Operating and Financial Highlights
|Three Months Ended December 31||Twelve Months Ended December 31|
|FINANCIAL ($000s, except as noted)||2020||2019||Change||2020||2019||Change|
|Royalty and other revenue||25,793||36,827||-30%||89,958||140,837||-36%|
|Net income (loss)||373||6113||-94%||(13,931)||5,193||nm|
|Per share, basic and diluted ($)(1)||–||0.05||-100%||(0.12)||0.04||nm|
|Cash flows from operations||20,610||27,954||-26%||65,767||105,801||-38%|
|Funds from operations||22,129||30,659||-28%||72,891||118,098||-38%|
|Per share, basic ($) (1)||0.19||0.26||-27%||0.61||1.00||-39%|
|Acquisitions and related expenditures||222||2,727||-92%||7,058||49,689||-86%|
|Per share ($) (2)||0.045||0.1575||-71%||0.3300||0.6300||-48%|
|Per share ($) (2)||0.0500||0.1575||-68%||0.2975||0.6300||-53%|
|Payout ratio (3)||24%||61%||-37%||54%||63%||-9%|
|Long term debt||93,000||109,000||-15%||93,000||109,000||-15%|
|Shares outstanding, period end (000s)||118,788||118,623||–||118,788||118,623||–|
|Average shares outstanding (000s) (1)||118,747||118,568||–||118,685||118,486||–|
|Royalty production (boe/d) (4)||9,563||10,315||-7%||9,605||10,229||-6%|
|Light and medium oil (bbl/d)||3,239||4,024||-20%||3,449||3,814||-10%|
|Heavy oil (bbl/d)||1,173||1,089||8%||1,018||1,034||-2%|
|Total liquids (bbl/d)||5,225||5,912||-12%||5,294||5,701||-7%|
|Natural gas (Mcf/d)||26,027||26,416||-1%||25,868||27,166||-5%|
|Total production (boe/d) (4)||9,681||10,740||-10%||9,781||10,628||-8%|
|Oil and NGL (%)||54||57||-4%||55||56||-2%|
|Average price realizations ($/boe) (4)||28.16||37.04||-24%||24.56||35.78||-31%|
|Cash Costs ($/boe) (3) (4)||4.11||5.10||-19%||4.63||5.30||-13%|
|Operating netback ($/boe) (3) (4)||28.64||36.19||-21%||24.56||35.28||-30%|
nm – not meaningful
(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)
2020 was a significant year for Freehold, one in which we undertook a number of key initiatives to underpin the long-term sustainability of our business and reinforce Freehold’s identity as a lower risk income vehicle for our shareholders. This was accomplished despite the challenging backdrop of COVID-19 and the sharp decline in oil prices.
Our team worked hard to identify acquisition opportunities in the bottom of the price cycle and in November we announced the acquisition of a diversified U.S. royalty package that solidified our position as the only publicly traded North American focused oil and gas royalty company. This transaction added a growing production stream to our portfolio and broadens the opportunity set in front of us to further enhance our portfolio.
In April, we completed a divestment of the majority of our remaining working interest assets, allowing for increased focus on our core royalty business and driving our cash costs down to the lowest level in our 24-year history.
Our 2020 royalty production was very resilient to the commodity price volatility, declining only 6% year-over-year despite the slowdown in Western Canada drilling activity and the production shut-ins that occurred in response to the pricing lows in the second quarter.
The initiatives we have taken to position our portfolio “in front of the drill bit” was rewarded in 2020 as drilling activity ramped up in the second half of the year. In the fourth quarter, we had more wells drilled on our royalty lands than we had in Q4-2019 and we see continued strong drilling activity into 2021.
The groundwork we have set in 2020 has positioned us for an exciting 2021 as we return to growth, projecting a 10–15% increase in royalty production year-over-year. The improved economic conditions are very positive for our industry. Reflecting our strong belief in our business model, our healthy balance sheet, the improving commodity price stability, and our commitment to return value to our shareholders, we will revise our dividend upward by 50% from $0.02/share to $0.03/share starting with our April dividend payment.
We want to thank our employees and shareholders for their patience and support as we navigated 2020. We see an exciting year ahead for Freehold and its shareholders.
David M. Spyker
President and CEO
With an improved outlook for commodity prices and a strengthened business model, Freehold’s Board of Directors (the Board) has approved increasing the monthly dividend from $0.02 to $0.03 per share, or $0.36 per share annualized. The $0.03 per share dividend will commence on April 15, 2021 and will be paid to shareholders of record on March 31, 2021. The dividend is designated as an eligible dividend for Canadian income tax purposes.
