Q1 2021 Falcon Minerals Corp Earnings Call
Ladies and gentlemen, thank you for your patience you are holding for today's Falcon minerals Q1, 2021 earnings call. At this time, we are gathering additional participants and will begin momentarily. We appreciate your patience and ask that you. Please continue to hold.
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Posted on our website.
Lastly, the company will be attending several virtual investor confidence as a as in the coming weeks, including cities 2021, global energies and utilities virtual conference on May 11th.
And a UBS global oil and gas virtual conference on May 26.
That I will now turn the call over in a Falcons, President and Chief Executive Officer, Daniel Hearns for his remarks Daniel.
Thanks, Brian Good morning, everyone. Thank you for joining Falcon minerals first quarter, a 2021 earnings call.
Following my remarks, Mike Downs, our Chief operating officer will discuss specifics related to the first quarter as well as a favorable impact that day. Many recent wells turned in line will have on the second quarter and for the rest of 2021.
Then Brian Gunderson, our Chief Financial Officer, who you just heard from will give the financial report and then we will take your questions.
As you May remember.
Last quarter I quoted Red Queens warning to Alice in Lewis Carroll's through the looking glass when she said quote it takes all the running you can do to keep in the same place. If you want to get somewhere else you must run at least twice as fast.
Well I'm pleased to say that we had Falcon are in fact now running twice as fast and we really are getting somewhere.
I'm happy to report the first quarter of 2021 was quite satisfying.
Falcon minerals generated nine $5 million, a adjusted EBITDA and free cash flow growth of approximately 28%.
Of course this <unk>.
Cash flow growth reflects the impact of the winter storm in Texas, So without the storm, we would have seen even more favorable results.
This growth and cash flow is allowed us to increase our dividend, 33% relative to the fourth quarter of 2020 to 10 cents or 40 cents on an annualized basis.
And we are just getting started for the year.
We've spent the better part of the last nine months thoroughly dissecting, our business, including the value proposition, which exists to invite investors and considering various options to closed a significant discount we are currently trading at.
Having completed that work it is even more clear to us that we have a world class asset base in the core a vehicle Ford with the best operators in the U S. Prosecuting long term development plans.
Even if Falcon remained static we would generate and returned substantial cash flow for a very long time.
Likely returning cash flow that is multiples of our current share price.
But we are not going to remain static.
We fully recognize the value of becoming a larger more diversified and dynamic minerals business.
<unk> minerals has the potential to be best in class with our foundational assets in the karnes trough of the Eagle Ford and the opportunity to grow that asset base, while remaining in the core of the core of the top plays in the United States.
As such we have re engaged our ground game for acquisitions and are actively acquiring top tier minerals.
Of course, we also remain committed to our balance sheet and expect to be approaching one times debt to EBITDA in the second quarter and well below one times by the end of the year.
Knowing that we can do very well without acquiring anything allows us to be discriminating and to acquire only assets that we really want at prices that drive value for Falcon and its shareholders.
Brian outlook is driven by the following there were one two or three wells turned in line during the first quarter, which 117 is related to the Eagle Ford.
These well connections occur throughout the quarter with a majority of that connection's happening during the latter half of the quarter.
Sure.
This will drive production growth into the second quarter as production continues to ramp from these wells and we see a full period a production.
Looking forward to the remainder of the year, we have 203 gross and 2.04 net Eagle Ford Wells in our line of sight inventory.
Included in this total are 94 net wells that are ducks, we're waiting on a connection.
And our internal forecasting we assume that the majority of the dust and wells waiting a connection will be connected over the next two quarters.
To be clear. This means we expect approximately $2 one seven net wells to be turned in line over the first three quarters of 2021.
For permits we assume a conservative approach compared to our historical average timing from permit to well turn in line and assume approximately 30% a permits will be connected by the end of 2021.
And this doesn't take into account the more than doubling a completion crew activity currently running compared to the trough of 2020.
Using these assumptions along with a modest amount a new Marcellus well connections results than our anticipated, 20% to 25% production growth from the first quarter the second quarter.
For a quarter marketing and transportation expenses were point $4 million for the quarter or $1 six per barrel down from $1.15 per barrel in the fourth quarter a 2020.
Cash G&A expense was approximately $2.4 million for the first quarter.
First quarter cash G&A excludes approximately 1.0 million of non cash stock compensation expense recognized in the period a G.
Justin EBITDA for the fourth quarter was nine 5 million.
This represents an increase a $2.7 million from the six $8 million reported in the fourth quarter. The increase was largely attributable to a 41% increase in average realize oil prices compared to the fourth quarter.
At the end of the first quarter Falcon at $45 million outstanding on it's a revolving credit facility and $2.9 million cash on hand, resulting in a net debt of approximately 37 $6 million at the end of the first quarter.
<unk> net debt to LTM EBITDA ratio as of the end of the first quarter was 144 times, we anticipate but Falcons net debt to LTM EBITDA ratio will tech will trend back below one times leverage mid 2021 at the second quarter of 2020 rolls off.
