Q3 2020 Falcon Minerals Corp Earnings Call

Ladies and gentlemen, thank you for your patience. Please remain on the line while we gather additional participants again, we do appreciate your patience. Please remain on the line your conference will begin momentarily. Thank you.

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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 2020 Stevens all sector Virtual conference on November 18th and the 2020 capital one virtual energy conference on December 7th through ninth with that I'll turn the call over to file.

<unk>, President and Chief Executive Officer, Daniel Hers for his remarks Daniel.

Thanks, Brian Good morning, everyone. It is nice to speak to you I Hope you are all well. Thank you for joining today's Falcon minerals third quarter of 2020 earnings call.

Brian Our Chief Financial Officer, who you just heard from will give the financial reports following my remarks, and then we will take your questions.

But first in these unique Titans I would like to offer you a quote from the great Athenian philosopher Plato.

B K for everyone. You meet is fighting a hard battle.

Now.

It was a modest increase over the second quarter of 2020.

Importantly, this modest increase occurred even though only 0.03 net wells returned in line during the quarter.

Increase in production was driven by wells that had been curtailed during the second quarter and then came back online throughout the third quarter.

We believe as of the end of September all of the curtail wells are back online and are producing to our benefit with the barrels of oil selling it substantially higher prices than existed during the curtailment period.

There is good news for assault.

While the third quarter had limited wells turned online.

Which is consistent with what we had expected and previously discussed activity has begun to pick up.

Leaves us the 143 net wells that are already permitted.

Which we expect to also come online during 2000 2021.

Let me repeat that of course that still leaves us. The 143 net wells that are already permitted which we expect to also come online during 2021.

To put this into context, if we just have our 313 net line of sight wells come online over the next 14 months with no additional wells added that will be approximately twice the net wells that will have come online during 2000.

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Pretty substantial growth beyond the 25% free cash flow yield levels and.

And it should be noted that if oil prices rise we have further upside available to us as well.

For natural gas was one dollar and 98 cents per Mcf.

And our NGL realizations average $13 and 58 per barrel.

During the third quarter Falcon initiated a natural gas hedging program for volumes beginning in the fourth quarter of 2020 and extending into the first quarter of 2021.

All volumes were hedged in September through the use of Costless colors.

Natural gas hedges are in addition to the crude oil swaps that Falcon put in place during June for the third and fourth quarters of 2020, and the first quarter of 2021.

Exact volumes and the associated pricing for all hedged volumes are laid out in the companies investor presentation that is available on Falcons website.

Total cash operating costs for $3.2 million <unk>.

Looking at the breakdown.

Add valorem and production taxes, where approximately point $7 million for the quarter.

This reflects a point $1 million increase compared to the prior quarter, which is due to higher realized prices.

Marketing and transportation expenses were point $6 million for the quarter for $1.37 per barrel. This expense represents a decrease on one dollar per barrel basis from the dollar 50 per barrel of expense that we reported in the second quarter 2020.

Cash G&A G&A expense was approximately $1.9 million for the third quarter.

Cash G&A excludes approximately point $9 million of non-cash stock compensation expense recognized in the period.

Adjusted EBITDA for the third quarter was 6.5 million, which represents an increase of $3.1 million from the $3.4 million reported in the second quarter 2020.

The increase was largely attributable to a 68% increase in average realized oil prices compared to the second quarter.

Okay.

As I mentioned on previous earnings calls.

80% of our dividends paid to class a shareholders during 2019 reclassified as non dividend distributions and therefore represent a reduction of basis rather than ordinary income.

As a reminder, non dividend distributions are treated as a reduction in basis until the time when investors basis is fully recovered the reduced tax basis.

Increase shareholder's capital gain or decrease shareholders' capital loss when the shareholder sales their common shares.

Again, ladies and gentlemen, if you do have a question or comment. Please press star than one at this time and we'll take our first question from Lee Kuperman with Omega family Office. Please go ahead.

I'm just curious you mentioned the relief that you know looking at different alternatives to create value for the shareholders could you elaborate a about what different considerations or are you pursuing.

Thankfully morning, nice to talk to you.

Looking forward to hearing your views in perspective on on the election at another point, but to answer. Your question. We are looking at all options will let your yeah you're.

They've already been completed and based on our land Department has great relationships with our producer partners. We have very strong line of sight into the.

The completion activities, especially on our high net revenue interest pads. So we really we really see activity and wells turning in line ramping this quarter.

