Q2 2021 Freehold Royalties Ltd Earnings Call
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All participants please standby your conference is ready to begin.
Good morning, ladies and gentlemen, welcome to the second quarter results Conference call I would now like to turn the meeting over to Mr. David Spyker. Please go ahead.
Good morning, and thank you for joining us.
On the call with me today are Dave Hendry, our CFO, Rob Kain Vice.
Vice President business development, and Matt Donohue, our manager of Investor Relations and capital markets.
The second quarter marked a period, where freehold continued to execute its strategy growing its funds from operations, reducing its debt levels, increasing its dividend and subsequent to the quarter completing three value enhancing transactions showcasing the north American advantage that our royalties portfolio provides investors.
To start this morning, I would like to talk about the dividend increase and then we will focus on the excellent operational performance we've had.
In conjunction with projecting 12%, 15% production growth over 2020, we will be increasing our monthly dividend by 25% from four cents per share.
<unk> per share starting in September to shareholders of record on August 31.
This represents the force increase in the past nine months.
The dividend increase strikes a balance between maintaining the flexibility to continue to enhance our portfolio through acquisitions and returning value created by this works back to our shareholders at an appropriate pace.
We continue to strive for further increases in our payout through a measured approach moving the dividend upwards toward our long term, 60% to 80% payout ratio objective.
Yeah.
On the acquisition front, we've had a very busy period subsequent to quarter end announcing three acquisitions, which expand our position in the U S. Permian and Eagle Ford plays along with building our already strong position in the Clearwater in Canada. All transactions are expected to be funded with free cash flow and our existing credit facilities.
In July we closed the acquisition of certain U S royalty properties for $19.3 million.
This transaction included exposure to the Eagle Ford, Delaware, and Midland basins, expanding free holds north American royalty footprint.
Freehold forecast greater than 500 growth development locations associated with the acquired royalty acres plus near term development upside from approximately 15 drilled and uncompleted wells and 30 permits over 90% of which are forecasted 2022 development activity and approximately 50% of <unk>.
In 2023 development activity.
The acquired royalty assets provide exposure to a strong suite of E&P producers with multiple years development plans expected on the acreage.
2022 funds from operations from the acquired royalty properties is forecast at approximately $2.7 million with production of approximately 150 <unk> per day.
Yesterday freehold entered into a definitive agreement with one map mineral services LLC to acquire concentrated high quality U S royalty package for $67.1 million subject to confirmatory due diligence and any potential resulting adjustments with the deal scheduled to close in October.
This year.
These Midland assets will play a key role in strengthening the resiliency of free holds north American royalty portfolio, enhancing near and long term sustainability of freehold the dividend.
Through multiple years of production and funds flow growth.
The transaction provides our core Midland basin royalty position anchored by our premier counterparty with multiple years of future development.
Freehold forecast greater than 2300 growth future development locations with over 50% of the development expected to be economic at WTS prices less than U S $35 a barrel.
Production volumes are forecast to grow by approximately 25% on a compounded annual growth rate from 2021 through 2024 with approximately 50% of development in 2022, underpinned by drilled and uncompleted wells and permits.
2022 production and funds from operations from these assets are forecast at approximately 550 Boe per day and $9 million.
The addition of <unk>.
U S royalty acquisition is in line with freehold strategy to add to our North American portfolio further positioning us into high quality development areas with multiple years of development upside in growth.
And finally in July freehold closed a Canadian Ross.
Royalty deal, adding to the company's already strong position in the Clearwater play in Central Alberta.
Total committed consideration associated with this transaction is up to $7.9 million to be paid in accordance with the drilling agreement for 3% to 5% gross overriding royalty over 35 sections of land.
2022 forecast funds from operations associated with the acquired royalty assets is approximately $1.2 million with production volumes forecast at 100 per day.
On the operations front production for the quarter averaged 11130 <unk> per day, representing a 20% improvement over Q2 of last year, and a 2% gain versus the previous quarter.
U S portfolio continues to perform above expectations, averaging 540, <unk> a day in Q2.2021, a 20% increase from 285 <unk> in the first quarter of this year.
Growth in volumes reflect better well performance and slightly better than forecast activity levels on those royalty lands and.
In Canada production averaged 90, 593 Boe per day up 4% from the same period in 2020 with gains associated with increased third party spending on freehold royalty lands.
After realizing actual results for the first half of 2021 and with Freehold. Most recent acquisitions, we are implementing guidance for the second half of the year.
We are forecasting production volumes to range between 11000 to 11500 <unk> a day through <unk> through 2021 with volume expected to be weighted approximately 55% oil and Ngls and 45% natural gas.
