Falcon Minerals - Still Discounted As Activity Begins To Recover

Summary

• In line quarter.
• Last quarter they "blessed" our upper end of range volumes for 2021; this quarter they called that number "conservative." We note the Street is at that "conservative" level too.
• On our "current" upper end volumes, they are trading at a forward yield of 10 to 15%.
• After the call, it's likely higher activity levels prompt upward estimate revisions including from us.

This is a Z4 Energy Research pre-conference call note.

Falcon Minerals (FLMN) is a small-cap Eagle Ford minerals player. Their 4Q20 report was essentially in line with expectations and follows a previously announced increase in the quarterly dividend. Guidance provided in the quarterly release was better than the Street expected. We last wrote about this name for Seeking Alpha here in November 2020. First, a breakdown of the numbers:

The 4Q20 Numbers

• Production was a little light but this OK given the small size of the company and the nature of their production which is essentially tiny bits from hundreds of wells.
• EBITDA was in line after excluding $0.8 mm on a previously disclosed strategic review. We'd like to hear what happened here as two quarters ago this appeared to be front and center, last quarter it was given less focus and was "ongoing" and now it appears to be completed without mention of the alternative that were produced.
• The 4Q20 dividend was previously disclosed at $0.075 implying an annualized yield of 7.1% as of last night's close of $4.23.

Highlights

• Line-of-Sight wells: These are wells that can be thought of as "work in progress"
  • 1.37 net permitted wells. We give less weight to this category than the next two as they've not spud yet and permitted wells can stay that way longer than some might expect.
  • 1.17 net waiting on completion. These are wells that have been drilled and cased and are likely on frac spread's calendar.
  • 0.52 net waiting on connection. These are wells that have been completed and will generally soon be tied to sales. These are generally a near term almost sure thing to contribute to production volumes.
  • Total: 3.06 net wells

For reference, last quarter they had 3.13 net wells in Line-of-Sight and for further reference; for all of 2020, they only saw 1.91 net wells turned to sales.

2021 is starting off on the front foot

• So far in 1Q21 they have confirmed that five high net revenue interest wells (NRI wells) (which equate to 0.5 net wells) have been turned in line (TILs) this quarter. Yes, that's half a well and yes, as noted they are a small player. It's the yield here we are after. Please keep reading.
• And in the rest of 1Q21 they expect to see another six high NRI wells at Hooks Ranch (that's ConocoPhillips (COP) as the operator) (for another 0.45 net wells) turned in line late in the quarter. Given the strong economics in this part of the Eagle Ford we are not at all surprised to Conoco and others ramping up activity levels.
• Note that these first quarter hookups would therefore equate to over half of last year's TILs.
• Furthermore, they now have 7 rigs working on their acreage which is more than three times the rig count in 2H20.
• Favorite Quote Watch 1: "We anticipate that Free Cash Flow per share will increase meaningfully throughout 2021 from fourth quarter 2020 levels... we see Free Cash Flow per share potentially doubling from fourth quarter 2020 levels in the second quarter of 2021, and then continuing to grow throughout the second half of the year.” We note the Street has FCF up only 47% from 4Q20 to 2Q21 and then grows from there. This is how estimates rise mechanically following conference calls.

Guidance

• Volumes: No point estimate or range provided however this leads us to another favorite quote. Favorite Quote Watch 2: "Given the high NRI locations that have turned in line and that are expected to turn in line, our significant backlog of line-of-sight wells, and the robust activity that we are seeing across our position, we believe that the previously discussed average of 5,000 barrels of oil equivalent per day is conservative relative to what we expect to produce this year."
  • The Street is at 5,000 BOEpd for 2021.
  • Z4 has been employing a low and high range for 2021:
    • 4,000 BOEpd at oil prices ranging from $45 to $65 with a projected forward yield range of 7% to 11%
    • and 5,000 BOEpd with the same range yielding forward yields of 10% to 15%.
    • We will take another look at lifting modeled volumes in the wake of the call.
• Capex - as always as a minerals player they have $0 capex.

Balance Sheet

Net debt to annualized 4Q20 EBITDA of 1.2x which is fine.

Nutshell

OK quarter, pretty much as expected if a little light on volumes. The balance sheet remains strong. As expected, higher activity due to strong commodity pricing and the stout economics of their area of the Eagle Ford has materialized. As such the forward-looking color is solid and our sense is analysts will be boosting 2021 volumes, modeled free cash, and therefore the dividend in the wake of the call. FLMN is currently our primary yield play.

Analyst’s Disclosure: I am/we are long FLMN, COP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.