All participants, please stand by. Your conference is now ready to begin. Good morning, ladies and gentlemen, and welcome to the fourth quarter results conference call. I would now like to turn the meeting over to Mr. David Spyker. Please go ahead, Mr. Spyker.
Morning, and thank you for attending. We're excited to share our Q4 2021 results with you this morning. Joining me today are Dave Hendry, our CFO, Rob King, our Vice President, Business Development, and Matt Donohue, our Manager of Investor Relations and Capital Markets. 2021 was a transformational year for Freehold, as we completed CAD 377 million in acquisitions and set record production levels at 14,005 BOE per day in Q4. We positioned our portfolio with the addition of royalty assets in the premier oil and gas basins across North America, including the Permian, Eagle Ford Oil basins, Haynesville Gas basin, and the Clearwater Oil Play. With this work, we achieved the following. We delivered CAD 69 million in funds from operations, our highest quarterly funds flow ever. This equates to CAD 0.46 per share.
We are increasing our dividend by 33% from CAD 0.06 per share to CAD 0.08 per share, which is CAD 0.96 per share annualized, and this commences with the April payment. We've increased the dividend every quarter in 2021, and this is the highest dividend level since 2015. We have the most under-levered balance sheet of our Canadian royalty peers, exiting the year at 0.5 x net debt to trailing funds from operations. We are positioned to grow our royalty volumes through drilling on our existing land base. We had 250 wells drilled on our lands in Q4. We have 9-12 rigs continuously active on our Canadian lands to start 2022. We have had CAD 1 million in lease bonus revenue so far this year, more than the last three years combined.
We realized almost 1,000 BOE per day of production associated with our audit, compliance, and royalty authorization drilling initiatives in 2021. These are the best acquisitions per se, as they don't require capital. With this all, we grew our Canadian production 4% from Q3 to Q4 2021 as a result of this robust drilling activity. We are very well-positioned in the Permian Basin, an area which has set all-time high production levels in the past two consecutive months, with half of the active U.S. drilling rigs operating there. We have 17 rigs operating on our U.S. lands currently, with 45 new wells permitted in the last two weeks alone. We are receiving premium pricing on our U.S. assets.
We received $60 per BOE for our U.S. royalty volumes in Q4 2021, compared to CAD 53 per BOE for our Canadian royalty volumes, a 27% pricing premium due to proximity to U.S. Gulf Coast. These are material shifts to our portfolio, and with our updated guidance, we are projecting between CAD 230 million and CAD 250 million in funds from operations in 2022. The dividend increase we announced strikes a balance between returning value to our shareholders, further strengthening our balance sheet, and providing the flexibility to continue disciplined acquisition work. The opportunity to further build on the quality of our portfolio remains robust, and we view it as important to retain the flexibility to continue to evaluate and acquire assets that enhance our royalty portfolio. I will now pass the call to Dave Hendry to walk through some of the financial highlights.
Thanks, David. Good morning, everyone. As commodity prices improved over the quarter, Freehold continued to deliver on the core financial aspects of its return proposition, providing a meaningful dividend while also providing investors with a lower-risk investment, differentiating itself from traditional oil and gas E&P companies. Funds from operations for Q4 2021 totaled CAD 68.8 million, an all-time record for Freehold, or CAD 0.46 per share, up 43% versus the previous quarter and 211% from the same period in 2020. For the year, funds from operations totaled CAD 189.6 million or CAD 1.39 per share, which is up 129% year-on-year. The significant increase in funds from operations provided added financial strength and flexibility to how we manage our business.
Freehold's royalty revenue and funds flow both benefited from the strong upward momentum in crude oil and natural gas prices alongside growing production, particularly in the U.S., which received better pricing relative to our Canadian assets. Freehold's dividend payout totaled 35% for Q4 2021 versus 24% in Q4 2020. As previously mentioned, we are increasing our monthly dividend from CAD 0.06 per share to CAD 0.08 per share, reflecting our continued measured response to an improved commodity price outlook, better-than-anticipated production associated with increasing third-party spending on our royalty lands in 2021, which is expected to continue into 2022. For Q4 2021, cash cost totaled CAD 3.57 per BOE, down meaningfully from CAD 4.03 per BOE in Q4 2020.
