Good morning, ladies and gentlemen. Welcome to Freehold Royalties' Fourth Quarter Results Conference Call. I'd like to turn the meeting over to Mr. David Spyker. Please go ahead.
Good morning, and thank you for joining us today. On the call with me from Freehold are David Hendry, our CFO, Rob King, our Vice President of Business Development, and Ian Hankey, our VP of Diversified Royalties. 2022 was a year of records for us. This result is of significant work that was done over the last three years to establish Freehold as a premier North American energy royalty company. Our expansion and optimization efforts have resulted in a new-look Freehold, with a scale and asset base that will enable sustainable long-term value creation for our shareholders. By targeting plays across North America, our asset base, development inventory, and revenue generation is underpinned by exceptionally high-quality payers in many of the top-tier operating areas across Canada and the U.S. Freehold's Q4 and full year 2022 results reflect this quality. In 2022, we set a number of records.
We had record revenue of CAD 393 million. That was up 88% over 2021, and more than a 170% increase over the five year average of the company, highlighting the bigger, better nature of Freehold. Our portfolio is well-balanced, with revenue from Canada accounting for approximately 60% of the total and the U.S. contributing the remainder. Oil and NGLs represented 82% of revenue for the year. We had record funds from operations in 2022 of CAD 317 million or CAD 2.10 a share. This compares to CAD 190 million or CAD 1.39 a share in 2021, and is a 153% improvement versus the five year average for Freehold. We had record realized pricing of CAD 75.14 a BOE. That was up 57% compared to the previous year.
We continue to highlight the pricing advantage that our US strategy has provided. Freehold realized $90.64 a BOE within our U.S. portfolio last year versus CAD 68.12 a BOE in Canada, a 33% improvement. The higher pricing in our US portfolio is driven by the ability to sell our product closer to market, thus reducing the impact of transportation and Canadian egress bottlenecks. We had record production in 2022, 14,101 BOE a day, an increase of 19% over 2021. Our Canadian volumes averaged just over 9,700 BOE a day, and we're approximately flat year-over-year without completing a major acquisition in Canada. U.S. volumes averaged just under 4,400 BOE a day, up over 100% due to acquisition activity paired with an increase in third-party drilling activity.
For Q4, volumes averaged a record 15,041 BOE a day, up 7% versus the previous quarter. We are forecasting 2023 production to average between 14,500 and 15,500 BOE a day, and we are taking a cautious stance given the sharp pullback in natural gas pricing and the volatility in oil pricing, which is currently off 20% compared to 2022 average price. As with 2022, we can expect to see production rate volatility in our portfolio with seasonal impacts in Canada and the multi-pad drilling impacts in the U.S., with a number of our operators drilling 10 to 20 wells on a pad with sequential drilling completion and tie-in activities as opposed to activities in parallel that we would see elsewhere in our portfolio.
We had a record year of dividend payments, $142 million or $0.94 a share, an increase of 128% over 2021. Freehold's dividend pay-out ratio was on average 45% for 2022, an increase from 33% in 2021. We took a measured approach to dividend increases throughout the past two years. At current strip pricing, we expect dividend levels will be above a 60% pay-out ratio in 2022, and we're comfortable with that. Further dividend increases will be in lockstep with an increase in production or a fundamental shift in our underlying commodity price assumptions. We reiterate that we believe we can pay the dividend at much lower commodity prices and third-party development assumptions with the work over the past five years in enhancing our payer and asset quality, improving the overall sustainability of the company.
We had a record year of drilling in 2022 with 1,057 gross wells drilled on our acreage, a record for Freehold and a 61% increase over 2021. Almost half of the gross drilling was on Freehold's mineral title lands, including over 80% of U.S. gross wells drilled on mineral title land. In Canada, we saw drilling in oil-weighted areas such as the Viking, Clearwater, and Cardium, in addition to liquids-rich gas-weighted targets in the Deep Basin and Spear River. 503 gross locations were drilled on Freehold's Canadian land, a 14% increase over 2021. We estimate approximately CAD 1 billion in industry capital was deployed on our lands by our Canadian payers. In the U.S., operators focused drilling on light oil prospects in the Permian and Eagle Ford, with 90% of the activity occurring within these two basins.
