Q3 2021 Freehold Royalties Ltd Earnings Call

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This conference is being recorded so it goes to the homes that don't have as you see.

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

Good afternoon, and thank you for joining us.

On the call with me today are David Henry our CFO.

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

The third quarter of 2021, Mark has started a significant transformation for freehold as a company was able to close on more than $250 million in portfolio enhancing transactions.

These transactions were focused on core U S and Canadian oil basins, and further solidify <unk> position as the North American royalty company.

To start this afternoon I would like to talk about the dividend increase and then we will focus on the excellent operational and financial performance that we've had.

With the strength in our business model, we are continuing our measured approach to setting three holds the monthly dividend increasing it by 20% from five cents a share to six cents a share or <unk> 72 cents a share annualized.

This represents our fifth increase over the past five quarters.

Projected 2021 payout levels are below our stated dividend policy levels, which outlines a payout ratio starting at 60% over the long term based on forward looking funds from operations.

We feel this dividend increase strikes a balance between returning value to our shareholders managing our balance sheet and positioning freehold to remain active on the acquisition front.

The opportunities to further build on the quality of our portfolio remains robust within both U S and Canada and we view it is important to retain the flexibility to evaluate and acquire assets that continue to make us better.

On the acquisition front, we were very busy we announced four transactions, which expanded our position in the U S. The Eagle Ford and Permian plays along with building on our already strong position in the Clearwater.

The largest transaction, which closed late in the quarter was the acquisition of a best in class Eagle Ford Basin asset for approximately $160 million about 200 million Canadian.

This eagle Ford property will significantly enhance the quality of freehold North American portfolio projecting 2500 BOE a day of production in 2022.

Improving both in near term and long term sustainability of freehold the dividend, while providing further option value to return capital to shareholders through multiple years of free cash flow growth.

After corner and freehold announced that it had closed its previously disclosed transaction to acquire concentrated high quality U S royalty assets in the Midland Basin for approximately U S 55 million or about 69 million Canadian.

The Midland assets in conjunction with a focused acquisition were completed year to date are expected to add multiple years of production and find slow growth.

The growth of the U S portfolio was in line was pretty old strategy to add to our north American portfolio, focusing on high quality development areas with multiple years of drilling upside in growth.

These acquisitions were funded through a combination of freehold as previously announced bought deal equity financing in which we issued $19 1 million subscription receipts at a price of 905 per share.

And the utilization of our credit facility and our funds from operations.

On the operations front production for the quarter averaged 11265 Boe per day, representing a 23% improvement over Q3, 2020, and a slight gain versus the previous quarter.

The U S portfolio averaged 1700, and 48 BOE a day in.

Q3, a 13% increase from $15 44 in Q2.

Growth in volumes reflect better well performance slightly better than forecast activity levels I mean.

Integration of U S royalty acquisitions that have been completed so far this year.

In Canada production averaged 90 517 be re a day for the quarter up 5% from the same period in 2020, and essentially flat relative to the previous quarter.

With the ramp up in activity on our royalty lands in Q3, we expect freehold Canadian portfolio to deliver organic growth into year end.

After realizing actual results for the first three quarters of 2021 and with free holds most recent acquisitions now closed.

We are implementing guidance for the fourth quarter and expect production volumes to range between 13500 to 13750 <unk> during the period weighted approximately 60% oil and Ngls and 40% natural gas.

For 2022 pretty holders, increasing our previous guidance and is now projecting volumes to average between 13000 and 750 be weird eight to 14750 <unk> a day with the same weighting of 60% crude oil and Ngls and 40% natural gas.

On the drilling front, we had 179 gross six net wells drilled on our lands in Q3.

A substantial 450% improvement on a gross basis versus the same period in 2020 as activity continued to return to our land and supported by higher commodity pricing and our expanding U S land base.

For the quarter drilling was very well balanced across our core play areas with 27 gross wells drilled in the Viking 20.

<unk> 24 in southeast Saskatchewan.

<unk> 18 in the Cardium.

<unk> 18 in the Spirit River.

<unk> in the Clearwater.

14 in the Eagle Ford and 11 wells targeting the Midland and Delaware basins.

For the first nine months of 2021 375 gross 11.8 net wells were drilled on freehold royalty lands compared to 261 gross eight seven net drilled during the same period last year.

In Q3, 2021, approximately 70% of all gross locations on freehold screen assets targeted core prospects with 25% focused on freehold mineral title lands and 5% from Nols.

44% of all locations drilled targeted bid prospects in Alberta, 37% in Saskatchewan.

19% in the U S on a gross basis.

