Q3 2021 Falcon Minerals Corp Earnings Call

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Your conference call will begin momentarily again, we do appreciate your patience excuse me an online conference call will begin momentarily. Thank you.

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Good day, ladies and gentlemen, and welcome to the fucking mineral Q3 2021 earnings call. All lines have been placed on a listen only mode and the floor will be open for questions and comments.

Yeah.

If you should require throughout the conference. Please first songs there on your telephone.

Operator [laughter].

At this time it is my pleasure to turn the floor over to your home.

Worse, CFO Osake minerals, Sir the floor is yours.

Thank you Jack nine good morning, everyone [noise]. Thank you for joining today's call to discuss in Falcon mineral third quarter of 2021 results.

Before we begin I would like to remind you that during this call. We will make certain forward looking statements that address are expected future business financial performance and financial conditions actual results achieved by the company may differ materially from those made or implied in any forward looking statement due to a wide range of risks and uncertainties, including those set forth in our cell.

Filings the company expressly disclaims any obligation to update and revise any forward looking statements Adele.

Additionally, this discussion also includes non-GAAP measures reconciliation of these measures to the most directly comparable GAAP measures are included in the earnings release, which is posted on our web site and with that I will now turn the call over to Falcons, President and Chief Executive Officer, Brian Gundersen for his remarks, Brian. Thanks.

Thanks, Matt Good morning to those on the line. We appreciate you joining Falcon minerals third quarter of 2021 earnings call.

I'm joined today by Falcons, Chief Financial Officer, Matt Awkward, you just heard from and Falcons, Chief operating officer might Downs. After my remarks, Matt will speed toward financial results for the third quarter and then we'll take questions from those on the line.

We are pleased with the way the business perform during the third quarter, which was in line with what we expected the business generated 16 cents at free cash flow per share, which exceeds the high end of our 13% to 15% cash flow per share guidance range that we shared in August.

Production during the quarter was 4535.

Per day, with approximately 47% crude oil and 61% total liquids.

The business generated $14.7 million of EBITDA with greater than 70% EBITDA margins.

These results are reflective of the quality of our position in the car and strafe, which continues to be among the best performing and Lois breakeven reservoirs in the United States.

Additionally, we saw a significant benefits from our position in the Marcellus shale this quarter, including $1.1 million in lease bonus revenue as operators and the base and saw to take advantage of the rising prices for natural gas.

The free cash flow that Falcons generated from this performance allowed us to declare a quarterly dividend 15, and a half cents, which represents a payout ratio of approximately 97% sequential increase from the second quarter.

We are excited to see our shareholders immediately benefiting from Falcons industry, leading payout ratio and the strong commodity backdrop, we've experienced in the second half of this year.

The third quarter dividend on an annualized basis translates to 62 cents per share, which we believe represents a compelling yield for investors.

Looking ahead to the remainder of 2021, we anticipate that production volumes will continue to moderate three year, and while still allowing free cash flow to remain healthy in this supportive commodity price environment.

Based on current strip pricing, we anticipate free cash flow to beach per share to be approximately 13 to 14 in the fourth quarter of 2021.

While we're excited for Falcons prospects in 2022, it's too soon for us to give any specific guidance for the full year. However, we are optimistic knowing that that the key operators on our assets are working to finalize their own capital budgets in the midst of very strong commodity prices.

A component of 2022 will likely be development activity on our hooks ranch asset the hooks ranch as a world class shale asset with exceptionally strong operator economics, and we are pleased to own the entire mineral estate under this property.

As we've previously discussed Conoco Phillips permitted six wells in the third quarter of 2020, which will be drilled across unit boundaries from the Hamilton tries to be unit into the hooks ranch, where falcon holds material NRI.

During our last conference call I noted a car to go Phillips development of these wells was delayed due to difficulties regarding the location of the bad with the surface owner on the Hamilton Trust B unit.

While Falcon is not involved with this dispute we are optimistic that the parties are nearing resolution and developed development activity could begin during the first half of 2022.

It is our strongly held belief that hooks ranch <expletive> at the hooks ranch assets will be developed over time and will deliver meaningful returns to shareholders.

While we remain enthusiastic about our existing portfolio of core Eagle Ford acreage I continue to believe in Falcon could benefit from being a larger entity with a more diverse portfolio of properties.