For the year, cash cost totaled CAD 3.71 per BOE, the lowest in Freehold's history and down 19% versus the previous year. We continue to drive efficiencies in this area alongside increasing production volumes. Net debt totaled CAD 101.2 million at December 31, representing 0.5 x net debt to twelve-month trailing funds from operations. Overall, Freehold's net debt increased by CAD 35 million versus the previous year. The increase in net debt reflected acquisitions completed over the year, with stronger funds from operations also meaningfully contributing to the funding of these acquisitions.
Freehold's prudent strategy of maintaining long-term debt to funds from operations well below 1.5 x, alongside a longer-term dividend payout target starting at 60% of funds from operations, provides protection to the business from commodity price volatility while maintaining capacity to continue to grow through strategic and disciplined acquisition work. In absence of additional acquisition work, Freehold has the optionality to potentially reduce net debt to zero by year-end 2022 based on guidance estimates. Freehold expanded its credit facilities with four Canadian banks in the fall of 2021 to CAD 300 million, with a permitted increase up to CAD 375 million, subject to lenders' consent, which provides capacity and flexibility to potentially fund further accretive acquisitions during 2022. Now back to Dave for his final remarks.
Thanks, Dave. In closing, we remain enthusiastic about the next 12 months. There's been a steady trending up of capital spending and associated production growth on our royalty lands, both in Canada and the US. At current commodity price levels, our high margins offer significant option value to provide returns to our shareholders. Today's increase in our monthly dividend means that we have increased our payout every quarter in 2021. The acquisition work that we completed last year is expected to continue to provide both near and long-term value for our shareholders. There's been a tremendous amount of work completed in the transformation of Freehold into a premier North American royalty company. I think you can see the fourth quarter has shown the full impact of the acquisition activity throughout the year, resulting in these record-setting production and funds from operations for Freehold.
I would like to thank all our shareholders for their support, and also thank our board and employees that contribute the ideas, the energy, and the inspiration that has made an investment in Freehold a success. Thank you all, and we'll now take questions.
Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your device's keypad. At any time, you may cancel that question by pressing star two. Once again, please press star one at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. We have our first question from Luke Davis. Please go ahead. Your line is open.
Hey, thanks. Good morning, guys. Just on M&A, wondering if you could provide some details on how the market's developed, just given the run in oil pricing here, maybe what kind of opportunities you're seeing. I imagine you're still focused on the U.S., but curious if you can comment just on both sides of the border.
Morning, Luke, it's Rob King speaking. Yeah, I can provide a few comments in terms of what we're seeing right now. You know, start of January is really quiet on both sides of the border in terms of activity. You know, that only lasted a couple of weeks before things, you know, a number of opportunities, particularly in the U.S., started coming across our desks, all over the size range from, you know, call it, you know, $10 million of value and less, up to $500+ million of value. I think one of the challenges that our team's having right now is how we allocate our time and allocate our capital to looking at these opportunities.
Because, you know, we're fortunate to have a lot to look at. In terms of what we're sort of seeing in terms of bid-ask spread and what the market is looking like, because obviously the market has been incredibly dynamic in the last several weeks here. You know, just a few examples of activity in the U.S. in the last month, we've seen 3 transactions north of $1 billion of value.
The common thread between those mineral title opportunities was that they were done, you know, with the high teens, you know, cash flow yields in them. You know, it's still a very attractive market, even in this commodity price environment where, you know, we are seeing, you know, our peers seeing bid-ask spreads narrow. You know, I think for us, we haven't been testing the markets at the same extent since our acquisition activity that you sort of see in our Q4 numbers, you know, right now. We're starting, you know, having some discussions, and things are similarly pointing to, you know, metrics that would be in that range.
