Q2 2021 Falcon Minerals Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the Falcon minerals Q2, 2021earnings call. All lines have been placed in a listen only mode and a floor will be opened for questions and comments following the presentation.

If you shouldn't require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator.

At this time, it's my pleasure to turn the floor over to your host snap a quote sir the floor is yours.

Thank you Kat.

Good morning, everyone and thank you for joining today's call to discuss Falcon minerals second quarter 2021 results before we begin I would like to remind everyone that during this call. We will make certain forward looking statements that address our expected future business financial performance and financial conditions actual results achieved by the company may differ materially from those made or imply.

And any forward looking statement due to a wide range of risks and uncertainties, including those set forth in our SEC filings I would also like to caution you not to place undue reliance on these forward looking statements, which reflect managements analysis as of the date hereof.

A company expressly disclaims any obligation to update or revise any forward looking statements. Additionally, this discussion also includes non-GAAP measures reconciliations of these measures to the most directly comparable GAAP measures are included in the earnings release, which is posted on our website.

Lastly, the company will be presenting at the Barclays CEO Energy Power conference on September 9th and hosting Investor meetings throughout the conference with that I will now turn the call over to Falcons, President and Chief Executive Officer, Bryan Gunderson for his remarks, Brian. Thanks.

Thanks, Matt and good morning to those on the line I appreciate everybody joining Falcon minerals second quarter 2021 earnings call.

I'm joined today by Falcon is recently appointed Chief Financial Officer, Matt awkward or you just heard from and Falcon as Chief operating Officer, Mike Downs.

After my remarks, Matt will speak to the financials and then we will take questions from those on the line for.

First I'd like to welcome Matt awkward, Matt is a terrific addition to the Falcon team and I'm confident that our shareholders. Other key stakeholders in the equity research community will enjoy working with them as much as I do.

Matt is a vital part of Falcons path forward and we are excited to have him on board.

Next.

Like to take a moment to take stock of where we are.

During my time as Falcon as Chief Financial Officer, I had the opportunity to participate in hundreds of meetings and discussions with our world class shareholder base.

As CFO I also had the opportunity to participate in hundreds of meetings and discussions with best in class potential shareholders, who are not yet invested in Falcon minerals.

In addition to these conversations I've had a.

A hundreds more conversations with the equity research analysts, who cover Falcon and study or a releases calls and SEC filings in detail.

Over a 2 plus years as CFO. These conversations both individually and in aggregate contributed to my view of where we are and where we should go.

And now a C O Falcon as management team and board of directors are committed to executing on this view.

My vision for Falcon begins with the unwavering recognition that we have a world class asset base and the Eagle Ford shale.

Our position in the Karnes trough is among the best rock in the United States and is being developed by some of the premier oil and gas operators in the world.

The assets that we have in the Eagle Ford are among the lowest break evens in the U S and compete for capital with the best portions of the Permian Basin.

Falcon a assets will be developed over time and Falcon conserve as an efficient pass through of the associated gas cash flows for a decade plus.

These contours had been well articulated and are well known.

My vision for Falcon also reflects a belief that the committee that the company would benefit from being larger and more diverse.

Falcons existing assets, our core of the core and in certain instances a results are meaningfully influenced by a high net revenue interest wells within our portfolio.

This truth serves as a strong tailwind for Falcon as these high NRI locations are developed and conserve as a cross wind. When these specific locations are not included in our operators development plans.

My view.

That enhanced diversity and scale, providing that it comes from large largely from tier 1 assets in tier 1 operators with a latest contour.

The Falcon is existing top tier assets and serve as an engine to grow free cash flow on a per share basis.

Addressing these contours is a material portion of my focus as CEO.

Now onto the second quarter 2021results.

We're pleased with the way in a business performed yeah. That's delivered as we expected they would and the results for the quarter are directly in line with a direct trajectory we outlined in the first quarter call.

Reported production was 5034 Boe per day, which represents a 22% increase above daily production levels from the first quarter.

The production increase was driven primarily by a high NRI wells being turned in line late in the first quarter and early in the second quarter violating the tailwind I mentioned moments ago.

These wells delivered meaningful growth in production quarter over quarter, which contributed to Falcon generating free cash flow per share. Excluding 1 time costs associated with the executive transition of 15.3 cents.

This represents an increase a 48% above first quarter 2021 levels.

The free cash flow debt Falcon generated a second quarter allowed us to declare a dividend a 15 cents, which represents a 98% payout ratio, excluding 1 time items associated with the executive transition.

The second quarter dividend also reflects a meaningful increase of 50% when compared to the first quarter.