[noise] enhance diversity in scale provided that it comes largely from tier one assets in tier one operators can serve as an engine to grow free cash flow on a per share basis. The market continues to provide avenues to express this view and we will explore them as we seek to maximize shareholder value.

Above all our core focus remains on unwavering commitment to generate an industry, leading shareholder returns through free cash flow growth on a per share basis and the distribution of this cash flow to our investors.

We will continue to be thorough and disciplined as we manage the existing portfolio and as we consider opportunities to grow the business with that I will now turn it up the confirmed there are CFO, Matt awkward Matt.

Thank you Brian.

During the third quarter, our assets generated 22 million and royalty and lease revenue, we recognize the cash loss of $1.3 million from our commodity derivative instruments during the period.

Production for the third quarter was 4535 per day compared to 5034 Boe's per day in the second quarter.

The sequential decline in production during the third quarter is consistent with our expectations from the second quarter earnings call as the robust pace of development activity in the early part of the year moderated into the summer and early fall on a net basis to sequential increase in revenue. We experienced this quarter was driven by higher pricing and revenue associated with least bonuses.

And the Marcellus.

During the third quarter, we saw <unk> three one net or 62 gross wells turned in line.

Compared to a 0.51 net for 55 gross wells during the second quarter. This brings our total wells turned in line year to date to 2.05 net wells are 100 177 on a gross basis.

Falcons averaged realized price for oil during the third quarter was $59.61 per barrel. The average realized price for natural gas was $3 65 per Mcf and our NGL realizations averaged $33.92 per barrel. We have generally seen more favorable realized pricing is differentials have tightened across our.

<unk> in Texas, while Marcellus differentials widened as the benchmark Henry hub prices rose during the third quarter.

Also during the quarter Falcons entered into new commodity derivative instruments through Costless collars related to natural gas for the months of November of 2021 through March 2022, which provide for prices are $4 20 per MB to you on the head volumes fell.

And is unhedged on crude oil volumes in 2022.

Associated pricing and volumes for all of these hedges are laid out in our investor presentation, which is available on our web site.

Cash operating costs for the third quarter of 2021 or $1.5 million AD of alarm in production taxes comprised approximately $1.1 million of this figure for the quarter.

Marketing and transportation expenses, where the remaining zero point $5 million or about one dollar and 12 cents per Boe.

Cash G&A expense was approximately $2.7 million for the third quarter, which excludes approximately half a million dollars of non-cash stock based compensation expense recognized in the period.

Adjusted EBITDA for the third quarter was $14.7 million, which represents an increase of approximately $900000 from the $13.8 million reported in the second quarter of 2021.

The increase was largely attributable to increased realized pricing across all three product streams as well as an increase in lease bonus income.

At the end of the third quarter Falcon had 36 $5 million of debt outstanding on its revolving credit facility and approximately $3.6 million in cash on hand, resulting in net debt of approximately $32.9 million.

Falcon continues to have a conservative approach to leverage we held the revolver balance flat quarter over quarter and Falcons net debt to LTM EBITDA has decreased two 0.74 times.

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

Dr. <unk> reported third quarter net income of five $8 million on a standalone basis, and $10.5 million inclusive inclusive of Noncontrolling interests reported third quarter net income of five 8 million is inclusive of the gain of $1.7 million associated with the reevaluation 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 basis step up related to the assets that Falcon acquired as part of the transaction with Royal resources in 2018.

Falcon expects that more than 50% of the dividends paid to class a shareholders for 2021 will be classified as non dividend distributions. This treatment will generally result in a non taxable reduction to the tax basis of shareholders common shares until the time when in the investors basis is fully recovered this.

This reduced tax basis will increase shareholder capital gain or decrease shareholders capital loss when the shareholder sells their common shares.

Pro forma free cash flow per share was approximately 16 for the quarter.

On November 3rd 2021, Falcon declared a third quarter dividend of $15 five per share.

This dividend is payable on December 8th 2021 to shareholders of record as of November 23rd and reflects a payout ratio of approximately 97%. We define pro forma free cash flow is adjusted EBITDA inclusive of Noncontrolling interest less interest expense and cash.

