Good morning, ladies and gentlemen. Welcome to the second quarter results conference call. I would now like to turn the meeting over to Mr. Spyker. Please go ahead.
Good morning, and thank you for joining us. On the call with me today are Dave Hendry, our CFO, Rob King, our Vice President, Business Development, and Matt Donohue, our Manager, Investor Relations and Capital Markets. The second quarter marked a period where Freehold continued to execute its strategy, growing its funds from operations, reducing its debt levels, increasing its dividend, and subsequent to the quarter, completing three value-enhancing transactions, showcasing the North American advantage that our royalty portfolio provides investors. To start this morning, I would like to talk about the dividend increase, and then we will focus on the excellent operational performance we have had. In conjunction with projecting 12%-15% production growth over 2020, we will be increasing our monthly dividend by 25%, from CAD 0.04 per share to CAD 0.05 per share, starting in September, to shareholders of record on August 31st.
This represents the fourth increase in the past nine months. The dividend increase strikes a balance between maintaining the flexibility to continue to enhance our portfolio through acquisitions and returning value created by this work back to our shareholders at an appropriate pace. We continue to strive for further increases in our payout through a measured approach, moving the dividend upwards toward our long-term 60%-80% payout ratio objective. On the acquisition front, we've had a very busy period subsequent to quarter end, announcing three acquisitions which expand our position in the U.S. Permian and Eagle Ford plays, along with building our already strong position in the Clearwater in Canada. All transactions are expected to be funded with free cash flow and our existing credit facilities. In July, we closed the acquisition of certain U.S. royalty properties for CAD 19.3 million.
This transaction included exposure to the Eagle Ford, Delaware, and Midland basins, expanding Freehold's North American royalty footprint. Freehold forecasts greater than 500 gross development locations associated with the acquired royalty acres, plus near-term development upside from approximately 15 drilled but uncompleted wells and 30 permits, over 90% of which are forecasted 2022 development activity and approximately 50% of forecasted 2023 development activity. The acquired royalty assets provide exposure to a strong suite of E&P producers with multiple years of development plans expected on the acreage. 2022 funds from operations from the acquired royalty properties is forecast at approximately CAD 2.7 million, with production of approximately 150 boe a day.
Yesterday, Freehold entered into a definitive agreement with OneMap Mineral Services LLC to acquire a concentrated, high-quality U.S. royalty package for CAD 67.1 million, subject to confirmatory due diligence and any potential resulting adjustments, with the deal scheduled to close in October this year. These Midland assets will play a key role in strengthening the resiliency of Freehold's North American royalty portfolio, enhancing near and long-term sustainability of Freehold's dividend through multiple years of production and funds flow growth. The transaction provides a core Midland basin royalty position anchored by a premier counterparty with multiple years of future development. Freehold forecasts greater than 2,300 gross future development locations, with over 50% of the development expected to be economic at WTI prices less than $35 a barrel.
Production volumes are forecast to grow by approximately 25% on a compound annual growth rate from 2021 through 2024, with approximately 50% of development in 2022 underpinned by drilled but uncompleted wells and permits. 2022 production and funds from operations from these assets are forecast at approximately 550 boe a day and CAD 9 million. The addition of the U.S. royalty acquisitions is in line with Freehold's strategy to add to our North American portfolio, further positioning us into high-quality development areas with multiple years of development upside and growth. Finally, in July, Freehold closed a Canadian royalty deal, adding to the company's already strong position in the Clearwater play in Central Alberta. Total committed consideration associated with this transaction is up to CAD 7.9 million, to be paid in accordance with a drilling agreement for 3%- 5% gross overriding royalty over 30.5 sections of land.
2022 forecast funds from operations associated with the acquired royalty assets is approximately CAD 1.2 million, with production volumes forecast at 100 boe a day. On the operations front, production for the quarter averaged 11,137 boe a day, representing a 20% improvement over Q2 of last year and a 2% gain versus the previous quarter. The U.S. portfolio continues to perform above expectations, averaging 1,544 boe a day in Q2 2021, a 20% increase from 1,285 boe a day in the first quarter of this year. Growth in volumes reflect better well performance and slightly better than forecast activity levels on those royalty lands. In Canada, production averaged 9,593 boe a day, up 4% from the same period in 2020, with gains associated with increased third-party spending on Freehold's royalty lands.