Projected 2021 payouts are below our stated dividend policy levels, which outlines a 60%-80% payout ratio over the long-term based on forward looking funds from operations. The dividend increase announced today is at a measured pace as, although the commodity price outlook has improved substantially, there is still risk as the supply – demand balance for oil continues to be tenuous. We also see meaningful, high quality, acquisition opportunities across North America and feel it would be prudent to retain financial flexibility to pursue these as we work to continually enhance our portfolio positioning and business strength.
U.S. Royalty Acquisition
On January 5, 2021, Freehold closed the acquisition of U.S. royalty properties for US$58 million ($74 million) net of customary adjustments financed by $60.7 million of proceeds from an equity financing and utilization of Freehold’s credit facilities. The acquisition included 400,000 gross drilling unit acres of mineral title and overriding royalty interests across 12 basins in eight states; predominantly weighted towards the Permian and Eagle Ford basins. 2021 production associated with the acquired assets is forecast at 1,250 boe/d. The acquired assets are well capitalized having seen approximately 1.5% of all Lower-48 E&P capital spending over the past five years.
Freehold also closed two additional U.S. royalty transactions subsequent to year-end, complementing our positions in the Bakken and Permian basins. Total consideration associated with these transactions was approximately $4.7 million and the assets are estimated to add 75 boe/d to 2021 average production.
Fourth Quarter Highlights
- Dividends declared for Q4-2020 totaled $0.05 per share, up 11% from Q3-2020 with the December increase to $0.02 per share. Our payout ratio (1) totaled 24% for the quarter and 54% for the year.
- With decreasing volatility in oil prices and strength in operations, on November 10, 2020, Freehold announced a 33% increase to the monthly dividend to $0.02 per share (annualized $0.24 per share). The first payment at the revised dividend level was paid to shareholders on record as of December 31, 2020 on January 15, 2021.
- Funds from operations for Q4-2020 totaled $22.1 million, an increase of 11% from Q3-2020. On a per share basis, funds from operations totaled $0.19 per share in Q4-2020, a 12 % increase from the $0.17 per share in Q3-2020.
- At December 31, 2020, net debt totaled $65.8 million, down from $81.7 million in Q3-2020, implying a net debt to 12-month trailing funds from operations ratio of 0.9 times. The decrease in net debt over the previous quarter reflected excess free cash flow over and above our dividend and acquisition capital in Q4-2020.
- Cash costs (1) for the quarter totaled $4.11/boe, up from $3.70/boe in Q3-2020 but down from $5.10/boe achieved during the same period last year. The decrease year-over-year reflects reduced debt levels and lower interest charges, the disposition of working interest properties, and lower G&A costs.
- Q4-2020 net income totaled $0.4 million, flat versus Q3-2020.
- Freehold’s total royalty production averaged 9,563 boe/d, up 5% versus the previous quarter.
- Royalty oil production, which has higher operating netbacks (1) and returns, averaged 5,225 boe/d in Q4-2020, increasing 4% when compared to the previous quarter, as wells returned from being shut-in.
- Wells drilled on our royalty lands totaled 111 (4.9 net) in the quarter, up on a net measure versus 186 (4.5 net) drilled during the same period in 2019.
|(1)||See Non-GAAP Financial Measures|
- Dividends declared for 2020 totaled $35.3 million ($0.30 per share), down 53% versus 2019 when Freehold declared dividends of $74.7 million ($0.63 per share). Our dividend payout ratio (1) for 2020 totaled 54%.
- Royalty and other revenue totaled $90.0 million in 2020, down 36% from the previous year as weakness in crude oil prices impacted revenue and production volumes. Total royalty revenue was comprised of 79% oil and natural gas liquids (NGL’s) as we maintained our crude oil and liquids focus.
- Funds from operations in 2020 totaled $72.9 million or $0.61 per share, down 38% from $118.1 million or $1.00 per share in 2019.
- Freehold exited 2020 with long term debt of $93 million, implying debt to trailing funds from operations of 1.3 times. This compares to $109 million in long term debt as of year-end 2019 with a 0.9 ratio. Despite lower funds from operations causing an increase in this ratio, the absolute decrease in leverage reflected funds from operations exceeding dividend obligations.
- Freehold completed $3.3 million in royalty acquisitions in 2020. Much of the focus was associated with smaller tuck-in deals building on Freehold’s position in North Dakota. Subsequent to year-end, Freehold completed its first material U.S. royalty transaction as previously discussed.
- 2020 royalty production averaged 9,605 boe/d, a 6% decrease versus the previous year as reduced third-party royalty drilling additions and shut-in production negatively impacted volumes. Since late Q2-2020, however, royalty production has displayed steady growth into year-end, as producers have increased capital towards third-party drilling and shut-in volumes have come back on-line.
