedges were.
Opportunistic.
We saw the brink I think we all felt the brink a in the energy market in March and April when oil rebounded to $40 a it seemed reasonable to protect the cash flow of the business.
Ed what are attractive levels, while remaining a unhedged done a good portion and benefiting from all of the a line of sight, well production, which should grow our production and if prices are higher will benefit even more.
It really positions us and I'm sure your models and others models will show.
Meaningful free cash flow growth.
Just by way of the fact that we'll have and we had substantially higher commodity prices.
Hedged and resulting for the third and fourth quarter as well as the first <unk> first quarter 2021.
Got it thank you.
Thanks DJ.
And once again, ladies and gentlemen, it a star one if you have a question or comment.
Well, maybe next well such Patrick at U.S.
Hey, good morning.
Hey, well hey with them.
Good karnes try because.
In the prepared remarks, and you know I guess anytime conoco kinda calls out your backyard and.
And where they're keeping rigs could it's it's pretty positive have have you guys seem to have you guys seen anyone trying to to kind of come into your neighborhood have you seen I know you haven't done a whole lot of acquisitions recently, but have you seen.
People kind of trying to but end to karnes have you seen more competition and theyve been in recently be because of the relative stability of the area.
You know we are obviously by far the biggest.
Certainly public but the biggest a as far as footprint mineral owner in the core of Eagleford and the karnes trough.
We are and have a world class organic that is on the ground acquisition effort. We also have I didn't get very strong strategic acquisition effort.
Where we have a model we do not miss deals no matter what.
And so while we have been extremely cautious as far as what we had moved forward with.
We have seen everything that's going on and.
You know.
Pardon the frustration with where our equities trading is that we have opportunities that we see.
That are attractive to us now others aren't coming in to answer your question directly and buying those assets, but there are attractive on the ground deals that are what I'd call small and medium sized bold that we can execute on based on our relationships.
Our presence in a in the car and strong.
And yeah.
We would like to take advantage of that on the other hand, we see an equity value and <unk> and I don't blame anybody any of our shareholders you've been great supporters the bars, what we need is more shareholders.
To help increase our value because.
There are more opportunities for us to acquire at extremely attractive rates on the other hand again, we're trading at a substantial discount when we look at our value.
So going out and buying third party assets in any area, it's very hard to concede, though when we look at.
The present value that were trading at a on a per share basis. So those are some of the.
The kind of insights into how we're thinking about things.
At the moment.
Okay, Okay that makes sense and I'm sure. It's it's frustrating I mean, so so needless to say you guys aren't willing to do those those smaller bolt ons and and throw on a little bit of debt. That's just kinda off the table for the time Ben.
Nothing is off the table in and I Hope I don't sound frustrated because I'm appreciative did this isn't entered this is a market, where we know public investors or are not overly enamored with or not even a little bit enamored with energy generally we think we have an amazing asset.
Pace than I've seen M.T. I've, Ronnie MP businesses in midstream businesses, I don't think Theres, a better asset base than a core of the core eagleford mineral business, where we have no capex and it's driven by Conoco Phillips Yohji NBP doesn't and we're trading as I understand.
But at seven times, a analyst expectations for 2021. This is a business with zero Capex I see price targets with yeah, similar multiples I N P businesses, and I think analyst expectations will probably move substantially higher.
As we move yeah through this call it a 420 21.
He's done a our line of sight and hooks ranch development et cetera.
So I think theres, a great undervalued situation here.
For those equity investors, who want to sift through the wreckage, if the energy space and really find the diamond or in the sand.
Okay that makes sense and then just one last one if I could sneak it in those [laughter] looks ranch wells were brought back on after curtailment can you can you do you have any data on what those look like post curtailment and have the those had a little bit of a pop above the curve on them.
Just kinda talk to the performance there as those came back on.
Sure we do have a data on those wells.
They are they're great wells the hooks ranch is in the top.
Conoco Phillips is Ah portfolio production has been in the top quartile and got that style I don't Wanna be ahead of Conoco Phillips in any way shape or form they've been great partners, great producers, but they have said.
That their wells have come online.
Yeah, we're even ahead of where the wells had been shot in that and I simply would echo those comments in their comments.
Thanks, so much.
Thanks Wells.
And one final reminder, if you had a question or comment and its star one on your telephone at this time.
Well go next to Pearce Hammond at Simmons energy.
Good morning, and thanks for taking my questions and helpful color on the call. So far Daniel totally understand you want to keep it real high level as it pertains to evaluating all options to increase value.
