Freehold Royalties Q4 2023 Earnings Call Transcript

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February 29, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and thank you for joining us today. On the call with me with Freehold are Rob King, our COO and Dave Hendry, our CFO. 2023 was a strong year for Freehold. It really showcased the strengths of our unique North American portfolio, which consists of robust production base in Canada and a growing oil weighted position in the U. S.

Operator

Total production of 14,714 BOE a day in 2023 2 Boe a day. Growth in our U. S. Assets was driven by the Midland Basin with volumes up 25% over 2022. Our Canadian portfolio had no decline in production year over year.

Operator

2023 production in Canada was 9,612 BOE a day, driven by consistent operator activity. This was achieved in the absence any material acquisitions and really highlights the quality of our Canadian asset base. For 2024, we're expecting production in the range of 14,700 Boe to 15,700 Boe a day, implying approximately 3% growth at the midpoint over 2023. Revenue in 2023 was $315,000,000 and funds from operations was $240,000,000 both in line with expectations and funded our annual dividend of $163,000,000 or $1.08 per share. This resulted in a payout ratio of 68% for the full year.

Operator

We expect to continue to maintain our current dividend level, striking a balance between strong shareholder returns and retaining the ability to continue to fund business growth through reinvestment of excess free cash flow above the dividend. This strategy has allowed us to reduce our net debt by 27% in 2023 compared to year end 2022 and facilitate funding of the $115,000,000 in transactions that we sellers and we acquired high quality Permian mineral title and royalty assets in the Midland Basin in Texas and the Delaware Basin in New Mexico and Texas. Some of the highlights associated with the assets include, 2024 forecast average production of 600 BOE a day, increasing freeholds Permian production by approximately 30% and the company's U. S. Production by 12%.

Operator

These assets are 85% liquid weighted production. Of that, most of it is oil on a full basis, it's 65% oil weighted and that versus Freehold's U. S. Liquids weighting of 78% and the company's total liquids weighting of 64%, thus providing meaningful uplift to Freehold's realized price. With the assets, we see multiple years of future upside with greater than 2,000 gross development locations identified, increasing Freehold's total U.

Operator

S. Drilling inventory by 25%. The future development is expected to be underpinned by some of North America's top operators with the combined ExxonMobil and Pioneer Natural Resources expected to move into Freehold's top 5 payer list and represents greater than 25% of future gross locations within the company's U. S. Inventory.

Operator

Pro form a, these transactions are expected to double Freehold's Midland Basin activity with 1 in every 7 wells drilled in 2023 would have occurred on Freehold's land on this combined asset base. In total, 993 wells were drilled on our royalty lands in 2023. 95% of the wells are drilled targeted oil prospects in Canada and the U. S. Approximately 28% of gross wells on freehold royalty lands targeted prospects in Alberta, approximately 18% in Saskatchewan and almost half at 46% in Texas with a balanced spread across other regions.

Operator

We estimate that in 2023, approximately $8,000,000,000 in gross third party capital was spent on our lands, up from $6,000,000,000 in 2022. Spending was comprised of $7,000,000,000 about $35,000,000 net on our U. S. Royalty assets and about $1,000,000,000 or $34,000,000 Backstopped by the quality of our asset base, we delivered record level of leasing on our Canadian lands in 2023 with 122 leases signed. Approximately 10% of these leases have already had well spud and we expect to see continued momentum on the drilling on these lands through 2024.

Operator

The majority of these 122 new leases are made up of Mississippian light oil targets in Southeast Saskatchewan, representing about 51% of the leases and Manville heavy oil targets in Alberta, representing about 28% of the leases. We continue to see a revitalization of Southeast Saskatchewan light oil and Manville heavy oil with several well capitalized growth oriented junior focusing on these areas. Multilateral drilling has been a focus by operators in the heavy oil areas to improve both well productivity and ultimate

Speaker 1

oil recovery.

Operator

With our year end results and our forward look, we're very excited about the position of strength we have in both the quality and the diversity of our portfolio. Looking forward, we continue to expect robust performance from our assets generating significant funds flow that will underpin our sustainable dividend, will maintain our balance sheet strength and fund further growth opportunities on both sides of the border. We will now take the time to answer any questions that investors may have.

Speaker 2

Thank you. We will now take questions from the telephone lines. And the first question is from Travis Wood from National Bank Financial. Please go ahead.

