Freehold Royalties Ltd. (FRU) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the Freehold Royalty second quarter 2026 webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message. advising the Johannes Race. Please be advised that today's conference is being recorded. I'd like to turn the conference over to your speaker, Sir David Spiker, President and CEO. Please go ahead, sir.

Thank you, and good morning everyone. Thank you for joining us today. Before we begin, I'd like to remind everyone that certain statements made on this call are considered forward-looking information and we caution listeners to review the advisory regarding forward-looking statements contained in our news release and MD&A available on our website. So on the call with me this morning is Brad Monaco, our Chief Financial Officer, and Tom McBride, our Manager of Investor Relations. Matt joined our team in June and brings extensive experience in the energy sector with a strong background in finance, capital markets, and strategic planning. We're excited to have Brad join Freehold, and we look forward to introducing him to many of you in the coming months. Turning to the quarter, production averaged 15,622 BOE per day with a liquids weighting of 66%. Production was in line with the expectations that we outlined earlier this year. Over the past few quarters, our current production reflected the moderated activity levels experienced through the second half of 2025 when commodity prices were much lower. We are encouraged by the recovery and drilling activity levels that will contribute to our growth through the back half of 2026. Overall, our Q2 results were strong, generating $78 million of funds from operations. Our net debt is down $24 million and our balance sheet is in great shape as we head into the second half of the year. From a portfolio perspective, our North American asset base continues to benefit from geographic diversification. Actually, 54% of our production is from Canada and 46% from the U.S. this quarter. While the US represents a smaller portion of production, it generated higher revenues and realized pricing and is a key contributor to our cash flow generation. This quarter we had a 35% increase in drilling activity with a total of 300 gross wells drilled on freehold lands compared to 223 wells drilled in the first quarter. On a net basis, freehold on 1.8 net wells in Canada and 0.9 net wells in the US. net drilling activity in the us is at the highest level we've had over the past several years and activity across the portfolio was largely directed toward crude oil opportunities, as operators responded to this much more constructive oil price environment. In Canada, 74 wells were drilled during the quarter despite operators working around spring break-up conditions. Industry drilling has been robust coming out of breakup with rig counts up 20% on a year-over-year basis. Activity on our lands in Canada is concentrated in oil focused areas, including the Clearwater, Southeast Saskatchewan and Manville Heavy Oil. Across Western Canada, operators continue to focus on improving well economics through longer lateral lengths, optimized completions, enhanced reservoir targeting, and implementation of secondary recovery schemes. These improvements, alongside higher productivity targets, have supported a 30% improvement in well performance and continues to expand the drilling inventory across our land base. We entered into 45 new leases in Canada, largely concentrated in southeast Saskatchewan. Several operators have outlined plans to advance drilling programs later this year and we expect those production additions to begin contributing through late 2026 and into 2027. Turning to the United States, 226 gross wells were drilled on our lands during the quarter, with approximately 82% of activity occurring in the Permian Basin. We continue to see significant activity in the Permian where operators have been investing into technological advancements that support longer lateral lengths as well as well as use of surfactants and lightweight propans to improve well productivities. As an example, spuds in the Midland Basin average three miles on our acreage this quarter. actually 10% higher than last year. We've also had an increase in activity in the Barnett Formation. in the first half of the year. We remain constructive on the opportunities in the Barnett as operators continue to demonstrate the potential of this deeper formation. This is backed off by the strong leasing and permitting activity we saw through the quarter, and drilling activity is just commencing. One area we continue to monitor is natural gas infrastructure in the Permian. During the quarter, natural gas pricing and production was negatively impacted by egress constraints at the Waha Hub. The Waha Hub is the primary point for moving gas out of the Permian, and during the quarter, gas pricing and production was negatively impacted by egress constraints at the Oaxaca This caused gas price differentials to NYMEX to widen to unusually high levels, resulting in negative gas pricing for most of the second quarter. In late June, compression was added to the Gulf Coast Express expansion line and the first phase of the Hugh Brinson pipeline was put in service. combined, adding approximately 2 BCF a day of takeaway capacity. This moved our Permian gas into positive pricing very late in the quarter and alleviated any immediate Waha egress related production constraints in the Permian. In addition to the two expansions I just mentioned, there's a total of 4.5 BCF a day of new egress capacity expected to come online by the first quarter of next year. This will provide producers much greater flexibility to manage their associated gas volumes and support further production growth across the basin. Looking ahead, drilling activity has improved substantially from the levels experienced through much of 2025, and operators remain focused in many of the core oil-weighted areas within our portfolio. We also continue to see an inventory of licensed and drilled and uncompleted wells across our lands. While timing of production additions ultimately depends on operator completion schedules, current activity levels support our existing outlook and we we are maintaining our 2026 production guidance of 15,500 to 16,300 VOE per day. So, with that, I'll turn the call over to Brad to review the financial results in more detail.