Yeah, I think we're seeing the strength in commodity prices bringing out a lot of sellers, but obviously just from, you know, the sheer strength of it, but it's also has changed the development pace of the assets. Sellers that might have looked to sell in the back half of 2022 or into 2023 are now seeing their portfolios mature that much faster and are sort of provide that great mix of near-term development with future upside that buyers like us are looking for.
Thanks. That was super helpful. Just curious what you're generally using now for pricing when you're doing those evaluations.
Yeah. It's, I mean, it's that that's a pretty dynamic process. Yeah, I mean, it's multiple pricing scenarios, as you'd guess. You know, it's grounded in strip, but then it's strip minus, kind of running scenarios that, you know, so look at strip for a one year or two year time period, then moderating to a lower level or a lot of flat pricing scenarios. Yeah, it's, you know, you're touching on one of the more challenging pieces of our evaluations these days.
Yeah, that makes sense. Thanks. Just one final one for me. Can you just give us an update on what's going on with the CRA process?
Hi, Luke. It's Dave Hendry here. Yes. First off, we still strongly believe our filing position is correct. You know, field officer has been assigned. We've talked with them. We've provided submissions to them justifying why we believe our position is correct, and they're going through that, through those submissions as well as the rest of the material. Yeah, I'm not expecting this to be quickly resolved. Probably see it maybe taking six months. I mean, it's hard to tell. CRA is gonna take as much time as they want, and clearly they manage the process. With that, depending on where we are in that, you know, our next tax filing for the 2021 year will be sort of mid-year.
If it's still outstanding and they haven't made a conclusion of their appeal process at that point, there is a chance that most likely we would get reassessed on our 2021 and then have to deposit probably another CAD 10 million approximately until we wait for the appeal decision. But to finalize, I think we strongly believe our position is correct and you know, we're actively focusing on that.
Yeah, it's helpful. Thank you. That's it for me.
Thank you. The next question is from Aaron Bilkoski from TD Securities. Please go ahead. Your line is open.
Thanks. Good morning, guys. Would you be able to give me a sense of what first-year production rates would look like for your average U.S. well relative to your average Canadian well?
Yeah. Aaron, Rob's gonna answer that. He's just pulling up his screen here right now.
Yeah. If you have a second question, I'll kind of run this in the background while you.
Sure. I guess internally, what leading indicators are you guys watching for future production additions? Are you guys seeing a ramp up in licenses or a ramp up in active rigs on your land? I'd be curious to know which plays are seeing the biggest rate of change.
Yeah. Yeah, maybe come back to your first question, then I'll come to that question. In terms of our-
Sure.
You know, average one-year production on our U.S. wells, it's just under 800 barrels a day is what we saw. This was a number that we ran back in our investor day in December. This contemplates wells on our U.S. properties as if we've built them for the last four years, 2017 to 2021. Yeah, just under 800 barrels a day. In terms of activity on our U.S. assets, you know, we've had a pretty consistent number of rigs over the last four, five months now, you know, sitting at 15-20 range. That's kind of given us some confidence.
Yeah, I think what we're also tracking is just the number of permits that are, you know, that are on our lands. As Dave said at the outset, you know, in the last two weeks, we've had 45 permits, you know, on our U.S. lands. I think that's to put that 45 permit number into context, you know, in the first two months, we've had about 50 gross wells, you know, drilled in the U.S. on our lands. 45 permits is pretty exciting. You know, and of those, in the last two weeks on the spud side, you know, half have been in the Eagle Ford with Marathon.
You know, the other half have been in the Permian, largely under Pioneer and also, you know, a handful of privates. You know, those permits that we talked about, so you got 45, 35 were in Midland, and the vast majority of those were under our OneMap lands that we acquired, closing in October, with most of that coming from Pioneer. 10 were from Marathon in the Eagle Ford. And, you know, just to give you a little bit of triangulation. There's often in the Permian and the Eagle Ford about a 2-3-month lag between permit to spud. So we can if you see those permits coming in February, you know, that sort of points to a Q2 spud timeframe.
