Freehold Royalties (OTC:FRHLF) Ltd. (Freehold) showcased a year of growth and strategic expansion during its recent earnings call. The company reported a 4% increase in total production in 2023, achieving an average of 14,714 barrels of oil equivalent per day (BOE/d), with a notable 16% rise in U.S. production, particularly in the Midland Basin.
Canadian production remained steady at 9,612 BOE/d. Freehold's revenue for the year stood at $315 million, with funds from operations reaching $240 million, enabling a substantial annual dividend payout. Looking ahead to 2024, the company anticipates production to be between 14,700 and 15,700 BOE/d. The company also completed two significant acquisitions in December, poised to increase its Permian and U.S. production substantially.
Key Takeaways
- Freehold's total production rose to 14,714 BOE/d in 2023, a 4% increase from the previous year.
- U.S. production, particularly from the Midland Basin, grew by 16% to 5,102 BOE/d.
- Canadian production remained consistent at 9,612 BOE/d.
- Revenue for 2023 was $315 million, with funds from operations at $240 million.
- The company paid an annual dividend of $163 million or $1.08 per share.
- Two acquisitions in December are expected to boost Permian production by 30% and U.S. production by 12%.
- Over 2,000 gross development locations have been identified, offering significant upside potential.
- A record number of leases were signed in Canada, with a focus on Mississippian light oil and Mannville heavy oil targets.
- The company evaluated over 100 deals in Q4, with a focus on the Permian Basin.
- Freehold expects a modest downtick in Canadian volumes due to changes in production volume royalty agreements and drilling focus.
Company Outlook
- Production in 2024 is projected to be in the range of 14,700 to 15,700 BOE/d.
- Continued drilling activity on Canadian lands is anticipated, with a shift towards Southeast Saskatchewan and Mannville heavy oil.
- The company is exploring non-energy royalty structures cautiously, seeking opportunities that rival oil and gas returns.
Bearish Highlights
- A modest decrease in Canadian volumes is expected due to a production volume royalty agreement and a shift in drilling focus.
Bullish Highlights
- The recent acquisitions are set to significantly enhance Freehold's production in the Permian Basin and overall U.S. output.
- The company sees continued growth opportunities in both the U.S. and Canada.
- There is potential for further acquisitions, particularly in Texas, due to the high average mineral title royalty.
Misses
- The company did not mention any significant misses during the earnings call.
Q&A highlights
- Freehold is focused on targeted acquisitions in the U.S., particularly in Texas, due to substantial privately owned mineral titles.
- The company's Canadian shareholder base is primarily interested in strategic land additions rather than consolidation opportunities in the U.S.
- Freehold's average net royalty interest in Texas is 0.5%, indicating room for considerable growth through acquisitions.
InvestingPro Insights
Freehold Royalties Ltd. has demonstrated not only growth in production but also financial resilience and a commitment to shareholder returns. Here are some InvestingPro Insights that reflect the company's financial health and potential for investors:
InvestingPro Data:
- The company boasts a market capitalization of approximately $1.54 billion, underscoring its significant presence in the energy sector.
- Freehold's Price/Earnings (P/E) ratio, adjusted for the last twelve months as of Q4 2023, stands at 15.72, suggesting a reasonable valuation compared to earnings.
- With a Dividend Yield as of the latest data point in 2024 at 7.83%, Freehold remains an attractive option for income-focused investors.
InvestingPro Tips:
- Freehold has consistently rewarded its shareholders, raising its dividend for 3 consecutive years and maintaining dividend payments for an impressive 28 years.
- The stock is characterized by low price volatility, which may appeal to investors seeking stability in their portfolios.
Investors seeking a deeper dive into Freehold Royalties Ltd. can find additional insights and tips on InvestingPro. There are 6 more InvestingPro Tips available, which could provide valuable guidance for those considering adding Freehold to their investment portfolio. To access these tips, visit https://www.investing.com/pro/FRHLF and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Freehold Royalty (FRHLF) Q4 2023:
Operator: Good morning, ladies and gentlemen. Welcome to the Fourth Quarter Results Conference Call. I would like to turn the meeting over to Mr. David Spyker. Please go ahead.