Speaker 1

Yes. Good morning, guys. David, you touched on it

Speaker 3

a bit in your opening remarks with respect to some M and A activity and Exxon moving up the payee list. With a lot of the M and A activity in the U. Maybe as important the lands that have been acquired kind of over the last year or so? Has there been a shift in how you see activity picking up with some of the deals more recently in the U. S?

Operator

Yes. Good morning, Travis. I'm going to turn that over to Rob just to answer that. He's been pretty active in looking at that as part of how we assess these opportunities. So Rob is

Speaker 3

going to handle that. Sure.

Speaker 1

Hi, Travis. So yes, it certainly has been a key focus for us, particularly in the Permian. Just to kind of put some numbers around what we sort of look at the Midland Basin, which is our most of our Permian production is concentrated in. That basin has become a lot more consolidated between the Exxon Pioneer combination and the Diamondback Endeavor combination. Those two operators are now more than 50% of Midland production.

Speaker 1

So it certainly is a lot more concentration under handful of names. I think that's one of the things that got us just given how much was concentrated under Pioneer in those two transactions. Now the combination of Exxon and Pioneer is both 2,000 of our development inventory locations, which is about 45% of our Permian inventories underneath the combined Pioneer Exxon. And I think what we've also seen, this is just from Exxon's public disclosure where they talk about how the Pioneer acreage is some of the highest quality in the Midland Basin. And relative to what Pioneer's oil growth forecasts were in the low single digit rates.

Speaker 1

Exxon has been talking about in the 8% to 12% annual Permian growth over the next 4 years, which we anticipate a meaningful amount coming from the Pioneer acreage.

Speaker 3

Okay. That's great color. Thanks for that, Rob. That's all for me.

Speaker 2

Thank you. The next question is from Luke Davis from RBC. Please go ahead.

Speaker 3

Just with respect to the most recent Permian acquisitions, can you remind me what the impacts they were expected to have on 2024 volumes? And if any of your kind of initial assumptions or expectations have changed since closing?

Speaker 1

Yes. Hi, Luke. It's Rob here again. So in terms of we expect the 2 transactions to add about 600 BOE a day to our 2024 production. So we're sort of expecting in that 3% growth range for our existing U.

Speaker 1

S. Assets plus the 600 BOE a day from our most recent acquisitions. I think one of things that really gets us again excited about that deal is just we've added about 30% to our acreage footprint with those two transactions with really modest overlap with the existing Permian Midland footprint that we have. So we're really kind of getting more of that what we like to call wall to wall carpeting across the Midland Basin. In January at least, we are capturing 1 in 5 of the rig activity in the Midland Basin, kind of up from that 1 in 7 number that Dave mentioned in his remarks in 2023.

Speaker 3

And historically, you've provided some context just in terms of the amount of deals that you've evaluated. Just curious if you can give us a sense for how much is currently available, what you guys have been looking at and sort of contextualize that within the last year or 2?

Speaker 1

Sure. In the Q4, we still looked at about 20 deals coming across our plate about $1,500,000,000 worth of value that's sort of on trend for the over 100 deals that came across that we actually evaluated. Saw a lot more than that, but those are the ones that we actually looked at. Most of those are still on the U. S.

Speaker 1

Side, 70% focused on the U. S. Front. We probably took our gas foot off and accelerate a little bit, just given we got traction on these two deals in late October, November time frame. So sort of turned our attention to evaluating these and getting these 2 deals across the finish line.

Speaker 1

2024 looks strong again. We probably we're down in at the NAIT conference in Houston a few weeks back and just the amount of conversations and opportunities that have come out over the last 3 weeks since Nate has been pretty impressive.

Speaker 3

That's helpful. Thank you.

Speaker 2

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

Speaker 4

Hey guys, good morning and thank you for taking my question here. I'm just kind of wondering maybe shifting back and this will be more Canadian oriented. But in terms of the leasing activity, I think that you guys had a record year in 2023 here. You spoke a little bit to it in the preamble there. Just wondering if you can sort of unpack a little bit more granularity in terms of what the key trends you're seeing?

Speaker 4

And then I think you spoke to some of the multilateral development. In terms of your inventory of available lands for leasing, sort of where you sit in that life cycle and where the land rush is maybe inning wise?

