Q1 2021 Freehold Royalties Ltd Earnings Call

This conference is being recorded.

Let's close the holes at the old as you see.

All participants please standby your conference is ready to begin good morning, ladies and gentlemen, and welcome to the first quarter results Conference call I would now like to turn the meeting over to Mr. David The Speaker. Please go ahead.

Good morning, everyone and thank you for joining us.

On the call with me today are David Hendry, our CFO.

Rob Kain, Vice President of business development, and Matt Donohue, our manager of Investor Relations of capital markets.

The first quarter marked a period of rebound for freehold as the company restored production levels generated significant improvements in funds from operations.

The <unk> dividend and completed its first transformational in the U S royalty transaction.

All while reducing leverage.

To start this morning, I would like to talk about the dividend increase and then we will focus on the excellent operational performance we have had.

In conjunction with projecting 10% to 15% production growth over 10 over 2020, we will be increasing our dividend for the third time this year.

Increasing our monthly payout by 33% from three <unk> per share for per share starting in June the shareholders of record on March on May 31, 2021.

This healthy dividend the increase represents a measured approach and moving the dividend upwards towards our long term, 60% to 80% payout ratio objective.

The step wise approach takes into consideration that despite the improvement in the commodity price outlook. There still remains a considerable risk with the uncertainty on the ultimate pace and sustainability of demand recovery as COVID-19 vaccination initiatives are well underway.

We also see this as an opportunity to deleverage our balance sheet with free cash flow after dividends being directed to further reduce our debt retaining financial flexibility to do further high quality acquisition work.

The key highlight for the quarter was the completion of our acquisition of of diverse U S royalty package reinforcing our identity as a publicly traded north American focused oil and gas royalty company.

The $74 million of acquisition closed in early January and has provided freehold with exposure to 450000 gross drilling unit acres of many.

Title as an overriding royalty interest across 12 basins in eight states predominantly weighted towards the activity of rich Permian and Eagle Ford basins.

Our team has worked hard to incorporate these assets into our portfolio over the quarter with early indications, suggesting performance exceeding expectations.

Additionally over the quarter, we were able to complete three tuck in acquisitions, adding exposure to the Bakken and Permian basins.

These deals totaled $4 9 million and closed this quarter there.

They are estimated to add 85 <unk> a day of production in 2021, and we will provide additional growth into next year.

We have been extremely encouraged with the level and quality of acquisitions, we have seen to date with the initial transaction, providing us a strong suite of assets to expand on two further deals in.

In the near term, we expect to be busy on both sides of the border with a focus on enhancing the quality of our royalty portfolio and providing strong returns to our shareholders.

We see the growth of freehold the U S portfolio as further diversifying our royalty lands, enabling participation in some of the most attractive plays in North America.

Moving forward, we believe our U S royalty lands will provide a key growth wedge to our production profile increasing option value to provide returns to our shareholders.

On the operations from production for the quarter average 10944 Boe per day, representing a 13% improvement over Q4, 2020 and of 3% gain on a per share measure.

We had a small period of weakness associated with our U S portfolio with the cold weather in Texas over the quarter, but has since rebounded production.

Production for free holds the U S royalty assets average 285 Boe per day in Q1, 2021.

Our 400% increase from 257 BOE per day in Q4, 2020 and of 414% increase versus the same period last year.

Based on our first quarter results and our outlook for activity on our royalty lands both of those in the U S and Canada. We are maintaining our 2021 production guidance range of 10502 of 11000 Boe per day.

At current commodity price levels, we see third party activity offsetting natural declines, which enables free cash flow for growth of the dividend value enhancing transactions for to pay down leverage.

On the drilling front of 111 growth $3 nine net wells were drilled on our royalty lands in Q1 of 37% decline on a gross measure versus the same period of 2020, but flat when compared to Q4 of 2020.

With the upward moving crude oil prices, we are seeing activity increase on the free hauls royalty lands with approximately 10 rigs.

In Canada for in the U S.

On our royalty lands during the quarter.

In Q1, 2021, approximately 75% of all locations drilled in Canada targeted gross overriding royalty prospects with 25% focused on prospects on freehold the mineral title lands.

50% of all locations drilled targeted prospects in Saskatchewan with the remainder focused in Alberta the.

Vast majority of wells drilled more than 90% or FERC were focus on oil or liquids prospects.

The Clearwater oil play in Central Alberta represents freehold, most active area over the quarter.

The increase in activity, reflecting the change in operator late last year and subsequent ramp up in that operators spending on the lands.

We expect this to represent a key growth area for freehold in the near to medium term with the play offerings strong economics at current commodity price levels.

In the U S activity levels on free holds the mineral title lands have met expectations with the majority of the focus on light oil prospects targeting the Permian and Eagle Ford basins.

Overall 18 gross wells were drilled on our U S royalty lands over the quarter was between four to five rigs continuing to drill on our lands.

The acquisition of additional U S royalty production and royalty lands in Q1 2021, as further diversified and enhanced freehold asset base, bringing added sustainability to its portfolio and dividend.

We have considerable optimism heading into 2021, and we'll continue to focus on positioning freehold to be of Premier North American royalty company with a strong balance sheet.