Thank you, Dave. I'm pleased to be on the call today and excited to have joined Freehold. This It's a great business model with a high-quality royalty portfolio, and I look forward to working with Dave and the team to build on that foundation. Q2 royalty and other revenue totaled $100 million, up 29% compared to Q1-26, driven mainly by stronger realized commodity prices. Crude oil pricing was particularly strong, with Freehold realizing $122 Canadian per barrel in the quarter. Including NGLs and natural gas, our average realized price was just over $69 per BOE, compared with approximately $55 per BOE in the first quarter. Cash costs average approximately $6.50 per BUE, improving from $7.02 per BUE in the first quarter and $7.38 in Q2 2025. cost structure remains among the lowest in the oil and gas industry and is a key advantage of Freehold's royalty business model. Funds from operations totaled $78 million, or $0.47 per share, up 30% from Q126. We returned $44 million to shareholders through dividends. presenting a 57% payout ratio and investing approximately $9 million in acquisitions. Year to date, Freehold has invested approximately $29 million in mineral title and royalty interest in the Permian Basin. These tuck-in investments have added 12,500 acres in core areas of Texas and New Mexico, including Loving, Martin, Midland, and Lee counties. The focus remains on adding high-quality, undeveloped acreage that can support future production growth as operators develop these lands. We also strengthened the balance sheets in Q2, with net debt declining by $24 million during the quarter to $251 million, while our net debt to trailing funds from operations ratio improved to one times. This provides the capacity to continue pursuing value-add acquisitions while consistently returning capital to shareholders. shareholders. Capital allocation is central to how we create per share value. For Freehold, every dollar needs to be thought about carefully, whether it is deployed through acquisitions to make our business better, used to add financial flexibility through debt reduction, or returned to shareholders. We are coming from a position of strength, and we've built additional flexibility after a strong second quarter. With that, I'll turn the call back to Dave.

Thanks, Brad. And with that, we're pleased to take questions from the audience.

Thank you. Ladies and gentlemen, if you have a question at this time, you will need to press star 1 1 on your telephone and wait for your name to be announced. The standby will be compiled to KNE Roster. One moment for our question. And we have a question coming from the line of Jamie Kivick with CIBC. Your line is now open.

Good morning, thanks for taking my question. I'm interested if you could talk about the drilling activity increase that you saw in the US this quarter and any timing factor expectations for when that production possibly comes online. And then can you just talk about what you're seeing for recent activity and how you think that translates into Q3Q2?.

for net drills on the US side. Thanks. Yes, Jamie here. With respect to the US, you know, We expect that most of the activity in the quarter was directed in the Permian. And so you will expect to see that kind of ramp up into Q4 or into Q1. The Eagleford, our other big area in the U.S., we've gotten a lot of indication from Conoco that that's a back half program. So, you know, whether we're going to see those Eagleford wells come on in, in, you know, late in 2026 or early 2027, not a hundred percent sure yet a bit of a function of timing. Um, on that, but it will be a strong drilling activity in the US just going into the back half of the year. I would say that's the same for Canada, where in the first four months of the year, we had 75 wells drilled on their lands. over 100 in the last three months. So you can see that that activity is really ramping up quite sharply. So again, that kind of feeds what we've been messaging all along here is that really the ramp up in production both in Canada and the US based on where we're seeing the drilling activity directed will be the latter part of the year. Okay, thanks for the color. I'll hand it back.

Thank you. Our next question in queue, coming from the line up, Patrick O'Rourke with ATB Cornwall Capital Markets. Your line is now open.

Hey guys, good morning and thanks for taking my questions. I guess first off, congrats to Brad on the appointment and we look forward to hearing from you. know maybe building a little bit on what Jamie asked but it's fairly apparent the uptick in activity we can see that in terms of well spuds but I guess if we could maybe look a little bit under the hood in terms of what that means in terms of well productivity and sort of meters drilled and how the sort of the nature of the the wells is also changing, maybe perhaps some color there.