© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Fourth 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 attending. We're excited to share our Q4 2021 results with you this morning. Joining me today are David Hendry, our CFO; Rob King, our Vice President-Business Development; and Matt Donohue, our Manager of Investor Relations & Capital Markets.
2021 was a transformational year for Freehold, so we completed CAD 377 million in acquisitions and set record production levels at 14,005 boe per day in Q4. We positioned our portfolio with the addition of royalty assets in the premier oil and gas basins across North America, including the Permian, Eagle Ford oil basins, Haynesville gas basin, and the Clearwater oil play.
With this work, we have achieved the following. We delivered CAD 69 million in funds from operations, our highest quarterly funds flow ever. This equates to CAD 0.46 per share. We are increasing our dividend by 33% from CAD 0.06 per share to CAD 0.08 per share, which is CAD 0.96 per share annualized, and this commences with the April payment. We've increased the dividend every quarter in 2021, and this is the highest dividend level since 2015.
We have the most underlevered balance sheet of our Canadian royalty peers, exiting the year at 0.5 times net debt to trading funds from operations. We're positioned to grow our royalty volumes through drilling on our existing land base. We had 250 wells drilled on our lands in Q4. We have 9 to 12 rigs continuously active on our Canadian lands to start 2022. We have had CAD 1 million in lease bonus revenue so far this year, more than the last three years combined.
We realized almost 1000 BOE per day of production associated with our audit, compliance and royalty optimization drilling initiatives in 2021. These are the best acquisitions per se as they don't require capital. With this all, we drew our Canadian production 4% from Q3 to Q4 2021 as a result of this robust drilling activity.
We are very well positioned in the Permian oil basin, an area which has set all-time high production levels in the past two consecutive months with half of the active US drilling rigs operating there. We have 17 rigs operating on our US lands currently with 45 new wells permitted in the last two weeks alone. And we are receiving premium pricing on our US assets. We received CAD 60 per BOE for our US royalty volumes in Q4 2021 compared to CAD 53 per BOE for our Canadian royalty volumes, a 27% pricing premium due to proximity to US Gulf Coast.
These are material shifts to our portfolio, and with our updated guidance we are projecting between CAD 230 million and CAD 250 million in funds from operations in 2022. The dividend increase we announced, strikes a balance between returning value to our shareholders, further strengthening our balance sheet and providing the flexibility to continue disciplined acquisition work. The opportunity to further build on the quality of our portfolio remains robust, and we view it as important to retain the flexibility to continue to evaluate and acquire assets that enhance our royalty portfolio.
I will now pass the call to Dave Hendry to walk through some of the financial highlights.
Thanks, Dave, and good morning, everyone. As commodity prices improved over the quarter, Freehold continued to deliver on the core financial aspects of its return proposition, providing a meaningful dividend while also providing investors with a lower risk investment, differentiating itself from traditional oil and gas E&P companies.
Funds from operations for Q4 2021 totaled CAD 68.8 million, an all-time record for Freehold, or CAD 0.46 per share, up 43% versus the previous quarter, and 211% from the same period in 2020. For the year, funds from operations totaled CAD 189.6 million, or CAD 1.39 per share, which is up 129% year-on-year. The significant increase in funds from operations provided added financial strength and flexibility to how we manage our business. Freehold's royalty revenue and funds flow both benefited from the strong upward momentum in crude oil and natural gas prices alongside growing production, particularly in the US, which received better pricing relative to our Canadian assets.
Freehold's dividend payout totaled 35% for Q4 2021 versus 24% in Q4 2020. As previously mentioned, we are increasing our monthly dividend from CAD 0.06 per share to CAD 0.08 per share, reflecting our continued measured response to an improved commodity price outlook, better than anticipated production associated with increasing third-party spending on our royalty lands in 2021, which is expected to continue into 2022.
For Q4 2021, cash costs totaled CAD 3.57 per BOE down meaningfully from CAD 4.03 per BOE in Q4 2020. For the year, cash costs totaled CAD 3.71 per BOE the lowest in Freehold's history and down 19% versus the previous year. We continue to drive efficiencies in this area alongside increasing production volumes.
Net debt totaled CAD 101.2 million at December 31 representing 0.5 times net debt to 12-month trailing funds flow from operations. Overall, Freehold's net debt increased by CAD 35 million versus the previous year. The increase in net debt reflected acquisitions completed over the year with stronger funds from operations also meaningfully contributing to the funding of these acquisitions. Freehold's prudent strategy of maintaining long term debt to funds flow well below 1.5 times alongside a longer term dividend payout target starting at 60% of funds from operations provides protection to the business from commodity price volatility, while maintaining capacity to continue to grow through strategic and disciplined acquisition work.
