OPERATING AND FINANCIAL HIGHLIGHTS
|Three Months Ended March 31|
|FINANCIAL ($000s, except as noted)||2021||2020||Change|
|Royalty and other revenue||36,745||26,284||40||%|
|Net income (loss)||5,635||(9,022||)||nm|
|Per share, basic ($) (1)||0.04||(0.08||)||nm|
|Cash flows from operations||24,990||30,883||-19||%|
|Funds from operations||32,421||20,248||60||%|
|Per share, basic ($) (1)||0.25||0.17||47||%|
|Acquisitions and related expenditures||79,782||5,370||nm|
|Per share ($) (2)||0.06||0.1575||-63||%|
|Per share ($) (2)||0.07||0.1575||-56||%|
|Payout ratio (%) (3)||24||92||-68||%|
|Long term debt||96,000||103,000||-7||%|
|Shares outstanding, period end (000s)||131,463||118,664||11||%|
|Average shares outstanding (000s) (1)||130,874||118,623||10||%|
|Light and medium oil (bbl/d)||3,811||3,936||-3||%|
|Heavy oil (bbl/d)||1,045||1,300||-20||%|
|Total liquids (bbl/d)||5,921||6,132||-3||%|
|Natural gas (Mcf/d)||30,132||29,361||3||%|
|Total production (boe/d) (4)||10,944||11,026||-1||%|
|Oil and NGL (%)||54||56||-2||%|
|Average price realizations ($/boe) (4)||37.31||26.20||42||%|
|Cash Costs ($/boe) (3) (4)||4.37||5.74||-24||%|
|Netback ($/boe) (3) (4)||32.94||20.46||61||%|
(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 first quarter of 2021 marked a period of rebound as Freehold restored production levels, generated significant improvements in funds from operations, increased its dividend and completed a transformational U.S. royalty transaction, all while reducing leverage.
We closed Freehold’s first material U.S. royalty transaction during the quarter. Our team worked hard to incorporate these assets into our portfolio, with early indications suggesting performance exceeding expectations. We see the growth of Freehold’s U.S. portfolio as further diversifying our royalty lands, enabling participation in some of the most attractive plays in North America. Moving forward, we believe our U.S. royalty lands will provide a key growth wedge to our production profile, increasing option value to provide returns to our shareholders.
Production from our royalty lands continues to display growth, with volumes increasing 13% quarter-over-quarter (3% on a production per share measure). At current commodity price levels, we see third-party activity offsetting natural declines. Drilling activity on our lands over the quarter was in-line with expectations, with our core royalty positions in the Viking, Cardium and Sparky, continuing to attract capital. We also saw a ramp-up in activity associated with the Clearwater in central Alberta where we have approximately 200 sections of land at an average 4.0% royalty interest. In the U.S. there has been strong activity on our royalty lands in both the Permian and Eagle Ford basins. We currently have approximately 10 rigs on our royalty lands, in the U.S. and Canada.
With an improved outlook for commodity prices and strengthened business model, we are increasing our monthly dividend from $0.03 to $0.04 per share, or $0.48 per share annualized. The revision reflects a measured increase in our payout strategy, with the goal of aligning dividend levels to a stronger and stabilizing business outlook.
Looking forward, the groundwork is in place for an exciting 2021 and beyond. The improved economic conditions are very positive for our industry and highlight the strength of the royalty model. Through execution of our strategy in the coming quarters, we expect to be able to showcase the strong return proposition an investment in Freehold provides, with the ultimate commitment to maximize value to our shareholders.
David M. Spyker
President and CEO
The Board of Directors has declared a dividend of $0.04 per share to be paid on June 15, 2021 to shareholders of record on May 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, 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.
First Quarter Highlights
- Freehold’s production averaged 10,944 boe/d during Q1-2021. This represents a 13% improvement over Q4-2020 and brings volumes back in-line with the 11,026 boe/d averaged in Q1-2020.
- Funds from operations totaled $32.4 million, or $0.25 per share. This represented a 60% increase from the $20.2 million ($0.17 per share) generated in Q1-2020 and a 47% increase from the $22.1 million ($0.19 per share) in Q4-2020. The strong recovery in funds from operations were due to continued upward momentum in crude oil prices, growth in production volumes, and stronger realized pricing on our U.S. assets.
- Gross wells drilled on our royalty lands totaled 111 in the quarter, which was in-line with production guidance. Drilling was lower compared to 175 gross wells drilled in Q1-2020 as operators have taken a more measured approach to a return to activity. Q1-2021 drilling activity was unchanged from Q4-2020.
- Dividends declared for Q1-2021 totaled $0.07 per share, down from $0.1575 per share in Q1-2020, but up from and Q4-2020 levels of $0.05 per share. Freehold’s payout ratio (1) totaled 24% for the quarter, versus 92% during the same period last year but unchanged from Q4-2020.
- Q1-2021 net income totaled $5.6 million compared with a $9.0 million net loss recorded in Q1-2020. The higher net income reflected increased revenues due to improving oil prices.
- Closing net debt as at March 31, 2021 was $64.8 million, a decrease of $1.0 million versus the previous quarter while reducing net debt by $37.0 million versus the same period last year. Despite partially funding four acquisitions through its existing bank facility, Freehold was able to maintain net debt levels quarter-over-quarter.
