Mr. Tom Mullane reports
FREEHOLD ROYALTIES LTD. ACHIEVES RECORD QUARTERLY PRODUCTION AND OUTLINES 2017 GUIDANCE
Freehold Royalties Ltd. has released third quarter results for the period ended Sept. 30, 2016.
RESULTS AT A GLANCE
Three months ended Nine months ended
Sept. 30, Sept. 30,
2016 2015 2016 2015
Financial ($000s, except as noted)
Gross revenue $32,923 $36,076 $90,075 $101,831
Funds from operations (1) 24,148 27,643 63,790 78,311
Per share, basic ($) 0.21 0.28 0.59 0.89
Acquisitions 68 815 162,498 411,495
Operating income (2) from
royalties (%) 93 90 93 86
Dividends declared 14,133 24,604 45,358 69,392
Per share ($) (3) 0.12 0.25 0.42 0.79
Average daily production
(boe/d) (4) 12,281 11,266 12,099 10,652
Oil and NGL (%) 55 63 59 61
Average price realizations
($/boe) (4) $28.69 $34.11 $26.50 $34.27
Operating netback ($/boe)
(2) (4) 24.99 29.52 23.09 29.57
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(1) For the three and nine months ended Sept. 30, 2016, funds from
operations included a $1.1-million loss upon settlement of litigation.
(2) A non-generally accepted accounting principle financial measure.
(3) Based on the number of shares outstanding at each record date.
(4) Note the conversion of natural gas to barrels of oil equivalent (boe).
The company had a strong quarter, setting a production record, averaging 12,281 barrels of oil equivalent per day, aided by organic growth within the company's portfolio and a full quarter of production from its recent acquisition, and as a result, the company has revised its 2016 production guidance from 11,700 boe per day to 12,000 boe per day. The company is also seeing activity levels rebound with 48 (2.3 net) wells drilled on its royalty lands over the quarter with higher productivity from new wells.
Freehold has established a relatively conservative dividend policy, which the company believes serves shareholders well in times of uncertainty. This quarter's dividend of 12 cents per share was safely within the company's funds from operations of 21 cents per share. The company's long-term goal is to have an adjusted payout ratio between 60 per cent to 80 per cent, and at current levels, the company is comfortably at the bottom of this range. The company expects to use excess free cash flow over and above the company's dividend to finance future acquisitions and pay down debt, keeping the company's net debt to funds from operations between 0.5 to 1.5 times.
Looking into 2017, the company remains confident that commodity prices will continue to improve, and the company is looking for indications of oil price stability prior to resetting dividend levels. The company is estimating average production of 11,000 boe per day for 2017 with continued conservatism in forecasting drilling activity.
On Nov. 25, 2016, Freehold will celebrate its 20th anniversary. Over this time frame, the company have generated superior returns and would like to thank the company's employees for their hard work, which has made this possible. From a $10-per-share initial public offering in 1996, the company has provided dividends of over $30 per share. It would like to thank its shareholders for their continuing support.
Tom Mullane, president and chief executive officer
The board of directors has declared a dividend of four cents per share, to be paid on Dec. 15, 2016, to shareholders of record on Nov. 30, 2016. The dividend is designated as an eligible dividend for Canadian income tax purposes.
Third quarter 2016 highlights:
- Freehold's production averaged a record 12,281 boe per day, a 9-per-cent improvement
over third quarter 2015 and a 2-per-cent increase over second quarter 2016. Gains in production were
largely driven by better-than-expected third party production additions
and a full quarter's production from the company's second quarter 2016 acquisition from
certain affiliates of Husky Energy Inc.
- Royalty production was up 16 per cent compared with third quarter 2015, averaging 10,169
boe per day, accounting for 83 per cent of production and 93 per cent of operating income.
- Funds from operations totalled $24.1-million (21 cents per share) in third quarter
2016, flat over the previous quarter but down 13 per cent from last year with
reduced commodity prices somewhat offset by higher production. Impacting
funds from operations, Freehold settled an outstanding legal claim
recognizing a loss of $1.1-million.