We are excited by the cash flow generated in a business during the second quarter and a way in which our shareholders are immediately benefiting from the strong commodity backdrop, we have seen during the first half of the year.

The second quarter dividend on an annualized basis translates to 60 cents, which we which represents a 13% dividend yield based on yesterday's closing price.

We believe it has presented a very attractive yield for investors in a environment, where inflation concerns a bound and Ted and the 10 year Treasury is under a 1.2%.

Falcon high payout ratio allows investors to continue to benefit directly from the constructive macro market backdrop.

Looking at the balance sheet, we have a conservative approach to leverage.

The balance on a revolver decreased by $4 million quarter over quarter and Falcon is net debt to LTM EBITDA decreased to a 0.92 times.

We see that ratio tightening further as we close out 2021 under current commodity pricing.

Looking ahead, we anticipate free cash flow per share to remain healthy for the balance of the year based on the current pricing environment, we expect free cash flow per share to be between 13, and 15 cents in the third quarter, and we anticipate being able to maintain similar levels going into the fourth quarter.

As we look at free cash flow that we generated in Q2, 'twenty, 1 and our expectations for the third quarter. This implies an approximately 12% to 13% forward free cash flow yield.

Now I would like to take a moment to speak about our hooks ranch position, which is operated by Conoco Phillips.

Previously discussed Conoco Phillips permit it permitted 6 sharing wells in the third quarter a 2020.

The 6 permanent wells are known as production sharing wells because they were drilled from the Hamilton Trust B unit, which sits to the north of the hooks ranch lease.

Well lateral extend into our interest in the hooks ranch lease to the south.

Our expectation was that these wells would be drilled in the first quarter 2020 and turned in line during the fourth quarter. The first quarter 2021 and turned in line during the fourth quarter 'twenty 'twenty 1.

The wells have not yet been drilled a delay in development of this pad stems from a dispute over the surface use regarding the location in a pad between the operator and a surface owner on the Hamilton Trust B unit, while frustrating disputes of this kind are not uncommon in the oil and gas industry.

And we are optimistic that the dispute is nearing resolution.

This view is informed by a review of a public records and a recent judgment in favor of the operator.

On a per share basis.

The Falcon team is committed to remaining thorough and disciplined as we manage the existing portfolio and as we consider opportunities to grow the business with that I will now turn the call over to our CFO, Matt awkward mat.

Thank you, Brian I'm ordering and excited to be a part of the Falcon team.

Turning to the second quarter results are assets generated $18.9 million and royalty revenue during the second quarter a 2021 we.

We recognized a cash loss of $1.2 million from a commodity derivative instruments during the period the growth in production and revenue during the second quarter is consistent with our expectations from the first quarter call and a lines with the activity. We are seeing from a key operators. The increase in revenue was driven by high in our ipads turning in line during the first quarter.

Along with 251 net wells 55, gross wells, which turned in line during the second quarter. These second quarter wells include 2 pads, which totaled approximately 2.5 net wells that were turned in line during may and we will support production into the third quarter.

Since the end of 2020, we have seen operators completing ducks and taking advantage of high oil prices, specifically Conoco Phillips has grown production in the Eagle Ford by 21% compared to the first quarter of this year and 24% cumulatively since the fourth quarter of 2020.

Current Eagle Ford production from Conoco Phillips is now exceeding late 2019 production levels.

Conoco Phillips stated this week during their second quarter call that they expect to maintain for rigs and 3 frat cruise in the Eagle for it for the remainder of the year, which should contribute to increased permitting in the second half of 2021.

Falcons net realized price for oil during the first quarter was $64.45 per barrel.

The average realized price for natural gas was $2.79 per Mcf and our NGL realizations average $25.23 per barrel <unk>.

During the second quarter, a falcon did not enter into any new commodity derivative instruments.

Associated pricing for all hedge volumes are laid out in the company's investor presentation, which is available on Falcons website.

Cash operating costs for the second quarter, a 2021 were $1.6 million AD valorem and production taxes comprised approximately $1.1 million a this figure for the quarter marketing and transportation expenses for the remaining point $5 million or 1 dollar and a <unk> per barrel, which is down slightly from $1.

6 cents per barrel equivalent in the first quarter a 2021.

Cash G&A expense was approximately $2.4 million for the second quarter after adjusting for approximately $1.7 million of expenses incurred during the quarter related to the executive transition.

Second quarter cash G&A also includes approximately $1.7 million of non-cash stock based compensation income recognized during the period.

The non-cash stock based income primarily reflects a reversal a prior period non-cash stock-based expenses due to forfeitures of Unvested shares associated with the executive transition.