From the calculation.
Falcon reported a first quarter net loss of $1.5 million on a standalone basis and point 5 million net income a inclusive of noncontrolling interests.
Falcons reported first quarter net loss of $1.4 million inclusive of a loss of $3.2 million associated with a reevaluation of the companies Warren liability on GAAP income tax expense a point 4 million for the quarter is mostly attributable to the utilization of our deferred to.
<unk> asset.
The company encouraged no amounts related to the current period income tax expense and incurred no cash income taxes for the first quarter a 2021.
This is primarily due to the tax benefit a a step up a a basis step up related to the assets that Falcon acquired as part of a transaction with a oil resources and 2018.
As a result of the stepped up basis, we expect to benefit from a cash tax perspective for the foreseeable future.
Falcon expect that at least 50% of a dividends paid to class a shareholders. During 2021 will be classified as a non dividend distributions in 2021.
This treatment will generally result in a nontaxable reduction to the tax basis of shareholders common shares.
As a result, non dividend distributions are treated as a reduction of basis until the time when investors basis is fully recovered. This reduced tax bases will increase shareholder capital gain a decrease shareholders capital loss from the shareholders sales their common shares.
On May 5th 2021, Falcon declared a first quarter dividend of 10 cents per share. This dividend is payable a june 8th 2021 to shareholders of record as of May 25th 2021 day.
The 10% dividend payment reflects a payout ratio of 97% a pro form a free cash flow.
Pro perform a free cash flow per share was approximately 10.3 per share for the quarter, we defined pro forma free cash flow as adjusted EBITDA inclusive of Noncontrolling interest less interest expense and pro forma cash income taxes are estimate a pro forma for.
<unk> cash flow for the first quarter, a 2021 did not included in amount for a pro forma cash income taxes with that I will now turn the call back over to Daniel Daniel.
Thanks, Brian.
Karen I think we're ready for questions. Thank you, ladies and gentlemen, a floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time.
Speaker phone, we ask that while posing your question you pick up your handset to provide the best sound quality.
Again, ladies and gentlemen, if you do have a question or comment please price star one on your telephone keypad at this time, please hold on a moment, while we pull for a question.
Well, we'll take our first question from Lee Cooperman with Omega family Office. Please go ahead.
Good morning, and thank you for all the information.
As a a focusing on the comment we're going to a strategic review the way I read what you said was that we have a very undervalued asset you remain a flexible if something intelligent came about to do but right now you want a run your own show and if a.
Accretive acquisition presented themselves you're more likely to be acquired to acquiring then selling is that what you're trying to say.
Said.
Thanks, Lee good morning.
Good morning, I think that's generally.
Very well said, a except I would ah.
Just dead.
We are constantly looking for the way to maximize value I am bringing forward value. So.
Right now, we see opportunities to acquire but that certainly doesn't.
Eliminate other opportunities that would be contrary to that.
Such a a good luck. Thank you very much for all your information.
Thankfully.
We'll take our next question from Kyle made with capital One Securities. Please go ahead.
Hey, good morning, guys.
Thank God.
Daniel appreciate color on the strategic review and following up on a previous question. Just wondering if you can elaborate on what Falcons Falcon is doing to become larger and more diversified.
Yes so.
Good morning, Kyle nice to talk to you.
As I mentioned in my remarks, we've re engaged our ground game.
Staying true to our core principles of owning core of the core top basins with top operators.
And.
I look forward to coming back next quarter with an update but I would say we're starting modestly.
But we are actively on the ground by.
Got it okay. That's helpful a.
And I believe last quarter. It was mentioned that the the prior full year production outlook for around 5000 per day was conservative and and based on your comments today that seems to still be the case.
Just wondering if you can give us an update on maybe a little bit more granular. How you are seeing production shape up for the year.
Yeah I think.
It's very similar to a couple of months ago as we discussed I think the the.
The first quarter is right on line with what we were talking about a couple of months ago and that even with the effect of the winter storm. There's high NRI wells came on line in January they keep the other ones came on line in March.
The all of the additional lower NRI wells, and we're going to get the full benefit.
Of that production in the second quarter.
And and really that that peak production without the negative impact a the storms we than a.
A significant number a wells that are completed and waiting to be turned in line and then the next batch of ducks.
So on with the permits so we really see an upward trajectory during the second half of the year and we feel very good about.
5000, plus Bowie per day.
Understood. Thanks for taking the questions. This morning.
Thanks Kyle.
I will take our next question from Derek Whitfield with Stifel. Please go ahead.
Thank you good morning, all congrats on a strong front.
Thanks Derek.
Picking up on the last question I wanted to ask if you could play some broad parameters around your 2022 outlook based on your line of sight activity and current industry activity.
Thanks, Derek that's a.
So.
We're really getting pretty excited about 2022, given what's going on with our main three operators plus others.
With that said I really don't want to get.
