Q3 2022 Freehold Royalties Ltd Earnings Call

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

All participants please standby your conference is ready to begin <unk>.

Good morning, 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 morning, everyone and thank you for joining us this morning.

On the call from Freehold with me are Dave Hendry, our CFO , Rob King our VP of business development.

We're really excited about the third quarter for the third quarter, we delivered record production of 14219 D. We are day.

Driving revenues of $98 million and funds from operations of $81 million.

<unk> 54 per share.

After two years of upward momentum in crude oil prices Q3, 2022 representing a 15% retreat in west, Texas intermediate oil price.

This oil price Ritchie contributed $2 million reduction in funds from operations quarter over quarter.

She's a corner freehold was able to complete greater than $160 million in value enhancing royalty transactions, adding to both our U S and Canadian portfolios.

Increased our dividend for the sixth time in the past nine quarters, and we maintain flexibility within our balance sheet.

Some of the highlights from yesterday's news release include as I mentioned already the record production with volumes, averaging 14219 BOE a day for the quarter up 6% versus the previous quarter.

Up 26% versus the same period in 2021.

Our Canadian portfolio was not impacted by the seasonal slowdown associated with lower Q2 drilling with Canadian production flat quarter over quarter.

U S production was up 24% quarter over quarter as new wells were brought on production in the acquisition work announced it was our Q2 results closed in August .

Looking forward, we continue to see strong third party development on our royalty lands with 30% to 35 rigs consistently drilling on our lands in Q3, we are reiterating our 2022 production guidance range of 13750 to 14750 a day.

The $160 million in value enhancing acquisitions expanded our royalty positions in the Permian and Eagle Ford in the U S as well as the Clearwater in Canada.

The Permian and Eagle Ford transactions have been incorporated into our portfolio already with already drilling results in line or ahead of expectations. These transactions are expected to provide a strong growth wedge for our royalty portfolio going into 2023.

In Canada, we completed a royalty transaction for Clearwater assets in total this deal adds greater than 300000 gross acres to free hold inventory.

Tripling the company's previous Clearwater land position.

This $18 4 million dollar deal includes a drilling commitment with a strategic partner, who has a track record of development success within the play.

This transaction aligns nicely with the drilling momentum we're seeing in the Clearwater oil play we've had 26 wells drilled on our Clearwater acreage in Q3 with early success in our southern Clearwater acreage, including figure Lake, where we're seeing initial oil production rates for the first 30 days or approximately 200 majority of barrels a day per well.

On a gross basis.

Overall, we achieved record gross drilling results within our North American portfolio with 304 gross wells drilled on royalty lands over the quarter for the first nine months of 2022.

More than 760 gross locations have been drilled with there are both robust activity associated with both our Canadian and U S portfolios.

Setting up for what we expect will be a record level of gross drilling on freehold lands in 2022.

In Canada, we've seen activity focused on oil weighted areas in southeast Saskatchewan.

Viking Cardium and the previously mentioned Clearwater play.

We've also had strong drilling results in the deep basin and Spirit River with eight wells drilled in a number of those wells in the top 15, while results in August and September .

We expect this to be a strong growth driver through the remainder of the year and into 2023.

With activity expected to continue on freehold lands.

In the U S development is focused on light oil prospects in the Permian and Eagle Ford basins drilling.

Drilling was driven by a diverse group of disciplined investment grade companies wherever we've also seen an increase in the share of activity coming from a more active group of smaller public and private operators.

Freehold achieved near record financial returns for the quarter as the company generated $81 million or 54 cents per share and funds from operations.

This represents a 67% increase on a per share measure versus the same period last year and only $2 million below the funds flow record set in Q2 2022.

A key highlight associated with the advancement of our North American strategy has been the stronger pricing, we received associated with our U S production.

Our U S realized pricing was $92.15 a Boe.

On 40, 653 Boe production.

While our Canadian pricing was $65 63, a Boe.

Ah 90, 566 BOE a day of production.

This is a 40% premium on a third of our production and really highlights the benefit of our diversification to north American pricing points, which has enhanced the sustainability of our return profile.

We benefit from lower transportation and quality differentials on the oil side.

Specifically for Q3, the strength in Nymex pricing when eco gas pricing was weaker as it related to egress constraints associated with maintenance on pipelines systems in Canada.

Cash cost in the second quarter totaled $3 62.

Down 57% versus the same period in 2021.

This decrease was driven by increased production volumes and reduced stock based comp payout.

Given the low cost intensity of royalties as we expand our north American portfolio. We believe we are positioned to add production at very low costs.

Okay.

The transactions that we've completed year to date were funded by utilizing our existing credit facility.

Q3, 2022, net get exited the period at approximately $160 million or 0.5 times net debt to trailing funds from operations.

Note that this includes acquiring over $160 million of value, adding acquisitions in the quarter, while paying down $33 million in debt.