Adjusted EBITDA for the second quarter, excluding 1 time expenses associated with the executive transition was $13.8 million, which represents an increase a $4.3 million from the $9.5 million reported in the first quarter a 2021 the.

The increase was largely attributable to an increase in average production volumes of 918 Boe per day compared to the first quarter as well as a 14 per cent increase and realized oil pricing.

At the end of the second quarter Falcon had $36.5 million outstanding on a revolving credit facility and $3 million a cash on hand, resulting a net debt a approximately $33.5 million as Brian mentioned Falcons net debt to LTM EBITDA ratio as of the end of the second quarter was 0.92.

Falcon reported second quarter net income a $3.6 million on a standalone basis and $7.2 million of net income inclusive of non controlling interest.

Falcon reported second quarter excuse me Falcons reported a second quarter net income of $7.2 million is inclusive of a non-cash gain a zero point $8 million associated with the revaluation of the companies warrant liability.

GAAP income tax expense of $1.3 million for the quarter is mostly attributable to the utilization of our deferred tax asset. This is primarily due to the tax benefit of a step base a step up related to the assets that Falcon acquired as part of the transaction with Royal resources in 2018.

We expect to be able to utilize the stepped up basis to reduce our taxable income for the foreseeable future.

Falcon expects that more than 50% of the dividends paid to class a shareholders. During 2021 will be classified as a non dividend distributions. This treatment will generally result in a non taxable reduction to the tax basis of shareholders common shares as a result, non dividend distributions are treated as a reduction of basis until.

All the time when a investors basis is fully recovered this reduced tax basis will increase shareholder capital gain or decreased shareholders capital loss when the shareholders sales they're common shares.

Pro forma free cash flow per share was approximately 15.3.

For the quarter.

On August for a 2021 Falcon declared a second quarter dividend a 15 cents per share. This dividend is payable on September 8th 2021 to shareholders of record as of August 25th 2021, and reflects a payout ratio a approximately 98% we defined pro forma free cash flow as adjusted EBITDA.

Inclusive of Noncontrolling interest less interest expense and cash income taxes are estimate a free cash flow for the second quarter. A 2021 did not include any amount for cash income taxes.

And with that I will now turn the call back over to Bryan Bryan Thanks, Matt tablets on the questions.

Thank you certainly the for a how open for questions. If you do have a question you May press star 1 on your telephone keypad at this time it for you.

A question has been answered you can remove yourself from a Q by pressing 1 again, ladies and gentlemen that star 1 and our first question comes from a quick sales from stifle high for go ahead.

Thank you and good morning all.

Mourning mourning Derek.

Perhaps for you Brian It with regard to your strategic perspective wanted to focus on how important diversification is in your view and it's important.

How do you plan to affect a diversification strategy.

Yeah.

Question, Derek and I appreciate you asking I mean, I think that my point of view.

As I mentioned in after.

2 years in the seat a CFO is that the business would benefit from diversification of scale.

Pretty strongly about it.

In terms of.

Where we see that coming I think the best way to execute on it is.

Think that.

Folks the Falcon is an attractive as an attractive combination vehicle for.

Assets that are held in private hands.

That's that's the way we would see it manifesting.

Great.

I'm sorry, he dropped out of a cow you could press star 1 a cat I'm sorry.

When will take well. Thank you when you come back on a line Derek.

<unk> 1 moment.

Okay.

Hey, Brian sorry about that.

A good Miami Okay.

My follow up on it too.

Ask you a question on your outlook.

And if possible could you play some broad parameters around how you're speaking about 2022, a president based on what you know with a Hamilton update line, a slight activity and current industry activity.

Yes, I think it was a little I think it is a little too early to put a broad brush strokes on 2022.

I think that's certainly something will come back to port for him.

November a call with but I'm not sure I'm ready to put a a broad brush drunk on it quite yet.

Understood. Thanks for your time guys.

And next question comes from Peter Hamon go ahead.

Yeah, a morning and.

Thanks for the helpful prepared remarks.

About the strategy moving forward.

Just curious Brian on the on the payout ratio given the desire to become more diverse how do you see that trending overtime.

Yeah.

Thanks for the question for you is good to hear good to hear from you.

I mean, we've been really clear with a market that we're in kind of a 90 plus percent. We're cognizant of the fact that our peers are throttling back on there a payout ratios.

And suddenly we were watching closely.

Where are we to ever go down that road throttling back our own a ratio.

Message it very very clearly to the market over time, but.

It's not something that we're looking at right now.

Okay. Thank you, Brian and then by follow up some of your peers are instituting the base in the variable dividend.

