Operating and Financial Highlights
|Three Months Ended June 30||Six Months Ended June 30|
|FINANCIAL ($000s, except as noted)||2021||2020||Change||2021||2020||Change|
|Royalty and other revenue||44,925||14,758||204||%||81,670||41,042||99||%|
|Net income (loss)||12,545||(5,421||)||nm||18,180||(14,443||)||nm|
|Per share, basic ($) (1)||0.10||(0.05||)||nm||0.14||(0.12||)||nm|
|Cash flows from operations||33,420||13,144||154||%||58,410||44,027||33||%|
|Funds from operations||40,208||10,622||279||%||72,629||30,870||135||%|
|Per share, basic ($) (1)||0.31||0.09||244||%||0.55||0.26||112||%|
|Acquisitions and related expenditures||930||981||-5||%||80,712||6,421||nm|
|Per share ($) (2)||0.10||0.0825||21||%||0.16||0.24||-34||%|
|Per share ($) (2)||0.11||0.045||144||%||0.18||0.2025||-11||%|
|Payout ratio (%) (3)||33||%||92||%||-59||%||29||%||92||%||-63||%|
|Long term debt||78,000||102,000||-24||%||78,000||102,000||-24||%|
|Shares outstanding, period end (000s)||131,490||118,705||11||%||131,490||118,644||11||%|
|Average shares outstanding (000s) (1)||131,463||118,664||11||%||131,170||118,623||11||%|
|Light and medium oil (bbl/d)||4,102||3,314||24||%||3,958||3,595||10||%|
|Heavy oil (bbl/d)||1,199||920||30||%||1,122||1,140||-2||%|
|Total liquids (bbl/d)||6,408||5,022||28||%||6,167||5,577||11||%|
|Natural gas (Mcf/d)||28,376||25,576||11||%||29,250||27,468||6||%|
|Total production (boe/d) (4)||11,137||9,285||20||%||11,042||10,155||9||%|
|Oil and NGL (%)||58||%||54||%||4||%||56||%||55||%||1||%|
|Average price realizations ($/boe) (4)||44.22||17.06||159||%||40.71||21.67||88||%|
|Cash costs ($/boe) (3) (4)||4.48||4.79||-6||%||4.43||5.30||-16||%|
|Netback ($/boe) (3) (4)||39.83||12.68||214||%||36.43||16.91||115||%|
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)
Freehold delivered exceptional operational results in the second quarter with production averaging 11,137 boe/d, approximately 1,850 boe/d higher than a year ago and a 2% increase versus the previous quarter, highlighting an organic growth profile within Freehold’s North American royalty portfolio. Funds from operations of $40.2 million, or $0.31/share also marked the highest level achieved in the past six years while Freehold was able to reduce net debt by $24 million versus Q1-2021.
The strategic shift to a North American portfolio allows Freehold to participate in increased drilling and completion activity funded by high quality operators, in the best basins in both Canada and the U.S. This balanced approach of Canadian drilling and strong asset performance, alongside our U.S. production outperformance and higher U.S. sales margins, has resulted in Freehold’s realized pricing outpacing the increase in benchmark pricing.
We continue to enhance our royalty portfolio, completing three transactions subsequent to Q2-2021. These transactions in the Permian and Eagle Ford basins in Texas and the Clearwater oil play in Canada provide a growth-oriented royalty footprint in the most desirable and economically attractive plays in North America. The assets are expected to contribute an estimated 635 boe/d in Q4-2021 and expected to grow by almost 50% in 2022.
With an improved outlook for commodity prices and strengthened business model, we are increasing our monthly dividend from $0.04 to $0.05 per share, or $0.60 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.
The groundwork is in place for an exciting second half of 2021 and beyond. We have set production guidance for the second half of 2021 to a range of 11,000-11,500 boe/d, and expect record royalty production levels in the latter half of 2021, exiting the year above 11,500 boe/d. The improved economic conditions are very positive for our industry and our results showcase both the quality of our asset portfolio and highlight the strength of the royalty model.
Freehold incorporates best in class business practices relating to environmental, social, and governance matters and provides investors with an excellent opportunity to participate in the top energy plays across North America.
David M. Spyker
President and CEO
The Board of Directors has declared a dividend of $0.05 per share to be paid on September 15, 2021 to shareholders of record on August 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 strikes a balance between continuing to enhance our portfolio through acquisitions and returning the value created by this work back to our shareholders at an appropriate pace.
