Freehold Royalties Ltd. Q1 2023 Earnings Call
Speaker 1: All participants, please continue to stand by. The conference will begin momentarily. Once again, please continue to stand by. We thank you for your patience.
Speaker 1: We want to thank you for your patience. The conference has been great. We want to thank you for your patience.
Speaker 1: This conference is being recorded. This conference is being recorded.
Speaker 2: All participants, please stand by. Your conference is now ready to begin.
Speaker 2: Good morning ladies and gentlemen and welcome to the first quarter results conference call. I would now like to turn the meeting over to Mr. David Spiker. Please go ahead Mr. Spiker.
Speaker 3: Good morning and thank you for joining us today.
Speaker 3: On the call from Freehold are David Henry, our CFO , and Rob King, our COO. We're off to a good start for 2023 with operational momentum carrying over from a record year in 2022. Production of 14,724 BUE per day.
Speaker 3: was up 8% over the first quarter of 2022 and in line with our expectations.
Speaker 3: The production of 9,822 B.E. per day was modestly up over the previous quarter and was the highest quarterly average to Q1 2020.
Speaker 3: The real deal you see of our Canadian production is a testament to the quality of our land as we've only made minor early stage investments over the past three years with our team primarily focused on new developments, leasing and augmentation efforts on our Canadian acreage.
Speaker 3: Production for our USATS average approximately 4,900 B.E. per day during the quarter. Also in line with expectations.
Speaker 3: Overall, Q1 production was slightly lower than the previous quarter in the US as the completion schedules of some of our larger payers resulted in a significant number of new wells being brought on production in the fourth quarter of 2022 in both the Eagleburg and Midland basins.
Speaker 3: Decline from the significant plus production associated with these Q4-New-Well starts are reflected in our Q1 numbers.
Speaker 3: On the drilling side in Q1 2023, we had 349 gross well drilled, up 19% over the previous quarter, and up 43% over Q1 2022.
Speaker 3: In Canada, 175 growth wells were drilled on our land this quarter, up 22% from a year ago and up 28% over last quarter.
Speaker 3: 6.9 net wells represent the second most active first quarter of drilling activity since 2010.
Speaker 3: Oil weighted drilling in the Viking, Cardium and Clearwater led to Canadian activity.
Speaker 3: The turnover of assets in southern Saskatchewan from larger operators to smaller companies is resulting in increased activity as a number of these new, smaller private and public operators are targeting more ambitious growth objectives than predecessor operators have in recent years.
Speaker 3: In the US, 174 growth wells were drilled in the first quarter, up 12% over the previous quarter, and an increase of 74% from a year ago.
Speaker 3: As industry activity remained robust, an acreage was added to our portfolio in 2022.
Speaker 3: Canadian well.
Speaker 3: We will continue to be focused on light oil prospects in the Eagle Bird and Permian invasions.
Speaker 3: decline for much of the quarter, the rig count on our lands remains robust with average rigs for Q1 2023 increasing over Q4.
Speaker 3: The spring break up occurring in Canada activity is expected to remain strong a benefit in the U.S. a benefit of our North American land base.
Speaker 3: Looking forward, leasing activity has been very active in 2023 year-to-date with 44 leases executed across 16 counterparties, which compared to 83 leases executed in the full year 2022.
Speaker 3: We continue to benefit from the premium pricing over US assets with US oil realized pricing per barrel 26% higher than Canadian pricing.
Speaker 3: to the $59 million remaining in line with expectations, and we reiterate our production guidance of 14,500 to 50,500 BWe per day for 2023 and funds from operations of $250 to $280 million.
Speaker 3: With the current wildfire activity in Alberta and BC, we do expect some impact on our Q2 production numbers, although too early to tell at this point how that may play out.
Speaker 3: Our dividend payout for the quarter totaled 69%.
Speaker 3: Royal fees remain a high margin asset class enabling three-fold the ability to maintain our current dividend level even if the payout ratio is above our 60% guidance range for multiple quarters. Need knowledge? g.fo.ac.uk
Speaker 3: able to maintain a conservative balance sheet.
Speaker 3: exiting the quarter at 0.4 times net debt to trailing funds from operations.
