Q3 2020 Freehold Royalties Ltd Earnings Call
All participants please standby your meeting is ready to begin.
Good afternoon, ladies and gentlemen, welcome to the third quarter results Conference call I would now like to turn the meeting over to David Baker. Please go ahead.
Good afternoon, everyone and thank you for joining us with me on the call from Freeholder RGB Henry our CFO.
Walking our vice president of business development.
I'm not going to you our manager of Investor Relations and capital markets.
Before we get into the highlights for the quarter and it was a really good quarter for us we want to know that alongside government and public health officials, we're actively monitoring cobot Nike update and following the latest guidance.
We prioritize the health and safety of our workforce by directing all employees to work from home. Initially now the burn a public health measures relax in June I returned to office top sports worked diligently to develop office safety protocols.
And with government and public health guidelines.
We were able to reopen drops in July with the reduced staff complement and we'll continue to monitor COVID-19 update.
All the latest guidance to move to our next phase of returned office.
We sincerely appreciate your continued efforts of our staff. During this time, we want to thank our shareholders for their ongoing support.
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We hope to continue to deliver strong returns to shareholders over the quarter.
We remain focused on sustainability ever dividend and providing consistent income source for our shareholders.
While reducing the overall risk profile by reducing leverage and positioning our royalty land the head of the drill bit.
We continue to highlight that during these periods of weakness is our strong margin and simple business model stand the test of time.
Operationally production on our royalty lands averaged 9096, B, a day essentially flat versus the previous quarter and down approximately 10% versus the same period last year.
Shutting in production on our royalty lands averaged about 5% during Q2, three and improvement from 9% in the previous quarter and we exited the quarter with only about 3% shot in.
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Through the remainder of the year and then 2021, we see volume stabilizing in our core plays like the biking, Clearwater Southeast and southwest is gathering in North Dakota. This.
This is driven by volumes coming back online and the resumption of third party drilling on a royalty lands.
We were encouraged with the level of drilling on our royalty lands during the third quarter was 32 wells drilled.
Recall, the previous quarter and no drilling activity after excluding adjustments as producers responded to weaker crude oil prices.
For the first nine months of 2020, we had 261 wells drilled on royalty lands.
The higher than our initial expectations.
What we're seeing is activity continued to be focused on our core Viking play it Dod Glenn but we also saw increased drilling in core plays in southeast Saskatchewan Westerns disguised in heavy oil cardium oil in West Central Alberta, and then liquids rich natural gas in the basin.
We believe that with the lower volatility within the crude oil price environment and the stronger natural gas pricing through the winter months producers will continue to remain active on royalty lands into break up of 2021.
Given the backdrop for Chinese volumes and uncertainty around that needs a third party drilling freehold announced early in Q2. It previously its previously released 2020 guidance no longer applicable.
We have continued to span the spend 2020 guidance at this time.
Expectation that we will resume 2021 guidance as more information is unveil on spending levels associated with some of our top drillers.
We expect to provide the next update investors as part of our Q4 2020 results, which will be released in March 2021.
As part of our Q3 results, we are increasing our monthly dividend by 33% for one and a half tends to two cents per share starting in January 2021 for shareholders on record as of December 31st 2020.
At the revised monthly dividend level three holds funds from operations are forecast to be at the low end of the annual payout range of 60% to 80%.
With two months remaining in the year is our expectation that dividend levels will be at the low end of our payout range for 2020 as well.
While increasing the dividend we continue to maintain the strength of our balance sheet and we'll continue to pursue pursue value enhancing acquisitions.
At current commodity prices and the revised dividend levels, we expect to pay down approximately two to two and a half a million dollars in debt per month with leverage remaining below 1.5 net debt to funds from operations.
I'll now pass the call to de boundaries walk through some of the financial highlights.
Thanks, Dave and good afternoon, everyone.
Financially as crude oil prices stabilized and natural gas prices improve freehold continues to deliver on the core aspects of its return proposition meaningful dividend well, providing investors with a lower risk investment differentiating itself from traditional oil and gas CMP companies.
