Results at a Glance
|Three Months Ended September 30||Nine Months Ended September 30|
|FINANCIAL ($000s, except as noted)||2020||2019||Change||2020||2019||Change|
|Royalty and other revenue||23,123||33,068||-30||%||64,165||104,010||-38||%|
|Net income (loss)||139||2,729||-95||%||(14,304||)||(920||)||-1455||%|
|Per share, basic and diluted ($)(1)||–||0.02||-100||%||(0.12||)||(0.01||)||-1100||%|
|Cash flows from operations||1,130||30,711||-96||%||45,157||77,847||-42||%|
|Funds from operations||19,893||27,996||-29||%||50,763||87,439||-42||%|
|Per share, basic ($) (1)||0.17||0.24||-29||%||0.43||0.74||-42||%|
|Acquisitions and related expenditures||415||15,060||-97||%||6,836||46,962||-85||%|
|Per share ($) (2)||0.045||0.1575||-71||%||0.2850||0.4725||-40||%|
|Per share ($) (2)||0.045||0.1575||-71||%||0.2475||0.4725||-48||%|
|Payout ratio (3)||27||%||67||%||-40||%||67||%||64||%||3||%|
|Shares outstanding, period end (000s)||118,746||118,568||–||118,746||118,568||–|
|Average shares outstanding (000s) (1)||118,706||118,513||–||118,665||118,459||–|
|Royalty production (boe/d) (4)||9,096||10,149||-10||%||9,620||10,200||-6||%|
|Light and medium oil (bbl/d)||3,383||3,771||-10||%||3,520||3,744||-6||%|
|Heavy oil (bbl/d)||791||1,148||-31||%||966||1,015||-5||%|
|Total liquids (bbl/d)||5,022||5,659||-11||%||5,317||5,630||-6||%|
|Natural gas (Mcf/d)||24,446||26,938||-9||%||25,819||27,419||-6||%|
|Total production (boe/d) (4)||9,143||10,482||-13||%||9,816||10,591||-7||%|
|Oil and NGL (%)||55||56||-1||%||55||55||–|
|Average price realizations ($/boe) (4)||26.93||33.87||-20||%||23.37||35.35||-34||%|
|Cash Costs ($/boe) (3) (4)||3.70||4.67||-21||%||4.80||5.37||-11||%|
|Operating netback ($/boe) (3) (4)||27.20||33.36||-18||%||23.21||34.98||-34||%|
(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 third quarter results highlight the simplicity and resiliency of our business model as production stabilized and was flat quarter over quarter at 9,096 boe/d and royalty revenue was up materially at $23.1 million with the rebound in oil price. We saw a return to drilling in the latter part of the quarter with 32 (2.1 net) wells being drilled in the light oil and liquids rich plays within our portfolio.
Our funds from operations was $19.9 million, highlighting the strong margins associated with royalty production. The year to date dividend payout is now at 67% after being greater than 90% in the first half of the year. As the necessary early steps were taken to position our company to successfully weather the challenges facing our industry earlier in the year, we can now provide a dividend increase that is aligned with our strategy of targeting a payout ratio in the 60%-80% range while maintaining balance sheet health and flexibility.
The recent strategies to position our company “in front of the drill bit” with key asset acquisitions in Canada and the U.S., along with our drive to reduce cash costs are leading to a continued strengthening of our business. In Q3-2020, our cash costs of $3.70/BOE, were the lowest in our history. We have strong leadership in place, an engaged and idea rich workforce, and a supportive and constructive Board of Directors.
Earlier this year, we prioritized the health and safety of our workforce by directing all employees to work remotely from home while our company remained fully operational. Over the summer months our Return to Office Task Force worked diligently to develop office safety protocols in alignment with government and public health guidelines which allowed us to successfully re-open our office with a reduced staff complement. We continue to closely monitor the COVID-19 situation and will not compromise on the health and safety of our workforce. We appreciate the unwavering efforts of all our staff during this time and we want to thank our shareholders for their ongoing support.
Despite considerable uncertainty associated with the ultimate impact of COVID-19 as it pertains to supply and demand fundamentals surrounding commodity oil pricing, Freehold has continued to deliver attractive operating margins, which in turn provides a steady source of income to our shareholders.
David M. Spyker
Interim President and CEO
The Board has declared a dividend of $0.015 per share to be paid on December 15, 2020 to shareholders of record on November 30, 2020, in-line with the previous dividend level set for 2020. The dividend is designated as an eligible dividend for Canadian income tax purposes.
