RESULTS AT A GLANCE
|Three Months Ended|
|FINANCIAL ($000s, except as noted)||2016||2015||Change|
|Net income (loss)||(8,590||)||21,617||-140||%|
|Per share, basic and diluted ($)||(0.09||)||0.29||-131||%|
|Funds from operations||15,500||21,938||-29||%|
|Per share, basic ($)||0.16||0.29||-45||%|
|Operating income (1)||20,292||22,632||-10||%|
|Operating income from royalties (%)||97||83||17||%|
|Per share ($) (2)||0.18||0.27||-33||%|
|Net debt obligations (1)||149,197||198,834||-25||%|
|Shares outstanding, period end (000s)||99,284||75,457||32||%|
|Average shares outstanding (000s) (3)||99,093||75,199||32||%|
|Average daily production (boe/d) (4)||11,974||10,058||19||%|
|Average price realizations ($/boe) (4)||22.23||29.80||-25||%|
|Operating netback ($/boe) (1) (4)||18.62||25.01||-26||%|
|(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).|
The Board of Directors has declared a dividend of $0.04 per share, to be paid on June 15, 2016 to shareholders of record on May 31, 2016. The dividend is designated as an eligible dividend for Canadian income tax purposes. Including the June 15, 2016 payment, the 12-month trailing cash dividends total $0.81/share.
2016 First Quarter Highlights
- Production for Q1-2016 averaged 11,974 boe/d, a 19% increase over Q1-2015 and a 1% increase over Q4-2015.
- Royalties accounted for 97% of operating income and 79% of production, reinforcing our royalty focus.
- Royalty production was up 33% compared to Q1-2015, averaging 9,495 boe/d. Growth in volumes was associated with a combination of production acquired through the year, new production from drilling on our royalty lands and a strong quarter from our audit function; which was largely responsible for approximately 600 boe/d of prior period adjustments, including compensatory royalties on our mineral title lands.
- Working interest production averaged 2,479 boe/d for the quarter, down 14% when compared to the same period last year, reflecting reduced spending through a weaker commodity price environment.
- Funds from operations totaled $15.5 million ($0.16/share) in Q1-2016, down 29% from the same period last year owing to continued weakness in oil and natural gas prices.
- Though average commodity price realizations decreased 25%, reduced revenues were partly offset by the increase in production volumes, resulting in a 10% decrease in gross revenue compared to Q1-2015.
- Q1-2016 net loss was $8.6 million (Q1-2015 net income of $21.6 million – without a $24.3 million gain on corporate acquisition it would have been a $2.7 million net loss) primarily due to lower revenues and increased depletion and depreciation expense as a result of higher production volumes.
- Dividends declared for Q1-2016 totaled $0.18 per share, down from $0.27 per share one year ago. On March 3, 2016, Freehold adjusted its monthly dividend to $0.04 per share from $0.07 per share as a result of reduced funds from operations within the weak commodity price environment.
- Average participation in our dividend reinvestment plan (DRIP) was 11% (Q1-2015 – 35%). DRIP proceeds for Q1-2016 totaled $2.4 million.
- Net capital expenditures on our working interest properties totaled $2.1 million over the quarter.
- Basic payout ratio (dividends declared/funds from operations) for Q1-2016 totaled 115% while the adjusted payout ratio (cash dividends plus capital expenditures/funds from operations) for the same period was 132%. However, based on our 2016 key operating assumptions our current dividend level remains well funded with our basic payout ratio expected to total approximately 82% for 2016.
- At March 31, 2016, net debt obligations totaled $149.2 million, up $2.3 million from $146.9 million at December 31, 2015. This implies a net debt to 12-month trailing funds from operations ratio of 1.5 times (excluding the proforma effects of acquisitions).
On May 2, 2016, Freehold entered into a definitive agreement with certain affiliates of Husky Energy Inc. to acquire an extensive suite of royalty production and fee lands for an aggregate purchase price of $165 million, prior to normal closing adjustments (the Husky Transaction). The effective date of the Husky Transaction is January 1, 2016, with closing expected to occur on or about May 25, 2016, subject to regulatory approval and certain other closing conditions.
Highlights include (based on relevant assumptions from our 2016 Key Operating Assumptions):
- Adds approximately 2.5 million acres of royalty lands (including 0.3 million acres of mineral title land), increasing our royalty lands acreage by 74% to 5.9 million acres.
- Expected 2016 annualized average royalty production of 1,700 boe/d and annualized operating income of $11.4 million.