At current commodity price levels cash flow generation remains robust, allowing for that to be paid down over and above our dividend with freehold committed to maintaining flexibility to our balance sheet.

Dividends declared for Q3 totaled $39 million or 26 cents a share. This represents a 102% increase versus the same period in 2021.

He holds a dividend payout ratio for Q3, 2022 was 47% versus 35% during the same period in 2021.

We increased our dividend, 13% to nine cents a share from eight tenths of share paid on September 15th and our dividend planning is based on a longer term price view of $75 U S per barrel West, Texas intermediate oil price of $4 in Mcf Canadian gas price and.

$5, an Mcf U S gas price.

This view reflects the volatility that we're seeing in commodity pricing and positions us within our stated payout guidance of approximately 60% in the 2023.

We will continue to monitor our dividend quarterly allocating returns with an objective of maximizing shareholder value.

We continue to see high quality acquisitions opportunities across North America.

With that patient and disciplined M&A work will continued to be a key component of our go forward strategy.

In closing freehold remains focused on executing our strategy of continuing to enhance our north American asset base, providing girl growing shareholder returns and maintaining low leverage.

The acquisitions announced during the quarter have made a material improvement in the scale and quality of freehold.

Folio.

Thank you and we'll now take questions.

Thank you we will now take questions from the telephone lines. If you have a question and you are using a speaker phone. Please lift your handset prior to making your selection.

If you have a question. Please press star one on your devices Keypad you may cancel your question at any time by pressing Star Q. Please.

Please press star one at this time, if you have a question there will be a brief pause some other participants register thank you for your patience.

The first question is from Luke Davis with RBC. Please go ahead.

Okay.

Hey, good morning, guys I'm wondering if you can just frame out your volume growth expectations for Q4 split by the U S and in Canada, and just provide some details on our key plays key operators key drivers that sort of thing and to the extent that you can frame that out just directionally for 2023 that would be helpful as well.

Yeah.

Sure Alex.

It's Rob came here so for Q4 in terms of overall volumes were sort of targeting in and around that 15000, plus or minus for the for the quarter.

And you know that's really call. It two thirds in Canada, one third in the U S. In terms of what that how that volume contributes to that 15000 types of all type level. Some of the key plays on the U S side are clearly going to be and are in the Eagle Ford.

Marathon actually is really bring on a oh, 40% of the AR of the wells that they and we expect to have turned in line in 2022 actually in September October November timeframe. So we are expecting some strong production from our Eagle Ford assets. So I think the other.

<unk> is going to be the new transaction that we closed in August in Howard County, and in the Midland Basin and you know that you know one of the key operators. There is has been very actively completing a number of the docs that they had on the on that asset.

So between those two you know that's a material part of our of our of our Q4 volume growth in the U S side in Canada, we're seeing.

Some really strong gas drilling in the deep basin and so that's probably work, let's say the most significant amount of the volume growth that we're going to see in Canada.

You know 2023, you know I think we're a little early to be talking about 2023, I think it's one where we're still waiting to sort of understand a bit from from our some of our key payers in terms of what their capital programs are going to be but if we are directionally call. It like right now candidates you know call it.

Got it in terms of what we would sort of see that you know that over the next year in the U S would be a would be modestly growing.

Yeah.

That's helpful. Thanks.

Thank you once again, please press star one at this time, if you have a question.

Next question is from Patrick O'rourke with ATB capital. Please go ahead.

Hey, good morning, guys. Thank you for taking my question.

Yes, I just would like to know kind of your views in terms of the current dividend payout ratio.

Now that you've sort of rightsize did over the last couple of years, how you think about the timing and scaling of future dividend growth and then I guess, it's probably somewhat inextricably linked to our view on the outlook for M&A and balance sheet management here. So perhaps you know if you could tie in how you think.

About all these sort of three factors working together going forward.

Yeah.

Yeah, Dave Spyker here.

It's really how we're thinking of the dividend as.

We run a run their dividend at approximately 60% payout based again on that longer term pricing strategy that are that we see in that longer term pricing strategy really aligns with what we're seeing on the forward curve right now and so when we review the dividend again in <unk>.

And with our Q4 results it will be looking at you know what is what is pricing a yoshi.

Shipping ought to be I mean, there's a lot of moving parts on commodity right now we see the volatility in it.

Yeah, we want to keep our balance sheet are strong. So you know being a key part of that is continuing to you know to pay down debt to keep ourselves flexible for for M&A acquisition type opportunities. So like you mentioned, we do see a lot of deal flow right.

Right now.

Robert and I were in Houston last week, and you'll continue to see quality opportunities are available today and and it didn't sound like that the pipeline of opportunity is slowing down any so you know part of our our strategy is is to be able to invest you know the other 40% of our funds from.