With decreasing volatility in oil prices and strength in operations, Freehold’s Board has approved a 33% increase to the monthly dividend to $0.02 per share (annualized $0.24 per share) where the first increased dividend is expected to be paid on January 15, 2021 to shareholders of record on December 31, 2020. While our strategy remains a 60%-80% payout, we are mindful of future events such as the upcoming OPEC meeting and the overall supply and demand market fundamentals from the continuing impact of COVID-19 as well as potential acquisition opportunities that may arise. Based on current commodity price assumptions, and assuming no significant changes to 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 review and approval of our Board).
Q3 2020 Highlights
- Our payout ratio(1) totaled 27% for the quarter, versus 67% during the same period last year. Dividends paid for Q3-2020 totaled $0.0450 per share, down from Q3-2019 when dividends paid totaled $0.1575 per share. The decreased payout reflected a dividend reduction made by the Board during Q2-2020 in response to a weaker crude oil price outlook driven by a supply/demand imbalance associated with COVID-19. As oil prices appear sustainable at current levels and the business environment has stabilized, the Board is comfortable adjusting the dividend upward, starting with the January 2021 dividend payment.
- Q3-2020 funds from operations totaling $19.9 million, or $0.17 per share over the quarter, is almost double the $10.6 million reported in Q2-2020, but down compared to $28.0 million or $0.24 per share in Q3-2019. The reduction in funds from operations from the same period in 2019 reflected weakness in oil prices along with reduced production volumes associated with shut-in production and lower levels of third-party drilling. Based on Freehold’s share price at quarter-end of $3.69/share and annualizing Q3-2020 funds from operations, Freehold offers investors a 18% free cash flow(1) yield, a strong return given its low risk profile.
- Freehold’s royalty production averaged 9,096 boe/d during Q3-2020, essentially unchanged from Q2-2020, as volumes were brought back on-stream from the price induced shut-ins that occurred during Q2-2020. Q3-2020 royalty production represents a 10% decline versus the same quarter of last year due to lower levels of third-party drilling and shut-in production. Royalty liquids production averaged 5,022 boe/d for Q3-2020, down 11% versus the same period in 2019 but up 1% when compared to Q2-2020. On an exit to exit measure, Freehold was able to increase its oil and liquids volumes by 8% versus Q2-2020, as production trended up throughout the quarter.
- Overall, only 5% of payor’s production remained shut-in in Q3-2020, 3% as we exited the quarter, a significant recovery from the 9% that was shut-in during Q2-2020.
- Production from Freehold’s U.S. royalty assets averaged 148 boe/d in Q3-2020, doubling from Q2-2020 levels of 74 boe/d, as previously shut-in wells were reactivated late in the quarter. As we exited the quarter, production had recovered to 240 boe/d, back to the levels achieved in early 2020.
- Oil and natural gas liquids represented 55% of production in Q3-2020, down slightly from 56% in Q3-2019 as production shut-in during 2020 was primarily oil focused.
- Cash costs(1) for the quarter totaled $3.70/boe, a record low for Freehold, down from $4.67/boe in Q3-2019 and $4.79/boe in Q2-2020. The decrease in costs year over year reflects lower operating costs and reduced interest charges reflecting a decline in prime lending rates.
- Closing net debt as at September 30, 2020 was $81.7 million, a decrease of $14.4 million versus the previous quarter. The decrease quarter over quarter reflects continued positive funds from operations relative to costs and dividend obligations. Long term debt ended the quarter at $107.0 million, reflecting the previously announced deposit made to the Canada Revenue Agency (CRA).
- Q3-2020 net income totaled $0.1 million this quarter compared to $2.7 million in net income in Q3-2019. Despite Q3-2020 funds from operations of $19.9 million buoyed by lower cash costs, the lower net income reflected lower revenues due to the retreat in oil prices and lower production volumes.
(1) See Non-GAAP Financial Measures.
Return to Drilling in Q3
In Q2-2020, producers chose to preserve capital through a cessation of drilling activities in response to crude prices trading at multi-decade lows. We are now observing the beginning of a return to drilling activity. Although lower than the same quarter of 2019, there were 32 (2.1 net) wells drilled on our royalty lands. This compares to 181 (6.1 net) royalty wells drilled in Q3-2019. In dialogue with some of the major operators on our royalty lands, we believe that with continued stability in commodity prices, activity levels will increase through Q4-2020 and into 2021.
Royalty Interest Drilling
|Three Months Ended September 30||Nine Months Ended September 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.
Conference Call Details
A conference call to discuss financial and operational results for the period ended September 30, 2020 will be held for the investment community on Tuesday November 10, 2020 beginning at 4:00 PM MST (6:00 PM 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 5501124#.