- Expected to increase royalties as a percentage of 2016 operating income to approximately 94%.
- The production base is expected to have a low decline of approximately 17% per year in 2016.
The Husky Transaction will be funded by a concurrent $165 million public equity financing (before 15% over-allotment option and underwriters’ fees) and an approximate $20 million concurrent private placement to CN Pension Trust Funds, with remaining funds allocated to debt repayment. 16,018,000 common shares at a price of $11.55 per share will be issued through the financings (excluding potential effects of the over-allotment option). If the over-allotment option is exercised in full by the underwriters an additional 2,142,900 common shares will be issued at a price of $11.55 per share for gross proceeds of approximately $25 million. The underwriters will receive a commission of 4% on the common shares issued pursuant to the financing (other than the common shares issued pursuant to the concurrent private placement).
Two of Freehold’s long standing directors, Nolan Blades (Chair of the Board) and David Sandmeyer are not standing for re-election and after 19 years of service will retire from the Board at the Annual and Special Meeting of Shareholders (the Meeting) being held May 11, 2016. Mr. Blades joined the Board in 1996 and was appointed Chair of the Board in May 2009. Mr. Sandmeyer was appointed to the Board in 1996 and served as President and Chief Executive Officer of Rife Resources Ltd. and Freehold until his retirement in May 2009. We would like to thank them for their dedication, wisdom and leadership throughout their tenure on the Board. It is planned that Marvin Romanow will succeed Mr. Blades as Chair of the Board following the Meeting. Mr. Romanow has over 30 years of experience in the oil and gas industry.
We are pleased to announce that Douglas Kay has agreed to stand for election at the Meeting. Mr. Kay is a Corporate Director and former oil and gas executive with over 35 years industry experience.
The table below summarizes our key operating assumptions for 2016, updated to reflect actual statistics for the first three months and our current expectations for the remainder of the year. The assumptions and guidance reflects the Husky Transaction and the financings (before over-allotment option) discussed in Subsequent Events.
- The increase in our production guidance on May 2, 2016 from 9,800 boe/d to 11,400 boe/d was a function of the Husky Transaction, higher than expected drilling activity on our royalty lands, lower than expected shut-in heavy oil volumes and positive prior period adjustments. Volumes are expected to be weighted approximately 59% oil and natural gas liquids (NGL’s) and 41% natural gas. We continue to maintain our royalty focus with royalty production accounting for 80% of forecasted 2016 production and 94% of operating income.
- We have increased our WTI and WCS pricing to US$40.00/bbl and $34.00/bbl respectively (previously US$35.00/bbl and $31.00/bbl respectively), due to recent price momentum. We have revised downward our 2016 AECO natural gas price assumption from $2.00/mcf to $1.80/mcf.
- Based on our key operating assumptions, we forecast our 2016 basic payout ratio to total approximately 82%.
- Operating costs have been reduced from $4.75/boe to $4.00/boe as a result of increased royalty production as a percentage of total production.
- Our capital spending budget remains at $7 million.
- G&A costs have decreased to $2.50/boe as a result of production added through the Husky Transaction, offset somewhat by expected acquisition integration costs
- Weighted average shares outstanding have increased due to the financings detailed in Subsequent Events.
Key Operating Assumptions (1)
|2016 Annual Average||May 11, 2016||Mar. 3, 2016||Nov. 12, 2015|
|WTI oil price||US$/bbl||40.00||35.00||50.00|
|Western Canadian Select (WCS)||Cdn$/bbl||34.00||31.00||47.00|
|AECO natural gas price||Cdn$/Mcf||1.80||2.00||2.75|
|General and administrative costs (2)||$/boe||2.50||2.65||2.85|
|Capital expenditures||$ millions||7||7||15|
|Dividends paid in shares (DRIP) (3)||$ millions||8||8||13|
|Weighted average shares outstanding||millions||109||100||100|
|(1)||Production guidance was updated to 11,400 boe/d on May 2, 2016 but no other assumptions were changed at that time.|
|(2)||Excludes share based and other compensation.|
|(3)||Assumes an average 15% participation rate in Freehold’s dividend reinvestment plan, which is subject to change at the participants’ discretion.|
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 with the expectation to increase dividend levels as the environment stabilizes or improves (subject to the quarterly review and approval of our Board of Directors – see Dividend Policy).
Availability on SEDAR
Freehold’s 2016 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 at www.sedar.com and on our website.