Earnings call transcript: Freehold Royalties Q2 2025 shows production growth

Freehold Royalties Ltd. reported its financial results for the second quarter of 2025, revealing a strong performance in funds from operations and production growth. The company, which maintains a notable 7.98% dividend yield and boasts an overall "Good" financial health score according to InvestingPro, saw its stock price fall by 1.7% in after-hours trading, reflecting investor concerns over declining oil prices and reduced drilling activity. InvestingPro analysis reveals 10+ additional insights about Freehold’s financial strength and market position.

Key Takeaways

• Funds from operations increased by 40% per share compared to Q1 2021.
• Production grew by 9% year-over-year.
• The stock price declined by 1.7% after the earnings release.
• WTI oil prices dropped by 11% quarter-over-quarter.
• The company maintains a focus on high-return mineral title land acquisitions.

Company Performance

Freehold Royalties demonstrated robust performance in Q2 2025, with a notable 40% increase in funds from operations per share compared to Q1 2021. The company achieved production of 16,584 barrels of oil equivalent per day, marking a 9% growth from the same quarter last year. This growth was driven by efficiency improvements in drilling operations and strategic investments in undeveloped mineral title lands in the U.S.

Financial Highlights

• Revenue: $78.3 million for the quarter.
• Earnings per share: $0.04.
• Funds from operations: $57 million, or $0.35 per share.
• Dividends paid: $44 million.
• Net debt: $271 million, with a trailing net debt to FFO ratio of 1.1x.

Market Reaction

Following the earnings announcement, Freehold Royalties’ stock price experienced a 1.7% decline, closing at $13.40. This movement is within the company’s 52-week range of $10.53 to $14.62. The decline may be attributed to investor concerns over the 11% drop in WTI oil prices and reduced drilling activity in key U.S. basins.

Outlook & Guidance

Looking ahead, Freehold Royalties remains focused on acquiring high-return mineral title lands, expecting returns in the high teens to low 20s percentage range. The company plans to maintain its current dividend of $0.09 per month and is exploring potential mergers and acquisitions opportunities later in the year.

Executive Commentary

CEO David Spiker stated, "We’ve delivered a strong second quarter, reflecting the resiliency of our North American portfolio." He highlighted that over 90% of drilling permits on Freehold’s Midland Basin lands this year have been on undeveloped acreage. CFO Shana Morihara added, "We’re quite comfortable with our 60% payout ratio," emphasizing the company’s commitment to shareholder returns.

Risks and Challenges

• Volatility in oil prices could impact revenue and profitability.
• High net debt levels may limit financial flexibility.
• Reduced drilling activity in key basins could slow production growth.
• Potential regulatory changes in the U.S. energy sector.
• Competition for high-return land acquisitions may increase costs.

Q&A

During the earnings call, analysts inquired about the outlook for liquids production and the reduced activity in the Cardium and Viking plays. Management confirmed strong performance in Southeast Saskatchewan and the Midland Basin, while addressing concerns about market conditions and operational efficiency.

Full transcript - Freehold Royalties Ltd. (FRU) Q2 2025:

Conference Operator: Good morning, ladies and gentlemen, and welcome to the Q2 Results Conference Call. I would now like to turn the meeting over to Mr. David Spiker.

Please go ahead.

David Spiker, CEO/Spokesperson, Freehold Royalties: Good morning, everyone, and thank you for joining us today. On the call with me from Freehold are Rob King, our COO Shana Morihara, our CFO and Todd McBride, our Manager of IR. Shana joined our team as CFO in June, and we look forward to working together and having the opportunity to introduce her to you, our shareholders over the coming months. So we’ve delivered a strong second quarter, reflecting the resiliency of our North American portfolio despite the uncertainty and caution associated with the constant headlines that are driving volatility in both markets and commodity prices. During the quarter, we achieved production of 16,584 BOE a day with a liquid weighting of 67%, both new high watermarks for Freehold as we continue to build and evolve our portfolio.

This 9% production growth from the second quarter of last year reflects our strategic acquisitions over the past twelve months, which have expanded and strengthened our U. S. Positioning, particularly in the Permian Basin. As in Canada, operators in The U. S.

Continue to drive higher production levels while minimizing rig time and associated costs. During the quarter, we had several prolific wells come online, producing at rates double that of the performance of the historical offsetting wells. These high productivity wells were key contributors to the production levels achieved this quarter and a reminder of the ongoing advancements in well drilling and completion strategies, despite there being over 100,000 horizontal wells drilled to date in Texas. Specific to this example, we had 31 new wells drilled on six distinct drilling pads across the Permian And Eagle Ford Basins. And these wells are brought on with initial production rates IP30s of over 73,000 BOE a day.

Freehold’s average net royalty interest across these 31 wells was 1.1%, more than twice that of Freehold’s average U. S. Royalty interest. And as such, the combination of outstanding well results and a higher royalty interest was particularly impactful. For those of you that can see on the screen, we’ve included a graph that illustrates how these Permian and Eagle Ford wells compare to other world class unconventional resource plays in North America, such as the Montney and Duvernay in Canada.

