Q4 2021 Freehold Royalties Ltd Earnings Call
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Good morning, ladies and gentlemen, and welcome to the fourth quarter results Conference call I would now like turn the meeting over to Mr. David Spyker.
Please go ahead Mr Spyker.
Good morning.
Thank you for attending we're excited to share our Q4 2021 results with you. This morning.
Joining me today are Dave Hendry, our CFO Rob.
Rob <unk>, our vice President business development.
And Matt Donohue, our manager of Investor Relations and capital markets.
2021 was a transformational year for freehold, So we completed $377 million in acquisitions and set record production levels.
14005 Boe per day in Q4.
We positioned our portfolio with the addition of royalty assets in the Premier oil and gas basins across North America, including the Permian Eagle Ford oil basins.
Enzo gas basin.
Clearwater oil play.
With this work we have achieved the following.
We delivered $69 million in funds from operations, our highest quarterly funds flow ever.
This equates to <unk> 46 per share.
We are increasing our dividend by 33% from six per share to <unk> <unk> per share, which is <unk> 96 per share annualized and this commences with the April payment.
We've increased the dividend every corner in 2021, and this is our highest dividend level since 2015.
Yeah.
We have the most under Levered balance sheet of our Canadian royalty peers exiting the year at <unk> five times net debt to trailing funds from operations.
We are positioned to grow our royalty volumes through drilling on our existing land base, we had 250 wells drilled on our lands in Q4.
We have nine to 12 rigs continuously active on our Canadian land to start 2022.
We had $1 million in lease bonus revenue so far this year more than the last three years combined.
We realized almost 1000 Boe per day of production associated with their audit compliance and royalty authorization drilling initiatives in 2021.
These are the best acquisitions per se as they don't require capital.
Which is all we do our Canadian production, 4% from Q3 to Q4 2021 as a result of this robust drilling activity.
We are very well positioned in the Permian basin, an area, which is set all time high production levels in the past two consecutive months with half of the active U S drilling rigs operating there.
We have 17 rigs operating on our U S. Land is currently with 45, new wells permitted in the last two weeks alone.
And we are receiving premium pricing on our U S assets.
Received $68 per Boe for our U S royalty volumes in Q4, 2021 compared to $53 per Boe for our Canadian royalty volumes, a 27% pricing premium due to proximity to U S Gulf Coast.
These are material shifts to our portfolio and with our updated guidance, we are projecting between 230 and $250 million in funds from operations in 2022.
The dividend increase we announced strikes a balance between returning value to our shareholders.
Strengthening our balance sheet and providing the flexibility continued disciplined acquisition work.
The opportunity to further build on the quality of our portfolio remains robust and we view it is important to retain the flexibility to continue to evaluate and acquire assets that enhance our royalty portfolio.
I will now pass the call to Dave Hendry to walk through some of the financial highlights.
Thanks, Dave and good morning, everyone.
As commodity prices improved over the quarter freehold continues to deliver on the 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.
Funds from operations for Q4, 2021 totaled $68 8 million, an all time record for freehold or <unk> 46 per share up 43% versus the previous quarter and 211% from the same period in 2020.
Or the year funds from operations totaled $189 6 million or $1 39 per share, which is up 129% year on year.
Significant increase in funds from operations provided added financial strength and flexibility to how we manage our business three holds royalty revenue and funds flow both benefited from the strong upward momentum in crude oil and natural gas prices alongside growing production, particularly.
In the U S, which received better pricing relative to our Canadian assets.
Three holds dividend payout totaled 35% for Q4 of 2021 versus 24% in Q4 2020. As previously mentioned, we are increasing our monthly dividend from <unk> <unk> per share to eight per share, reflecting our continued measured response to an improved.
Modest price outlook better than anticipated production associated with increasing third party spending on our royalty lands in 2021, which is expected to continue into 2022.
For Q4 of 2021 cash cost totaled $3 57 per Boe.
Down meaningfully from $4 <unk> per BOE in Q4, 2020 for the year cash costs totaled $3 71 per Boe.
