Freehold Royalties Ltd
TSX:FRU
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Freehold Royalties Ltd
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Good morning, ladies and gentlemen. And welcome to the first quarter results conference call.
I would now like to turn the meeting over to Mr. David Spyker. Please go ahead, Mr. Spyker.
Good morning, and thank you for joining us today. On the call from Freehold are David Hendry, our CFO; and Rob King, our COO. We're off to gig starts for 2023 with operational momentum carrying over from a record year in 2022. Production of 14,724 BOE per day was up 8% over the first quarter of 2022 and in line with our expectations.
These production of 9,822 BOE per day was largely ample in the previous quarter and was the highest quarterly average since Q1 2020. The resiliency of our Canadian production is a testament to the quality of our land as we were only making minor early-stage investments over the past 3 years with our team primarily focused on new developments, leasing and optimization efforts on our Canadian acreage. Production from our U.S. assets averaged approximately 4,900 BOE per day during the quarter, also in line with expectations.
Overall, Q1 production was slightly lower than the previous quarter in the U.S. as the completion schedule of some of our larger payers resulted in a significant number of new wells being brought on production in the fourth quarter of 2022 in both the Eagle Ford and Midland Basins. Declines from the significant flex production associated with these Q4 new well starts are reflected in our Q1 numbers.
On the drilling side, in Q1 2023, we had 349 gross wells drilled, up 19% over the previous quarter and up 43% over Q1 2022. In Canada, 175 gross wells were drilled on our land this quarter, up 22% from a year ago and up 28% over last quarter. 6.9 net wells represent the second most active first quarter drilling activity since 2010. Oil-weighted drilling in the Viking, Cardium and Clearwater led Canadian activity.
The turnover of assets in Southern Saskatchewan from larger operators to smaller companies, is resulting in increased activity as a number of these new smaller private and public operators are targeting more ambitious growth objectives than predecessor operators have in recent years. In addition, the application of open all multilateral drilling techniques along with improving heavy oil pricing and resulted in increased activity in the [ Sparky ] (sic) and Mannville play in the broader Lloydminster oil fairway.
In the U.S., 174 gross wells were drilled in the first quarter, up 12% over the previous quarter, an increase of 74% from a year ago. As industry interior remained robust and increase was added to our portfolio in 2022. In total, 0.8 net wells were drilled in Q1 on our U.S. land with a typical U.S. well having 10x the initial productivity of our average Canadian well. Drilling continues to be focused on light oil prospects in the Eagle Ford and Permian Basins.
While total rates in North America were in declining for much of the quarter, the rig count on our lands remained robust with average rates for Q1 2023 increasing over Q4. The spring breakup occurring in Canada, activity is expected to remain strong in the U.S., a benefit of our North American land base.
Looking forward, leasing activity has been very active in 2023 year-to-date with 44 leases executed across 16 counterparties, which compares to 83 leases executed in the full year 2022. We continue to benefit from the premium pricing of our U.S. assets with U.S. oil realized pricing per barrel of 26% higher than Canadian pricing.
Our first quarter revenue of $77 million and funds from operations of $59 million remain in line with expectations, and we reiterate our production guidance of 14,500 to 15,500 BOE per day for 2023 and funds from operations of $250 million to $280 million based on an average oil price of $80 per barrel WTI. With the current wildfire activity in Alberta and BC, we do expect some impact on our Q2 production numbers, although too early to tell at this point how that may play out.
Our dividend payout for the quarter totaled 69%. Royalties remain a high-margin asset class, enabling Freehold the ability to maintain our current dividend level even if the payout ratio is above our 60% guidance range for multiple quarters.
After completing approximately $190 million in acquisitions in 2022, we've been able to maintain a conservative balance sheet, exiting the quarter at 0.4x net debt to trailing funds from operations. This considerable financial flexibility allows Freehold the opportunity to continue to pursue value-enhancing acquisitions on both sides of the quarter and also contribute to dividend sustainability.
