RESULTS AT A GLANCE
|Three Months Ended||Nine Months Ended|
|September 30||September 30|
|FINANCIAL ($000s, except as noted)||2016||2015||Change||2016||2015||Change|
|Funds from operations (1)||24,148||27,643||-13||%||63,790||78,311||-19||%|
|Per share, basic ($)||0.21||0.28||-25||%||0.59||0.89||-34||%|
|Operating income (2) from royalties (%)||93||90||3||%||93||86||8||%|
|Per share ($) (3)||0.12||0.25||-52||%||0.42||0.79||-47||%|
|Net debt obligations (2)||87,301||148,994||-41||%||87,301||148,994||-41||%|
|Shares outstanding, period end (000s)||117,850||98,599||20||%||117,850||98,599||20||%|
|Average daily production (boe/d) (4)||12,281||11,266||9||%||12,099||10,652||14||%|
|Oil and NGL (%)||55||63||-13||%||59||61||-3||%|
|Average price realizations ($/boe) (4)||28.69||34.11||-16||%||26.50||34.27||-23||%|
|Operating netback ($/boe) (2) (4)||24.99||29.52||-15||%||23.09||29.57||-22||%|
|(1)||For the three and nine months ended September 30, 2016, funds from operations included a $1.1 million loss upon settlement of litigation.|
|(2)||See Non-GAAP Financial Measures.|
|(3)||Based on the number of shares outstanding at each record date.|
|(4)||See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).|
We had a strong quarter, setting a production record averaging 12,281 boe/d aided by organic growth within our portfolio and a full quarter of production from our recent acquisition, and as a result, we have revised our 2016 production guidance from 11,700 boe/d to 12,000 boe/d. We are also seeing activity levels rebound with 48 (2.3 net) wells drilled on our royalty lands over the quarter with higher productivity from new wells.
Freehold has established a relatively conservative dividend policy which we believe serves our shareholders well in times of uncertainty. This quarter’s dividend of $0.12 per share was safely within our funds from operations of $0.21 per share. Our long term goal is to have an adjusted payout ratio between 60%-80% and at current levels we are comfortably at the bottom of this range. We expect to use excess free cash flow over and above our dividend to fund future acquisitions and pay down debt, keeping our net debt to funds from operations between 0.5 to 1.5 times.
Looking into 2017, we remain confident that commodity prices will continue to improve and we are looking for indications of oil price stability prior to resetting dividend levels. We are estimating average production of 11,000 boe/d for 2017 with continued conservatism in forecasting drilling activity.
On November 25, 2016, Freehold will celebrate its 20th anniversary. Over this time frame we have generated superior returns and would like to thank our employees for their hard work, which has made this possible. From a $10 per share initial public offering in 1996, we have provided dividends of over $30 per share. We would like to thank our shareholders for their ongoing support.
Tom Mullane, President and CEO
The Board of Directors (the Board) has declared a dividend of $0.04 per share, to be paid on December 15, 2016 to shareholders of record on November 30, 2016. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2016 Third Quarter Highlights
- Freehold’s production averaged a record 12,281 boe/d, a 9% improvement over Q3-2015 and 2% increase over Q2-2016. Gains in production were largely driven by better than expected third party production additions and a full quarter’s production from our Q2-2016 acquisition from certain affiliates of Husky Energy Inc. (the Husky Transaction).
- Royalty production was up 16% compared to Q3-2015, averaging 10,169 boe/d, accounting for 83% of production and 93% of operating income.
- Funds from operations totaled $24.1 million ($0.21 per share) in Q3-2016, flat over the previous quarter but down 13% from last year with reduced commodity prices somewhat offset by higher production. Impacting funds from operations Freehold settled an outstanding legal claim recognizing a loss of $1.1 million.
- Freehold generated $9.8 million in free cash flow(1) over and above our dividend, which we applied to outstanding debt. At September 30, 2016, net debt obligations(1) totaled $87.3 million, down $10.9 million from $98.2 million at June 30, 2016. This implies a net debt to 12-month trailing funds from operations ratio of 1.0 times. Despite challenging commodity prices, we continue to generate an attractive netback and free cash flow.
- Cash costs(1) for the quarter totaled $6.78/boe, down from $7.34/boe in Q2-2016 and $8.84/boe in Q3-2015. Included in these costs General and Administrative (G&A) costs totalled $1.71/boe for Q3-2016 versus $2.04/boe in Q2-2016 and $2.33/boe in Q3-2015.
- Wells drilled on our royalty lands totaled 48 (2.3 equivalent net) in the quarter; for the first three quarters of 2016, 156 (6.1 equivalent net) wells were drilled, including 15 royalty wells on the recently acquired acreage associated with the Husky Transaction, with seven locations targeting the Shaunavon.
- In Q3-2016, Freehold issued four leases; 71 leases have been issued year-to-date in 2016, 57 relating to the Q2-2016 Husky Transaction.
- Dividends declared for Q3-2016 totaled $0.12 per share, unchanged from the previous quarter and down from $0.25 per share one year ago.
- Basic payout ratio(1) (dividends declared/funds from operations) for Q3-2016 totaled 59% while the adjusted payout ratio(1) (cash dividends plus capital expenditures/funds from operations) for the same period was 55%.
(1) See Non-GAAP Financial Measures.
2016 Guidance Update
The table below summarizes our key operating assumptions for 2016, updated to reflect actual statistics for the first nine months and our current expectations for the remainder of the year.
Key Operating Assumptions
|2016 Annual Average||Nov. 8,
|WTI oil price||US$/bbl||43.00||40.00||40.00||35.00||50.00|
|Western Canadian Select (WCS)||Cdn$/bbl||38.00||34.00||34.00||31.00||47.00|
|AECO natural gas price||Cdn$/Mcf||2.10||2.00||1.80||2.00||2.75|
|General and administrative costs (1)||$/boe||2.35||2.40||2.50||2.65||2.85|
|Capital expenditures||$ millions||6||7||7||7||15|
|Dividends paid in shares (DRIP) (2)||$ millions||5||5||8||8||13|
|Weighted average shares outstanding||millions||110||110||109||100||100|
|(1)||Excludes share based and other compensation.|
|(2)||Effective with the August dividend the Board approved the suspension of the DRIP pending further notice.|
We see average production volumes of 11,000 boe/d (assuming no acquisitions), which includes expectations of 100 boe/d of shut-in working interest natural gas, 100 boe/d of shut-in heavy oil production (primarily working interest) and production additions associated with our strong audit function. Estimated volumes are comprised of approximately 56% oil and NGL and 44% natural gas. We continue to maintain our royalty focus with royalty production expected to account for approximately 84% of production and 91% of operating income.
Key Operating Assumptions
|2017 Annual Average||Nov. 8, 2016|
|WTI oil price||US$/bbl||50.00|
|Western Canadian Select (WCS)||Cdn$/bbl||46.00|
|AECO natural gas price||Cdn$/Mcf||3.00|
|General and administrative costs (1)||$/boe||2.65|
|Capital expenditures||$ millions||6|
|Weighted average shares outstanding||millions||118|
|(1)||Excludes share based and other compensation.|
Recognizing the cyclical nature of the oil and gas industry, we continue to closely monitor commodity prices and industry trends for signs of changing 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 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).
Availability on SEDAR
Freehold’s 2016 third 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.