Mr. Tom Mullane reports
THIRD QUARTER RESULTS: FREEHOLD INCREASES 2017 PRODUCTION GUIDANCE
Freehold Royalties Ltd. has released its third quarter results for the period ended Sept. 30, 2017.
RESULTS AT A GLANCE
Three months ended Nine months ended
Sept. 30 Sept. 30
2017 2016 2017 2016
Financial (in thousands of dollars,
except as noted)
Royalty and other revenue 33,938 32,923 113,459 90,075
Net income (loss) 103 (1,962) 20,275 (12,801)
Per share, basic and diluted ($) - (0.02) 0.17 (0.12)
Funds from operations 27,927 24,148 91,765 63,790
Per share, basic ($) 0.24 0.21 0.78 0.59
Operating income (1) 31,246 28,231 103,565 76,534
Operating income from royalties (%) 99 93 95 93
Acquisitions (146) 68 34,473 162,498
Capital expenditures 1,657 209 3,508 3,046
Working interest dispositions 2,969 - 32,065 -
Dividends declared 17,714 14,133 50,757 45,358
Per share ($) (2) 0.15 0.12 0.43 0.42
Net debt 38,274 87,301 38,274 87,301
Average daily production (boe/d) 12,036 12,281 12,456 12,099
Oil and NGL (natural gas
liquid) (%) 56 55 56 59
Average price realizations ($/boe) 29.67 28.69 32.54 26.50
Operating netback ($/boe) (1) 28.22 24.99 30.46 23.09
(1) Non-GAAP (generally accepted accounting principles) financial measures.
(2) Based on the number of shares issued and outstanding at each record date.
President Tom Mullane's message:
"As a result of strong drilling and production performance, we are increasing our 2017 average production guidance to 12,000 to 12,500 boe/d. In the quarter, we created 30 new leases with producers, with year-to-date leasing more than double when compared to all of 2016. Freehold continued to pay down debt, maintained a conservative payout ratio and drove cash costs below $5/boe, in line with providing a safe oil and gas investment. Over all, our objective is to deliver growth and low-risk attractive returns to our shareholders over the long term, and we feel the results of this quarter are consistent with this goal."
The board of directors has declared a dividend of five Canadian cents per share to be paid on Dec. 15, 2017, to shareholders of record on Nov. 30, 2017. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2017 third quarter highlights
Freehold's production averaged 12,036 barrels of oil equivalent per day (boe/d), down 2 per cent versus Q3 2016. The reduction in volumes was primarily the result of working interest dispositions made in 2017 (approximately 750 boe/d for the full-year 2016) as the company's royalty volumes displayed strong growth versus the same period in 2016.
Royalty production was up 7 per cent compared with Q3 2016, averaging 10,919 boe/d. Gains in volumes were associated with strength in the company's audit function (approximately 700 boe/d in prior-period adjustments) and strong drilling on its lands.
Royalty interests accounted for 91 per cent of total production and contributed 99 per cent of operating income in Q3 2017, both representing the highest totals in the company's history. Freehold remain committed to enhancing its royalty focus with continuing efforts to dispose of its non-core working interest production.
Freehold sold a minor working interest property for $3.0-million. Production associated with this asset was approximately 45 boe/d.
Wells drilled on Freehold's royalty lands totalled 144 (6.4 net) in Q3 2017, up from 48 (2.3 net) in Q3 2016. From Jan. 1, 2017, to Sept. 30, 2017, Freehold has seen 352 (16.6 net) wells drilled on its royalty lands compared with 156 (6.1 net) locations drilled during the same period in 2016.
In Q3 2017, Freehold issued 30 new leases for a cumulative total of 69 new leases in the first nine months of 2017, significantly exceeding the 2016 total new lease count. It expects to see drilling associated with these efforts to occur over the remainder of the year and into 2018. Freehold's unleased holdings are available for review on its website's leasing opportunities page.
Funds from operations totalled $27.9-million, an increase of 16 per cent compared with Q3 2016, largely due to an increase in revenue and reduced operating costs. On a per-share basis, funds from operations were 24 cents per share in Q3 2017 up from 21 cents per share in Q3 2016.
Freehold generated $8.6-million in free cash flow (1), over and above its dividend, which the company applied to outstanding debt. At Sept. 30, 2017, net debt totalled $38.3-million, resulting in a ratio of net debt to 12-month trailing funds from operations of 0.3 times. Even though the company is below its target of 0.5 to 1.5 times net debt to funds from operations, it will continue to apply excess cash to debt repayment in the short term but also remain committed to acquiring additional royalties.
Cash costs (1) for the quarter totalled $4.80/boe, down from $6.78/boe in Q3 2016 and $5.63/boe in Q2 2017. The reduction versus the same period last year reflects the disposition of working interest production and deleveraging of Freehold's balance sheet.
