Q4 2022 Freehold Royalties Ltd Earnings Call
<unk> continue to standby we thank you for your patience.
No one else seemed to be honest, we lapped a silty duckenfield they'd be touched soup, the civil pretty old to be honest, we want don't want to look at it because that's the renewable isn't there some of the best guilty.
[music]. This conference is being recorded so it goes to homes that don't go as you see.
Please standby your meeting is ready to begin good morning, ladies and gentlemen, welcome to freehold royalties fourth quarter results conference call I would like to turn the meeting I'll, Let you Mr. David Spyker. Please go ahead.
Good morning, Thank you for joining us today on.
On the call with me from Freehold are David Hendry, our CFO , Rob Kain, Vice President of business development.
Our VP of diversified royalties.
<unk> was a year of records for US This result.
And work that was done over the last three years, just awash freehold as a premier North American energy royalty company.
Our expansion and optimization efforts have resulted in a new look freehold with the scale and asset base that will enable sustainable long term value creation for our shareholders.
Targeting plays across North America, our asset base development inventory and revenue generation is underpinned by exceptionally high quality pay ours and many of the top tier operating areas across Canada and the U S.
<unk> fourth quarter and full year 2022 results reflect this quality.
In 2022, and we set a number of records, we had record revenue of $393 million that was up 88% over 2021 and more than 170% increase over the five year average of the company highlighting the bigger better nature freehold.
Our portfolio is well balanced with revenue from Canada accounting for approximately 60% of the total in the U S contributing the remainder.
Oil and Ngls represented 82% of revenue for the year.
We had record funds from operations in 2000 $20 million to $317 million or $2 10, a share.
This compares to $190 million or $1 39, a share in 2021.
153% improvement versus the five year average for freehold.
Yeah.
We had record realized pricing of $75.14 a Boe.
That was up 57% compared to the previous year.
We continue to highlight the pricing advantage that our U S strategy.
As provided.
For you all realized $90.64 of BOE within our U S portfolio last year versus $68.12, a b, we in Canada, a 33% improvement.
Higher pricing in our U S portfolio is driven by the ability to sell our product closer to market, thus, reducing the impact of transportation and Canadian egress bottlenecks.
Okay.
We had record production in 2020 to 14101 BOE a day, an increase of 19% over 2021.
Our Canadian volumes averaged just over 9700, a day and were approximately flat year over year without completing a major acquisition in Canada.
U S volumes averaged just under 4400, <unk> a day up over 100% due to acquisition activity paired with.
With an increase in third party drilling activity.
For Q4 volumes averaged a record $15 41, <unk> per day up 7% versus the previous quarter.
We are forecasting 2023 production to average between 14000 515500, <unk> a day and we are taking a cautious stance given the sharp pullback in natural gas pricing and the volatility in oil pricing, which is currently off 20% compared to 2022 average price.
As with 2022, we can expect to see production rate volatility in our portfolio with seasonal impacts in Canada, and the multi pad drilling impacts in the U S. With a number of our operators drilling 10 to 20 wells on a pad with sequential drilling completion and tie in activities as opposed to activities in parallel.
That we would see elsewhere in our portfolio.
Okay.
We had a record year of dividend payments of $142 million or <unk> 94, a share an increase of 128% over 2021.
The dividend payout ratio was on average 45% for 2022, an increase from 33% in 2020 one we.
We took a measured approach to dividend increases throughout the past two years at.
At current strip pricing, we expect dividend levels will be above a 60% payout ratio in 2022, and we're comfortable with that.
Other dividend increases will be in lock step with an increase in production or a fundamental shift in our underlying commodity price assumptions.
We reiterate that we believe we can pay the dividend at much lower commodity prices and third party development assumptions with the work over the past five years and enhancing our pay are in asset quality, improving the overall sustainability of company.
We had a record year of drilling in 2022 with a 1057 gross wells drilled on our acreage are records for freehold and a 61% increase over 2021.
Almost half of the gross drilling was at a freehold mineral title lands, including over 80% of U S. Gross wells drilled on mineral title land.
In Canada, we saw drilling and oil weighted areas, such as the Viking Clearwater and Cardium and additional liquids rich gas weighted targets in the deep basin the Spirit River.