The production performance curves are very similar and in general, the Permian and Eagle Ford wells have a much higher oil weighting with Eagle Ford being similar to the Duvernay and the Permian being oilier than most unconventional Canadian plays. Gross drilling activity in the quarter in The U. S. Remained consistent with the prior quarter and increased almost 10% year over year. Wind in the quarter with approximately 4.6 net activity wells and these are wells that have been permitted as they call in The U.

S. Or licensed as we refer to in Canada, plus wells that have been drilled, but yet not completed. So recall that we need about four net activity wells to maintain our U. S. Production.

So at 4.6 net wells, we’re well ahead of that pace. We have seen a slowdown in drilling rig activity in both the Permian and Eagle Ford Basins. Both are down about 10% year to date compared to last year. This has been offset by an improvement in drilling efficiencies as total meters drilled in the horizontal section of the wellbore or the pay interval is the same as last year despite the lower rig count. Our largest payers in The U.

S. Accounting for approximately 60% of Freehold U. S. Revenue are ConocoPhillips and ExxonMobil. Both of these companies have maintained a similar market share of drilling rigs in the Midland and Eagle Ford Basins as shown on the left hand chart, respectively over the past three years.

The benefit of exposure to these large investment grade companies is that they approach capital programs with a longer term view, maximizing program efficiencies and reducing activity level volatility. In Canada, we saw a seasonal slowdown in drilling activity during spring breakup, while licensing activity remains strong with a similar number of licenses in the 2025 as through the same time period in 2024. We view this as a positive tailwind for the second half activity. Our key Canadian oil plays grew by 10% compared to the second quarter of last year. These key oil plays are the Manville and Clearwater heavy oil and then Southeast Saskatchewan light oil.

These three plays now make up approximately 30% of our Canadian production. So moving on to financial performance. We had another strong quarter of bonus and leasing activity, driving a combined $5,800,000 in revenue for the 2025. This increased leasing activity reflects continued operator interest in leasing our Canadian mineral title lands as well as leasing activity on our expanded U. S.

Mineral title portfolio. Funds from operations were $57,000,000 in the quarter or $0.35 per share. Benchmark oil pricing was 11% lower than the previous quarter, dropping almost $8 a barrel to approximately US64 dollars a barrel, the lowest level since the 2021. By comparison, however, in that first quarter twenty twenty one or just over four years ago, our funds from operations was $0.25 a share. At $0.35 a share today, this marks a 40% increase in FFO per share at a similar WTI oil benchmark price.

This improvement reflects our initiatives to build our production through the acquisition of high quality assets in The U. S. That deliver premium priced light oil barrels and basins with multi decade drilling inventories. We paid $44,000,000 in dividends to our shareholders in the second quarter and we invested $12,000,000 to acquire undeveloped mineral title lands in The U. S.

These land acquisitions are in the core activity areas of both the Midland and Delaware basins of the Permian, where operators are prioritizing development, leveraging the ability to develop these lands with the most recent drilling and completion efficiencies, thus optimizing production performance and reserve recoveries as we referred to earlier. Over 90% of the drilling permits on Freehold’s Midland Basin lands this year have been on undeveloped acreage and we expect to realize returns in the high teens, low 20s percentage range from these investments. We’ve continued to maintain the strength of our balance sheet with net debt of $271,000,000 at the end second quarter, representing a 1.1 times trailing net debt to funds from operations. So with that, we’re pleased to take your questions.

Conference Operator: Thank you. We will now take questions from the telephone lines. If you have a question, please press star one on the device’s keypad. You may cancel the question at any time by pressing star 2. We have a first question on the telephone lines.

It is from Patrick O’Rourke from ATB Capital Markets. Please go ahead. Your line is open. I’m sorry, Mr. O’Rourke has hung up.

I will skip to the next question from Kevin Fisch from Scotiabank. Please go ahead. Your line is open.

Kevin Fisch, Analyst, Scotiabank: Thanks for taking my question. Freehold had strong liquids production in Q2. Can you walk us through your outlook for liquids production for the rest of the year?

David Spiker, CEO/Spokesperson, Freehold Royalties: Yes. Thanks, Kevin. I’ll turn that over to Rob here.

Rob King, COO, Freehold Royalties: Sure. Hi, Kevin. Yes. So Q2 had very strong NGL volume growth is almost on The U. Side, almost 30% kind of quarter over quarter.

Some of that was reflective of prior period adjustment where we got some additional liquids volumes in Q1, but there’s also additional liquids and frankly some additional oil clearly from those six pads, 31 wells that Dave talked about. I think where we continue to see liquids growth in both our Canadian assets, as Dave talked about, about 30% of our Canadian volumes are coming from Southeast Sask, Mandeville Heavy and Clearwater, where sort of a disproportionate amount of the licensing and leasing activity has been taking place on our lands. And then similarly on The U. S. Side, where again, was 4.5, 4.6 net activity wells that Dave talked about.

Most of that is concentrated within our Midland and Eagle Ford position, which those liquids weightings tend to be in the 70%, 80% plus range.

Kevin Fisch, Analyst, Scotiabank: Perfect. Thanks very much.

