Q3 2023 Freehold Royalties Ltd Earnings Call

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

All participants please standby your conference is ready to begin.

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 Sir.

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

On the call from Freehold are Dave Hendry, our CFO and Rob King our Chief operating officer.

So you've had a good third quarter highlighted by growing U S production volumes.

Active drilling programs across North America, and an 18% reduction in net debt.

Production of 14600 <unk>.

<unk> was in line with the previous quarter and up three.

3% versus the same period in 2022.

Growth in volumes was due to drilling from our third party payers, leading to organic oil weighted growth, most notably within our U S portfolio.

U S production in the corner averaged 50 427 date eclipsing the previous U S production record by 160, <unk> today, which was set in Q4 last year.

The 12% quarter over quarter growth was driven by several high impact multi well pads being brought on stream and higher net royalty interest wells being turned in line.

Freehold Canadian portfolio saw a slight production declined quarter over quarter and this was primarily due to a negative prior period adjustment as wildfire impact due to the areas where offline in June longer than originally estimated.

Yeah.

Our revenue of $84 million was in line with expectations generating funds from operations of $65 million or <unk> 43 per share.

Realized pricing of $61 55 per BOE continues to benefit from the premium pricing associated with our U S portfolio.

In the U S. We realized a 34% uplift over our Canadian realized pricing during the same period and this is due to both quality and waiting our production mix to oil as well as a proxy I mean, your sales points, which significantly reduces pipeline transportation costs.

We reduced our net debt by $23 million or 18% ending the period at $107 million or is there a 0.4 times trailing funds from operations, we continue to maintain significant financial flexibility.

We paid $40 7 million to our shareholders in dividends or 27 cents a share up 8% versus the same period in 2022.

Dividend payout for the period was 62% and we believe our dividend is right sized and provides freehold the flexibility to continue to reduce leverage or pursue value enhancing acquisitions. As we continue to see a strong set of opportunities on both sides of the border.

During the first nine months of this year several hundred and 79 gross or 14.1 net wells were drilled on a north American royalty lands, representing the highest level of gross drilling activity through the first three quarters of the Companys 27 year history.

For the quarter, we had 251 gross or 4.6 net wells drilled with 90% of these wells targeting oil prospects.

In Canada, we had 116 gross three nine net locations drilled.

Activity was slower in Q3 2023 relative to Q3 last year relating in part to reduced gas well drilling activity.

On the oil side, we are seeing increased activity and capital programs as we go into year end.

In the U S of 135 gross wells were drilled on our royalty lands, which compares to 157 gross wells during the same period last year and 124 gross locations during the previous quarter.

Given the composition of our U S portfolio, which is greater than 60% investment grade Payors, we see sustained development on our lands with more than 13 years of multi zone oil weighted drilling inventory.

Our U S operators have been focus on drilling light oil prospects in the Permian and Eagle Ford was 83% of the activity was in these basins.

In total we had 71 gross locations targeting prospects in the Permian and 35 gross locations in the Eagle Ford.

We also continue to see activity associated with the Bakken and Haynesville plays.

We've had significant leasing activity through our Canadian portfolio in 'twenty to 'twenty three with nearly half of the 120 to 102, new leases are issued for the first nine months of this year targeting Mississippian oil in southeast, Saskatchewan and Manville oil.

BARDA.

We continue to see a revitalization of our southeast Saskatchewan light oil and heavy oil portfolios with several well capitalized growth oriented junior producers focusing in these areas.

Multilateral drilling has also been a focus by operators and both are in southeast Saskatchewan and the heavy oil areas, where the aim to improve both well productivity and oil recovery.

We continue to highlight the saw tooth nature of our U S production driven both by pace of activity and variation with our royalty interest across our land base.

As well it's come off flush production associated with the shale plays we continue to build a low decline underlying asset base.

As the drilling continues on our lands this asset base will continue to grow.

On a gross basis, we had a number of new pads in the Midland Basin and Eagle Ford has contributed gross production.

50 to 60000 BOE, a day or approximately 350 BOE 80, NAFTA freehold over the period from high quality operators, such as pioneer Exxon any Oh Gee.

Additional contribution to our robust U S volumes came from well outperformance relative to our type curves and higher than expected completion activity.