Dividends declared for Q3 2017 totalled 15 cents per share, up 25 per cent from 12 cents per share one year ago. In March, 2017, Freehold announced an increase to its monthly dividend from four cents to five cents per share.
Basic payout ratio (1) (dividends declared/funds from operations) for Q3 2017 totalled 63 per cent while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 69 per cent.
(1) These are non-GAAP financial measures.
Increased activity returns to Freehold's lands
Including drilling associated with acquisitions, 352 (16.6 net) wells were drilled on Freehold's royalty lands during the first nine months of 2017, a 172-per-cent increase versus the same time period in 2016 (on a net basis). After some slowdown in activity during the previous quarter, Q3 2017 saw a resurgence in activity on Freehold's lands with 144 (6.4 net) locations drilled, compared with 48 (2.3 net) during the same period last year.
Activity through the first nine months of 2017 was primarily focused on oil prospects including the Viking at Redwater and Dodsland, which represented greater than 40 per cent of Freehold's net locations through the first three quarters. Through this time period, activity has also been concentrated in southeast Saskatchewan (Bakken, Mississippian), southwest Saskatchewan (Shaunavon) and the Deep basin (Montney). In Q3 2017, Freehold has also seen renewed activity in central Alberta (Cardium) as well as eastern Alberta (Mannville heavy oil). Freehold's top payors continue to represent some of the most well-capitalized E&P (exploration and production) companies in Canada.
ROYALTY INTEREST DRILLING
Three months ended Sept. 30 (1) Nine months ended Sept. 30 (1)
2017 2016 2017 2016
Equivalent Equivalent Equivalent Equivalent
Gross Net (2) Gross Net (2) Gross Net (2) Gross Net (2)
Non-unitized wells 121 6.3 46 2.3 296 16.3 105 5.8
Unitized wells (3) 23 0.1 2 - 56 0.3 51 0.3
Total 144 6.4 48 2.3 352 16.6 156 6.1
(1) Counts include wells drilled on acquired lands from the beginning of the reporting
period (this may differ from the closing date of the acquisitions).
(2) Equivalent net wells are the aggregate of the numbers obtained by multiplying each
gross well by Freehold's royalty interest percentage.
(3) Unitized wells are in production units wherein Freehold generally has small royalty
interests in hundreds of wells.
Below are details of some of the changes made to Freehold's key operating assumptions for 2017.
The company is increasing its 2017 average production range to 12,000 to 12,500 boe/d (previously 11,800 to 12,300 boe/d). Freehold does not include the effects of future acquisition activity in its forecasts. Also, minimal prior-period adjustments are in the company's forecast as Freehold does not record the effects of audit and compliance activities until revenue collection is certain.
Freehold continues to improve its royalty focus with royalty production accounting for 89 per cent of forecasted 2017 production (up from 88 per cent) and 96 per cent of operating income (up from 95 per cent).
Freehold's AECO natural gas price assumption has been reduced to $2.40 per thousand cubic feet (previously $2.60 per thousand cubic feet).
Based on its current five-cent monthly dividend level, Freehold expects its 2017 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 62 per cent (previously 61 per cent).
The company continues to forecast year-end net debt to funds from operations of approximately 0.3 times based on its revised key operating assumptions.
Reflecting the expectation that most of Freehold's royalty payors will provide capital spending guidance late in 2017 or early 2018, the company expects to provide its 2018 operating guidance as part of its Q4 2017 results in March, 2018.
KEY OPERATING ASSUMPTIONS
2017 annual average Nov. 9, 2017 Aug. 9, 2017 Nov. 8, 2016
Daily production (boe/d) 12,000 to 12,500 11,800 to 12,300 11,000
West Texas Intermediate crude oil (US$/bbl) 50.00 50.00 50.00
Western Canadian Select crude oil (Cdn$/bbl) 49.00 49.00 46.00
AECO natural gas (Cdn$/mcf) 2.40 2.60 3.00
Exchange rate (Cdn$/US$) 0.77 0.77 0.75
Operating costs ($/boe) 2.40 2.40 3.25
General and administrative costs (1) ($/boe) 2.50 2.50 2.65
Capital expenditures ($ millions) 4 4 6
Weighted average shares outstanding (millions) 118 118 118
(1) Excludes share-based compensation.
Recognizing the cyclical nature of the oil and gas industry, Freehold continues to closely monitor commodity prices and industry trends for signs of deteriorating market conditions. The company caution 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, Freehold 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 results for the period ended Sept. 30, 2017, will be held for the investment community on Friday, Nov. 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 1-800-806-5484 (toll-free in North America).
Availability on SEDAR
Freehold's 2017 third quarter interim unaudited condensed consolidated financial statements and accompanying management's discussion and analysis (MD&A) are being filed today with Canadian securities regulators and will be available on SEDAR and on the company's website.
We seek Safe Harbor.
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