Hello, and welcome to Freehold Royalties Third Quarter 2026 webcast conference call. At this time, all participants are in 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 could then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to turn the call over to David Spyker, President and CEO. You may begin.
Thank you, operator. Good afternoon, everyone, and thank you for joining us on the call today. Before we begin, I would like to remind everyone that certain statements made on this call are considered forward-looking information. We caution listeners to review the advisory regarding forward-looking statements contained in our news release and MD&A, and available on our website. On the call with me this afternoon is Brad Monaco, our Chief Financial Officer, and Todd McBride, our Manager of Investor Relations. We'll just start off with a review of our quarter. In Q3, we averaged 15,758 BOE per day, with a liquids weighting of 65%. Production has grown sequentially through the year, and we see continued momentum heading into 2027. In Canada, our production was consistent quarter-over-quarter, as our assets captured the momentum that has been building in our industry.
In the U.S., we saw another quarter of modest growth, led by the Permian, as operators take advantage of high commodity prices, improving well productivities, and expansion of natural gas egress capacity, which has resulted in incremental production and improved pricing. We had robust activity this quarter, with gross drilling reaching 412 wells, up 46% from the same period last year. Net wells were also up about 8% compared to the third quarter in 2025. In Canada, drilling activity and wells brought online were higher in almost every play on a year-over-year basis, making Q3 one of the busiest quarters we've seen since 2022. The pace of development in the Clearwater continues to lead as our royalty payers have increased their drilling activity and continue to implement waterflooding to grow production and mitigate declines.
Activity across Saskatchewan has continued to ramp up, driven by both our public and private operators. We've had particularly strong leasing in this area, as operators look to capitalize on the strength in light oil pricing and resource capture through open-hole multilateral drilling. In the U.S., we had 292 gross wells drilled this quarter, primarily focused in the Permian Basin. In the Permian, we benefited from a significant increase in market share of drilling activity, where one in every three wells drilled in the Midland side of the basin has been on lands where Freehold holds a royalty interest. Since the first quarter of this year, drilling on our Permian lands has increased from 135 gross wells to 229 gross wells. That is an increase of 70% compared to the 5% increase in drilling activity basin-wide over that same timeframe.
This market share positioning is a direct result of executing our U.S. ground game strategy. We have been leveraging our Houston-based buy team and focused on acquiring lands in the core of the Permian Basin that have not been drilled with horizontal wells at the time of acquisition. This high-quality inventory of undrilled land is being prioritized by operators as they develop the lands using the most current drilling and completion strategies to optimize production and reserves. As mentioned in our news release, our average NRI, or net royalty interest, is lower in the Permian relative to interests held in other basins in the U.S. As we acquire mineral title interest in a drilling spacing unit, our gross activity levels are showing that we are acquiring lands in the right areas that are attracting capital today.
In fact, 30% of the gross wells drilled on our land in Midland this quarter were lands acquired through our ground game initiative. Just as a refresher to our listeners, our average royalty interests in the United States are lower than they are in Canada. This lower average royalty interest is partially offset by initial well productivities and reserves recovery, where in the Permian, initial productivities can be 10 times that of the average Canadian well in our portfolio. As most of our U.S. drilling is on large multi-well pads where all drilling is done first, followed by all fracking, and then tie-ins, the average well in the U.S. typically takes longer to come on production than what we see in Canada. As such, we expect this increase in activity to show up in our production levels into 2027.
Moving past the quarterly activity, today we have announced a strategic expansion into the West Central Alberta Duvernay play. Freehold is investing alongside Refraction Energy, an experienced technical and operating team who most recently led Duvernay-focused Parallax Energy. The Refraction team has assembled a large undeveloped land position in the West Shale Basin. Freehold will receive a 3% gross overriding royalty across 179 contiguous sections in this liquids-rich play. Our funding is tied to successful development. Our initial investment of CAD 20 million will be paid upon closing in Q4 of this year, with the balance of the funding expected to be deployed through 2027 and 2028 as specific operational milestones are achieved. This includes a CAD 5 million payment tied to production milestones expected in 2028.
This area of the Duvernay has the porosity, permeability, and pressure characteristics proven through a handful of key wells drilled and put on production in 2013 and 2014. As has been successfully demonstrated by offset operators in the play, the most current drilling and completion strategies have driven significant increases in productivity and reserves. The current development plan has the potential to grow the asset to 5%-10% of our Canadian production over the next decade. Importantly, we have the ability to invest in additional acreage alongside the operator and expand our royalty footprint. Similar to the ground game in the Permian, we are investing ahead of the drill bit by acquiring undeveloped lands that have the potential to meaningfully contribute to growth in the portfolio. This investment positions Freehold for long-term growth in a proven Canadian resource play.