<unk> to really grow our business and enhance it you know along the same lines that we've been focused on over the last two years.

Thank you.

Thank you. The next question is from Jamie Kubik with CIBC. Please go ahead.

Yeah. Good morning, guys. Thanks for taking my question just a question on your U S asset base.

Rob you're mentioning.

You know around a third of the volumes in U S. A for Q4.

From 15000, Boe's a day, so about 5000 barrels a day out of the U S. Can you just talk a little bit about how many net wells you need to see drilled to maintain.

Volumes at that level in 2023, and and you know what what level of <unk>.

Cadence would see that our God asset base grow.

Yes.

In terms of the number of net wells that we need to sort of see a.

A flat scenario, it's about call it three and a half net wells and I'd say that obviously is a is an estimate.

It's there's there's obviously no shortage of.

Of different type curves that are embedded within that just kind of give a context you know obviously so far in 2022, we've had close to 400 gross wells drilled on our on our U S plans about two net wells.

So a lot of type curves are are embedded within that but.

But we still see boat and averaged 700 to 800 barrels a day.

<unk> hundred 65 is what our typical U S well.

It's in our portfolio.

You sort of put that three and a half.

Net wells in context, when we look at what our net activity as wells are so that's a combination of the drilled uncompleted wells and the and the permits that are on our lands at the end of Q3, we had over four of those net activity wells.

I think one of the other parts of Gotta get guess gives us some confidence that gets US excited is also seeing that the.

The net ducks.

<unk> increased quarter over quarter, you know, what <unk> built and that confidence of how we can sort of see those boys materialize.

Q4 and into the into the first half of next year.

Okay. So the four net wells activity wells that you mentioned there did I get that right are first of all and then I guess how.

Over what time frame would you expect those to start to hit the profile I know that there is extended time frames in the U S. Yeah yeah.

Yes, before activity wells or they're almost call it equally split between docs and permits and Ducks you know those can come on.

We were between one month and formats.

And the permits.

Six to 12 months between when a permit is is filed and when it's turned in line. So it's a much much wider range on the on the permit side isn't it a tighter range typically on the on the Doc prep.

Okay. That's good color thanks, guys.

Thank you.

The next question is from Jeremy Mccrea with Raymond James. Please go ahead.

And I guess I have a couple of quick questions. Here. One can you give us some actual numbers behind you know some of the statements that you guys were talking about just I think it was Patrick who was asking the question is just on some of the M&A.

You know what would be the dollar amount that you've looked at say you know this quarter versus last quarter versus this time last year and then just for the Clearwater acquisition can you give us a little bit more details on that you know you know how many wells are committed on the land you know is there any results.

To date that we could.

Speculate on you know how much more you'll follow up wells that could be here. If there's any been any success along these lines so far.

Sure.

So you can get on the on the deals that we looked at in Q3 so.

Just a little bit under on a value basis about two and a half million U S.

There's a number of opportunities that's about <unk>.

Close to 40 opportunities came across our desk.

In terms of what we actually dug into it reviewed about a third of that.

By number so if you took that 40 and probably looked at.

Ill call. It 12, 13 opportunities out of that bid on about half.

And we were successful in closing the Clearwater transaction.

There is a makeup of those of those deals were 80% we're focused in the U S. 20% in Canada. So we're still.

The point being we're still very actively looking at at Canadian opportunities as well as U S opportunities as just given the size and scope of the of the U S market there tends to be a lot more a lot more opportunities to you know to look at but obviously demonstrating that our our our Clearwater tribes.

Auction you know Canadian opportunities is still it's still something very much in our AR and our focus area.

How that compares to the activity we've seen so far this year as you know that's you know 36 opportunities that as I mentioned 90 opportunities. We've we've reviewed over the course of 'twenty. Two so it's sort of at the Q3 was consistent with what we've seen in.

In prior quarters. This year I don't have the staff for what a what a Q3 of 'twenty, one, but it looked like but I think we've certainly seen increased activity.

Year over year as a as prices have remained constructive that's brought a number of sellers and to the into the market.

On the Clearwater side, you'll see it.

It's a 26 well commitment that gross well commitment that we are that we have with the operator.

They have drilled two gross wells, so far but if we don't have any any tangible results at this point you know they certainly have very active winter.

You know drilling program that we're pretty excited with.

Okay.

Thank you guys for that thank you.

Yeah.

Thank you.

And there are no further questions registered at this time I will turn the meeting back over to Mr. Speaker.

Thanks, everyone for participating today are we're very enthusiastic for the remainder of the year and really going to remain focused on the execution of our strategy. So thanks again and have a good day.

Yeah.

Thank you.

The conference has now ended please disconnect your lines at this time and we thank you for your participation.

Yeah.

Thank you the conference has now ended.

Please disconnect your lines at this time and we thank you for your participation.