Q2 2023 Freehold Royalties Ltd Earnings Call

Yeah.

[music].

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

All participants please standby your conference is now ready to begin.

Good morning, ladies and gentlemen, and welcome to the second quarter results Conference call.

I'd like to turn the meeting over to Mr. David Spyker. Please go ahead Mr. Speicher.

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

On the call from Freehold are David Hendry, our CFO and Rob Kain our CLO.

The second quarter delivered consistent results across our North American portfolio.

Production of $14 667, <unk> a day was in line with the previous quarter and up 9% over Q2 of last year.

Year over year growth was due to organic growth on both sides of the border as well as acquisition activity completed in the Midland and Eagle Ford basins.

Revenue of $74 million was in line with expectations generating funds from operations of $53 million or <unk> 35 per share.

Realized pricing for the corner of 50 405 per Boe.

The benefit from the premium pricing associated with our U S portfolio.

In the U S. We realized a 39% uplift over a Canadian realized price due to both the quality of oil and proximity to sales points, which significantly reduces pipeline transportation costs.

We reduced our long term debt by $7 million during the quarter and our net debt was increased to $131 million or 0.5 times trailing funds from operations.

This increase in net debt as a result of $24 $4 million and income tax deposits being reclassified from a current asset to a long term asset due to the expected timeline for appealing assessments with the Canada revenue agency.

We continue to expect to be successful in challenging the assessment based on the legal advice that we've received.

The diversified high quality nature of our North American portfolio has further the sustainability of freehold as dividend, which we have grown to its highest level since 2015.

The consistent income provider, we remain committed we remain committed to targeting a payout ratio of approximately 60% of forward looking funds from operations.

During periods similar to what we realized during the second quarter, we are very comfortable at higher payout levels, given our low leverage and high margin business, which we believe resulted in dividend coverage below U S $50 per barrels meti full.

Full year, we are anticipating payout ratios in the mid 60% range based on current strip prices.

Our Canadian volumes averaged 9800 BOE a day for the quarter no change from the previous quarter with organic growth offsetting the 225 barrels a day of production shut ins associated with the wildfires in Western Canada.

The shut in production has now been restored.

Strength in our Canadian portfolio year to date reflects the high quality nature well positioned in the active drilling plays across Western Canada. We've had strong drilling in the Viking was 62 gross wells drilled resulting in our oil volume contributions from this play reaching a three year high.

Water continues to be a growth area with 17 wells drilled year to date, driven mainly in that figure Lake area with excellent results to date and an active drilling program expected in the second half of the year.

Leasing activity has been very robust so far in 2023 was 67 agreements signed during the quarter, yielding bonus revenue $1 million.

Continuing past the quarter. Another 16 leases have been signed bringing the year to date numbers to 83.

We're halfway through the year and we have matched our 2022 levels already.

The much improved health of the industry has been evident across our southern Saskatchewan acreage.

We have seen a revitalization of this legacy acreage as smaller well financed operators aimed to achieve growth in these areas targeting the Mississippian and Bakken formations.

Nearly half of the new leases have targeted development of the Mississippian and southeast Saskatchewan and approximately 25% are with manville heavy oil operators as they are focused on capitalizing on technological advancements in heavy oil development, along with narrowing Canadian heavy oil differentials.

On the U S side, our production volumes of 4800 60 <unk> today were also consistent with the prior quarter and were in line with our expectations.

Rig activity year to date has been strong with rigs on our acreage setting a high watermark of 31 rigs in April current activity is in line with average 2022 levels.

The Eagle Ford and Midland basins are the most active areas in our portfolio with drilling underpinned by high quality investment grade entities.

For those that are watching the webcast. There is a lot going on in this slide and it mirrors the significant drilling activity. We are seeing in multiple reservoir benches and from large pad drilling operations.

We expect U S volumes for the second half of 2023, the benefit from the completion of several of these large multi well pads.

Shifting to strengthening volumes throughout the remainder of the year.

Yeah.

These pads are high impact and are expected to bring on significant production.

An example of the 19, well pad drilled by Crown quest on our acreage in the Midland Basin and put on production in Q4 of last year.

So a little illustration to the right just shows the 19 wells that are targeting several different reservoir benches in a spacing unit.

On a gross basis. This pad had a peak rate of 27000 BOE a day with average production in the first six months of 17000 B a day.