Development of Freehold's US lands was led by a diverse group of disciplined investment-grade public companies and growth-oriented public and private operators. We estimate approximately CAD 3 billion of industry capital was deployed on our lands by our U.S. drillers last year. Through the H2 of 2022, Freehold consistently had between 30 and 35 rigs running on our royalty lands with a good balance between our U.S. and Canadian portfolios. We expect oil-targeted drilling activities to remain relatively strong, but we are approaching gas prospects with caution. Our business development team remained busy in 2022, completing CAD 190 million in value-enhancing acquisitions, expanding our royalty positions in the Permian and Eagle Ford Basins in the U.S. and in the Clearwater in Canada.
Looking forward, we continue to see good opportunities both within Canada and the U.S. although Freehold will remain very disciplined in its portfolio investment strategy in terms of play and focus areas, patiently looking to invest in areas that will continue to strengthen our portfolio and provide value to our shareholders. On the leasing front, Freehold executed 83 new leases with 30 distinct counterparties, a level that we've not seen since 2018, 2019. Areas of activity included Southeast, Saskatchewan, and Mannville heavy oil with operators weighted to junior private entities with a near-term growth objective. We've also been successful in leasing some of our mineral title lands in the U.S. Cash costs for 2022 totalled CAD 5.19 a BOE, up 40% versus the same period in 2021. The majority of the increase was associated with higher interest rates.
Our net debt exited the year at CAD 120 million or 0.4x net debt to trailing funds from operations. This was achieved while acquiring CAD 190 million of value-adding acquisitions and increasing our dividend twice in 2022. At current commodity price levels and our limited cost exposure, fund flow generation remains robust, allowing for debt to be paid down while maintaining our dividend. Early in 2023, we announced the release of our sustainability report, highlighting the company's focus on responsibly growing and enhancing our business through environmental, social, and governance initiatives. Freehold strives to generate shareholder value by maintaining a strong balance sheet, focusing on the long-term sustainability of our business, and partnering with high-quality operators across North America who are aligned with our views on the importance of sustainability and ESG performance.
In closing, 2022 represented a very successful year for the company. We moved forward with a measured advancement of our North American strategy. I would like to thank our board of directors, our shareholders, employees, and all those who have supported Freehold through 2022. We will now take any questions. Thank you.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your device's keypad. To cancel the question, please press star two. Please press star one at this time if you have a question. There will be a brief pause while participants register. Thank you for your patience. Your first question is from Luke Davis from RBC. Please go ahead.
Hey, thanks. Good morning, guys. Just wondering if you can speak a little bit to your alternative royalty business, what types of opportunities you're looking for and just generally what that market looks like currently?
Yeah, that sounds good, Luke. We're gonna turn that over to Ian Hankey. He's looking after that for us. So, Ian?
Hi, Luke. We're tackling a diversified strategy much in a similar way our early-day approach to the U.S. expansion was. We're trying to be patient and examine a bunch of the opportunities and just get up to learning curve before we put too much capital to work. We have a number of opportunities that we're looking at. Some have traction, we're just in the space to get a better understanding of where Freehold can fit. Most of the conversations we're having are focused around sort of base and industrial mines and minerals, renewable power and renewable fuel and some amounts of critical minerals, but not a huge amount. You know, we've got some existing Potash Royalties. You know, we like those assets.
We're looking to grow our position there, I think that's gonna be probably a slow and measured approach. Those are typically smaller assets. We'll have to pick up one at a time. Yeah. I would say we're just trying to make sure that we're looking at opportunities that add to the stability of Freehold and make sure we compete for capital with oil and gas opportunities and sort of, I guess, stay out of the way of the base business as we, as we look for interesting things to examine.
I think, Luke, our thinking has certainly evolved over the past year. I think we originally thought we might be able to find a niche in wind and solar, but, you know, those opportunities certainly can't compete for oil and gas returns. That's why Ian and his team have diverted onto some of these other types of opportunities that he talked about. We think that there's some pretty good opportunities within that scope.
That's helpful. Curious, what kind of a return threshold or hurdle rate or something that you guys generally look at when you're evaluating this stuff?