Almost 90% of wells drilled focused on oil or liquids prospects.

This improved activity was driven by a broad increase in overall industry spending across North America with the upward move in crude oil pricing activity continues to increase on free holds royalty lands with approximately 20 rigs six in Canada and 14 in the U S are running on Orlando last week.

We have considerable optimism heading into the final quarter of 2021 and into 2022 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 afternoon, everyone as commodity prices improved over the quarter freehold continued to deliver on our core financial 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 $50 9 million for Q3 2021 up 13%.

Percent from the previous quarter, and 120% when compared to the same period last year funds from operations for Q3, 2021 totaled $48 2 million.

And all time record for freehold up 20% versus the previous quarter and 143% for the same period in 2020.

This significant increase in funds flow from operation provides added financial strength and flexibility in how we manage our business on a per share basis funds from operations was 36 per share during Q3, representing a level not achieved since 2014 freehold.

<unk> royalty revenue and funds flow benefited from the strong upward momentum in oil price and natural gas prices.

While growing production, particularly in the U S, which receive better pricing relative to our Canadian assets.

Three holds dividend payout totaled 35% for Q3 2021 up slightly from Q2, 2021, and 8% from Q3 2020. As previously mentioned, we are increasing our monthly dividend from <unk> <unk> per share to <unk> <unk> per share, reflecting a measured.

Bonds to an improved commodity price outlook strong production volumes and increasing third party spending on our royalty lands in 2021, which is expected to continue into 2022.

For Q3, 2021 cash cost totaled $2 49 per Boe.

The lowest in freehold history down materially from $4 48 per BOE in Q2, 2021, and $3 70 per BOE during the same period in 2020 that.

To continue we continue to drive efficiencies in this area through reduced G&A and operating costs, while increasing production volumes acquisitions completed late in the quarter and after quarter end are expected to only Adam marginal amount of G&A as we continue to drive optimization optimization.

On our cost structure, resulting in a better net back to our shareholders.

Net debt totaled $75 $3 million on September 30, representing 0.5 times net debt to 12 month trailing funds from operations. Overall three holds net debt increased by $35 million versus the previous quarter, but was still lower than September 32020.

The increase in net debt reflects acquisitions completed over the quarter with stronger funds from operations also meaningfully contributing to the funding of these acquisitions.

Freehold prudent strategy of maintaining net debt to funds flow well below one five times alongside a lower longer term dividend payout target starting at 60% of funds from operation provides protection to the business from composites price volatility.

While maintaining capacity to continue to grow through strategic acquisitions.

Concurrent with the closing of the Eagle Ford transaction highlighted earlier frilled amended its credit facility with a syndicate of four Canadian banks, increasing their committed revolving facility to $285 million and maintaining the operating facility at $15 million. The amended credit facility includes a.

Permitted increase and a committed revolving facility of up to $360 million subject to lenders consent, both a committed revolving and operating facilities mature September 28 2024.

Lastly, Freehold board has approved the filing of the preliminary short form base shelf prospectus upon filing the final based short form shelf prospectus freehold will be able to from time to time offer and sell common shares preferred shares subscription receipts warrants and units on an aggregate amount of.

Up to $500 million during the next 25 months period for yield has no immediate plans to raise equity capital. However, the filing of the shelf prospectus is a natural and prudent step for the company for financial flexibility as it continues to enhance and expand its asset base and drive continued.

<unk> business improvement.

Now back to Dave for his final remarks, thanks, Dave.

So in November of this month November 25th Freehold will celebrate its 20 <unk> anniversary of business.

The leadership team is committed to continue building on our successful history as we evolve freehold into the Premier North American oil and gas focused royalty company.

Current economic conditions are very positive for our industry and the strength of our royalty model and a strong return proposition of an investment in freehold provides will continue to be showcased going forward.

We remain incredibly enthusiastic about the next 12 months there has been a steady trending up of capital spending and associated production growth on our lands both in Canada and the U S.

At current commodity price levels are high royalty margins offer significant option value to provide returns to our shareholders.

With today's increase to our monthly dividend, we reiterate that this is the fifth consecutive quarter that we have revised our dividend upwards.

The acquisition work that has been completed in Q3, along with the transaction after quarter and are expected to provide both near and long term value for our shareholders and further our patient execution of our strategy.

There's been a tremendous amount of work completed in the transformation of freehold from a premier Canadian royalty company to a premier North American royalty company.

The fourth quarter of this year will be the first period, our shareholders will see the full impact of the approximately $320 million of U S. A $312 million of acquisition activity in the third and very early in the fourth quarter and we are confident that freehold will delivered record levels of royalty production and funds from operations.

