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Freehold Royalties Ltd
Symbol C : FRU
Shares Issued 117,530,415
Close 2016-08-04 C$ 11.08
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Freehold loses $2.24-million in Q2

2016-08-05 02:19 ET - News Release

Mr. Matt Donohue reports

FREEHOLD ROYALTIES LTD. ANNOUNCES 2016 SECOND QUARTER RESULTS AND SUSPENSION OF DRIP

Freehold Royalties Ltd. has released second quarter results for the period ended June 30, 2016.

                        RESULTS AT A GLANCE

                           Three months ended         Six months ended
                                 June 30,                  June 30,
Financial ($000s,
except as noted)            2016         2015        2016         2015

Gross revenue            $32,219      $38,004     $57,152      $65,755
Net income (loss)         (2,249)       3,919     (10,839)      25,536
Per share, basic and
diluted ($)               (0. 02)        0.04       (0.11)        0.31
Funds from operations     24,142       28,730      39,642       50,668
Per share, basic ($)        0.23         0.32        0.39         0.62
Operating income (1)      28,011       32,733      48,303       55,365
Operating income
from royalties (%)            91           85          94           84
Acquisitions             162,211      342,310     162,430      410,680
Capital expenditures         753        2,750       2,837        8,719
Dividends declared        13,380       24,459      31,225       44,788
Per share ($) (2)           0.12         0.27        0.30         0.54
Net debt obligations
(1)                       98,191      146,992      98,191      146,992

Operating

Average daily
production (boe/d)        12,041       10,617      12,006       10,338
(3)
Average price
realizations ($/boe)       28.48        38.63       25.37        34.36
(3)
Operating netback
($/boe) (1) (3)            25.57        33.88       25.11        29.58
                          ------       ------      ------       ------

(1) A non-generally accepted accounting principle financial 
measure.
(2) Based on the number of shares issued and outstanding at each 
record date.
(3) A conversion of natural gas to barrels of oil equivalent.

Dividend announcement

The board of directors has declared a dividend of four cents per share, to be paid on Sept. 15, 2016, to shareholders of record on Aug. 31, 2016. The dividend is designated as an eligible dividend for Canadian income tax purposes.

Dividend reinvestment plan suspension

Effective with the August dividend, the board has approved the suspension of the company's dividend reinvestment plan (DRIP) pending further notice. As of Sept. 15, 2016, shareholders who were enrolled in the DRIP will receive the regular monthly cash dividend of four cents per share. Participants in the DRIP will still receive shares in lieu of the monthly cash dividend to be paid on Aug. 15, 2016, to shareholders of record as at July 31, 2016.

Second quarter 2016 highlights:

  • Freehold's production averaged a record 12,041 barrels of oil equivalent per day in second quarter 2016. Gains in production were the result of acquisition activity (see news release dated May 25, 2016) and a strong quarter from the company's audit function (largely responsible for 475 boe per day of prior-period adjustments for second quarter 2016).
  • Funds from operations totalled $24.1-million (23 cents per share) in second quarter 2016, up 55 per cent from first quarter 2016. Royalties accounted for 91 per cent of operating income, reinforcing the company's royalty focus.
  • Freehold acquired royalty production and fee lands from certain affiliates of Husky Energy Inc. for $162-million. Freehold's royalty acreage now totals 5.9 million acres (73-per-cent increase).
  • After a review of company's prospect inventory, including the upside from the Husky transaction, the company estimates that it has greater than 10 years of free drilling on its royalty lands.
  • In second quarter 2016, Freehold issued 15 leases, with the majority of the interest focused on Freehold's southeast Saskatchewan royalty lands.
  • Basic payout ratio (dividends declared and funds from operations) for second quarter 2016 totalled 55 per cent while the adjusted payout ratio (cash dividends plus capital expenditures and funds from operations) for the same period was 50 per cent.
  • At June 30, 2016, net debt obligations totalled $98.2-million, down $51.0-million from $149.2-million at March 31, 2016. This implies a ratio of net debt to 12-month trailing funds from operations of 1.1 times (0.9 times including the pro forma effects of acquisitions).

Guidance update

The attached key operating assumptions table summarizes the company's key operating assumptions for 2016, updated to reflect actual statistics for the first six months and the company's current expectations for the rest of the year.

  • The company has increased its production guidance from 11,400 barrels of oil equivalent per day to 11,700 boe per day, reflecting lower-than-expected decline within the company's royalty production 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. It continues to maintain its royalty focus with royalty production accounting for 80 per cent of forecasted 2016 production and 93 per cent of operating income.
  • The company has revised upward its 2016 AECO natural gas price assumption from $1.80 per thousand cubic feet to $2 per thousand cubic feet.
  • Increased expected royalty production, which has no operating costs, has resulted in a downward revision to the company's operating costs from $4 per boe to $3.75 per boe.
  • The company's general and administrative costs have been reduced from $2.50 per boe to $2.40 per boe, reflecting the increased production guidance.
  • Freehold's board has approved the suspension of the DRIP pending further notice, resulting in estimates for the company's dividends paid in shares for the full year decreasing from $8-million to $5-million.
  • The company's capital spending budget remains at $7-million. A large percentage of the company's capital expenditure program is non-operated, and the activity level is difficult to predict.
  • Weighted-average shares outstanding have increased from 109 million to 110 million due to the full exercise of the overallotment option relating to the company's May, 2016, financing.
  • Based on the announced DRIP suspension and changes to certain operating assumptions, the company forecasts its 2016 basic payout ratio to be approximately 74 per cent (previously 82 per cent).
  • The company forecasts year-end net debt to funds from operations of approximately 1.1 times based on its revised key operating assumptions (excluding the pro forma effects of acquisitions).

                                 KEY OPERATING ASSUMPTIONS

                                              Aug. 4,     May 11,      March 3,     Nov. 12,
Annual 2016 average                             2016        2016          2016         2015

Daily production                    boe/d     11,700      11,400         9,800        9,800
WTI oil price                   U.S.$/bbl     $40.00      $40.00        $35.00       $50.00
Western Canadian Select (WCS)    Cdn$/bbl      34.00       34.00         31.00        47.00
AECO natural gas price           Cdn$/Mcf      2. 00        1.80          2.00         2.75
Exchange rate                  Cdn$/U.S.$       0.76        0.77          0.72         0.76
Operating costs                     $/boe       3.75        4.00          4.75         5.00
General and administrative 
costs (1)                           $/boe       2.40        2.50          2.65         2.85
Capital expenditures           $ millions          7           7             7           15
Dividends paid in shares
(DRIP)                         $ millions          5           8             8           13
                               ----------      -----       -----         -----        -----

(1) Excludes share-based and other compensation.

Recognizing the cyclical nature of the oil and gas industry, the company continues to closely monitor commodity prices and industry trends for signs of changing market conditions. The company 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 monthly dividend rate through the next quarter. It will continue to evaluate the commodity price environment and adjust the dividend levels as necessary (subject to the quarterly review and approval of the company's board of directors).

Availability on SEDAR

Freehold's second 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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