- Freehold exchanged 12.6 million subscription receipts for an equivalent number of Freehold’s common shares for gross proceeds of $60.7 million upon closing of a U.S. royalty acquisition.
- Freehold amended its credit facility agreement with an unchanged committed revolving and operating facilities at $165 million and $15 million respectively, with three-year terms maturing in March 31, 2024.
- Cash costs (1) for the quarter totaled $4.37/boe, down from $5.74/boe in Q1-2020. The decrease year-over-year reflects reduced general and administrative (G&A) and operating cost charges.
(1) See Non-GAAP Financial Measures.
US Royalty Assets Update
- Freehold closed four U.S. royalty property acquisitions in Q1-2021 for total consideration of $79.7 million. The first transaction closed on January 5, 2021, for $74.3 million. This acquisition included exposure to approximately 400,000 gross drilling unit acres of mineral title and overriding royalty interests across 12 basins and eight states. Freehold closed three additional transactions, complementing Freehold’s position in the Bakken and Permian basins. Total consideration associated with these transactions was approximately $4.9 million with the assets estimated to add 85 boe/d to 2021 average production. In total, the newly acquired U.S. royalty assets are estimated to add 1,335 boe/d to 2021 average production.
- Production from Freehold’s U.S. royalty assets averaged 1,285 boe/d in Q1-2021, a 400% increase from 257 boe/d in Q4-2020 and a 414% increase versus the same period last year. Volume increases reflect the closing of the four U.S. royalty acquisitions in Q1-2021.
- In the U.S., activity levels have exceeded expectations with the majority of the focus on light oil prospects targeting the Permian and Eagle Ford basins. Overall, 18 gross wells were drilled on our U.S. royalty lands over the quarter with between 4-5 rigs continuing to drill on our lands.
Q1 Activity Levels in-line with Forecasts
In total, 111 (3.9 net) wells were drilled on our royalty lands in Q1-2021, a 37% decline on a gross measure versus the same period in 2020 but flat when compared to Q4-2020. Reduced activity year-over-year was driven by a broad reduction in overall industry spending across both Canada and the U.S. With the upward move in crude oil prices, we have seen activity increase on Freehold’s royalty lands with approximately 10 rigs (six in Canada, four in the U.S.) running on our royalty lands currently.
In Q1-2021, approximately 75% of all locations drilled on Freehold’s Canadian assets targeted gross overriding royalty prospects with 25% focused on prospects on Freehold’s mineral title lands. 50% of all locations drilled targeted prospects in Saskatchewan, with the remainder focused in Alberta. The vast majority of wells drilled (>90%) focused on oil or liquids prospects.
The Clearwater oil play in central Alberta, where Freehold holds an interest in approximately 200 sections of land at an average 4.0% royalty interest, represented Freehold’s most active area over the quarter. The increase in activity reflected a change in operator late last year and subsequent ramp-up in that operator’s spending on the lands. We expect this area to represent a key growth area for Freehold in the near to medium term with the play offering strong economics at current commodity price levels.
In addition, we saw consistent drilling activity in the Viking in southwest Saskatchewan, the Cardium in northwest Alberta and the Sparky in central Alberta over the quarter. These areas remain core in terms of growth and execution of strategy for the producers developing them and we expect activity levels to remain strong.
In the U.S., activity levels on Freehold’s mineral title lands have met expectations with the majority of the focus on light oil prospects targeting the Permian and Eagle Ford basins. Overall, 18 gross wells were drilled on our U.S. royalty lands over the quarter with between 4-5 rigs continuing to drill on our lands. The acquisition of additional U.S royalty production and royalty lands in Q1-2021 has further diversified and enhanced Freehold’s asset base, bringing added sustainability to its portfolio and dividend.
ROYALTY INTEREST DRILLING
|Three Months Ended March 31|
|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.
- We are maintaining our 2021 average production range of 10,500 boe/d to 11,000 boe/d. Volumes are expected to be weighted approximately 55% oil and NGL’s and 45% natural gas.
- We are increasing our WTI price forecast from US$50.00/bbl to US$55.00/bbl.
- We are increasing our Edmonton Light Sweet oil price assumptions from $58.00/bbl to $63.00/bbl.
- We are maintaining our AECO monthly price assumption at $2.75/mcf.
|Guidance Date||Guidance Date|
|2021 Annual Average||May 11, 2021||March 4, 2021|
|West Texas Intermediate crude oil||US$/bbl||55.00||50.00|
|Edmonton Light Sweet crude oil||Cdn$/bbl||63.00||58.00|
|AECO natural gas||Cdn$/Mcf||2.75||2.75|
|NYMEX natural gas||US$/mmbtu||3.10||3.10|
(1) See Non-GAAP Financial Measures.
Virtual Annual and Special Meeting
Freehold’s annual and special meeting of Shareholders will be conducted via live audio webcast at https://web.lumiagm.com/478980034 commencing at 4:00 PM (MDT) on Tuesday, May 11, 2021. Further details are available on our website at www.freeholdroyalties.com/investors/events-presentations.
Conference Call Details
A conference call to discuss financial and operational results for the three months ended March 31, 2021 will be held for the investment community on Wednesday May 12, 2021 beginning at 7:00 AM MDT (9:00AM EDT). 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 6233148#