David Spyker: Good morning, everyone, and thank you for joining us today. On the call with me with Freehold are Rob King, our COO; and Dave Hendry, our CFO. 2023 was a strong year for Freehold. It really showcased the strengths of our unique North American portfolio, which consists of robust production base in Canada and a growing oil-weighted position in the U.S. Total production of 14,714 BOE a day in 2023, was up 4% over the previous year, driven primarily by oil-weighted U.S. production growing 16% year-over-year to 5,102 BOE a day. Growth in our U.S. assets was driven by the Midland Basin with volumes up 25% over 2022. Our Canadian portfolio had no decline in production year-over-year. 2023 production in Canada was 9,612 BOE a day driven by consistent operator activity. This was achieved in the absence of any material acquisitions and really highlights the quality of our Canadian asset base. For 2024, we're expecting production in the range of 14,700 to 15,700 BOE a day, implying approximately 3% growth at the midpoint over 2023. Revenue in 2023 was $315 million and funds from operations was $240 million, both in line with expectations, and funded our annual dividend of $163 million or $1.08 per share. This resulted in a payout ratio of 68% for the full year. We expect to continue, to maintain our current dividend level, striking a balance between strong shareholder returns and retaining the ability to continue to fund business growth through reinvestment of excess free cash flow above the dividend. This strategy has allowed us, to reduce our net debt by 27% in 2023, compared to year-end 2022 and facilitate funding of the $115 million in transactions that we announced in December, utilizing the strength of our balance sheet. These December transactions were with two private sellers, and we acquired high-quality to Permian mineral title and royalty assets in the Midland Basin in Texas and the Delaware Basin in New Mexico and Texas. Some of the highlights associated with the assets include: 2024 forecast average production of 600 BOE a day, increasing Freehold's Permian production by approximately 30% and the company's U.S. production by 12%. These assets are 85% liquids-weighted production, of that - most of it is oil on a full basis, it's 65% oil-weighted, and that versus Freehold's U.S. liquids weighting of 78%, and the company's total liquids weighting of 64%, thus providing meaningful uplift to Freehold's realized price. With the assets, we see multiple years of future upside, with greater than 2,000 gross development locations identified, increasing Freehold's total U.S. drilling inventory by 25%. The future development is expected to be underpinned, by some of North America's top operators, with the combined ExxonMobil (NYSE:XOM) and Pioneer Natural Resources (NYSE:PXD) expected to move into Freehold's top five payer list, and represents greater than 25% of future gross locations, within the company's U.S. inventory. Pro forma, these transactions are expected to double Freehold's Midland Basin activity with one in every seven wells drilled in 2023, would have occurred on Freehold's land on this combined asset base. In total, 993 wells were drilled on our royalty lands in 2023. 95% of the wells are drilled targeted oil prospects in Canada and the U.S. Approximately 28% of gross wells on Freehold royalty lands targeted prospects in Alberta, approximately 18% in Saskatchewan, and almost half at 46% in Texas, with a balanced spread across other regions. We estimate that in 2023, approximately $8 billion in gross third-party capital was spent on our lands, up from $6 billion in 2022. Spending was comprised of $7 billion, about $35 million net on our U.S. royalty assets and about $1 billion, or $34 million net on our Canadian royalty assets. Backstopped by the quality of our asset base, we delivered record level of leasing on our Canadian lands in 2023, with 122 leases signed. Approximately 10% of these leases have had - already had wells spud, and we expect to see continued momentum on the drilling on these lands through 2024. The majority of these 122 new leases are made up of Mississippian light oil targets in Southeast Saskatchewan, representing about 51% of the leases; and Mannville heavy oil targets in Alberta, representing about 28% of the leases. We continue to see a revitalization of Southeast Saskatchewan light oil and Mannville heavy oil, with several well-capitalized, growth-oriented junior producers focusing on these areas. Multilateral drilling has been a focus by operators in the heavy oil areas, to improve both well productivity, and ultimate oil recovery. With our year-end results and our forward look, we are very excited about the position of strength we have in both the quality, and the diversity of our portfolio. Looking forward, we continue to expect robust performance from our assets, generating significant funds flow that will underpin our sustainable dividend, will maintain our balance sheet strength, and fund further growth opportunities on both sides of the border. We will now take the time to answer any questions that investors may have.
Operator: Thank you. [Operator Instructions] And the first question is from Travis Wood from National Bank Financial. Please go ahead.
Travis Wood: Yes, good morning, guys. David, you touched on it a bit in your opening remarks with respect to some M&A activity and Exxon moving up the payee list. With a lot of the M&A activity in the U.S. now, how is that changing your outlook on pace of development on the lands and maybe how important the lands that have been acquired kind of over the last year or so? Has there been a shift in how you see activity picking up with some of the deals more recently in the U.S.?