Looking forward, our portfolio remains well positioned to deliver value for our shareholders. We continue to reiterate our asset base has improved considerably through our North American expansion with ownership in a broader range of quality oil-weighted plays, a deeper offer of well-financed top-tier payers, broader exposure to commodity pricing and sales points and overall scale improvements, ensuring sustainability for our shareholders.
As commodity price has monitored the recent weakness, we highlighted strong margins associated with royalties as an asset class, but subject to the margin compression we are seeing in other business models associated with recent inflationary pressures.
We'd like to now turn the call over for questions.
[Operator Instructions] The first question is from Luke Davis from RBC.
Your U.S. volumes were a little bit lighter than what I would have expected, just given the Q4 run rate. So hoping that you can frame out what's implied in your guidance on a quarterly basis between Canada and the U.S.
Sure. Luke, it's Rob here. In terms of one, maybe the volumes came down between Q4 and Q1. That was, at least from our perspective, very much in line with what our expectations were. Q4, we actually saw a number of -- both the number of gross wells and a number of higher net wells in our Eagle Ford assets come on, which was great to get that flush production, but they obviously declined at the rates that they do.
And so that sort of fed into what we thought with Q1 would be a bit less volume relative to Q4. It's kind of that sawtooth that we sort of talked about where we have these significant volumes that come on with the combination of the high productivity of a number of the wells, but also just the size of some of these pads that we're observing in our assets.
As an example, in the in the Permian in Q4, late Q4, we had a 19-well pad of Crownquest come on, on our Midland Basin asset. So when volumes of that amount kind of come on, you get this great flushed production that does then decline thereafter. So that's kind of sort of in line with our expectations.
And I think it's probably on the Eagle Ford side, we did see some weather-related impacts. I think it's not quite the freeze-offs that we saw in Canada in December time frame, but we do know talking to a couple of the Eagle Ford producers that they had some production challenges in January, February time frame with colder weather in Texas.
That's helpful. And do you have a sense for how you expect specifically the U.S. volumes to shape up through the balance of the year?
Yes. I mean it will be generally sort of flat to modestly up over the course of the balance of this year. I think, again, we're expecting that, that sawtoothing that we talked about, where there's going to be some inter-quarter volatility, but the general trend will be flat.
Got you. Just one more for me related to Alberta wildfires. I know you provided some commentary in the release still pretty early, but it sounds like a lot of those issues have largely been resolved. So I imagine limited impacts to your production volumes and guidance. But any incremental detail that you can provide there?
I don't know we have a whole lot of incremental detail there. The only other one I can comment on is that it's probably more of our gas volumes, natural gas volumes that have been impacted so far. So while it may have a -- I'm not sure if meaningful is the right word, but an impact from a volume perspective, our expectation is it will have a more muted cash flow perspective.
The next question is from Patrick O'Rourke from ATB Capital Markets.
Maybe just to add sort of another angle to the questions from Luke there with respect to U.S. volumes, I know they're fairly chunky here or sawtooth, as you've articulated. The high level of spot activity, I think it was 174 gross wells in Q1. How does that sort of compare to what your expectations would have been for the quarter? And sort of what are the sort of early Qs that you're seeing for Q2 and Q3 in terms of planning on that front?
Yes. I mean I would say in terms of this productivity, the 174 gross wells, very much in line with expectations. Growth activity has, as I say, continue to be in line. We have seen sort of the net wells. We've had some lower NRI net royalty interest wells that have been drilled. So we'll see how that impacts the portfolio over the next 6 or 9 months or so. As you know, that often can be the lag factor that we see on the U.S. in terms of drilling in Q1 leads to Q3, Q4 production.
We certainly saw that in '22. Maybe to just shift gears a little bit here. I thought you guys did a really good job in terms of contextualizing the opportunity in the royalty market yesterday at the AGM when you discussed sort of it being a $1 trillion market. Just wondering if you could give us sort of with all the moving parts with interest rates, with commodity, sort of your outlook in terms of M&A?
And then with the Permian and some of these U.S. resource basins reaching a more mature phase in terms of type curves and inventory development, how you're sort of taking that into your risking of your approach to these acquisitions right now?
