Q2 2020 Freehold Royalties Ltd Earnings Call
All participants please standby your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to the second quarter results Conference call I'd now like to turn the meeting over to tumbling. Please go ahead.
Yes, thank you very much.
Good morning, ladies and gentlemen, welcome to the free gold royalties limited 2022nd quarter Conference call.
Thank you joining us with me on the call from <unk>, our CFO Dave's Baker our CEO.
<unk> senior Vice President business development and not Donna.
Manager Investor Relations and capital markets.
Before we get us the highlights for the quarter, we want to know that alongside government in public health officials. We are actively monitoring opened 19 updates and follow the latest guidance.
Initial phase of the cobot, Nike and definitely we prioritize the health and safety of our workers by directing all workers to work from home.
That was all burden public health measures were relaxed in June.
Turn to office Task Force worked diligently to develop office safety protocols in alignment with government in public health guidelines.
With his preparation we were able to reopener office in July with the reduce staff quote.
We will continue to monitor cobot 19 updates and follow the latest guidance to move to the next phase return.
We appreciate the continued efforts of our stock during this time and want to thank shareholders for their ongoing support.
Operationally the second quarter was challenging with demand weakness for commodities associated with Cowen 19, coupled with a supply data within opex driving global crude prices to multi decade lows.
As a result of this weakness we saw a number of producers on a royalty lands shut in production in order to preserve economics and reserves.
Royalty production for the quarter, what fruitful plans averaged 9150 leaves a day.
Down from 10618 view is a day the previous quarter. A 10311. He was a day during the same period in 2019.
Well the positive.
Period of weakness is behind us.
For free cold shut in volumes reached a peak of 20% of total production, even day, but averaged 11% for the quarter.
Through the remainder of the year, we see volumes improving core areas like the Clearwater liking southeast and southwest this catch one.
Coda.
This is driven by volumes coming back online and the resumption of third party drilling and our loyalty lands.
As mentioned the lower prices had a materially impact a drilling activity on our lands no wells drilled during the second quarter drilling through the first half twentytwenty.
As totaled 229 Rose 6.6, net wells down approximately 35% versus the same period last year.
Looking into the second half 2020, we do expect some activity in a royalty lands driven by traditional payers.
With incremental dollar spent on plays in southeast and southwest of scheduling and Central Alberta.
Given the backdrop for shut in volumes and uncertainty around the pace of third party drilling.
Freehold announced it really in the quarter. Its previously released Twentytwenty guidance was no longer applicable.
We're continuing to spend guidance at this time with the expectation we will resume guidance for the return of clarity instability associated with the commodity price environment in our world P. payers drilling programs.
During the quarter and reflecting sustained weakness in crude oil prices prequels board of directors revised free holds monthly dividend rate from five in the quarter sense to one half cent per common share.
Everybody loved the dividend level.
Freehold funds from operations are forecast to exceed dividend outflows for the remainder 2020 and be at the low end of our annual payout range.
60% to 80% for 2020.
Adjusting the dividends during the quarter preserved the strength of <unk> balance sheet and enhances our ability to pursue value enhancing acquisitions.
Looking forward, we expect to pay down debt levels in the near term with the expectation to revise the dividend as our fourth path or funds from operations improves.
At current commodity prices, we expect to pay down approximately three to three and half million dollars in get per month.
Although debt levels are expected to stay flat in the third quarter over second quarter as we.
For the 11.5 million dollar deposits in Canada revenue agency.
Which gave hendry will speak about shortly.
In addition, our board of directors and staff reduce junaid by approximately 15%.
Which we believe was important to align with our shareholders experience.
Lastly on April Thirtyth 2020.
Freehold disposed of certain working interest properties with estimated production up 265 used today.
As part of the agreement, which occurred to sure has agreed to assume that you commissioning liabilities of approximately $3.6 million on these properties.
The benefits of this disposition include a material improvement in operating costs moving forward and reduce spending associated with this with asset retirement obligations associated with these assets.
Now I'll pass the call to David to walk through some of the financials.
Thanks, Tom and good morning, everyone financially well, we entered a significant retreat and global oil prices over the second quarter Reals continues to provide a meaningful dividend, which has differentiated ourselves from many traditionally Pete companies in Canada over the period.
In the second quarter real generated $14.8 million royalty and other revenue down 58% versus the same period in 2019.
Reflecting lower liquid prices and lower production slightly offset by improved natural gas pricing.
Total royalty revenue was comprised of 75% oil and NGL was also reflected the decline in oil prices a royalty portfolio generated an operating netback of $16 in 80 cents 86 cents per view, we in the second quarter of 52% decline versus the same here.
In 2019, which mirror the 53% decline in WT prices during the same period.
Funds flow from operations for Q2, 2020 totaled $10.6 million down 65% from Q2 2019 levels.
Our payout on a dividend paid basis totaled 92% in the second quarter 2020 up from 62% during the same period in 2019.
At the revised dividend level, we target for yields payouts to remain at the low end of our outlined range in 60% to 80% for 2020.
Through the remainder of the year, we expect free holds payout to remain below 40% on a declared and paid basis.
