Mr. Matt Donohue reports
FREEHOLD ROYALTIES LTD. ANNOUNCES CONTINUED ROYALTY GROWTH AND FIRST QUARTER RESULTS
Freehold Royalties Ltd. has released its first quarter results for the period ended March 31, 2018.
RESULTS AT A GLANCE
Three months ended
(in thousands of dollars, except as noted)
Royalty and other revenue $39,366 $41,091
Net income 4,423 7,088
Per share, basic and diluted ($) 0.04 0.06
Funds from operations 32,384 32,069
Per share, basic ($) 0.27 0.27
Operating income (1) 37,658 37,084
Operating income from royalties (%) 99 91
Acquisitions 30,881 33,352
Working interest dispositions 8,130 288
Dividends declared 18,026 15,338
Per share ($) (2) 0.1525 0.13
Net debt 89,567 76,030
Royalty production (barrels of oil equivalent
per day (boe/d)) (4) 11,197 10,701
Total production (boe/d) (4) 12,002 12,753
Oil and natural gas liquid (NGL) (%) 54 56
Average price realizations ($/boe) 34.52 34.88
Operating netback ($/boe) (1) 34.86 32.31
(1) Non-GAAP (generally accepted accounting principles) financial
(2) Based on the number of shares issued and outstanding at each
"Freehold continued to generate strong returns for our shareholders in Q1 2018 as royalty production averaged 11,197 boe/d, up 5 per cent over the same period in 2017. We expect near-record drilling on our lands and are maintaining our 2018 production forecast between 11,750 [and] 12,250 boe/d. After increasing our dividend by 5 per cent earlier this year, 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.
"We recently held our inaugural investor day unveiling our 2017 asset book highlighting the multiyear upside on Freehold's royalty lands. A copy can be found on our website [...]
"As a leading royalty company, Freehold's objective is to deliver growth and low-risk attractive returns to shareholders over the long term, which we have continued to provide in this reporting period."
President and chief executive officer
The board has declared a dividend of 5.25 cents per common share to be paid on June 15, 2018, to shareholders of record on May 31, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2018 first quarter highlights
Freehold delivered strong operational results in the first quarter of 2018. Highlights included:
- Freehold's royalty production averaged 11,197 boe/d, up 5 per cent versus Q1 2017 and 2 per cent when compared with Q4 2017. Growth in production was associated with acquisitions completed late in 2017 and during Q1 2018, the strength of Freehold's audit function (approximately 550 boe/d of prior-period adjustments) and third party drilling on Freehold's lands.
- Royalty interests accounted for 93 per cent of total production and contributed 99 per cent of operating income in Q1 2018, reinforcing Freehold's royalty focus.
- Funds from operations totalled $32.4-million, an increase of 1 per cent compared with Q1 2017, with slightly lower revenue more than offset by a reduction in cash costs. On a per-share basis, funds from operations was 27 cents per share in Q1 2018, flat to 27 cents per share in Q1 2017.
- While West Texas Intermediate (WTI) prices improved 21 per cent versus the same period in 2017, Edmonton Light Sweet oil prices were up only 12 per cent and Western Canadian Select (WCS) prices were down 1 per cent over the same period, reflecting the infrastructure/egress issues Canadian producers continue to experience. In addition, AECO prices retreated 37 per cent versus the same quarter in 2017, and the Canadian/U.S. exchange rate increased, resulting in average oil and gas price realizations on a dollar-per-barrel-of-oil-equivalent basis similar to Q1 2017.
- Freehold generated $12.8-million in free cash flow (1), over and above its dividend, which the company applied to outstanding debt. At March 31, 2018, net debt totalled $89.6-million, resulting in a ratio of net debt to 12-month trailing funds from operations of 0.7 times.
Freehold closed 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 gross overriding royalty (GORR) on approximately 114,000 gross acres and a 3.0-per-cent gross overriding return royalty (GORR) on 1,920 gross acres of royalty lands. The asset has multiple years of development planned.
Freehold closed two other royalty acquisitions, one in the Weyburn unit in Saskatchewan and the other on the Mitsue Gilwood Sand unit No. 1 in Alberta. The purchase price associated with these transactions was $24-million and the assignment by Freehold of certain minor working interest assets.
