Earnings Call: Q4 2019

Mar 5, 2020

Good morning, ladies and gentlemen. Welcome to the Freehold Royalties Limited twenty nineteen Year End and Fourth Quarter Conference Call. Please be advised that certain statements on this call constitute forward looking information. All statements other than those of historical facts may be forward looking, and we caution the listener. I will now pass the call over to Tom Mullane, Chief Executive Officer. Please go ahead, Mr. Mullane. Good morning, and thank you for joining us. On the call from Freehold are David Hendrie, our CFO David Spiker, our Chief Operating Officer Matt Donahue, our investment IR and capital markets manager. We also have Bob Lamond, our asset development VP and and Michael Stone, our VP Land. Before we go into some of the over some of the highlights associated with our 2019 results and our outlook for 2020, I would like to welcome David Hendrie, our new Chief Financial Officer and Rob King, our new VP, Business Development. This year. Both Dave and Rob will be key members of our team as we strive to maximize value for our shareholders. Freehold offers dividend sustainability, oil production and reserve growth and an attractive return to our shareholders. Operationally, 2019 royalty production averaged 10,229 BOEs a day, down 4% versus 2018. The decrease year over year reflected lower third party drilling on our royalty lands, primarily associated with reduced natural gas drilling. Oil and NGL volumes averaged 5,701 barrels per day for the year, down 3% versus the previous year. However, we had seen growth in our oil volumes for the 2019. Royalty production volumes for the fourth quarter averaged 10,315 BOEs a day, up slightly versus Q4 twenty eighteen and the previous quarter. We grew our oil and liquids volumes by 4% quarter over quarter and 5% year over year, reflecting increasing oil focused drilling. For 2019, royalties as a percentage of production, 96%, and operating income, 100%, represented all time highs for Freehold as we remain focused on enhancing the quality of our underlying asset base and our sustainability. Looking into our 2020, we have unveiled our production guidance and are forecasting royalty volumes to average between 9,750 barrels a day BOEs a day and 10,250 BOEs a day, a slight decrease over our fourth quarter average. Our production forecast includes third party royalty additions from 20 net wells forecast to be drilled in our well on our lands in 2020. The Canadian macroeconomic environment continues to be challenged for producers with a number of egress infrastructure constraints along with the current commodity environment. And with that, we are taking a conservative outlook for the year. We also note that our 2020 production forecast does not include acquisitions. As part of our 2019 results, we unveiled our year end reserves. Some of the highlights included proved plus probable net reserves totaling 31,700,000 BOEs, up from 30,900,000 BOEs a year earlier. 2019 proved post probable royalty interest reserve additions replaced 129% of production, a testament to the quality of Freehold's underlying assets and recent acquisitions. On the activity front, a total of six forty one gross 20.8 net wells were drilled in our royalty lands in 2019. This represented 11% decrease on a gross measure and a 2% decrease on a net measure versus activity levels in 2018. 96% of all drilling on our lands in 2019 targeted oil and liquids. 22% of all drilling occurred on our mineral title acreage, with the remainder on gross overriding royalty lands. The Viking, both in Alberta and Saskatchewan, continued to be an anchor development in 2019 with greater than 100 gross wells in our lands by a private Viking producer. We also have seen a resurgence in drilling in Southeast Saskatchewan and continued strong drilling in Northwest Alberta Cardium and Central Alberta Clearwater formations. We completed $46,000,000 in value enhancing acquisitions in 2019 compared to $62,000,000 in 2018. Acquisitions included a growth overriding royalty with drilling commitments on certain light and medium oil reservoirs in Central And Northern Alberta and Southwest Saskatchewan. We completed our first U. S. Royalty transaction, acquiring quality royalty assets in North Dakota for USD 9,800,000.0. For 2020, we believe there are acquisition opportunities both in Canada and The U. S. As we focus on enhancing value for our shareholders. Our leasing team completed 93 new lease agreements in 2019, down slightly from 2018. We believe leasing activity resulted in approximately two net wells in 2019, and the expectation this continues in 2020. Since inception, our leasing team has completed over 300 new lease agreements. Leasing activity was focused in East Shield, Duvernay, Cardium, Probucher, MyDale and Viking formations. I'll now pass the call to David to walk through some of the financials. Thanks, Tom. Good morning, everyone. Financially, we continue to deliver on our dividend payout and debt threshold objectives and position Freehold as a lower risk oil and gas investment. At the current share price, we generate a dividend yield of approximately 10% that is fully funded at current commodity price levels. This