503, gross locations, where Gerald a free Oleds Canadian land, a 14% increase over 2020 one.
We estimate approximately $1 billion in industry capital was deployed on our lands by our Canadian Payors.
Yeah.
In the U S operators focused drilling on light oil prospects in the Permian and Eagle Ford with 90% of the activity occurring within these two basins.
Development of Freehold U S. Land was led by a diverse group of disciplined investment grade public companies and growth oriented public and private operators.
We estimate approximately $3 billion of industry capital was deployed on our lands are by our U S Drillers last year.
Through the second half of 2022 freehold consistently have between 30 and 35 rigs running on our royalty lands with a good balance between our U S and Canada.
Canadian portfolios.
We expect oil targeted drilling activities to remain relatively strong, but we are approaching gas prospects with caution.
Our business development team remains busy in 2022, completing $190 million in value enhancing acquisitions, expanding our royalty positions in the Permian and Eagle Ford basins in the U S and in the Clearwater in Canada.
Looking forward, we continue to see good opportunities both in Canada, and the U S. Although freehold will remain very disciplined in this portfolio investment strategy in terms of play and focus areas patiently looking to invest in areas that will continue to strengthen our portfolio and provide value to our shareholders.
Yeah.
On the leasing front freehold executed 83, new leases with 30 distinct counterparties a level that we've not seen since 2018 2019.
Areas of activity included southeast, Saskatchewan, and Manville heavy oils with operators weighted to junior private entities with a near term growth objective. We've also been successful in leasing somewhere mineral title lands in the U S.
Yeah.
Cash costs for 2022 totaled $5 19, a Boe.
Up 40% versus the same period in 2021.
The majority of the increase was associated with higher interest rates.
Our net debt exited the year at $128 million or 0.4 times net debt to trailing funds from operations.
This was achieved while acquiring $190 million of value, adding acquisitions and increasing our dividend twice in 2020 'twenty two.
At current commodity price levels, and or eliminate cost exposure funds flow generation remains robust, allowing for that to be paid down while maintaining our dividend.
Early in 2023, we announced the release of our sustainability report.
The company's focus on responsibly growing and enhancing our business through environmental social and governance initiatives.
Freehold strives to generate shareholder value by maintaining a strong balance sheet focusing on the long term sustainability of our business.
Partnering with high quality operators across North America, we're aligned with our views on the importance of sustainability and ESG performance.
So in closing 2022 represented a very successful year for the company.
Move forward with a measured advancement of our North American strategy.
I would like to thank our board of directors shareholders employees and all of those who have supported free all through 2022.
We will now take any questions.
Thank you, we'll now take questions from the telephone lines. If you have a question and you're using a speaker phone. Please lift the handset before making your selection. If you have a question. Please press star one on your devices keypad to cancel the question. Please press star two.
Please press star one at this time, if you have a question.
It'd be a brief pause so participants register thank you for your patience.
And your first question is from Luke Davis from RBC. Please go ahead.
Hey, Thanks, Good morning, guys I'm, just wondering if you can speak a little bit too year alternative royalty business, what types of opportunities Youre looking Florida, and just generally what that market looks like currently.
Yeah that sounds it sounds good look we're going to turn that over to Ian Yankee and he's looking after that for us so yeah.
Hi, Luke.
Yeah were worked for tackling diversified strategy much in a similar way our early day approach to the U S expansion was where we're trying to be patient and examine a bunch of the opportunities and just get up the learning curve before we put too much capital to work.
We have a number of opportunities that we're looking at somehow traction some of them were just sort of in this space to get a better understanding of where freehold consent.
Most of the conversations we're having are focused around sort of base in industrial mines and minerals, a renewable power and renewable fuel and some amount of critical minerals, but but not a huge amount. So you know we've got some existing potash royalties.
You know, we like those assets, we're looking to grow our position there, but I think that's going to be probably a slow and measured approach to those are typically smaller assets you want to pick up one at a time.
Yeah, I would say, we're just trying to make sure that we're looking at opportunities that.
Add to the stability of a freehold and make sure we sort of compete for capital with oil and gas opportunities and sort of how you stay out of the way of the base business as we can because it looks like interesting things to examine.
