Freehold Royalties Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 7, 2024

There are 3 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Annual Meeting of Shareholders of Freehold Royalties Limited. I appreciate the good turnout we're getting today.

Operator

I'm sure this beautiful Calgary spring day that the golf course was calling, but you made a much better decision. So let me thank you for attending today's 2024 Annual Meeting. My name is Marvin Romanow and I'm the Chairman of Freehold's Board of Directors. For the past 3 to 4 years, your Board is focused on improving the talent level and execution capacity at the senior management level. The capability and success of this transformation and the strength of our team shows in the results we have delivered for shareholders.

Operator

David Spyker, our CEO, was appointed 3.5 years ago and we'll discuss these results in a few minutes. The Board has also turned its attention to overseeing the expansion of our business into the resource rich oil and gas basins of Texas. This expansion is making our company better in numerous dimensions and most importantly in providing multiple years of drilling inventory and associated reserves that complement our Canadian asset base. We have also kept a keen eye on both Board and corporate governance. We have taken steps to reduce our cyber risk.

Operator

We have improved our governance scores provided by the key external rating agencies that rate us. And through this, we have also improved our environmental and social governance performance. These are relatively new areas of corporate ranking and we score well on both of these fronts. Now good corporate governance can't guarantee strong operating and financial results. Your Board takes a practical and applied approach to governance, while primarily focusing on delivering the business results that investors expect and deserve.

Operator

Today's meeting marks the 28th Annual Meeting for Freehold. Through the volatility of our industry, we take pride in the consistent returns Freehold has provided our investors over its history. We have paid a monthly dividend for the past 28 years and we haven't missed a month, a rare accomplishment in our industry. I will now move on to the more formal part of the meeting, but before I do that, I would like to advise you that this meeting is being webcast and all the references in my comments and in the slides are Canadian dollars unless otherwise noticed. For those attending the AGM for the first time or for those new to freehold, I would like you to introduce our executive team and I ask each of you to stand when you're introduced.

Operator

David Spyker, President and CEO Rob King, Chief Operating Officer David Henry, Vice President of Finance and CFO Lisa Farstad, Vice President, Corporate Services Ian Hanke, Vice President, Diversified Royalties and Susan Nagy, Vice President, Business Development. For the purpose of the meeting today, voting on all matters except for termination of the meeting will be conducted by ballot. I would also like to introduce standing for election today all of our directors. Please stand as your name is called, Yuri Bujot. We're not going by height.

Operator

We're going by alphabetical order. Maureen Howe, Douglas Kaye, Kimberly Lynch Proctor, Valerie Mitchell, myself, Marvin Romano Matthew Raw, related to the goalie, but you can talk to him later about that David Spiker, who is also President and CEO of Freehold and Aidan Walsh. I would also like to introduce the representatives from KPMG, our auditors, Heather Steinle, right at the back and Lindsay Fone, right next. I would like to recognize Sylvia Barnes who is not standing for reelection to the board at this meeting. We thank Sylvia for the many contributions she has made to the company.

Operator

Peter Harrison will also not be standing for reelection and will retire from Freehold's Board of Directors. Mister Harrison is a founder of Freehold and has been a Freehold Board member since its initial public offering in 1996. There are very few people in town here who get to tag founder besides their name. And we do not hold it against Peter that he still resides in Montreal. We think he brings enormous capability and has done a wonderful job for the company.

Operator

He has been instrumental in the growth and success of our company and we have to thank him and want to thank him for everything that he has contributed to Freehold over the past 28 years for his very hard work, his wisdom and his leadership throughout his tenure on the Board. Peter, I will miss your steady, positive and practical approach to managing businesses. We wish you all the best in your retirement. Maybe he'll relocate to Calgary at his retirement. He's been here enough times.

Operator

Standing for election today for the first time are Kim Lynch Proctor and Matthew Roy. Ms. Lynch Proctor is an independent businesswoman and an experienced tax lawyer, accountant and executive with over 25 years of industry experience. Her prior roles include Chief Financial Officer and General Counselor of Kern Partners Limited, an energy focused private equity firm and a practicing lawyer and chartered professional accountant with Faleski Flynn, Bennett Jones and Deloitte. Ms.

Operator

Lynch Proctor holds both a Bachelor of Commerce and a Bachelor of Law Degrees from the University of Calgary, a Master of Law Degrees from New York University and is also a chartered professional accountant. She holds an ICD designation from the Institute of Corporate Directors. Welcome. Mr. Roy is a Managing Director of Real Assets at CN Investment Division.

Operator

I'm sure that I have not yet met his counterpart who is managing unreal assets at the pension fund, but you can ask Matthew about that later. He has over 20 years of experience in capital markets, including 16 years at the CN Investment Division. And he's recently just taken on more responsibilities, including ourselves and a few other things. So we look forward to his participation on our Board. He has been attending meetings as a guest for the last little while.