Cash thoughts for the quarter totaled $4.79 per view, we down from $5.06 per view either in the same period in 2019.
Decrease year over year reflects lower operating in financing charges. The reduction cash costs was most materially impacted by the disposition of working interest production over the quarter.
Freehold closed the quarter with a $5.7 million reduction in net debt from Q1, Twentytwenty net debt totaled $96 million at June 32020, representing 1.1 times net debt funds flow from operations.
The decrease in net debt quarter over quarter reflected the reduction in dividend obligation the disposition of our working interest assets and resulting lower asset retirement obligations offset by weaker production, resulting in lower funds from operations.
Even though oil prices are likely to remain subdued through 2020, we expect our long term debt to EBITDA ratio to remain covenant compliance.
Freehold prudent strategy of maintaining long term debt cash flow below 1.5 time, and a dividend payout range of 60% to 80% of funds flow from operation provides cushion for volatile prices.
Free holding costs incurred a second quarter 2020, net loss of $5.8 million compared with a $3.4 million net income recorded during the same period in 2019, the higher net loss reflected lower revenues due to the retreat in oil prices and.
In volumes.
During the quarter Freehold announced that it had received the proposal letter from Canada written New agency Freehold has now received notices of reassessment from the CR rate in which the CR rate has denied the deduction of certain non capital losses, and other tax attributes and computing the companies.
Income for taxation years, ending in 2015 and 2018.
In order to appeal. These reassessments freehold is required to make the payment of 50% of the reassessment amounts $11.5 million as the deposit this year a prior to September one 2020.
Freehold has received legal advice that is entitled to deduct the non capital losses, and as such management remains of the opinion that all tax filing to date are filed correctly and that it expects to be successful in its objection of these reassessments and therefore any fuel.
Sure deposits paid to this year rate should be refunded plus interest.
Freehold anticipates the proceeding through this year, a could take a year or more to result.
Further the payment of any deposits does not impact freehold earnings or funds from operations.
We hold is currently in the process of filing its objection of the Reassessments.
Now back to Tom for his final remarks.
Thanks, Dave.
Looking forward, we expect the next three to six months to remain challenging for the industry.
Although.
Proving sharply from oil price loads of Q2.
Setting ourselves apart freehold provides investors relative stability as royalties represent a higher margin business.
As we do not atypical costs associated with oil and gas operations and reclamation.
Enabling more returns to be transferred to our shareholders.
We continue to maintain flexibility in our balance sheet, while maintaining sustainability in our dividend.
Current share price levels, we feel that occurred proposition as attractive as you point for investors.
As we allocate free cash flow our preference is to ensure sustainable dividends, while maintaining a conservative balance sheet, we've been medium term outlook shifting to value creation via acquisitions, as we grow and improve our royalty portfolio.
The ability to access capital both equity and debt remains challenged for many producers.
And we believe we can serve as a financing tool to the accretion of new royalties.
Core plays core play areas.
And in the United States.
The royalty model is sustainable through all commodity cycles as we have demonstrated since going public in 1996, nearly 25 years ago.
Now we would entertain any questions.
Thank you.
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Okay.
The first question is from Amir Arif. Please go ahead.
Thanks. Good morning, guys I was just a couple of quick questions for you here just just first of all on the.
Like can come to the shut in volumes I know we've noticed that.
Some of the processing companies and gathering companies are having to provide some incentives to print from set of loans back on line. Just curious if you're having to do anything on the royalties from consented by some of the shut in volumes to come back from your drilling to start.
Thanks, and air It's Rob King speaking, yes, no. We haven't had any of those out any material discussions in that regard certainly when I when I think back to the.
April may time period as companies were shutting in volumes, we have a lot of discussions about how or if we may be able to a two to work with them on the on the royalty rate too.
Think about whether we they continue to shut in or not and the reality is we didnt. We didnt make met many changes at all back then and as volumes have come back online.
We similarity have not seen.
And anything material.
From a from our premier royalty payers in terms of needing to modify.
The the royalty rate.
Okay and.
And then secondly, where I noted and nearer remarks, you did mention that you're seeing activity coming back and Clearwater Vikings Scotch one just curious with improvement in the cash to have you seen any pickup in interest in terms of gas drilling on any of your acreage.
Yeah, we've had we've had a little bit of a of activity on the gas side I would say if you think back to our 2019 and Q1 at 2020 drilling activity.
Well over 90% was focused on oil and so while we have 40% of our production base is natural gas. The reality is most of our our drilling activity has been and we expect will continue to be on the on the oil side.
That being said we have had few wells that have been drilled in the level of the half a dozen by the end of year, we expect in the deep basin.
So there are some there's certainly some drilling.
That's really activity on our land, but for the most heart those places that you mentioned, our where we anticipate seeing the the bulk of the activity in the back half of the year here.
Okay, and then just on the dividends I know, you're correct or 62% payout ratio range from one and a half for your leverage metric that you'd like to get too.
Like how many quarters below those levels, which you need to see before you're comfortable bringing some of that dividend cut back into into the dividend.
In the different backup.