Look you know where our thinking is certainly evolved over the past year you know what I think we originally thought we might.
You'll find a nation in wind and solar but there's.
So those opportunities are.
Certainly can't compete.
For oil and gas returns and so that's why he and his team have I've kind of diverted onto some of these other types of opportunities that he talked about it and we think that there are some some pretty good opportunities are within that scope.
That's helpful curious, what kind of a return threshold or hurdle later or something that you guys are generally like I wonder evaluating the stuff.
It was a it would have to be in that you know mid a high teens I'm even into the 20% range look just just to make sure that we're getting those returns.
A new type of business for us.
Yeah makes sense. Thanks, maybe just one more for me broadly on M&A. What are you guys currently seeing in Canada. The U S and do you think.
There's as much opportunity as you saw through 2022.
I look at the drop here. So in Q4, we had about 20 opportunities that we are that we screened we didnt looked at some were bid on a couple of those were not successful.
Continuing they're pretty very disciplined.
Approach that you know that we're taking with the with with the acquisition opportunities as it was a probably I'd sort of say a slower start to 2023, maybe not surprising just given the.
The volatility and the significant degradation on the natural gas side, you've seen a number of potential sellers just sort of a pull back and re look at redesign when they may look to look to monetize that being said there are several things that we're looking at you know in Canada I think.
We're still focused on the on the Clearwater, we'd actually just closed.
A couple of weeks ago, a small million dollar tuck in and in figure Lake and an active dialogue with with several producers. So yes, it's still still still are still active but and remaining disciplined.
Great I appreciate that thanks, guys.
Thank you. The next question is from Travis Wood from National Bank Financial. Please go ahead.
Yeah. Thanks, maybe just to follow on M&A could you provide any commentary around kind of the aggregate deal value that your activity, maybe specifically those 20 deals through Q4 would've.
Would have added up to and kind of more interestingly just across the year itself.
And then I have just one follow up.
Yeah. So in Q4 of those 20 opportunities that we've reviewed that'd be about 200, and you know it was $250 million of U S and 300 million CAD are in terms of the deals that we looked out in Q4 'twenty. Two it was closer to over 100 opportunities that we are reviews I was over $5 billion of of U S.
<unk> opportunities and $700 million of Canadian opportunities.
Okay interesting. Thank you.
Just on the assets that you purchased just kind of thinking over the last 12 to 18 months.
Any surprises that you've seen through now that you have had a good full year of operations a busy second half of the year as well any surprises as you look back on performance.
Versus your initial expectations and specifically thinking of the Eagle Ford performance against the Permian specifically.
Yeah, I think it's actually been a it's been a nice having a full year of 2022 to two to see the performance of our 21 acquisitions and obviously we are very very active list. So we had almost 300 almost $400 million worth of deals that we added to our portfolio in 2021. So you have added.
To have a full year and sort of see how they've done and we've been really really pleased with the performance and it was one where we've already generated $165 million of revenue on 367 million of of acquisition capital. So that's about a 45% of our investments that's been returned in less than two years and.
And I think relative to our acquisition assumptions on those three 2021 deals.
<unk> drilling has been basically in line, where I think we're about there was about a 1% difference in the gross wells that have been drilled on our lands.
And so that that's sort of this quiet validated until the capital is certainly being deployed onto our onto our labs and in our in the in the levels that we had anticipated. So no checkmark. There you know well productivity has been equally inline we forecasted about 800 barrels a day of <unk>.
180 on our on those <unk> deals and you know the actual spend of about 790. So.
Call it 1% off on those are on the type curve. So again positively I'm pleased that that's been in line. What we have seen is there was a net wells have been have been lower and that's sort of a reflection of some lower net royalty interest wells that are that have been brought on and that's that.
It's sort of a timing issue that we discussed in the in the mid part of 2022.
That's what we would would've been a lot more concerned if the gross drilling you know it wasn't in line. So that would have been more of a reflection of capital wasn't being deployed on our lands you know the net drilling is.
Is that transitory timing issue on some of the things that were.
We're we're continuing to manage with our with our production forecasts on the on the U S side the Eagle Ford.
