Today, thank you for standing by. Welcome to the Freehold Royalties second quarter 2026 webcast. At this time, all participants are on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, David Spyker, President and CEO. Please go ahead, sir.
Thank you, good morning, everyone. Thank you for joining us today. Before we begin, I'd like to remind everyone that certain statements made on this call are considered forward-looking information, and we caution listeners to review the advisory regarding forward-looking statements contained in our news release and MD&A available on our website. On the call with me this morning is Brad Monaco, our Chief Financial Officer, and Todd McBride, our Manager of Investor Relations. Brad joined our team in June and brings extensive experience in the energy sector with a strong background in finance, capital markets, and strategic planning. We're excited to have Brad join Freehold, and we look forward to introducing him to many of you in the coming months. Turning to the quarter, production averaged 15,622 BOE per day with a liquids weighting of 66%.
Production was in line with the expectations that we outlined earlier this year. Over the past few quarters, our current production reflected the moderated activity levels experienced through the second half of 2025 when commodity prices were much lower. We're encouraged by the recovery in drilling activity levels that will contribute to our growth through the back half of 2026. Overall, our Q2 results were strong, generating CAD 78 million of funds from operations. Our net debt is down CAD 24 million, and our balance sheet is in great shape as we head into the second half of the year. From a portfolio perspective, our North American asset base continues to benefit from geographic diversification. Approximately 54% of our production is from Canada and 46% from the U.S. this quarter.
While the U.S. represents a smaller portion of production, it generated higher revenues and realized pricing and is a key contributor to our cash flow generation. This quarter, we had a 35% increase in drilling activity with a total of 300 gross wells drilled on Freehold lands, compared to 223 wells drilled in the first quarter. On a net basis, Freehold added 1.8 net wells in Canada and 0.9 net wells in the U.S. Net drilling activity in the U.S. is at the highest level we've had over the past several years. Activity across the portfolio was largely directed toward crude oil opportunities as operators responded to this much more constructive oil price environment. In Canada, 74 wells were drilled during the quarter despite operators working around spring breakup conditions. Industry drilling has been robust coming out of breakup, with rig counts up 20% on a year-over-year basis.
Activity on our land in Canada is concentrated in oil-focused areas, including the Clearwater, Southeast Saskatchewan, and Mannville heavy oil. Across Western Canada, operators continue to focus on improving well economics through longer lateral lengths, optimized completions, enhanced reservoir targeting, and the implementation of secondary recovery schemes. These improvements, alongside higher productivity targets, have supported a 30% improvement in well performance and continues to expand the drilling inventory across our land base. We entered into 45 new leases in Canada, largely concentrated in southeast Saskatchewan. Several operators have outlined plans to advance drilling programs later this year, and we expect those production additions to begin contributing through late 2026 and into 2027. Turning to the United States, 226 gross wells were drilled on our lands during the quarter, with approximately 82% of activity occurring in the Permian Basin.
We continue to see significant activity in the Permian, where operators have been investing into technological advancements that support longer lateral lengths, as well as use of surfactants and lightweight proppants to improve well productivities. As an example, spuds in the Midland Basin averaged three miles on our acreage this quarter, approximately 10% higher than last year. We've also had an increase in activity in the Barnett Formation in the first half of the year. We remain constructive on the opportunities in the Barnett as operators continue to demonstrate the potential of this deeper formation. This is backed up by the strong leasing and permitting activity we saw through the quarter, and drilling activity is just commencing. One area we continue to monitor is natural gas infrastructure in the Permian. During the quarter, natural gas pricing and production was negatively impacted by egress constraints at the Waha Hub.
The Waha Hub is the primary point for moving gas out of the Permian. During the quarter, natural gas pricing and production was negatively impacted by egress constraints at the Waha Hub. This caused gas price differentials to NYMEX to widen to unusually high levels, resulting in negative gas pricing for most of the second quarter. In late June, compression was added to the Gulf Coast Express expansion line, and the first phase of the Hugh Brinson Pipeline was put in service. Combined, adding approximately 2 Bcf a day of takeaway capacity. This moved our Permian gas into positive pricing very late in the quarter and alleviated any immediate Waha egress-related production constraints in the Permian.
