Earnings call transcript: Freehold Royalties Q4 2024 beats EPS expectations

Freehold Royalties Ltd. (FRU) reported a stronger-than-expected earnings per share (EPS) of $0.33 for Q4 2024, surpassing analyst forecasts of $0.2394 by approximately 37.8%. Despite the revenue coming in below expectations at $76.9 million against a forecast of $81.7 million, the company’s stock price increased by 1.61% in post-earnings trading, reflecting investor optimism. According to InvestingPro, the company maintains an impressive 8.7% dividend yield and has achieved a "Good" financial health score, with particularly strong marks in profitability and cash flow metrics.

Key Takeaways

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• Freehold Royalties exceeded EPS expectations significantly.
• Revenue fell short of forecasts, raising some investor concerns.
• The stock rose 1.61% following the earnings release.
• The company increased its production focus on liquid-weighted plays.
• Positive guidance for 2025 suggests continued growth.

Company Performance

Freehold Royalties demonstrated robust performance in Q4 2024, with a notable increase in funds from operations, reaching $61 million for the quarter. The company’s focus on liquid-weighted plays in Canada and the U.S. contributed to a 15% year-over-year production growth in heavy oil. This strategic shift positions Freehold favorably in both Canadian and U.S. markets.

Financial Highlights

• Revenue: $76.9 million, below the forecast of $81.7 million.
• Earnings per share: $0.33, above the forecast of $0.2394.
• Annual production: 14,962 BOE per day, with a 66% payout ratio.

Earnings vs. Forecast

Freehold Royalties reported an EPS of $0.33, surpassing the forecast of $0.2394 by approximately 37.8%. However, the revenue of $76.9 million fell short of the expected $81.7 million, marking a revenue miss that could raise concerns about top-line growth.

Market Reaction

Following the earnings announcement, Freehold’s stock price rose by 1.61%, closing at $12.61. This positive movement, despite the revenue miss, indicates investor confidence in the company’s strategic direction and operational efficiency. The stock remains within its 52-week range, suggesting stable investor sentiment.

Outlook & Guidance

Freehold Royalties provided optimistic guidance for 2025, projecting production growth of 10% year-over-year with an expected liquids weighting of 66%. The company continues to target mid-teen internal rates of return (IRRs) for new acquisitions, maintaining a conservative leverage approach.

Executive Commentary

David Spiker, IR Manager, highlighted the revenue potential by stating, "100 barrels a day of oil in our portfolio will generate $3,400,000 a year in revenue." COO Rob Cain emphasized strategic goals, saying, "We are targeting at least sort of mid-teen IRRs for our opportunities." CFO Dave Hendry reiterated financial discipline, noting, "Our targeted payout is still 60%."

Risks and Challenges

• Potential volatility in oil prices could impact revenue.
• Integration risks associated with increased M&A activity.
• Regulatory changes affecting the oil and gas sector.
• Macroeconomic pressures that could affect demand.
• Competition from other oil producers in key markets.

Q&A

During the earnings call, analysts inquired about Freehold’s acquisition strategy and leverage targets. The company addressed production guidance methodology and potential for stock buybacks, emphasizing its focus on sustainable growth and shareholder returns.

Full transcript - Freehold Royalties Ltd. (FRU) Q4 2024:

Speaker 0: All participants, please continue to stand by. The conference will begin momentarily. Once again, please this conference is being recorded.

Conference Operator: All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr.

David Spiker. Please go ahead.

David Spiker, Manager of IR, Freehold Royalties: Good morning, everyone, and thank you for joining us today. On the call from Freehold are Rob Cain, our COO Dave Hendry, our CFO and Tom McBride, our Manager of IR. First off, I would like to acknowledge David Henry’s retirement that was announced yesterday. I want to say I’m very grateful to David for his strong leadership and partnership over the last six years and thank him for the significant contribution to our success. This will not be the last conference call we get with David.

He will be continuing in his role until later this year as we identify and transition to his successor. So before jumping into the results, I wanted to highlight that 2024 was another big step forward for Freehold. We strengthened our portfolio through our focus on liquid weighted plays in both Canada and The U. S, including building an exceptional position in core inventory rich lands in the Permian Light Oil Basin. Through this work, we’ve had a strong production growth in heavy oil, both Clearwater and Manville STACK, with 15% year over year gains.