It's one where when we think back to that it was like how do we when we paid for that deal I think that was one of the important things is that we didn't pay for a lot of upside on that on that transaction, we sort of paid for the five years of development and I think what we've observed with our with the key of royalty payer there marathon ware.
They've.
Dave.
They probably had some well productivity declines relative to what we saw prior years, but theyre still keeping pace and it's still keeping largely flat flat production coming from marathons, you know assets that we have with them in the Eagle Ford.
Yeah.
Awesome, that's great color I appreciate all of that thank you that's all for me.
Thank you.
The next question is from Matthew from <unk> Capital markets. Please state. Your last name. Please go ahead, yeah, sorry, it's weeks. Thanks for taking my question and good morning, I'm just wondering it sounds like there's a little bit of sort of conservatism maybe in the in the guidance range for 2023 I'm just wondering if you could walk through.
Maybe some of the broad you know points are kind of drivers into the cadence of production growth as you look to the year ahead.
Yeah I think.
It's Dave here.
Yeah, when we when we look at that and it was just look our first off at the pullback in gas prices and so.
With the gas in the portfolio you know it can it can add a lot of production it doesn't add a lot of of.
Cash flow and so you're all well.
What we see is that with some pullback in in in gas drilling and we do see some of the rig counts are.
Slowing down a little bit.
We'll have an impact on our.
On our on our volumes, especially you know where we've been seeing some gas drilling and in Canada, as you know where where that would have the bigger impact the on the on the oil side.
Again, we're not seeing.
A slowdown on the U S side, you'll get a little bit more worried on the Canadian side, where it's a little bit more impacted by the differentials.
And so just taking a cautious approach when we look at the.
The guidance that you know our drillers are giving what we're seeing for guidance as people will release their year end results and guidance at that there is a little bit more of a cautionary tone and we reflect that in our business and so that's how we're approaching.
Approaching it we don't want to get ahead of our skis and like we saw last year. The portfolio can be volatile candidate can be it's probably a little bit smoother, but.
Impacted by much more weather related events, whether its breakup or cold weather.
Snaps, but the U S. Just because of the nature of the drilling we see you I'm very much more sawtooth.
Our production profile, depending on when a number of these pads are brought on and so that's been reflected in and you know how do we think of guidance and Youre just to build a little bit further what Rob was talking about on the net wells.
We've got you know.
A wide range of.
Net royalty interest in the U S and we can't predict where that drilling is going to occur. So we look at it more from a on average net royalty interest across the portfolio. If we get some of those higher.
MRI spacing units drilled and then we will get a had ahead of some of the numbers. If I. If we are on some of the lower ones and then.
So that impacts our view so it's just a little bit much more volatile.
Portfolio, given you know.
Both the combination of how U S lands are developed and in Canadian history.
Okay. Thanks, that's helpful and so it sounds like kind of some of the headwinds on the gas side and just thinking about your overall weighted to oil and kind of most the most of the drilling you know being more oil weighted would you say you know there's a degree of kind of protect protection from from the lower gas prices there.
And then potentially as long as we see kind of differentials narrowing on the heavy oil side, you know in Canada, a little bit would you say these factors kind of might provide a little bit of support in the context of the commodity price volatility.
Yeah, I think that that so that's fair, especially on the Canadian side with the differentials.
The U S side, you know, we're starting to hear some chatter that.
Maybe some of those U S rigs are going to get deployed onto the oil side, but you know, we certainly have to factor that into how we're thinking of the business yet.
Bottom rigs are still competitive in the U S and so operators are hesitant to give up a rig and so we just have to see how that all plays out.
Okay. Thanks, I appreciate the comments I'll turn the call back thanks.
Thank you. The next question is from Christopher Jones from Haywood Securities. Please go ahead.
Thank you for taking my question just to add to look some jobs question. There on M&A, how do you think about balancing incremental.
M&A relative to dividend increases given the opportunity set to transact is it does it make sense to sort of accelerate M&A and perhaps slow down on any potential dividend increases or maybe just kind of talk to that a little bit.
Yes, I think where we're at with the dividend that at nine cents a share that that's the right.
Level for us, even with where we see quantity prices on strip the strip pricing and.
So we'll be in that well I'm sure we'll have a six handle on the payout ratio in our 2023 and so we think that that's the right level right now and in the interim we'll continue to pay down debt and see if there's opportunities that we can add to the portfolio like Robin <unk>.