Industry has grown Duvernay production by 25% per year over the past three years, with the West Shale Basin being the fastest-growing basin within the play. Supported by a highly capable technical and operating team, substantial resource potential, and defined development milestones, the asset provides visibility into long-term royalty growth. With that, I am going to turn it over to Brad to discuss our financial results and capital position.
Thank you, Dave. Our Q3 revenues totaled CAD 100 million, reflecting strong realized pricing, bonus consideration, and lease rental revenue. This was unchanged from the second quarter of this year, despite a decrease in benchmark WTI prices from quarter to quarter. Realized pricing was strong in Q3 at nearly CAD 67 per BOE, driven primarily by our U.S. production, where our NGL and natural gas realizations benefited from additional egress capacity that led to improved pricing at the Waha Hub. We also had over CAD 3 million of bonus considerations and lease rental revenue in the quarter. Our team has been successful leasing in the Permian, where operators continue to focus on the deeper targets such as the Barnett Formation, as well as in Saskatchewan, where smaller and nimble operators have been active developing their lands to take advantage of constructive oil prices.
Cash cost declined to CAD 5.31 per BOE from CAD 5.58 per BOE in Q3 2025. This was driven by lower interest expense and a continued low-cost structure that supports netbacks of approximately 90% of revenue over the past five years. Underpinned by these strong fundamentals, we generated CAD 80 million in funds from operations, or CAD 0.49 per share. As Dave mentioned, we have announced a new transaction with Refraction Energy, which is expected to close in Q4. It signals our commitment to the Canadian market, the opportunity we see here, and our willingness to partner early with high-quality operators to develop high-quality plays. We also remain committed to developing our U.S. royalty assets, having spent CAD 46 million year to date, inclusive of CAD 17 million in Q3, focused on inventory-rich lands in the Permian as we continue to deliver on our ground game strategy.
Production associated with our ground game initiative, which we kicked off in late 2024, has grown to over 400 BOE a day and is an important contributor to our overall U.S. strategy. Together with the Refraction partnership, this highlights the advantage of our North American portfolio and ability to allocate capital on both sides of the border. As we near the end of 2026, we have added a new core growth area in Canada and further expanded our prospect-rich acreage in the U.S. We have maintained a disciplined and balanced approach to capital allocation, translating the favorable commodity prices and cash flow into strategic investments that make our business better over the long term. Through September 30th, we have also paid over CAD 130 million in dividends to our shareholders and reduced long-term debt by CAD 34 million.
I want to reiterate our full year 2026 production is expected between 15,500 and 16,300 BOE per day, with approximately 65% weighted to crude oil and natural gas liquids. Going forward, we are laser-focused on growing our royalty portfolio and are energized by the opportunities in front of our team. With that, I'll turn the call back to Dave.
Yeah, thanks, Brad. The third quarter demonstrated the strength of Freehold's royalty model. We generated strong funds from operations, maintained a sustainable payout ratio, reduced leverage, and invested in future growth. We will look to build on this momentum heading into 2027. Thanks, everyone, for their time this afternoon. We're now pleased to take your questions.
Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star one one on your telephone, then wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Patrick O'Rourke with ATB Cormark Capital Markets. Your line is open.
Good afternoon, guys, and thanks for taking my question. I guess I'll just open up with respect to the Refraction deal. I guess you kind of teased previously or on the prior quarter's call that you were considering activity in Canada again. First, what made this the right time? Second, Refraction being private, we obviously know the team and very competent over there, but what's your expectation for sort of the production mix? How far along are they in terms of type curve development? We can see that one well has been spud there. Is that well that's been spud part of the royalty package?
Yeah, Patrick, Dave here. Thanks for the questions. What made Canada the right time to return? I think that what we've seen over the past five years is limited opportunity to deploy capital to grow our business meaningfully in Canada. That's really been changing over the past, I would say, six to nine months, led by the change in federal government and really an improved view of Canada as wanting to participate in production growth. With that, we're seeing a lot more opportunity set that's driven by a couple different things. New capital coming into the space. There's also a lot of teams that have spun out of some of the consolidation that's happened over the past couple years that are looking to deploy. We see royalty financing as an opportunity to help them.