Speaker 3: This considerable financial flexibility allows Freehold the opportunity to continue to pursue value enhancing acquisitions,
Speaker 3: on both sides of the border and also contributes to dividend sustainability.
Speaker 3: Looking forward, our portfolio remains well positioned to deliver value for our shareholders. We continue to reiterate our asset base has improved considerably through our North American expansion with ownership in broader range of quality oil weighted plagues.
Speaker 3: A deeper roster of well financed top tier payors.
Speaker 3: strong margins associated with royalties as an asset class not subject to the margin of depression we have seen in other business models associated with recent inflationary pressures.
Speaker 3: We'd like to now turn the call over for questions.
Speaker 2: Thank you. We will now take questions from the telephone lines.
Speaker 2: If you have a question and you're using a speakerphone, please lift your handset before making your selection.
Speaker 2: If you have a question, please press star 1 on your device's keypad.
Speaker 2: You also can cancel the question at any time by pressing star 2. So please press star 1. At this time, if you have a question, there will be a brief pause while the participants register.
Speaker 2: Thank you for your patience. Thank you. The first question is from Luke Davis from RBC. Please go ahead. Your line is open. Thank you. Good morning, guys. Your US volumes were.
Speaker 3: In terms of why the volumes came down between Q4 and Q1, that was, at least from our perspective, very much in line with what our expectations were. In Q4, we actually saw both a number of gross wells and a number of higher net wells in our Eagle Bird assets come on.
Speaker 3: a bit less volume relative to Q4. It's kind of that saw tube that we sort of talked about where we have these significant volumes that come on with the combination of the high productivity of a number of the wells, but also just the sizes of these pads.
Speaker 3: that we're observing in our assets. As an example, in the Permian in the late Q4, we had a 19-well pad of Crown Quest come on our Midland Basin assets. When volumes of that amount come on, you get this great, flush production that does then decline.
Speaker 3: thereafter. So that's in line with our expectations. I think it's probably on the Eagleford side. We did see some weather related impacts. I think it's not quite the freeze offs that we saw in Canada in December timeframe, but we do know talking to a couple of the...
Speaker 3: Eagle Bird producers that they had some production challenges in January , February timeframe with colder weather in Texas.
Speaker 4: That's helpful. Thanks. And do you have a sense for how you expect specifically the U.S. volumes to shape up to the balance of the year? Yes. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do. I do.
Speaker 3: Yeah, I mean it'll be generally sort of flat to modestly up over the course of the balance of this year. I think again we're expecting that saw-to thing that we talked about where there's going to be some inter-quarter volatility but the general trend will be flat.
Speaker 4: Gotcha. Just one more for me related to Alberta wildfires. I know you provided some commentary in the release. Still pretty early, but sounds like a lot of those issues have largely been resolved. So I imagine limited impact to
Speaker 4: your production volumes and guidance, but any incremental detail that you can provide there.
Speaker 3: I don't know if we have a whole lot of incremental detail there. The only other one I can comment on is that it's probably more of our natural gas volumes that have been impacted so far. So while it may have a, I'm not sure if meaningful is the right word, but an impact from a volume perspective?)
Speaker 3: our expectation is it will have a more muted cash flow perspective.
Speaker 2: That's great, thanks for that. Thank you. The next question is from Patrick O'Rourke from ATB Capital Markets. Please go ahead, your line is open.
Speaker 4: Hey, good morning guys and thanks for taking my question. Maybe just to add sort of another angle to the questions from Luke there with respect to US volumes, I know they're fairly chunky here or sawtooth as you've articulated. The high level of spot activity, I think it was 174 gross wells.
Speaker 4: in Q1. How does that sort of compare to what your expectations would have been for the quarter? And sort of what are the sort of early cues that you're seeing for Q2 and Q3 in terms of planning on that front?
Speaker 3: Yeah, I mean I would say in terms of the this flat activity that could be 174 gross wells very much in line with expectations. Gross activity you know has uh has uh as I say continued to be in line. What we have seen is sort of the net wells you know we've had some some lower or lower NRI net royalty of tris wells you know that have been uh that have been drilled.