It would have to be in that, you know, mid, high teens, even into the 20% you know, range, Luke, just to make sure that, you know, we're getting those returns in a, in a, in a new type of business for us.
Yeah, makes sense. Thanks. Maybe just one more for me broadly on M&A. What are you guys currently seeing in Canada and U.S., and do you think there's as much opportunity as you saw through 2022?
Yep. Hi, Lucas. It's Rob here. In Q4, we had about 20 opportunities that we screened. You know, looked at some, you know, bid on a couple of those, not successful. You know, still continuing a pretty, very disciplined, you know, approach that, you know, we're taking with the acquisition opportunities. I'd say a slower start, you know, to 2023. Maybe not surprising just given the, you know, volatility and the significant degradation on the natural gas side. We've seen a number of, you know, potential sellers, you know, just sort of pull back and re-look and re-decide when they may, you know, look to monetize.
You know, that being said, there are, you know, several things that we're looking at, you know, in Canada. I think we're still focused on the Clearwater. We've actually just closed, you know, a couple weeks ago, a small million-dollar tuck-in, in Figure Lake, and active dialogue with several producers. Yeah, still active, but remaining disciplined.
Great. Appreciate that. Thanks, guys.
Thank you. The next question is from Travis Wood from National Bank Financial. Please go ahead.
Yeah, thanks. Maybe just to follow on M&A. Could you provide any commentary around the aggregate deal value that your activity, maybe specifically those 20 deals through Q4 would've added up to? Kind of more interestingly, just across the year itself. I have just one follow-up.
In, in Q4, those 20 opportunities that we reviewed, that'd be about $250 million of U.S. and CAD 300 million, in terms of the deals that we looked at in Q4. You know, 2022, it was closer to over 100 opportunities that we reviewed. That was over $5 billion of U.S. opportunities and CAD 700 million of Canadian opportunities.
Okay. Interesting. Thank you. Just on the assets that you purchased, kind of thinking over the last 12, 18 months, any surprises that you're seeing through now that you've had a good full year of operations, a busy H2 of the year as well? Any surprises as you look back on performance and any versus your initial expectations and specifically thinking of the Eagle Ford performance against the Permian, specifically?
You know, I think it's actually been nice having a full year of 2022 just to see the performance of our 2021 acquisitions. You know, obviously, we were very active with, you know, almost CAD 400 million worth of deals that we added to our portfolio in 2021. You know, I've had a chance to have a full year and sort of see how they've done, and we've been really pleased with the performance. It's one where we've already generated CAD 165 million of revenue on CAD 367 million of acquisition capital. That's about a 45% of our investment that's been returned in less than two years.
You know, I think relative to our acquisition assumptions on those three 2021 deals, the gross drilling has been, you know, basically in line. I think we're about, there's about a 1%, you know, difference in the gross wells that have been drilled on our lands. That, that sort of is the. Quite validating to know that capital is certainly being deployed, you know, onto our lands and, in the levels that we had anticipated. Check mark there. You know, well productivity has been, you know, equally in line. We, we forecasted about 800 barrels a day of IP180 on our U.S. deals, and, you know, the actual has been about 790.
You know, so, you know, call it 1% off on those on the type curves. Again, been positively, you know, pleased that that's been in line. What we have seen is, you know, the net wells have been lower. That's sort of a reflection of some lower, you know, net royalty interest wells that have been brought on. That's sort of the timing issue that, you know, we discussed in the mid part of 2022. You know, I think it's one where we would've been a lot more concerned if the gross drilling, you know, wasn't in line, so that would've been more of the reflection that capital wasn't being deployed on our lands.
You know, the net drilling, you know, is that transitory timing, you know, issue and some of the things that we're, you know, we're continuing to manage, you know, with our production forecast, you know, on the U.S. side. You know, Eagle Ford, you know, it's one where when we think back to the... When we paid for that deal, I think what's one of the important things is that we didn't pay for a lot of, you know, upside, you know, on that transaction. We paid for, you know, five years of development.
I think what we've observed with the key royalty payer there, Marathon, where they've, you know, they probably had, you know, some, you know, well productivity declines relative to what we saw prior years. They're still keeping pace and, it's still keeping largely, you know, flat production coming from Marathon's, you know, assets that we have with them in the Eagle Ford.
