Results at a Glance
|Three Months Ended June 30||Six Months Ended June 30|
|FINANCIAL ($000s, except as noted)||2020||2019||Change||2020||2019||Change|
|Royalty and other revenue||14,758||35,333||-58||%||41,042||70,942||-42||%|
|Net income (loss)||(5,421||)||3,430||-258||%||(14,443||)||(3,649||)||-296||%|
|Per share, basic and diluted ($)(1)||(0.05||)||0.03||-267||%||(0.12||)||(0.03||)||-300||%|
|Cash flows from operations||13,144||27,816||-53||%||44,027||47,136||-7||%|
|Funds from operations||10,622||30,095||-65||%||30,870||59,443||-48||%|
|Per share, basic ($) (1)||0.09||0.25||-64||%||0.26||0.50||-48||%|
|Acquisitions and related expenditures||981||30,973||-97||%||6,421||31,902||-80||%|
|Per share ($) (2)||0.0825||0.1575||-48||%||0.2400||0.3150||-24||%|
|Per share ($) (2)||0.045||0.1575||-71||%||0.2025||0.3150||-36||%|
|Payout ratio (3)||92||%||62||%||48||%||92||%||63||%||46||%|
|Shares outstanding, period end (000s)||118,705||118,513||–||118,705||118,513||–|
|Average shares outstanding (000s) (1)||118,664||118,458||–||118,644||118,431||–|
|Royalty production (boe/d) (4)||9,150||10,311||-11||%||9,884||10,226||-3||%|
|Light and medium oil (bbl/d)||3,313||3,727||-11||%||3,588||3,731||-4||%|
|Heavy oil (bbl/d)||872||983||-11||%||1,055||947||11||%|
|Total liquids (bbl/d)||4,957||5,672||-13||%||5,465||5,615||-3||%|
|Natural gas (Mcf/d)||25,156||27,834||-10||%||26,513||27,664||-4||%|
|Total production (boe/d) (4)||9,285||10,664||-13||%||10,155||10,646||-5||%|
|Oil and NGL (%)||54||55||-2||%||55||55||–|
|Average price realizations ($/boe) (4)||17.08||35.88||-52||%||21.75||36.08||-40||%|
|Cash Costs ($/boe) (3) (4)||4.79||5.05||-5||%||5.30||5.72||-7||%|
|Operating netback ($/boe) (3) (4)||16.86||35.36||-52||%||21.40||35.79||-40||%|
(1) Weighted average number of shares outstanding during the period, basic
(2) Based on the number of shares issued and outstanding at each record date
(3) See Non-GAAP Financial Measures
(4) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe)
The focus through Q2-2020 was on stabilizing our business in a very dynamic environment. Early in the quarter, we announced a 71% reduction in our monthly dividend and reduced our general and administrative (G&A) expenses by 15%. These changes were necessary to maintain the sustainability of our business during the sharp drop in oil prices. Our balance sheet remains strong including a reduction of net debt by $5.7 million compared to Q1-2020 despite volatile commodity pricing and as further supported by the expectation that our debt to funds from operations will remain below 1.5 times through 2020.
In addition, we successfully disposed of a large percentage of our remaining working interest production. This disposition will improve our corporate netbacks and profitability margins while reducing our asset retirement liability.
Operationally, Q2-2020 royalty production averaged 9,150 boe/d, down 11% versus the same period last year. The reduction in volumes were primarily associated with shut-in volumes as a result of producer response to low oil pricing. These shut-in volumes represented 11% of production, with much of this production now expected to come back on-line through the third quarter. These relatively low shut-in volumes are a testament to the quality and resiliency of Freehold’s royalty portfolio. Given the seasonal nature of drilling in western Canada (Q2 generally has less activity given operating conditions) combined with the uncertainty associated with COVID-19, drilling was muted on our royalty lands over the period. Since quarter-end however, we have had indications that our top industry partners are looking to restart drilling operations in the latter part of 2020, which should aid production volumes into 2021.
In the initial phase of the COVID-19 pandemic we prioritized the health and safety of our workforce by directing all employees to work remotely from home. As Alberta public health measures were relaxed in June, our Return to Office Task Force worked diligently to develop office safety protocols in alignment with government and public health guidelines. With this preparation we were able to reopen our office in July with a reduced staff complement. We will continue to monitor COVID-19 updates and follow the latest guidance to move to our next phase of return. We appreciate the continued efforts of our staff during this time and we want to thank our shareholders for their ongoing support.
Looking forward, we expect the next three to six months to be a challenging period for the North American exploration and production industry. There remains considerable uncertainty associated with the ultimate impact of COVID-19 as it pertains to supply/demand fundamentals surrounding oil prices. Setting ourselves apart from the broader industry, Freehold has continued to provide investors some level of dividend throughout the different business cycles, as royalties represent a high margin business, enabling more returns to be transferred to our shareholders. Over our history, Freehold has been able to pay out greater than $32.50/share in cumulative dividends to its shareholders through varying cycles of the commodity. Moving forward, we expect to revisit our payout on a quarterly basis with the expectation that dividend levels will increase as cash flows improve.