Speaker 3: So we'll see how that impacts the portfolio over the next six or nine months or so. As you know, that often can be the lag factor that we see on the US in terms of drilling in Q1 leads to Q3, Q4 production.
Speaker 4: sort of, with all the moving parts, with interest rates, with commodity, sort of your outlook in terms of M&A, and then with the Permian and some of these US resource basins reaching a more mature phase in terms of type curves and inventory development, how you are sort of taking that into your risking of your approach to these acquisitions right now. Yeah, and the first one in terms of the level of activity, I think our Q1 deal flow has been pretty consistent with what we saw in 2022 and in 2021. When I look at the number of confidentiality agreements that we signed
Speaker 3: On the US so far, it's basically in line with what we signed in 22 and 21 at the same time period. So from the activity, it feels the same, but it does feel slower. I think the other part that we are seeing is, it's always a competitive space, but it's one with the backwardated curve the way that we are, the bid-ask spread.
Speaker 3: it's probably widened a bit and we've certainly seen several of our competitors willing to accept lower returns than what Freehold's willing to take. So we're still holding that quality bar you know really high. I think the encouraging sign is there does feel to still be you know
Speaker 3: continued deal flow and you'll sort of see how that how that plays out the balance of this year.
Speaker 4: So, maintaining that growth discipline that we've seen our royalty payers largely be taking. Okay, thank you very much. Thank you. The next question is from Chris Jones from Haywood Securities. Please go ahead, your line is open. Hey guys, thanks for taking my question. Looking on the bigger picture US activity, you own a lot of mineral rights under majors. Just curious what you're seeing in terms of activity cadence between majors and privates, independent types. I think it's understood that privates drove much of the activity through 2022.
Speaker 3: are weighted towards the investment grade public names. We've really sort of seen, for the most part, they've had a fairly steady drilling cadence and bringing wells online, sort of in that flat to modest growth that we've seen with them. I think where we've had some positive surprises has been on the private side, with the Crown Quest as an example. I mentioned that 19 Well Pad that they brought on in late 2022. That was exciting to see. High Peak in Howard County has continued to be fairly active. They've kind of pulled back their capital program.
Speaker 3: 20, you know, kind of equally split between Canada and the US. You know, we only bid on three of those opportunities and lost them all. I don't know if we lost necessarily by that 70% that one of our peers sort of talked about, but we certainly, it was a meaningful difference.
Speaker 5: Okay, thank you.
Speaker 2: Thank you. The next question is from Matthew Weeks from IA Capital Markets. Please go ahead. Your line is open. The next question is from Matthew Weeks from IA Capital Markets. Please go ahead.
Speaker 6: Good morning. Thanks for taking my question. Just on the alternatives and diversified royalty team and some of the activity going on there, there were some disclosures this quarter. I'm just wondering if you could touch on that a little bit what kind of opportunities you're seeing there. Is it kind of picking up and are these...
Speaker 6: kind of in advanced stages at this point? Do you think we could expect something kind of in the next, in the short term, for the next 12 months on that front?
Speaker 6: Yeah, I'm going to do a little bit more of that space that kind of fits our kind of the parameters that we're looking for. For the most part, you know, really focusing on the mineral sides really.
Speaker 3: You're pushing Rx-5 expertise that we have in resource plays on the oil and gas side. And you see if we can leverage that into the kind of balance or mineral space. So I think that is a number of things that you're working pretty hard on. And it was some...
Speaker 6: The focus is really on the balance of minerals and that you can be anything from helium, lithium to a number of other, you know, potash, you can continue to be active in, like those types of opportunity sets, you know, versus I think when we first got into it we thought, you know, with your solar but.
Speaker 6: those types of opportunities don't compete for capital with the oil and gas space but leveraging our balance of minerals expertise we think that those can drive pretty attractive returns. Okay thank you appreciate the commentary on that. I'll turn it back.
Speaker 2: Thank you. There are no further questions registered. At this time I'll turn the call back to Mrs. Piker.
Speaker 6: Alright, thanks everybody for participating today and for those questions and we look forward to catching up with everybody again at the end of Q2. Thank you.
Speaker 2: Thank you, the conference has now ended. Please disconnect your lines at this time.
Speaker 5: and we thank you for your participation.