- Oil and NGL’s volumes represented 55% of 2020 royalty production, down slightly from 56% in 2019 as weakness in crude oil prices during the year resulted in shut-in production which was estimated to have an annual impact of 365 boe/d.
- In total, 372 (13.6 net) wells were drilled on our royalty lands in 2020, a 35% and 42% decrease on a gross and net measure respectively, versus 2019. Despite the reduction in drilling year-over-year, Freehold saw a ramp-up in activity during Q4-2020 with 111 gross (4.9 net) wells drilled on our royalty lands, a 9% improvement on a net measure versus the same quarter in 2019. We saw a broadening of producers drilling on our royalty lands over the fourth quarter with capital focused on southeast Saskatchewan, the Viking, the Cardium in northwest Alberta and the Sparky in Central Alberta driving much of drilling activity for the period.
- Proved plus probable net reserves (2) totaled 29.4 MMboe as at December 31, 2020, down from 31.7 MMboe as at December 31, 2019. The slight decrease year-over-year reflected working interest dispositions and production despite additions from tuck-in acquisitions in North Dakota, drilling additions and an on-going evaluation of our undeveloped properties.
|(1)||See Non-GAAP Financial Measures|
|(2)||A detailed review of Freehold’s reserve information, including a summary of the evaluation of Freehold’s reserves and associated future net revenues as prepared by Trimble Engineering Associates Ltd., Freehold’s independent reserves evaluator effective as at December 31, 2020, is provided in the Annual Information Form (AIF). A copy of the AIF can be found on Freehold’s website at www.freeholdroyalties.com or www.sedar.com.|
Q4 drilling ahead of 2019 levels
In total, 372 (13.6 net) wells were drilled on our royalty lands in 2020, a 35% decline on a net measure versus 2019. We saw reduced drilling activity associated with an overall reduction in North America drilling. Freehold’s royalty land base, however, continued to outperform activity levels across western Canada and North Dakota.
In 2020, approximately 49% of gross wells on our royalty lands targeted prospects in Saskatchewan, 40% in Alberta and 11% in Manitoba. Producers continue to remain focused on oil prospects within Freehold’s land base with 87% of prospects drilled during the year, targeting oil and liquids with 80% of net wells drilled targeting gross overriding royalty (GORR) prospects with the remaining 20% drilled on Freehold’s mineral title lands. The Viking in southwest Saskatchewan, Clearwater in central Alberta, Cardium in northwest Alberta and Sparky in central Alberta continue to be key areas of focus, with our top royalty payors remaining well capitalized.
In Q4-2020, Freehold saw 111 gross (4.9 net) wells drilled on our royalty lands which was more than double Q3-2020 activity and an 9% improvement versus the same quarter in 2019. Looking forward, we believe there remains strong momentum both within our Canadian and U.S. portfolios that is expected to drive strong third-party drilling and production additions into 2021. The acquisition of U.S. royalty production and royalty lands subsequent to 2020 is expected to further diversify our royalty lands, bringing added sustainability to our portfolio and dividend.
Royalty Interest Drilling
|Three Months Ended December 31||Twelve Months Ended December 31|
|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.
The following table summarizes our key operating assumptions for 2021.
- With the resurgence in drilling activity on Freehold’s lands, we are increasing our 2021 guidance and assuming an average royalty production range of 10,500 boe/d to 11,000 boe/d. Royalty volumes are expected to be weighted approximately 55% oil and NGL’s and 45% natural gas.
- We are assuming WTI and Edmonton Light Sweet oil price assumptions of US$50.00/bbl and $58.00/bbl respectively, and AECO at $2.75/mcf.
|2021 Annual Average||Mar. 4, 2021|
|West Texas Intermediate crude oil||US$/bbl||50.00|
|Edmonton Light Sweet crude oil||Cdn$/bbl||58.00|
|AECO natural gas||Cdn$/Mcf||2.75|
(1) See Non-GAAP Financial Measures.
2020 Reserves Information
Freehold’s reserve information, including a summary of the evaluation of Freehold’s reserve and associated future net revenue as prepared by Trimble Engineering Associates Ltd., Freehold’s independent reserve evaluator effective as at December 31, 2020 is included in our AIF which is available on SEDAR at www.sedar.com and Freehold’s website at www.freeholdroyalties.com
Conference Call Details
A conference call to discuss financial and operational results for the period ended December 31, 2020 will be held for the investment community on Friday March 5, 2021 beginning at 7:00 AM MST (9:00 AM ET). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-866-696-5910 (toll-free in North America) participant passcode is 5856352#.