Lowest in freehold history, and down 19% versus the previous year.
Continue to drive efficiencies in this area alongside increasing production volumes.
Net debt totaled $101 2 million at December 31 Rep.
Representing 0.5 times net debt to 12 month trailing funds flow from operations overall freehold net debt increased by $35 million versus the previous year.
The increase in net debt reflected acquisitions completed over the year with stronger funds from operations also meaningfully contributing to the funding of these acquisitions three.
Three holds prudent strategy of maintaining long term debt to funds flow well below one five times alongside a longer term dividend payout target starting at 60% of funds from operations provides protection to the business from commodity price volatility while maintaining capacity.
To continue to grow through strategic and disciplined acquisition work and.
In absence of additional acquisition work freehold has the opposite optionality to potentially reduce net debt to zero by year end 2022 based on guidance estimates.
Freehold expanded its credit facilities with four Canadian banks in the fall of 2000 $21 million to $300 million with a permitted increase up to $375 million subject to lenders consent, which provides capacity and flexibility to potentially fund further.
Accretive acquisitions during 2022.
Now back to Dave for his final remarks.
Thanks, Dave So in closing we remain enthusiastic about the next 12 months, there's been a steady trending up of capital spending associated production growth on our royalty lands, both in Canada and the U S.
At current commodity price levels are high margins offer significant option value to provide returns to our shareholders.
Today, we are increasing our monthly dividend means that we have increased our payout every quarter in 2021.
And the acquisition work that we completed last year is expected to continue to provide both near and long term value for our shareholders.
There's been a tremendous amount of work completed in the transformation of freehold into a premier North American royalty company.
I think you can see the fourth quarter is showing the full impact of the acquisition activity throughout the year, resulting in these record setting production and funds from operations for freehold.
I would like to thank all our shareholders for their support and also thank our board employees that contribute the ideas the energy and the inspiration that has made an investment in freehold of success.
Thank you all and we will now take questions.
Thank you.
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Oh.
We have our first question from Luke Davis. Please go ahead. Your line is open.
Hey, Thanks, Good morning, guys just on M&A I'm wondering if you could provide some details on how the market develops just given the run in oil pricing here and maybe what kind of opportunities you're seeing and I imagine you're still focused on the U S. But I'm curious if you can comment just on both sides of the border.
[noise] I'm wondering if it gets a rob <unk> speaking.
So you have to provide a few comments in terms of what our what we're seeing right now.
The start of January .
Really quiet on both sides of the border in terms of turns of activity but.
That only lasted a couple of weeks before things started a number of opportunities, particularly in the U S certainly coming across our across our desks.
All over the size range from you know call.
Call. It 10 $10 million of value with less up to 500 plus million dollars of our value. So I think one of the one of the challenges that are our team's happening right. Now is how we allocate our time and allocate our capital.
Looking at these opportunities because you know who we've been where we're fortunate to have a lot to a lot to look at in terms of what we're sort of seeing in terms of a bid ask spread is what the market is looking like because obviously the market has been incredibly dynamic and up in Alaska. The last several weeks here.
A few examples of activity in the U S. In the last month, we've seen three transactions north of a billion of value and the common thread between those mineral title opportunities was that they were done with a high teens.
Cash flow yields in them.
So it's still it's still a attractive a very attractive market even in this commodity price environment, where you know you are we are we are seeing you know are our peers seeing bid ask spreads narrow you know I think for US. We've we we've been we haven't been testing the market to the same extent since our our acquisition.
<unk> that you sort of see in our Q4 numbers right now we're starting you'll having some some discussions and things are are similarly, pointing to.
Metrics that would be in that in that range.
I think we're seeing that the strengthening commodity prices, bringing out a lot of a lot of sellers plugged up obviously just from the sheer strength and that's what it's also has change the development pace of the assets. So sellers might look to sell in the back half of 'twenty two or into 'twenty three are now seen there.
