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Freehold Royalties Ltd
Symbol FRU
Shares Issued 118,182,667
Close 2018-03-08 C$ 11.86
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Freehold Royalties loses $8.1M in Q4, raises dividend

2018-03-08 21:01 ET - News Release

Mr. Thomas Mullane reports


Freehold Royalties Ltd. has released its fourth quarter and year-end results for the period ended Dec. 31, 2017.

                             RESULTS AT A GLANCE
                                     Three months ended     12 months ended 
                                                Dec. 31             Dec. 31         
                                         2017      2016      2017      2016
Financial (in thousands of dollars,
except as noted) 
Royalty and other revenue            $ 38,435  $ 39,893  $151,894  $129,968
Funds from operations                  32,023    30,421   123,788    94,211
Per share, basic ($)                     0.27      0.26      1.05      0.85
Operating income (1) 
from royalties (%)                         97        93        96        93
Acquisitions                           52,270        92    86,743   162,590
Working interest dispositions             354         -    32,419         -
Dividends declared                     17,722    14,144    68,479    59,502
Per share ($) (2)                        0.15      0.12      0.58      0.54
Net debt                               68,621    73,161    68,621    73,161
Average daily production (boe/d) (3)   12,032    12,579    12,350    12,219
Oil and NGL (natural gas liquid) (%)       53     56           55        58
Average price realizations
($/boe) (3)                             33.59     33.72     32.80     28.37
Operating netback ($/boe) (1) (3)       32.66     29.80     31.00     24.83

(1) See non-GAAP (generally accepted financial measures).

(2) Based on the number of shares outstanding at each record date.

(3) See conversion of natural gas to barrels of oil equivalent (boe). 

President's message

"Two thousand seventeen was a successful year for Freehold, as we achieved a number of objectives both operationally and financially.

"Operationally, Freehold achieved record production in 2017 as volumes averaged 12,350 barrels of oil equivalent per day (boe/d). We grew royalty production by 10 per cent with volumes averaging 10,963 boe/d, a testament to the quality of our royalty portfolio. Volume additions were associated with oil-focused drilling on our royalty lands and a key Viking acquisition. We also completed a transaction late in the year, increasing our position in the Cardium. These deals provide multiyears of drilling inventory.

"Financially, we are increasing our monthly dividend from five cents to 5.25 cents per share (5-per-cent increase). This is consistent with our dividend strategy of positioning our adjusted payout at 60 per cent to 80 per cent of funds from operations. Our forecasted adjusted payout ratio for 2018 is 61 per cent, safely at the lower end of our target range. We lowered our net debt and lowered our total cash costs to $5.13 per boe in the fourth quarter. Our goal is to position Freehold as a low-risk, attractive investment in oil and gas which we continue to achieve."

Thomas J. Mullane, president and chief executive officer


With increasing oil prices and strength in operations, Freehold's board of directors has approved a 5-per-cent increase to its monthly dividend to 5.25 cents per share or 63 cents per share annualized. The board has declared a dividend of 5.25 cents per common share to be paid on April 16, 2018, to shareholders of record on March 31, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.

The dividend increase is in line with Freehold's previously stated dividend policy which outlines a 60-per-cent-to-80-per-cent adjusted payout ratio based on forward-looking funds from operations. 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 revised monthly dividend rate through the next quarter. Freehold will continue to evaluate the commodity price environment and adjust the dividend levels as necessary (subject to the quarterly review and approval of Freehold's board).

Subsequent events

Consistent with Freehold's strategy of enhancing its royalty focus, on Feb. 14, 2018, Freehold disposed of its non-core working interest in the Pembina Cardium unit No. 9 in Alberta for $8-million (before adjustments). As part of the transaction, Freehold retained a 4-per-cent gross overriding royalty (GORR) on the same interests that were sold. Average production and operating income associated with the asset in 2017 were 179 boe/d and $2.1-million (before GORR), respectively. This deal reduced Freehold's decommissioning liability by approximately 40 net working interest wells and also reduced its exposure to capital activities as Freehold had $2.4-million of capital expenditures related to the property in 2017.