On an annual basis, we expect our U S portfolio to provide organic growth of approximately 3% over the next 12 months align with third party projections of production growth in the U S oil producing basins.

We're very excited about the position of strength, we're in given the quality diversity and long duration characteristics of our portfolio.

We continue to unlock value as new technology is being deployed new reservoir benches are being tested and brought on production and our operators continue to lease and drill on our extensive land base.

Looking forward, we continue to expect robust performance from our assets generating significant funds flow to underpin our sustainable dividend.

Jane or balance sheet strength and to fund further growth opportunities on both sides of the border.

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

Thank you we will now okay.

Questions from the telephone lines. If you have a question and youre using a speakerphone lift your handset before making your selection. If you have a question. Please press star one on your debt.

Nice keypad you may cancel your question at any time by pressing star queue. Please press star one at this time. If you have a question there will be a brief pause while the participants register for questions. Thank you for your patience.

The first question is from Duke Davis one.

Your line is now open.

Thanks, Good morning, guys I Wonder if you can provide some details on our leasing activity just the expectations for how that impacts volumes through the balance of this year and into 2024 and if you can just provide some details on that.

The types of Counterparties, and just general activity that you're seeing.

Sure. Thanks Lucas.

Yeah. So as we said it's about 102 leases that we signed with 33, Counterparties and and up to Q3. The pipeline is continuing to you know to grow lever going out with them as well past, our our record levels of leasing activity.

At the end of this year most of that about 50% of sudden in southeast, Saskatchewan and I'll come back to that in a minute about 25% with men they'll heavy we've already seen about a half a dozen wells that have been drilled already on these on these leases are they something that way we were suddenly work with our lessees.

To try and encourage our active drilling on them in fact.

But a dozen of the leases, we actually have a have a well commitments associated with that in terms of who the makeup of the those people's he's taken leases with US 90% have been surprised that junior type companies. You know I think we kept coming back to southeast Saskatchewan.

Comment I think that that that area of activity is going to be a bright spot for us in Q4 and into 'twenty four right. Now you know our Mississippian oil is actually reaching two year highs were over 900 Boe's a day of oil production in that are in that play and as mentioned, that's where 50% of all.

Our leases that we've signed this year have that focus.

The last time that makes you just as it relates to thinking about 'twenty for activity.

When you think about the 346 gross wells that have been drilled on our land.

In 2023, that's what an average 4% royalty interest these leases that we're signing of the average is close to 16%. So they're also going to have a much more meaningful impact on <unk> on a net basis.

Yeah.

Okay.

Thank you.

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

Yeah. Good morning, Thanks for taking my question guys I'm. So we've seen a pretty good drop in overall U S rig activity in the Permian and the Eagle Ford over the past year can you just talk a little bit about what you're seeing on your acreage in real time here and what you have a sort of baked into your forward plans for for production growth in the U S.

Brought here again, so yeah, we got about.

A little over 20 rigs that are active on our lands right now on the on the U S and that's really what that is in line with 2022 levels.

Maybe a bit of a broader Midland basin comments, you know I think we've seen it.

Maybe to ask you just how efficient rigs and completions are getting and that gives me give an example, right now in overall Midland There's about 120 rigs operating in that basin, which is about 15% lower than the average in the AR in the first half of this year, but with that 120 rig.

Countless we're still expecting to see mid single digit year over year oil growth in the Midland Basin and I think it's when we've looked at our type curves in the two basins in the U S that are most relevant to us our Eagle Ford and Midland.

We've actually not seen a degradation in the BOE per day type curve. We do know that operators are pushing longer laterals. They are having more frac intensity on the completions, but you know theres still.

Being able to keep that degradation that day bye bye bye bye.

Doing some different drilling operations.

You know on the Eagle Ford I think we've actually seen or are most of our land 70% of our activity in the Eagle Ford is a marathon and our core karnes trough area and there we've seen no degradation at all in their well results over the last four years, you know I think what we have.

Seeing a little bit of degradation outside of marathons acreage in the Eagle Ford and this has probably been more of a symptom of companies like silver forward, Devon, who are actually targeting oiler wells just given you know pull back in gas pricing.

So you might.

I have seen less Coa is there, but you know more barrels of oil being up and coming out of those some of those Eagle Ford wells.

Okay. Thanks for that and then maybe just a follow on question you know we've seen some.