And really into next year and throughout 2021.

Got it really helpful. Daniel Thank you and my follow up Youve seen some some peers of yours looking at scaling back payout ratios trying to retain cash for other purposes, obviously on the balance sheet side certainly no no requirement. There for you guys to address your debt seem in good shape, but just wondering if you could discuss the merits of that but.

And anything whether that be acquisitions are obviously, a big disconnect in the stock so a buyback I imagine could make some sense. So just wondering from a high level, how you might be the merits of a lower payout.

Yes, I appreciate that.

Good question, Jeff I'm going to put that into the category of Oh.

Our strategic review.

We're looking at all options all options and look forward to coming back to you as soon as we have determined the best path forward.

Understood I'll turn it over someone else thanks, guys.

Thanks, Jeff.

Next we go to the line of Pearce Hammond with Simmons Energy. Please go ahead.

Yes, good morning, and Daniel Thanks for your helpful prepared remarks, just making sure I understand so you said that based upon the line of sight wells that you have right now that as you look at 21, you think the ticket average about 5000 Boe per day.

Next year, and then a pre cash flow of roughly 50 cents a share so that equates to free cash flow yield a 25% is that correct.

Yes, thats exactly right and I would.

Just again restate that average 5000 Boe per day in 50 cents of free cash flow at strip pricing.

Only includes the line of sight wells the 3.13.

Line of sight wells coming on line through 2020 ones over the next 14 months and have I think critical importance within that historically line of sight well. This entire group of line of sight wells and when I say historically I mean over the last 10 years has been under.

300 dates from permit to turned in line. So yes, if we take that.

Say 10 months and we extend it out which is what we're assuming to 14 months, that's what's embedded within the assumption to get to 5000 Boe per day, we believe.

We believe a based on history be probably more important than history. The direct discussions that we have with our producers.

And for our producer partners that that's a very reasonable assumption based on that discussion in their publicly stated activity that gets you to that 5000 Boe per day average.

No to caveat that a little bit further no of course, we see that ramping through the year. So the number that the production would be below 5000.

In the beginning part of the year and above 5000 in the later part of the year.

Okay, Great Thats Super helpful color and then.

Not not trying to peak in the one 2.0 is going to look like but just high level. When you talk to shareholders I knew you've had discussions within the company.

What do you think holds back the valuation is it just simply the size of the company. The company smaller or are people feel like you need more inventory, but you said you have felt very confident at the decade level it sort of 25% free cash flow yield. So just high level. What do you think are the puts and takes around that.

The kind of maybe depress balchem relative to other mineral companies.

Sure.

I think there is we can go back through a little bit of that.

History of the year and I think.

Fact of the matter is we have a world class asset base with World class operators were generating free cash flow, we have a strong balance sheet. We're returning that free cash flow, we have defined to growth and I think in my experience with our half a dozen plus public companies.

Mr market doesn't leave.

Money sitting on the ground for very long and so I think there happens to be a period right now that is an opportunity for investors to really step in and make a lot of money from that free cash flow yield 13% at current levels, that's our dividend 14% in our cash.

Cash flow generation and then the upward trajectory through next year, which is I think extremely well defined I think there is a.

An immediate opportunity that exists for investors I think you can look at.

The year end tax selling as a.

As.

Catalyst for whats depressed our price over the last month, or so, especially with the the I think liquidity in the stock price.

Or excuse me in the just the volume I think that.

That definitely ways and as Wayne, but I think the I think Mr markets pretty efficient then obviously energy is hated small cap energy's hated.

There has been we have great investors some of which have had great years outside of energy and are taking their tax losses.

I think all that does is set up a great opportunity for those you sift through the wreckage, we want to make money.

And Falcons, a great place to make money it certainly feels like from our perspective.

We're in a heads we win tails, we win scenario from a shareholder standpoint in any which way we go and so I think it's pretty it's a pretty exciting time for those who want to come in and make a lot of money in.

Falcon today.

Thank you Dan I appreciate it.

Thanks peers nice talking to you.

Next we go to the line Spiric Whitfield with Stifel. Please go ahead.

Thanks, and good morning all.

Hey, there.

Perhaps perhaps for you Daniel in light of the record M&A activity, we've seen across the energy sector. I wanted to ask if you could offer your views on the potential merits of consolidation within the minerals sector.

Sure.

As as Weve.

I think talked about in the past as you've heard from others. There's billions of dollars of minerals held.

Within private equity firms.