In absence of additional acquisition work, Freehold has the optionality to potentially reduce net debt to zero by year-end 2022 based on guidance estimates. Freehold expanded its credit facilities with four Canadian banks in the fall of 2021 to CAD 300 million, with a permitted increase up to CAD 375 million subject to lenders consent which provides capacity and flexibility to potentially fund further accretive acquisitions during 2022. Now, back to Dave for his final remarks.
Thanks, Dave. So, in closing, we remain enthusiastic about the next 12 months. There's been a steady trending up of capital spending and associated production growth on our royalty lands, both in Canada and the US. At current commodity price levels, our high margins offer significant option value to provide returns to our shareholders. So this increase in our monthly dividend means that we have increased our payout every quarter in 2021. And the acquisition work that we completed last year is expected to continue to provide both near- and long-term value for our shareholders. There's been a tremendous amount of work completed in the transformation of Freehold into a premier North American royalty company. I think you can see the fourth quarter has shown the full impact of the acquisition activity throughout the year, resulting in these record setting production and funds from operations for Freehold.
I would like to thank all our shareholders for their support and also thank our board employees that contribute the ideas, the energy and the inspiration that has made an investment in Freehold a success. Thank you all and we'll now take questions.
Thank you. We will now take questions from the telephone lines. [Operator Instructions] [Operator Instructions] We have our first question from Luke Davis. Please go ahead. Your line is open.
Hey, thanks. Good morning, guys. Just on M&A, wonder if you could provide some details on how the market develops, just given the run in oil pricing here. Maybe what kind of opportunities you're seeing and I imagine you're still focused on the US, but I'm curious if you can comment just on both sides of the border.
Good morning, Luke. It's Rob King speaking. So, yeah, I can provide a few comments in terms of what we're seeing right now. We started the – sort of January is really quiet on both sides of the border in terms of terms of activity, but that only lasted a couple of weeks before things – a number of opportunities, particularly in the US, started coming across our desks all over the size range from call it CAD 10 million of value and less up to CAD 500 million of value. So I think one of the challenges that our team is having right now is how we allocate our time and allocate our capital to looking at these opportunities because we're fortunate to have a lot to look at.
In terms of what we're sort of seeing in terms of bid ask spread and what the market is looking like because obviously the market has been incredibly dynamic in the last several weeks here, just a few examples of activity in the US, in the last month, we've seen three transactions north of CAD 1 billion of value, and the common thread between those mineral title opportunities was that they were done with the high teens cash flow yields in them. So, it's still an attractive – a very attractive market, even in this commodity price environment where you are – we are seeing our peers seeing bid ask spreads narrow.
I think, for us, we've been – we haven't been testing the market to the same extent since our acquisition activity that you, sort of, see in our Q4 numbers, right now. We're starting, having some discussions, and things are similarly pointing to metrics that would be in that range.
I think we're seeing the strength in commodity prices bringing out a lot of sellers. Obviously just from the sheer strength of it, but it also has changed the development pace of the assets. So sellers that might have looked to sell in the back half of 2022 or into 2023 are now seeing their portfolios mature that much faster. And are sort of – it provided that great mix of near-term development with future upside that buyers like us are looking for.
Thanks. That was super helpful. And just curious what you're generally using now for pricing when you're doing those evaluations?
Yeah. It's – I mean, it's – that – that's a pretty dynamic process. I mean, it's multiple pricing scenarios, as you'd guess. It's grounded in strip, but then it's strip minus to running scenarios. So look at the strip for a one-year or two-year time periods, and moderating to a lower level or a lot of flat pricing scenarios. Yeah. It's – you're touching on one of the more challenging pieces of our valuation these days.
Yeah, that makes sense. Thanks. And then just one final one for me. Can you just give us an update on what's going on with the CRA process?
Hi, Luke. It's Dave Hendry here. Yes, we – first off, we still strongly believe our filing position is correct. Field officer has been assigned. We've talked with them. We've provided submissions to them justifying why we believe our position is correct, and they're going through that – through those submissions as well as the rest of the material. I'm not expecting this to be quickly resolved. Probably see it may be taking six months. I mean, it's hard to tell. CRA is going to take as much time as they want and clearly – and they manage the process.
So with that, depending on where we are in that, our next tax filing for the 2021 year will be sort of mid-year. And so if it's still outstanding and they haven't made a conclusion of their appeal process at that point, there is a chance that most likely we would get reassessed on our 2021 and then have to deposit probably another CAD 10 million approximately until we wait for the appeal decision. But to finalize, I think we strongly believe our position is correct and we're actively focusing on that.
Yeah. That's helpful. Thank you. That's it for me.