Yes. On the first one, in terms of the level of activity, I think our Q1 deal flow has been pretty consistent with what we saw in '22 and '21. When I look at the number of confidentiality agreements that we signed on the U.S. so far, it's basically in line with what we signed in '22 and '21 at the same time period. So from the activity, it feels the same, but it does feel slower.
I think -- well, the other part that we are seeing is it's always a competitive space. It's one the -- with the backwardated curve wave that we are, the bid-ask spread. It's probably widened a bit, and we've certainly seen several of our competitors willing to accept lower returns than what Freehold is willing to take.
So we're still holding that quality bar really high. And I think the encouraging sign is there does feel to still be continued deal flow and we'll sort of see how that plays out for the balance of this year.
In terms of the growth expectations or how we're sort of approaching things, I think the reality is capital discipline of the producers, both public and private, largely certainly does continue and that sort of factoring into how we're looking at to add opportunities, and so maintaining that growth discipline that we've seen our royalty payers largely be taking.
The next question is from Chris Jones from Haywood Securities.
Focusing on the bigger picture, U.S. activity. You own a lot of mineral rights under majors. Just curious what you're seeing in terms of activity cadence between majors and private independent types. I think it's understood that private drove much of the activity through 2022. But the offset to that is perhaps they now generally have less quality acreage and more exposed to price volatility as a result. So just curious on what you're observing from an activity perspective there.
Yes. I mean we've -- about 70% of our U.S. volumes by production are weighted towards the investment-grade public names. And we've really sort of seen for the most part, they've had a fairly steady drilling cadence and bringing wells online, sort of in that flat to modest growth that we've seen with them.
I think where we've had some positive surprises has been on the private side, with the Crownquest as an example. I mentioned that 19 wells pad that they brought on in late '22. That was exciting to see. And then IP in Howard County has continued to be fairly active. It's kind of pulled back the capital program a little bit, but they've still been active on our lens.
Okay. Great. And then just to add to some of the M&A questions. I think you touched on this with your prior answer. But some of the commentary coming out of the quarter from some of your U.S. royalty peers, is that the private mineral market deals are going for quite lofty valuations. I think one particular company noted that it was losing deals by upwards of about 70%. Is that a trend you are seeing as well kind of that over pricing in the market?
Yes. I mean we're -- of the 30 deals that we looked at in Q1. We evaluated 20 kind of equally split between Canada and the U.S. We only bid on 3 of those opportunities and lost them all. I don't know if we lost necessarily by that 70% that one of our peers sort of talked about, but we certainly -- it was a meaningful difference.
The next question is from Matthew Weekes from iA Capital Markets.
Just on the alternatives and diversified royalty team and some of the activity going on there, there were kind of some disclosures this quarter. I was just wondering if you could touch on that a little bit what kind of opportunities you're seeing there? Is it kind of picking up? And are these kind of in advanced stages at this point? Do you think we could expect something kind of in the next -- in the short term or the next 12 months on that front?
Yes. Matthew, it's Dave, I can definitely answer that. We're certainly seeing a lot more deal flow in that space that kind of fits our -- kind of the parameters that we're looking for. And for the most part, really focusing on the mineral side. So really pushing our expertise that we have in resource plays with the oil and gas side and seeing if we can leverage that into the kind of balance of mineral space.
So I think that is a number of things that we're working pretty hard on and it was some success there. You -- we still view that we could do a transaction this year. I would say it's likely a sub-$50 million deal, maybe $25 million to $50 million, if you want to kind of stick with that way. But the focus is really on valve of minerals.
And that it could be anything from helium, lithium to a number of other potash that continue to be after in those types of opportunity sets versus I think when we first got into it, we thought we enter solar. But those types of opportunities don't compete for capital with the oil and gas space. But leveraging our balance of minerals and expertise, we think that those can drive some pretty track returns.
There are no further questions registered. At this time, I'll turn the call back to Mr. Spyker.
All right. Thanks, everybody, for participating today and for the questions. And we look forward to catching up with everybody again at the end of Q2. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.