As well as family offices, but yes in places where.

They are not meant to be held over the long term and I think you will see consolidation in the space and I think there is an opportunity for value creation as a result of that.

Understood and as my follow up.

Ill shift over to the Marcellus in light of the increasingly constructive natural gas backdrop could you offer any color on activity trends youre seeing in the Marcellus that could impact your financials for 2021.

Sure. So we've always said.

Our Marcellus position is a.

They recover around 80000 gross unit acres 1500.

Net acres approximately but we've always.

That is a great call option on gas.

And I know there has been periods, where there is a feeling of there is no hope for gas ever and Lo and behold things change and I quoted Plato.

Hopefully uplift some people.

But Plato always described.

Constant change of life and just when we thought gas was dead of course natural gas prices are above $3 and thats, a great call option for us and and we have two rigs running across our acreage position and we have a nice amount of gas were not assuming anything.

Any upside in any of the numbers I've talked about.

Just our line of sight wells that we have and.

And Thats pretty satisfying we may have upside beyond what I've described but we're not assuming any of it.

That's great very helpful. Thanks for your time.

Yes. Thank you.

Our next question or comment comes from the line of Brian Downey with Citigroup. Please go ahead.

Good morning, Thanks for taking the questions on the line of sight wells in the hoax Ranch recent permit activity that you highlighted specifically how are you thinking about timing of those hoax ranch turn in lines. During 2021 have you had any conversations with the operator around that property or at this point is that connection estimate based on historical timing ranges.

Sure. So thanks, Brian nice talking to you.

Maybe is your follow up you'll have a financial question so Brian.

Yes get an answer in here, but.

But.

We of course.

Regular dialogue with our operators as you know as I've mentioned.

We make it an absolute policy not to front run our great partners are great operators and so.

We do have a view on timing.

And I think a pretty strong understanding as to win.

Timing will occur.

That of course will be in all likelihood in the second half of next year.

The numbers the 5000 BOE, we on average for next year.

Assumes.

Call. It late third quarter early fourth quarter turn in line.

For those 0.4 or five net wells.

So I think that gives us a lot of comfort with that number and conservatism built into.

The 5000 Boe per day average throughout.

2021.

Great and then actually I did have a follow up from Brian How are you thinking about your your hedging strategy going forward are you started hedging oil and now more recently natural gas.

Change in thinking around how you're going to approach that is there a particular target price level hedge percentage or so forth that you're going to target Sir.

No. It's a good question I appreciate it good to talk to you.

So obviously yet in June we put on those crude hedges really defensive in nature given the.

Given the volatility that we had seen in.

Two two and pricing so that was really defensive.

Sure on the crude side the gas hedges, obviously as Daniel mentioned, we saw I guess.

Up above $3 is pretty attractive pricing and so we feel good about where we are hedged right now and.

We're going to continue to monitor it but theres no.

We don't have we don't feel a need to add anything else.

Current juncture we.

We feel pretty comfortable.

Sorry, I was going to ask you is that so is that going to be more opportunistic rather than systematic.

No I mean, we're going to continue to evaluate and continuing to watch the market I think.

No obligations to hedge and so on.

We're always going to be looking at it on a on a.

On a market dependent basis so.

Yes, and Brian just to.

Add on to that.

Yes, I think opportunistic is the right way to think about it we saw on the oil side.

Oil rebound do 40, plus dollars a barrel and brown felt pretty satisfying after the debt so.

Of despair the market belt.

In April to be able to put on put in place hedges, if 40 plus dollars.

It's been good for the.

For the fourth quarter and first quarter on.

On the gas side felt pretty satisfying to lock in three dollar tight gas prices. So we've got to we've got a good business with good cash flow good balance sheet.

We feel like there's good prices will take them off.

Hi.

I mean, historically because our operating expenses are so low on a per barrel basis, we certainly don't need to hedge.

And you know we kind of also lump this into our strategic review and really rolling out a fulsome Falcon do point out. So it's conceivable that way, yes, there's a number of factors that will come back to the market with.

Inclusive of.

Of payout ratio and hedging.

To really lay out the next phase.

So that's that's how we think of it today.

Great I appreciate it.

Ladies and gentlemen, this concludes our question and answer session. We turned back to Daniel Harris for closing remarks.

Great. Thanks, Melinda and thank you all for joining the earnings call. Please.

Please be well stay safe, we look forward to speaking to you soon.

Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a great day.

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Oh.

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