Operating and Financial Highlights
|Three Months Ended September 30||Nine Months Ended September 30|
|FINANCIAL ($000s, except as noted)||2021||2020||Change||2021||2020||Change|
|Royalty and other revenue||50,879||23,123||120%||132,549||64,165||107%|
|Net income (loss)||22,726||139||nm||40,906||(14,304)||nm|
|Per share, basic ($) (1)||0.17||–||nm||0.31||(0.12)||nm|
|Cash flows from operations||43,911||1,130||nm||102,321||45,157||127%|
|Funds from operations||48,247||19,893||143%||120,876||50,763||138%|
|Per share, basic ($) (1)||0.36||0.17||112%||0.92||0.43||114%|
|Acquisitions and related expenditures||228,382||415||nm||309,094||6,836||nm|
|Per share ($) (2)||0.13||0.045||189%||0.29||0.285||1%|
|Per share ($) (2)||0.14||0.045||211%||0.32||0.2475||29%|
|Payout ratio (%) (3)||35%||27%||8%||31%||67%||-36%|
|Long term debt||126,000||107,000||18%||126,000||107,000||18%|
|Shares outstanding, period end (000s)||150,585||118,746||27%||150,585||118,746||27%|
|Average shares outstanding (000s) (1)||132,941||118,706||12%||131,767||118,665||11%|
|Light and medium oil (bbl/d)||4,038||3,384||19%||3,986||3,522||13%|
|Heavy oil (bbl/d)||1,236||791||56%||1,160||1,025||13%|
|Total liquids (bbl/d)||6,399||5,034||27%||6,246||5,395||16%|
|Natural gas (Mcf/d)||29,203||24,656||18%||29,229||26,524||10%|
|Total production (boe/d) (4)||11,265||9,143||23%||11,118||9,816||13%|
|Oil and NGL (%)||57%||55%||4%||56%||55%||1%|
|Average price realizations ($/boe) (4)||49.17||26.93||83%||43.60||23.37||87%|
|Cash costs ($/boe) (3) (4)||2.49||3.70||-33%||3.76||4.80||-22%|
|Netback ($/boe) (3) (4)||46.60||23.79||96%||39.92||19.06||109%|
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)
The third quarter of 2021 was transformational for Freehold as the Company was able to close greater than $250 million in portfolio enhancing transactions (before closing adjustments). These transactions were focused in core U.S. and Canadian oil basins and further solidify Freehold’s position as a North American royalty company.
As a result of this hard work, Freehold’s portfolio is positioned to generate organic growth into the coming years with significantly increased funds from operations which will allow us to continue to build and enhance our business. The “new look” Freehold has the following attributes:
- Positioned in some of the best oil and gas basins in North America with core positions added in the Permian (Delaware and Midland) and Eagle Ford in the United States and the Clearwater in Canada
- Q3-2021 production of 11,265 boe/d is 23% higher on an absolute and 10% on a per share measure over the same period in 2020
- 2022 guidance of 13,750 – 14,750 boe/d, represents a greater than 25% increase from the current quarter with production per share expected to grow by 12% at the midpoint of guidance
- Funds from operations of $48.2 million ($0.36/share) in Q3-2021 and expected to grow materially higher with the acquisitions completed during the year fully incorporated in Q4-2021
- 179 gross wells (6.0 net) drilled on Freehold lands in the quarter more than doubles, on a net basis, the activity levels on our royalty lands through the first half of 2021
With the strength in our business model, we are continuing our measured approach to setting Freehold’s monthly dividend, increasing it by 20% from $0.05/share to $0.06/share, or $0.72/share annualized. Projected 2021 payout levels are below our stated dividend policy levels, which outlines a payout ratio starting at 60% over the long-term based on forward looking funds from operations. This dividend increase strikes a balance between returning value to our shareholders, managing our balance sheet, and positioning Freehold to remain active on the acquisition front, as the opportunities to further build on the quality of our portfolio remains robust, within both U.S. and Canada.
On November 25, 2021, Freehold will celebrate its 25th anniversary from its initial public offering. From an offering of $10.00/share, Freehold has returned almost $33/share in dividends, while providing a lower risk income vehicle for investors. I would like to personally thank all of our shareholders for their support over that time and also thank our Board and employees that contribute to the ideas, the energy, and the inspiration that have made an investment in Freehold a success.
We have enjoyed the first 25 years and strongly believe that we are positioning Freehold for another 25 years of continued success.
David M. Spyker
President and CEO
The Board of Directors has declared a dividend of $0.06 per share to be paid on December 15, 2021 to shareholders of record on November 30, 2021. The dividend to be paid on December 15, 2021 represents a 20% increase over the $0.05 per common share dividend to be paid on November 15, 2021 to shareholders on record on October 31, 2021. The dividend is designated as an eligible dividend for Canadian income tax purposes.
On October 5, 2021, Freehold announced that it had closed its previously disclosed transaction to acquire concentrated, high quality U.S. royalty assets for US$54.7 million ($69.3 million) (the Midland Assets). The Midland Assets, in conjunction with the focused acquisition work completed year-to-date, are expected to play a key role in strengthening the resiliency of Freehold’s North American royalty portfolio, enhancing the near and long-term sustainability of Freehold’s dividend, through multiple years of production and funds flow growth.
