Results at a Glance
|Three Months Ended||Six Months Ended|
|June 30||June 30|
|FINANCIAL ($000s, except as noted)||2018||2017||Change||2018||2017||Change|
|Royalty and other revenue||40,153||38,430||4||%||79,519||79,521||–|
|Per share, basic and diluted ($)||0.05||0.11||-55||%||0.08||0.17||-53||%|
|Funds from operations||34,540||31,769||9||%||66,924||63,838||5||%|
|Per share, basic ($)||0.29||0.27||7||%||0.57||0.54||6||%|
|Operating income (1)||38,331||35,235||9||%||75,989||72,319||5||%|
|Operating income from royalties (%)||100||97||3||%||99||94||5||%|
|Working interest dispositions||7||28,808||-100||%||8,137||29,096||-72||%|
|Per share ($) (2)||0.1575||0.15||5||%||0.31||0.28||11||%|
|Shares outstanding, period end (000s)||118,293||118,073||–||118,293||118,073||–|
|Average shares outstanding (000s) (3)||118,238||118,018||–||118,211||117,987||–|
|Royalty production (boe/d) (4)||11,052||11,270||-2||%||11,124||10,986||1||%|
|Total production (boe/d) (4)||11,721||12,589||-7||%||11,860||12,670||-6||%|
|Oil and NGL (%)||54||54||–||54||55||-2||%|
|Average price realizations ($/boe) (4)||36.96||32.98||12||%||35.73||33.93||5||%|
|Operating netback ($/boe) (1) (4)||35.94||30.76||17||%||35.39||31.54||12||%|
(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).
With oil prices continuing to display strength, our funds from operations per share grew by 7% from Q1 to Q2 and we are forecasting an adjusted payout ratio for 2018 near the lower end of our target adjusted payout range of 60%-80%. We will continue to monitor commodity prices and allocate free cash flow in ways that maximize shareholder value.
On the activity front, drilling on our royalty lands came in slightly below expectations, however the second quarter typically represents a period of reduced activity. We are maintaining our 2018 production forecast between 11,750-12,250 boe/d and we continue to position Freehold as a high quality investment in oil and gas with low debt, sustainable dividends and an attractive yield.
President and CEO
The Board has declared a dividend of $0.0525 per common share to be paid on September 17, 2018 to shareholders of record on August 31, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2018 Second Quarter Highlights
Freehold delivered strong financial results in the second quarter of 2018. Highlights included:
- Freehold’s royalty production averaged 11,052 boe/d, nearly flat versus Q2-2017 and Q1-2018. Volumes were impacted by acquisitions completed in Q1-2018, the strength of our audit function (approximately 380 boe/d of prior period adjustments) and third-party drilling on our lands.
- Royalty interests accounted for 94% of total production and contributed 100% of operating income in Q2-2018, representing all-time highs for Freehold.
- Funds from operations totaled $34.5 million, an increase of 9% compared to Q2-2017. Higher funds from operations was driven by better oil and natural gas liquids (NGL) prices and lower cash costs. On a per share basis, funds from operations was $0.29/share in Q2-2018 up from $0.27/share in both Q2-2017 and Q1-2018.
- Freehold generated $15.1 million in free cash flow (1), over and above our dividend, which we applied to outstanding debt. At June 30, 2018, net debt totaled $77.9 million resulting in a net debt to 12-month trailing funds from operations ratio of 0.6 times.
- Freehold closed a $2.7 million royalty acquisition in Q2-2018. The transaction included a 3% gross overriding royalty on a 21% working interest on the Mitsue Gilwood Sands Unit No. 1. Annualized 2018 production and operating income associated with this asset is estimated to be 16 bbl/d and $0.4 million.
- Wells drilled on our royalty lands totaled 85 (1.2 net) in the quarter compared to 58 (1.6 net) in Q2-2017. The second quarter typically represents a period of slower drilling on our lands as spring break-up occurs, slowing operations. For the year, 324 gross (7.6 net) wells have been drilled.
- In Q2-2018, Freehold issued 18 new lease agreements with 10 companies, compared to 42 issued in Q1-2018 and 12 leases in Q2-2017, highlighting the success of our leasing team. Year-to-date (YTD) we have completed 60 new lease agreements on our royalty lands. Since the inception of our leasing team in January 2017 we have completed 161 new lease agreements.
- Cash costs (1) for the quarter totaled $5.17/boe, down from $5.63/boe in Q2-2017. For 2018, we are forecasting cash costs of approximately $5.00/boe.