And with that I will now turn the call back over to Brian vendors. Thanks, Matt.

The line for for questions.

The floor is now open for questions.

You do have a question please press one.

Please hold while we call for class.

Okay. Our first question comes from Cairo May I. Please take your question.

Hi, good morning, everyone.

He got to go ahead.

Hey, guys.

Brian maybe to start out.

One of your peers announced an acquisition this morning, and Brian you touched on scale in your opening remarks, just wondering if you can give us an update on maybe the opportunities that you're seeing and how falcons thinking about potentially growing the asset base.

Yeah, I think it's a good question, how we obviously saw print this morning.

Look we're focused on driving free cash flow on a per share basis as we've said.

That as we've said as well.

There are a number of assets. They are in private hands that are looking at migrated to the public and you are seeing that narrative unfold I think for us.

We continue to be focus on strategic level transactions were being.

Opportunistic on it but we have a real bias towards core basins and.

And for that for us that really means the.

The mid one in the door.

Got it okay. That's helpful.

You also touched on the dispute it hooks ranch and I believe you mentioned.

The development activity could begin in the first half of next year any any preliminary thoughts about maybe when that production could begin to flow are kind of how you guys are thinking about the timing of that.

Yeah, I mean look we are optimistic that is nearing resolution we anticipate.

Optimistic and we anticipate that we're going to see develop again again in one age and I mean that implies.

Second half turning line timeline.

Okay got it.

Turn it back thanks.

Thanks.

Okay.

Comes from.

Comes from here I'm in with Piper fan please take your questions.

Good morning, and thanks for taking my questions.

With the improvement in the price of gas as well as the least bonus to chew reported in the Marcellus are you expecting a higher gas mix as we move forward into 2022.

Hi, piers is Matt good morning.

Good morning.

I think I think the short answer is a consistent mix.

We saw Marcellus volumes grow Q2, Q3 by a low double digit percentage so not insignificant.

It's not clear to us if that kind of growth rate will be sustained.

But given what's going on in the Marcellus and the least bonuses. We've got a lot of those have some near term potential production associated with them I would anticipate will continue to see a little more gas in the mix.

Okay. Thank you and then Brian.

Line of sight wells have been ticking down.

And our took down this past quarter, so net wells of about 1.5.

112, and then our eyes, a little higher than it was last quarter, but just curious number one.

Do you see the line of sight wells started to increase maybe more from the permitting standpoint.

Or what can you is there anything you can do or what's your preference time, how much line of site that you have in front of you because I think this quarter you completed light 0.3, net well. So it just seems like it's starting to narrow between that wells in the line of sight versus how many were completed in the quarter.

Yeah, I'll start and then I'll, let others jump and I mean, I think one of the things. We're focused on is that at this time of year.

We don't have one line of sight fully repopulated, yet as our core operators are really in the middle of budgeting process.

Anticipate on it to come up with those.

As those budgeting processes unfold.

Yes.

Color.

Sorry go ahead, I think that's right yeah, well I was outside that's right on a gross basis.

Activity has been pretty consistent on a net basis. It was we had some really high NRI pads early this year and it's the gross activity has just hit lower in our ipads in the summer and into the fall so activity broadly.

His strong we even saw EOG at a rig here very recently.

A question of when and how that lands on us in the material net way and that's that's really been the story of first half our second half in 2021.

Okay. Thanks, Brian Thanks map.

No problem. Thanks mirrors.

Again, ladies and gentlemen, if you would like to ask a question.

Okay.

Can you hold on the call for questions.

Okay. Our next question comes from PK self please state your question.

Okay. Thanks, good morning.

So you guys keep a higher payout ratio in the dividend form of your mineral peers, just any thoughts on.

Retaining more cash if you see more acquisition opportunities are you're kind of general view on where that payout ratio may trend to longer term.

For you, all and kind of higher thinking about financing potential acquisition.

I'll take the I'll take the payout ratio portion and then I'll, let Matt jumping on the financing portion for acquisitions I think I'm a payout ratio we've been really clear in the market that we want to keep that high payout ratio and as you've seen it's been 90, plus kind of averaging around that 95%, we seen as a way to hand back cash to shareholders in a can.

Structure of sure can drops constructive commodity price environment, and we think it's an attractive value proposition on a yield basis to the to our shareholder base.