Yeah, Thanks merits, Tom as far as our dividends go I mean, we revisit our dividends with our board every quarter.
And give them a forecast outlook.
When we look at a 2020 with are being low sixtys within our range and also the Cashel near the upper end, where we're comfortable.
We're not we'll probably we're going to revisit winner third quarter. These here later this year on timing of perhaps increasing our dividend or adjusting our dividend. According to the conditions at the time. So we'll revisit that in November with our release of our third quarter.
Okay.
The lower end for the year and on a I guess on that.
As we mentioned here below 40% payout in the last back half but on average.
Our target range for the year.
For 2020, but certainly there are below that right now.
No. Thanks for that color and just one final question, we've seen a pickup in industry M&A activity, Okay and historically.
Some companies have used.
Royalties are putting a royalty on some of that acquisition has a financing vehicle. Just curious if you can give us any color.
Our sitting on that front if any.
And the I think in terms of Q2 activity. It was it was pretty quiet like we had a up I would characterize it as a modest level of of up discussions both in Canada as well as in the U.S. that has definitely picked up and in July and August, particularly in the U.S., but.
So in Canada.
A lot about a lot more.
Marketed deals as well as productive discussions I would say it is a really tough environment for a lot of companies and a lot of companies do need money and were being fairly discerning in this environment in terms of what were what were what we're looking at or whatever return thresholds need to be.
And looking ways that we can continue to even that even better quality assets to the portfolio.
Okay perfect. Thanks.
Thank you.
The following question is from loop Davis. Please go ahead.
Hey, good morning, guys Im just wondering if you can comment a little bit more on M&A and whether or not you're.
Having issues finding counterparties that you think her Bible it can be able to provide drilling commitments that actually makes sense to longer term.
Yes, good good it's a good question, Luke and that certainly or you're kinda hit in the nail and ahead in terms of one of the that the key aspects in terms of being able to to bridge that bid ask spread with the with with the with the potential counterparties in terms of.
Clearly lot of the deals were looking on right now have a higher than we would've had average PDP waiting in the in the in the value that we're coming up with because it is the while there's still is clearly upside and a lot of the opportunities that we're looking out the funding ability and when those.
As a upside locations will be drilled certainly gets pushed out.
So that's kind of comes back to that that comment on being more discerning in the quality of the asset and the quality of the counter the counterparty.
In terms of having some some confidence in terms is that they're going to be able to.
Drill and that kind of comes into some of the structuring that we've been we've been talking to you know to people about as well in terms of ring fencing or some of the.
The consideration.
Not just to debt repayment in there and there and they're part but also to putting it into the ground.
So we can more fully ascribe value.
To those undeveloped locations.
Right that makes sense okay.
And then just wondering on the on the Siri proposal.
She gets its like assuming you guys are treating anything differently here. So I'm wondering if you can kind of quantify what the downside risk is for the out years into 2019 and 2020, assuming that that comes back and it's not in your favor.
Yes, It entertainment.
Yes, so as far as you know were first of all is.
It's not uncommon for a.
Reassessment auditor to to do this so we still barely is very strongly believe that at our position is correct and we fully believe that we'll get the reassessment foot for context, we did file our 2090 tax year and we did apply 22 million.
Dollars of capital losses.
To that.
So for I think it was for about a 6 million dollar cash set our for tax effect of its legacy bit of a context for how that applied for 2019, but.
We.
We obviously just have to wait until and it feels officer gets.
Sign to arcade and that's what it that's what it takes like upwards of year, it's not the complexity or or the any concerns with regards to our cases, just met or getting through that could you until our term our time's up too.
To resolve the issue.
Great. Thanks for the eco there.
Well done.
Thank you.
Once again, please press star one at this time if you have a question. The following question is from Adam Gill. Please go ahead.
Hi, good morning, guys.
Just in terms of where the opportunities our producers with better balance sheets are open to discussions.
Do you find a the guys that are more open to discussions are the guys with a with a weaker financial position.
Yes.
I'd sort of say Adam it's it's it's a bit of both to be up to be Frank.
I think there certainly is if you were probably you had to put it into into a percentage categorize it probably would be a higher percentage of companies that are maybe in a more challenge liquidity leverage perspective that are.
Kind of actually looked after the looking at the at the core side, but there are so there are other better capitalized companies that are considering that as a as a as a as an alternative given the lack of availability of other capital both in the bank and ER and an equity market.
Yes, it's sort of say a meaningful part of our us opportunity focuses on the mineral titled side So that.
That's a that's certainly less relevant in that regard.
Great. Thank you.
Thank you.
There are no further questions registered at this time I'll turn the meeting back over to Mr. milling.
Yes. Thank you very much thanks, everybody for.
Joining us on this conference call. Obviously this is a challenging time what are the things that you will see in the royalty spaces that this model is pretty resilient through all commodity cycles.
Since we will continue to provide our shareholders with me.
A return of capital primarily in dividends and as you know cash flow improves.
Our dividend will improve thank you very much for joining us.
Thank you.
The conference has now ended please disconnect your lines at this time, we thank you for your participation.
This conference is no longer being recorded no as you put modest coffeehouse it does WP.
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