Freehold Royalties Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 7 speakers on the call.

Operator

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 Spyker. Please go ahead, Mr. Spiker.

Speaker 1

Good morning, and thank you for joining us today. On the call from Freehold David Henry, our CFO and Rob King, our COO. We're off to a good start for 2023 With operational momentum carrying over from a record year in 2022. Production of 14,724 BOE per day It was up 8% over the Q1 of 2022 and in line with our expectations. Aviation production of 9,822 BOE per day was modestly up over the previous quarter and was the highest quarterly average In Q1 2020, the resiliency of our Canadian production is a testament to the quality of our land We've only made minor early stage investments over the past 3 years with our team primarily focused on new developments, Leasing and optimization efforts on our Canadian acreage.

Speaker 1

Production from our U. S. Assets averaged approximately 4,900 BOE During the quarter, also in line with expectations. Overall, Q1 production was slightly lower than the previous quarter in the U. S.

Speaker 1

As the completion schedules of some of our larger payers resulted in a significant number of new wells being brought on production In the Q4 of 2022 in both the Eagle Ford and Midland basins. Declines from the significant flush production Associated with these Q4 new well starts are reflected in our Q1 numbers. On the drilling side, in Q1 2023, we had 349 gross wells drilled, up 19% over the previous quarter And up 43% over Q1 2022. In Canada, 175 growth wells were drilled on our land this quarter, Up 22% from a year ago and up 28% over last quarter. 6.9 net wells represent the 2nd Most active Q1 of drilling activity since 2010.

Speaker 1

Oil weighted drilling in the Viking, Cardium and Clearwater led Canadian activity. The turnover of assets in Southern Saskatchewan from larger operators to smaller companies This is resulting in increased activity as a number of these new smaller private and public operators are targeting more ambitious growth objectives than predecessor operators have in recent years. In addition, the application of open hole multilateral drilling techniques, Along with improving heavy oil pricing has resulted in increased activity in the Sparky and Mandeville plays in the broader Lloydminster Oil Fairway. In the U. S, 174 gross wells were drilled in the Q1, up 12% over the previous quarter, An increase of 74% from a year ago.

Speaker 1

As industry activity remained robust, an acreage was added to our portfolio in 2022. In total, 0.8 net wells were drilled in Q1 on our U. S. Land with a typical U. S.

Speaker 1

Well having 10 times the initial productivity of our average Canadian well. Drilling continues to be focused on light oil prospects in the Eagle Ford and Permian Basins. While total rigs in North America were in decline for much of the quarter, the rig count on our lands remained robust with average rigs for Q1 2023 Increasing over Q4. With spring breakup occurring in Canada, activity is expected to remain strong A benefit in the U. S, a benefit of our North American land base.

Speaker 1

Looking forward, leasing activity has been very active in 2023 Year to date with 44 leases executed across 16 counterparties, which compares to 83 This is executed in the full year 2022. We continue to benefit from the premium pricing of our U. S. Assets With U. S.

Speaker 1

Oil realized pricing per barrel 26 percent higher than Canadian pricing. Our Q1 revenue of $77,000,000 and funds from operations of $59,000,000 We remain in line with expectations, and we reiterate our production guidance of 14,500 The 15,500 BOE per day for 2023 and funds from operations of $250,000,000 $280,000,000 based on an average oil price of $80 per barrel WTI. With the current wildfire activity in Alberta and BC, we do expect some impact on our Q2 production numbers, Although, it's too early to tell at this point how that may play out. Our dividend payout for the quarter totaled 69%. Royalties remain a high margin asset class, enabling Freehold the ability to maintain a current dividend level Even if the payout ratio is above our 60% guidance range for multiple quarters.

Speaker 1

After completing approximately $90,000,000 in acquisitions in 2022, we've been able to maintain a conservative balance sheet, exiting the quarter at 4.4 times net debt to trailing funds from operations. This considerable financial flexibility allows Freehold the opportunity to We continue to pursue value enhancing acquisitions on both sides of the border and also contribute to dividend sustainability. Looking forward, our portfolio remains well positioned to deliver value for our shareholders. We continue to reiterate our asset base has improved considerably through our North American expansion with ownership in broader range of quality oil weighted plays, a deeper roster of well financed top tier payers, Broader exposure to commodity pricing and sales points and overall scale improvements ensuring sustainability for our shareholders. As commodity prices have come under some recent weakness, we highlight the strong margins associated with royalties as an asset class, Not subject to the margin compression we have seen in other business models associated with recent inflationary pressures.

