RESULTS AT A GLANCE
|Three Months Ended||Twelve Months Ended|
|December 31||December 31|
|FINANCIAL ($000s, except as noted)||2016||2015||Change||2016||2015||Change|
|Royalty and other revenue||39,893||33,833||18||%||129,968||135,664||-4||%|
|Funds from operations||30,421||25,509||19||%||94,211||103,820||-9||%|
|Per share, basic ($)||0.26||0.26||0||%||0.85||1.15||-26||%|
|Operating income (1) from royalties (%)||93||89||4||%||93||87||7||%|
|Per share ($) (2)||0.12||0.21||-43||%||0.54||1.00||-46||%|
|Shares outstanding, period end (000s)||117,918||98,940||19||%||117,918||98,940||19||%|
|Average daily production (boe/d) (3)||12,579||11,815||6||%||12,219||10,945||12||%|
|Oil and NGL (%)||56||64||-13||%||58||62||-6||%|
|Average price realizations ($/boe) (3)||33.72||30.34||11||%||28.37||33.20||-15||%|
|Operating netback ($/boe) (1) (3)||29.80||26.85||11||%||24.83||28.83||-14||%|
|(1)||See Non-GAAP Financial Measures.|
|(2)||Based on the number of shares outstanding at each record date.|
|(3)||See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).|
We see positive momentum entering 2017, with Freehold continuing to achieve production growth from its attractive property portfolio. Record production and robust drilling activity have led us to increase our 2017 production guidance and raise our dividend by 25%.
Freehold achieved record production again this quarter, marking the 12th consecutive quarterly increase and the second consecutive quarter without an acquisition. Organic growth primarily came from development in Saskatchewan and in central Alberta.
Looking forward, we are comfortable that commodity prices have found support at current levels, which is driving higher levels of drilling activity. Based on increased drilling through the fourth quarter, better than expected production through year-end and our recent acquisition in February (see Subsequent Event), we are revising our 2017 production forecast from 11,000 boe/d to a range of 11,300 boe/d to 11,800 boe/d.
We are increasing our monthly dividend from $0.04 to $0.05 per share consistent with our strategy of a 60%-80% adjusted payout ratio. Our projected adjusted payout ratio for 2017 is 65%, safely at the lower end of our payout target range. Freehold provides a low risk investment opportunity in the oil and gas industry.
Tom Mullane, President and CEO
The Board of Directors has declared a dividend of Cdn. $0.05 per share to be paid on April 17, 2017 to shareholders of record on March 31, 2017. The dividend is designated as an eligible dividend for Canadian income tax purposes.
In keeping with our strategy of making accretive acquisitions that complement our existing portfolio, in February 2017 Freehold closed a $34 million acquisition of various gross overriding royalties and mineral title lands in the greater Dodsland area of Saskatchewan. There were 32,000 acres of royalty land acquired with current estimated production of 185 boe/d (91% oil). The transaction strengthens our position in the Dodsland Viking play, with development expected to remain strong at current commodity price levels.
A Strong Fourth Quarter
- Freehold’s production averaged a record 12,579 boe/d, a 6% improvement over Q4-2015 and 2% increase over Q3-2016. Gains in production were largely driven by volumes associated with our Q2-2016 acquisition, better than expected third party production additions and the strength of our audit function (over 400 boe/d of prior period adjustments in the quarter, which includes compensatory royalties on our mineral title lands).
- Royalty production was up 12% compared to Q4-2015 averaging 10,351 boe/d and accounted for 93% of operating income and 82% of production.
- Q4-2016 royalty and other revenue was up 18% to $39.9 million versus $33.8 million in the previous year due to increased production and higher average price realizations.
- Funds from operations totaled $30.4 million, an increase of 19% due to higher volumes and commodity prices. On a per share basis, funds from operations were $0.26/share in Q4-2016, up from $0.21/share in Q3-2016.
- Net income was $1.6 million compared to a $7.4 million loss in Q4-2015, which resulted from an $8.0 million impairment charge.
- Freehold generated $14.1 million in free cash flow (1), over and above our dividend, which we applied to outstanding debt. As a result, at December 31, 2016, net debt totaled $73.2 million, down from $87.3 million at September 30, 2016, implying a net debt to 12-month trailing funds from operations ratio of 0.8 times.
- Cash costs (1) for the quarter totaled $7.83/boe, up slightly from $7.63/boe in Q4-2015, as we saw operating costs add approximately $0.7 million ($0.60/boe) for charges relating to prior periods.
- Wells drilled on our royalty lands totaled 125 (7.8 net) in the quarter, up from 48 (2.3 net) in the previous quarter.
- In Q4-2016, Freehold issued 9 leases; 93 leases were issued in 2016, 63 relating to the Q2-2016 acquisition.