David Spyker: Yes. Good morning, Travis. I'm going to turn that over to Rob. Just to answer that, pretty active in looking at that as part of the - how we assess these opportunities. So Rob, do you want to handle that?
Rob King: Sure. Hi, Travis, so yes, it certainly has been a key focus for us, particularly in the Permian. Just to kind of put some numbers around, what we sort of look at the Midland Basin, which is our - most of our Permian production is concentrated in, that basin has become a lot more consolidated between the Exxon-Pioneer combination and the Diamondback-Endeavor combination. Those two operators are now more than 50% of Midland production. So it certainly is a lot more concentration under a handful of names. I think that's one of the things that got us super excited, with the January transactions that we just closed, just given how much was concentrated under Pioneer in those two transactions. Now the combination of Exxon and Pioneer is both 2,000 of our development inventory locations, which is about 45% of our Permian inventories, underneath the combined Pioneer-Exxon. And I think what we've also - we've seen this is just from Exxon's public disclosure, where they talk about how the Pioneer acreage is some of the highest quality in the Midland Basin, and relative to what Pioneer's oil growth forecasts were in the low single-digit rates. Exxon has been talking about in the 8% to 12% annual Permian growth over the next four years, which we anticipate a meaningful amount coming from the Pioneer acreage.
Travis Wood: Okay. That's great color. Thanks for that, Rob. That's all from me.
Operator: Thank you. The next question is from Luke Davis from RBC. Please go ahead.
Luke Davis: Good morning, guys. Just with respect to the most recent Permian acquisitions, can you remind me what the impact they expect to have on 2024 volumes, and if any of your kind of initial assumptions, or expectations have changed since closing?
Rob King: Yes. Hi, Luke, Rob here again. So in terms of - we expect the two transactions to add about 600 BOE a day to our '24 production. So, we're sort of expecting in that 3% growth range for our existing U.S. assets plus the 600 BOE a day from the - from our most recent acquisitions. I think one of the things that really gets us, again, excited about that deal is just we've added about 30% to our acreage footprint with those two transactions. With really modest overlap with the existing Permian-Midland footprint that we have. So, we're really kind of getting more of that, what we like to call wall-to-wall carpeting across the Midland Basin. And we're - in January, at least, we were capturing one in five of the rig activity in the Midland Basin, kind of up from that one in seven number that Dave mentioned in his remarks in 2023.
Luke Davis: That's helpful. Thanks. And historically, you provided some context just in terms of the amount of deals that you've evaluated. Just curious, if you can give us a sense, for how much is currently available, what you guys have been looking at, and sort of contextualize that within the last year or two?
Rob King: Sure. We - in Q4, we still looked at about 20 deals coming across our plate, about $1.5 billion worth of value. That's sort of on trend for the over 100 deals that, came across that we actually evaluated. Saw a lot more than that, but those are the ones that we actually looked at. Most of those are still on the U.S. side, 70% focused on the U.S. front. We probably took our gas - foot off the accelerator a little bit, just given we got traction on these two deals in late October, November time frame. So sort of turned our attention to evaluating these, and getting these two deals across the finish line. 2024 looks strong again. We probably - we were down in - at the NAPE conference in Houston a few weeks back, and just the amount of conversations and opportunities that, have come out over the last three weeks since NAPE, has been pretty impressive.
Luke Davis: That's helpful, thank you
Operator: Thank you. The next question is from Pat O'Rourke from ATB Capital Markets. Please go ahead.
Patrick O'Rourke: Well, hi guys, good morning, and thank you for taking my question here. I'm just kind of wondering maybe shifting back, and this will be more Canadian-oriented. But in terms of the leasing activity, I think that you guys had a record year in 2023 here. You spoke a little bit to it in the preamble there. Just wondering, if you can sort of unpack a little bit more granularity in terms of, what the key trends you're seeing. And then I think you spoke to some of the multilateral development. In terms of your inventory of, available lands for leasing, sort of where you sit in that life cycle, and where the land rush is maybe inning-wise?
