Freehold Royalties Ltd.

Q2 2023 Earnings Conference Call

7/31/2023

spk00: Good morning, ladies and gentlemen, and welcome to the second quarter results conference call. I would now like to turn the meeting over to David Spiker. Please go ahead, Mr. Spiker.
spk02: Good morning, everyone, and thank you for joining us today. On the call from Freehold are David Henry, our CFO, and Rob King, our COO. The second quarter delivered consistent results across our North American portfolio. Production of 14,667 BWI 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 $0.35 per share. Realized pricing for the quarter of $54.05 for BOE continues to benefit from the premium pricing associated with our US portfolio. In the US, we realized a 39% uplift over our Canadian realized price, due to both 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 is a result of $24.4 million in 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 have received. The diversified, high-quality nature of our North American portfolio has furthered the sustainability of Freehold's dividend, which we have grown to its highest level since 2015. As a consistent income provider, 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 results in dividend coverage below US$50 per barrel WTI. Full year, we are anticipating payout ratios in the mid 60% range based on current strip prices. Our Canadian volumes average 9,800 BUE 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. This shut-in production has now been restored. Strength in our Canadian portfolio year to date reflects its high quality nature, well positioned in the active drilling plays across Western Canada. We have had strong drilling in the Viking with 62 gross wells drilled, resulting in our oil volume contributions from this play reaching a three-year high. The Clearwater continues to be a growth area with 17 wells drilled year-to-date, driven mainly in the Fidger 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, with 67 agreements signed during the quarter yielding bonus revenue of $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 aim 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 4867 BUE a day 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 water mark of 31 rigs in April. Current activity is in line with average 2022 levels. The Eagleford 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 US volumes for the second half of 2023 to benefit from the completion of several of these large multi-well pads, contributing to strengthening volumes throughout the remainder of the year. These pads are high impact and are expected to bring on significant production. An example is a 19-well pad drilled by Crown Quest on our acreage in the Midland Basin and put on production in Q4 of last year. The 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 27,000 BWE a day, with average production in the first six months of 17,000 BWE a day. To put this into perspective, when started up, five of these pads would be equivalent to the current levels of clearwater oil production in Canada. While our royalty interest in the pad is 0.5%, the size of the pad and the production from it makes it meaningful to Freehold's net production, contributing 160 BUE a day at peak rate and 100 BUE a day on a six-month average. We have several of these high-impact ducts and permits that we expect to contribute to near-term production growth. Specifically, we anticipate three new pads totaling 41 gross wells 0.6 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 50,000 BUE a day. We continue to reiterate the simplicity of royalties as an asset class to investors. Prehold's dividend remains our primary return mechanism and remains sustainable at commodity prices material lower than current levels. Our North American portfolio offers significant diversity with greater than 350 quality industry payers through two countries, five provinces, and eight states. During periods where we saw temporary slowdowns associated with wildfires in Canada or slowdowns associated with spring breakup, maintaining a 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 strengthen freehold's asset base, balance sheet, and the long-term sustainability of our business. We will now take the time to answer any questions that investors may have.
spk00: Thank you. Yes, we will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your hands up before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Thank you. So please press star 1 at this time. If you have a question, there will be a brief pause while the participants register. We thank you for your patience. The first question is from Travis Woods from National Bank Financial. Please go ahead. Your line is open.
spk05: Yeah, thanks, and good morning. David, you talked about a bit of the inventory and the high-impact nature of kind of the U.S. development plans and the significance of the PADS. I notice a couple slides here kind of highlighting that you referenced in your opening remarks, but could you help us or maybe even remind us how you think about that in terms of your planning around guidance, maybe from the conservative side, or is there any risk to that changing in terms of the timing of the production ads? Just kind of how do you think about that? How comfortable are you with the planning. You kind of talked about the on-stream dates from Exxon as an example, but just help us appreciate, I guess, the risk profile around the timing of that and how you layer that into your plan.
spk02: Yeah, thanks for the question, Travis. I've got Rob here, and he's grinding through this stuff every day, so I'll let him answer that.