Woody holders just curious what you're thinking from a time process timeframe as to when do you think you report back to analysts investors.
You know how this process is going and then would you consider hiring in investment bank.
Well I'll start with the last question of course, we're always talking to a investment banks, we value their advice and their breath knowledge and interactions with.
With.
Lots of different parties from a equity holders to family offices et cetera.
As far as the the timing we're going to run the ground every option available and then really come back with our strategic vision.
For the market you know I've heard you know.
Passengers your peers talk about well, they're going to hold off on acquisitions are owed they're going to pursue acquisitions or oh, they're going to increase their payout ratio or they'll reduce their payout ratio. They want less debt yeah. The market once yeah. This and that we need to consider and we've been considering so we're not this isn't.
Something we're starting a this is something we're along the way in what we want to do and what I want to do is come back to you.
And the market with a very specific vision as to what I'll call Falcon 2.0, and that is where this business is.
And where this business is headed and the value proposition that exists for our equity holders as a result, what I can do it what I can say and I think everybody on this call will can do the analysis is that from an M&A be standpoint, a free cash flow standpoint from every standpoint that we can look at will.
Massively undervalued and so for those Lucky you know fuel who are listening to this call or read the transcript.
The opportunity is now what are what I expected there will be back over the coming.
A couple of months.
With our strategic vision for Falcon, 2.0, which I hope will really eliminate that massive value gap between.
Where we're trading today and what our value of our assets really are.
Thank you Daniel that's very helpful and a and then turning to Brian you all did a good job of learning some hedges to protect the downside just curious what's your latest thoughts are on on hedging as we start to figure out to 2021 and beyond.
Yeah. Thanks for the question here is I think that Dave mentioned it in the earlier in the call.
We're not anticipating Larry on any incremental hedges other than the hedges, but you've seen for Q threes Q4 Q1 at this point.
Okay. Thank you very much.
Thanks peers.
[noise] fears.
Well go next to Kyle May a capital one.
Hey, good morning, guys.
A follow up on one of your comments about hooks ranch you'd mentioned an expectation of activity sooner rather than later.
First can you give us a sense of you know what gives you that inclination and then second a if you give us any thoughts around timing all that.
Sure. Thanks for the question Kyle Good morning.
I.
Well tread very carefully, but I'd remind you in everybody on the call prior to conoco permitting their last pad for hooks Ranch I said to the market or the same words that I'm optimistic about near term development of our hooks ranch property and.
So I'll stick with that.
Optimism.
And ER and led things develop publicly or as they well I certainly don't want to get ahead of the conoco and ER and their plans but.
I am and we are optimistic that we'll see near term development and really what that means and what I think conoco has said publicly you know as they laid out their 10 year plan is they're moving into manufacturing mode and Eagleford. They have a 10 year plan that their dedicated to and what that looks.
Like for US is probably more of an annual type cadence for development across our hooks ranch property.
Got it thanks for that and one more for me you know I I understand there's.
As you had mentioned, there's M&A opportunities out there that that seem attractive and you know given the circumstances that the stock is undervalued in your view and it seems like your adverse to levering up the company just wondering if there's other things that you could do or other levers to pull a that you could use for M&A purchases.
Sure I think one of the real advantages we have and.
Has demonstrated as a management team is our ability to access capital over the last 17, or so years and do it in creative ways, a that don't dilute our our equity holders, there's certainly options around that and that's part of the yep strategic thinking as to how to take advantage.
If those opportunities.
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With that said you know thinking about acquisitions.
Add Falcon it's.
Really yeah.
The world's greatest deal would have to present itself.
And that's always possible, but the world's greatest deal that have to present itself given where we're currently trading.
And I guess to address your point.
Around leverage I don't I mean, we've.
Historically been a cautious with respect to leverage a I'm not sure levering up to make an acquisition.
Necessarily the Rightmove, we've seen lots of people bit by that snake before.
But you know that doesn't mean leverage is always a bad thing if leverage allows you to take advantage of.
Uniquely valuable opportunities.
Got it thanks for that and I appreciate it.
Thanks Kyle.
And with no other questions holding I would like to turn the conference back to management for any additional are closing comment.
Great. Thank you Jess Brian. Thank you and thank you all for listening to this quarterly call. We look forward to Ah coming back and updating you sit down with respect to Falcon 2.0.
We're excited about the business as you can hear.
And excited to speak to you over the coming weeks and months.
Bye bye.
Ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect at this time and have a great day.
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