Freehold Royalties Ltd.

Q1 2024 Earnings Conference Call

5/7/2024

spk04: This conference has been recorded. This conference has been recorded. All participants please stand by. Your conference is ready to begin. 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,
spk03: sir. Good morning, everyone, and thank you for joining us today. On the call for freehold are Rob King, our Chief Operating Officer, and Dave Henry, our Chief Financial Officer. Correction for the quarter averaged 14,714 BUE a day, essentially unchanged over the previous quarter. Canadian volumes averaged 95.93 BUE a day, 56% liquids, and the U.S. averaged 51.21 BUE a day, 78% liquids, generating total revenue of $74 million. Severe January weather events, both in Canada and the U.S., impacted our production in the quarter. However, volumes made a strong recovery from these unplanned outages, with corporate production in the second half of the quarter over 15,000 BUE a day. In the U.S., our light oil-weighted Midland volumes increased 18%, and Delaware volumes increased 59% over Q4 2023. This is due in part to the closing of the previously announced acquisitions of high-quality core acreage concentrated in the Midland and Delaware basins of the Permian. These acquisitions contributed approximately 400 BUE a day to first quarter production, in line with their expectations. We maintained our balance sheet strength and exited the quarter with net debt detrailing funds from operations of 0.9 times after closing $116 million in the previously announced Permian acquisitions. With natural gas benchmark pricing being weak throughout the quarter, we continue to see the benefits of our liquids-weighted, premium-priced North American portfolio, with oil and NGLs representing 90% of our revenue, driving a top-tier, realized price of $54.81 a BUE. Funds from operations for the quarter totaled $54 million, or $0.36 per share, funding our $0.09 per month dividend, and resulting in a 75% payout ratio for the quarter. Our high-margin, oil-weighted portfolio enables us to provide consistent and sustainable returns to our shareholders, while retaining optionality to fund future growth initiatives. On the drilling side, growth drilling activity was strong throughout Q1, with a total of 300 wells drilled across our North American portfolio, a 15% increase over the previous quarter. Approximately 56% of the total growth wells drilled on freehold lands targeted prospects in Texas, 23% in Saskatchewan, and 20% in Alberta. Canadian net drilling increased 55% over the previous quarter, led by increased drilling targeting Viking, Southeast Saskatchewan Light Oil, and heavier oils in the Clearwater and Manville stacks. Following a record year of leasing in Canada, we have seen the momentum continue, with 20 leases signed during the quarter, predominantly in Southeast Saskatchewan and the Manville stack. The continued revitalization of these areas through new drilling techniques and core area focus from new management teams represents a significant opportunity for our portfolio. Approximately 75% of the 2024 leasing activity has been associated with public and private junior companies, and the operators that we have issued leases to have been very active. 20% of our drilling year to date has been on the record 122 leases signed in 2023. On our U.S. portfolio, we're encouraged by the growth drilling and the rig activity that we have seen to start the year, with growth drilling up 18% over the previous quarter. Activity in our U.S. assets continues to be driven by large, high-quality investment-grade payors, in addition to growth-oriented privates. Our drilled, uncompleted well and permanent well inventory remains in a position of strength, providing us confidence in the outlook for our U.S. portfolio for the remainder of the year. As a tidbit, the first major U.S. acquisition that we closed in January 2021 for $74 million pays out this quarter, so just over three years, and is still contributing almost a thousand barrels a day of production. We will talk further about the exceptional performance of our U.S. asset base at our annual general meeting this afternoon. So we're very excited about the quality of our business, a result of the multi-year transformation into a uniquely North American energy royalty company, providing significant returns to our shareholders, while retaining the ability to self-fund future growth opportunities. We'll now take the time to answer any questions.
spk04: Thank you. We will now take questions from the telephone lines. 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. Please press star 1 at this time if you have a question. That will be it for our participants. If you have any questions, we thank you for your patience. Our first question is from Jamie Kubik from CIBC. Please go ahead.
spk02: Good morning and thanks for taking my question, guys. I'm just curious if you can talk about the trend in the net welds drilled on your acres, both in Canada and the U.S., and some of the trends that you're seeing with respect to operators and specific places that they're targeting and things of that nature.
spk03: Thanks for the question. I'll turn that over to Rob. He's got a pretty good handle on that.
spk01: Good morning, Jamie. Yeah, May, I'll talk first on the Canadian side where I think when we look at our activity on a -over-quarter basis, it was quite strong on both a gross basis and in particular on a net basis. I think really where the strength in the nets came from is on the -over-quarter basis was one of our key drillers in the Viking tine was less active in Q4 and a lot more active in Q1. That certainly helped given that's under a meaningfully high gross overriding relative interest that we have, about 8.5%. I think some of the other themes on the Canadian side we saw in the quarter was, Dave talked about that really just that lease conversion. We saw in the quarter, the number is the same at 20%. Both 20% of the wells that were drilled in Canada in the quarter were from the leases that we signed in 2023, and 20% of the leases that we signed in 2023 have been drilled in the first quarter. So we're pretty encouraged by that in terms of just what we're seeing those leases get converted into drilling. That has continued on pace to see meaningfully more incremental leasing in the first quarter of this year. It continued on with the same momentum. I think the other highlight that we sort of point to in the Canadian side was in the Clearwater. Clearwater both had our highest production that we've seen, just under 500 BOEs a day, and we've seen some really interesting results from Woodcott in the West Nipissie block where we have a gore with them. On the US side, it really was led by oil drilling. 99% of our drilling in the quarter was targeting oil and liquids, with the bulk of that being really in the Permian, 73% of gross wells were targeted there. We did see, coming down a -over-quarter basis, an increase in the gross number of drilling, but a decrease in the net number of drilling. To us, the gross number is an important reflection on what the overall activity is. On the net side, that really speaks to timing issues and timing, where we will see some of the higher NRIs that we have in our portfolio get drilled over the course of the year.
spk02: Okay, thanks. Then in your press release, you state that the portfolio demonstrated a strong recovery in the second half of the quarter with volumes above 15,000 BOEs a day. I'm just curious if you can provide a number with respect to production of where your volumes are at currently, and how much was lost as a result of the weather impacts. Thanks.
spk01: I think what we really saw was January was what we call the month's different gas, particularly on the US side in terms of what we saw in particular on our Eagleford assets under Marathon, where severe weather had quite a negative impact on our January production in the Eagleford. Coming into February and then also into March, we saw that revenue and that production come back very materially. That led us to have the confidence to know that the portfolio in March is back up above 15,000 BOEs a day largely from seeing that temporary weather impact in January subside. It was a temporary aspect, not a structural aspect within the portfolio.
spk02: Okay, thanks. I'll turn it back. Thanks, guys.
spk01: Thank you.
spk04: Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Spiker.
spk03: Great. Thank you, and thanks, everybody, for participating on the call this morning, and hope to see you at the AGM this afternoon. Thank you.
spk04: Thank you. Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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