Sustainable dividend and prospects for growth and top tier oil and gas operating areas.

I will now pass the call to Dave Hendry to walk through some of the financial highlights.

Thanks, Dave and good.

Good morning, everyone financially as commodity prices improved over the quarter freehold continued to deliver on the core aspects of his return proposition, providing a meaningful dividend, while also providing investors with a lower risk investment differentiating itself from traditional oil and gas E&P.

Companies.

Royalty and other revenue totaled $36 8 million for Q1, 2021 up 42% from the fourth quarter of 2020.

Funds flow from operations for Q1, 2021 total of 32 4 million for 25 cents per share up 47% versus the previous quarter. The increase of both reflects strong upward momentum in crude oil prices and the positive contribution from our U S acquisitions.

Freehold the dividend payout totaled 24% for Q1 2021, consistent with Q4 of 2020 and down from 92%. During the same period in 2020 as previously mentioned, we increased our monthly dividend for 2021 from <unk>.

Per share two for per share reflecting of measured response to an improved commodity price outlook and an expected increase in the third party spending on our royalty lands in 2021.

For Q1, 2021 cash cost totaled $4 37 per BOE slightly up from $4 on 11 per BOE in Q4 of 2020 with annual of short term incentive plan paid in the first quarter of each year, but down 24% versus the same periods of.

Last year the.

Wrong result, reflected reduced G&A financing and operating cost charges.

For the year, we executed upon a number of cost saving measures, which have improved our net back and profitability.

For 2021 U S acquisitions are expected to only add a marginal amount of G&A, which should continue to improve our corporate cost base and net back.

Net debt totaled $64 8 million at March 31, 2021, representing 0.8 times net debt to funds flow from operations relatively consistent with Q4 2020 as free cash flow was applied to our recent acquisitions, but of 37 million.

All of the reduction from Q1 2020, the decrease in net debt year over year reflected strong funds flow from operations alongside of lower dividend payout.

Freehold prudent strategy of maintaining long term debt to funds flow from operations.

Below zero.

And the harp between zero and one five times alongside of longer term longer term dividend payout target range of 60% to 80% of funds flow from operations.

Provides the cushion for potential volatility in commodities.

In conjunction with our recent U S acquisition Freehold, the exchange $12 6 million subscription receipts for an equivalent number of freehold common shares.

The raising gross proceeds of $67 million. This represented one of the first successful Canadian E&P financing and a number of years and we would like to thank all of our shareholders and the syndicate of banks that helped freehold complete the transaction.

In March 2021, Freehold also amended its credit facility with a syndicate of for Canadian banks, maintaining the committed revolving facility at $165 million and the operating facility of $15 million.

The amended credit facility agreement includes the permitted increase in the revolving facility to $215 million subject to lenders consent.

Both of the committed revolving and operating facilities mature March 31 2024.

At the end of Q1 2021 $96 million was drawn on these facilities versus $93 million at year end the.

The slight increases due to the recent acquisitions of U S royalty properties. The credit facilities are secured with a $400 million first charged demand debentures over all of free holds Canadian royalty income assets and fixed charge mortgage securities on certain U S royalty income assets.

Now back to Dave for his final remarks.

Thanks, Dave So looking forward, we remain enthusiastic about the next 12 months of operations, we've seen of steady training up of capital and production volumes on our lands both in Canada, and the U S and at current commodity price levels are high royalty margins offer significant option value to provide returns to our share.

Our holders.

With today's increase to our 2021 monthly dividend. We highlight that this is the third time in the past six months that we have revised our 2021 payout upwards.

The groundwork is in place for an exciting 2021 of them beyond the improved economic conditions are very positive for our industry and highlight the strength of the royalty model.

Through execution of our strategy in the coming quarters, we expect to be able to showcase the strong return proposition and investment in freehold provides with the ultimate commitment to maximize value to our shareholders.

Okay. So I will now turn the turn the meeting over to a question. So if anyone has any questions. Please feel free to bring them forward at this time and are and we will answer those.

Thank you.

A question and Youre using a speakerphone please Mr handset prior to making your selection.

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Once again, please press star one at this time if you have a question is the first question is from Evs is tuscola with industrial Alliance. Please go ahead.

Good morning, and thanks for taking my call.

Got a couple of questions first one of if you could comment on the trap line of potential acquisitions in both Canada and the U S.

Just maybe flipping back to six months ago and today do you see that trap line is greater or equal to or less and very broad.

The numbers are of size.

And really what I want to drive to is is the potential increase in the capital gains tax rate driving some of that.

The potential upside.

Sure.

As Rob King speaking I'll tell I'll take this question of eyes.

So maybe I'll just give you a couple of data point numbers in terms of the opportunities that we sort of looked out of the first four months of the year and sort of what we're seeing on our plates right now on the first four months between the U S and Canada.

We looked at above 35 opportunities.

In depth there is probably about the same number that we did not look at it in terms of in terms of something we wanted to allocate our time to and what that was for whether it's the wrong basins or not the right mix of development versus <unk>.

Versus the near term production et cetera of bunch of reasons, why we might have decided not to evaluate those.

