Freehold Royalties Q2 2024 Earnings Call Transcript

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August 1, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Freehold Royalty Second Quarter Results Conference Call.

Operator

I would like to turn the meeting over to Mr. David Spyker. Please go ahead, sir.

Speaker 1

Good morning, everyone, and thank you for joining us today. On the call from Freehold are Rob King, our COO and Dave Hendry, our CFO. We're really pleased with our quarter with the production averaging 15,221 BOE a day, a 3% increase over the prior quarter. Oil production was driving this growth averaging 7,899 barrels a day, which was a 7% increase over the prior quarter. Our U.

Speaker 1

S. Assets grew 9% over the quarter to 5,599 BOE a day. Our results of increased drilling activity on our Eagle Ford and Permian assets as well as the recovery from the extreme weather impacts in Q1 2024. Funds from operations for the quarter totaled CAD60 1,000,000 or CAD0.40 per share, an 11% increase over the prior quarter. This funded our CAD0.09 per month dividend, resulting in a 68% payout ratio for the quarter.

Speaker 1

We exited Q2 with net debt to trailing funds from operations of 0.8 times, reducing our net debt by $12,000,000 while closing 3 tuck in acquisitions in both Canada and the U. S. For a combined $7,300,000 Natural gas benchmark pricing was weak through the quarter. However, we continue to see the benefits of our oil weighted premium priced North American portfolio with oil and NGLs representing over 95% of our revenue, leading to a top tier realized price of $59.74 a boe. We're quite excited about the drilling activity on our portfolio.

Speaker 1

Gross drilling activity was strong for the quarter with a total of 274 wells drilled across North America. Approximately 75 percent of total gross wells drilled on freehold lands targeted oil prospects in Texas with a balance in Canada focusing on oil prospects largely in Southeast Saskatchewan, the Manuel Stack and Clearwater. On our U. S. Portfolio, we're encouraged by the drilling and rig activity we have seen with gross drilling up 24% over the previous quarter.

Speaker 1

And this represents the highest level of quarterly drilling that Freehold has had on its U. S. Royalty lands. Digging a little deeper on the U. S.

Speaker 1

Side, we are seeing continually evolving drilling and completion practices unlocking value in the high quality multiple reservoir bench Permian Basin. A recent royalty interest pad in Delaware was brought on at peak rates per well of 3,200 barrels a day of oil with 90 day average oil rates of 2,200 barrels a day. We see other areas where current views on completion technology are being applied to older wells. We're focused right now in the Eagle Ford where ConocoPhillips is acquiring Marathon and they reference over 1,000 refrac candidates on the Marathon asset base. And we see 500 plus of these where we have a royalty interest.

Speaker 1

These refracs are targeting wells drilled pre-twenty 16 where profit loading was less than half of what current best practices are, hence not effectively accessing all the reservoir potential. We are also seeing leasing activity with our U. S. Mineral title lands with some of the focus in Q2 being on the eastern side of the Midland Basin with the target being the deeper Barnett Shale. This is moving Barnett oil prospectivity much further east than where wells have been successfully drilled to date and really opens up a deeper prospect opportunity on our U.

Speaker 1

S. Land base. Activity on our U. S. Assets continues to be driven by large, high quality investment grade payers in addition to growth oriented privates.

Speaker 1

Our drilled uncompleted well and our permanent well inventory is robust, providing us confidence in the outlook for our U. S. Portfolio for the remainder of 2024 and into next year. On the Canadian side, over the last 5 years, production has been rock solid at 9,600 Boe a day with only modest capital investment of about $40,000,000 in early stage Clearwater opportunities. What's different now?

Speaker 1

Leasing activity. Over the last 18 months, we've signed 157 leases. That compares to as many leases that we have signed in 2020, 2021 and 2022 combined. This leasing strength is showing up in our licensing activity where 2024 year to date licensing is at similar levels to full year licensing in both 20222023. The most active areas for leasing has been Southeast Saskatchewan with about 50% of our leasing activity and mostly to private and junior companies who are revitalizing this area with focused attention and multi leg laterals, Clearwater style technology.

Speaker 1

Similarly, the Mandeville stack has gained about 25% of our leasing activity, again to privates and juniors who are successfully developing with multi leg laterals. The continued revitalization of these areas represents a significant opportunity for our portfolio. So overall, we're very excited about the quality of our business. It's really been a result of a multiyear transformation into a uniquely North American energy royalty company. Leading indicators such as leasing activity, licensing activity and drilling activity are all very positive.

Speaker 1

We'll now take the time to answer any questions.

Operator

Thank you. We will now take questions from the telephone lines. And we do have a question from Aaron Bilkoski from TD Cowen. Please go

Speaker 2

ahead.

Operator

Mr. Bikovsky, your line is open.

Speaker 2

Sorry about that. So now that you guys have had these Permian assets additions through 2025? And I guess an associated question would be, do you anticipate any other higher rate, high productivity Permian pads come on in any particular quarter given what you know about the spacing between drilling and completion and tying times?

Speaker 3

Thanks, Aaron. It's Rob here. Maybe I'll highlight a little bit of what the Q2 activity was like, both from a drilling perspective and also a permitting perspective. So in the quarter, we had about 1 net well that was drilled, which is actually our highest level of drilling activity that we've ever had on our U. S.

Speaker 3

Assets. As well in the quarter, we had about 1.7 sorry, 1.4 net permits that were permitted on our U. S. Lands, which also was sort of the highest level of permitting activity that we've had since we've owned our U. S.

Speaker 3

Assets. And so it's one where one of the things that is different within the U. S. And in Canada is just the time between when a well is permitted to when it's completed to well is turned in line. And that's where we're seeing anywhere between 6 to upwards of 12 months and beyond that we need to that we sort of need to wait for the operator to get active on our lands.

Speaker 3

That compares to in Canada it's measured in weeks. So that really kind of highlights a little bit of how the 2025 is likely going to shape out because we have this strong inventory right now of DUCs, 1 point 7 net DUCs at the end of Q2. And we have a 1.9 net permits at the end of Q2. Just as a reminder, one doesn't sound like a lot, one net well, but that's over 1200 BOEs a day of production. So it's pretty meaningful.

Operator

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

Speaker 1

Okay. Thanks everyone for participating today and say we're excited about everything that we've got on the go right now and looking forward to reconnecting with Erwin on our Q3 results. Thank you.

Operator

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 Q2 2024
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