On the drilling front.
84 growth are $2, one net wells were drilled on our royalty lands in Q2.
5% improvement on a growth measure versus the same period last year.
With the upward moving crude oil prices, we are seeing activity increase on freehold.
With approximately 16 rigs nine in Canada seven in the U S running on our royalty lands late in Q2.
In Q2, approximately 40% of all locations on freehold Canadian assets target gross overriding royalty prospects.
With 60% focused on prospects on freehold mineral title lands.
24% of locations drilled target prospects in Saskatchewan.
53% in Alberta.
And 23% in the U S on a gross basis.
The vast majority of wells greater than 96%, we're focused on oil or liquids prospects.
Through the first six months of the year for you all have seen consistent drilling activity in oil plays such as the Viking Sparky Clearwater and Cardium.
We are also seeing a strong increase in licensing and well spuds in the deep basin as natural gas prices remains strong into Q2.
We expect this resurgence in drilling activity that started in June and has continued into Q3.2021 will result in incremental volume is being brought on later in this year and early next year.
In the U S activity levels on freehold mineral title lands have met expectations with the majority of the focus on light oil prospects targeting of the Permian and Eagle Ford basins overall.
Overall 25 gross wells were drilled on our U S royalty lands over the quarter with the acquisition of additional U S. Royalty production subsequent to the quarter expected to further diversify and energize freehold asset base, bringing added sustainability to its portfolio and its dividend.
We have considerable optimism heading into the back half of this year and will continue to focus on positioning freehold to be a premier North American royalty company with a strong balance sheet, a 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 morning, everyone financially as commodity prices improved over the quarter freehold continue to deliver on the core aspects of its 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 $44.9 million for Q2, 2021 up 22% from the previous quarter and 2021 funds from operations for Q2, 2021 totaled $42 million or <unk> 31 per share up <unk> <unk>.
<unk>, 4% versus the previous quarter and very close to all time high.
Freehold is royalty revenue and funds from operations benefited from strong upward momentum in crude oil and natural gas prices.
Growing production, particularly in the U S, which receive better pricing relative to our Canadian assets, which helped to further strength in freehold already strong operating margins.
Freehold dividend payout totaled 33% for Q2.2021 up slightly from Q1.2021.
And down from 92% from the same period in 2020 as previously mentioned, we increased our monthly dividend for 2021 from <unk> <unk> per share to <unk> <unk> per share, reflecting a measured response to an improved commodity price outlook better than forecast production.
And an expected increase in third party spending on our royalty lands in 2021.
Our Q2.2021 cash cost totaled $4.48 per BOE slightly up from $4.37 per BOE in Q1, 2021, but down 6% from the same period last year. This strong result reflected reduced G.
<unk> and operating cost charges alongside improved production acquisitions completed subsequent to the quarter and 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 $48 million on June 32021, representing 0.4 times net debt to funds from operations overall freehold reduced its net debt by $24 million versus the previous quarter and by $55 million.
From the previous year.
The decrease in net debt reflected stronger funds from operations alongside a lower dividend payout freehold to prudent strategy of maintaining net debt to funds from operations between zero and one five times alongside a longer term dividend payout target range of 60 to 80.
Percent of funds from operation provides cushion for potential volatility in commodities now back to day for his final remarks.
Thanks, Dave.
So we've had an exceptional quarter and we remain enthusiastic about the next 12 months of operations we.
We've seen a steady training up of capital and production volumes on our lands both in Canada, and the U S and in correctly got current commodity price levels are high royalty margins offer significant option value to provide returns to our shareholders.
With today's increase to our 2021 monthly dividend. We highlight that this is the fourth time in the past nine months that we've revised our 'twenty, one 2021 payout upwards.
The transactions subsequent to quarter end are expected to provide both near and long term value for our shareholders and further our execution to be a leading north American royalty company.
Looking forward the groundwork is in place for an exciting 2021 and beyond the improved economic conditions are very positive for the industry and highlight the strength of a royalty model.
Through execution of our strategy in the coming quarters, we expect to be able to showcase the strong return proposition.
<unk> and freehold provides with the ultimate commitment to maximize value to our shareholders.
Thank you very much.
Yes.
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There will be a brief pause with participants from just two quick questions.
For your patients.
Okay.
Okay.
Our first question is from Jamie Kubik with.
CIBC. Please go ahead.
Yes. Good morning, guys. Thanks for taking my question historically freehold has run a pretty conservative leverage model.