Folios mature that much faster and ER are sort of it provides a great mix of near term development with a future upside that our buyers like us are looking for.
Yeah.
Thanks that was a super helpful and just curious what you're generally using now for pricing when youre doing those evaluations.
Yeah. It's.
Yeah, that's a pretty dynamic process.
It's multiple pricing scenarios as you as you would guess.
It's grounded in stress, but then it's stripped minus.
Running scenarios that so look at look at the strip for a one one year or two year time periods and moderating to a lower level or in a lot of flat pricing scenarios. Yeah. It's yeah, you're touching on one of the more challenging pieces of our evaluation of these days.
Yeah that makes sense, thanks, and just one final one for me can you just give us an update on what's going on with the CRA process.
Hi, Lucas Dave Hendry here, Yes, we are.
First off we still strongly believe our filing position is correct.
Feel officer has been assigned we've talked with them. We've provided submissions to them justifying why we believe our position is correct and they are going through that through those submissions as risk as well as the rest of the material.
Yeah.
I'm not expecting this to be quickly resolved probably see it may be taking six months I mean, it's hard to tell.
CRA is going to take as much time, as they want to and clearly and they manage the process. So so with that depending on where we are in that.
Our next tax filing for the 2021 year will be sort of mid year and so if it is still outstanding and they haven't made a conclusion out there appeal process at that point, there is a chance, but most likely we would get reassessed on our 2021, and then have to deposits probably another $10 million approximately.
Until we wait for the appeal decision.
And but but the finalized we strongly believe our position is correct and you know where we're actively focusing on on that.
Yeah.
That's helpful. Thank you that's it for me.
Okay.
Thank you.
The next question is from Aaron Milkowski.
From TD Securities. Please go ahead your line is open.
Thanks. Good morning, guys would you be able to give me a sense of what first year production rates would look like for your average U S well relative to your average Canadian.
Yeah.
Yeah, and Rob can add studies, just a pull up his screen here right now we have a second question Oh, I'll kind of run us in the background while you.
I guess internally, what leading indicators do you guys are watching for future production additions are you guys seeing a ramp up and licenses or a wrap up at night.
Active rigs on your land and I'd be curious to know.
Which players are seeing the biggest change.
Yeah.
Yeah, maybe come back to your first question that'll come to come to the last question. So in terms of Saar.
Average.
One year production on our U S wells, it's just about just under 800 barrels a day is what we saw this was a you know a.
A number that we ran back in or back in our Investor day in December . So this war contemplates wells on our U S properties as if we had those them for the last four years 2017 to 2021.
So yes, just under 800 barrels a day in terms of activity on our on our U S. A U S assets you know we've had a pretty consistent number of rates over the last gosh for five months now so net 15 to 20 range. So that's kind of giving us some confidence.
Yeah, I think what we're also tracking is just the number of permits that are that around on our lands and as Dave said at the outset you know in the last two weeks. We've had 45 permits on our on our U S labs, and I think that that's what you just put that is that 45 permit number into context, you know in the <unk>.
First two months, we've had about 50 gross wells, you'll drill bit drilled in the U S on our on our lands and so 45 purposes.
It's pretty exciting.
Those on our own or in the last two weeks on the spot side, you'll have a bet on the Eagle Ford with marathon. The other half have been in the Permian largely under pioneer and also you'll handful of privates.
Those permits that we talked about the 45 30.
<unk> 35 were in Midland.
And the vast majority of those were under our our one Matt lands that we acquired closing in October with most of that coming from from pioneer Tamara for marathon in the Eagle Ford.
And just to give you a little bit of a triangulation, there's often in the Permian and the Eagle Ford about a two to three month lag between permit to spud. So we can see if you see those permits coming in February you know that sort of points to a Q2 spud time frame.
Final question for me and I guess, it's a follow up I'm Gonna Lukes question I'd be curious to know what the size of the asset packages are that are crossing your desk.
There's a sweet spot in terms of size for freehold, either your ability to I guess them more if there's a sweet spot in terms of valuation.