Operator

So he's not going to get any benefit of training wheels. We expect him to contribute from day 1. Mr. Hua holds a bachelor and master's degree in finance from the University of Sherbrooke and he is a chartered financial analyst. Kim and Mathieu will be key contributors to the growth of Freehold for many years to come and we appreciate them standing for election today.

Operator

And we are a company with a lot of stability. Just yesterday, I learned that in our 28 year history, we've only had 4 CEOs and 3 Chairman. And I think that is remarkable amount of stability and I think it's part of what's delivered the performance that you're going to see Dave talk about. Okay. Now we move to the start of the formal part of the meeting.

Operator

And to make best use of our time, we have pre arranged with certain shareholders attending today to move and to second the resolutions, which we'll consider in one motion today and which are set out in the notice of meeting. Other than the election of directors, all matters will be considered and will be put to a vote by a single motion. Shareholders will though be able to vote on each of the matters separately by ballot. If you have already sent in your proxy, your vote has already been counted and you do not need to vote at this meeting. We ask that questions during this formal part of the meeting refer only to the matters set out in the notice of meeting.

Operator

Following this formal part of the meeting after we adjourn it, David Spyker will be making a presentation including with very colorful slides to update you on our business results and our strategies. He and I will be happy to answer any additional questions at that time. The meeting will now come to order. I am the Chairman of Freehold and will act as Chairman of the meeting. Brianna Guenter at the far right there, my right and, representatives of the Computershare Trust Company of Canada will act as scrutineers.

Operator

I have received this warrant affidavit as to the meeting of notice of Annual Meeting of Shareholders of the mailing of the notice of annual meeting of shareholders, the information circular, the instrument of proxy and the annual report to shareholders. I directed this sworn affidavit together with copies of the documents mailed to the shareholders be kept by the secretary with the minutes of this meeting. A quorum for a meeting of shareholders of the corporation is 25% or greater of the outstanding common shares present in person or by proxy. There is a quorum today and in excess of 49 percent of the shares have been voted by proxy. The interim scrutineers report indicates that a majority of shares have voted and have voted in favour of each of the matters to be considered at today's meeting, including the election of each of the director nominees.

Operator

I now declare the meeting to be regularly called and properly constituted for the transaction of business. We will now move to voting. We will conduct each vote by way of ballot other than termination of the meeting. I understand that the scrutineers have collected all the ballots and if you have a ballot, please provide it to the scrutineers now. The annual financial report to shareholders, which includes the financial statements of the corporation for the fiscal year ended December 31, 2023, and the auditor's report for the same period was mailed to those shareholders who requested it.

Operator

There are extra copies of the report available here today. They are also available on Freehold's website as well as on SEDAR Plus website. As noted earlier, to make best use of our time, I will be asking for a motion to consider and if thought appropriate, approve certain of the remaining items of business set forth in Treehold's notice of annual meeting and management information circular. However, before doing so, I will speak to the nomination and election of the directors of Freehold. According to the governance agreement between Freehold and Rife Resources, Rife is a wholly owned subsidiary of CN.

Operator

Riffe has the right to nominate 2 individuals for election as directors. Rife has nominated Mathieu Roy and David Spyker for election as directors of the corporation. In accordance with this government agreement and the advanced notice by law of Freehold, the only individuals entitled to be nominated as directors at this meeting are the persons named as nominees in the information circular. Therefore, as directed by the Board and in accordance with the notice of meeting and information circular, these persons, Gary Bujold, Maureen Howe, Douglas Kaye, Kimberly Lynch Proctor, Valerie Mitchell, Marvin Nominal, Matthew Roy, David Spyker, and Aidan Walsh are hereby nominated as directors at Freehold or directors of Freehold to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Business Corporations Act and the bylaws of Freehold? Is there any discussion or question from any registered shareholder or proxy

Speaker 1

holder?

Operator

The rule of thumb I use at meetings when I ask questions like this is 8 seconds and 8 seconds can be a long time. Okay. We've got our 8 seconds in. I declare those nominated as duly elected directors of freehold. Particulars of the votes cast on the election of directors will be available via news release after the meeting.

Operator

I will now ask for a motion to approve each of the remaining items of business set forth in Freehold's notice of annual meeting and management information circular.

Speaker 2

Mr. Chairman, I move that the firm of KPMG LLP Chartered Accountants be appointed auditors of Freehold until the next annual meeting or until their successors are appointed and that the resolution set forth in Freehold's information circular regarding Freehold's approach to executive compensation be approved and adopted.

Operator

Mr. Chairman, I second the motion. Is there any discussion or questions from any registered shareholder or proxy holder? I have been advised by the scrutineers that each of the matters considered today have been approved by the requisite majorities. I direct that the scrutineers report be an X to the minutes of this meeting as a schedule.

