Mr. Matt Donohue reports
FREEHOLD ROYALTIES LTD. ANNOUNCES 2016 FIRST QUARTER RESULTS
Freehold Royalties Ltd. has released first quarter results for the period ended March 31, 2016.
RESULTS AT A GLANCE
Three months ended
Financial ($000s, except as noted) 2016 2015
Gross revenue $24,933 $27,751
Net income (loss) (8,590) 21,617
Per share, basic and diluted ($) (0.09) 0.29
Funds from operations 15,500 21,938
Per share, basic ($) 0.16 0.29
Operating income (1) 20,292 22,632
Operating income from royalties (%) 97 83
Acquisitions 219 68,370
Capital expenditures 2,084 5,969
Dividends declared 17,845 20,329
Per share ($) (2) 0.18 0.27
Net debt obligations (1) 149,197 198,834
Shares outstanding, period end (000s) 99,284 75,457
Average shares outstanding (000s) (3) 99,093 75,199
Average daily production (boe/d) (4) 11,974 10,058
Average price realizations ($/boe) (4) $22.23 $29.80
Operating netback ($/boe) (1) (4) 18.62 25.01
(1) A non-generally accepted accounting principle financial
(2) Based on the number of shares issued and outstanding at
each record date.
(3) Weighted-average number of shares outstanding during the
(4) Note the conversion of natural gas to barrels of oil
The board of directors has declared a dividend of four cents per share, to be paid on June 15, 2016, to shareholders of record on May 31, 2016. The dividend is designated as an eligible dividend for Canadian income tax purposes. Including the June 15, 2016, payment, the 12-month trailing cash dividends total 81 cents per share.
First quarter 2016 highlights:
- Production for first quarter 2016 averaged 11,974 barrels of oil equivalent per day, a 19-per-cent increase over first quarter 2015 and a 1-per-cent increase over fourth quarter 2015.
- Royalties accounted for 97 per cent of operating income and 79 per cent of production,
reinforcing the company's royalty focus.
- Royalty production was up 33 per cent compared with first quarter 2015, averaging 9,495
boe per day. Growth in volumes was associated with a combination of production
acquired through the year, new production from drilling on the company's royalty
lands and a strong quarter from the company's audit function, which was largely
responsible for approximately 600 boe per day of prior-period adjustments,
including compensatory royalties on its mineral title lands.
- Working interest production averaged 2,479 boe per day for the quarter, down
14 per cent when compared with the same period last year, reflecting reduced
spending through a weaker commodity price environment.
- Funds from operations totalled $15.5-million (16 cents per share) in first quarter 2016,
down 29 per cent from the same period last year owing to continued weakness in
oil and natural gas prices.
- Though average commodity price realizations decreased 25 per cent, reduced
revenues were partly offset by the increase in production volumes,
resulting in a 10-per-cent decrease in gross revenue compared with first quarter 2015.
- First quarter 2016 net loss was $8.6-million (first quarter 2015 net income of $21.6-million --
without a $24.3-million gain on corporate acquisition, it would have been
a $2.7-million net loss) primarily due to lower revenues and increased
depletion and depreciation expense as a result of higher production
- Dividends declared for first quarter 2016 totalled 18 cents per share, down from 27
cents per share one year ago. On March 3, 2016, Freehold adjusted its monthly
dividend to four cents per share from seven cents per share as a result of reduced
funds from operations within the weak commodity price environment.
- Average participation in the company's dividend reinvestment plan was 11 per cent
(first quarter 2015: 35 per cent). DRIP proceeds for first quarter 2016 totalled $2.4-million.
- Net capital expenditures on the company's working interest properties totalled $2.1-million over the quarter.
- Basic payout ratio (dividends declared/funds from operations) for first quarter
2016 totalled 115 per cent while the adjusted payout ratio (cash dividends plus
capital expenditures/funds from operations) for the same period was
132 per cent. However, based on the company's 2016 key operating assumptions, its current
dividend level remains well financed with its basic payout ratio expected
to total approximately 82 per cent for 2016.
- At March 31, 2016, net debt obligations totalled $149.2-million, up $2.3-million from $146.9-million at Dec. 31, 2015. This implies a net
debt to 12-month trailing funds from operations ratio of 1.5 times
(excluding the pro forma effects of acquisitions).
On May 2, 2016, Freehold entered into a definitive agreement with certain affiliates of Husky Energy Inc. to acquire an extensive suite of royalty production and fee lands for an aggregate purchase price of $165-million, prior to normal closing adjustments. The effective date of the Husky transaction is Jan. 1, 2016, with closing expected to occur on or about May 25, 2016, subject to regulatory approval and certain other closing conditions.
Highlights include (based on relevant assumptions from the company's 2016 key operating assumptions):
- Adds approximately 2.5 million acres of royalty lands (including 300,000 acres of mineral title land), increasing the company's royalty lands
acreage by 74 per cent to 5.9 million acres;
- Expected 2016 annualized average royalty production of 1,700 boe per day and
annualized operating income of $11.4-million;
- Expected to increase royalties as a percentage of 2016 operating income
to approximately 94 per cent;
- The production base is expected to have a low decline of approximately
17 per cent per year in 2016.