And I was just curious what your thoughts were on on that for Falcon.

Yes.

Is a good question, it's something we've obviously notice it's something we've obviously seen a something that we get a questions about.

Right. This second I think of and a calculated out in a prepared remarks, which is we see Falcon is inefficient pass through of a commodity prices and and the and the cash flows of our operators.

We really want to leave it as a as a.

As a full paying out that full amount to our shareholders so or not.

Focused on it but we've certainly noticed that it's a narrative going on the market.

We're going to keep an eye on a.

Okay. Thank you Brian.

Thanks for years.

And our next question comes from Brian Downey from Citigroup go ahead, Brian.

Hey, good morning, Thanks for taking my questions, maybe following Bryan with a strategic a strategic question. How do you I guess currently see your.

The the queue, a ground game or A&D opportunities to move the needle.

Words, achieving that scale or for the overtime or do you foresee the need for a potentially something more chunky at this juncture.

Yeah. That's a good question I mean, I think like on the ground named side I think that I am less focused on it.

That I am a larger side the on a ground game side.

As we see things that are.

That really really meet stringent criteria.

And that come out across our desks that we really really like we do them.

But those are going to be that's a a.

More of a 1 off type thing for us at this at this juncture I think you're really in a I think the focus on my mind is really going to be on those chunkier ideas.

Great and then maybe 1 for for Matt I guess on as you are thinking about on the hedging front from a quick look at the slide deck doesn't appear you added and hedges and a quarter.

Given where the balance sheet could you give us an update a around how you're thinking about hedging going forward is that something you're going to continue to systematically do are you going to leave upside exposure exposure a commodity price.

Yeah I appreciate the question I think there's a couple a ways we can break that apart thinking about the gas side and a crude side for obviously looking at winter gas and opportunities near for dollars. There. That's attractive we haven't done anything yet I think if there is an opportunity to sell some winter gas we might look at that I don't think we.

He would do anything really long term on a natural gas side on the crude side haven't had haven't laid on any new hedges you mentioned.

The balance sheet being a consideration there under 1 times is a good place for us to be I think that will a trend lower this year. So.

We're always keeping an eye on it but we're happy with where we sit at the moment, yeah and I'll just add W. I think Matt really articulating a well I mean.

A a gas is interesting obviously when you see for a dollar gas theirs is.

I'm going to keep your eye on.

And we might be opportunistic there, but again on a crude side, it's just not where we're focused right now.

I appreciate the comments.

Sure could you talk to you Brian.

And our next question comes from Ali Ryan from Stevens go ahead.

Alien life.

Her on mute.

Let's go to the next question.

Next question is from John Evans from F. T Capital go ahead John.

Hey, Brian can you talk a little bit about I guess in debt then.

Slide deck, they talked about the Eagle for it I don't know if.

You didn't mention anything about them, but they were pretty positive and a ramp for their volumes like 20 per cent sequentially, they're going to run to rig are you seeing that on any of your pieces in the mineral rights that day.

Yeah.

Yes, John it's good to talk to you I. Appreciate the question I am actually going I'm actually getting a mic down to a maritime on this 1 so Mike.

Hey, John good to talk to you as.

A as you mentioned, we saw some positive news from.

Devon JV when they talked about their production increase from Devon standpoint, a 21% from Q1 and Q2 as well as a rig outlook.

Turned on my 21 wells during a.

First half a year, we did we did see a significant number of those wells on our position so that was again positive.

I think the other day they confirmed that they are going to be running to ray cruise.

For the remainder of the year, so I need to call a very positive.

In a sense is from their call that those came on pretty late in the quarter is that fair. So will you see more of that flush production in Q3.

Some of the wells came on late and so we would see some of that into a few 3 but also some of them came in line sort of and a Q.

Q wanted to choose where we saw a significant number a wells associated with that.

Okay and then my follow up question can you just talk a little bit about your guys' israelization because we're the eagle for it is on natural gas.

And what kind of basis, you have coming off a Henry hub.

Yeah, I mean that I'll, let you take all net I'll, let you take this because I know you were looking at a really good for Ya.

Yeah, a generally we trend pretty tight for Henry hub.

So weird I mean.

Change a pretty tight generally a over time, it's really an aggregate of generally an aggregate of the Appalachia gas number and the Eagle for gas number into what we report ends up being like a blended basis.

Okay great.

It gives you a possibly salt.

Hi, John I appreciate it.

Thank you and at this time, we have no further questions I'd like to turn it back to management for any closing remarks.

I appreciate it I appreciate to everybody on the line looking forward to it.

Targeting everybody over the coming months and on <unk> call. Thanks for everybody.

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

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