Operator

As mentioned earlier, the results of the votes will be made available in a news release to be issued by freehold and in a report of voting results to be posted on CEDAR Plus. Unless there are any questions of the floor, I would entertain a motion that the meeting be terminated. Give me a few seconds, Dave.

Speaker 2

Mr. Chairman, I move this meeting be terminated.

Operator

All in favor, please raise your hand. Any contrary? I declare the formal portion of this meeting terminated. David Spyker will now provide an update on Freehold's activities. But before I turn the meeting over to Mr.

Operator

Spyker, does anyone have any additional questions at this time? David, the floor is yours.

Speaker 1

Thank you, Marvin. So over the past 3 to 4 years, we've purposely built Freehold into a North American energy royalty company. We've done that by stepping out from Canada where we've been established since 1996 and moved ourselves into some of the most prolific and economic basins in the U. S, biggest positions being in Texas in both the Delaware, Midland and Eagle Ford Basins. With that, we've been able to deliver production per share growth to our shareholders and we've really been focused on moving our liquids waiting up.

Speaker 1

So the bulk of our production is going to be oil and NGL, which would make up about 64% of our revenue. A couple of the reasons that we're really appealing of the U. S. Is that we get quite a bit premium pricing. So overall, our U.

Speaker 1

S. Portfolio drives about 47% premium to what we get in Canada And on an oil basis, it's about a 28% higher oil price that we get and that's just due to proximity to markets. So core to our business is providing our shareholders with a high quality sustainable dividend. And we've had a 12% average return since our IPO in 1996. And that 12% has outperformed the S and P 500, the TSX Composite Index and the TSX Energy Index.

Speaker 1

And we believe that the nature of our business being a royalty that we can be very sustainable beyond commodity prices much lower than where we are today. So if we look at our industry peers, we're at top tier, but we think because that we don't have any capital costs in our business, any operating costs in our business that dividend where we're at right now about a 7.5% yield is very sustainable. We've always paid a dividend as Marvin mentioned. This past year, we paid $160,000,000 out to our shareholders in the form of a dividend. And over the lifetime of the company, we paid out $2,100,000,000 worth.

Speaker 1

The extra money over and above the dividend, we've been really focused on investing into the portfolio. And you can see that on the return on capital employed with our we've continually outpaced our royalty peers in how we deploy that capital and build our business. So, it's patient investment and it's very strategic in basins that we think are going to continue to attract capital. We wanted to do today is to spend a little bit of time talking about the U. S.

Speaker 1

What we've learned since we our first major acquisition in 2021. First off, what attracted us to the Permian is just the unparalleled pay that exists. So the Permian is here, Midland, Delaware. This is kind of a pictorial of the amount of pay thickness present. So Midland, we're talking about 3,500 feet Delaware 4,000 feet.

Speaker 1

In the Canadian Basin, the Western part of Western Canadian Sedimentary Basin that same thick pay stack exists. We talk a lot about those plays, the Montney, the Duvernay, Cardium Deep Basin. The big difference between the two is that in the Permian, not only do we get a premium pricing, but it's all mineral title land. So we can acquire mineral title land in the best rock in North America under the operators that we want in the thickest parts of the pay. And when we're buying mineral title, just like in Canada, we're buying from the roots of the grass to the center of the earth.

Speaker 1

So we're getting the whole stack. So what we originally evaluate, what I'll show you is that there's a lot more zones that are starting to contribute than we ever thought even when we bought it. We like BC, Alberta, West 5, West 6. The fact of the matter is there's no mineral title in there. You can't build a position with mineral title, hence we're moving down to the U.

Speaker 1

S. So we get the thickest stack of pay, scalable. When we look at the Canadian acquisitions on a publicly disclosed basis, the deals are about 10 to 1 in the U. S. So to put that into perspective, those are just the public data that would be kind of $10,000,000 and above.

Speaker 1

We see transactions daily in the sub $10,000,000 range. So there's just so many different ways to put the puzzle pieces together that we don't get in the Canadian side of the portfolio. This is what I was referring to. When we originally started looking at the Permian in 2020, we did our first deal in early 2021. Really we are focused on valuing these primary targets.

Speaker 1

What we're seeing over the past 3 to 4 years is that the emerging targets that's really driving the growth. I'm using Midland as an example, the same would be on the Delaware side. But those primary targets that we initially valued, they've grown at about 100 and 70,000 barrels over this time period. The emerging targets are 375,000 and we see that continuing. So, as operators are focused on maximizing value throughout the resource stack and substantially increasing recovery from the basin.

Speaker 1

And this for us is free upside. We didn't pay for it. It doesn't take incremental capital to develop and we're starting to see this roll through in our reserve reporting. From a financial perspective, we've got super comfortable with the reserves. The financial performance of the assets is again exceeding expectations.