Rob King: Yes. Rob here, Patrick. So a little more color on it, as Dave mentioned, 122 leases, 41 counterparties. The vast majority of it was concentrated in two plays: Southeast Saskatchewan Mississippian and Mannville heavy oil in Eastern Alberta. It's where, gosh, 80-plus percent of the leasing was. Duvernay would be the next largest amount, but that would be a lot smaller than those other two. The nature of the companies taking the leases are sort of on that private/junior E&P front. And they've already been active on, probably importantly, translating that leasing into drilling. We've already seen about 15 of those 122 leases having spuds on them. So that's encouraging. For us, we are anticipating a rotation in our Canadian drilling results from maybe less Viking, but more Southeast Saskatchewan and more Mannville heavy oil. In terms of what inning that we're at, I mean, I think there's a lot more opportunity set that we see in both Southeast Saskatchewan and Mannville heavy in particular. So, I'd say early innings would be my comment.
David Spyker: I would just add to that a little bit, Patrick, that we talk about the multilateral drilling in the heavy oil. But certainly, multilateral drilling has been rolling out in Southeast Saskatchewan, a little bit with a number of operators, looking at the Bakken, with the multilateral, see some licensing in Southwest Saskatchewan now in that Shaunavon area. So, I think - this multilateral technology, that's where I think we're in some of the earliest innings of where we can unlock value. And so, we're watching that closely. And as Rob referenced, we have lots of opportunities that we see on our land base that, will really benefit from some of that work that's being tested.
Patrick O'Rourke: And so I guess the follow-up question from me would be, in terms of your confidence in the productivity and the results you're going to see and obviously the challenge with providing guidance on the production side, you don't have full control over the drill bit. You're at the behest of some of these producers that, have leased off you. I'm just wondering, what sort of risking and sort of parameters, or outlook you have in terms of when you can have more confidence, in providing some guidance to potential growth there. Or how that kind of, evolves over time here in terms of a lag, between lease to conversion of forward outlook for production there?
Rob King: Yes. I mean some of those 122 leases, about 10% of those, we actually had drilling obligations associated with those. So, you get some perspective on it. We've kept the average term on those leases to two years. So it does help in terms of incentivizing the driller, to either get after it, or the land comes back to us and we get to do it all over again. You're right, coming out of spring breakup is really when we'll be able to have a much better feel for sort of how the operators are feeling with some recent softness, particularly on the gas side, but also on the oil side as well.
Patrick O'Rourke: Okay. Thank you.
Operator: Thank you. The next question is from Aaron Bilkoski from TD Cowen. Please go ahead.
Aaron Bilkoski: Thanks, good morning guys. So I wanted to follow-up a little bit on Luke and Patrick's questions. You talked about U.S. assets growing 3% or 4% before the acquired volumes. How do you see the Canadian production trending throughout the year? And I guess a follow-up question to that is, how much of the opportunity you just spoke about is baked into your 2024 guidance already?
Rob King: Aaron, Rob here. So in terms of our Canadian production, I think we are - there are sort of two things that are causing, what I would sort of call a, modest downtick on the Canadian volumes. One - this is probably a lot more detail than we need to give, but we'll give it anyways. One, we sort of have a production volume royalty agreement with terminalling that is contractually declining by about 100 BOEs a day. And this is natural gas volume. So the revenue impact is like less than 0.5 percentage point. So it's very marginal impact on what matters the most, being cash flow, but does have a volume impact, and that's something that - we're just needing to manage. The other, I think, is that we just talked about it with Patrick in terms of the change in transition that we're seeing where there's going to be in our portfolio less Viking drilling and more Southeast Saskatchewan, more Mannville heavy oil drilling. So those - yes the lease conversion that we're expecting is baked into our '24 numbers. It's in that - in the range that we provided. But those sort of two factors in the Canadian side, it's probably going to be where we believe our Canadian volumes, are going to be flat to like slightly one-ish percent down.
David Spyker: And then maybe just a little bit more color there. Our Canadian portfolio has been 9,600 BOE a day for the last three years, I think 9,620. And with that is only with modest early-stage investment in the Clearwater. And so, when we look at that, even though that 95% of our drilling activity is oil-focused, those gas wells do have more of a BOE impact, although to Rob's point, not much of a funds flow, or cash flow impact for our business. And so, when we look at Canada, we're just taking a little bit more conservative perspective given the weakness in gas pricing. And - but again, it's got a pretty strong history of delivering. And as we look at those leases that we've got signed, we look at the activity that we're seeing, that's kind of why we're feeling, yes. It's probably going to be another year of fourth year in a row of plus or minus that same 9,600 BOE a day with the contractual step-down in that PVR of 100 BOE a day of gas. But we think that we can make that up as we go throughout the year, but those are - later in year volumes that will come out of the drilling on the new lands, or the leased lands.