I would like to personally thank all of our shareholders for their support over the past 25 years and thank our board and employees have contributed the ideas the energy and the inspiration that has made an investment in free all the success.

Thank you and we'll now take questions.

Thank you.

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Please press star one at this time, if you have a question there will be a brief pause while the participants register for questions. Thank you for your patience.

We will take the first question.

Please go ahead Luke Davis.

Hey afternoon guys.

Just had a quick one here relating to the shelf I'm. Just wondering if you can kind of frame out the thinking behind this I know you hit on it a little bit, but it shouldn't be read into that that you're kind of setting up to do something larger or are you really just looking to kind of enhance flex.

Flexibility there and then I guess the second piece of that would just be it. It is fairly sizable. So I was wondering if you can kind of frame out how you came to that $500 million.

Any any kind of details there would be helpful.

Sure Lucas Dave Hendry here.

Yes, no we have absolutely no immediate plans to utilize the shelf. This was merely about being prepared so the shelf just gives us added flexibility.

Should a future opportunity to come along we want to make sure that we're adding the best value in being able to communicate it and the best way. So this is purely about being preparedness.

As far as on the size of it is it's a what we did is we looked at what our peers were putting out from the last shelf prospectuses over the last year or so and what we found was about a medium of those was about 25%. So we took a look at our market cap, 25% and that sort.

Rounded to around that 500 million dollar Mark and then we looked at you know deal opportunities, we want to make sure that it's a reasonable side, because it's going to be out there for that shelf period of 'twenty five months and so.

That's that was the logic on how we came around $500 million.

Got you it makes sense.

Maybe just another one for you Dave just just around hedging I mean things look really good now activities picking up.

Margins are high.

But the industry is pretty notorious for kind of overestimating pricing. So wondering if you have any updated thoughts on hedging and how that might look over the next couple of years.

Yeah, so as far as on hedging it's something we do discussed regularly with our board as far as as well.

Whether whether we want to apply it.

Right now I mean with our dividend.

Sorry, our net debt to funds flow as projections, where we're looking around that more 0.5 times is relatively.

Let's call it a conservative on the leverage and so you know.

Hedging doesn't really have a lot of logic to it.

For protecting that one as far as protecting the dividend side, you're still seeing you know less.

Let's call it a backward dated position of the hedging and so you know at this point.

Where we're comfortable with not having a hedging position, but we continue to evaluate it every single quarter with the board.

Got you thanks for that.

My pleasure Luke.

Thank you we will take the next question. Please go ahead Robert Wood.

Hey, Travis how are you hey, guys. Thanks.

Two questions for you the first.

Could you give us some color just around the strength of pricing Youre seeing.

Specifically in the U S on the liquid side as well as the natural gas side, and then I'll have one more as well.

Okay I can tell you can't keep Dave Henry busy so.

Yeah exactly so yeah.

Just to help us.

Provide a little bit more details of it was one of the changes that we made to our MD&A and financial statement disclosure was providing data both on a Canada in a U S basis and so.

For it's always.

I'm, just pointing out to the nine months.

Just providing a little bit more of a smooth pricing scenario rather than like in a particular quarter and where you can see on accrued basis, our realized pricing in.

In the U S. On the oil is about $10 higher. So you can take a look at it and saying as you know over the last nine months, we were getting about $68 net on oil.

Versus in the U S. We're at $78.

And similarly on a gas basis, where you know the our natural gas realized pricing was $3 90, and you know relative to 260 Canadian so you're seeing.

A dollar delta and in the third quarter that was you know that natural gas Delta was even wider where it was $1.40 improvement on that so we're seeing great realizations in the U S and so our production in the third quarter was about 16% weighted to the U S and obviously with that Eagle Ford deal.

That waiting will go up and you'll continue to see that torque of the improved.

Realizations.

On a U S product and if you look at on a net oil equivalent basis blended together. So for the first nine months of the year Youre looking at almost $52 a barrel in the U S relative to 42, so it's noticeably improvement in the U S and so that's why we're projecting funds flow.

To improve proportionally better than that weighted average percentage of production in the U S.

Okay, that's great color and then one more.

Just around activity.

Guidance for the tail end of this year into 2022 edged higher you've seen the resilience in pricing continue.

Or on the services side I think you mentioned 20 rates.

Has that picked up subsequent to the quarter and how should we think about kind of the pie chart of U S. Canada from from rig activities through at least the at least the tail end of this year I guess.

Okay.

Travis it's Rob King speaking.