Thank you. The next question is from Aaron Bilkoski from TD Securities. Please go ahead. Your line is open.
Thanks. Good morning, guys. Would you be able to give me a sense of what first-year production rates would look like for your average US well relative to your average Canadian well?
I mean, Rob can answer that. He's just pulling up his screen here right now.
Yeah. The second question, I'll run these in the background while you...
Sure. I guess internally what leading indicators are you guys watching for future production additions? Are you guys seeing a ramp up in licenses or a ramp up in active rigs on your land? And I'd be curious to know which plays are seeing the biggest rate of change?
Yeah. And maybe come back to your first question then I'll come to that question. So in terms of our average one year production on our US wells, it's just about just under 800 barrels a day is what we saw. This was a number that we ran back in our Investor Day in December. So this contemplates wells on our US properties, as if we had known them for the last four years 2017 to 2021. So, yeah, just under 800 barrels a day.
In terms of activity on our US assets, we've had a pretty consistent number of rigs over the last, gosh, four, five months now. So that's now 15-year to 20-year range. So that's kind of given us some confidence. I think we're also tracking is just a number of permits that are around on our lands. And as Dave said at the outset, in the last two weeks, we've had 45 permits on our US lands. And I think that was – you just put that that 45-permit number into context.
In the first two months, we've had about 50 gross wells drilled in the US on our lands. And so 45 permits is pretty exciting. Of those on our – in the last two weeks on the spud side, half of them in the Eagle Ford with Marathon. The other half have been in the Permian, largely under Pioneer, and also, a handful of privates. Those permits that we talked about to get a 45, 35 were in Midland, and the vast majority of those were under our OneMap lands that we acquired, closing in October with most of that coming from Pioneer. 10 were from Marathon in the Eagle Ford.
And just to give you a little bit of a triangulation, there's often, in the Permian and Eagle Ford about a two- to three-month lag between permit to spud. So we can see – if you see those permits coming in February, that sort of points to a Q2 spud timeframe.
Perfect. Final question for me, and I guess it's a follow-up to one of Luke's questions. I'd be curious to know what the size of the asset packages are that are crossing your desk, and if there's a sweet spot in terms of size for Freehold either your ability to digest them or if there's a sweet spot in terms of valuation.
Yeah. Maybe on your second point there, so definitely the sweet spot valuation, that's far more important and relevant and – than the size in everything we look at. If it doesn't make us better, we're not interested in adding it to our portfolio. And so that's – in terms of size – to that answer, but it literally is all over the map in terms of – I'd probably say, it's almost a barbell. There's either – there's a number of opportunities in that CAD 50 million or less. And then what's interesting is the number of opportunities that are a couple of hundred and more.
And I think that's – we're looking at both ends of the barbell. And there's obviously a heck of a lot more deals in that smaller range. But there is – there are more than three that are in that larger category that are currently on our desks.
Do you find there's more competition for smaller deals or larger deals or it's tough to tell?
It did. Yeah. Definitely agree with that comment in terms of more competition on the smaller end. And you can certainly see that with the marketers. The marketers know that they size the packages [indiscernible] (00:19:49) correctly to try and get the most number of competitors looking at it. I think it's – but it's fair to say there's a lot of opportunities. And yes, there's a lot more competition we've observed in the US, but there's also a lot more opportunities.
Great. Thanks for that, guys.
Thank you. The next question is from Jamie Kubik. Please go ahead. Your line is open.
Yeah. Good morning, and thanks for taking my question. I've got two of them just quickly. So, volumes on your Canadian assets really strong in Q4. How should we think about production volumes in 2022 on the Canadian side, given where producer activity is at? And also curious if you can touch on how the US portfolio is trending currently. Thanks.
On the Canadian side, I think, our forecasting, we think we're going to have about 20 net wells on our Canadian assets in 2022. And just to put that number into context, that will – we believe that will replace our decline rate in Canada. So Canada is kind of a flat to maybe modestly up. We've seen so far activity in Canada about a 100 gross wells drilled on our lands in the first two months, which is definitely on pace for that annualized 20 net wells. A lot of that has been, well, 30 drillers make up those 100 wells. 20 were with [indiscernible] (00:21:35) in the Viking. Tamarack was very active and the Clearwater with a dozen wells on our lands, and Tundra and some of the privates have also accelerated their activity we've observed in the last in couple of months.
Sorry, I don't know if that answers your Canada question. Your US question I just can't – I can't remember it. Sorry, Jamie.
Yeah, sorry. I was just curious on how the production volumes are trending versus your guidance, I know you split out Canada about 9,300 barrels a day, contributing in 2022 and the US contributing at 4,900. Just curious on what you're seeing so far because obviously the mix in Q4 was different than that.