demonstrates that Freehold is one of the more defensive Canadian oil and gas companies. In 2019, Freehold generated $141,400,000 in royalty and other revenue, down 3% versus 2018, reflecting slightly lower production volumes. Royalty revenues totaled $136,800,000 which is flat versus the previous year as higher realized prices offset slightly lower production volumes. We also continue to emphasize value protection on our royalty lands through our audit compliance function, which recovered approximately $3,000,000 of incremental revenue in 2019. Bonus consideration and lease rentals totaled $1,100,000 for 2019, down from $3,800,000 in 2018 as our leasing efforts focused more on well commitments and less on bonuses over the year. Total royalty revenue was comprised of 88% oil and NGLs. Our royalty portfolio generated an operating netback of $36.56 per BOE in 2019, a 4% increase year over year, reflecting an improving oil price environment. Funds sold from operations for 2019 totaled $118,100,000 down 3% from 2018 levels. Funds sold from operations were impacted by a slight decrease in production volumes, offset by an improvement in realized oil prices. Our payout totaled 63% in 2019, up slightly from 61% in 2018. This remains at the low end of our outlined payout strategy of 60% to 80% of funds flow from operations. In total, Freehold generated approximately $43,000,000 in free cash flow during 2019, which we allocated towards value enhancing. 2019 year end release, we announced that our Board of Directors had approved maintaining our monthly dividend at $0.05 $25 per share or $0.63 per share annualized. The current payout levels are in line with our previously stated dividend policy based on our current guidance and commodity price assumptions. And assuming no significant changes in the current business environment, we expect to maintain the current dividend rate through 2020. We will continue to evaluate current commodity price environment and adjust the dividend as appropriate. Freehold closed with net debt of 94,600,000.0 representing 0.8x net debt to funds flow from operations. Net debt increased versus the same period last year as a result of our 2019 acquisition activity. Our debt strategy is to maintain net debt to funds flow from operations below 1.5x, and we expect to remain within this range while maintaining a dividend payout between 6080%. Now back to Tom for his final remarks. Thanks, Dave. In closing, we executed the core aspects of Freehold's strategy in 2019 and maintained Freehold's identity as a lower risk oil in Canada and in The United States. With our excess free cash flow over and above our dividends, we acquired value enhancing acquisitions and forged new business opportunities in North Dakota. We continue to maintain significant flexibility in our balance sheet while maintaining sustainability in our dividend. At current share price levels, we feel the return proposition is an attractive entry point for investors and sustainable in the current commodity environment. In terms of how we expect to allocate free cash flow in the near term, our preference is to take advantage of acquisition opportunities as they present themselves. The ability to access capital, both equity and debt, remains challenged for many Canadian E and P producers, and we believe we can serve as a financing tool through the creation of new royalties in Canada and in The United States as well. If we are unable to complete acquisitions with our free cash flow, we expect to pay down debt. Thank you for joining us on this conference call, and we have now entertained any questions. Thank you. We will now turn the telephone lines. Thank Thank you. You. The first question is from Dennis Fong. Please go ahead. Your line is now open. Hi, good morning and thanks for taking my questions. I've got two here. The first is really, it's something I've asked in the past. I'm just curious as to how your I guess, strategy around incentivizing activity on your current or already leased land is progressing, especially given the oil price pullback? And if maybe you could provide a couple of examples of initiatives that you're pursuing right now for the second one. Okay, Dennis. I'll take that. So what we're doing, Dennis, is specifically on areas where we find secondary recovery, etcetera, we do incentivize drilling to encourage more reserves, a win win for everybody and development. We also look at incentivizing producers that commit wells, also, producers that perhaps, can accelerate development from where we think it'll it'll happen naturally. This will be a win win for both us and for, producers. Okay. And then my second question here is just I know kind of looking into The U. S, just wanted to kind of understand the pipeline or what you guys are seeing in the pipeline of potential U. S. Acquisitions, kind of the level and the level of interest in kind of further potential acquisitions from your counterparties or potential counterparties as well as how we should be thinking about, I guess, the level of activity you guys are seeing on your land from your first four races up this quarter? Dennis, it's Rob King here on the business development side. In terms of what we're seeing so far in 