Freehold Royalties Ltd
TSX:FRU
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Freehold Royalties Ltd
Earnings Call Analysis
Q2-2024 Analysis
Freehold Royalties Ltd
In the second quarter, Freehold Royalties reported a robust production average of 15,221 BOE per day, marking a 3% increase from the previous quarter. This growth was primarily driven by oil production, which averaged 7,899 barrels per day, reflecting a 7% quarter-over-quarter increase. The U.S. assets alone grew by 9%, reaching 5,599 BOE per day, aided by increased drilling activity in the Eagle Ford and Permian regions, and a recovery from adverse weather conditions earlier in the year.
Funds from operations totaled $60 million for the quarter, translating to $0.40 per share. This represented an 11% increase compared to the prior quarter, providing sufficient coverage for the monthly dividend of $0.09, leading to a healthy payout ratio of 68%. The company successfully reduced net debt by $12 million, ending the quarter with a net debt to trailing funds from operations ratio of 0.8x.
The quarter exhibited strong drilling activity with a total of 274 wells drilled across North America. Notably, approximately 75% of these wells targeted oil prospects in Texas, while the remaining focused on oil prospects in Canada, particularly in Southeast Saskatchewan, the Mannville Stack, and Clearwater regions. Drilling in the U.S. saw a remarkable 24% increase from the previous quarter, marking the highest level of activity to date on Freehold's U.S. royalty lands.
With over 95% of revenue derived from oil and natural gas liquids, Freehold has effectively positioned itself within the premium-priced North American market. The average realized price during the quarter was $59.74 per BOE, underscoring its advantageous portfolio. The company is also leveraging improved drilling and completion technologies in the Permian Basin, which are unlocking value in high-quality reservoirs. Current completion strategies are being applied to older well candidates, enhancing the potential of existing assets.
The last 18 months have yielded significant leasing activity, with 157 new leases signed, surpassing the total from the previous three years. This surge indicates a revitalization in operational interest, particularly in Southeast Saskatchewan. The increased licensing activity in 2024 mirrors or exceeds levels from 2022 and 2023. This promising trend assures investors of a strengthened pipeline for future growth as more drilling operators continue to engage with Freehold's mineral lands.
Looking ahead, Freehold executives are optimistic about the production cadence through 2025. The company holds 1.7 net drilled uncompleted wells (DUCs) and 1.9 net permits at the end of Q2. With the U.S. operations experiencing longer wait times from permitted well to production—ranging 6 to 12 months—investors can expect production to ramp up significantly as operators become active on Freehold’s lands. This anticipated growth aligns with Freehold's long-term strategy of capitalizing on quality assets, ensuring continued revenue generation.
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Good morning, ladies and gentlemen. Welcome to the Freehold Royalties' Second Quarter Results Conference Call.
I would now like to turn the meeting over to Mr. David Spyker. Please go ahead, sir.
Good morning, everyone, and thank you for joining us today. On the call from Freehold are Rob King, our COO; and Dave Hendry, our CFO.
We're really pleased with our quarter with the production averaging 15,221 BOE a day, a 3% increase over the prior quarter. Oil production was driving this growth, averaging 7,899 barrels a day, which was a 7% increase over the prior quarter. Our U.S. assets grew 9% over the quarter to 5,599 BOE a day, a result of increased drilling activity on our Eagle Ford and Permian assets as well as the recovery from the extreme weather impacts in Q1 2024.
Funds from operations for the quarter totaled $60 million or $0.40 per share, an 11% increase over the prior quarter. This funded our $0.09 per month dividend, resulting a 68% payout ratio for the quarter. We exited Q2 with net debt to trailing funds from operations of 0.8x, reducing our net debt by $12 million while closing 3 tuck-in acquisitions in both Canada and the U.S. for a combined $7.3 million. Natural gas benchmark pricing was weak through the quarter. However, we continue to see the benefits of our oil-weighted premium-priced North American portfolio with oil and NGLs representing over 95% of our revenue, leading to a top tier realized price of $59.74 a BOE.
We're quite excited about the drilling activity on our portfolio. Gross drilling activity was strong for the quarter with a total of 274 wells drilled across North America. Approximately 75% of total gross wells drilled on Freehold lands target oil prospects in Texas with the balance in Canada, focusing on oil prospects largely in Southeast Saskatchewan, the Mannville Stack and Clearwater.