Awesome. That's great, Rob. Appreciate all of that. Thank you. That's all for me.
Thank you. The next question is from Matthew from iA Capital Markets. Please state your last name. Please go ahead.
Yes, it's Weekes. Thanks for taking my question, and good morning. I'm just wondering, it sounds like there's a little bit of sort of conservatism maybe in the guidance range for 2023. I'm just wondering if you could walk through maybe some of the broad, you know, points or kind of drivers into the, you know, cadence of production growth as you look to the year ahead.
I think, It's Dave here. You know, when we look at that and we just look first off at the pullback in gas prices. The thing with the gas in the portfolio, you know, it can add a lot of production. It doesn't add a lot of cash flow. What we see is that, you know, with some pullback in gas drilling, you know, we do see some of the rig counts slowing down a little bit.
You know, that will have an impact on our volumes, especially, you know, where we've been seeing some gas drilling in Canada is, you know, where that would have the bigger impact. On the oil side, you know, again, that we're not seeing, you know, a slowdown on the U.S. side. You get a little bit more worried on the Canadian side, where it's a little bit more impacted by the differentials. Just taking a cautious approach.
You know, when we look at, you know, the guidance that, you know, our drillers are giving, what, we're seeing for guidance as people release their year-end results and guidance, that there is a little bit more of a cautionary tone and that we reflect that in our business. That's how we're, you know, approaching it. We don't wanna get ahead of our skis. Like we saw last year, the portfolio can be volatile. You know, Canada can be. It's probably a little bit smoother, but, you know, impacted by much more weather-related events, whether it's break up or cold weather, you know, snaps.
The U.S., just because of the nature of the drilling, you know, we see a very much more Sawtooth production profile depending on when a number of these pads are brought on. You know, that's been reflected in, you know, how we think of guidance. Just to build a little bit further what, you know, Rob was talking about on the net wells, you know, we've got a, you know, a wide range of net royalty interests in the U.S. We can't predict where that drilling is gonna occur. We look at it more from an average net royalty interest across the portfolio. If we get some of those higher NRI spacing units drilled, then we'll get ahead of some of the numbers.
If we're on some of the lower ones, then, you know, that impacts our view. It's just a little bit much more volatile, portfolio given, you know, both the combination of how U.S. lands are developed and just Canadian history.
Okay, thanks. That's helpful. It sounds like kind of some of the headwinds on the gas side. Just thinking about, you know, your overall weight into oil and kind of most of the drilling, you know, being more oil-weighted, would you say, you know, there's a degree of kind of protection from the lower gas prices there? Then potentially as well as we see kind of differentials narrowing on the heavy oil side, you know, in Canada a little bit. Would you say these factors kind of might provide a little bit of support in the context of the commodity price volatility?
Yeah. I think that that's fair, especially on the Canadian side with the differentials. You know, on the U.S. side, you know, we're starting to hear some chatter that maybe some of those U.S. rigs are gonna get deployed onto the oil side. You know, we certainly haven't factored that into how we're thinking of the business yet. Bottom rigs are still competitive in the U.S., and so operators are hesitant to give up a rig, and so we just have to see how that all plays out.
Okay, thanks. I appreciate the comments. I'll turn the call back. Thanks.
Thank you. The next question is from Christopher Jones from Haywood Securities. Please go ahead.
Thank you for taking my question. Just to add to Luke's and Josh's question there on M&A. How do you think about balancing incremental M&A relative to dividend increases, given the opportunity set to transact? Does it, does it make sense to sort of accelerate M&A and perhaps slow down on any potential dividend increases? Maybe just kind of talk to that a little bit.
I think where we're at with the dividend at CAD 0.09 a share, that that's the right level for us, you know, with where we see, you know, commodity prices on strip pricing. So, you know, we'll be in that. I'm sure we'll have a safe handle on the pay-out ratio in 2023. So we think that that's the right level right now. In the interim, you know, we'll c.ontinue to, you know, pay down debt and, you know, see if there's opportunities that we can add to the portfolio. Like Rob had indicated, you're starting to see a little bit of slowdown in the opportunity set, you know, going into Q1 in the U.S.