Perfect. Final question from me, and I guess it's a follow-up to one of Luke's questions. I'd be curious to know what the size of the asset packages are that are crossing your desk, and if there's a sweet spot in terms of size for Freehold, either your ability to digest them or if there's a sweet spot in terms of valuation?
Yeah. You know, maybe on your second point there definitely is a sweet spot in valuation. That's far more important and relevant than, you know, the size. Everything we look at, you know, and if it doesn't make us better, we're not interested in adding it to our portfolio. That's the. In terms of size, bad answer, but it literally is all over the map, you know, in terms of. I'd probably say it's almost a barbell. There's a number of opportunities in that CAD 50 million and less. What's interesting is the number of opportunities that are a couple hundred million and more. You know, I think that's. We're looking at both ends of the barbell.
There's obviously a heck of a lot more deals, you know, in that smaller range. There are more than three that are in that larger category that are currently on our desks.
Do you find there's more competition for smaller deals or larger deals, or it's tough to tell?
Yeah, definitely agree with that comment in terms of more competition on the smaller end. You can certainly see that with, you know, the marketers. The marketers know that. They, you know, size the packages, correct, air quotes, correctly to try and, you know, get the most number of competitors looking at it. It's fair to say there's a lot of opportunities, you know, yes, there's a lot more competition we've observed in the U.S., but there's also a lot more opportunities.
Great. Thanks for that, guys.
Thank you. The next question is from Jamie Kubik. Please go ahead. Your line is open.
Yeah. Good morning, and thanks for taking my question. I've got two of them just quickly. Volumes on your Canadian assets really strong in Q4. How should we think about production volumes in 2022 on the Canadian side, given where producer activity is at? Also curious if you can touch on how the U.S. portfolio is trending currently. Thanks.
On the Canadian side, yeah, I think our forecasting, we think we're gonna have about 20 net wells on our Canadian assets in 2022. Just to put that number into context, that we believe that will replace our decline rate, you know, in Canada. Canada's kind of a flat to maybe modestly up. You know, we've seen so far activity in Canada, about 100 gross wells drilled on our lands in the first 2 months, which is definitely well on pace for that, you know, annualized 20 net wells. A lot of that has been, you know. Well, 30 drillers make up those 100 wells. You know, 20 were with Teine in the Viking.
Tamarack was very active in the Clearwater with 12 wells on our lands. You know, Tundra and some of the privates have also, you know, accelerated their activity we've observed in the last couple of months. Sorry, I don't know if that answers your Canada question. I know you had a U.S. question. I just can't remember it. Sorry, Jamie.
Yeah, sorry. Was just curious on how the production volumes are trending versus your guidance. I know you split out Canada about 9,300 barrels a day contributing in 2022, and the U.S. contributing at 4,900. Just curious on what you're seeing so far, because obviously the mix in Q4 was different than that.
Yeah. Yeah, I'd say sort of trending on pace. I mean, I think we've put out our production guidance in November timeframe, and I think our expectation for 2022 is it'll be about the high end, you know, of that range. You know, the Eagle Ford is showing a lot of continued strength and, you know, probably even maybe a little bit ahead of where, you know, I think our expectations were. That's both a production comment but also a cash flow comment. We're even getting, you know, higher realized pricing than I think we had actually expected.
You know, we were encouraged seeing Marathon's 2022 capital guidance a few weeks back, where, you know, their capital plans are supportive, you know, corroborative of the acquisition modeling that we had for our assets under Marathon in the Eagle Ford. You know, they're actually talking about, you know, 15 redevelopment, recompletion wells in the Eagle Ford. Obviously, all won't be on our lands, but we did not value any recompletions in our analysis. You know, that is, you know, some upside that we will see in 2022 that we weren't expecting.