On Feb. 28, 2018, Freehold completed a $7.0-million royalty acquisition in the prospective East Shale Duvernay basin in central Alberta. As part of the transaction, Freehold acquired a 1.0-per-cent GORR on approximately 113,920 gross acres (178 sections) and a 3.0-per-cent GORR on 1,920 gross acres (three sections) of royalty lands. The asset has multiple years of development planned.

On March 7, 2018, Freehold closed two royalty acquisitions, one of them on the Weyburn unit in Saskatchewan and the other on the Mitsue Gilwood sand unit No. 1 in Alberta. At Weyburn, where Freehold acquired a 0.2-per-cent lessor royalty, Freehold sees multiyear upside through expansion of the existing CO2 (carbon dioxide) enhanced oil recovery process and additional infill drilling. At Mitsue, where Freehold acquired a 1.9-per-cent new GORR interest, the company sees further value enhancing opportunities through waterflood optimization, reactivations and infill drilling. The purchase price associated with these transactions was $24-million (before adjustments) and the assignment by Freehold of certain minor working interest assets. Current production associated with the acquired royalty interests is approximately 110 boe/d (100 per cent oil) and $2.6-million in annualized operating income assuming strip pricing. Freehold sees these transactions shallowing its already-low corporate decline.

Both transactions were financed through Freehold's existing credit facilities.

Fourth quarter results

Freehold delivered strong operational results in the fourth quarter of 2017. Highlights included the following:

  • Freehold's production averaged 12,032 boe/d, down 4 per cent versus the same period in 2016. Reduced volumes were largely driven by non-core working interest dispositions (approximately 800 boe/d based on 2016) completed in 2017.
  • Royalty production was up 6 per cent compared with Q4 2016 averaging 10,960 boe/d. Increased volumes were largely associated with better-than-expected third party production additions and the strength in Freehold's audit function (over 600 boe/d of prior-period adjustments in the quarter). Royalties, as a percentage of operating income (97 per cent) and production (91 per cent), highlight the company's commitment to its royalty focus.
  • Q4 2017 royalty and other revenue was down 4 per cent to $38.4-million versus the previous year largely due to reduced working interest production volumes.
  • Net loss was $8.1-million compared with $1.6-million net income in Q4 2016. The loss was a result of a $16.2-million impairment charge on Freehold's working interest assets, approximately half from assets disposed of in Q4 2017 and subsequent to year-end.
  • Funds from operations for Q4 2017 totalled $32.0-million, an increase of 5 per cent versus the same period in 2016. The increase year over year reflected growth in royalty revenue and lower cash costs. On a per-share basis, funds from operations totalled 27 cents per share in Q4 2017, up from 26 cents per share in Q4 2016.
  • Freehold closed the acquisition of a new 2-per-cent GORR in petroleum and natural gas rights in the Cardium, which included 166,000 gross acres (259 sections) of land in the greater Pembina area of Alberta. The purchase price of the GORR was $52-million plus the assignment by Freehold of certain minor working interest assets. The royalty assets are currently producing approximately 210 boe/d (74 per cent light oil).
  • Freehold generated $12.9-million in free cash flow (1), over and above its dividend in Q4 2017, which the company applied to outstanding debt. At Dec. 31, 2017, net debt totalled $68.6-million, up from $38.3-million at Sept. 30, 2017, implying a net-debt-to-12-month-trailing-funds-from-operations ratio of 0.6 times. The increase in net debt quarter over quarter reflected the $52-million royalty acquisition which was financed through its existing credit facility.
  • Cash costs (1) for the quarter totalled $5.13 per boe, down from $7.83 per boe in Q4 2016. The decrease versus Q4 2016 reflected lower operating expenses due to the continued disposition of Freehold's working interest portfolio and gains in royalty production.
  • Wells drilled on Freehold's royalty lands totalled 112 (5.7 net) in the quarter, down from 144 (6.4 net) in the previous quarter.
  • In Q4 2017, Freehold issued 32 leases associated with its unleased mineral title lands; 100 leases were issued in 2017, compared with 30 leases in all of 2016.
  • Dividends declared for Q4 2017 totalled 15 cents per share, unchanged from the previous quarter and up from 12 cents per share one year ago.
  • Basic payout ratio (1) (dividends declared divided by funds from operations) for Q4 2017 totalled 55 per cent while the adjusted payout ratio (1) ((cash dividends plus capital expenditures) divided by funds from operations) for the same period was 60 per cent.

