Freehold Royalties Ltd.

Good morning. Welcome to the Freehold Royalty third quarter results conference call. Please be advised that certain statements on this call constitute forward-looking information. All statements other than those of historical facts may be forward-looking and we caution the listeners. As a new added feature this quarter, You can now submit your questions in the Q&A window on the webcast page or ask your question through the telephone line, if preferred. I would now like to turn the meeting over to Mr. David Spiker. Please go ahead.

Good morning, everyone, and thank you for joining us today. On the call from Freehold are Rob King, our COO, Dave Henry, our CFO, and new to our team, Todd McBride, as Manager, Investor Relations. So on today's call, we will share with you our third quarter results, as well as share our excitement around two big projects that we've been working on. One is our asset book, which will be an in-depth review of the extensive opportunity set in our portfolio. And second is an investor day, where we can walk through this in detail and provide our shareholders with an update on our business and how we think of things going forward. We will highlight our attractive dividend yield currently just under 8%. The sustainability of our dividend levels, which through the strategic oil-focused portfolio work that we have done, is covered well below current prices. And third, our multi-decades of inventory in the top oil basins across North America that will support our business and our dividends for years to come. We built a great company here at Freehold, and we look forward to sharing more of these thoughts at our investor day. It will be in Calgary on December 3rd with full virtual access. So turning our attention to our third quarter results, liquids production in the quarter was 93.67 barrels a day, up 3% from Q3 2023 and up 4% year-to-date this year compared to 2023. As you've been hearing through these quarterly calls, our liquid-weighted portfolio is key to delivering strong realized pricing and cash flows. Our realized price of $54.36 per BUE this quarter was 10% and 78% higher than our Canadian royalty peers. As our Texas production in the Permian and Eagleford basins, our light oil barrels situated right on the Gulf Coast sales points. This drives a much stronger realized price, well above the price of any Canadian barrel at today's exchange rates. So in Canada, our production of 9,075 BUE a day was impacted by gas volumes, which were down 270 BUE a day from the prior quarter, really a reflection of the weak ACO pricing throughout the summer and early fall. This weak pricing had led to production curtailments as well as deferred drilling activity as our operators pushed that drill program into Q4 and into Q1 2025, looking to capture an expected better gas pricing environment. We should note that while the gas prices impacted our top line production numbers, it had a negligible impact on cash flow in the current quarter. As at the 20-year low in gas prices that we saw in Q3, less than 4% of our Q3 funds from operations was from natural gas. I'll get into a little bit more detail later in the call, but I just wanted to touch on the oil-focused drilling activity on Freehold's lands, particularly the Clearwater, Manville Heavy Oil, Southeast Saskatchewan, and Viking Light Oil Plays, where we had 82 wells drilled in Q3. In the U.S., which is a very high returns part of our business, our production remained near record levels at 5,533 BUE a day in the quarter. We currently have 33 rigs active on our U.S. lands, with our market share of rigs active at about 5% are drilling on our lands in the quarter. Wells drilled in our midland acreage have been outperforming previous year type curves as operators are drilling longer wells. With three-mile wells becoming much more common, they're optimizing what we call multi-bench continuous development or Q development strategies, and they continue to optimize their frac designs. Our acquisition strategy has been really focused on acquiring mineral title in these undeveloped drill spacing units in the core of the Permian in both the Midlands and Delaware sides. We have further advanced our U.S. presence with an active ground game working with a well-established team based in Houston. The ground game means we are purchasing mineral titles one by one in the drill spacing units that can be drilled and developed using the latest and greatest technology to optimize production and reserve recovery. We are very excited about having this as part of our portfolio build strategy. A little further on rig efficiency, operators are needing fewer rigs to achieve the same level of activity. It's worth noting that in Diamondback's comments on their Q3 call, where they're a key operator in the Midland Basin, they indicated they will only need 18 rigs to drill the same lateral footage as about 23 rigs in the past. I was in Midland about three weeks ago with Dave Hendry, our CFO, and we were on those rigs, and the technology that's being deployed to continually improve the drilling efficiency is quite impressive. Turning to our financial performance, our funds from operations was $56 million in the quarter. Our focus on oil and NGL production growth in both Canada and the US has been key in our ability to generate solid financial results. Our diversified exposure to pricing markets throughout North America helps drive our net backs and cash flows and allows the business to grow over time. This quarter, we paid $41 million to our shareholders in the form of dividends and reduced our net debt by $12 million to $187 million. This equates to a 73% payout ratio and a net debt at 0.8 times our trailing funds from operations. Our balance sheet remains strong as we continue to operate well below our debt target range. So just turning back to the drilling side, we had another strong quarter drilling activity with a total of 278 wells drilled across our North American portfolio, an increase of 11% compared to Q3 last year. In Canada, our net wells increased by 41% as payers elevated their drilling activity on our mineral title lands wherein we receive a higher royalty rate. This is really a function of the amount of leasing activity that we've done over the last couple of years, and we're seeing drillers focus on those lands. We saw more wells focused on the heavy oil-weighted Manville stack and Clearwater formations this quarter, with about 55% of drilling in the Clearwater and Manville, making it the highest level of heavy oil drilling activity on our lands over the past several years. With the weaker gas pricing, the drilling focus has been on oil wells, which have a lower overall productive capability on a BOE a day basis versus a gas well, but they contribute significantly more revenue given the relative strength of oil prices. Turning to our U.S. portfolio, both gross and net drilling were up 14% from Q3 2023 to 0.8 net wells. We continue to be encouraged by our U.S. assets and their ability to grow over time. Our lands are situated in the best place in North America with some of the best operators continually finding more efficient ways to grow production and add to their portfolios through M&A work. With M&A, our top U.S. operators will be ExxonMobil after their $60 billion acquisition of Pioneer and ConocoPhillips after their $23 billion acquisition of Marathon. Both these companies have made significant investments in our core U.S. operating areas. Overall, our Q3 results show the strength of the company and our ability to navigate through volatility and commodity prices. We drive premium pricing on our assets through our North American exposure, and we're well positioned in the best oil plays. We have $33 million a day in natural gas that will help drive gas role growth as those gas markets strengthen. We are encouraged by the drilling and leasing activity on our lands, and we look ahead to the last few months of 2024 and into 2025. So just to close things off, as mentioned at the beginning of remarks, we will be hosting an in-person and webcasted Investor Day in Calgary on December 3rd, as well as introducing our updated 2024 asset book. We look forward to having our leadership team walk you through all the exciting developments we have made over the past few years and highlight our unique competitive advantage as a North American energy royalty company. So with that, we will now take the time to answer any questions that you may have.

Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1. You may cancel your question at any time by pressing star 2. Please press star 1 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 will be from Christopher Jones from Haywood Securities. Please go ahead.