Mr. Tom Mullane reports
FREEHOLD ROYALTIES LTD. ANNOUNCES FIRST QUARTER RESULTS
Freehold Royalties Ltd. has released first quarter results for the period ended March 31, 2019.
RESULTS AT A GLANCE
Three months ended March 31,
Financial ($000s, except as noted)
Royalty and other revenue $ 35,609 $ 39,157
Net income (loss) (7,079) 4,423
Per share, basic and diluted ($) (0.06) 0.04
Funds from operations 29,348 32,384
Per share, basic ($) 0.25 0.27
Acquisitions and related expenditures 929 32,396
Dividends declared 18,651 18,026
Per share ($) 0.1575 0.1525
Net debt 77,533 89,567
Royalty production (boe/d) 10,139 11,197
Total production (boe/d) 10,627 12,002
Oil and NGL (%) 55 54
Average price realizations ($/boe) 36.29 34.52
Operating netback ($/boe) 36.22 34.86
"An improved commodity environment relative to Q4 2018 helped Freehold generate strong funds from operations in Q1 2019 of $29.3-million, or 25 cents per share, comfortably above current dividend levels of 15.75 cents per share and allowing Freehold to pay down approximately $12-million in net debt quarter over quarter. Based on Freehold's closing share price on March 31, 2019, our free cash flow yield of 12 per cent positions Freehold as an attractive oil and gas investment. As we look forward, we will continue to allocate our free cash flow towards a combination of debt repayment, value-enhancing acquisitions and our dividend, with the goal of maximizing returns for our shareholders.
"On the operations front, royalty production for the quarter averaged 10,139 barrels of oil equivalent per day, above the midpoint of our 2019 production guidance. Volumes were impacted by a combination of cold weather and lower additions from our audit function. Activity outpaced expectations in the quarter with 147 (7.3 net) locations drilled on our royalty lands with the majority of third party drilling centred on our light oil portfolio.
"It is our objective to drive oil and gas development on our lands and to acquire royalties with acceptable growth and risk profiles. During the quarter, development on our lands exceeded industry trends, demonstrating the strength of our asset base."
President and chief executive officer
The board has declared a dividend of 5.25 cents per common share to be paid on June 17, 2019, to shareholders of record on May 31, 2019. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2019 first quarter highlights
Freehold's royalty production averaged 10,139 barrels of oil equivalent per day during Q1 2019, down 9 per cent versus Q1 2018 and 2 per cent when compared with Q4 2018. Reduced volumes quarter over quarter were associated with lower third party production additions on the company's royalty lands and weather-related shut-ins.
Royalty interests accounted for 95 per cent of total production and contributed 99 per cent of operating income in Q1 2019.
Funds from operations totalled $29.3-million, or 25 cents per share, a decrease of 9 per cent compared with Q1 2018. Funds from operations were $10.9-million, or 59 per cent, higher than the previous quarter. The improvement in funds from operations quarter over quarter was a result of improved natural gas commodity prices and stronger Canadian oil pricing due to reduced discounts to West Texas Intermediate (WTI).
In the first quarter, free cash flow in the quarter also equalled $29.3-million, a decrease of 9 per cent compared with Q1 2018. Using Freehold's closing share price as at March 31, 2019, of $8.41, this represents an annualized free cash flow yield of 12 per cent.
Income in Q1 2019 was reduced by a non-recurring impairment charge of $14.1-million, offset by a related deferred tax recovery of $3.8-million.
Wells drilled on the company's royalty lands totalled 147 (7.3 net) in the quarter, compared with 239 (6.4 net) in Q1 2018 and 220 (7.4 net) in the previous quarter. The company saw strong activity levels associated with its light oil portfolio, particularly in southwest Saskatchewan Viking.
In Q1 2019, Freehold issued 20 new lease agreements with 10 companies, compared with 26 issued in Q4 2018 and 42 leases in Q1 2018.
Cash costs for the quarter totalled $6.39 per barrel of oil equivalent, up from $6.13 per barrel of oil equivalent in Q1 2018. 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 full-year 2019, the company is forecasting cash costs of approximately $5 per barrel of oil equivalent (2018: $5.10 per barrel of oil equivalent).
Dividends declared for Q1 2019 totalled 15.75 cents per share, similar to the previous year.
Freehold's payout ratio (dividends declared divided by funds from operations) for Q1 2019 totalled 64 per cent, compared with 101 per cent in the previous quarter and 56 per cent in Q1 2018.
For the first three months of 2019, 147 (7.3 net) wells were drilled on the company's royalty lands, down 38 per cent on a gross measure but up 14 per cent on a net measure versus the same period in 2018. When compared with Q4 2018, net well activity was relatively flat. The net well drilling numbers are a testament to the quality of the company's underlying royalty portfolio, especially given broader drilling activity weakness within the Western Canadian sedimentary basin.