We positioned 45% of our production into tariff free U. S. Light oil basins. As we go into 2025, we have an estimated 66% oil and NGL weighting, up from 64% in 2024, which then drives nearly a 20% increase to revenue per BOE. Just to put this into perspective, 100 barrels a day of oil in our portfolio will generate 3,400,000 a year in revenue.

100 bb a day of gas will generate $50,000 So these numbers are based on 2024 pricing, but you can see how impactful moving the liquids weighting can be. So in 2024, our acquisitions were concentrated in the Midland Basin of The Permian. There’s a lot of reasons why we love the Midland Basin. It produces over 2,500,000 barrels a day of light oil. It’s captured 20% of The U.

S. Lower 48 drilling in 2024 and has been the target of over $100,000,000,000 of M and A activity in recent years. Our acquisitions have expanded our ownership in some of the best reservoirs being developed by some of the best operators in North America. Our exposure in the Midland Basin has increased to the extent that Freehold is now positioned to capture an interest in one in every three wells drilled in the Midland Basin compared to one in every 12 wells the year prior. Our Midland lands are well positioned under major investment grade operators that have signaled substantial investment in and production growth from their Permian asset base over the next five years and beyond.

ExxonMobil, for example, is now Prehold’s largest payer in the Midland Basin and our second largest payer overall. We are excited about the growth they have discussed, planning to add 1,000,000 barrels a day or 1,000,000 BOE a day into the Permian production by 02/1930. Today, half of our Midland production is associated with ExxonMobil lands compared to only 20% in 2023. The 2024 acquisitions also balanced our portfolio from a revenue perspective. In 2025, we expect half our revenue to come from our Canadian assets and half from our U.

S. Assets. So half of our revenue is protected from all the tariff threats and actions that are in the forefront of the news right now. As noted earlier, our deliberate investment in oil weighted assets will be a difference maker as we think about our cash flows this year. In 2025, our liquids weight is expected to be 66%.

That’s a significant move up from fifty five percent five years ago when we undertook the initiative to reposition a portion of our portfolio away from working interest assets into a broader North American oil royalty portfolio. Our portfolio today has higher revenue generating oil barrels in areas that are attracting capital, in areas that are attracting premium pricing. And that translates to more value for our shareholders. So specific to our Q4 and twenty twenty four results, in Q4, we had $61,000,000 in funds from operations in the quarter. That translates to $0.4 a share and a payout ratio of 66%.

Our production was 15,306 Boe a day, which was 65% liquids. For the full year, we had $231,000,000 in funds from operations, which was $1.53 a share and production of just under 15,000 barrels a day at 14,962 BOE per day. On the reserve side, proved developed producing reserves totaled 30,000,000 BOE and proven plus probable reserves totaled 65,000,000 BOE at year end, an increase of 510% per share, respectively, continuing our multiyear track record of delivering reserves growth on a per share basis. For 2024, we delivered organic reserve replacement of 100% on a PDP basis and 109% on proven plus probable basis. If we include the acquisitions, that’s 170% replacement on PDP and 300% replacement on PROV plus prop oil.

Drilling activity was up modestly quarter over quarter, but up 15% year over year, a result of increased activity and increased scale of our Midland asset base. Our portfolio is very well positioned to participate in the development and revitalization of heavy oil in Alberta and Western Saskatchewan as open hole multilateral drilling has been a game changer in these plays. 30% of our wells drilled in Canada in 2024 were heavy oil wells, a sizable increase over the 19% of total we saw in 2023. This 2024 drilling contributed almost 400 barrels a day of new oil production exiting the year. We expect production to continue to grow in the Clearwater and Manuel Stack, where we are seeing excellent drilling results in the West Nipissie Clearwater, proving of an area where we hold significant undeveloped lands.