Rob King, COO, Freehold Royalties: Thanks, Kevin.

Conference Operator: Thank you. The next question is from Josef Schachter from Schachter Energy Research. Please go ahead. Your line is open.

Kevin Fisch, Analyst, Scotiabank: Thank you very much. Good morning, Dave and Ram. First question for me is the Canadian number of wells down by twenty, forty five versus 65. And it looks like nothing was going on in the Viking, very little in the Cardium. Is it that because of the higher gas waiting there and given the commodity price that drilling there was slower?

And how do you see those two areas moving in terms of activity into the end of the year?

David Spiker, CEO/Spokesperson, Freehold Royalties: Yes, it’s Dave here. I can handle that. On the Cardium, we definitely see that Cardium, despite it being a bit of an oilier type play, still needs a stronger gas pricing to make those economics go around. And so over the last couple of years with a weaker AECO pricing, we have seen activity levels come off in the Cardium. And so that’s just a simple matter of well economics.

On the Viking side, that has been a play that typically is a bit more seasonal. We see a lot of drilling activity in the Viking that comes on in starts in late December and contributes to our Q1 production volumes. And there, we’ve had relatively consistent activity on that play. But again, don’t see it as a play that’s going to represent growth in the portfolio. It’s been a very strong performer for us over the last ten years.

But if we look at other plays in the portfolio that are attracting capital such as the ones that both Rob and I talked to earlier, that’s where we see the growth coming from. Viking, see that more of a kind of a flat production profile going forward.

Kevin Fisch, Analyst, Scotiabank: Super. Second question for me. The Belly River is getting a lot of attention from medium guys, but even companies like Tourmaline are talking about 700, 800 BOEs a day, mostly liquids. Do you guys have a lot of exposure in the Belly River?

David Spiker, CEO/Spokesperson, Freehold Royalties: Yes, have a reasonable amount of exposure and we are the benefit right now of some of that Belly River drilling, some of the leasing in the second quarter of this year was in the Belly River. And so we expect to that area to continue to attract capital and be a growth area for us. I think like you pointed out, it’s emerging, it’s just starting to come into the limelight, but certainly it’s been active.

Kevin Fisch, Analyst, Scotiabank: Last one for me. How do you see the M and A side? And is it from the activity and number of deals you’re looking at, is it possible in terms of a deal of some significance, material deal for you guys before year end?

David Spiker, CEO/Spokesperson, Freehold Royalties: I think right now, we’re focusing on Joseph is on what we call the ground game or acquiring these undeveloped mineral title lands in the When we’re getting high teens, low to mid-20s returns on that, it’s a pretty efficient way to build the portfolio. And you pair that with the fact that the where we’re seeing all the drilling is on these undrilled spacing units. And again, for as long as the Permian has been around, it’s quite amazing how many undrilled lands there are that we’re targeting. From a bigger scale perspective, we’re not seeing the same level of opportunity that we’ve seen in prior years. I think that we’re hearing that there is some bigger packages that are going to be marketed potentially later this year and into next year.

But we don’t have a sense of what those look like yet or what the scale and scope would be.

Kevin Fisch, Analyst, Scotiabank: Super. Well, very much for taking my questions and congratulations on the good growth quarter.

David Spiker, CEO/Spokesperson, Freehold Royalties: Excellent. Thanks, Joseph.

Conference Operator: Thank you. The next question is from Patrick O’Rourke from ATB Capital Markets. Please go ahead. Your line is open.

David Spiker, CEO/Spokesperson, Freehold Royalties: Hey, good morning, guys. Apologies for before the call seemed to drop on me. And I apologize if this has already been asked because I was off for a moment there. But just sort of walking through some of the variability in the net royalty rates in The U. S.

That you guys have seen and thinking about how that relates to the 2.2 DUCs and the 2.4 permitted but not yet drilled wells. Can you maybe provide a little bit of color on sort of the concentration and the nature of those DUCs that you have outstanding right now?

Rob King, COO, Freehold Royalties: Yes. I don’t have the exact NRI percentage in terms of what makes up those, but they’re pretty well distributed, I would say. As mentioned, our average net royalty interest in The U. S. Is about 0.5%.

Think that would be in fact, that’s baked into that 4.6 calculation or the number of net activity wells that was represented there.

David Spiker, CEO/Spokesperson, Freehold Royalties: Okay. And then just in terms of balance sheet capital management and the dividend here, sort of towards the upper end of the payout range, is it still reasonable to expect that dividend growth, accompanies the outlook for M and A going forward here?

Shana Morihara, CFO, Freehold Royalties: Hi, Patrick. It’s Sheena. Thanks for the question. I think at this point, we’re quite comfortable with our 60% payout ratio and the $09 per month. I think we’ll continue to evaluate that as we look forward with any type of M and A, but I think we’re at a good competitive level at this point.

David Spiker, CEO/Spokesperson, Freehold Royalties: Okay. Thank you very much. Thanks, Patrick.

Conference Operator: Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Spiker.

David Spiker, CEO/Spokesperson, Freehold Royalties: Okay. Thanks everyone for joining us this morning and look forward to catching up again next quarter. Thank you.

Conference 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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