spk03: Hi, Travis. So a little bit of context for, you know, I'll back up just a little bit. When we sort of think about our U.S. portfolio, you know, to keep production flat, we sort of need somewhere in the 3 to 3.2 net wells. You know, and again, that varies depending on what the productivity, you know, is of those underlying wells. But that's sort of a general number that, you know, that we've looked to. We look at Q3 specifically, our forecast has a little under one net well that we expect to be turned in line and brought on production. I think what gives us some confidence in that number for Q3 are those three paths that Dave talked about in his remarks. Just to add 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 Exxon, one's under Pioneer. The Exxon, we have one in the Eagle Forge, it's a 12 gross wells with a 0.7% net royalty interest on those wells. That pad is fully complete with half already reporting production. Exxon also has a pad in the middle in the Houston Ranch, which is 14 gross wells. We have a larger net royalty interest on that particular opportunity, 2.3%. That compares to our U.S. average of about 0.6, 0.7. So this is a meaningful pad both on a gross number of wells as well as net to freehold. That pad is over 90% complete. and we've had dialogue with XCO, Exxon's back offices, understanding when those pads will be coming online. They've already started bringing on some of those wells on that 14 gross well pad. The last is Pioneer in the Midland, Eric Sims pad. That is 15 gross wells. We have a 0.8% net royalty interest. That pad is fully complete, and we're waiting to see that come online shortly.
spk05: 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 is super useful as we think about the impact of that as you lay out the working interests across each of those. So I'll turn it back. Thank you.
spk02: Thanks, Travis.
spk00: Thank you. The next question is from Jamie Kubik from CIBC. Please go ahead. Your line is open.
spk01: 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., notice that net wells drilled were down quarter over quarter, but you did note that the rig activity in April set the high water mark in your U.S. portfolio at 31 rigs on your lands and rig activity so far has mirrored 2022 levels. Just wondering if you can help us reconcile maybe the difference between gross versus net activity and maybe how that will translate into the production growth you guys are talking about in the second half. And then maybe a tag on to that question is where do you think U.S. production volumes could go to in the second half?
spk03: Yeah, so it's Rob here again, Jamie. In terms of rig activity in the U.S., as you mentioned, we did see our 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 gross drilling activity, quarter over quarter, it was pretty similar on the U.S. side, but we did see... some lower net wells that were drilled. And I think in terms of how that will impact production, we'll see, as you know, it takes somewhere between three and nine months for those wells, once they've been drilled, to be completed and turned in line. So that's sort of somewhere in that Q4, Q1 timeframe. So lots can change between then and now. I know you had a second question there. I'm just trying to recall what it is. I apologize.
spk01: Yeah, no problem. 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 at you here. Just curious on where you can guide us to as far as where U.S. volumes might end up in a high case here with what pads are coming on.
spk03: Yeah, I mean, I think we've given overall guidance in terms of that, you know, $14,500 to $15,500. You know, I think as we've said before, we're going to be towards the, you know, bottom mid-end of that range. You know, I think what gives us encouragement, I'd say, for Q3 is As Dave talked about, those three paths bring on over 50,000 barrels a day of gross, and that could translate to 300 to 400 barrels a day net to freehold at those peak rates. Depending on when those get turned on in the quarter, we'll certainly have an impact on what we see specifically for Q3, but certainly for the second half of Q23, we're encouraged with those volumes.
spk01: Okay, and then maybe just last from me on the Canadian side, your production at 9,800 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 one particular play or a couple that you can point us to that are giving you the strong results on the Canadian side?
spk03: Yeah, I mean, Q2 is obviously always impacted by spring breakups, so this is less about drilling activity and actually more about flush production in Q1 that continued into Q2. You know, I think that would be, you know, that specific comment would be very much a biking comment. you know, specific commentary. I think the other piece that, you know, buoyed our Q2 volumes was just a shallower than expected base decline rate. You know, and that comment would be, you know, a much broader comment across a significant number of our areas in Canada.
spk01: Okay. That's it for me. Thank you, guys.
spk00: Thanks, Amy. Thank you. The next question is from Luke Davis from RBC. Please go ahead. Your line is open.
spk04: Hey, good morning, guys. Apologies, I delved in a little bit late. Sorry if you covered this already, but I'm curious if you can provide a little bit of detail on new leasing activity and where you would expect to see most activity going forward, specifically in Canada.
spk03: Sure. Thanks, Luke. It's Rob here. Yeah, we have had a really strong start to the year on leasing. Dave talked about We've signed 83 leases year to date with 25 counterparties with another 15 to 20 or so that we're still negotiating. Put that number in context, 83 was the entire number that we had in 2022. We've been really encouraged with our Canadian leasing activity. Over half of the 83 leases that we've signed have been in southeast Saskatchewan targeting you know, Mississippian opportunities. About a quarter has been Manville heavy oil, you know, leases, you know, particularly one, you know, private, you know, higher growth operator. You know, I think the average royalty rate has been 15% with terms that really incentivize drilling. And over 90% of those 83 leases have been to private, you know, or junior companies who are targeting growth.
spk05: That's helpful. Thanks, Rob.
spk00: Thank you. There are no further questions at this time. I will turn the call back to Mr. Spiker.
spk02: Thank you very much, everyone, for your time today and for your interest in Freehold. Look forward to connecting again with our Q3 results in November. Thank you.
spk00: Thank you. The conference call has now ended. Please disconnect your lines at this time. And we thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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