To put this into perspective when started up five of these pads will be equivalent to the current levels of Clearwater oil production in Canada.

Well our royalty interest in the pad is <unk>, 5% the size of the pad in the production from it makes it meaningful to free holds net production.

<unk> 160, <unk> peak rate and Hunter BOE a day on a six months average.

We have several of these high impact docks and permits that we expect to contribute to near term production growth.

Specifically, we anticipate three new pads totaling 41 gross wells <unk> six net wells operated by Exxon and pioneer to be on production in the second half of this year.

The combined gross initial productivity of these pads is expected to be around 50000 BOE a day.

We continue to reiterate the simplicity of royalties as an asset class to investors freehold.

Freehold is dividend remains our primary return mechanism and it remains sustainable commodity prices material lower than current levels.

Our north American portfolio offer significant diversity with greater than 350 quality industry payers through two countries five provinces in eight states.

During periods, where we saw a temporary slowdowns associated the wildfires in Canada or slowdowns associated with spring breakup, maintaining our north American presence ensured that our return profile remained consistent for our shareholders over the quarter.

Our balance sheet remains in a strong position with capacity to mitigate weakness in commodity prices or support portfolio reinvestment for value enhancing opportunities.

Looking forward, we remain excited about the long term outlook for freehold as we continue to strike and freehold asset base balance sheet in the long term sustainability of our business.

We will now take the time to answer any questions that investors may have.

Thank you.

Yes, we will now take questions from the telephone lines. If you other question.

Speaker phone. Please go.

Your handset before making a selection.

I have a question please press star one.

The devices key pad.

You may cancel your question at any time by pressing star two.

Thank you. So please press star one at this time, if you have a question there will be a brief pause all the participants register.

Thank you for your patience.

Yeah.

The first question is from Travis Wood from National Bank Financial. Please go ahead. Your line is open.

Yeah, Thanks, and good morning.

David you talked about a bit of the inventory and that the high impact nature of kind of the U S development plans and the significance of the pads.

I noticed a couple slides here kind of highlighting that they that you referenced in your opening remarks, but could you help us or maybe you can remind us how.

How do you think about that in terms of your planning around guidance.

Maybe on the conservative side or is there any risk to to that changing in terms of the timing of the production adds just kind of how do you. How do you think about that how comfortable are you with the planning and you kind of talked about the onstream dates from Exxon as an example, but I'm just just help us appreciate I guess the.

The risk profile around the timing of that and how you layer that into the into your plan.

Yeah. Thanks for the question Charles I've got Rob here.

Yeah. He is grinding through this stuff every day, so I'll, let him answer that.

Hi, Travis so a little bit of context for.

I'll back up just a little bit when we sort of think about our U S portfolio to keep production flat, we sort of need somewhere in the three to 3.2 net wells you know and again that varies depending on what the productivity.

Of those underlying wows, but that's sort of a general number that you know that.

We'd love to.

At Q3, specifically in our forecast has about little under one net wells that we expect to be turned in line are brought on production.

And you know I think what gives us some confidence in that in that number for Q3 are those three pads that Dave talked about in his in his remarks.

Just a little bit of color on those those represent over 50% of those wells that we expect to be turned in line. In Q3, two are under axon ones under pioneer the Exxon we have one in the in the Eagle Ford just 12 gross wells with a 0.7% net royalty interest on those wells in that pad is.

It's fully complete.

With half already reporting production.

Exxon also has a.

Pat on the Midland to Houston Ranch, which is 14 gross wells you know we have a larger net royalty interest on that particular opportunity to 3% that compares to our U S. Average of about 0.60 0.7. So this is a meaningful pad both on a gross number of wells as well as net to NAFTA freehold.

That pad is over 90% complete and we've had dialogue with ex.

<unk> excellence back offices understanding when those pads will be will be coming online and they've already started bringing on some of those wells on that are on that 14 gross well pad.

Fastest pioneer in the in the Midland Eric same as pad. That's 15 gross wells, we have a 0.8% north net royalty interest that pad is fully complete and we're waiting to see that oh that come online shortly.

Okay, that's great and just for some context I think that the slides that you guys have layered in there specifically I think 15.

That's super useful as we think about the impact of that as you lay out the door.

Interest across each of those so I'll turn it back thank you.

Thanks Robert.

Thank you.

The next question is from Jamie Kubik from CIBC. Please go ahead. Your line is open.

