Freehold Royalties Ltd.

This conference is being recorded. This conference is being recorded.

All participants please stand by. Your meeting is now ready to begin. Good morning ladies and gentlemen and welcome to the Q2 results conference call. 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 with me from Freehold are Rob King, our COO, Shana Morihara, our CFO, and Todd McBride, our manager of IR. Shana joined our team as CFO in June of this year and we look forward to working together and having the opportunity to introduce her to you, our shareholders, over the coming months. So we've delivered a strong second quarter reflecting the resiliency of our North American portfolio. Despite the uncertainty and caution associated with the constant headlines that are driving volatility in both markets and commodity prices. During the quarter we achieved production of 16,584 BW a day with a liquid weighting of 67%. Both new high watermarks for Freehold as we continue to build and evolve our portfolio. This 9% production growth from the second quarter of last year reflects our strategic acquisitions over the past 12 months which have expanded and strengthened our US positioning, particularly in the Permian Basin. As in Canada, operators in the US continue to drive higher production levels while minimizing rig time and associated costs. During the quarter we had several prolific wells come online producing at rates double that of the performance of the historical offsetting wells. These high productivity wells were key contributors to the production levels achieved this quarter and a reminder of the ongoing advancements in well drilling and completion strategies. Despite there being over 100,000 horizontal wells drilled to date in Texas. Specific to this example, we had 31 new wells drilled on 6 distinct drilling paths across the Permian and Eagleford Basins. And these wells are brought on with initial production rates IP 30s of over 73,000 BW a day. Freehold's average net royalty interest across these 31 wells was 1.1%. More than twice that of Freehold's average US royalty interest. And as such, the culmination of outstanding well results and a higher royalty interest was particularly impactful. For those of you that can see on the screen, we've included a graph that illustrates how these Permian and Eagleford wells compared to other world class unconventional resource plays in North America, such as the Montney and Duvernay in Canada. The production performance curves are very similar and in general, the Permian and Eagleford wells have a much higher oil weighting with Eagleford being similar to the Duvernay and the Permian being oilier than most unconventional Canadian plays. Growth drilling activity in the quarter in the US remained consistent with the prior quarter and increased almost 10% year over year. We ended the quarter with approximately 4.6 net activity wells. And these are wells that have been permitted, as they call in the US or licensed, as we refer to in Canada, plus wells that have been drilled but yet not completed. So recall that we need about four net activity wells to maintain our US production. So at 4.6 net wells, we're well ahead of that pace. We have seen a slowdown in drilling rig activity in both the Permian and Eagleford basins. Both are down about 10% year to date compared to last year. This has been offset by an improvement in drilling efficiencies, as total meters drilled in the horizontal section of the well bore, or the pay interval, is the same as last year, despite the lower rig count. Our largest payers in the US, accounting for approximately 60% of Freehold's US revenue, are Chronic Oil Phillips and ExxonMobil. Both of these companies have maintained a similar market share of drilling rigs in the Midlands and Eagleford basins, as shown on the left-hand chart, respectively, over the past three years. The benefit of exposure to these large, investment-grade companies is that they approach capital programs with a longer-term view, maximizing program efficiencies and reducing activity level volatility. In Canada, we saw seasonal slowdown in drilling activity during spring break-up, while licensing activity remained strong, with a similar number of licenses in the first half of 2025, as through the same time period in 2024. We view this as a positive tailwind for the second half activity. Our key Canadian oil plays grew by 10% compared to the second quarter of last year. These key oil plays are at the Manville, Clearwater Heavy Oil, and Southeast Disguise and Light Oil. These three plays now make up approximately 30% of our Canadian production. So, moving on to financial performance, we had another strong quarter bonus in leasing activity, driving a combined $5.8 million in revenue for the first half of 2025. This increased leasing activity reflects continued operator interest in leasing our Canadian mineral title lands, as well as leasing activity on our expanded U.S. mineral title portfolio. Funds from operations were $57 million in the past year, and $1.5 million in the past year. The first quarter was $1.5 million in the last quarter, or $0.35 per share. Benchmark oil pricing was 11% lower than the previous quarter, dropping almost $8 a barrel to approximately $64 a barrel, the lowest level since the first quarter of 2021. By comparison, however, in that first quarter of 2021, or just over four years ago, our funds from operations was $0.25 a share. At $0.35 a share today, this marks a 40% increase in FFO per share at a similar WTI oil benchmark price. This improvement reflects our initiatives to build our production through the acquisition of high-quality assets in the U.S. that deliver premium-priced light oil barrels and basins with multi-decade drilling inventories. We paid $44 million in dividends to our shareholders in the second quarter, and we invested $12 million to acquire undeveloped mineral title lands in the U.S. These land acquisitions are in the core activity areas of both the Midland and Delaware basins of the Permian, where operators are prioritizing development. Leveraging the ability to develop these lands with the most recent drilling and completion efficiencies, thus optimizing production performance and reserve recoveries, as we referred to earlier. Over 90% of the drilling permits on Freehold's Midland Basin lands this year have been on undeveloped acreage, and we expect to realize returns in the high teens, low 20s percentage range from these investments. We've continued to maintain the strength of our balance sheet with net debt of $271 million at the end of the second quarter, representing a 1.1 times trailing net debt to funds from operations. So with that, we're pleased to take your questions.