In addition to the two expansions I just mentioned, there's a total of 4.5 Bcf a day of new egress capacity expected to come online by the first quarter of next year. This will provide producers much greater flexibility to manage their associated gas volumes and support further production growth across the basin. Looking ahead, drilling activity has improved substantially from the levels experienced through much of 2025. Operators remain focused in many of the core oil-weighted areas within our portfolio. We also continue to see an inventory of licensed and drilled and uncompleted wells across our lands. While timing of production additions ultimately depends on operator completion schedules, current activity levels support our existing outlook, and we are maintaining our 2026 production guidance of 15,500 to 16,300 BOE per day.
With that, I'll turn the call over to Brad to review the financial results in more detail.
Thank you, Dave. I'm pleased to be on the call today and excited to have joined Freehold. This is a great business model with a high-quality royalty portfolio, and I look forward to working with Dave and the team to build on that foundation. Q2 royalty and other revenue totaled CAD 100 million, up 29% compared to Q1 2026, driven mainly by stronger realized commodity prices. Crude oil pricing was particularly strong, with Freehold realizing CAD 122 per barrel in the quarter.
Including NGLs and natural gas, our average realized price was just over CAD 69 per BOE, compared with approximately CAD 55 per BOE in the first quarter. Cash costs average approximately CAD 6.50 per BOE, improving from CAD 7.02 per BOE in the first quarter and CAD 7.38 in Q2 2025. Our cost structure remains among the lowest in the oil and gas industry and is a key advantage of Freehold's royalty business model.
Funds from operations totaled CAD 78 million, or CAD 0.47 per share, up 30% from Q1 2026. We returned CAD 44 million to shareholders through dividends, representing a 57% payout ratio and investing approximately CAD 9 million in acquisitions. Year-to-date, Freehold has invested approximately CAD 29 million in mineral title and royalty interest in the Permian Basin. These tuck-in investments have added 12,500 acres in core areas of Texas and New Mexico, including Loving, Martin, Midland, and Lee counties. The focus remains on adding high-quality, undeveloped acreage that can support future production growth as operators develop these lands. We also strengthened the balance sheet in Q2, with net debt declining by CAD 24 million during the quarter to CAD 251 million, while our net debt to trailing funds from operations ratio improved to 1x. This provides the capacity to continue pursuing value-add acquisitions while consistently returning capital to shareholders.
Capital allocation is central to how we create per-share value. For Freehold, every dollar needs to be thought about carefully, whether it is deployed through acquisitions to make our business better, used to add financial flexibility through debt reduction, or returned to shareholders. We are coming from a position of strength, and we built additional flexibility after a strong second quarter. With that, I'll turn the call back to Dave.
Thanks, Brad. With that, we're pleased to take questions from the audience.
Thank you. Ladies and gentlemen, if you have a question at this time, you will need to press star one one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for a question. We have a question coming from the line of Jamie Kubik with CIBC. Your line is now open.
Yeah. Good morning. Thanks for taking my question. Just interested if you could talk about the drilling activity increase that you saw in the U.S. this quarter and any timing factor expectations for when that production possibly comes online. Then can you just talk about what you're seeing for recent activity and how you think that translates into Q3, Q4 net drills on the U.S. side? Thanks.
Yeah. Jamie, Dave here. With respect to the U.S., we expect that most of the activity in the quarter was directed in the Permian. You will expect to see that kind of ramp up into Q4, into early Q1. The Eagle Ford, our other big area in the U.S., we've got indication from ConocoPhillips that that's a back half program. Whether we're going to see those Eagle Ford wells come on in late 2026 or early 2027, not 100% sure yet. A bit of a function of timing on that. Will be a strong drilling activity in the U.S. just going into the back half of the year. I would say that's the same for Canada, where you had the first four months of the year, we had 75 wells drilled on their lands. Over 100 in the last three months.
