RESULTS AT A GLANCE
|Three Months Ended||Twelve Months Ended|
|December 31||December 31|
|FINANCIAL ($000s, except as noted)||2017||2016||Change||2017||2016||Change|
|Royalty and other revenue||38,435||39,893||-4%||151,894||129,968||17%|
|Funds from operations||32,023||30,421||5%||123,788||94,211||31%|
|Per share, basic ($)||0.27||0.26||4%||1.05||0.85||24%|
|Operating income (1) from royalties (%)||97||93||4%||96||93||3%|
|Working interest dispositions||354||–||–||32,419||–||–|
|Per share ($) (2)||0.15||0.12||25%||0.58||0.54||7%|
|Shares outstanding, period end (000s)||118,183||117,918||–||118,183||117,918||–|
|Average daily production (boe/d) (3)||12,032||12,579||-4%||12,350||12,219||1%|
|Oil and NGL (%)||53||56||-5%||55||58||-5%|
|Average price realizations ($/boe) (3)||33.59||33.72||–||32.80||28.37||16%|
|Operating netback ($/boe) (1) (3)||32.66||29.80||10%||31.00||24.83||25%|
(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).
2017 was a successful year for Freehold, as we achieved a number of objectives both operationally and financially.
Operationally, Freehold achieved record production in 2017 as volumes averaged 12,350 boe/d. We grew royalty production by 10% with volumes averaging 10,963 boe/d, a testament to the quality of our royalty portfolio. Volume additions were associated with oil focused drilling on our royalty lands and a key Viking acquisition. We also completed a transaction late in the year increasing our position in the Cardium. These deals provide multi-years of drilling inventory.
Financially, we are increasing our monthly dividend from $0.05 to $0.0525 per share (5% increase). This is consistent with our dividend strategy of positioning our adjusted payout at 60%-80% of funds from operations. Our forecasted adjusted payout ratio for 2018 is 61%, safely at the lower end of our target range. We lowered our net debt and lowered our total cash costs to $5.13/boe in the fourth quarter. Our goal is to position Freehold as a low risk, attractive investment in oil and gas which we continue to achieve.
Thomas J. Mullane
President and CEO
With increasing oil prices and strength in operations, Freehold’s Board of Directors (the Board) has approved a 5% increase to its monthly dividend to $0.0525 per share or $0.63 per share annualized. The Board has declared a dividend of $0.0525 per common share to be paid on April 16, 2018 to shareholders of record on March 31, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.
The dividend increase is in-line with our previously stated dividend policy which outlines a 60%-80% adjusted payout ratio based on forward looking funds from operations. Based on our current guidance and commodity price assumptions, and assuming no significant changes in the current business environment, we expect to maintain the revised 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).
Consistent with our strategy of enhancing our royalty focus, on February 14, 2018 Freehold disposed of our non-core working interest in the Pembina Cardium Unit No. 9 in Alberta for $8 million (before adjustments). As part of the transaction Freehold retained a 4% gross overriding royalty (GORR) on the same interests that were sold. Average production and operating income associated with the asset in 2017 was 179 boe/d and $2.1 million (before GORR), respectively. This deal reduced our decommissioning liability by approximately 40 net working interest wells and also reduced our exposure to capital activities as Freehold had $2.4 million of capital expenditures related to the property in 2017.
On February 28, 2018, Freehold completed a $7.0 million royalty acquisition in the prospective East Shale Duvernay Basin in central Alberta. As part of the transaction, Freehold acquired a 1.0% GORR on approximately 113,920 gross acres (178 sections) and a 3.0% GORR on 1,920 gross acres (3 sections) of royalty lands. The asset has multiple years of development planned.
On March 7, 2018, Freehold closed two royalty acquisitions, one of them on the Weyburn Unit in Saskatchewan and the other on the Mitsue Gilwood Sand Unit #1 in Alberta. At Weyburn, where Freehold acquired a 0.2% lessor royalty, we see multi-year upside through expansion of the existing CO2 enhanced oil recovery process and additional infill drilling. At Mitsue, where Freehold acquired a 1.9% new GORR interest, we see further value enhancing opportunities through waterflood optimization, reactivations and infill drilling. The purchase price associated with these transactions was $24 million (before adjustments) and the assignment by Freehold of certain minor working interest assets. Current production associated with the acquired royalty interests is approximately 110 boe/d (100% oil) and $2.6 million in annualized operating income assuming strip pricing. We see these transactions shallowing Freehold’s already low corporate decline.
Both transactions were funded through Freehold’s existing credit facilities.
Fourth Quarter Results
Freehold delivered strong operational results in the fourth quarter of 2017. Highlights included:
- Freehold’s production averaged 12,032 boe/d, down 4% versus the same period in 2016. Reduced volumes were largely driven by non-core working interest dispositions (approximately 800 boe/d based on 2016) completed in 2017.
- Royalty production was up 6% compared to Q4-2016 averaging 10,960 boe/d. Increased volumes were largely associated with better than expected third party production additions and the strength in our audit function (over 600 boe/d of prior period adjustments in the quarter). Royalties, as a percentage of operating income (97%) and production (91%), highlight our commitment to our royalty focus.
- Q4-2017 royalty and other revenue was down 4% to $38.4 million versus the previous year largely due to reduced working interest production volumes.
- Net loss was $8.1 million compared to $1.6 million net income in Q4-2016. The loss was a result of a $16.2 million impairment charge on our working interest assets, approximately half from assets disposed of in Q4-2017 and subsequent to year end.
- Funds from operations for Q4-2017 totaled $32.0 million, an increase of 5% versus the same period in 2016. The increase year over year reflected growth in royalty revenue and lower cash costs. On a per share basis, funds from operations totaled $0.27 per share in Q4-2017, up from $0.26 per share in Q4-2016.