In the Greater Lloydminster area, production is a result of our active leasing program as well as from new drilling in areas which have been historically developed with vertical wells. We’re also excited about the progression of multi well drilling development into Southeast Saskatchewan as that will drive light oil growth. The royalty incentive programs that were put in place by the Saskatchewan government in April 2024 to encourage open hole multilateral development has resulted in operators using this drilling technique to optimize asset development. As a reminder, Freehold has a dominant land position in Southeast Saskatchewan with over 500,000 acres, including about 300,000 acres of mineral title lands. We are quite excited about this area as operators are just getting started in drilling these light oil targets with multilateral wells.

We also hold a large royalty footprint in the Deep Basin and are well positioned to participate in the strengthening of Canadian gas prices. Although not attracting capital at the same pace in recent years, our natural gas asset base will prove valuable as AECO pricing improves. We talked about it at the beginning of the call about how the twenty twenty four acquisitions have positively changed our Midland footprint. Our Midland position is now our largest asset with over 20% of our production, more than doubling its 2023 contribution, and we continue to expect low- to mid single digit growth from our Midland assets. Our Eagle Ford position has seen ConocoPhillips resume drilling post their acquisition of Marathon last year, and we expect Eagle Ford to continue to contribute steady, high value oil weighted production.

For 2025, we’re expecting production to be in the 15,800 to 17,000 BOE a day range. At the midpoint, this represents a 10% year over year production growth. We continue to highlight the high value liquids shift in our portfolio with 2025 expected to be weighted 66% to liquids, an increase from the 64% in 2024, which is expected to drive an additional 3% to FFO per share year over year. Production guidance is premised on current strip pricing with liquids driving almost 95% of our revenues in 2025. Dollars At Freehold, investors get a multi decade inventory of drilling locations across our expansive Canadian and U.

S. Portfolios. They get $1.08 per share in annual dividend paid monthly and which is covered at all oil prices into the low 50s. And the portfolio that exposed to premium priced, tariff free U. S.

Light oil production. With that, we’re happy to take your questions.

Conference Operator: Thank you. We will now take the question from the telephone line. The first question is from Joseph Kascher. Please go ahead.

Joseph Kascher, Analyst: Good morning, Dave. Good morning, everyone. I have two questions for me. Could you walk us through your assumptions for the guidance of $15,800 to $17,000 and what you’re assuming so we can kind of figure out our own approach to our forecasts?

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: Yes. Hi, Joe. It’s Rob King here. So maybe I’ll kind of talk to the midpoint of our guidance, Joseph, in terms of how we sort of came to that.

David Spiker, Manager of IR, Freehold Royalties: As you’d kind of

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: guess, it’s a very bottoms up approach that we take in terms of looking through on a well by well basis and what we anticipate activity will be both in Canada and The U. S. But in terms of a top down approach to explain it to yourself and other stakeholders, it’s I’ll kind of talk in terms of The U. S. And then I’ll talk in terms of Canada.

So under U. S. Assets, our Midland assets, those are growing in the mid single digit rate. And again, that’s predominantly oil and liquids. There’s probably by volume 7075% of the volumes are oil and NGLs from our Permian assets.

And then our Eagle Ford assets, that’s one where, like Marathon, Conoco has been so far approaching that as very much as a maintenance type mode where they’re maintaining activity to hold the production steady on our Eagle Ford assets. In Canada, I’d sort of say the overall from a BOE perspective is probably flat to modestly up, but the makeup of those barrels are changing. In terms of with the current gas pricing, we are seeing areas like the Deep Basin, like the Cardium not getting as much capital. And we are seeing some of the BOEs there actually declining kind of year over year. I’d say we’re offsetting that with growth in places like Mandeville Heavy, like Clearwater.

And as David Spiker mentioned, just in terms of the positive impact that, that has on our cash flow per share, that move from 64% liquids waiting in 2024 to 66% liquids waiting in 2025, that adds over 3% to FFO per share.

Joseph Kascher, Analyst: Next one then. Thanks for that. In terms of going forward, is the goal always to get debt to cash flow below one times 0.7, zero point eight, and then at that point, you’re ready to do further acquisitions? Or is there a number just under one times? Or what do you look at in terms of where you want the balance sheet to be before you make the next growth phase?

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: Hi, it’s Dave Hendry here. It’s a little bit of a depends question. I mean, it depends on the size of the acquisition and the metrics and cash flows related to the acquisitions. Obviously, our targeted range is leverage of less than 1.5 times. Our comfort range obviously that gives us flexibility is lower to that one times range.

