CALGARY, Alberta, Aug. 09, 2017 (GLOBE NEWSWIRE) — Freehold Royalties Ltd. (Freehold) (TSX:FRU) announced second quarter results for the period ended June 30, 2017.
Results at a Glance
|Three Months Ended||Six Months Ended|
|June 30||June 30|
|FINANCIAL ($000s, except as noted)||2017||2016||Change||2017||2016||Change|
|Royalty and other revenue||38,430||32,219||19||%||79,521||57,152||39||%|
|Net income (loss)||13,084||(2,249||)||–||20,172||(10,839||)||–|
|Per share, basic and diluted ($)||0.11||(0.02||)||–||0.17||(0.11||)||–|
|Funds from operations||31,769||24,142||32||%||63,838||39,642||61||%|
|Per share, basic ($)||0.27||0.23||17||%||0.54||0.39||38||%|
|Operating income (1)||35,235||28,011||26||%||72,319||48,303||50||%|
|Operating income from royalties (%)||97||91||7||%||94||94||0||%|
|Working interest dispositions||28,808||–||–||29,096||–||–|
|Per share ($) (2)||0.15||0.12||25||%||0.28||0.30||-7||%|
|Shares outstanding, period end (000s)||118,073||117,652||0||%||118,073||117,652||0||%|
|Average shares outstanding (000s) (3)||118,018||106,736||11||%||117,987||102,914||15||%|
|Average daily production (boe/d) (4)||12,589||12,041||5||%||12,670||12,006||6||%|
|Oil and NGL (%)||54||59||-8||%||55||61||-10||%|
|Average price realizations ($/boe) (4)||32.98||28.48||16||%||33.93||25.37||34||%|
|Operating netback ($/boe) (1) (4)||30.76||25.57||20||%||31.54||22.11||43||%|
(1) See Non-GAAP Financial Measures.
(2) Based on the number of shares issued and outstanding at each record date.
(3) Weighted average number of shares outstanding during the period, basic.
(4) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).
Freehold achieved record royalty production and solid cash flow results in Q2-2017 marking the fourth consecutive quarter of increasing royalty production on a per share basis. We are revising our 2017 production guidance up 500 boe/d to 11,800 – 12,300 boe/d with better than expected audit recoveries and operating results. At current dividend levels we are forecasting an adjusted payout ratio for 2017 of 61%, safely within our target adjusted payout range of 60% – 80%. Not only are we growing royalty production on a per share basis, we exited the quarter with lower debt resulting in net debt to 12-month trailing funds from operations of 0.4 times (net debt of $50 million). In Q2-2017, Freehold issued 12 new lease agreements for a cumulative total of 37 new leases in the first half of 2017, exceeding the entire 2016 new lease count as we deliver continued organic growth. Our quarter was in line with Freehold’s objective to deliver growth and low risk attractive returns to shareholders over the long term.
President and CEO
The Board of Directors has declared a dividend of Cdn. $0.05 per share to be paid on September 15, 2017 to shareholders of record on August 31, 2017. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2017 Second Quarter Highlights
- Freehold’s production averaged 12,589 boe/d, a 5% improvement over Q2-2016. Gains in production were largely driven by drilling activity on our royalty lands, our strong audit function (over 700 boe/d of prior period adjustments) and royalty acquisitions.
- Royalty production was up 16% compared to Q2-2016, averaging 11,270 boe/d. Royalty production increased 5% on a per share basis versus Q1-2017. We have grown our royalty production nine successive quarters and four quarters on a per share measure.
- Royalty interests accounted for 90% of total production and contributed 97% of operating income in Q2-2017, both being the highest totals in our history.
- Wells drilled on our royalty lands totaled 58 (1.6 net) in Q2-2017, up from 23 (0.4 net) in Q2-2016. Year-to-date we have seen 208 (10.2 net) wells drilled on our royalty lands compared to 108 (3.8 net) locations drilled during the same period in 2016.
- In Q2-2017 Freehold issued 12 new lease agreements for a cumulative total of 37 new leases in the first half of 2017, exceeding the 2016 total new lease count. Freehold’s unleased holdings are available for review on our website’s Leasing Opportunities page at www.freeholdroyalties.com.
- Freehold closed $28.9 million dispositions of various working interest assets located in southeast Saskatchewan. Total production and operating income associated with these assets for Q1-2017 was approximately 650 boe/d and $1.4 million respectively.
- Funds from operations totaled $31.8 million, an increase of 32% compared to Q2-2016, largely due to the increase in revenue. On a per share basis, funds from operations was $0.27/share in Q2-2017 up from $0.23/share in Q2-2016.
- Freehold generated $12.9 million in free cash flow (1), over and above our dividend, which we applied to outstanding debt. At June 30, 2017, net debt totaled $49.8 million resulting in a net debt to 12-month trailing funds from operations ratio of 0.4 times.