Yeah, Good morning, and thanks for taking my question, a little bit along the lines of what Travis asked here, but I guess just on the activity in the U S noticed that net wells drilled were down quarter over quarter, but.

You did note that the the rig activity in April set a high watermark in your U S portfolio with a 31 rigs on your lands in rig activity. So far has mirrored the 2022 levels. Just wondering if you can help us reconcile maybe the difference between gross versus net activity and maybe how that.

It will translate into a.

The production growth you guys are talking about and in the second half and then maybe a tag onto that question is where where do you think U S production volumes could go to in the second half.

Yeah. So it's a it's Rob here again Jamie.

In terms of rig activity in the U S. You know as you mentioned, we did see a highest levels a little over 30 rigs on our lands in April that's trended down to about 20 rigs on the lands currently which is in line.

With 2022 average levels.

In terms of the lower amount when we looked at that gross drilling activity.

Over a quarter it was pretty similar between you know on the on the U S side, but we did see.

Lower net wells all of that was that that we're thrilled and I think in terms of how that will impact production, we will see.

As you know as you know it takes somewhere between.

The three and nine months for those wells once they've been drilled to be completed and turned in line.

So now that sort of somewhere in that Q4 Q1 timeframe.

So lots lots lots can change stream then.

Now.

I know you had a second question there I'm just trying to recall what it is apologize.

Yeah No problem just on you know I guess a lot of positive commentary on where volumes are headed in the U S with respect to the.

Completions that you see coming.

Coming at you here, just curious on where you can.

Guide us to as far as where U S volumes might might end up in.

And our high case here with what our with what with what pads are coming on so yeah.

Yeah, I mean, I think it's <unk>.

Overall guidance in terms of that 14000.

515500.

As we've said before we're going to be towards the bottom mid end of that of that range, but I think when what gives us encouragement that say for Q3 is just Dave talked about that those three pads are bringing on over 50000 barrels a day of gross you know in our.

Are you now are are that that could translate to three to 400 barrels a day net to to freehold at those at those peak rates kind of depending on when those those get turned on in the quarter. We'll certainly has oh well will have an impact on on what we see specifically for Q3, but certainly for the second half.

Half of 'twenty, three we're encouraged with those volumes.

Okay, and then maybe just last for me on the Canadian side, you know your production at 9800 barrels a day in the quarter basically flat to Q1.

But would have been higher as you noted without some of the wildfire impacts.

Is it just a mix of different plays that is holding the Canadian side up or is it a is it one particular player. A couple that you can point us to that are giving you the strong results on the Canadian side.

Yeah, I mean Q2 is obviously always impacted by spring breakup. So this is less about drilling activity and actually more about flush production in Q1 that continued into Q2, I think that would be that specific comment so much on Viking specific commentary I think the other piece.

Boyd our our Q2 volumes was just a shallower than expected base decline rate on that Tom It would be a.

Much broader comment across a significant number of our all of our areas in Canada.

Okay. That's it for me Thank you guys.

Thanks, Jamie.

Thank you.

The next question is from Luke Davis from RBC. Please go ahead. Your line is open.

Hey, good morning, guys I apologize I delve in a little bit late so sorry, if you've covered this already but I'm curious if you can provide a little bit of detail on new leasing activity, and where where you would expect to see most activity going forward specifically in Canada.

Sure. Thanks, Liz it's Rob here.

Having a really strong start to the year on a on leasing out.

I've talked about inside 83 leases year to date with a with 25 counterparties with another 15 to 20 or so that were that where we.

We're still negotiating so put that number in context 83 was the entire number that we had in.

In 2022, so we've been really encouraged with our our Canadian leasing activity over half of the 83 leases that we've signed with them in southeast Saskatchewan targeting Mississippian opportunities are about a quarter has been manville heavy oil.

Yeah, all leases, particularly one private.

You know higher growth operator.

I think the average royalty rate is about 15% with a with terms that really incentivize drilling oh and over 90% of those 83 leases have been to private or junior companies, who are targeting growth.

That's helpful. Thanks, Rob.

Thank you.

There are no further questions at this time I will turn the call back to Mr. Speicher.

Thank you very much everyone for your time today and for your interest in Freehold are look forward to connecting again with our Q3 results in November Thank you.

Thank you the conference call has now ended please disconnect your lines at this time.

Thank you for your participation.

Yeah.

Okay.

Yeah.

Okay.

Yeah.