Okay. Maybe a follow-on question here. How should we think about the free cash flow priorities for the business? I mean, should we think about you know, the dividend being anchored at a lower commodity price level? I mean, or should we think about Freehold likely increasing the dividend as the year goes on if strip pricing or if commodity pricing outperforms your expectations? I know that you have WTI estimated $75 a barrel for 2022 and Q1 at $90 next. Clearly a dynamic environment, but can you talk about how we should think about the dividend moving forward to 2022 and free cash flow priorities?
No. Hi, Jamie. It's Dave Hendry again. I mean, obviously, we just updated our dividend. Commodity prices are incredibly volatile, so you know, it's very hard to sort of know what those predictions are. We start with $75 WTI just because you know, it's relatively consistent with you know, a lot of our peers and as well as, you know, it's more of a moderated position. On top of that dividend that we just announced of CAD 0.08 per share, you know, the most meaningful contribution is acquisitions. We're gonna have to see how acquisitions play out this year, you know, to see what the ask numbers are and about you know, can we get some deals across the line that realize the returns that we're expecting.
That's the key focus. You know, we'll continue to monitor what commodity prices. You know, we set that 60% target range for a reason. We'll continue to monitor that. We do have still CAD 146 million of debt to pay down, so we'll use that as a toggle. We'll balance those three contributions like usual. But as far as ultimately do we change the dividend, we don't have a plan on updating the dividend, you know, in the next quarter, but we'll just evaluate it and see how our acquisitions play along.
Okay. That's it for me. Thanks, guys.
Thank you. The next question is from Patrick O'Rourke. Please go ahead. Your line is open.
Good morning, guys. Pretty comprehensive questions from the guys ahead of me there. I'll have to be a little bit quicker on the finger trigger there going forward. Just a couple of quick things, though, that I don't think have been touched on, and I'm curious, too. In particular, you're showing some strength out of the Canadian asset here, and I think that drove a bit of the outperformance on the quarter. I'm wondering if you can comment now with, you know, pricing so strong in Canada, and the progressive nature of royalty or Crown royalty, Crown royalty curve here, how you're sort of competitively positioned on your Freehold lands.
Yeah, that's a good question, Patrick. As far as the Crown royalty structure goes, you know, there's still, you know, Crown royalty holidays that are in place early on. When you come off those holidays, you know, our royalty lands, you know, are very competitive. You know, right now, you know, we see, you know, drilling as active on the royalty lands as I think we see in Crown lands across the portfolio. We see that continuing. You know, on a rig activity level, you know, there's certainly higher rigs in Canada than we were this time last year.
We're still, you know, 60 rigs or so under the long-term average in Canada if we go back a few years. You know, we are seeing, you know, certainly increased activity. You know, it hasn't, you know, recovered to, you know, more steady-state pre-pandemic levels and the same in the U.S. You know, we're seeing the rigs really focusing, you know, in the most cost-effective basins, you know, Permian and Eagle Ford in the U.S. is really driving a lot of that drilling. You know, we did see a good uptick in gas drilling in the Deep Basin in Q4.
We expect to see that continue, but oil plays are what's really being developed, you know, at a pretty good clip on our lands.
Okay, thanks. You know, considering you guys are using a pretty conservative planning budget here with $75 WTI, would Freehold consider an approach to hedging any of the production here?
Yeah, I don't. You know, we would talk about hedging before, Patrick, maybe to backstop an acquisition. You know, as far as hedging in general, it's not something that we're looking at. You know, we do have the strongest balance sheet of our royalty peers, and we're generating, you know, significant cash flow right now. We think that we've got the balance with the dividend payments and the focus on managing our debt that we don't think that hedging is the right answer for us right now.
Okay, thank you.
Thank you. The next question is from Matthew Weiss. Please go ahead. Your line is open.
Hi. Good morning. I think all my questions have been answered at this point, so I'll just hop back in the queue. Thanks.
Thanks, Matthew.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Spyker.
Okay. Thanks, everyone, for participating today. We had some great discussion, and just appreciate throwing those questions at us. Good luck to all, and we'll talk to you next quarter.
Thank you. The conference is now ended. Please disconnect your lines at this time, and we thank you for your participation.