- Cash costs (1) for the quarter totaled $5.63/boe, down from $7.34/boe in Q2-2016 and $7.66/boe in Q1-2017. With the April 2017 disposition of our southeast Saskatchewan working interest assets and growth in our royalty production, we have reduced our cash costs and enhanced our netback.
- Dividends declared for Q2-2017 totaled $0.15 per share, up 25% from $0.12 per share one year ago. In March 2017, Freehold announced an increase to its monthly dividend from $0.04 to $0.05 per share.
- Basic payout ratio (1) (dividends declared/funds from operations) for Q2-2017 totaled 56% while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 59%.
(1) See Non-GAAP Financial Measures.
Sustained Momentum on our Lands
Including drilling associated with acquisitions, 208 (10.2 net) wells were drilled on our royalty lands during the first six months of 2017, a 168% increase versus the same time period in 2016 (on a net basis). While the second quarter typically represents a slower period on the activity front, drilling on our lands came in above expectations with 58 (1.6 net) locations drilled, this compares to 23 (0.4 net) during the same period last year.
Activity through the first half of 2017 was primarily focused on oil prospects including the Viking at Redwater and Dodsland, which represented greater than 40% of our net locations through the first two quarters. We also see continued activity in core areas southeast Saskatchewan (Bakken, Mississippian), southwest Saskatchewan (Shaunavon) and the Deep Basin (Montney). Our top payors continue to represent some of the most well capitalized E&P producers in Canada.
|Royalty Interest Drilling|
|Three Months Ended June 30 (1)||Six Months Ended June 30 (1)|
|Gross||Net (2)||Gross||Net (2)||Gross||Net (2)||Gross||Net (2)|
|Unitized wells (3)||23||0.1||12||0.1||33||0.2||49||0.3|
(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 our royalty interest percentage.
(3) Unitized wells are in production units wherein we generally have small royalty interests in hundreds of wells.
The table below summarizes our key operating assumptions for 2017.
- We are increasing our 2017 production range to 11,800-12,300 boe/d (previously 11,300-11,800 boe/d), as a result of higher than expected results through the first half of the year, mostly due to drilling activity and prior period adjustments. We do not include the effects of future acquisition activity in our forecasts. Also, minimal prior period adjustments are in our forecast as we do not record the effects of audit and compliance activities until revenue collection is certain.
- Volumes are expected to be weighted approximately 55% oil and natural gas liquids (NGL) and 45% natural gas.
- We continue to improve our royalty focus with royalty production accounting for 88% of forecasted 2017 production (up from 87%) and 95% of operating income (up from 94%).
- We are reducing our West Texas Intermediate price assumption to US$50.00/bbl (previously US$52.00/bbl). Western Canadian Select remains unchanged due to positive effects of the declining light/heavy oil differentials. Our AECO natural gas price assumption remains at $2.60/mcf.
- The Cdn$/US$ exchange rate has been adjusted upwards to $0.77 from $0.76 as a result of recent Canadian dollar appreciation and market expectations for the remainder of the year.
- Our operating costs forecast is revised downwards to $2.40/boe (from $2.50/boe) and general and administrative costs to $2.50/boe (from $2.60/boe) as a result of our increased royalty production.
- Based on our current $0.05 monthly dividend level, we expect our 2017 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 61%.
- We continue to forecast year-end net debt to funds from operations of approximately 0.3 times based on our revised key operating assumptions.
Key Operating Assumptions
|2017 Annual Average||Aug. 9, 2017||May 10, 2017||Mar. 2, 2017||Nov. 8, 2016|
|Daily production||boe/d||11,800-12,300||11,300 – 11,800||11,300 – 11,800||11,000|
|West Texas Intermediate crude oil||US$/bbl||50.00||52.00||52.00||50.00|
|Western Canadian Select crude oil||Cdn$/bbl||49.00||49.00||49.00||46.00|
|AECO natural gas||Cdn$/Mcf||2.60||2.60||2.60||3.00|
|General and administrative costs (1)||$/boe||2.50||2.60||2.60||2.65|
|Capital expenditures||$ millions||4||4||6||6|
|Weighted average shares outstanding||millions||118||118||118||118|
(1) Excludes share based compensation.
Recognizing the cyclical nature of the oil and gas industry, we continue to closely monitor commodity prices and industry trends for signs of deteriorating market conditions. We caution that it is inherently difficult to predict activity levels on our royalty lands since we have 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 our current guidance and commodity price assumptions, and assuming no significant changes in the current business environment, we expect to maintain the current monthly dividend rate through the next quarter. We will continue to evaluate the commodity price environment and adjust the dividend levels as necessary (subject to the quarterly review and approval of our Board of Directors).
Conference Call Details
A conference call to discuss financial and operational result for the period ended June 30, 2017 will be held for the investment community on Thursday, August 10, 2017 beginning at 6:00 am MT (8:00 am ET). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-800-273-9672 (toll-free in North America).
Availability on SEDAR
Freehold’s 2017 second 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 at www.sedar.com and on our website www.freeholdroyalties.com.