In your business can you highlight maybe where you'd like debt levels to be moving forward either on an absolute basis or in terms of.
Dead relative to future cash flow generation.
Yes, Dave Hendry here.
We haven't changed our strategy as far as the type of the level of leverage that we're looking at obviously ending the quarter at a 0.6 times debt to EBITDA at four and a net debt is definitely in a in a comfortable place. So we look to keep that within that range of zero to one five times net debt to funds flow from opt.
<unk> ideally are lower than the one times and so when we're looking at acquisitions and how we are.
Deploy dividends Thats definitely a consideration.
Okay that was all from me thanks, guys.
Thank you.
Once again, please press star one at this time if you have a question. Our next question is from Al Yost, We'll close with industrial Alliance capital markets. Please go ahead.
Good morning, and thanks for taking my questions.
I guess I'd like to start with the top line potential acquisitions, particularly within the U S.
We sort of take some slices in time and look at Q4 Q1 and today.
Would you say that that trap line is the same or growing.
Highlights of Rob King here I would say I'll give you some stats for Q2 in terms of the number of opportunities that we looked at in both the U S and in Canada in the U S. We had over 100 opportunities come across our desks and probably two.
Two thirds of those we took either either some review either light or or deep.
Deep review of those opportunities when Canada, we probably saw about 20 opportunities that Tom.
That came across.
So I was kind of a Q2 comment Q1 wasn't quite as are as active as a Q2 has been and certainly Q4 was even was even frankly, even even less activity.
And that the forward calendar continues to be very strong on the on the U S side I think we'll see the level of participation engagement that that freehold has and that we're really happy with the three opportunities that we added to our portfolio post quarter end here.
And we will take some time to digest, those and still continuing to look at at.
Mineral opportunities in both markets.
Okay.
Appreciate that color.
Focusing in on a couple of the drivers that might make it stronger.
Notice.
Non acquisition went from one.
Which frankly from a whole lot about the company, but they seem to be a royalty aggregator.
What might be driving things in the U S could it be a tax changes is that the capital markets, putting the squeeze on U S producers and safely.
When you're mining don't drill with it.
Is it a combination of factors.
I mean, I think it has more to do with less to do with that last comment on the on the on the capital providers.
And the markets, causing the upstream producers to have less capital because of these are for the most part like 90.95 plus percent of the AR.
Of the assets that we've added are mineral title assets theyre not overriding royalty interests.
So these are these are very much coming from private equity mineral aggregators, who.
<unk> built up these portfolios over the last five years or so.
Frankly with the events of 2020 had no opportunity to to consider divestments. So that's accelerating in 2021, you're absolutely right on the capital gains.
Potential changes in the U S. There are a number of opportunities that.
We have been and are looking at where that is a significant driver.
For the seller to be looking to lock in.
For those.
Practically doubling.
Capital gains taxes.
Okay.
I appreciate that color and maybe.
Although I have a natural questions I'll stick with one more.
And.
This is probably more on the financial side.
Given the initial funding of this acquisition would you be looking at using hedging in any manner.
Yes. This is Dave here high line.
For for hedging and we've looked at it but we don't think that our hedging as it is appropriate for these acquisitions.
You have a stress testing at different pricing levels, we can.
Easily accommodate this on the balance sheet and still advanced that the dividend increase.
Increased side that we've talked about so we looked at it but we don't feel it's appropriate for for where we're at today.
Okay.
I think I'll stop at that point appreciate the.
Colored from every one of them Doug congratulations on the quarter on the acquisitions.
Thanks, guys.
Thank you. Our next question is from David <unk> with RBC. Please go ahead.
Hey, good morning, guys just another one on the acquisitions.
Given that you've got three of the Hopper here can you just speak to the potential cadence of acquisitions going forward. Many.
Any expectation that Youll do more through the balance of this year and then maybe just provide a little bit of color on.
What youre seeing in terms of valuations and kind of where you see that trending going forward.
Yes.
Steve Baker.
And for the balance of the year, we're going to continue to look at.
Opportunities.
With this.
The one that we are we.
Aside yesterday, that's going to be closing in October so.
Youll continue to see if Theres places for some smaller tuck in deals probably through the balance of the year that you.
You would augment the portfolio in certain cases and continue to look if there is opportunities for larger scale deals that might.
It might really advance our portfolio in the core areas that.
We're looking at so we don't see ourselves slowing down on evaluating opportunities and if we see a deal that really works well in our portfolio will continue to pursue that.
Yeah. Thanks, that's helpful and I guess, you've touched on it a little bit.