- Freehold generated $9.8-million in free cash flow (1) over and above the company's dividend, which the company applied to outstanding debt. At Sept. 30, 2016,
net debt obligations (1) totalled $87.3-million, down $10.9-million from
$98.2-million at June 30, 2016. This implies a ratio of net debt to 12-month
trailing funds from operations of 1.0 times. Despite challenging
commodity prices, the company continues to generate an attractive netback and free
- Cash costs (1) for the quarter totalled $6.78 per boe, down from $7.34 per boe in
second quarter 2016 and $8.84 per boe in third quarter 2015. Included in these costs, general and
administrative (G&A) costs totalled $1.71 per boe for third quarter 2016 versus
$2.04 per boe in second quarter 2016 and $2.33 per boe in third quarter 2015.
- Wells drilled on the company's royalty lands totalled 48 (2.3 equivalent net) in
the quarter. For the first three quarters of 2016, 156 (6.1 equivalent
net) wells were drilled, including 15 royalty wells on the recently
acquired acreage associated with the Husky transaction, with seven
locations targeting the Shaunavon.
- In third quarter 2016, Freehold issued four leases. Seventy-one leases have been issued
year to date in 2016, 57 relating to the second quarter 2016 Husky transaction.
- Dividends declared for third quarter 2016 totalled 12 cents per share, unchanged from
the previous quarter and down from 25 cents per share one year ago.
- Basic payout ratio (1) (dividends declared/funds from operations) for third quarter
2016 totalled 59 per cent while the adjusted payout ratio (1) (cash dividends plus
capital expenditures/funds from operations) for the same period was 55 per cent.
(1) A non-generally accepted accounting principle financial measure.
The attached key operating assumptions table summarizes the company's key operating assumptions for 2016, updated to reflect actual statistics for the first nine months and the company's current expectations for the rest of the year.
KEY OPERATING ASSUMPTIONS
Annual average 2016 Nov. 8, Aug. 4, May 11, Mar. 3, Nov. 12,
2016 2016 2016 2016 2015
Daily production boe/d 12,000 11,700 11,400 9,800 9,800
WTI oil price U.S.$/bbl $43.00 $40.00 $40.00 $35.00 $50.00
Select (WCS) Cdn$/bbl 38.00 34.00 34.00 31.00 47.00
AECO natural gas price Cdn$/Mcf 2.10 2.00 1.80 2.00 2.75
Exchange rate Cdn$/U.S.$ 0.76 0.76 0.77 0.72 0.76
Operating costs $/boe 3.75 3.75 4.00 4.75 5.00
(1) $/boe 2.35 2.40 2.50 2.65 2.85
Capital expenditures $ millions 6 7 7 7 15
Dividends paid in
shares (DRIP) (2 ) $ millions 5 5 8 8 13
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(1) Excludes share-based and other compensation.
(2) Effective with the August dividend, the board approved the suspension of
the dividend reinvestment plan, pending further notice.
The company sees average production volumes of 11,000 barrels of oil equivalent per day (assuming no acquisitions), which include expectations of 100 boe per day of shut-in working-interest natural gas, 100 boe per day of shut-in heavy oil production (primarily working interest) and production additions associated with the company's strong audit function. Estimated volumes are composed of approximately 56 per cent oil and natural gas liquids and 44 per cent natural gas. The company continues to maintain its royalty focus with royalty production expected to account for approximately 84 per cent of production and 91 per cent of operating income.
KEY OPERATING ASSUMPTIONS
Annual average for 2017 Nov. 8, 2016
Daily production boe/d 11,000
WTI oil price U.S.$/bbl $50.00
Western Canadian Select (WCS) Cdn$/bbl 46.00
AECO natural gas price Cdn$/Mcf 3.00
Exchange rate Cdn$/U.S.$ 0.75
Operating costs $/boe 3.25
General and administrative costs (1) $/boe 2.65
Capital expenditures $ millions 6
(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 the company 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. The company 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 third 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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