Mr. Tom Mullane reports
FREEHOLD ACHIEVES RECORD ROYALTY PRODUCTION, INCREASES GUIDANCE
Freehold Royalties Ltd. has released second quarter results for the period ended June 30, 2017.
RESULTS AT A GLANCE
Three months ended Six months ended
June 30 June 30
2017 2016 2017 2016
Financial ($000s, except as noted)
Royalty and other revenue $38,430 $32,219 $79,521 $57,152
Net income (loss) 13,084 (2,249) 20,172 (10,839)
Per share, basic and diluted ($) 0.11 (0.02) 0.17 (0.11)
Funds from operations 31,769 24,142 63,838 39,642
Per share, basic ($) 0.27 0.23 0.54 0.39
Operating income (1) 35,235 28,011 72,319 48,303
Operating income from royalties (%) 97 91 94 94
Acquisitions 1,267 162,211 34,619 162,430
Capital expenditures 1,139 753 1,851 2,837
Working interest dispositions 28,808 - 29,096 -
Dividends declared 17,705 13,380 33,043 31,225
Per share ($) (2) 0.15 0.12 0.28 0.30
Net debt 49,819 98,191 49,819 98,191
Average daily production (boe/d) (3) 12,589 12,041 12,670 12,006
Oil and NGL (%) 54 59 55 61
Average price realizations ($/boe) (3) 32.98 28.48 33.93 25.37
Operating netback ($/boe) (1) (3) 30.76 25.57 31.54 22.11
(1) A non-generally accepted accounting principle financial measure.
(2) Based on the number of shares issued and outstanding at each record date.
(3) Based on the conversion of natural gas to barrels of oil equivalent.
Freehold achieved record royalty production and solid cash flow results in second quarter 2017, marking the fourth consecutive quarter of increasing royalty production on a per-share basis. We are revising our 2017 production guidance up 500 barrels of oil equivalent per day to 11,800 to 12,300 boe per day with better-than-expected audit recoveries and operating results. At current dividend levels, we are forecasting an adjusted payout ratio for 2017 of 61 per cent, safely within our target adjusted payout range of 60 per cent to 80 per cent. Not only are we growing royalty production on a per-share basis, we exited the quarter with lower debt resulting in net debt to 12-month trailing funds from operations of 0.4 time (net debt of $50-million). In second quarter 2017, Freehold issued 12 new lease agreements for a cumulative total of 37 new leases in the first half of 2017, exceeding the entire 2016 new lease count as we deliver continued organic growth. Our quarter was in line with Freehold's objective to deliver growth and low-risk attractive returns to shareholders over the long term.
President and chief executive officer
The board of directors has declared a dividend of five cents per share to be paid on Sept. 15, 2017, to shareholders of record on Aug. 31, 2017. The dividend is designated as an eligible dividend for Canadian income tax purposes.
The attached guidance update table summarizes the company's key operating assumptions for 2017.
The company is increasing its 2017 production range to 11,800 to 12,300 boe per day (previously 11,300 to 11,800 boe per day), as a result of higher-than-expected results through the first half of the year, mostly due to drilling activity and prior-period adjustments. The company does not include the effects of future acquisition activity in its forecasts. Also, minimal prior-period adjustments are in its forecast as the company does not record the effects of audit and compliance activities until revenue collection is certain.
Volumes are expected to be weighted approximately 55 per cent oil and natural gas liquids (NGL) and 45 per cent natural gas.
The company continues to improve its royalty focus with royalty production accounting for 88 per cent of forecasted 2017 production (up from 87 per cent) and 95 per cent of operating income (up from 94 per cent).
The company is reducing its West Texas Intermediate price assumption to $50 (U.S.) per barrel (previously $52 (U.S.) per bbl). Western Canadian Select remains unchanged due to positive effects of the declining light/heavy oil differentials. Its AECO natural gas price assumption remains at $2.60 per thousand cubic feet.
The Canadian-dollar/U.S.-dollar exchange rate has been adjusted upward to 77 cents from 76 cents as a result of recent Canadian-dollar appreciation and market expectations for the rest of the year.
Its operating costs forecast is revised downward to $2.40 per boe (from $2.50 per boe) and general and administrative costs to $2.50 per boe (from $2.60 per boe) as a result of the company's increased royalty production.
Based on its current five-cent monthly dividend level, the company expects its 2017 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 61 per cent.
The company continues to forecast year-end net debt to funds from operations of approximately 0.3 time based on its revised key operating assumptions.
KEY OPERATING ASSUMPTIONS
2017 annual average Aug. 9, 2017 May 10, 2017 March 2, 2017 Nov. 8, 2016
Daily production boe/d 11,800-12,300 11,300-11,800 11,300-11,800 11,000
West Texas Intermediate crude oil U.S.$/bbl $50.00 $52.00 $52.00 $50.00
Western Canadian Select crude oil Cdn$/bbl 49.00 49.00 49.00 46.00
AECO natural gas Cdn$/Mcf 2.60 2.60 2.60 3.00
Exchange rate Cdn$/U.S.$ 0.77 0.76 0.76 0.75
Operating costs $/boe 2.40 2.50 3.25 3.25
General and administrative costs (1) $/boe 2.50 2.60 2.60 2.65
Capital expenditures $ millions 4 4 6 6
(1) Excludes share-based 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 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. It will continue to evaluate the commodity price environment and adjust the dividend levels as necessary (subject to the quarterly review and approval of its board of directors).
Conference call details
A conference call to discuss financial and operational result for the period ended June 30, 2017, will be held for the investment community on Aug. 10, 2017, beginning at 6 a.m. MT (8 a.m. ET). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-800-273-9672 (toll-free in North America).
Availability on SEDAR
Freehold's second quarter 2017 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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