Freehold disposed of its non-core working interest in the Pembina Cardium unit No. 9 in Alberta for $8.1-million. As part of the transaction, Freehold retained a new 4.0-per-cent GORR on the same interests that were sold.
Wells drilled on Freehold's royalty lands totalled 239 (6.4 net) in the quarter compared with 150 (8.6 net) in Q1 2017 and 112 (5.7 net) in the previous quarter.
In Q1 2018, Freehold issued 42 new lease agreements with 15 companies, compared with 32 issued in Q4 2017 and 25 leases in Q1 2017, highlighting the success of its leasing team.
Cash costs (1) for the quarter totalled $6.32 per barrel of oil equivalent (boe), down from $7.66 per boe in Q1 2017. Cash costs are typically higher in the first quarter of the year associated with certain annual general and administrative charges that occur early in the year. For 2018, Freehold is forecasting cash costs of approximately $5 per boe.
Dividends declared for Q1 2018 totalled 15.25 cents per share, up slightly versus the previous year. In March, 2018, Freehold announced an increase to its monthly dividend from five cents to 5.25 cents per share.
Basic payout ratio (1) (dividends declared/funds from operations) for Q1 2018 totalled 56 per cent while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 60 per cent.
(1) Non-GAAP financial measures
Continued strength in royalty drilling
Including drilling associated with acquisitions, 239 (6.4 net) wells were drilled on Freehold's royalty lands during the first three months of 2018, up 59 per cent on a gross measure but down 26 per cent on a net measure versus the same period in 2017. When compared with Q4 2017, activity increased 113 per cent and 12 per cent on a gross and net measure, respectively.
Activity through the first three months of 2018 was primarily focused on Saskatchewan oil prospects, including Viking at Dodsland, Mississippian plays in southeast Saskatchewan and Shaunavon in southwest Saskatchewan. Together, Saskatchewan and Manitoba wells represented greater than 60 per cent of Freehold's gross non-unit drilling through the quarter. Alberta activity has been concentrated in the Cardium, with strong drilling (17 gross wells) on the company's newly acquired Pembina Cardium acreage. Drilling for Deep basin Spirit River and Montney remains positive, and four wells were drilled for East Shale Duvernay basin on the company's acreage. Freehold's top payors continue to represent some of the most well-capitalized E&P (exploration and production) companies in Canada.
2018 guidance update
Below are details of some of the changes made to Freehold's key operating assumptions for 2018 based on results for the first quarter and expectations for the remainder of the year.
Freehold is maintaining its 2018 average production range to 11,750 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. The company 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 revising its WTI oil price assumption to $65 (U.S.) per barrel (previously $60 (U.S.) per barrel).
Freehold's AECO natural gas price assumption has been reduced to $1.75 per thousand cubic feet (mcf) (previously $2 per mcf).
Based on its current 5.25-cent-per-share monthly dividend level, Freehold expects its 2018 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 54 per cent (previously 61 per cent). The expectation of the company's longer-term payout ratio remains cautious as the market is showing future light oil prices below current levels.
General and administrative (G&A) costs remain at $2.50 per boe even though costs for the first quarter were $3.60 per boe. G&A expenses are typically higher in the first quarter and decline through the remainder of the year, as a number of annual expenses occur early in the year.
Freehold has reduced its forecast year-end net debt to funds from operations to approximately 0.3 times (from 0.4 times) due to increased oil price expectations.
KEY OPERATING ASSUMPTIONS
2018 annual average May 9, 2018 March 8, 2018
Total daily production (boe/d) 11,750 to 12,250 11,750 to 12,250
West Texas Intermediate crude oil (U.S. $/bbl) 65.00 60.00
Edmonton Light Sweet crude oil (Canadian $/bbl) 76.00 not applicable
Western Canadian Select crude oil (Canadian $/bbl) 53.00 45.00
AECO natural gas (Canadian $/mcf) 1.75 2.00
Exchange rate (Canadian $/U.S. $) 0.79 0.80
Operating costs ($/boe) 1.45 1.45
General and administrative costs (1) ($/boe) 2.50 2.50
(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. 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 its 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 March 31, 2018, will be held for the investment community on Thursday, May 10, 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 2018 first 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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