- Dividends declared for Q4-2016 totaled $0.12 per share, unchanged from the previous quarter and down from $0.21 per share one year ago.
- Basic payout ratio (1) (dividends declared/funds from operations) for Q4-2016 totaled 46% while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 53%.
(1) See Non-GAAP Financial Measures.
A Rebound in Year-End Drilling Activity
Including drilling associated with acquisitions, 281 (13.9 net) wells were drilled on our royalty lands in 2016, a 25% decrease versus 2015. The fourth quarter saw a resurgence in activity on our land with 125 gross (7.8 net) locations drilled, representing over 50% of our net annual total. Activity through the quarter was focused in the greater Dodsland area with the new operator accelerating activity and drilling 16 new locations. In southeast Saskatchewan we also saw traditional players increase activity with 25 wells drilled. In addition, incremental drilling also targeted prospects in the Alberta Viking, the Cardium and in heavy oil.
On the acquired lands in 2016, 56 locations were drilled, materially higher than our initial forecast for the year. Of these wells 37 were drilled in the fourth quarter, mostly in southwest Saskatchewan, in Alberta Viking and in the Deep Basin.
ROYALTY INTEREST DRILLING
|Three Months Ended December 31 (1)||Twelve Months Ended December 31 (1)|
|Gross||Net(2)||Gross||Net (2)||Gross||Net(2)||Gross||Net (2)|
|Unitized wells (3)||8||–||20||0.1||59||0.3||118||0.7|
|Royalty joint venture (4)||1||–||1||4|
|(1)||Counts include wells drilled on acquired lands from January 1st (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.|
|(4)||Wells drilled on various royalty joint venture lands, where equivalent net wells cannot be calculated.|
2016 Highlights- A Strong Year in a Challenging Environment
- Achieved record production with volumes averaging 12,219 boe/d, representing a 12% increase versus the same period last year. Volumes were comprised of 58% oil and liquids and 42% natural gas. On the royalty side volumes averaged 9,936 boe/d, representing a 20% increase versus 2015.
- Funds from operations totaled $94.2 million or $0.85/share. This was down from $103.8 million or $1.15/share in 2015 reflecting continued weakness in commodity prices.
- Declared dividends were $59.5 million ($0.54/share), down from $90.1 million ($1.00/share) in 2015, reflecting lower funds from operations and a conservative payout strategy.
- Ended 2016 with net debt of $73.2 million, implying net debt to funds from operations of 0.8 times. At year end we had nearly $180 million in available room within our credit facility.
- Executed a major transaction, acquiring a $162 million royalty package; further diversifying our land base by adding approximately 2.5 million acres of royalty land, increasing our total royalty lands to approximately 5.9 million acres.
- Proved plus probable reserves totalled 38.3 mmboe, up from 36.1 mmboe in 2015.
2017 Guidance Update
The table below summarizes our key operating assumptions for 2017, updated to reflect our current expectations for the remainder of the year.
- We have increased our production guidance from 11,000 boe/d to a range of 11,300 boe/d to 11,800 boe/d, due to production additions on our royalty lands along with recently added acquisition volumes. Volumes are expected to be weighted approximately 55% oil and natural gas liquids (NGL) and 45% natural gas. We continue to maintain our royalty focus with royalty production accounting for 84% of forecasted 2017 production and 91% of operating income.
- We have increased our West Texas Intermediate (WTI) and Western Canadian Select (WCS) price assumptions from US$50.00/bbl and $46.00/bbl to US$52.00/bbl and $49.00/bbl respectively.
- We have revised downward our 2017 AECO natural gas price assumption from $3.00/mcf to $2.60/mcf.
- We have revised our G&A expense assumption from $2.65/boe to $2.60/boe reflecting the increased production guidance.
- After increasing our dividend by 25% from $0.04 to $0.05 per month, we expect our 2017 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 65%.
- We forecast year-end net debt to funds from operations of approximately 0.6 times based on our revised key operating assumptions.
Key Operating Assumptions
|2017 Annual Average||Mar. 2, 2017||Nov. 8, 2016|
|Daily production||boe/d||11,300 – 11,800||11,000|
|WTI oil price||US$/bbl||52.00||50.00|
|Western Canadian Select (WCS)||Cdn$/bbl||49.00||46.00|
|AECO natural gas price||Cdn$/Mcf||2.60||3.00|
|General and administrative costs (1)||$/boe||2.60||2.65|
|Capital expenditures||$ millions||6||6|
|Weighted average shares outstanding||millions||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 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).
2016 Reserves Information
Conference Call Details
A conference call to discuss financial and operational results for the period ended December 31, 2016 will be held for the investment community on Friday, March 3, 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 2016 audited financial statements and accompanying Management’s Discussion and Analysis (MD&A) and Annual Information Form (AIF) are being filed today with Canadian securities regulators and will be available at www.sedar.com and on our website.