In the third quarter freehold generated 23.1 million in royalty and other revenue up 56% versus Q2 2020.
Reflecting improved liquids and natural gas pricing lower cash costs and stable production volumes, our royalty portfolio generated an operating net back up $27.20 per be a week during the third quarter up 61% when compared to two Q2 2012.
Okay.
Funds from operations for Q3, 2020 totaled $19.9 million or 17 cents per share up 87% and 89% respectively versus Q2 2020.
Our payout on the dividend paid basis was 27% in the third quarter of 2020 down.
Down from 92% during Q2 2020.
We target free wholesale to remain at the lower end of our outlined range of 60% to 80% or 2020.
Our year to date payout at 67% as previously mentioned, we increased our monthly dividend for 2021 from one and a half cents per share to two cents per share, reflecting an improved and less volatile crude oil price environment and positive momentum.
Associated with third party capital on our royalty lands well.
While still remaining cautious and measured.
Cash costs for the quarter totaled $3.70 per really an all time low for freehold.
This was down noticeably from $4.79 per view in Q2 2020, the decrease versus Q2 reflects both lower operating and financing charges.
The reduction in cash cost was most materially impacted by the disposition of working interest production during the previous quarter.
With the forecasted impact on operating costs are expected to be approximately 35 cents previously.
Freehold closed the quarter with 14.4 million dollar reduction in net debt from Q2 2020.
Net debt totaled $81.7 million at September 32020, representing a one times net debt to funds from operations.
The decrease in net debt quarter over quarter reflect stronger funds from operations with oil prices likely to remain range bound for the remainder of 2020 and into the first half of 2021.
Expect our long term debt to EBITDA ratio to comfortably remain covenant compliance.
Freehold prudent strategy of maintaining long term debt to cash flow below one and a half times and a dividend payout range of 60% to 80%.
Funds from operations, providing cushion for potential volatility may pick up in commodities.
Updating our Canada Revue agency Reassessments.
Amounts are consistent with those reported last quarter freehold corporate income tax filings for 2015, 2018, and 2019 reassessed by the CR a in 2021% pursuant to these reassessments deductions of $92.6 million of non capital.
This is why freehold were denied resulting and reassess taxes interest and penalties totaling $29.3 million. In addition to a denial of $129.9 million of carry forward non capital losses.
We hold has filed its objection of the reassessment, which required deposits totaling $14.7 million.
We pay to the CR rate during the third quarter.
Freehold has received legal advice that it should be entitled to deduct the non capital losses, and as such management remains of the opinion that all tax filing today were filed correctly and that it expects to be successful and its objection to these re assessments and therefore the deposits paid to us.
They should be refunded with interest free hold anticipates the proceedings for this year Ray will take approximately one year to resolve further.
Furthermore, the payments of these deposits is not impact free holds earnings or funds from operations or net debt.
Now back to Dave for his final remarks.
Thanks, David.
So looking forward, we expect the next three to six months to remain challenging for the industry, although improving sharply from the oil price lows of Q2.
Setting ourselves apart revolt provides investors relative stability as royalties represent a higher margin business.
We continue to maintain flexibility in our balance sheet, while maintaining sustainability in our dividend occur.
At current share price levels, we feel the return proposition is an attractive entry point for investors.
With today's increase to our 2021 must be dividend, we highlight our the royalty model is sustainable through all commodity cycles. As we have demonstrated since we went public in 1996, nearly 25 years ago, we continue to execute on the core aspects of our strategy moving forward with the goal of maximizing returns for our shareholders.
In addition, we would also like to encourage all people to take a moment tomorrow. If you remember some of the sacrifices made by our D. heroes through Remembrance day ceremonies.
Well many of us may not be able to attend in person given some of the restrictions associated with COVID-19, we think it is important for people to take a moment to record nine some of the tremendous sacrifices Canadian soldiers of me to provide us with the credible redone and quality of life, We mean gaming Canada today.
We'll now entertain any questions that you may have.
Thank you we will now take questions from the telephone lines. If you have a question that you are using a speaker phone. Please lift your handset before making your selection.