The other transactions I think we're.

Seeing a pickup particularly in the U S. As it relates to opportunities that we're seeing coming forward private equity, which is they've put north of $15 billion of.

Of capital towards the mineral title sector of the last half of dozen years.

We really haven't had an opportunity for an exit in the last year and a half.

So I think are increasingly looking to test the waters in terms of how this more constructive price environment.

They may play out and we're looking at right now close to a dozen opportunities are in the in the U S. Primarily focused on the Permian and all of the Eagle Ford.

In terms of the capital gains comment I think that was something that we we saw a bit more activity.

Lastly in late Q4.

In terms of the number of sellers wondering that that was on something that now.

That's the.

The rumors of the prospects of that and certainly that's probably accelerated a little bit in terms of people's against expecting there will be some near term tax changes.

I think the commodity price has a bigger impact frankly on terms of encouraging people then.

Then the capital gains out of being from what we're seeing.

Okay.

I really appreciate the color no my questions are a little higher level of macro maybe one last one.

The dividend payout ratio is relatively low you can Q1, then you do have your targeted range.

[laughter] targeted range of probably based on a number of factors but.

Over what period of time would you see moving on to that targeted range without the four quarters eight quarters.

Broad question, but I thought I'd throw it out there.

Hey, this is Dave Spyker could respond to that Tom Yeah for Mad of target perspective.

The 60 day, 80% range, we view that day to where we want to be as probably more on the lower end of that.

Target range right now and so you know going forward at the $55 of price Tech deck that we're using in our model, we're projecting kind of run rate.

The payout in the low 50%, so we're getting toward that 60 range and so the.

The couple of things that are that are keeping us air or is that still a little bit of uncertainty on the commodity price. We're we like where it's at right now but.

So we recognize given what's supporting it that it can still be a little bit fragile and and also just with the opportunity set that Rob referenced that we see in front of US we think that there's the opportunity to continue to add you know meaningful high quality assets to the portfolio.

Well one of our advantages is that are you know with the recent reconstruct of our portfolio with the.

Adding in the.

The U S acquisition work and some of the work we've done in Canada is that we see I really of low to no decline.

The forecast for the next few years. So we can be much more patient and finding the right opportunity that are that we want to add so we've got of certain recipe that we have to build the portfolio and so we want to just keep some capacity available to do that so in our view will we'll we'll keep at that low.

The end of the payout range or maybe slightly below that for the next year or so, but we'll ensure way back up into that range as we are confidence in the commodity price outlook.

Great.

Really appreciate the answer it helps with the calibration points.

The what youre thinking of got lots of more questions, but I'll I'll turn the call over to others in the queue. Thanks very much.

Thank you once again, please press star one on your device keypad. If you have a question on.

The next question is from Jamie Kubik. Please go ahead.

Yeah. Good morning, Thanks for taking my question here.

As highlighted in your press release, you had 10 rigs running six in Canada and for in the U S. On your royalty lands can you maybe frame or remind us I guess, what what level of rig activity would drive growth on your asset base in Canada, and what level would probably be needed to.

Remain flat I'm, sorry, both in Canada, and the U S on that question.

Yeah. So in terms of of rig activity when we when we came to the forecast for our 2021. The 10500 to 11000 barrels a day, that's sort of baked in about 15 one.

One five net wells on a on.

On our on our U S and Canadian lands over the course of of.

2021, and so as of as of first.

First quarter and were at just under four so we're sort of on on path to that effectively is is of maintaining flat production.

Year over year, so both above the level that we sort of saw in Q1.

Sort of the run rate that we're seeing right now.

Yeah.

And Jamie I don't think it's just necessary if it's Matt here.

Sorry, but I don't think it's just an add a rig number because we've had you know producer in the in the Viking go to longer reach wells and add the productivity. We've seen some more deep basin drilling net add higher but volumes and we're still kind of triangulating on the U S and what are the actual.

The rig translates to a well translate to a net well at and as production. So but I think we've done a pretty good job of trying to figure out what the profile looks like in the end. It looks you know on a much more constructive level of and it has in the past with.

I think inching up through the back half of the year as the U S grows and made of Canada declined slightly.

Good good common there on the on the net wells, Matt I mean, it's one where we're still calibrating these numbers, but when we look at what our net well in Canada brings on relative to one net well in the U S. It's quite a it's quite a different story.

While the net well in Canada for Us would bring on about call. It 70, Boe's a day of of incremental production.

One net well in the U S would bring 700.

Most of the day of incremental production, obviously all of our royalty rate in the U S is much smaller than it than it is in Canada for the four for four of 5% in Canada, 5% in the.

In the U S, but sort of shows on our ability to expand the the U S portfolio.

We can certainly bring a lot more incremental production gains.

Okay. That's good color guys. Thank you that's it for me.

Thank you there are no further questions registered at this time, so I'll turn the meeting back over to Mr. Speaker.

Okay. Thank you for everyone for attending today and say, we're really excited about our go forward in 2021, and we've got a lot of.

Good initiatives underway and look forward to catching up with everybody at the next quarter conference call. Thank you.

Thank you Mr Speicher that.

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