I'd say over over a easier we see a I think what you're alluding to is very much what.
What we're seeing which is a lot of activity or operators prosecuting their multiyear development plans and that really bodes well for a strong 2022 on top of the already significant permits.
Permits that are in place so beyond that.
I think we'll we'll hold for now.
Fully fair and maybe just a dig in a bit on the last part of that comment because we see the same things from our side and that is when you look at the core operators maintaining activity at that 12 rig level, they're a seemingly an upward bias in our view to your permit accounts, assuming you maintain your <unk>.
Market share is that a is that a fair assessment.
Yes, we definitely see that and of course, we also a benefit from.
And and it really is attributable to the full Falcon team to just really great relationships with our operator partners and and we are grateful for their openness with what their general plans are and and sometimes very specific plans are so we.
We very much are seeing that we are hearing it we don't like to and we have a will get in front of what they're what our operators are saying publicly but we do have a.
A strong positive bias towards 22, 2022, and where we're headed there.
Very helpful. Thanks for your time guys.
Thanks to Eric.
They will take our next question from Pierce Hammon with Semmens Energy. Please go ahead.
Good morning, and thanks for taking my questions just following up on some of the earlier questions a derek's questions specifically the hooks ranch.
What are you see there what's the latest booked.
Booked a to slide deck, and you said that the.
For a lower Eagle forward it to upper Eagle Ford Wells are expected to be turned in line in Q4 21.
Is that still you feel competent there and is that going to have more of a production impact for next year or for this year.
Yeah.
Question, we we remain confident and feel very good about.
Development coming on line in the fourth quarter I do think that will be.
Partially benefiting the fourth quarter, and then really helping a early into 2022.
And then Daniel obviously, you've been very successful in the Marcellus in your career, but.
Does it make sense to divest this Marcellus asset that you have here.
Okay, and then use those proceeds whenever they are to go ahead and add that to your ground game.
Dry powder just curious.
With the Marcellus, what's the longer term plan.
I think that's an insightful thought.
And that's the type of work were constantly doing to make sure that we are.
We are maximizing a returns and that.
That asset might be better more valuable in someone else's hands and we might be very.
Capable of redeploying that we don't currently a any plans to do that but I think it's a it.
Is certainly something we've we've considered and continue to consider.
Thank you.
Thank you we'll take our next question from Chris Baker with Credit Suisse. Please go ahead.
Hi, Good morning, guys Uhm solid update just hoping to take maybe a bit of a a different hang on a strategic review are there a sort of key learnings from that process that you might highlight force as we think about the the approach going forward.
Yeah.
Good question.
I think.
The number one takeaway is a.
I think we have a great team with respect to the management the board.
We have people, who really spend a lot of time.
Diving deep into every aspect of our business.
And the prospects for our business and I think the real takeaway is the level of confidence that we have in.
Our existing production and our future production and what that really means from.
From a value standpoint, and so.
I think what it means to us is that.
Under a valued in the public marketplace and.
You are radically we should trade at a higher value, which.
Is nice for us to think about but.
Think tangible reality, what it means is we're going to generate a lot of cash flow over the coming years and as I said in my remarks likely multiples of.
And hopefully many multiples of our current share price and we're going to hand net back so do.
Doing nothing is a could be a very good outcome at the same time. We also have very much recognize that being a larger more diversified.
<unk>.
Minerals business.
Could it be valued more highly than the public marketplace.
We will not delude, the great asset base in the great operator base that we have so we think that we really have a potential to be a best in class in the best basins and the core of the best basins with the best operators and so I think what we.
Learn as number one we have we've.
We've realer than that we have a world class asset base, where a shareholders. We're all going to do very well.
The coming years, but we also have an opportunity to yeah, I think a trade substantially better as we grow and become larger and more diversified while staying staying true to our essence of core a decor top basins top operators.
Great. That's helpful and then just as a follow up.
Kimball put out sort of a comprehensive inventory update this morning, I was curious just to get your thoughts.
A post strategic review on where you see inventory depth.
And if there is sort of a a right number out there as you think about the <unk>.
<unk>, starting the ground game A&D program.
Yeah, I, we've been laser focused on our work so have not reviewed kimball's from.
Luis but it from an inventory perspective, and this dovetails on the nine months plus a work.
Yes, we have just under 3000.
Top tier gross locations a.
And if you assume.
200 wells gross per year, that's 15 years, a inventory if you're a 250. That's 12 years of gross inventory I think that's a fair way to look at at 12.
12 to 15 years, a inventory life, that's all core core carnes trough.
And so.
From our perspective, I mean, that's that is.
A as as good as it gets in.
The energy World because our area I believe is the most economic area to drill for oil in the United States.
Great. Thanks.
Thanks, Chris.
And Mr. Herz, there appear to be no further questions at this time.
Great well. Thank you all very much for joining the call. We look forward to speaking to you again very soon.
Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation you may disconnect. Your lines at this time and have a great day.
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