Do you have a question. Please press star one on your devices keypad. If at any time you wish to cancel your question. Please press the pound time. Please press star one at this time if you have a question there will be a brief pause from other participants register for questions. Thank you for your patience.
And the first question is from Jeremy Mccrea. Please go ahead. Your line is now open.
Yes, hi, guys.
Can you give me an indication of how many new leases lease agreements Youve signed here for the quarter are looking to sign.
And just have you noticed any increase in activity on some of your gas weighted lens here I'm thinking maybe at saying or in some of those other areas there.
Yeah. Thanks, Jeremy it's a it's Rob seeking here maybe I'll answer your first question first or the second question first.
In terms of gas oriented drilling we've seen a little bit of a of activity in the deep basin with a couple of the the producers that that.
And we're close with.
I think that's I'd say, that's probably not the key focus of our activity. It's just really continue to be in the Viking in the Cardium.
In the southeast Saskatchewan, and we're beginning to see more activity in Clearwater. Those are certainly that are outside the big four that continue to be the most dominant in the portfolio but.
Some of the Cardium locations are obviously have that have a fair amount of Oh, my gosh in them as well so whether it's a gas economics of the liquids economics that are driving it.
Unclear, but they are big Port thing is there are being drilled.
And I was waiting for the new leases, let me get that number two I don't have a happy here it was a modest.
A modest amount in terms of what we were able to.
Oh, no secure in terms of new leases certainly from a dollar amount.
No we own this revenue.
Yeah. It was just more just trying to see how.
How much activity has really started to pick up have guys sorry to come.
Would you say, we're getting comfortable with filling again.
Let's look to sign these new leases are these lines over here and just generally how that's changed.
Sure, maybe I'll answer it a bit of a different way in terms of actual drilling because with what we've seen activity pick up in Q4 here. We are now on pace.
I play through Q4, we have about 50% more drilling on our lands relative to Q3 same areas are still the dominant areas of activity biking spark.
Sparky Cardium are kind of the the big three followed by a small by southeast Saskatchewan.
We've talked to a number of our Clearwater.
Players, where they're they're they're two in particular talked about 10 to 15 wells in.
In the winter drilling program here. So yes, I think we certainly are seeing signs of activity picking up.
In terms of drilling.
Okay No that's.
Thank you.
Thank you once again, please press star one on your devices keypad. If you have a question or comment. The next question is from site. Please go ahead. Your line is now open.
Hey, folks great quarter, just wondering why not instituted and see I mean, I just given Perry skies in doing something similar and it seems like there's not many acquisitions going on.
Yes Dick.
Our perspective on the N. JV is that.
Our preferred method of returning value to shareholders is through the dividend.
So that's our first priority and want to continue to manage our balance sheet is second priority and I think that we're actually seeing quite a good number of opportunities that are out there right now and so we do think that there are opportunities to further enhance our portfolio with select acquisition.
And we're taking a long term view that we think by allocating some capital to.
Making our portfolio, even more resilient and durable than it is right now by key acquisitions, and we think Thats a better.
Occasion of capital than.
I'd be at this point in time, certainly every opportunity that we look at do we compare to an empty IB, but ah, but right now we think that there.
There's there's opportunities to.
The new business out there that would make our company better.
Totally understand thanks for that color.
Just wondering as we get past Opac and you have more light on slide out over that.
Would you be targeting 60% to 80% payout ratio on that on the dividend as.
You know the the two the two cents.
Increase was good but just.
I guess, just thinking about it longer term.
Yes, definitely our strategy is still about 60% to 80% payout.
We're looking at here is more of a bit of a measured dividend increase we still have a conservative view on commodity prices, we're not 100% sure Youre always is going to play out despite.
Some of the optimism this week with the fire.
Their announcement and so really we need to see how that plays out we need to see how our quarter plays out and we're going to re evaluate in Q1, what's the evidence of our confidence that the environment ahead of US is it's a stabilized and is sustainable so.
The target is still there 60% to 80% how we ramp.
Ramp up to that through a measured approach is is how we're going to handle that so.