Aaron Bilkoski: Could I ask another question? In last year's annual report, you mentioned Freehold was advancing the technical, due diligence on several modest-sized, development-stage opportunities, including potash. I guess, what did you learn from this process? And are you still looking at these types of non-energy royalty structures?
David Spyker: Yes. We're still looking at them, Aaron. Like we've had, I'll call some really small level of success on the potash, really acquiring some additional mineral title on the potash side. To-date, it hasn't been a needle mover. It's good business. Some of the other opportunities that we're digging into a little bit more on the, due diligence side have fallen away. And some of it with regulatory concerns that we've stepped away. And so, we're still looking at a lot of stuff, but a cautious approach. We do recognize that when you look at, the returns that we're getting on the U.S. investments, really since we really stepped into the U.S., we've already recovered half of that investments through revenue. And it contributed $131 million of revenue last year and 5,100 barrels a day. We're going to be pretty careful when we evaluate an opportunity outside of oil and gas, that it can compete for those returns or in the long-term, really make us a much better sustainable company. So, we're looking at a lot of stuff and - but taking a cautious approach here. We don't want to get ahead of ourselves, knowing what we can invest in, in our base business right now.
Aaron Bilkoski: Thanks for the answer, I appreciate that.
Operator: Thank you. [Operator Instructions] And the next question is from Christopher Jones from Haywood Securities. Please go ahead.
Christopher Jones: Hi, thanks for taking my question. Just coming back to the M&A theme. Freehold has been active in acquiring royalty assets in the U.S., but what is your view on corporate consolidation, within the mineral space in the U.S.? Do you think it will play catch-up with the E&P consolidation that the market has seen? And what, if any, opportunities would this create for Freehold? And then maybe just remind us of some of the different dynamics in the U.S. versus Canada as it relates to potential acquisitions? Thank you.
David Spyker: What was the last part of your question, Chris?
Christopher Jones: Yes. Just maybe remind us of some of the different dynamics in the U.S. versus Canada and kind of how that relates to potential acquisition opportunities?
David Spyker: Yes. I think that from the consolidation opportunities, we did see a little bit of that with Sitio and Brigham - early last year on the royalty front. We don't get a sense that there's a lot of discussion there and nor do we view that it makes a lot of sense for us at this point, when you look at a U.S. shareholder base versus our shareholder base, which is a predominantly Canadian shareholder base, when you look at - we're a dividend-paying company in Canada and U.S. shareholders in U.S. consolidation. At this point, we're not looking at that as an opportunity. We see more opportunity just to continue to add land like we did with these December transactions that closed in January. We can just really, really targeted on the land that we want to bring into the portfolio. We've kind of got a bit of a sweet spot to identify that we're focusing on. And as Rob referenced, our goal ideally in acquisition work would be the wall-to-wall carpeting, or full coverage in the sweet spot. So that any drilling activity that would happen in those areas, would be on land that we have a royalty interest in. So, if we think broader acquisition strategy, that's how we're thinking about it right now. So it's much more bespoke-type acquisitions that really fit specific criteria's in building out sweet spots in the basins that we have identified.
Rob King: And Chris, a few of the big differences between Canada and the U.S., I mean the U.S. in the areas that we care about, really being Texas, that's effectively 100% privately owned mineral title as opposed to Canada, which the vast majority is held by the provincial Crown governments. So the opportunity set - not only do you sort of have like in the Midland Basin, where there's almost 5 million barrels a day of oil production. You also have 100% mineral title that's available. Multiply those two together, and you just have a significant opportunity set. To kind of put that in context, the average mineral title royalty in Texas is about 25%. Our average net royalty interest in Texas is 0.5%. So even in the lands that we have, there's another 24.5% interest that we could - that we continue to add. So that's a bit of why the opportunity set is as big as it is in the U.S., and it's just so - even though there's half a dozen of the public companies, they control about 2% of the overall value of mineral title that's available in the U.S.
Christopher Jones: Great. Thank you for that.
Operator: Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. Spyker.
David Spyker: All right. Thank you, everybody, for participating today. Good active dialogue, and we appreciate your questions. And we look forward to catching up with everybody in May on our Q1 results. Thank you.
Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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