You can see that that activity is really ramping up quite sharply. Again, that kind of feeds what we've been messaging all along here, is that really the ramp up in production, both in Canada and the U.S., based on where we're seeing the drilling activity directed, will be the latter part of the year.
Okay, thanks for the color. I'll hand it back.
Thank you. Our next question in queue, coming from the line of Patrick O'Rourke with ATB Cormark Capital Markets. Your line is now open.
Hey, guys. Good morning, and thanks for taking my questions. I guess first off, congrats to Brad on the appointment, and we look forward to hearing from you. I guess, maybe building a little bit on what Jamie asked, it's fairly apparent the uptick in activity, we can see that in terms of well spuds. I guess, if we could maybe look a little bit under the hood in terms of what that means, in terms of well productivity and meters drilled, and how the nature of the wells is also changing. Maybe perhaps some color there.
Yeah. Lots of layers in that one, Patrick. I think what we're seeing particularly, we'll focus on the Permian, because that's where we're seeing the biggest growth in the U.S. side. I think, consistent with what we're seeing with some of our core operators as they walk through their second quarter results, is that in productivity improvements related to surfactants are real, where we're seeing a significant shift in initial well productivity improvements with the surfactants, particularly on the ExxonMobil side. We're seeing improvements associated with their use of this lightweight proppant that is a coke-based material that comes out of their refineries. On the well length side, we are seeing, again, just this continual movement to longer wells. Well length up 10% quarter-over-quarter.
What we're seeing not only on our asset space, but in the literature as well as a lot of third parties kind of poring through all the data of the U.S., is that certainly a shift in the mandate of declining well productivity is where the technology advancements on many different fronts are kind of reversing that per lateral foot production productivity decline that had been seen over the last couple of years. Whereas today, those numbers are being reversed, and I think it's a function of just the technology, and as operators, there's a lot of reservoir intervals to pursue in the Permian, and operators are also starting to drill those. We've seen some fantastic well results out of the Barnett, and really that's being led by Diamondback right now as the key operator. We see that continuing to expand across the portfolio.
It's certainly where our leasing has been focused on. We're pretty bullish on well productivity in the U.S., not only from the existing zones, but from a number of zones that operators are pushing for.
I guess maybe just to put a finer point on it, because it was a bit convoluted there with my question. When you're seeing the results come in at an individual well level, the receipts that you're receiving, are they trending higher?
As a general rule, they're trending higher, yes. Our well productivity year-over-year, both in Canada and the U.S., are higher. Look, in Canada, well productivity was up about 30% year-over-year, and in the U.S., it's about 15%.
Okay. Just maybe over to the sort of finance capital side of the business. Debt continues to sort of inch down here. I know we were in a very buoyant commodity environment, you did get below the 60% level in terms of payout. In terms of when you think about the interplay between the debt on the balance sheet and the payout ratio, what are the conditions that sort of facilitate a return to dividend growth here for Freehold?
I can take that one. Thanks for the question, Patrick. Look, I think certainly pleased with the payout ratio in Q2 at under 60%, as you noted. Probably like to see that continue for a few quarters before we really change, I think, the outlook for share distributions as a whole. As you know, we'll factor in dividend growth. We also have an NCIB, which we can determine if we'll become active on. I think given the volatility in commodity prices over the last little while, and the amount of deal flow that we're seeing, particularly in the U.S., of all shapes and sizes, frankly, we've been focusing on strengthening the balance sheet to make sure we have dry powder and maintain the dividend with where we're at.
I think going forward, there's some work for us to do on our framework and communicating how we allocate every dollar, I referred to that a little bit in my comments. Certainly, something I'm partnering with Dave on, in dividend growth, share buybacks, and certainly, going hard on the acquisitions given the deal flow we're seeing is very much part of the framework moving forward.
Okay. Thank you very much.
Thank you. As I'm reminded to ask a question, please press star one one on your touch-tone telephone and wait for your name to be announced. We'll give it a moment. I'm showing there are no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. David Spyker for any closing comments.
Thank you, and thanks everyone for their participation in that call today, and I look forward to reconnecting with our Q3 results. Thank you.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.