Hi, Thanks, that's all for me.
Thank you. The next question is from Davis. Please go ahead. Your line is now open.
Hey, Thanks for taking my questions here, just just a few quick ones from me related to the last caller.
How are you thinking about setting the dividend just from a modeling perspective are you typically kind of targeting the.
Lower end at 60% and then.
Thinking about the balance the 80% this kind of volatility cushion or how should we be thinking about that going forward.
I think that's a fair comment there.
Definitely.
Now given that you know just.
Steve rapidly evolving business environment that we're in a more comfortable operating at that at that bottom end or low end of that are the payout range provides ourselves a little bit of cushion.
We do see retracement of quality price and again.
But also we think that.
There's a good opportunity to.
Make some small smaller dividend that I mean smaller acquisitions that enhance our portfolio. So why don't I just need a little bit of room, there as well. So it's a balance it's a number of factors that are driving us initially the season that lower end as we just watch how the environment unfolds.
Right makes sense and then I guess for on that any any change in terms of how you're thinking about.
Hedging because particularly with the C quality pricing that sort of appears more constructive and I would say.
More so on the gas side.
Yeah.
Have not historically hedged and it's not an area of focus right now is that.
The prices are still volatile enough in either direction that we.
We don't think that hedging it is the right thing for US right now and and by the nature of our Conservative business model and the high netback that we achieve hedging is not as a key part of our portfolio as it would be safe for a traditional the.
Producer, where we've got a really good.
Stable production base that doesn't have operating cost component to it and it doesn't have a capital draw associated with it so from hedging is not a priority right now.
Right makes sense and then I guess final one from me just on can you maybe frame out what you.
Seen any acquisition markets to date any any kind of changes in recent months and you know can you kind of think about how we should be thinking about that going forward.
Im going to turn that over to Rob you've got.
And his team have been and really looking at a lot of opportunities that last little bit here and maybe just give some color on what you're seeing.
I live in terms of.
Since our last update in August we've certainly seen an uptick on both sides of the border as it relates to attend.
Potential transactions these are both.
Marketed processes, but also proactive conversations that though.
Hi, Alan.
And then on the Canadian side, a lot more actually just on the other.
Other manufacturer to core opportunities.
The or receptivity as it relates to proactive conversations with a number of counterparties, particularly on the private side.
Fair amount of dialogue I mean theres still.
Still fair bid ask spread that's.
That's that's definitely out there but.
But you know with every with every month, we're optimistic about that.
That that spread will narrow in the U.S. side, a lot of opportunities are coming across our desks I'd say more more more packages that are also.
Fairly attractive pretty interesting mix.
Near term production tangible upside and future upside and you know that's not just a Bakken comments, we've really been exposed.
Expanding our efforts.
Efforts and our and our our capabilities are you looking outside of North Dakota.
And then ER and have been looking at a number of opportunities on top.
That are in other basins that are seen capital being actively allocated.
In this current commodity price environment.
That's providing some encouraging.
Entities that were actually working on.
Right makes sense and then just final one did I can appreciate this might be a little bit more sensitive, but when you when you speak to spreads can you maybe.
Provide some some broader ranges in terms of where the market sitting in and around where you'd like to execute transactions that.
Yeah, maybe I'll just kind of talk more from a one of the key tenants as Dave talked about that when we're looking at acquisitions. It really has to be accretive to our to our free cash flow yield and so like how to use our free cash flow yield in that 15 ish percent range, plus or minus depending on that depending on the day.
Hey.
It has to be superior to that.
And so I think that you this bit of a data point to kind of point to in terms of where where we need to see acquisitions to add to to be attractive and be competitive for us and there are probably a little that up a little bit inside that right now.
Well makes sense, thanks, very much guys appreciate it.
Thank you there are no further questions registered at this time I'll turn the meeting back over to Mr. spiker.
Okay, well thanks, everyone for attending the call. This afternoon and thank you for your interest in our story interest in our company and for the value proposition that we offer so at a very good quarter and we look forward to talking guys again throughout the coming weeks.
Thank you and good queue. Thank.
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