Mr. Matt Donohue reports
FREEHOLD ROYALTIES LTD. STRONG GROWTH IN FUNDS FROM OPERATIONS AND SECOND QUARTER RESULTS
Freehold Royalties Ltd. has released second quarter results for the period ended June 30, 2018.
RESULTS AT A GLANCE
($000s, except as noted)
Three months ended Six months ended
June 30, June 30,
2018 2017 2018 2017
Royalty and other revenue $40,153 $38,430 $79,519 $79,521
Net income 5,386 13,084 9,809 20,172
Per share, basic and diluted ($) 0.05 0.11 0.08 0.17
Funds from operations 34,540 31,769 66,924 63,838
Per share, basic ($) 0.29 0.27 0.57 0.54
Operating income (1) 38,331 35,235 75,989 72,319
Operating income from royalties (%) 100 97 99 94
Acquisitions 2,697 1,267 33,578 34,619
Working interest dispositions 7 28,808 8,137 29,096
Dividends declared 18,625 17,705 36,651 33,043
Per share ($) (2) 0.1575 0.15 0.31 0.28
Royalty production (boe/d) (3) 11,052 11,270 11,124 10,986
Total production (boe/d) (3) 11,721 12,589 11,860 12,670
Oil and NGL (%) 54 54 54 55
Average price realizations ($/boe) (3) 36.96 32.98 35.73 33.93
Operating netback ($/boe) (1) (3) 35.94 30.76 35.39 31.54
(1) A non-generally accepted accounting principle financial measure.
(2) Based on the number of shares issued and outstanding at each record date.
(3) Note the conversion of natural gas to barrels of oil equivalent (boe).
"With oil prices continuing to display strength, our funds from operations per share grew by 7 per cent from first quarter to second quarter, and we are forecasting an adjusted payout ratio for 2018 near the lower end of our target adjusted payout range of 60 per cent to 80 per cent. We will continue to monitor commodity prices and allocate free cash flow in ways that maximize shareholder value.
"On the activity front, drilling on our royalty lands came in slightly below expectations; however, the second quarter typically represents a period of reduced activity. We are maintaining our 2018 production forecast between 11,750 and 12,250 barrels of oil equivalent per day, and we continue to position Freehold as a high-quality investment in oil and gas with low debt, sustainable dividends and an attractive yield.
"President and chief executive officer"
The board has declared a dividend of 5.25 cents per common share to be paid on Sept. 17, 2018, to shareholders of record on Aug. 31, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.
Second quarter 2018 highlights
Freehold delivered strong financial results in the second quarter of 2018. Highlights included:
Freehold's royalty production averaged 11,052 barrels of oil equivalent per day, nearly flat versus second quarter 2017 and first quarter 2018. Volumes were impacted by acquisitions completed in first quarter 2018, the strength of the company's audit function (approximately 380 boe per day of prior-period adjustments) and third party drilling on the company's lands.
Royalty interests accounted for 94 per cent of total production and contributed 100 per cent of operating income in second quarter 2018, representing all-time highs for Freehold.
Funds from operations totalled $34.5-million, an increase of 9 per cent compared with second quarter 2017. Higher funds from operations were driven by better oil and natural gas liquids (NGL) prices and lower cash costs. On a per-share basis, funds from operations were 29 cents per share in second quarter 2018 up from 27 cents per share in both second quarter 2017 and first quarter 2018.
Freehold generated $15.1-million in free cash flow (1), over and above the company's dividend, which Freehold applied to outstanding debt. At June 30, 2018, net debt totalled $77.9-million resulting in a net debt to 12-month trailing funds from operations ratio of 0.6 times.
Freehold closed a $2.7-million royalty acquisition in second quarter 2018. The transaction included a 3-per-cent gross overriding royalty on a 21-per-cent working interest on the Mitsue Gilwood sands unit No. 1. Annualized 2018 production and operating income associated with this asset is estimated to be 16 barrels per day and $400,000.
Wells drilled on the company's royalty lands totalled 85 (1.2 net) in the quarter compared with 58 (1.6 net) in second quarter 2017. The second quarter typically represents a period of slower drilling on the company's lands as spring breakup occurs, slowing operations. For the year, 324 gross (7.6 net) wells have been drilled.
In second quarter 2018, Freehold issued 18 new lease agreements with 10 companies, compared with 42 issued in first quarter 2018 and 12 leases in second quarter 2017, highlighting the success of the company's leasing team. Year to date (YTD), the company has completed 60 new lease agreements on the company's royalty lands. Since the inception of the company's leasing team in January, 2017, the company has completed 161 new lease agreements.
Cash costs (1) for the quarter totalled $5.17 per boe, down from $5.63 per boe in second quarter 2017. For 2018, the company is forecasting cash costs of approximately $5 per boe.
Dividends declared for second quarter 2018 totalled 15.75 cents per share, up 5 per cent versus the previous year. In March, 2018, Freehold announced an increase to its monthly dividend from five cents to 5.25 cents per share commencing in April, 2018.
Basic payout ratio (1) (dividends declared from funds from operations) for second quarter 2018 totalled 54 per cent while the adjusted payout ratio (1) (cash dividends plus capital expenditures from funds from operations) for the same period was 56 per cent.
2018 guidance update
Below are details of some of the changes made to the company's key operating assumptions for 2018 based on results for the first half of the year and expectations for the rest of the year.
The company is maintaining its 2018 average production range of 11,750 to 12,250 boe per day. Volumes are expected to be weighted approximately 54 per cent oil and NGL and 46 per cent natural gas (previously 55 per cent and 45 per cent, respectively). The company continues to maintain its royalty focus with royalty production accounting for 94 per cent of forecasted 2018 production and 99 per cent of operating income.
As part of continued weakness in equity markets and depressed prices associated with natural gas, the company reduced its 2018 drilling forecast from 25 to 20 net wells.
The company is maintaining its WTI (West Texas Intermediate) oil price assumption of $65 (U.S.) per barrel but has increased its WCS (Western Canadian Select) oil price assumption to $55 per bbl (from $53 per bbl) as second quarter 2018 heavy oil differentials were lower than expected.
The company's AECO (Alberta Energy Company) natural gas price assumption remains unchanged at $1.75 per thousand cubic feet. Even though market prices are slightly lower, there have been significant AECO price fluctuations, so a change was not yet justified.
Based on the company's current 5.25-cent-per-share monthly dividend level, the company expects its 2018 adjusted payout ratio (cash dividends plus capital expenditures from funds from operations) to be approximately 55 per cent (previously 54 per cent). The expectation of the company's longer-term payout ratio remains cautious as the forward commodity market is showing future light oil prices below current levels.
General and administrative costs remain at $2.50 per boe.
The company has increased its forecast year-end net debt to funds from operations to approximately 0.4 times (from 0.3 times) due to acquisitions completed year to date, changes in working capital and a slight increase in gas production relative to oil production.
Conference call details
A conference call to discuss financial and operational results for the period ended June 30, 2018, will be held for the investment community on Aug. 3, 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), participant access code 6624442 followed by the number sign.
Availability on SEDAR
Freehold's second quarter 2018 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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