- Dividends declared for Q2-2018 totaled $0.1575 per share, up 5% versus the previous year. In March 2018, Freehold announced an increase to its monthly dividend from $0.05 to $0.0525 per share commencing in April 2018.
- Basic payout ratio (1) (dividends declared/funds from operations) for Q2-2018 totaled 54% while the adjusted payout ratio (1) ((cash dividends plus capital expenditures)/funds from operations) for the same period was 56%.
(1) See Non-GAAP Financial Measures.
Including drilling associated with acquisitions and unit wells, 324 (7.6 net) wells were drilled on our royalty lands during the first six months of 2018. This represents an increase of 56% on gross wells but a decrease of 25% on net wells versus the same period in 2017. While the second quarter typically represents a period of slowed activity, we saw even lower drilling activity than expected.
Activity through the first six months of 2018 was primarily focused on Saskatchewan oil prospects, including Viking at Dodsland, Mississippian plays in southeast Saskatchewan, and Shaunavon and Cantuar in southwest Saskatchewan. Together, Saskatchewan and Manitoba wells represented approximately 60% of our gross non-unit drilling through the quarter. Alberta activity has been concentrated in the Cardium, with strong drilling on our newly acquired Pembina Cardium acreage. Drilling for Deep Basin Spirit River, Ellerslie and Montney remains positive, along with Mannville Oil drilling in eastern Alberta. Our top payors continue to represent some of the most well capitalized E&P companies in Canada.
Royalty Interest Drilling
|Three Months Ended June 30||Six Months Ended June 30|
|Gross||Net (1)||Gross||Net (1)||Gross||Net (1)||Gross||Net (1)|
|Unitized wells (2)||61||0.2||23||0.1||156||0.6||33||0.2|
(1) Equivalent net wells are the aggregate of the number obtained by multiplying each gross well by our royalty interest percentage.
(2) Unitized wells are in production units wherein we generally have small royalty interests in hundreds of wells.
2018 Guidance Update
Below are details of some of the changes made to our key operating assumptions for 2018 based on results for the first half of the year and expectations for the remainder of the year.
- We are maintaining our 2018 average production range of 11,750-12,250 boe/d. Volumes are expected to be weighted approximately 54% oil and NGL and 46% natural gas (previously 55% and 45% respectively). We continue to maintain our royalty focus with royalty production accounting for 94% of forecasted 2018 production and 99% of operating income.
- As part of continued weakness in equity markets and depressed prices associated with natural gas we reduced our 2018 drilling forecast from 25 to 20 net wells.
- We are maintaining our WTI oil price assumption of US$65.00/bbl but have increased our WCS oil price assumption to $55.00/bbl (from $53.00/bbl) as Q2-2018 heavy oil differentials were lower than expected.
- Our AECO natural gas price assumption remains unchanged at $1.75/mcf. Even though market prices are slightly lower, there have been significant AECO price fluctuations, so a change was not yet justified.
- Based on our current $0.0525/share monthly dividend level, we expect our 2018 adjusted payout ratio ((cash dividends plus capital expenditures)/funds from operations) to be approximately 55% (previously 54%). The expectation of our longer-term payout ratio remains cautious as the forward commodity market is showing future light oil prices below current levels.
- General and administrative costs remain at $2.50/boe.
- We have increased our forecast year-end net debt to funds from operations to approximately 0.4 times (from 0.3 times) due to acquisitions completed YTD, changes in working capital and a slight increase in gas production relative to oil production.
Key Operating Assumptions
|2018 Annual Average||Aug 2, 2018||May 9, 2018||Mar. 8, 2018|
|Total daily production||boe/d||11,750-12,250||11,750-12,250||11,750-12,250|
|West Texas Intermediate crude oil||US$/bbl||65.00||65.00||60.00|
|Edmonton Light Sweet crude oil||Cdn$/bbl||76.00||76.00||N/A|
|Western Canadian Select crude oil||Cdn$/bbl||55.00||53.00||45.00|
|AECO natural gas||Cdn$/Mcf||1.75||1.75||2.00|
|General and administrative costs (1)||$/boe||2.50||2.50||2.50|
|Weighted average shares outstanding||millions||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 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 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 results for the period ended June 30, 2018 will be held for the investment community on Friday, August 3, 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), participant access code 6624442#.
Availability on SEDAR
Freehold’s 2018 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 at www.freeholdroyalties.com.