Maybe on your second point, there so definitely the sweet spot valuation. That's that's that's far more important and relevant than that then the seismic over everything we look at it.
If it doesn't make us better or we're not interested in adding to our portfolio.
And so that's that then in terms of size.
I'd answer, but it's literally it's all over them out.
In terms of I'd, probably say, it's almost a barbell theres either a theres a number of opportunities in that $50 million or less and then what's interesting is the number of opportunities that are a couple of hundred and more.
And I think that's where we're looking at both ends of the barbell and Ah Theres, obviously, a heck of a lot more deals in that.
That smaller range.
But there is there are there are more than three that are in that larger categories that are currently on our desks.
Do you find there's more competition for smaller deals or larger deals are it's tough to tell.
Yes, definitely agree with that comment in terms of more competition on the on the smaller end and you can certainly see that with the marketers. The marketers know that they are you know they they size. The packages are correct, Eric close correctly to try and get the most number of the most number of competitors.
Looking at it.
I think it's fair to say, there's a lot of opportunities.
Yes, there's a lot more competition, we've observed in the U S. But there's also a lot more opportunities.
Alright, thanks for that guys.
Thank you.
The next question is from Jamie Kubik. Please go ahead your line is open.
Yeah, Good morning, and thanks for taking my question I've got two of them just quickly so volumes on your Canadian assets really strong in Q4, how should we think about our production volumes in 2022 on the Canadian side, given where producer activity is that and also curious if you can touch on how the U S portfolio was trending.
Currently thanks.
On the on the Canadian side, Yeah, I think our our our forecasting we think we're going to have about 20 net wells on our on our Canadian assets in 'twenty, two and just to put that number into context that will reflect that we believe that will replace our to our decline rate.
Canada. So candidate is kind of a flat to maybe modestly up we've seen so far activity in Canada about a 100 gross wells drilled on our lands and the and the first two months.
Which is it's definitely on pace for that.
Annualized 20 net wells.
A lot of that is banned.
Well 30 Drillers makeup those hundred wells.
We're with a tiny in the Viking Tamarac was very active in the Clearwater with a with a dozen.
Wells on our lands and in turn drive some of the privates have also accelerated their activity we've observed in the last in the last couple of months.
I'm, sorry, I didn't know if that answers your Canada question I know you're a U S question I, just can't I can't remember I'm sorry, Jamie.
Yeah, sorry, I was just curious on how the production volumes are trending versus your guidance I know you split out Canada about 9300 barrels a day contributing in 2022.
In the U S. Contributing at 4900, just curious on what you're seeing so far because obviously the mix in Q4 was what's different than that.
Yeah, Yeah, I'd say, it's sort of trending on on pace to me I think we're where we put out our our production guidance and in November timeframe, but I think our expectation for 'twenty two is it'll be at the Hyatt.
At that are of that range.
The Eagle Ford is showing.
A lot of continued strength in <unk> and probably even maybe a little bit ahead of where I think our our expectations work I spoke to a production comment but also our cash flow comment what we're even getting higher realized pricing that I think we had we had actually expected Oh, we have incurred.
Saying marathons 22 capital guidance, a few weeks back where their capital plans are supportive proper out of the of the acquisition modeling that that we have for their for our assets under marathon in and they are in the Eagle Ford, they're actually talking about 15 REIT.
Development re completion wells are in the Eagle Ford I'm, obviously, all will be on our lands, but we did not value any re completions and our in our analysis. So you know that that is some you know some some.
Upside that we will see in 'twenty, two that we weren't expecting.
Okay, and then maybe.
The follow on question here, how should we think about the free cash flow priorities are for the business I mean should.
Should we think about the dividend being anchored at a at a lower commodity price level, I mean, where should we think about freehold likely increase in the dividend as the year goes on if if strip pricing or if commodity pricing outperforms. Your your expectations I know that you got the W. T I estimated at $75 a barrel.
For 2022, and $4 Nymex clearly a dynamic environment, but can you can you talk about how we should think about the dividend moving forward through 2022 and free cash flow priorities.