President and CEO
Our Board of Directors has declared a dividend of $0.015 per common share to be paid on September 15, 2020 to shareholders of record on August 31, 2020. The dividend is designated as an eligible dividend for Canadian income tax purposes.
2020 payout levels are in-line with our previously stated dividend policy, which outlines a 60%-80% payout based on annualized funds from operations. The COVID-19 pandemic however has caused significant destruction of demand for oil, volatility in commodity prices and uncertainty regarding the timing for recovery, which has made the preparation of financial forecasts challenging. As a result, there may be adverse changes in funds from operations that are currently unforeseen that could require further adjustments to dividend levels. We will continue to evaluate our production expectations and the commodity price environment and adjust the dividend level accordingly.
Q2 2020 Highlights
- Our payout ratio(1) totaled 92% for the quarter, versus 64% during the same period last year. Dividends paid for Q2-2020 totaled $0.0825 per share, down from Q2-2019 and Q1-2020 when dividends paid totaled $0.1575 per share. The increased payout reflected April’s paid dividends of $0.0525 per share. To position Freehold’s dividend within the guided payout thresholds of 60%-80% of annualized funds flow, the dividend paid in May and June was lowered to $0.015 per share. Previously, Freehold reported its payout ratio on a dividend declared basis that for Q2-2020 totaled $0.045 per share or 50% relative to funds from operations.
- Through an unprecedented Q2-2020, where we observed depressed crude oil benchmark pricing caused by demand destruction due to geopolitical forces and the COVID-19 pandemic, Freehold demonstrated its superior performance and relatively low risk profile compared to other investments in the petroleum and natural gas industry through continued dividend payouts and the generation of funds from operations.
- Q2-2020 funds from operations totaled $10.6 million, or $0.09 per share over the quarter, compared to $30.1 million or $0.25 per share in Q2-2019. The reduction in funds from operations from the same period in 2019 and the previous quarter reflected continued weakness in commodity prices along with reduced production volumes associated with shut-in volumes and no third-party drilling. Based on Freehold’s share price at quarter-end of $3.52/share and annualizing Q2-2020 funds from operations, Freehold offers investors a 10% free cash flow yield, a strong return particularly given the volatility associated with Q2-2020.
- Freehold’s royalty production averaged 9,150 boe/d during Q2-2020. This represented a 11% decline versus the same period last year and a 14% reduction when compared to the previous quarter. Royalty liquids production averaged 4,957 boe/d for Q2-2020, down 13% versus the same period in 2019 and 17% when compared to Q1-2020. The decline in liquids and overall volumes reflected price driven shut-in volumes during the quarter along with reduced third-party drilling on our royalty lands.
- Production from Freehold’s U.S. royalty assets averaged 74 boe/d in Q2-2020, representing a 69% reduction from 242 boe/d in Q1-2020, as a result of the temporary shut-in of production due to price declines. This is expected to recover in Q3-2020.
- Overall, 11% of payor’s production was shut-in during Q2-2020, given historically low crude oil benchmark pricing observed starting in March and lasting through to May.
- Oil and natural gas liquids represented 54% of production in Q2-2020, down slightly from 55% in Q2-2019 as shut-in production was oil weighted.
- Q2-2020 net loss totaled $5.4 million compared with $3.4 million in net income in Q2-2019. Despite Q2-2020 funds flow of $10.6 million, the higher net loss reflected lower revenues due to the retreat in oil prices and lower production volumes relative to a higher non-cash depletion rate.
- Closing net debt as at June 30, 2020 was $96.1 million, a decrease of $5.7 million versus the previous quarter. The decrease quarter-over-quarter reflects continued positive funds from operations despite lower realized commodity pricing and a reduction to our monthly dividend obligations.
- Cash costs(1) for the quarter totaled $4.79/boe, down from $5.05/boe in Q2-2019 and $5.74/boe in Q1-2020. The decrease in costs year-over-year reflects lower operating costs associated with our completed disposition over the quarter, reduced interest charges reflecting lower absolute debt levels and reduced G&A charges.(1) See Non-GAAP Financial Measures.
Drilling Muted Through Q2
With crude prices trading at multi-decade lows during Q2-2020 largely caused by geopolitical forces combined with demand destruction due to the COVID-19 pandemic, producers chose to preserve capital through a cessation of drilling activities. As a result, there was no drilling activity for this quarter other than previous period adjustments of 54 (0.4 net) wells drilled. This lag in reporting is largely due to the addition of unit wells that take longer to be made publicly available. This compares to 175 (6.2 net) in Q1-2020 and 127 (2.9 net) royalty wells drilled in Q2-2019. In dialogue with some of our major operators on our royalty lands, we believe that with continued stability in commodity prices, that activity levels will increase through Q3-2020 and year-end on our royalty lands.
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)|
(1) Equivalent net wells are the aggregate of the numbers obtained by multiplying each gross well by our royalty interest percentage.
Michael Stone retired as Vice-President, Land effective June 30, 2020. The Board of Directors and management would like to thank Mr. Stone for his dedication and years of service and wish him well in his retirement.
Conference Call Details
A conference call to discuss financial and operational results for the period ended June 30, 2020 will be held for the investment community on Thursday, August 13, 2020 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 1-800-898-3989 (toll-free in North America) participant passcode is 4525123#.