Speaker 1

Yes. Rob here, Patrick. So the little more color on it, as Dave mentioned, 122 leases, 41 counterparties, the vast majority of it was concentrated in 2 plays, Southeast Saskatchewan, Mississippian and Manville Heavy Oil in Eastern Alberta. It's where, gosh, 80 plus percent of the leasing was. Duvernay would be the next largest amount, but that'd be a lot smaller than those other 2.

Speaker 1

The nature of the companies taking the leases are sort of on that privatejunior E and P front. And they've already been active on probably importantly translating that leasing into drilling. We've already seen about 15 of those 122 leases having spuds on them. So that's encouraging. For us, we are anticipating a rotation in our Canadian drilling results from maybe less Viking, but more Southeast Saskatchewan and more Mandeville heavy oil.

Speaker 1

In terms of what inning that we're at, I mean, I think there's a lot more opportunity set that we see in both Southeast Saskatchewan and Mandeville Heavy in particular. So I'd say early innings would be my comment.

Operator

I would just add to that a little bit, Patrick, that we talked about the multilateral drilling Saskatchewan a little bit with a number of operators. Looking at the Bakken with the multilateral, see some licensing in Southwest Saskatchewan now in that Shaunavon area. So I think as this multilateral technology, that's where I think we're in some of the earliest innings where we can unlock value. And so you're watching that closely. And as Rob referenced, we have lots opportunities that we see on our land base that will really benefit from some of that work that's being tested.

Speaker 4

And so I guess the follow-up question for me would be in terms of your confidence in the productivity and the results you're going to see and obviously the challenge with providing guidance on the production side, you don't have full control over the drill bit. You're at the behest of some of these producers that have leased off you. I'm just wondering what sort of risking and sort of parameters or outlook you have in terms of when you can have more confidence in providing some guidance to potential growth there or how that kind of evolves over time here in terms of a lag between lease to conversion to forward outlook for production there?

Speaker 1

Yes. I mean, some of those 122 leases, about 10% of those, we actually had drilling obligations associated with those. So you get some perspective on it. We've kept the average term on those leases to 2 years. So it does help in terms of incentivizing the driller to either get after it or the land comes back to us and we get to do it all over again.

Speaker 1

You're right, coming out of spring breakup is really when we'll be able to have a much better feel for sort of how the operators are feeling with some recent softness, particularly on the gas side, but also on the oil side as well.

Operator

Okay. Thank you.

Speaker 2

Thank you. The next question is from Aaron Bilkoski from TD Cowen.

Speaker 5

So I wanted to follow-up a little bit on Luke and Patrick's questions. You talked about U. S. Assets growing 3% to 4% before the acquired volumes. How do you see the Canadian production trending throughout the year?

Speaker 5

And I guess the follow-up question to that is how much of that opportunity you just spoke about is baked into your 2024 guidance already?

Speaker 1

Aaron, Rob here. So in terms of our Canadian production, I think we are there's sort of 2 things that are causing a what I would sort of call a modest downtick on the Canadian volumes. 1, there's probably a lot more detail than we need to give, but we'll give it anyways. 1, we have a production volume royalty agreement with Tourmaline that is contractually declining by about 100 BOEs a day. This is natural gas volume.

Speaker 1

So the revenue impact is like less than 0.5 percentage point. So it's very marginal impact on what matters the most being cash flow, but does have a volume impact and that's something that we're just needing to manage. The other I think is that we just talked about it with Patrick in terms of the change the transition that we're seeing where there's going to be in our portfolio less Viking drilling and more Southeast Saskatchewan, more Manville heavy oil drilling. So those the lease conversion that we're expecting is baked into our 24 numbers. It's in the range that we provided.

Speaker 1

But those sort of two factors in the Canadian side, it's probably going to be where we believe our Canadian volumes are going to be flat to like slightly 1 ish percent down.

Operator

And then maybe just a little bit more color there. Our Canadian portfolio has been 9,600 bb a day for the last 3 years, I think 9,620. And with that, it's only with modest early stage investment in the Clearwater. And so when we look at that, even though that 95% of our drilling activity is oil focused, those gas wells do have more of a BOE impact, although to Rob's point, not much of a fund flow or cash flow impact for our business. And so when we look at Canada, we're just taking a little bit more conservative perspective given the weakness in gas pricing.

Operator

And but again, it's got a pretty strong history of delivering. And as we look at those leases that we've got signed, we look at the activity that we're seeing, That's kind of why we're feeling, yes, it's probably going to be another year of 4th year in a row of plus or minus that same 9,600 BOE a day with the contractual step down in that PVR of 100 BOE a day of gas. But we think that we're going to make that up as we go throughout the year, but those are later in year volumes that will come out of the drilling on the new lands or the leased lands.

