Freehold Royalties Ltd.

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.

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.

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.