Eagle Ford and Permian Transaction
In July 2021, Freehold closed the acquisition of certain U.S royalty properties for US$15.5 million ($19.3 million). This acquisition includes exposure to the Eagle Ford, Delaware and Midland and basins, expanding Freehold’s North American royalty footprint. Freehold forecasts greater than 500 gross development locations associated with the acquired royalty acres, plus near-term development upside from approximately 15 drilled and uncompleted wells (DUCs) and 30 permits (over 90% of forecast 2022 development activity and approximately 50% of forecast 2023 development activity). The acquired royalty assets provide exposure to a strong suite of E&P producers with multiple year development plans expected on the acreage. 2022 funds from operations from the acquired royalty properties is forecast at approximately $2.7 million with production of approximately 150 boe/d.
On August 10, 2021, Freehold entered into a definitive agreement with an affiliate of OneMap Mineral Services LLC to acquire a concentrated, high quality U.S. royalty package for US$52.3 million ($67.1 million) (the Midland Assets) subject to confirmatory due diligence and any potential resulting adjustments and is scheduled to close in October 2021. The Midland Assets will play a key role in strengthening the resiliency of Freehold’s North American royalty portfolio, enhancing near and long-term sustainability of Freehold’s dividend, through multiple years of production and funds flow growth.
- Core Midland basin royalty position anchored by a premier counterparty with multiple years of development expected to be on the Midland Assets.
- Greater than 2,300 gross future development locations with over 50% of the development locations expected to be economic at a WTI price less than US$35/bbl and approximately 85% of development locations expected to be economic at a WTI price less than US$45/bbl.
- 2,976 net royalty acres (166,000 gross drilling unit acres). Approximately 100% of the lands acquired are mineral title royalty acres.
- Based on current futures commodity pricing for the Midland Assets, realized pricing of greater than US$45/boe ($56/boe) is expected with crude oil and liquids weighting greater than 75% compares favorably to our Q2-2021 blended netback of $40/boe.
- Production volumes are forecast to grow by approximately 25% on a compounded annual growth rate from 2021 to 2024 with approximately 50% of development in 2022 underpinned by DUCs and permits and approximately 25% in 2023.
- 2022 production and funds from operations is forecast at approximately 550 boe/d and $9.0 million
The addition of the both U.S. royalty acquisitions is in-line with Freehold’s strategy to add to our North American portfolio, further positioning our portfolio in high quality development areas with multiple years of development upside and growth.
|Freehold Acquisition Summary||Purchase Price||Production (boe/d)||2022E Funds from Operations @WTI US$65/bbl|
|Eagle Ford & Permian||$19.3||100||150||$2.7|
In July 2021, Freehold also closed a Canadian royalty deal adding to the Company’s already strong position in the Clearwater play in central Alberta. Total committed consideration associated with the transaction is up to $7.9 million, to be paid in accordance with a drilling agreement for a 3% to 5% gross overriding royalty over 38.5 sections of land. 2022 forecast funds from operations associated with the acquired royalty assets is approximately $1.2 million with production volumes forecast at 100 boe/d.
After closing the latest transaction, production from Freehold’s royalty position in the Clearwater is expected to exit 2021 at over 350 boe/d, up from approximately 100 boe/d at year-end 2020.
Second Quarter Highlights
- Freehold’s production averaged 11,137 boe/d during Q2-2021. Production volumes grew 20% over the same period last year, highlighting the impact of our year-to-date U.S. acquisition activity as well as a return of third-party drilling activity to our royalty lands.
- Production from Freehold’s Canadian assets averaged 9,593 boe/d, up 4% from the same period in 2020. Gains in production were reflective of increased third-party spending on Freehold royalty lands.
- Funds from operations totaled $40.2 million, or $0.31 per share. This represented a 279% increase from the $10.6 million ($0.09 per share) generated in Q2-2020 and a 24% increase from the $32.4 million ($0.25 per share) in Q1-2021. The strong recovery in funds from operations compared to Q2-2020 was due to higher royalty production resulting from Freehold’s recent acquisitions of U.S. royalty properties, higher third-party drilling activities, higher commodity pricing reflecting significant improvement in crude oil benchmark pricing combined with both a weighted average shift to stronger U.S. based pricing and a low-cost structure. Continued upward momentum in oil benchmarks combined with higher than expected U.S. production contributed to the increase over Q1-2021.
- Gross wells drilled on our royalty lands totaled 84 in the quarter, which was in-line with production guidance. Drilling was higher compared to 54 gross wells drilled in the same period last year as operators increased their spending on Freehold royalty lands as commodity prices displayed positive momentum combined with incremental drilling activities on our U.S. properties acquired earlier in 2021.