But how are you thinking about funding going forward and are there are quite a few potential.
Potential acquisitions that you wouldn't be able to fund internally.
Yes, I think that for the most part we're you know we're looking at at funding using our balance sheet, but that being said if there was a.
The larger deal that supported the use of equity then we would look at that again it has to.
Check all the boxes as far as being accretive.
Fit well with our portfolio objectives.
Really being in front of the drill bit and adding an asset that.
Can can grow in.
In the coming years, so that we ensure that we have that organic growth in the portfolio that we're looking to pursue so.
You know, we're not constraining ourselves with.
The dollar per se right now, it's really looking at at the opportunity and if the opportunity is right. We'll look at how we funded our first with our balance sheet and secondly, if it makes sense and we used some equity.
Got it makes sense and apologize I think I jumped in a little bit quick there, but any comments on valuation would be helpful as well.
Yeah.
It's Rob here.
In terms of valuation on the three acquisitions, we announced post quarter end here those were Triangulated six 5% to seven five times cash flow on a IRR basis its in the mid teens.
For the for for that for each of the three transactions, which is actually pretty similar on an IRR basis to our November 2020 transaction.
Albeit with a combination of much better commodity pricing and <unk>.
Even better production.
Results coming from that.
Our initial U S acquisition that IRR is actually pushing north of $20.23 per cent.
Got it that's helpful. Thanks, very much guys.
Thank you once again, please press star one at this time if you have a question. My next question is from Jeremy Mccrea with Raymond James. Please go ahead.
Yes, I guess I just wanted to follow up just on what you're talking about.
The.
The amount of opportunities that you saw in Q2 you mentioned.
You talked about 100 different opportunities are these all like in the $1 million scale are they you know what I'm, just trying to get a better sense of size and potential.
For M&A growth there going forward and then if you wouldn't mind, just going a little bit more detail in terms of exactly what youre looking for in acquisitions is that commitment from different parties and it's just the accretion that you're looking for just did a little bit more.
So around that as well.
Sure I'll start I'll start on that one Jeremy in terms of the opportunities.
It's really all over the all over the size spec.
Spectrum.
I'd, probably say the average would be in that 32.
Fifth probably $30 million range.
For the most part like there are probably sub 30.
And but there are.
Those 80 there'll be looked at.
Lease term would have been over $50 million.
Our value level.
And certainly when we look at the forward calendar in terms of the larger packages. There are there are half a dozen that would be 50 to 100 million plus.
In terms of size. So there's the U S minerals market as is very significant in size and.
At scale I mean, it's quite it's quite different in Canada, where Canada is 90% crown 10%.
Private privately held it's the inverse in the U S and the fact that the U S. Obviously is that much more more production as well so you sort of have those two.
Multiple multiplying factors, which create significant.
Mt.
Potential opportunity.
Mhm.
Perfect. Thank you.
Jeremy just on you know what we're looking for in an acquisition you know first off has to be accretive on a cash flow production and reserves per share basis.
Really focusing on high quality Counterparties and.
To ensure that we will see continued development, we want to make sure that what we call tier one acreage positions and we were looking at basins that provide economic development at less than $40 W. T. I. So again can survive any volatility in the industry, we want to make sure that those lands will still get drilled in <unk>.
Tribute to organic growth.
And lastly, they do have to have significant development opportunities so that.
If someone can continue to develop those lands and grow them year over year and into the future. So that you know every deal that were doing is layering on a little bit more organic growth and so overall the portfolio.
It is improving so that we can see line of sight too.
Growing production year over year without having to rely on acquisitions like we have in the past.
If we look at.
This year, we're expecting a significant production growth 2021 into 2022 and to achieve that we don't have to do another acquisition.
For the next day 18 months at least and so that's a significant change in our portfolio and also allows us to be very selective and very patient and the type of deals that we're looking for the bid level that we're comfortable with and if you know what.
The deal flow that we're seeing right now if we don't find that metrics on the ones that on our table right now were comfortable that theres more opportunities coming up shortly so that patient has allowed us to.
To get.
The right assets that we want in our portfolio.
Okay.
Thank you.
Thanks, Jeremy.
Thank you.
There are no further questions registered at this time I would like to turn the meeting back over to you Mr. <unk>.
Okay. Thank you for everybody for joining today and in the call how like I said, we had an exceptional quarter and the outlook going forward is a very good that our industry is strong we see lots of good opportunities in front of us and we're really reshaping the company is as a as I believe.
Known it to date and so it really excited going forward and we look forward to catching up with each of you next quarter. Thank you.
Thank you everyone. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
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