As it relates to the financing acquisitions Mad maybe want to jump in yes sure.

It really even dovetails with the payout ratio there is some materiality portioning here that affects our thinking our focus is Brian articulated has been on more strategic level opportunities.

Where the payout ratio, even a little lower payout ratio wouldn't be very impactful relative to the size of strategic things that were focused on so we we really wouldn't want to with hold that Katherine shareholders in the short term as to financing.

It's.

Very dependent on the nature of an asset should we find the right. One that we acquire as you can imagine we're looking for right asset right basin and brightened value first and we will build the capital structure that fits around that with our guiding principles those principles being we aren't looking too overleverage the bat.

One sheet and we're also not looking too unnecessarily dilute shareholders. So we'll let the asset lead and build the cat the cat structure around that does that make sense.

Yeah that all makes perfect sense, thanks for that.

I guess it lasted for me, what's your expectation for hedging more not had any more.

Going forward into 22, and 23 prices. Thanks.

Yeah, obviously, you saw that we layered on some winter some winter gas ages. So we do have hedge is going into March I mean downside, we're totally unhedged on the crude side in 2022.

And I think that's where we're going to be but not anything that.

Yeah, just that we're not we're obviously completely unhedged on oil next year.

The fact that we haven't decided the layer and hedges as a conscious decision that we've made I tend to back to the acquisition question.

We think a lot about hedges in the context of any outlays of capital. So there may be a distinction in our mind between what we do with I'll call at the base business and if we have the opportunity to make a material investment subject to the timing of the cash flows and how we've underwritten. It I think using hedges tactically to protect returns and underpin the investment that were.

Underwriting would make a lot of sense, but in the absence of that we aren't today.

Looking to put on oil had just for 2022 at least not in the immediate term.

Perfect. Thanks.

Thanks to Jay.

Right.

Okay.

Our next question comes from.

John Evans, please take your question.

Hey, Brian I was just curious can you talk a little bit about I guess, because the curve is so backwardated.

I mean, it's unbelievably backwardated and I'm just curious if that's causing bid asks.

To be pretty wide relative to the acquisition market and then how should we think I know you've said that an acquisition is going to be accretive, but how do you think about.

Envision this that we'll see a couple like smaller transactions or is it just a major transaction or what are you guys kind of plan for.

I mean on the bid ask John I mean I. Appreciate the question. Another bid ask the reality is that the industry values that strip.

And so the Backwardated dimension of it's baked into every PBE cow you would go through.

And so I don't know if it is being a big distinction.

On the.

Deals on a big deal versus small deal I.

I think we're focusing on a bigger stuff just because I think that will really move the strategic landscape for Falcon more we're not we're not averse to something small and if things come across our desk, which they do that are really really attractive we'd be open to doing them, but it's really just not where we spend most of our time.

Got it and so when you think of that is that $100 million or more or is it $50 million or what can you give us like what's a big deal in your guys' his mind.

Yeah.

50, plus is like what we would think of as big.

And just.

I would say when I say I'm not focused on the smaller things I mean, I'm not focused on the 200000 500000 $2 million type deals.

Right and.

I mean before you've seen like you wanted to be in the Permian and you wanted to be pretty oily.

With what's happened to gas does that does that change at all or is it still primarily you want to be in the Permian and be oily.

Really primary primarily Permian an oily.

Okay. Thanks Hope you have a great day.

Likewise.

Our next question comes from leak Hoover. Please state your question.

Hi.

I guess the question I have all the dialogue has been on focused on buying have you guys thought about the possibility of showing since we saw the discount the private market value.

Sure we thought about it I mean, I think that the answer is that we are we are open to it if the right opportunity presents itself.

You're not concerned about this environment the high prices about paying down you did at all.

Now we have a really conservative balance sheet.

Really conservative balance sheet, we and we see a trending down.

Further over the course of the year.

Good luck. Thank you.

Thankfully I appreciate your support.

Okay number five five with our final question.

Thanks stagnant thanks for everybody for joining the line look forward to speaking to everybody over the coming months in on the on the <unk> you call. Thanks ever. Thank you.

Thank you. This concludes today's conference call and thank you for your participation you may disconnect. Your mind at this time and have a great day.

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