- Dividends declared for Q2-2021 totaled $0.11 per share, up from $0.045 per share in Q2-2020 and a 57% improvement from Q1-2021 levels. Freehold’s payout ratio (1) was 33% for the quarter, versus 92% during the same quarter in 2020.
- Q2-2021 net income totaled $12.5 million compared with a $5.4 million net loss recorded in Q2-2020. The higher net income reflected increased revenues due to improving oil prices and growth in production volumes.
- Closing net debt as at June 30, 2021 was $40.8 million, a decrease of $24.0 million from Q1-2021 and a decrease of $55.3 million from Q2-2020.
- Cash costs (1) for the quarter totaled $4.48/boe, down from $4.79/boe in Q2-2020. This decrease reflects reduced general and administrative and operating cost charges combined with increased production volumes.
(1) See Non-GAAP Financial Measures.
U.S. Royalty Assets Update
- Production from Freehold’s U.S. royalty assets averaged 1,544 boe/d in Q2-2021, a 20% increase from 1,285 boe/d in Q1-2021 and a significant increase from 74 boe/d in Q2-2020. Growth in volumes over the same period last year reflect acquisition activity completed earlier in 2021, a return of volumes shut-in during the low commodity price period and increased third party drilling on our royalty lands.
- 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, 25 gross wells were drilled on our U.S. royalty lands over the quarter, which was an increase from the 18 gross wells drilled in Q1-2021. Currently seven rigs continuing to drill on our U.S. royalty lands.
Q2 2021 Activity Levels in-line with Forecasts
In total, 84 (2.1 net) wells were drilled on our royalty lands in Q2-2021, a 55% improvement on a gross measure versus the same period in 2020. Increased activity was driven by a broad increase in overall industry spending across both Canada and the U.S. and Freehold’s U.S. acquisitions earlier in 2021. With the upward move in crude oil prices, we have seen activity increase on Freehold’s royalty lands with approximately 16 rigs (nine in Canada, seven in the U.S.) running on our royalty lands currently. For the first six months of 2021, 146 (5.5 net) wells were drilled on Freehold’s Canadian royalty lands, this compares to 229 (6.6 net) wells drilled during the same period last year.
In Q2-2021, approximately 40% of all locations on Freehold’s Canadian assets targeted gross overriding royalty prospects with 60% focused on prospects on Freehold’s mineral title lands. 24% of all locations drilled targeted prospects in Saskatchewan, 53% in Alberta and 23% in the U.S. on a gross basis. The vast majority of wells drilled (greater than 96%) focused on oil or liquids prospects. In the U.S. approximately 50% of all drilling targeted the Eagle Ford, while 25% and 20% targeted the Midland and Delaware of the Permian, respectively.
Through the first six months of the year, Freehold has seen consistent drilling activity in oil plays such as the Viking, Sparky, Clearwater and Cardium. We are also seeing a strong increase in licensing and well spuds in the Deep Basin as natural gas prices remained strong into Q2-2021. We expect this resurgence in drilling activity that started in June and has continued into Q3-2021, will result in incremental volumes being brought on later in 2021 and early 2022.
Royalty Interest Drilling
|Three Months Ended June 30||Six Months Ended June 30|
|Gross||Net (1)||Gross||Net (1)||Gross||Net (1)(2)||Gross||Net (1)|
(1) Equivalent net wells are the aggregate of the numbers obtained by multiplying each gross well by our royalty interest percentage
(2) Canada drilled interest wells in Q1-2021 were restated for an unfavorable 0.53 net well adjustment
After realizing actual results for the first half of 2021 and with Freehold’s most recent acquisitions, we are implementing guidance for the second half of the year. The following table summarizes our key operating assumptions for the second half of 2021 where production is expected to be weighted approximately 55% oil and NGL’s and 45% natural gas:
|H2 2021 Average||August 10, 2021|
|Average Production (boe/d) (1)||11,000-11,500|
|West Texas Intermediate crude oil (US$/bbl)||$65.00|
|Edmonton Light Sweet crude oil (Cdn$/bbl)||$75.00|
|AECO natural gas (Cdn$/Mcf)||$3.25|
|Exchange rate (US$/Cdn$)||$0.78|
(1) Previously Freehold provided full year 2021 guidance of 10,500-11,000 boe/d
Conference Call Details
A conference call to discuss financial and operational results for the three months ended June 30, 2021 will be held for the investment community on Wednesday August 11, 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 1-888-789-9572 (toll free in North America) participant passcode is 4628069#