Speaker 1

We'd like to now turn the call over for questions.

Operator

Thank you. We will now take questions from the telephone lines. Please lift your handset before making your selection. Thank you for your patience. Thank you.

Operator

The first question is from Luke Davis from RBC. Please go ahead. Your line is open.

Speaker 1

Hey, good morning, guys. Your U. S. Volumes were

Speaker 2

a little bit lighter than what I would have expected just given the Q4 run rate. So hoping that you can Frame out what's implied in your guidance on a quarterly basis between Canada and the U. S?

Speaker 3

Sure. Hi, Luke, it's Rob here. In terms of why maybe the volumes came Down between Q4 and Q1, that was, at least from our perspective, very much in line with what our expectations were. Q4, we actually saw a number of both a number of gross wells and a number of higher net wells in our Eagle Ford assets come on, Which was great to get that flush production, but they obviously declined at the rates that they do. And so that sort of fed Into what we thought with Q1 would be a bit less volume relative to Q4.

Speaker 3

It's kind of that sawtooth We sort of talked about where we have these significant volumes that come on both the combination of the high productivity of a number of the wells, but also Just the size of some of these pads that we're observing in our assets. As an example, In the Permian in Q4, late Q4, we had a 19 well pad of CrownQuest come On our Midland Basin assets. So when volumes of that amount kind of come on, you get this great flush production that does Decline thereafter. So that's kind of, as I said, sort of in line with our expectations. I mean, I think there's probably on the Eagle Ford side.

Speaker 3

We did see some weather related impacts. I think it's not quite the freeze off that we saw in Canada In December timeframe, but we do know talking to a couple of the Eagle Ford Producers that they had Some production challenges in January, February time frame with colder weather in Texas.

Speaker 2

That's helpful. Thanks. And do you have a sense for how you expect, specifically the U. S. Volumes to shape up through the balance of the year?

Speaker 3

Yes. I mean, it will be generally sort of flat to modestly up over the course of the balance of this year. I think, again, we're expecting That sawtooth thing that we talked about where there's going to be some inter quarter volatility, but the general trend will be flat.

Speaker 2

Got you. Just one more for me related to Alberta wildfires. I know you provided some commentary in the release. Still pretty early, but sounds like a lot of those issues have largely been resolved. So I imagine limited impacts to Your production volumes and guidance, but any incremental detail that you can provide there?

Speaker 3

I don't know if we have a whole lot of incremental detail there. The The other one I can comment on is that it's probably more of our gas volumes, natural gas volumes that have been impacted so So far, so while it may have a I'm not sure if meaningful is the right word, but an impact from a volume perspective, Our expectation is it will have a more muted cash flow perspective.

Speaker 1

That's great. Thanks for that.

Operator

Thank you. The next question is from Patrick O'Rourke from ATB Capital Markets. Please go ahead. Your line is open.

Speaker 4

Hey, good morning guys and thanks for taking my question. Maybe just to add sort of Another angle to the questions from Luke there with respect to U. S. Volumes. I know they're fairly chunky here or sawtooth as you've articulated.

Speaker 4

The high level of Spot activity, I think it was 174 gross wells in Q1. How does that sort of compare to what your Expectations would have been for the quarter and sort of what are the sort of early cues that you're seeing for Q2 and Q3 in terms of planning on Upfront.

Speaker 3

Yes. I mean, I would say in terms of the spot activity, the 174 gross wells, In line with expectations, gross activity has sort of, as I say, continued to be in line. What we have seen is sort of the net wells. We've had some lower NRI, net royalty interest wells that have been drilled. So we'll see how that impacts The portfolio over the next 6 or 9 months or so.

Speaker 3

As you know, that often can be the lag factor that we see On the U. S, in terms of drilling in Q1 leads to Q3, Q4 production.

Speaker 4

Yes, we certainly saw that in 2022. Maybe just to shift gears a little bit here. I thought you guys did a really good Job in terms of contextualizing the opportunity in the royalty market yesterday at the AGM when you discussed sort of it being a $1,000,000,000,000 market. Just wondering if you could give us sort of with all the moving parts, with interest rates, with commodity, sort of your outlook in terms of M and A? And then with The Permian and some of these U.

Speaker 4

S. Resource basins reaching a more mature phase in terms of type curves and inventory development, how You're sort of taking that into your risking of your approach to these acquisitions right now.

Speaker 3

Yes. On the first one, in terms The level of activity, I think our Q1 deal flow has been pretty consistent with what we saw in 2022 and in 2021. When I look at the number of confidentiality agreements that we signed on the U. S. So far, it's basically in line with What we signed in 2022 2021 at the same time period.