(1) See non-GAAP financial measures.

Continued strength in drilling on royalty lands

Including drilling associated with acquisitions, 464 (22.3 net) wells were drilled on Freehold's royalty lands in 2017, a 65-per-cent increase versus 2016. The majority of the spending on its royalty lands continues to be focused on oil targets with approximately 60 per cent of the drilling associated with prospects in southeast Saskatchewan and in the Viking formation. In addition, Freehold has seen an uptick in activity associated with the Shaunavon in southwest Saskatchewan and liquids-rich natural gas targets in the Deep basin in Alberta. Based on these activity levels, the company estimates $760-million was spent on its royalty lands in 2017. This compared with its estimate of $475-million in 2016. Looking into 2018, Freehold remains optimistic that activity levels will remain strong on its royalty lands.

                                        ROYALTY INTEREST DRILLING
                                 (1) Three months ended Dec. 31             (1) 12 months ended Dec. 31
                                       2017                2016                2017                2016             

                                 Equivalent          Equivalent          Equivalent          Equivalent 
                           Gross     net (2)   Gross     net (2)   Gross     net (2)   Gross     net (2)

Non-unitized wells            71        5.6      117        7.8      367       21.9      222       13.6       
Unitized wells (3)            41        0.1        8          -       97        0.4       59        0.3        
Total                        112        5.7      125        7.8      464       22.3      281       13.9       
Royalty joint venture (4)      2                   1                   4                   1                

(1) Counts include wells drilled on acquired lands from Jan. 1 through Dec. 31 of the year the 
acquisition was made, other than the December, 2017, acquisition (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.

(4) Wells drilled on various royalty joint venture lands, where equivalent net wells cannot be 

2017 highlights -- maintaining the company's core strategy:

  • Achieved record production with volumes averaging 12,350 boe/d, representing a 1-per-cent increase over 2016, despite completing approximately 800 boe/d (based on 2016 production) in non-core working interest dispositions. Volumes comprised 55 per cent oil and natural gas liquids (NGL), and 45 per cent natural gas. Royalty volumes averaged 10,963 boe/d, a 10-per-cent increase versus 2016, highlighting the improvement of the company's royalty portfolio;
  • Funds from operations totalled $123.8-million or $1.05 per share, up from $94.2-million or 85 cents per share in 2016, reflecting gains in operations and strength in the commodity;
  • Declared dividends totalled $68.5-million (58 cents per share), up from $59.5-million (54 cents per share) in 2016, reflecting increased funds from operations. Freehold increased its monthly dividend by 25 per cent in April, 2017;
  • Exited 2017 with net debt of $68.6-million, implying net debt to funds from operations of 0.6 times. At year-end, Freehold had $90-million of available room within its credit facility;
  • Freehold completed $86.7-million in royalty acquisitions in 2017, adding new lands in the Cardium and further bolstering its key Viking royalty position;
  • Proved plus probable reserves totalled 35.3 million boe, down from 38.3 million boe in 2016, with working interest dispositions in 2017 contributing to this reduction of reserves.

2018 guidance

The associated table summarizes Freehold's key operating assumptions for 2018.

Freehold is assuming a production range of 11,750 boe/d to 12,250 boe/d. Volumes are expected to be weighted approximately 55 per cent oil and natural gas liquids (NGL), and 45 per cent natural gas. Freehold continues to maintain its royalty focus with royalty production accounting for 93 per cent of forecasted 2018 production and 99 per cent of operating income.

Freehold is currently forecasting 25 net wells will be drilled on its lands in 2018, representing a 12-per-cent increase over near-record drilling on its lands in 2017.

Freehold is assuming WTI (West Texas Intermediate) and WCS (Western Canadian Select) price assumptions of $60 (U.S.) per barrel and $45 per barrel, respectively, and AECO at $2 per thousand cubic feet (mcf).

Freehold's general and administrative expense assumption is forecast at $2.50 per boe. Total cash costs are forecast to be approximately $5 per boe.