Hi, Jamie it's Dave Hendry again.
Yeah, I mean honestly, we just updated our dividend commodity prices incredibly volatile. So it's very it's very hard to sort of know what their predictions are we stuck with 75 W. T. I U S. Just because it's a you know it is relatively consistent with US you know a lot of a lot of our peers as well.
As you know, it's more of a moderated position on top of that dividend that'll be just an ounce of eight cents per share you know all of us. The most meaningful contribution is acquisitions. So we got to see how acquisitions play out this year.
See what the ASP numbers are in about Oh can we get some deals across the line doesn't realize the returns that we're expecting so so that's the key focus and you know.
And then we will continue to monitor what commodity prices you know we set at 60%.
Target range for for a reason so so we'll continue to monitor that and then.
And then we do have still $146 million of debt pay downs or so we'll use that as a toggle. So we'll balance those three contributions like usual.
So, but as far as ultimately do we changed the dividend we don't have a plan on updating the dividend you know in the next quarter, but we'll just evaluate it and see how our ex acquisitions play along.
Okay. That's it for me thanks, guys.
Thank you.
The next question is from Patrick O'rourke. Please go ahead your line is open.
Hey, good morning, guys I'm pretty comprehensive questions suddenly guys ahead of me there ought to be a little bit quicker on the.
The finger trigger there going forward just a couple of quick things, though that I I don't think it's been touched on and I'm curious too in particular, you're showing some strength out of the Canadian I sat here and I think that drove a bit of the outperformance on the quarter I'm wondering if you can comment now with you know pricing is so strong in Canada.
Ah and the progressive nature of royalty or crown royalty.
Crown royalty curves here, how you're sort of competitively positioned on your freehold plants.
Yeah.
Sure Patrick.
As far as the Crown a royalty stream.
[noise] goes.
No. The Theres still you know crown royalty holidays that are that are in place are early on but when you come off of those holidays.
Our Oh you are royalty lands you are very competitive and so you know right now we see drilling.
Drilling as active on the our royalty lands as I think we see in our crown lands across the portfolio.
And so we see that continuing you want to run a rig activity level, where you know where she's there certainly higher rigs in Canada than we were this year last time, but.
We're still 60 rigs or so under the.
Long term average and in Canada, if we go back a few years. So yeah, we are seeing.
You know certainly increased activity you know it hasn't recovered to a you know.
More and more steady state pre pandemic levels and the same in our in the U S. So you were seeing the rigs are really focusing the most.
Two of the most cost effective basins.
The Permian and Eagle Ford and in the U S is really driving a lot of that drilling and we did see a good uptick in gas drilling.
In the deep basin in Q4, we expect to see that continue but the oil plays are what's really are being developed are you don't have a pretty good clip on airlines.
Okay, Thanks and.
You know considering you guys are using up a pretty conservative planning budget here was $75 W. Ti.
Freehold are considered on an approach to hedging any of the production here.
Yeah, I don't you know, we we've talked about hedging before Patrick maybe that backstop acquisition, but you.
So as far as hedging in general.
So it's something that we're looking at you know, we do have our strongest balance sheet of Oh royalty peers in and we're generating significant.
Cash flow right now so we think that we've got the balance with the dividend payment and our and our focus on managing our debt that we don't think that hedging is the right answer for us right now.
Okay. Thank you.
Okay.
Thank you.
The next question is from Matthew Weekes. Please go ahead your line is open.
Hi, Good morning, I think all my questions have been answered at this point, so I'll just I'll hop back in the queue. Thanks.
Thanks Matthew.
Thank you there are no further questions registered at this time I will turn the call back to Mr. Spyker.
Okay. Thanks, everyone for participating today, if we had some great discussion and so appreciate tests or one of those questions at us and and good luck to all and we'll talk to you next quarter.
Yeah.
Thank you. The conference has now ended please disconnect your lines at this time.
And we thank you for your participation.
Yeah.
Yeah.