Yeah. Yeah. I'd say sort of trending on pace to me, I think we're where – we've put our production guidance in November timeframe, and I think our expectation for 2022 is that we'll be at the high end of that range. The Eagle Ford is showing a lot of continued strength and probably even maybe a little bit ahead of where I think our expectations were. That's both a production comment, but also a cash flow comment. We're even getting higher realized pricing than I think we had actually expected. We were encouraged seeing Marathon's 2022 capital guidance a few weeks back where their capital plans are supportive, cooperative of the acquisition modeling that we have for their – for our assets under Marathon. And in the in the Eagle Ford, they're actually talking about 15 redevelopment, re-completion wells in the Eagle Ford, obviously won't – all go beyond our lands, but we do not value any re-completions in our analysis. So that is some upside that we will see in 2022 that we weren't expecting.
Okay. And then maybe follow-on question here. How should we think about the free cash flow priorities for the business? I mean, should we think about the dividend being anchored at a lower commodity price level? I mean – or should we think about Freehold likely increasing the dividend as the year goes on if strip pricing or if commodity pricing outperforms your expectations? I know that you have WTI estimated $75 a barrel for 2022 and for the oil NYMEX, clearly a dynamic environment. But can you talk about how we should think about the dividend moving forward to 2022 and free cash flow priorities?
Hi, Jamie. It's Dave Hendry again. Yeah, I mean, obviously, we just updated our dividend. Commodity prices, incredibly volatile, so it's very hard to, sort of, know what their predictions are. We're stuck with $75 WTI US just because it's relatively consistent with a lot of our peers and as well as it's more of a moderated position. On top of that dividend that we just announced of CAD 0.08 per share, the most meaningful contribution is acquisition. So we're going to see how acquisitions play out this year to see what the ask numbers are and about can we get some deals across the line that realize the returns that we're expecting so. So that's the key focus. And then we'll continue to monitor what commodity prices.
We set that 60% target range for a reason, so we'll continue to monitor that. And then we do have still CAD 146 million of debt to pay down. So we'll use that as a toggle. So we'll balance those three contributions like usual. So – but as far as ultimately, do we change the dividend, we don't have a plan on updating the dividend in the next quarter, we'll just evaluate it and see our acquisitions play along.
Okay. That's it for me. Thanks, guys.
Thank you. The next question is from Patrick O'Rourke. Please go ahead. Your line is open.
Hey. Good morning, guys. Pretty comprehensive questions from the guys ahead of me there ought to be a little bit quicker on the finger trigger there going forward. Just a couple of quick things, though, that I don't think have been touched on. And I'm curious too. In particular, you're showing some strength out of the Canadian asset here, and I think that drove a bit of the outperformance on the quarter.
I'm wondering if you can comment now with pricing so strong in Canada and the progressive nature of royalty or Crown royalty. Crown royalty curves here, how you're sort of competitively positioned on your Freehold lands?
Yeah, Good question, Patrick. As far as the Crown royalty structure goes. There's still, Crown royalty holidays that that are in place early on. But when you come off those holidays, our royalty lands, are very competitive. And so, right now, we see drilling is active on the royalty lands as I think we see in Crown lands across the portfolio. And so we see that continuing. On a rig activity level, we're certainly higher in rigs in Canada than we were this year last time. But were still 60 rigs or so under the long term average in Canada if we go back a few years. So we are seeing certainly increased activity. It hasn't recovered to more steady state pre-pandemic levels, and the same in the US. So we're seeing the rigs really focusing in the most – still the most cost-effective basins. The Permian and Eagle Ford in the US is really driving a lot of that drilling. And we did see a good uptick in gas drilling in the Deep Basin in Q4. We expect to see that continue, but the oil plays are what's really being developed at a pretty good clip on our lands.
Okay. Thanks. And considering you guys are using a pretty conservative planning budget here with CAD 75 WTI, would Freehold consider an approach to hedging any of the production here?
Yeah. I don't – we – we've talked about hedging before, Patrick, maybe the backstop acquisition. But as far as hedging in general, it's not something that we're looking at. We do have a strongest balance sheet of our royalty peers and we're generating significant cash flow right now. So we think that we've got the balance with the dividend payment and the focus on managing our debt that we don't think that hedging is the right answer for us right now.
Okay. Thank you.
Thank you. The next question is from [ph] Matthew Weeks (00:29:19). Please go ahead. Your line is open.
Hi. Good morning. I think all my questions have been answered at this point. So I'll just hop back in the queue. Thanks.
Thanks, [ph] Matthew (00:29:32).
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Spyker.
Okay. Thanks everyone for participating today. It's a great discussion, and it's appreciated to hearing those questions at us and good luck to all. And we'll talk to you next quarter.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.