After realizing actual results for the first half of 2021, and with Freehold's most recent acquisitions, we are implementing guidance for the second half of the year. We are forecasting production volumes to range between 11,000 boe-11,500 boe a day through H2 2021, with volumes expected to be weighted approximately 55% oil and NGL and 45% natural gas. On the drilling front, 84 gross or 2.1 net wells were drilled on our royalty lands in Q2, a 55% improvement on a gross measure versus the same period last year. With the upward move in crude oil prices, we have seen activity increase on Freehold's lands with approximately 16 rigs, nine in Canada, seven in the U.S., running on our royalty lands late in Q2.
In Q2, approximately 40% of all locations on Freehold's Canadian assets targeted gross overriding royalty prospects, with 60% focused on prospects on Freehold's mineral title lands. 24% of locations drilled target prospects in Saskatchewan, 53% in Alberta, and 23% in the U.S. on a gross basis. The vast majority of wells, greater than 96%, were focused on oil or liquids prospects. Through the first six months of the year, Freehold has seen consistent drilling activity in oil plays such as the Viking, Sparky, Clearwater, and Cardium. We are also seeing a strong increase in licensing and well spots in the Deep Basin as natural gas prices remain strong into Q2. We expect this resurgence in drilling activity that started in June and has continued into Q3 2021 will result in incremental volumes being brought on later in this year and early next year.
In the U.S., activity levels on Freehold's mineral title lands have met expectations, with the majority of the focus on light oil prospects targeting the Permian and Eagle Ford basins. Overall, 25 gross wells were drilled on our U.S. royalty lands over the quarter, with the acquisition of additional U.S. royalty production subsequent to the quarter expected to further diversify and energize Freehold's asset base, bringing added sustainability to its portfolio and its dividend. We have considerable optimism heading into the back half of this year and will continue to focus on positioning Freehold to be a premier North American royalty company with a strong balance sheet, a sustainable dividend, and prospects for growth in top-tier oil and gas operating areas. I will now pass the call to Dave Hendry to walk through some of the financial highlights.
Thanks, Dave. Good morning, everyone. Financially, as commodity prices improved over the quarter, Freehold continued to deliver on the core 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. Royalty and other revenue totaled CAD 44.9 million for Q2 2021, up 22% from the previous quarter in 2021. Funds from operations for Q2 2021 totaled CAD 40.2 million, or CAD 0.31 per share, up 24% versus the previous quarter and very close to an all-time high. Freehold's royalty revenue and funds from operations benefited from strong upward momentum in crude oil and natural gas prices with growing production, particularly in the U.S., which received better pricing relative to our Canadian assets, which helped to further strengthen Freehold's already strong operating margins.
Freehold's dividend payout totaled 33% for Q2 2021, up slightly from Q1 2021 and down from 92% from the same period in 2020. As previously mentioned, we increased our monthly dividend for 2021 from CAD 0.04 per share to CAD 0.05 per share, reflecting a measured response to an improved commodity price outlook, better than forecast production, and an expected increase in third-party spending on our royalty lands in 2021. For Q2 2021, cash cost totaled CAD 4.48 per boe, slightly up from CAD 4.37 per boe in Q1 2021, but down 6% from the same period last year. This strong result reflected reduced G&A and operating cost charges alongside improved production. Acquisitions completed subsequent to the quarter end are expected to only add a marginal amount of G&A, which should continue to improve our corporate cost base and netback.
Net debt totaled CAD 40.8 million on June 30, 2021, representing 0.4x net debt to funds from operations. Overall, Freehold reduced its net debt by CAD 24 million versus the previous quarter and by CAD 55 million from the previous year. The decrease in net debt reflected stronger funds from operations alongside a lower dividend payout. Freehold's prudent strategy of maintaining net debt to funds from operations between zero and 1.5x alongside longer-term dividend payout target range of 60%-80% of funds from operations provides cushion for potential volatility in commodities. Back to Dave for his final remarks.
Thanks, Dave. We've had an exceptional quarter, and we remain enthusiastic about the next 12 months of operations. We've seen a steady trending up of capital and production volumes on our lands, both in Canada and the U.S. At current commodity price levels, our high royalty margins offer significant option value to provide returns to our shareholders. With today's increase to our 2021 monthly dividend, we highlight that this is the fourth time in the past nine months that we have revised our 2021 payout upwards. The transactions subsequent to quarter end are expected to provide both near and long-term value for our shareholders, and further our execution to be a leading North American royalty company. Looking forward, the groundwork is in place for an exciting 2021 and beyond. The improved economic conditions are very positive for the industry and highlight the strength of a royalty model.
Through execution of our strategy in the coming quarters, we expect to be able to showcase the strong return proposition an investment in Freehold provides, with the ultimate commitment to maximize value to our shareholders. Thank you very much.