Speaker 1

We invested on behalf of shareholders $565,000,000 into the U. S. With the first investment in January of 2020. That first investment was $74,000,000 that will pay out fully this quarter. The whole portfolio of 5 $65,000,000 we're expecting that to pay out in 2026, it's going to pay out again in 2,032 and this slope of the graph isn't changing.

Speaker 1

We see that just continually paying out, paying out. And when we look at match the reserves to the financial performance, you were talking payout in the next couple of years here and we've produced about 12% of the reserves that we have So there's just lots of value to give in these assets. So what we're seeing is financial performance exceeding expectations and reserves exceeding expectations, a lot of it with those emerging benches. The one thing that we do find the difference between Canada and the U. S.

Speaker 1

Is the U. S. Production is a lot more volatile. So we've crushed the financial, crushed the reserves, but what we do see is volatility. And that's driven by a number of things.

Speaker 1

We have scattered drill spacing units. So the yellow one here, we would be owning lands. And so this would be if you think of Canada, this would be 1 mile by 1 mile, so a section of land. And so you can see, how our lands are positioned. This little snapshot of the core of the Permian.

Speaker 1

You can see here that we've got some wells on production in blue. Over here, we've got wells that are either permitted or drilled and uncompleted. You can see lots of rig activity in the area, so we're in the core of the play. What we see here is that the well performance, we're not seeing any degradation in well performance with time. The most recent wells are still outperforming some of the historical type curves.

Speaker 1

And so we look at that and go, we're in the right parts of the basin, we're under really good operators. We don't know where the rig is going to go, but we got lots of drilling room. The royalty interest that we have in each of those drill spacing units can vary significantly across the portfolio. So that does have an impact on the impact of a well coming on production. And one of the other things that we see is a pad here for instance would be drilled, 20 wells would come on stream.

Speaker 1

So there's 20,000 barrels a day of production comes on at once when that operator a year after he started drilling brings out production on. So you get quite a production spike and then you get a decline off of that. So those are variables that we don't see in Canada, but don't impact the underlying value, but it does drive volatility in the portfolio. One of the things that we've been very conscious of is just aligning with top operators in North America. And this has evolved significantly over the past few years where on the Canadian side, our top 30 counterparties is about 18 Canadian firms and 12 U.

Speaker 1

S. Firms. And so we're aligned with the Tourmalines, the Whitecaps, Canadian Natural, Tyne, Tamarac Valley, Crescent Point. So it's just really high quality names in Canada that are developing our lands. And same within the U.

Speaker 1

S, we got Marathon Oil, ExxonMobil Pioneer on the back of the deal, the $116,000,000 deal that we did in Q1, that merger, they are our 4th largest payer. So when you think about the quality of an ExxonMobil and these guys are developing lands in 5 year thought processes, 5 year, 10 year business plans, they're not waking up every morning and looking at what the oil price is and deciding what to drill. And so we think by underpinning our portfolio with the likes of these names, again, it just ensures that the quality of the portfolio and the pace of development will be there for years to come. I think one of the things that goes underappreciated just with the royalty portfolio and our oil and NGL waiting and the exposure that we get with the U. S.

Speaker 1

Premium pricing, we are number 2, we try harder, but we're damn near there as far as what the cash flow per BOE that our portfolio generates. And no, this isn't PrairieSky. PrairieSky is down here somewhere. This is the one to the right of us is one of the public Clearwater players that are developing on our land. So, no different than anyone else in this portfolio.

Speaker 1

If oil price goes up $5 we get that same $5 leverage that everyone else has and we've already got a very strong cash flow per barrel. And so we can use that cash flow strength to continue to build the company to continue to fund our growth initiatives as we look to the future. So with that, we're very proud of the work that the entire team has done in continually evolving freehold to ensure our assets are well positioned that will attract future capital and thus ensure the sustainability of our business. We're taking a little bit different approach that we really want to share with our shareholders what we've learned with the U. S.

Speaker 1

And just how strong we believe in the assets and how they materially moved our business forward. So with that, we have copies of the presentation available at the back. And if anyone has any questions, both Marvin and I will be pleased to answer those.

Operator

Generally, when you don't get any questions, you have 2 alternatives. Nobody understood what you said or everyone understood it perfectly and it's impossible to ask any good questions. Dave and I are going with number 2. So thank you very much for attending this afternoon. We have quite a bit of food left over and I think we have to go boxes if you want to take some of that home.

Operator

I appreciate everyone taking time out of their day to come and say hello. Management and the board will be around for a little while longer.

Speaker 1

So if you feel more comfortable in asking us

Operator

questions 1 on 1, we're more than happy to stay here and do that. And thank you again very much for attending.

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Earnings Conference Call
Freehold Royalties Q1 2024
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