On our U.S. portfolio, we're encouraged by the drilling and rig activity we are seeing with gross drilling up 24% over the previous quarter, and this represents the highest level of quarterly drilling that Freehold has had on its U.S. royalty lands. Digging a little deeper on the U.S. side, we are seeing continually evolving drilling and completion practices, unlocking value in the high-quality multiple reservoir bench Permian Basin. A recent royalty interest pad in Delaware was brought on at peak rates per well of 3,200 barrels a day of oil with 90-day average oil rates of 2,200 barrels a day.
We see other areas where current views on completion technology are being applied to older wells with focus right now in the Eagle Ford, where ConocoPhillips is acquiring Marathon, and they referenced over 1,000 refrac candidates on the Marathon asset base. And we see 500-plus of these where we have a royalty interest. These refracs are targeting wells drilled pre-2016 where profit loading was less than half of what current best practices are, hence not effectively accessing all the reservoir potential.
We are also seeing leasing activity with our U.S. mineral title lands with some of the focus in Q2 being on eastern side of the Midland Basin with the target being the deeper Barnett shale. This is moving Barnett oil prospect activity much further east than where wells have been successfully drilled to date and really opens up a deeper prospect opportunity on our U.S. land base. Activity on our U.S. assets continues to be driven by large high-quality investment-grade players in addition to growth-oriented privates. Our drilled uncompleted well and our permitted well inventory is robust, providing us confidence in our outlook for our U.S. portfolio for the remainder of 2024 and into next year.
On the Canadian side, over the last 5 years, production has been rock solid at 9,600 BOE a day with only modest capital investment of about $40 million in early stage Clearwater opportunities.
What's different now? Leasing activity. Over the last 18 months, we signed 157 leases. That compares to as many leases that we have signed in 2020, '21 and 2022 combined. This leasing strength is showing up in our licensing activity where 2024 year-to-date licensing is at similar levels to 4-year licensing in both 2022 and 2023.
The most active areas for leasing has been Southeast Saskatchewan. It was about 50% of our leasing activity and mostly the private and junior companies who are revitalizing this area with focused attention and multi-leg laterals Clearwater-style technology. Similarly the Mannville Stack has gained about 25% of our leasing activity. Again, the privates and juniors who are successfully developing with multi-leg laterals. The continued revitalization of these areas represents a significant opportunity for our portfolio.
So overall, we're very excited about the quality of our business. It's really been a result of a multiyear transformation into a uniquely North American energy royalty company. Leading indicators such as leasing activity, licensing activity and drilling activity are all very positive.
We'll now take the time to answer any questions.
[Operator Instructions] We do have a question from Aaron Bilkoski from TD Cowen.
Sorry about that. So now that you guys have had these Permian assets for a couple of years and you've got a sense of pace of drilling and the pace of completions and tie-ins throughout the year, how do you guys think about the sort of cadence of production additions through 2025? And I guess an associated question would be, do you anticipate any other high rate, high productivity Permian pads to come on in any particular quarter, given now the spacing between drilling and completion and tie-in times?
Thanks, Aaron. It's Rob here. Maybe I'll highlight a little bit of what the Q2 activity was like, both from a drilling perspective and also a permitting perspective. So in the quarter, we had about 1 net well that was drilled, which is actually our highest level of drilling activity that we've ever had on our U.S. assets as well in the quarter.
We had about 1.7 -- or sorry, 1.4 net permits that were permitted on our U.S. lands which also was sort of the highest level of permitting activity that we've had since we've owned our U.S. assets. And so it's one where one of the things that is different within the U.S. and in Canada is just the time between when a well is permitted to when it's completed to wells turned in line. And that's where we're seeing anywhere between 6 to upwards of 12 months and beyond that we sort of need to wait for the operator to get active on our lands.
And that compares to Canada it's measured in weeks. So that really kind of call it a little bit of how the 2025 is likely going to shape out because we have this strong inventory right now of DUCs, 1.7 net DUCs at the end of Q2, and we have a 1.9 net permits at the end of Q2. Just as a reminder, one, it doesn't sound like a lot, 1 net well, but that's over 1,200 BOEs a day of production. So it's pretty meaningful.
[Operator Instructions] There are no further questions registered at this time. I'd like to turn the meeting back over to you, Mr. Spyker.
Okay. Thanks, everyone, for participating today. And I'd say we're excited about everything that we've got on the goal right now and looking forward to reconnecting with everyone on our Q3 results. Thank you.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.