Thank you. We will take questions from the telephone lines. Should you have a question and you're using your speakerphone, please get your handset before making your selection. If you have a question please press star one on your device's keypad. You may cancel your question anytime by pressing star two. Please press star one at this time if you have a question. There will be a brief pause for participants to register their questions. Thank you for your patience. Our first question is from Jamie Kubik with CIBC. Please go ahead.
Yeah. Good morning, guys. Thanks for taking my question. Historically, Freehold's run a pretty conservative leverage model in your business. Can you highlight maybe where you'd like debt levels to be moving forward, either on an absolute basis or in terms of debt relative to future cash flow generation?
It's Dave Hendry here. We haven't changed our strategy as far as the level of leverage that we're looking at. Obviously, ending the quarter at 0.6x debt to EBITDA and 0.4x on a net debt is definitely in a comfortable place. We look to keep that within that range of zero to 1.5x net debt to funds from operations, ideally, lower than the 1x . When we're looking at acquisitions and how we deploy dividends, that's definitely a consideration.
Okay. That was all for me. Thanks, guys.
Thank you. Once again, please press star one at this time if you have a question. Our next question is from Elias Foscolos with Industrial Alliance Capital Markets. Please go ahead.
Good morning, thanks for taking my questions. I guess I'd like to start with the track line of potential acquisitions, particularly within the U.S. If we sort of take some slices in time and look at Q4, Q1, and today, would you say that track line is the same or growing?
Hi, Elias. It's Rob King here. I'll give you some stats for Q2 in terms of the number of opportunities that we looked at in both the U.S. and in Canada. In the U.S., we had over 100 opportunities come across our desks and probably two-thirds of those, we took either some review, either light or a deep review of those opportunities. In Canada, we probably saw about 20 opportunities that came across. That was kind of a Q2 comment. Q1 wasn't quite as active as Q2 has been. Certainly Q4 was even, frankly, even less activity than that. The forward calendar continues to be very strong on the U.S. side. We'll see the level of participation engagement that Freehold has in that.
We're really happy with the three opportunities that we added to our portfolio post quarter end here, and we'll take some time to digest those. Still continuing to look at mineral opportunities in both markets.
Okay. I appreciate that color. Focusing in on a couple of the drivers that might make it stronger. I noticed one acquisition was from OneMap, which frankly, I don't know a lot about the company, but they seem to be a royalty aggregator. What might be driving things in the U.S.? Could it be tax changes? Is it the capital markets putting the squeeze on U.S. producers and say, "Give me the money, don't drill with it"? Is it a combination of factors?
Yeah. I think it has Less to do with that last comment on the capital providers and the markets causing the upstream producers to have less capital, because these, for the most part, like 90%- 95+ % of the assets that we've added are mineral title assets. They are not overriding royalty interests. These are very much coming from, you know, private equity, mineral aggregators who built up these portfolios over the last five years or so. You know frankly, with the events of 2020, had no opportunity to consider divestments. That's accelerating in 2021. You're absolutely right on the capital gains. Potential changes in the U.S. There are a number of opportunities that we have been and are looking at where that is a significant driver for the seller to be looking to lock in for those effectively doubling of capital gains taxes.
Okay. I appreciate that color. Maybe, although I have a number of questions, I'll stick with one more. This is probably more on the financial side. Given the initial funding of this acquisition, would you be looking at using hedging in any manner?
This is Dave here. Elias. For hedging, we've looked at it, but we don't think that hedging is appropriate for these acquisitions. With even stress testing at different pricing levels, we can easily accommodate this on the balance sheet and still advance the dividend increase that we've talked about. Yeah, we looked at it, but we don't feel it's appropriate for where we're at today.
I think I'll stop at that point. Appreciate the color from everyone, and congratulations on the quarter and the acquisitions.
Thanks, Elias.
Thank you. Our next question is from Luke Davis with RBC. Please go ahead.
Hey, good morning, guys. Just another one on acquisitions. Given that you've got three in the hopper here, can you just speak to the potential cadence of acquisitions going forward? Any expectation that you'll do more through the balance of this year? Maybe just provide a little bit of color on what you're seeing in terms of valuations and kind of where you see that trending going forward.
Yeah. Luke, it's Dave Spyker here again. I'll answer that. For the balance of the year, we're going to continue to look at opportunities. With the one that we assigned yesterday, that's going to be closing in October. We'll continue to see if there's places for some smaller tuck-in deals, probably through the balance of the year, that would augment the portfolio in certain cases and continue to look if there's opportunities for larger scale deals that might really advance our portfolio in the core areas that we're looking at. We don't see ourselves slowing down on evaluating opportunities, and if we see a deal that really works well in our portfolio, we'll continue to pursue that.