Activity through the first three months of 2019 was primarily focused on Saskatchewan oil prospects, including Viking at Dodsland, Mississippian plays in southeast Saskatchewan and Shaunavon in southwest Saskatchewan. Over 47 Dodsland Viking wells were drilled on the company's acreage in the first quarter, individually representing 32 per cent of the total gross wells drilled. Together, Saskatchewan and Manitoba wells represented greater than 56 per cent of the company's gross drilling in the quarter.
Alberta activity has been concentrated in the Cardium and Viking, with 11 wells drilled on the company's Pembina Cardium acreage and 25 wells drilled in Alberta Viking. Drilling for Deep basin Cretaceous oil plays remains active, with four East Shale basin Duvernay and two Northern Alberta Clearwater Sandstone wells drilled on the company's acreage this quarter. Freehold's top payers continue to represent some of the most well-capitalized E&P (exploration and production) companies in Canada.
ROYALTY INTEREST DRILLING
Three months ended March 31,
Gross Net (1) Gross Net (1)
Total 147 7.3 239 6.4
(1) Equivalent net wells are the aggregate
of the number obtained by multiplying each
gross well by its royalty interest
2019 guidance update
The following are details of the changes made to Freehold's key operating assumptions for 2019 based on results for the first quarter and expectations for the remainder of the year.
The company is maintaining its 2019 average royalty production range of 9,900 barrels of oil equivalent per day to 10,300 barrels of oil equivalent per day. Volumes are expected to be weighted approximately 55 per cent oil and natural gas liquids and 45 per cent natural gas. The company continues to maintain its royalty focus, with royalty production accounting for 96 per cent of forecasted 2019 production and virtually all of its operating income.
The company is revising its oil price assumptions for WTI to $62.50 (U.S.) per barrel (previously $55 (U.S.) per barrel) and for Edmonton Light Sweet prices to $71 per barrel (previously $61 per barrel) and Freehold's Canadian-dollar/U.S.-dollar currency exchange assumption to 75 U.S. cents per Canadian dollar (previously 76 U.S. cents).
Freehold's full-year AECO natural gas price assumption remains unchanged at $1.60 per thousand cubic feet.
Based on its current 5.25-cent-per-share monthly dividend level, the company expects its 2019 payout ratio (dividends declared divided by funds from operations) to be approximately 60 per cent (previously 76 per cent).
General and administrative costs remain at $3 per barrel of oil equivalent, reflecting lower costs in the second to fourth quarters versus the first quarter rate.
Due to the increase in oil price expectations noted herein and without factoring in any acquisition activity, the company currently estimates year-end net debt to funds from operations to exit 2019 at approximately 0.3 times (from 0.7 times).
Subsequent to March 31, 2019, Freehold's secured revolving credit facility was extended to mature May 31, 2022.
KEY OPERATING ASSUMPTIONS
2019 annual average Guidance dated
May 7, 2019 March 7, 2019
Royalty production (excludes
working interest production) boe/d 9,900 to 10,300 9,900 to 10,300
West Texas Intermediate crude oil US$/bbl $62.50 $55.00
Edmonton Light Sweet crude oil Cdn$/bbl $71.00 $61.00
AECO natural gas Cdn$/mcf $ 1.60 $ 1.60
Exchange rate Cdn$/US$ $ 0.75 $ 0.76
Operating costs $/boe $ 1.00 $ 1.00
General and administrative costs $/boe $ 3.00 $ 3.00
Weighted average shares outstanding millions 119 119
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. Freehold cautions that it is inherently difficult to predict activity levels on its royalty lands since the company 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. The company 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).
CRA (Canada Revenue Agency) proposal
Subsequent to March 31, 2019, Freehold received a proposal letter from Canada Revenue Agency, wherein CRA stated that it intends to reassess and deny Freehold's deduction of certain non-capital losses claimed and carried forward in the tax return filed for the year ended Dec. 31, 2015.
Freehold will vigorously defend its tax filing position; however, it anticipates that proceedings with CRA could take considerable time to resolve. If the CRA issues the notice of reassessment (NOR) described in the proposal letter, Freehold's assessed tax liability would be approximately $15-million (plus interest). If Freehold is reassessed in accordance with the proposal letter, it may also be reassessed with respect to the deduction of its non-capital losses in all of its tax filings subsequent to Dec. 31, 2015. In such event, Freehold would utilize alternative claims available that would fully offset any tax liability for filed tax returns in periods subsequent to Dec. 31, 2015. Freehold will be required to pay a deposit of 50 per cent of the assessed tax liability, and it will have 90 days from the date of the NOR to prepare and file a notice of objection. Freehold firmly believes it will be successful defending its position, and, therefore, any amounts paid to CRA should be refunded plus interest. No provisions have been made in the financial statements relating to the proposal letter.
Conference call details
A conference call to discuss financial and operational results for the period ended March 31, 2019, will be held for the investment community on Wednesday, May 8, 2019, 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 1-800-952-5114 (toll-free in North America); the participant passcode is 9393978 followed by the number sign.
Availability on SEDAR
Freehold's 2019 first quarter interim unaudited condensed consolidated financial statements and accompanying management discussion and analysis are being filed with Canadian securities regulators and will be available on SEDAR and on Freehold's website.
We seek Safe Harbor.
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