After increasing its monthly dividend by 5 per cent from five cents to 5.25 cents per share, the company expects its 2018 adjusted payout ratio ((cash dividends plus capital expenditures) divided by funds from operations) to be approximately 61 per cent.

Freehold forecasts year-end net debt to funds from operations of approximately 0.4 times based on its revised key operating assumptions.

                                                    Guidance dated
2018 annual average                                  March 8, 2018  

Daily production (boe/d)                          11,750 to 12,250
West Texas Intermediate (WTI) crude oil 
(U.S. $/bbl)                                                $60.00
Western Canadian Select (WCS) crude oil 
(Canadian $/bbl)                                            $45.00
AECO natural gas (Canadian $/mcf)                            $2.00
Exchange rate (Canadian $/U.S. $)                            $0.80
Operating costs ($/boe)                                      $1.45
General and administrative costs (1) ($/boe)                 $2.50
Weighted average shares outstanding (millions)                 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 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.

2017 reserves information

Freehold's reserves information is included in the company's annual information form (AIF), which is available on SEDAR and Freehold's website.

Conference call details

A conference call to discuss financial and operational results for the period ended Dec. 31, 2017, will be held for the investment community on Friday, March 9, 2018, beginning at 7 a.m. MT (9 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 audited financial statements, and accompanying management's discussion and analysis (MD&A) and annual information form (AIF), are being filed today with Canadian securities regulators and will be available on SEDAR and on the company's website.

Conversion of natural gas to barrels of oil equivalent

To provide a single unit of production for analytical purposes, natural gas production and reserves volumes are converted mathematically to equivalent barrels of oil. Freehold uses the industry-accepted standard conversion of 6,000 cubic feet of natural gas to one barrel of oil. The 6:1 ratio is based on an energy equivalency conversion method primarily applicable at the burner tip. It does not represent a value equivalency at the wellhead and is not based on either energy content or current prices. While the boe ratio is useful for comparative measures and observing trends, it does not accurately reflect individual product values and might be misleading, particularly if used in isolation. As well, given that the value ratio, based on the current price of crude oil to natural gas, is significantly different from the 6:1 energy equivalency ratio, using a 6:1 conversion ratio may be misleading as an indication of value.

Non-GAAP financial measures

Within this news release, references are made to terms commonly used as key performance indicators in the oil and natural gas industry. The company believes that, operating income, operating netback, basic payout ratio, adjusted payout ratio, free cash flow and cash costs are useful supplemental measures for management and investors to analyze operating performance, financial leverage and liquidity, and Freehold uses these terms to facilitate the understanding and comparability of its results of operations and financial position. However, these terms do not have any standardized meanings prescribed GAAP and therefore may not be comparable with the calculations of similar measures for other entities.

Operating income, which is calculated as royalty and other revenue less royalties and operating expenses, represents the cash margin for product sold. Operating netback, which is calculated as average unit sales price less royalties and operating expenses, represents the cash margin for product sold, calculated on a per-barrel-of-oil-equivalent basis.

Payout ratios are often used for dividend-paying companies in the oil and gas industry to identify their dividend levels in relation to the funds they receive and use in their capital and operational activities. Basic payout ratio is calculated as dividends declared as a percentage of funds from operations. Adjusted payout ratio is calculated as dividends paid in cash plus capital expenditures as a percentage of funds from operations.

Free cash flow is calculated by subtracting capital expenditures from funds from operations. Free cash flow is a measure often used by dividend-paying companies to determine cash available for payment of dividends, paying down debt or investment.

The cash cost measure is a total of certain cash expenses in the statement of income (loss) deducted in determining funds from operations. For Freehold, the measure is identified as royalty expense, operating expense, general and administrative expense, interest expense, and share-based compensation payments. It is key to funds from operations, representing the ability to sustain dividends, repay debt and finance capital expenditures.

Freehold refers to various per-barrel-of-oil-equivalent figures which provide meaningful information on its operational performance. The company derives per-barrel-of-oil-equivalent figures by dividing the relevant revenue or cost figure by the total volume of oil, NGL and natural gas production during the period, with natural gas converted to equivalent barrels of oil as described above.

We seek Safe Harbor.

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