2020 for US opportunities, we've been encouraged by the number of mineral title opportunities that we've had an opportunity and are reviewing right now in North Dakota. Now I would say there have been several processes that that have been pulled so far in terms of light of the market conditions, but there there continues to be, you know, a number of small and larger sized mineral title opportunities that we are actively reviewing and expect that will continue. On the production side in North Dakota, We entered the year with just over 200 barrels a day, and that's been steadily increasing as the number of the DUCs that have been coming online in Q1 being added to that production base. And so we're now exceeding our expectations of what those assets would provide from a production standpoint. Thank you. The next question is from Christopher McCullough. Please go ahead. Good morning. Yes, it looks like you guys posted another strong quarter here for oil production growth from your royalty interest assets. So think Dennis kind of alluded to some of these questions before, but maybe you could provide us with some color here as to how Q1 drilling activity is actually winding up here relative to your 2020 net well guidance. Hi. Good morning. This is Bob Lamond. I'll field that question. Yes. I mean, our guidance has been actually really strong from what we've been seeing. So while province in general and Canada in general has been down, We're actually seeing really constant and steady drilling on our land. And we're very happy. We set our projections for '20 wells per year. We see Southwest Saskatchewan and a few of our acquisitions from last year still continuing very, yeah, continuing at the same pace as we saw in the past year. So while the rest of the products, we would like to see everything going up. We're really quite happy with our numbers to date. And it really continues in our strongest field that we've seen in the past. The next question is from Jamie Kubick. Tom, you talked a little bit about capital allocation in 2020 of using free cash flow towards potential acquisitions and then debt. But when could buybacks conceivably become part of the structure for Freehold? And can you talk a little bit about the company's philosophy around that? Yes. Right now, we're seeing even at these stock price levels and cash flow projections per share, etcetera, we do see acquisitions that can be accretive to our existing cash flow per share. So we continue to look at acquisitions. When we look at an acquisition, we do comparative buybacks just to make sure that we are doing the right thing on capital allocation. Okay. And I guess when what could we possibly see an NCIB in place from Freehold? Is that something we should think about at all or no? It is something we review constantly. We have no plans right now put in place. Okay. Thank you. Thank you. There are no further I apologize. We now have a follow-up question from Dennis Fong. Please go ahead. Hey. Sorry, I just had a quick follow-up. I was actually hoping to maybe get a bit of an update around the CRA process that you guys announced in the previous quarter. Yes. Thanks, Dennis. It's Dave Hendrick here. So our last correspondence with the CRA was in the 2019. So we did report that it would take likely take quite a bit of time for the CRA to respond. And so the process was they were requesting additional details in order to come to a final position or at least an updated position, and we've been waiting for that since the fall. And so ultimately, that's a good sign, I think, is that it's been a number of months, and we haven't heard anything back from them. So I think our position is strong that we're continuing to believe that is defendable. And so we report it, but until we get something back from the CRA, I think our disclosure is as factual as we got at the moment. Great. Thank you. The next question is from Luke Davis. Please go ahead. Hey, good morning, guys. You obviously remain very focused on M and A. Just more of a question for Rob. You've been in the seat for a couple of months now. Has anything strategically changed in terms of, how you're looking at the market? No, I don't I don't think so. I mean, I think it's still we still see opportunities in The U. S, in North Dakota. We still see opportunities in Canada as well. And so we are actively reviewing, you know, mineral title deals as well as, door or the opportunities on both sides of the border. Opportunities for mineral title in Canada? At the margin, there is. I think that's probably more opportunity in the royalty space. And there are no further questions registered at this time. So I will turn the meeting back over to Mr. Malane. Well, thank you very much, and thank you, everyone, for joining us on this conference call. We are pretty proud of our quarter, very solid quarter. We outperformed the industry as far as drilling on our lands, and we continue to be a lower risk investment vehicle in the oil and gas space that provides a meaningful return Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. This conference is no longer being recorded. Please note that this conference call has ended. Please disconnect your line at this time. Thank you.