Yeah. Thanks. That's helpful. I guess you've touched on it a little bit, but how are you thinking about funding going forward, and are there quite a few potential acquisitions that you wouldn't be able to fund internally?
Yeah. I think that for the most part, we're looking at funding using our balance sheet. That being said, if there was the larger deal that supported the use of equity, we would look at that. Again, it has to check all the boxes as far as being accretive, fit well with our portfolio objectives of really being in front of the drill bit and adding an asset that can grow in the coming years so that we ensure that we have that organic growth in the portfolio that we're looking to pursue. We're not constraining ourselves with a dollar per se right now. It's really looking at the opportunity. If the opportunity is right, we'll look at how we fund it, first with the balance sheet, and secondly, if it makes sense, we'll use some equity.
Got it. Makes sense. Apologies, I think I jumped in a little bit quick there. Any comments on valuation would be helpful as well.
Yeah. Hey, Luke, it's Rob here. In terms of valuation on the three acquisitions we announced at post-quarter end here, those were triangulated 6.5x-7.5x cash flow. On an IRR basis, it's in the mid-teens for each of the three transactions, which is actually pretty similar on an IRR basis to our November 2020 transaction, albeit with the combination of much better commodity pricing and even better production results coming from our initial U.S. acquisition. That IRR is actually pushing north of 20%-23%.
Got it. That's helpful. Thanks very much, guys.
Thank you. Once again, please press star one at this time if you have a question. Our next question is from Jeremy McCrea with Raymond James. Please go ahead.
Hi guys. I just wanted to follow up just on when you were talking about the amount of opportunities that you saw in Q2. You mentioned that you saw about 100 different opportunities. Are these all in the CAD 1 million scale? I'm just trying to get a better sense of size and potential for M&A growth going forward. If you wouldn't mind just going into a little bit more detail in terms of exactly what you're looking for in acquisitions. Is it commitments from different parties, or is it just accretion that you're looking for? Just a little bit more context around that as well.
Sure. I'll start on that one, Jeremy. In terms of the opportunities, it's really all over the size spectrum. I'd probably say the average would be in that probably CAD 30 million range. For the most part, they're probably sub-CAD 30 million. Of those CAD 80 million that we looked at least CAD 10 million would've been over the CAD 50 million of value level. Certainly when we look at the forward calendar, in terms of the larger packages, there are half a dozen that would be CAD 50 million, CAD 100 million+ in terms of size. The U.S. minerals market is very significant in size and scale. It's quite different than Canada, where Canada is 90% Crown, 10% privately held. It's the inverse in the U.S., and the fact that the U.S. obviously has that much more production as well.
You sort of have those two multiplying factors which create a significant amount of potential opportunity.
Okay .
Jeremy, just on what we're looking for in an acquisition. First off, it has to be accretive on a cash flow production and reserves per share basis. We're really focusing on high-quality counterparties and to ensure that we'll see continued development. We want to make sure that what we call tier one acreage positions. We're looking in basins that provide economic development at less than $40 WTI. Again, can survive any volatility in the industry. We want to make sure that those lands will still get drilled and contribute to organic growth. Lastly, they do have to have significant development opportunities so that someone can continue to develop those lands and grow them year-over-year into the future so that every deal that we're doing is layering on a little bit more organic growth.
Overall, the portfolio is improving so that we can see line of sight to growing production year over year without having to rely on acquisitions like we have in the past. If we look at this year, we're expecting significant production growth 2021 into 2022. To achieve that, we don't have to do another acquisition for the next 18 months at least. That's a significant change in our portfolio and also allows us to be very selective and very patient in the type of deals that we're looking for, the bid level that we're comfortable with. With the deal flow that we're seeing right now, if we don't find the metrics on the ones that are on our table right now, we're comfortable that there's more opportunities coming up shortly.
That patience has allowed us to get the right assets that we want in our portfolio.
Okay. All right. Thank you.
Thanks, Jeremy.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Spyker.
Okay. Thank you everybody for joining today in the call. Like I said, we've had an exceptional quarter, and the outlook going forward is very good. The industry is strong. We see lots of good opportunities in front of us, and we're really reshaping the company as we've known it to date. Really excited going forward, and we look forward to catching up with each of you next quarter. Thank you.
Thank you, everyone. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.