So is that the trigger to do acquisitions? Not necessarily, but I mean obviously maybe the scale of the acquisition. So and that again is more of a longer term target. So if there’s the right acquisition, we are comfortable up to that 1.5 times range. But over the long term, we generally will trend downwards towards that one times or lower.

We think it gives us the flexibility for acquisitions, but it’s not a binary trigger itself. It’s just a range that we view ourselves as being a relatively conservative leverage company because we want to deliver dividends back to shareholders rather than pay interest on debt.

Joseph Kascher, Analyst: Okay. That’s it from me. Thanks very much. Thanks, Joseph.

Conference Operator: Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. David Spiker. Please go ahead.

We’ve

Joseph Kascher, Analyst: got a couple of questions that

David Spiker, Manager of IR, Freehold Royalties: are just coming in on the tax line, so we’ll just handle those.

Joseph Kascher, Analyst: Sure. So the first question

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: is what is the approximate hurdle rate for new acquisitions at current spot prices? Yes. Rob speaking. So that we’re still targeting I think we’re always targeting at least sort of mid teen IRRs for our opportunities on an after tax basis. I think the other pieces when we’re looking at any asset attached to the portfolio is something that it adds value both on a near term and longer term basis on a FFO per share perspective as well as on a production and reserves per share.

And that longer term basis on a net asset value accretive basis. The other piece is really focused on continuing to grow in our oil and liquids areas. Thanks. And the next question is about buybacks. Would there be better use of capital

Joseph Kascher, Analyst: to buyback stock in prices state where they are today?

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: Hi, it’s Dave Hendry here again. Buybacks are something we do discuss internally. I think right now, paying down debt as we are above one time is probably our first priority. We do evaluate sort of those metrics when we’re looking at acquisitions. Does that mean no ever to buybacks?

Absolutely not. It’s something that is a consideration, just not realistically something that we’re likely to do in the near term. And so if you put in a program right now, then that would effectively be a little bit disingenuous unless you realistically would be utilizing it. And if share prices or sorry, if commodity prices go down, which may impact share price, then that obviously affects how much free cash flow you’re actually going to have available. Our targeted payout is still 60%.

Obviously, buybacks factor into that consideration. It was a little bit elevated last year. Obviously, the acquisitions we’ve done in the constructive portfolio should see that payout ratio go down. But it’s something we’ll continue to consider, but not likely to implement anytime in the near future.

Joseph Kascher, Analyst: Great. And the next question is, what are some of the trends you’re seeing in drilling activity so far this year? And how do you expect it to progress going forward?

Rob Cain/Dave Hendry/Rob King, COO/CFO/Executive, Freehold Royalties: Sure. It’s we’re only two months into the year. So there are some trends you can sort of point to. When we look in both U. S.

And Canada, the drilling activity to date is in line with what our expectations were at the beginning of the year. In Canada, Q1 is one of our most important quarters from a drilling perspective. Almost onethree of our historical net activity has been in the first quarter. So we’ve been encouraged that we’ve seen as much activity as we have. When you look at the broader trends in Canada, from a licensing activity, January, February licensing results are up over 10% relative to this time last year, and a lot of that is in the Manseil heavy oil space where Freehold has had a lot of success.

A third of our wells were drilled targeting heavy oil in 2024. And on The U. S. Side, similarly in line with what our expectations are. As Dave Spiker mentioned, Conoco is back drilling on our Eagle Ford land, so we’re encouraged by that.

Joseph Kascher, Analyst: Thanks. There’s no more online questions. I’ll turn it to Dave to end the call.

David Spiker, Manager of IR, Freehold Royalties: Great. Well, thanks everyone for participating today. It’s a big questions. And yes, we’re excited about 2025. It will be a lot of continued to evolve our portfolio.

We’ll continue to have a good balance of revenue across Canada and The U. S. And we continue to build the oil weighting and liquids weighting in our portfolio. So thank you very much for your time today.

Conference Operator: Thank you. The conference has now ended. Please disconnect your line at this time. Thank you for your participation.

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