The Husky transaction will be financed by a concurrent $165-million public equity financing (before 15-per-cent overallotment option and underwriter fees) and an approximate $20-million concurrent private placement to CN Pension Trust Funds, with remaining funds allocated to debt repayment. A total of 16,018,000 common shares at a price of $11.55 per share will be issued through the financings (excluding potential effects of the overallotment option). If the overallotment option is exercised in full by the underwriters, an additional 2,142,900 common shares will be issued at a price of $11.55 per share for gross proceeds of approximately $25-million. The underwriters will receive a commission of 4 per cent on the common shares issued pursuant to the financing (other than the common shares issued pursuant to the concurrent private placement).
Two of Freehold's long-standing directors, Nolan Blades (chair of the board) and David Sandmeyer, are not standing for re-election and, after 19 years of service, will retire from the board at the annual and special meeting of shareholders being held May 11, 2016. Mr. Blades joined the board in 1996 and was appointed chair of the board in May, 2009. Mr. Sandmeyer was appointed to the board in 1996 and served as president and chief executive officer of Rife Resources Ltd. and Freehold until his retirement in May, 2009. The company would like to thank them for their dedication, wisdom and leadership throughout their tenure on the board. It is planned that Marvin Romanow will succeed Mr. Blades as chair of the board following the meeting. Mr. Romanow has over 30 years of experience in the oil and gas industry.
The company is pleased to announce that Douglas Kay has agreed to stand for election at the meeting. Mr. Kay is a corporate director and former oil and gas executive with over 35 years industry experience.
The attached key operating assumptions table summarizes the company's key operating assumptions for 2016, updated to reflect actual statistics for the first three months and the company's current expectations for the rest of the year. The assumptions and guidance reflect the Husky transaction and the financings (before overallotment option) discussed in subsequent events.
- The increase in the company's production guidance on May 2, 2016, from 9,800 boe per day
to 11,400 boe per day was a function of the Husky transaction, higher-than-expected drilling activity on the company's royalty lands, lower-than-expected
shut-in heavy oil volumes and positive prior-period adjustments. Volumes
are expected to be weighted approximately 59 per cent oil and natural gas
liquids and 41 per cent natural gas. The company continues to maintain its royalty
focus with royalty production accounting for 80 per cent of forecasted 2016
production and 94 per cent of operating income.
- The company has increased its WTI and WCS pricing to $40 (U.S.) per barrel and $34 (U.S.) per barrel,
respectively (previously $35 (U.S.) per bbl and $31 (U.S.) per bbl, respectively), due
to recent price momentum. The company has revised downward its 2016 AECO natural
gas price assumption from $2 per thousand cubic feet to $1.80 per thousand cubic feet.
- Based on its key operating assumptions, the company forecasts its 2016 basic
payout ratio to total approximately 82 per cent.
- Operating costs have been reduced from $4.75 per boe to $4 per boe as a
result of increased royalty production as a percentage of total
- The company's capital spending budget remains at $7-million.
- General and administrative costs have decreased to $2.50 per boe as a result of production added
through the Husky transaction, offset somewhat by expected acquisition
- Weighted-average shares outstanding have increased due to the financings
detailed in subsequent events.
KEY OPERATING ASSUMPTIONS (1)
Annual 2016 average May 11, 2016 March 3, 2016 Nov. 12, 2015
Daily production boe/d 11,400 9,800 9,800
WTI oil price U.S.$/bbl $40.00 $35.00 $50.00
Select (WCS) Cdn$/bbl 34.00 31.00 47.00
AECO natural gas price Cdn$/Mcf 1.80 2.00 2.75
Exchange rate Cdn$/U.S.$ 0.77 0.72 0.76
Operating costs $/boe 4.00 4.75 5.00
(2) $/boe 2.50 2.65 2.85
Capital expenditures $ millions 7 7 15
Dividends paid in
shares (DRIP) (3) $ millions 8 8 13
------- ------- -------
(1) Production guidance was updated to 11,400 boe per day on May 2, 2016, but no
other assumptions were changed at that time.
(2) Excludes share-based and other compensation.
(3) Assumes an average 15-per-cent participation rate in Freehold's dividend
reinvestment plan, which is subject to change at the participants'
Recognizing the cyclical nature of the oil and gas industry, the company continues to closely monitor commodity prices and industry trends for signs of deteriorating market conditions. It cautions that it is inherently difficult to predict activity levels on its royalty lands since it has no operational control. As well, significant changes (positive or negative) in commodity prices (including Canadian oil price differentials), foreign exchange rates or production rates may result in adjustments to the dividend rate.
Based on the company's current guidance and commodity price assumptions, and assuming no significant changes in the current business environment, the company expects to maintain the current monthly dividend rate through the next quarter. The company will continue to evaluate the commodity price environment with the expectation to increase dividend levels as the environment stabilizes or improves (subject to the quarterly review and approval of the company's board of directors -- see dividend policy).
Availability on SEDAR
Freehold's first quarter 2016 interim unaudited condensed consolidated financial statements and accompanying management's discussion and analysis are being filed today with Canadian securities regulators and will be available at SEDAR and on the company's website.
We seek Safe Harbor.
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