- Freehold closed the acquisition of a new 2% GORR in petroleum and natural gas rights in the Cardium, which included 166,000 gross acres (259 sections) of land in the greater Pembina area of Alberta. The purchase price of the GORR was $52 million plus the assignment by Freehold of certain minor working interest assets. The royalty assets are currently producing approximately 210 boe/d (74% light oil).
- Freehold generated $12.9 million in free cash flow (1), over and above our dividend in Q4-2017, which we applied to outstanding debt. At December 31, 2017, net debt totaled $68.6 million, up from $38.3 million at September 30, 2017, implying a net debt to 12-month trailing funds from operations ratio of 0.6 times. The increase in net debt quarter over quarter reflected the $52 million royalty acquisition which was funded through our existing credit facility.
- Cash costs (1) for the quarter totaled $5.13/boe, down from $7.83/boe in Q4-2016. The decrease versus Q4-2016 reflected lower operating expenses due to the continued disposition of our working interest portfolio and gains in royalty production.
- Wells drilled on our royalty lands totaled 112 (5.7 net) in the quarter, down from 144 (6.4 net) in the previous quarter.
- In Q4-2017, Freehold issued 32 leases associated with our unleased mineral title lands; 100 leases were issued in 2017, compared to 30 leases in all of 2016.
- Dividends declared for Q4-2017 totaled $0.15 per share, unchanged from the previous quarter and up from $0.12 per share one year ago.
- Basic payout ratio (1) (dividends declared/funds from operations) for Q4-2017 totaled 55% while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 60%.
(1) See Non-GAAP Financial Measures.
Continued Strength in Drilling on our Royalty Lands
Including drilling associated with acquisitions, 464 (22.3 net) wells were drilled on our royalty lands in 2017, a 65% increase versus 2016. The majority of the spending on our royalty lands continues to be focused on oil targets with approximately 60% of the drilling associated with prospects in southeast Saskatchewan and in the Viking formation. In addition, we have seen an uptick in activity associated with the Shaunavon in southwest Saskatchewan and liquids rich natural gas targets in the Deep Basin in Alberta. Based on these activity levels, we estimate $760 million was spent on our royalty lands in 2017. This compared to our estimate of $475 million in 2016. Looking into 2018, we remain optimistic that activity levels will remain strong on our royalty lands.
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)||41||0.1||8||–||97||0.4||59||0.3|
|Royalty joint venture (4)||2||1||4||1|
(1) Counts include wells drilled on acquired lands from January 1 through December 31 of the year the acquisition was made, other than the December 2017 acquisition (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.
2017 Highlights – Maintaining our Core Strategy
- Achieved record production with volumes averaging 12,350 boe/d, representing a 1% increase over 2016, despite completing approximately 800 boe/d (based on 2016 production) in non-core working interest dispositions. Volumes were comprised of 55% oil and natural gas liquids (NGL) and 45% natural gas. Royalty volumes averaged 10,963 boe/d a 10% increase versus 2016, highlighting the improvement of our royalty portfolio.
- Funds from operations totaled $123.8 million or $1.05 per share, up from $94.2 million or $0.85 per share in 2016, reflecting gains in operations and strength in the commodity.
- Declared dividends totaled $68.5 million ($0.58 per share), up from $59.5 million ($0.54 per share) in 2016, reflecting increased funds from operations. Freehold increased its monthly dividend by 25% in April 2017.
- Exited 2017 with net debt of $68.6 million, implying net debt to funds from operations of 0.6 times. At year end we had $90 million of available room within our credit facility.
- Freehold completed $86.7 million in royalty acquisitions in 2017, adding new lands in the Cardium and further bolstering our key Viking royalty position.
- Proved plus probable reserves totaled 35.3 mmboe, down from 38.3 mmboe in 2016, with working interest dispositions in 2017 contributing to this reduction of reserves.
The table below summarizes our key operating assumptions for 2018.
- We are assuming a production range of 11,750 boe/d to 12,250 boe/d. 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 93% of forecasted 2018 production and 99% of operating income.
- We are currently forecasting 25 net wells will be drilled on our lands in 2018, representing a 12% increase over near-record drilling on our lands in 2017.
- We are assuming WTI and WCS price assumptions of US$60.00/bbl and $45.00/bbl respectively, and AECO at $2.00/mcf.
- Our general and administrative expense assumption is forecast at $2.50/boe. Total cash costs are forecast to be approximately $5.00/boe.
- After increasing our monthly dividend by 5% from $0.05 to $0.0525 per share (see Dividend Announcement), we expect our 2018 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 61%.
- We forecast year-end net debt to funds from operations of approximately 0.4 times based on our revised key operating assumptions.
Key Operating Assumptions
|2018 Annual Average||Mar. 8, 2018|
|West Texas Intermediate (WTI) crude oil||US$/bbl||60.00|
|Western Canadian Select (WCS) crude oil||Cdn$/bbl||45.00|
|AECO natural gas||Cdn$/Mcf||2.00|
|General and administrative costs (1)||$/boe||2.50|
|Weighted average shares outstanding||millions||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.
2017 Reserves Information
Conference Call Details
A conference call to discuss financial and operational results for the period ended December 31, 2017 will be held for the investment community on Friday, March 9, 2018 beginning at 7:00 am MT (9:00 am ET). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-800-806-5484 (toll-free in North America).
Availability on SEDAR
Freehold’s 2017 audited financial statements and accompanying Management’s Discussion and Analysis (MD&A) and AIF are being filed today with Canadian securities regulators and will be available at www.sedar.com and on our website at www.freeholdroyalties.com.