Major U S consolidation take place over the last a couple of months can can you talk about how you think that impacts activity on your lands or is it too early days yeah.

Yeah I mean, it's early it's early days, but I think where we're pretty encouraged I'll say again in the Midland Basin side, most of our biggest exposure from the development upside perspective would be under pioneer.

And it's certainly one where the marathons marathons exxon's perspective on growth I've, certainly been differentiated relative to what pioneer was saying you know they've sort of talked about you know less than 5% oil growth.

And with Exxon talking about you know 10 plus percent production growth over the next few years. So we'll see a fighters that lots of great acreage and we certainly aren't under everything that they have but you know the combination of Exxon and pioneer has put a foot Exxon.

And two our top 10 payers on a corporate basis.

Okay. That's all for me thank you.

Thank you once again, please press star one on your telephone keypad or device. If you have a question.

There are no further questions registered at this time I would now like to attend the meeting back over to Mr. <unk>.

Well, we do have a few questions. So sorry may I. Mr. Speicher, Yes. Please proceed with questions. Thank you. The next question is from Chris Jones.

For taking my question just thinking about consolidation opportunities can you speak to.

What level of deal flow, you're seeing bid ask spreads and can you remind us of some of the boxes that need to be checked when you look at acquisitions.

That's correct yes.

Yeah in the quarter, we've looked at a.

A little of a little over 20 deals came across our all of our guests.

Consistent with levels that we saw in Q1 and Q2 of this year.

Yeah, I'd say the value of the opportunities did go also there's a few sort of meaning.

Meaningful sized opportunities that's out there that.

We did review you know 80% of those deals would have been in the U S 20% in Canada.

We actually even though we looked at a little over 20 deals we only dug in and about half of those and and then only bid on half of that number again. So I think we've been we've been we've had been encouraged I would say with the deals that we're looking at in Q4. So that's both in terms of the number of opportunities.

But more importantly, the quality of the of the opportunities.

And if you look at it is it is very competitive and we're continuing to make sure that you know the opportunity anything that we as you know really adds value on a near term long term basis.

And it makes us a better it makes us a better company.

Yeah, I think when we're looking at a lot of these opportunities.

In Q4 in particular that that quality comment we've been encouraged that a lot of it has been in our core Midland.

<unk> and core Delaware Basin, and I think it's one where there's been a few opportunities that we've been pretty encouraged by that and just how much under an undeveloped opportunity set is what's in it. So like you can really see.

Tangible perspective on what kind of production growth you might get from that.

Thank you I'll hand, it back.

Thank you. The next question is from Travis Wood. Please proceed.

Good morning, guys, sorry, you may have answered this Jamie and Mike.

The question here, but I wanted to get an understanding on some of the well performance I think over the last few years, we've heard some commentary that.

Type curves are lagging expectations, which I don't think that it's completely accurate. So apologies if you already touched on that from Jamie's question and if you did then maybe just expand on more so how that relates to you and could there be maybe broken telephone in terms of what that actually.

Means and could it.

<unk> be more of a capital cost are eroding economics, a background rather than well performance and you ours itself. Thank you.

Sure Yeah, Jamie I'm, sorry, Travis Jamie did I stopped at that question. So I'll, maybe I'll just kind of touch on the incremental incremental comments there.

Probably but it's probably the biggest one is sort of impacting.

That again, when we've looked at our type curves on our assets and in particular in the Eagle Ford and in the Midland Basin, which the two most relevant basins for freehold in the U S.

And the wells that have been drilled on our lands. We have we haven't seen a degradation in those type curves over the last four years and that includes the I'll call. It. The first you know three six months of 2023, where we have where we have enough data to be able to take our perspective on.

I'm sorry.

We have been seeing operators pushing longer laterals and you've certainly seen that on Oh I heard that on earnings calls and the operators are putting more frac intensity, you know into the into the reservoir so that that that does.

As you know factor into capital efficiencies.

And but when we look at on a BOE per day basis, and again, we've sort of seen a very similar level of our productivity.

Okay. Thank you for that added color.

Thank you very much.

Two questions I would now like to return the meeting back over to Mr. Mike. Thank.

Thank you.

Thanks, everyone for their time today and their participation in our conference calls we look forward to our continued growth and development on our assets and are catching up again with our Q4 results. Thank you.

Thank you.

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