On the Canadian side, you know, have probably a little bit more dialogue that we're having with people with respect to royalty financing type opportunities, again, given the higher interest rates and a bit of volatility in the commodity prices. We're in no rush, and we look at a lot of stuff and pretty selective on what we wanna bring into the portfolio. You know, think of dividend holding where it's at, excess cash used to pay down debt and patiently buying the time looking for the right opportunity.
Okay, thanks for that. Just on the Howard County Midland asset, volumes are up 15% since close. Is that above what you guys were internally forecasting and how do you see that trending this year?
Yep. You know, it certainly, you know, it is above. Like, you know, in Q4, production that we saw from, you know, from those assets was what? 900 barrels a day. Our acquisition analysis at 550 barrels a day. You know, some of that was just higher net royalty interest wells coming online. That's a little bit of the, you know, the, the positive aspect where you can get some, you know, higher NRI wells that are drilled sooner when we had, you know, predicted that there'd be lower NRI wells that would be, would have been turned in line. You know, that may, that may mean revert a little bit within, in 2023 and beyond.
You know, the, you know, the, the key operator under our Howard County assets is still aggressively allocating capital, you know, to that, to that place. you know, I think we're encouraged that it's gonna be, you know, in line with what our expectations were, at the time of the acquisition.
Got it. Thank you.
Thank you. The next question is from Jamie Kubik from CIBC. Please go ahead.
Yeah. Good morning. Thanks for taking my question. maybe answered a little bit already, but can you talk a bit about the production guidance range you provided for 2023 and maybe what sort of net well count would cause you to hit the low end versus the high end in those scenarios? Then maybe secondly, can you outline how you expect Canada and the U.S. to individually contribute this year? Thanks.
On our, on some of the ranges there on the net wells, Jamie, it was one where sorry, Jamie. On the Canadian side, we had a range of call it 15-20 on the net wells. You know, with the midpoint of the range pointing to where that, you know, where that, you know, where the 15,000 barrels a day for the overall production. You know, U.S. side, it was sort of about 3-4, you know, net wells is what we had forecasted in that, in that range.
You know, in terms of contribution between the two, you know, I actually don't have that number, you know, at hand right now. I mean, I think what we're sort of expecting to see on a year-over-year basis is, you know, basically flat Canadian volumes. Flat to, you know, maybe slightly down on a BOE basis just because of some of, some of the gas, you know, challenges that Dave was talking about. On the U.S. side, we're probably sort of seeing like, you know, low single digit, you know, growth on a year-over-year basis. That's kind of what, you know, the overall portfolio is. Apologies, don't have the at hand the 23 split on between the countries.
Okay. That's helpful. Maybe a tack-on question here, related to some of the M&A comments that you've made. I know Freehold's focus on the U.S. side has been really oil-weighted basins, but would you look at being opportunistic in some of the gas-weighted basins given the pullback in pricing to start this year? Is oil more the focus for Freehold? Thanks.
I mean, I think we're, we'll always gonna be opportunistic. Returns drive, you know, really drive what we're focusing on. That's kind of equal comment. That's why we're indifferent between allocating our capital in Canada versus allocating our capital in the U.S. We just look for, you know, the highest and best return, you know, and that's equally true for the commodity. You know, I think one thing we've observed is just, you know, we may be able to get, you know, the best of all worlds by focusing on the Permian, where not only can we get, you know, Nat -Gas opportunities, we still get the oil opportunities. You know, I think we're.
It's not that we haven't looked at, you know, natural gas opportunities in basins like the Haynesville, and we continue to look at those. I think where we've just, I think had more traction and are seeing a greater opportunity set, is in, are in the Texas place.
Okay. Thank you. That's it for me.
Thank you. Once again, please press star one at this time if you have a question. There are no further questions registered at this time. I'd like to turn the meeting back over to David Spyker.
All right. Thank you everyone for joining today. Some great questions and some good dialogue. Exciting year in 2022 for us and, you know, really looking forward to 2023, with a number of ideas and initiatives that we have going on. We're looking for another successful year. Thank you all.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.