This is the latest update this is up until a couple of days ago, We actually had an increase from those 20 rigs across our U S and Canadian land to 'twenty four rigs. So another 17 running on our <unk> in the U S 11 are in the Midland and the.

Other states are sort of scattered between Eagle Ford Bakken and Appalachia in <unk>.

Canada, we've seen an increase two to seven rigs running on our lands.

Even split between Alberta, and Saskatchewan, Viking and Cardium are definitely the most active active plays with four four rigs.

There were not four rigs.

And if I can cardium are definitely the most active right now for us and so on.

Almost every every time, we update our rig activity, we're sort of seeing an increase you know adverse ever since sometime early September timeframe. So it does give us some you know some pretty solid confidence about what our what we're going to see.

Balance of Q4 and into into 'twenty two.

Okay perfect. That's all for me. Thank you very much.

Thanks Travis.

Thank you.

Once again, please press star one on your devices keypad, if you have a question.

We will take the next question.

Please go ahead Jimmy in the claim.

Hey, Jeremy.

Okay.

Did we lose you Jeremy.

Yeah.

Yeah.

I'm, sorry, I'm unable to hear anyone if you're using a speaker phone. Please lift up your handset to Amit your line.

Hearing no response, we will have to go to the next question.

Yeah.

Please go ahead Elias pulse colas.

Hi, Les.

Good afternoon.

I've got it and thanks for taking my question I've got a question on the guidance I appreciate the production guidance, but I'm trying to tie in.

What the commodity price guidance.

Where that kind of a you know.

<unk> relates to things.

I mean directly.

With commodity price guidance, I guess I would be expecting some sort of funds flow or cash flow guidance, but there isn't any there. So can you frame.

No what I'm supposed to get out of the commodity price guidance for Q4 and a 22.

Yeah basically lies what we.

We're doing you know first I'll start with the production guidance, you're just recognizing the significant evolution of the portfolio throughout the year.

I'm just trying to tie all the bits and pieces together of the acquisition work that's been done and give you some insight into our view of what Q4 shapes up too and then continuing that forward and into next year. This is it really just tying all these all the acquisition work together for their production.

Oh or for the pricing guidance.

We're just giving you what were using in our modeling for pricing you know part of it when we talk about the dividend you know that.

Pricing, there and the midpoint of guidance for us triangulates around to you know kind of a 50% payout.

Pay out on pricing and that's all we're trying to just let the.

Analysts and investors kind of see what were using our in our numbers is where we're thinking through our business strategy and plans.

Okay. So if I can use that in a sense for the dividend then what I would say the amount of cushion off of that is to redeploy capital I guess would that be correct.

Yeah and in the way, we're looking at managing the the dividend is that we think that that that level of that pricing.

To triangulate around that 50%, we still see considerable opportunity.

You know for acquisitions I'm in front of US right now and so we think of that level of dividend. We can we can pay down debt and get ourselves comfortably that 0.5 times debt to cash flow and still leave.

Opportunity available money to invest on the acquisition front. So we're just trying to strike that balance and kind of lay that out a little bit more clearly for our readers.

Okay appreciate that and maybe a bit more of a high level question given the current commodity prices that are out there and the current drilling activity that youre seeing.

Absent of acquisitions.

How do you see production on your current stream of assets would it be holding relatively flat what I'm really trying to get at is are we at a point now where we've got something that's a flat slightly growing slightly declining leaving you you know the ability to add upside through acquisitions.

Yeah. That's a good question Elyse and and you know how we modeled it right now we see ourselves are essentially flat for the next three years. So we don't have.

We have to deploy our capital into acquisitions too.

We maintain a stable production profile. So you know that that's a significant difference from you know historically, what we've had to do with the company and it just reflects how we really repositioned and restructured the asset base in the last nine months and so what that's allowed us to do is we can be pretty selective on on.

The bid level that Oh, you know, we're proceeding with an asset and then the exact type of assets that we want to bring into our portfolio.

And so we've got a lot more horsepower to run our business with the increased our funds flow and with the production profile, where we're at we've got a lot more ability to you know.

And to really drive the value in and the location of where we're adding to the portfolio.

Great Perfect. If you ask me you answered the question.

Kind of what I was looking for it so I appreciate that clarity that's it for me I'll turn it back thanks.

Thanks, guys.

Thank you.

There are no further questions registered at this time I would now like to turn the meeting back over to Mr. Spyker.

Thank you for everyone that participated today once again, we're very excited with.

With the corner, where they're very excited about our going forward. So thank you all and we will please don't hesitate to call. If anyone has further questions. Thank you.

Thank you.

The conference has now the conference has now ended please disconnect your lines at this time. Thank you for your participation.

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