With that, just a lot more opportunities to look at that fit the mandate of what we were looking for. I don't think it's an intentional absence from the space. It was just more of an opportunity that we saw to deploy capital in Canada, get the returns that we were looking for and the asset base that we were looking for. Specific to the Refraction opportunity, yeah, we love the team. I think they've got a really proven track record on this particular land base. There are all the characteristics of some of the other early entries into the Duvernay play, where we've got established horizontal wells that were drilled 10-15 years ago that have shown the reservoir characteristics exist, and looking to unlock that value with the most current drilling and completion strategies.
The wells that they got licensed right now, the three wells that are licensed, the first one spud, are on the lands that we would be getting a royalty position on.
Okay, thanks. I guess my second question here, just with respect to sort of the leading indicators, we're looking at net wells drilled in the U.S. business unit. Q1 was a little weak, and I think that was probably a trailing impact of a weak commodity environment, but the last two quarters have looked pretty strong. When do we start, and I know you don't have control over the timing, and these are big pads, but what do you expect in terms of timing of the last two quarters and the high net well count that you've seen in the U.S. unit in terms of translating into production?
Hey, Patrick, I can take that one. We've got a little bit scheduled, we think, to come on in Q4 of this year. I think the bulk of it will show up in 2027. We haven't provided our 2027 guidance yet at this point. We plan to do that early in 2027. But I think the setup is looking pretty good. Obviously, coming into 2026, our guidance was underneath where we were in the prior year, and that reflected some of the lower spending off the back of weak prices in 2025. But certainly much more encouraged about the next 12-month outlook going into 2027 than we were in the last year.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Luke Davis with Raymond James. Your line is open.
Yeah. Hey, guys. I was hoping to just double-click a little bit on Patrick's question. I was wondering if you could provide just some parameters around performance expectations on the acquired assets. You noted it could become a pretty meaningful part of the corporate mix down the road, and to your point, the team clearly has a track record here, but just wondering if you could frame that out a little bit more over the next several years.
Yeah. I think, Luke, Dave here. We cannot get into the commercial terms, but what we expect over the short term here is a drilling program that is going to just firm up deliverability on these wells and get themselves into a position where they can start executing a one-rig program to start with year-round. We see that occurring potentially into 2028 timeframe. That becomes really the catalyst for growth, is when they move that asset into a one-rig drilling program. So, a little bit of groundwork to be laid here, as with the cases in these resource plays and getting their head around infrastructure. That is kind of how we think of it. First year and a half here is just getting their initial drilling done, assessments done, and looking to a ramp-up in year two to three.
Luke, maybe to build on that a little bit, what we did outline in the press release was the potential for this asset to become between 5% and 10% of our Canadian production base, which, as you noted, I think is quite material and quite important. I think the range on that is really a little bit of flux around the productivity, the type curves over time. We have seen wells in this area get better and better over time, so we think there is some upside there, as well as what we talked about, the ability to expand where we are in this asset and really truly partner with Refraction to help them grow the land base. Maybe the final point, and this is where it differs a little bit from our assets in the Permian, is this asset is Refraction's asset.
They are dedicated and motivated to grow this thing. There are no distractions. That is their goal, and we are going to hopefully participate in the success alongside them.
No, super helpful. Thanks. Maybe just one more. I am curious how much opportunity you think exists within Canada for these types of deals. Plenty of teams kind of looking to deploy. I guess, just any other plays that you would like to add exposure to within the Canadian portfolio today?
Yeah, this is Dave here again. Generally, what we're looking for is liquids-weighted plays. Two things. We wouldn't mind pushing our portfolio a little bit west. Right now, we got an easterly heavy portfolio, but giving a little bit more west exposure, which pushes us into the Duvernay. Would love to get a little bit of liquids-rich Montney. Some of those things are easier said than done, but as we think of the business, these have to be meaningful investments. What we found in the past that dabbling CAD 1 million here, a couple million dollars here, it's hard to grow that of scale. The difference in the opportunity set that we see right now is that there is opportunity to put together some deals of scale in the types of assets that we like.
More so, there's a lot of teams that are looking to deploy that capital. So you're not only dealing with just a half a dozen people or something like that. You've got 40-plus startup teams looking to get going. We think that that presents an opportunity for us that just hasn't existed in the past few years.
Awesome. Appreciate it. Thanks, guys.
Thank you. As a reminder, ladies and gentlemen, press star 11 to ask a question. I am showing no further questions in the queue. I would now like to turn the call back over to Dave for closing remarks.
Yes, thanks again for your time today and for coming to the call late in the day on Tuesday, and certainly open to any questions if someone wants to call in. Thank you.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.