<unk>, certainly seen a little bit of a slowdown in.
And the opportunity set.
Going into Q1.
In the U S on the Canadian side.
Probably a little bit more dialogue that we're having with our with people with respect to a royalty financing type opportunities again, given the higher interest rates and a bit of volatility in the commodity prices, but but where it would no rush and we look at a lot of stuff in and pretty selective on what we want to bring into the portfolio. So.
You know think of dividend holding holding where its at our excess cash used to pay down debt and patiently bide, our time looking for the right opportunity.
Okay. Thanks for that and then just on the Howard County, Maryland asset volumes were up 15% seems to close is that above what you guys are internally forecasting and how do you see that trending this year.
Yes.
It certainly is above like.
Q4.
Production that we saw from you know from those assets was what 900 barrels a day are our acquisition analysis at 550 barrels a day. So some of that was just higher net royalty interest wells coming online. So that's a little bit of the.
The positive aspect, where you can get some higher NRI wells that are drilled sooner. When we had predicted that there would be lower NRI wells that would be it would have been turned in line. So does that mean that may mean revert a little bit within in 2023 and beyond but the.
The key operator under our Howard County assets is still aggressively allocating capital to that to that place. So I think we're encouraged that it's going to be in line with with what our expectations were at the time of the acquisition.
Got it thank you.
Thank you. The next question is from Jamie Kubik from CIBC. Please go ahead.
Yeah. Good morning, Thanks for taking my question, maybe you answered a little bit already but can you talk a bit about the production guidance range you provided for 2023, and maybe what sort of net well count what caused you to hit the low end versus the high end and in those scenarios and then maybe secondly can you outline how you expect Canada and the U S too.
Individually contribute this year.
Yeah.
So on our on some of the ranges there on the AR on the net wells Jeremy It was one where on the sorry, Jamie on the on the.
On the Canadian side, where are we sort of had a range of call. It 15 to 20 on the net wells you know with the.
With the midpoint of the range kind of pointing to where that.
Where that you know where where what are the sale of 15000 barrels a day for the overall production U S side. It was sort of a three to four net wells is what you know what we had forecasted and that are in that range.
You know in terms of contribution between the two.
I don't I actually don't have that number at hand, right now I think what were sort of expecting to see on a year over year basis is basically flat Canadian volumes flat to maybe slightly down on a Boe basis, just because of some of our of some of some of the gas challenges that Dave.
I was talking about and then on the on the U S side, we're probably sort of seeing like low single digits.
Growth on a year over year basis. So that's kind of what the overall portfolio is apologize don't have the hand, the 'twenty three split them between the come out between the countries.
Okay. That's helpful and then maybe.
Tack on question here related to some of the M&A comments that you've made but I.
I no frills focus on the U S side has been really oil weighted basins, but would you would you look at being opportunistic in some of the gas rate of basins given the pullback in pricing to start this year or is it.
As oil more of the focus for freehold.
I mean, I think we're always going to be opportunistic returns drive.
Drive direct really drive what we're focusing on that that's kind of equal comment that's why we're indifferent between our allocating our capital in Canada versus allocating our capital in the U S. We just look for the highest and best return.
And that's equally true for the commodity I think one thing what we've observed is just yes, we may be able to get the best of all worlds by focusing on the Permian, where not only can we get you know nat gas opportunities because we still get the oil opportunities. So I think where it's not that we haven't looked at.
<unk> gas opportunities in basins like the Haynesville and we continue to look at those but I think where we've just had more traction in our <unk> are seeing a greater opportunity set is in our in the Texas place.
Okay. Thank you that's it for me.
Thank you.
Once again, please press star one at this time, if you have a question.
There are no further questions registered at this time I would like to turn the meeting back over to David Spyker.
Alright, Thank you everyone for joining us a some great questions with some good dialogue.
Exciting year in 2022 for us and really looking forward to it.
23, it was a number of ideas and initiatives that we have.
<unk>.
Going on now we're looking for another successful year. So thank you all.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.
[noise].
Okay.
Okay.
Okay.
This conference is no longer being recorded.
Jose Hosni. Please also as you see.
Yeah.