Speaker 3

So from the activity, it feels the same, but it does feel slower. I think the other part that we are seeing is, it's always a competitive space, but it's one with the backward David's curve the way that we are, the bid ask spread has probably widened a bit, and we've certainly seen several of our competitors Willing to accept lower returns than what Freehold is willing to take. So we're still holding that quality bar really high. I think the encouraging sign is there does feel to still be continued deal flow and we'll sort of see How that plays out for the balance of this year. In terms of the growth expectations or how we're sort of approaching I think the reality is capital discipline of the producers, both public and private, largely certainly does continue.

Speaker 3

And that's sort of factoring into how we're looking at opportunities. And so maintaining that Growth discipline that we've seen our royalty payers largely be taking.

Speaker 4

Okay. Thank you very much.

Operator

Thank you. The next question is from Chris Jones from Haywood Securities. Please go ahead. Your line is open.

Speaker 5

Hey guys, thanks for taking my question. Focusing on the bigger picture U. S. Activity, you own a lot of mineral rights under majors. Just curious what you're Seeing in terms of activity cadence between majors and privates independent types, I think it's understood that privates drove much of the activity through 2022, but the offset to that is perhaps they're now generally have less quality acreage and more exposed Price volatility as a result.

Speaker 5

So just curious on what you're observing from an activity perspective there.

Speaker 3

Yes. I mean, we've 70% of our U. S. Volumes by production are weighted towards the investment grade public names. We've really sort of seen for the most part, they've had a fairly steady drilling cadence and bringing wells On online, sort of in that flat to modest growth that we've seen with them, I think where we've had some positive surprises has been On the private side, with the Crown West as an example, I mentioned that 'nineteen well pad That they brought on in late 'twenty two.

Speaker 3

That was exciting to see And then High Peak in Howard County has continued to be fairly active. They've kind of pulled back their capital program a little bit, but They've still been active on our lands.

Speaker 5

Okay, great. And then just to add some of the M and A I think you touched on this with your prior answer. But some of the commentary coming out of the quarter from some of your U. S. Royalty peers is that The private mineral market deals are going for quite lofty valuations.

Speaker 5

I think one particular company noted that it was losing deals by upwards of about 70 Is that a trend you were seeing as well, kind of that overpricing in the market?

Speaker 3

Yes. I mean, we're of the 30 deals that we looked at in Q1, we evaluated 20, kind of equally split in Canada and the We only bid on 3 of those opportunities and lost them all. I don't know if we lost necessarily by that 20% that one of our peers sort of talked about, but we certainly it was a meaningful difference.

Speaker 5

Okay. Thank you.

Operator

Thank you. The next question is from Matthew Weekes from IA Capital Markets. Please go ahead. Your line is open.

Speaker 6

Good morning. Thanks for taking my question. Just on the Alternatives and diversified royalty team and some of the activity going on there. There were kind of some disclosures this quarter. I was just wondering if you could Touch on that a little bit what kind of opportunities you're seeing there.

Speaker 6

Is it kind of picking up? And are these Kind of in advanced stages at this point, do you think we could expect something kind of in the next in the short term, the next 12 months on that front?

Speaker 1

Yes, Matthew. Dave Spyker here to answer that. We've certainly seen a lot more You'll flow in that space that kind of fits our kind of the parameters that we're looking for. And for the most part, really focusing on The mineral side, so really pushing our expertise that we have in We resource plays on the oil and gas side and see if we can leverage that into the So, Kennip Kal is our mineral space. So, I think that is a number of things that we're working pretty hard on and with some success There, you were still view that we could do a transaction this year.

Speaker 1

I would say It's likely a sub $50,000,000 deal, maybe $25,000,000 to $50,000,000 if you want to kind of think of it that way. But the focus is really on balance of minerals and that it could be anything from helium, lithium to A number of other potash that you will continue to be active in, those types of opportunity sets Versus I think when we first got into that, we thought wind or solar, but those types of opportunities don't compete for capital The oil and gas space, but leveraging our balance of minerals expertise, we think that those can drive some pretty attractive returns.

Speaker 6

Okay. Thank you. Appreciate the commentary on that. I'll turn it back. Thanks.

Operator

Thank you. There are no further questions registered. At this time, I'll turn the call back to Mr. Spyker.

Speaker 1

All right. Thanks everybody for participating today and for the questions. And we look forward to catching up with everybody again at the end of Q2. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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Earnings Conference Call
Freehold Royalties Q1 2023
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