Speaker 5

Thanks. Can I ask another question? In last year's annual report, you mentioned Freehold was advancing the technical due diligence on several modest sized development stage opportunities, including potash. I guess, what did you learn from this process? And are you still looking at these types of non energy royalty structures?

Operator

Yes. We're still looking at them, Aaron. We've had I'll call some really small level of success on the potash. You're really acquiring some additional mineral title on that potash side. To date, it hasn't been a needle mover.

Operator

It's good business. Some of the other opportunities that we're digging into a little bit more on a due diligence side have fallen away. And some of it with regulatory concerns that we've stepped away. And so we're still looking at a lot of stuff, but a cautious approach. We do recognize that when you look at the returns that we're getting on the U.

Operator

S. Investments, you're really since we really stepped into the U. S, we've already recovered half of that investment through revenue and it contributed $131,000,000 of revenue last year and 5,100 barrels a day. We've got to be pretty careful when we evaluate an opportunity outside of oil and gas that it can compete for those returns or in the long term really make a much better sustainable company. So we're looking at a lot of stuff, but taking a cautious approach.

Operator

We don't want to get ahead of ourselves, knowing what we can invest in our base business right now.

Speaker 5

Thanks for the answer. I appreciate that.

Speaker 2

Thank you. And the next question is from Christopher Jones from Haywood Securities. Please go ahead.

Speaker 6

Hey, thanks for taking my question. Just coming back to the M and A team. Freehold has been active in acquiring royalty assets in the U. S, but what is your view on corporate consolidation within the mineral space in the U. S?

Speaker 6

Do you think it will play catch up with the E and P consolidation that the market has seen? And what if any opportunities would this create for Freehold? And then maybe just remind us of some of the different dynamics in the U. S. Versus Canada as it relates to potential acquisitions?

Speaker 6

Thank you.

Operator

What was the last part of your question there, Chris?

Speaker 6

Yes. Just maybe remind us of some of the different dynamics in the U. S. Versus Canada and kind of how that relates to potential acquisition opportunities?

Operator

Yes. I think that from the consolidation opportunities, we did see a little bit of that with Sidio and Brigham as early last year on the royalty front. We don't get a sense that there's a lot of discussion there and nor do we view that it makes a lot of sense for us at this point when you look at a U. S. Shareholder base Canada and U.

Operator

S. Shareholders in U. S. Consolidation. At this point, we're not looking at that as an opportunity.

Operator

We see more opportunity just to continue to add land like we did with this December transactions that closed in January. We can just

Speaker 1

kind of got a bit

Operator

of a sweet spot to identify that. We kind of got a bit of a sweet spot identified that we're focusing on. And as Rob referenced, our goal ideally in acquisition work would be to have wall to wall carpeting or full coverage in the sweet spot so that any drilling activity that would happen in those areas would be on land that we have a royalty interest in. So if we think broader acquisition strategy, that's how we're thinking about it right now. So it's much more bespoke type acquisitions that really fit specific criterias in building out sweet spots in the basins that we have identified.

Speaker 1

And Chris, if you have the big differences between Canada and the U. S, I mean, the U. S. In the areas that we care about really being Texas, that's effectively 100% privately owned mineral title as opposed to Canada, which the vast majority is held by the provincial crown governments. So the opportunity set, not only do you sort of have like in a Midland Basin where there's almost 5,000,000 barrels a day of oil production, you also have 100% mineral title that's available.

Speaker 1

Multiply those 2 together, you just have a significant opportunity set. To kind of put that in context, the average mineral title royalty in Texas is about 25%. Our average net royalty interest in Texas is 0.5%. So even on the lands that we have, there's another 24.5% interest that we could continue to add. So that's a bit of why the opportunity set is as big as it is in the U.

Speaker 1

S. And it's just so even though there's half a dozen of the public companies, they control about 2% of the overall value of mineral title that's available in the U. S.

Speaker 6

Great. Thank you for that.

Speaker 2

Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. Spyker.

Operator

All right. Thank you everybody for participating today. Good active dialogue and we appreciate the questions and we look forward to catching up with everybody in May on our Q1 results. Thank you.

Speaker 2

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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Earnings Conference Call
Freehold Royalties Q4 2023
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