Third Quarter Highlights
- Freehold’s production averaged 11,265 boe/d during Q3-2021. Production volumes grew 23% compared to the same period last year and 1% compared to Q2-2021, highlighting the impact of our year-to-date acquisition activity as well as a return of third-party drilling activity to our royalty lands.
- Production from Freehold’s Canadian assets averaged 9,517 boe/d during Q2-2021, up 5% from the same period in 2020. Gains in production were reflective of increased third-party spending on Freehold royalty lands, although we expect much of the benefit of increased drilling in Q3-2021 to occur later in 2021 and into 2022.
- Funds from operations totaled $48.2 million, or $0.36 per share. This represents a 143% increase from the $19.9 million ($0.17 per share) generated in Q3-2020 and a 20% increase from the $40.2 million ($0.31 per share) in Q2-2021. The strong recovery in funds from operations compared to Q3-2020 was due to higher royalty production resulting from Freehold’s acquisitions of U.S. royalty properties, higher third-party drilling activities and higher commodity pricing reflecting significant improvement in crude oil benchmark pricing driven by the expansion of the Company’s U.S. portfolio.
- Gross wells drilled on our royalty lands totaled 179 in the quarter. Drilling was materially higher compared to 32 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.
- In July, Freehold closed the acquisition of certain U.S royalty properties for US$15.5 million ($19.4 million). This acquisition included exposure to the Eagle Ford, Delaware and Midland basins in Texas, expanding Freehold’s North American royalty footprint. The acquired royalty assets provide exposure to a strong suite of E&P companies with multiple year development plans expected on the acreage.
- In late September, Freehold closed the acquisition of a high-quality U.S. royalty assets located in the Eagle Ford basin in Texas for US$160.6 million ($203.2 million) after closing adjustments (the Eagle Ford Royalty Transaction). The Eagle Ford Transaction is expected to significantly enhance the quality of Freehold’s North American portfolio, improving both the near-term and long-term sustainability of Freehold’s dividend while providing further option value to return capital to shareholders through multiple years of free cash flow growth.
- In late September, Freehold announced that it had completed its previously announced bought deal equity financing, issuing 19.1 million subscription receipts at a price of $9.05 per subscription receipt for gross proceeds of $172.6 million, which included the full exercise of the over-allotment option granted to the underwriters. The subscription receipts were exchanged for an equivalent number of Freehold common shares on September’s closing of the Eagle Ford Royalty Transaction.
- Concurrently with the closing of the Eagle Ford Royalty Transaction, Freehold amended its credit facility agreement with a syndicate of four Canadian banks increasing the committed revolving facility to $285 million and maintaining the operating facility at $15 million. The amended credit facility agreement includes a permitted increase in the committed revolving facility of up to $360 million subject to lenders’ consent. Both the committed revolving and operating facilities mature September 28, 2024.
- Dividends declared for Q3-2021 totaled $0.14 per share, up from $0.045 per share in Q3-2020 and a 27% improvement from Q2-2021 levels. Freehold’s payout ratio (1) was 35% for the quarter, versus 27% during the same quarter in 2020.
- Q3-2021 net income totaled $22.7 million compared to $0.1 million in Q3-2020. The higher net income reflected increased revenues due to improving commodity prices and growth in production volumes.
- Long term debt as at September 30, 2021 was $126 million, an increase of $48 million from Q2-2021 as we partially financed the Eagle Ford Royalty Transaction by utilizing our amended credit facility. This is up from $107 million as at September 30, 2020.
- Cash costs (1) for the quarter totaled $2.49/boe, a record low for Freehold. This was down from $3.70/boe in Q3-2020. 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 1,748 boe/d in Q3-2021, a 13% increase from 1,544 boe/d in Q2-2021 and a significant increase from 108 boe/d in Q3-2020. Growth in volumes over the same period last year reflect acquisition activity completed throughout 2021 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, 34 gross wells were drilled on our U.S. royalty lands over the quarter, an increase from 25 gross wells drilled in Q2-2021. Currently 14 rigs are drilling on our U.S. royalty lands across five basins with eight unique operators.
Q3 Net Drilling Activity Outpaces H1-2021
In total, 179 gross (6.0 net) wells were drilled on our royalty lands in Q3-2021, a 459% improvement on a gross basis versus the same period in 2020, as activity continued to return to Freehold’s lands supported by higher commodity pricing while also reflecting growth within our U.S. portfolio.
For the quarter, the most significant plays drilled included 27 gross wells in the Viking, 24 in the Mississippian, 18 in the Cardium, 18 in the Spirit River, 17 in the Clearwater, 14 in the Eagle Ford and 11 targeting the Midland/Delaware basins. For the first nine months of 2021, 375 (11.8 net) wells were drilled on Freehold royalty lands, this compares to 261 (8.7 net) wells drilled during the same period last year.
Increased activity was driven by a broad increase in overall industry spending across North America. With the upward move in crude oil prices, we have seen activity increase on Freehold’s royalty lands with approximately 20 rigs (six in Canada, 14 in the U.S.) running on our royalty lands currently.
In Q3-2021, approximately 70% of all gross locations on Freehold’s Canadian assets targeted gross overriding royalty prospects with 25% focused on Freehold’s mineral title lands and 5% from unit wells. 44% of all locations drilled targeted prospects in Alberta, 37% in Saskatchewan and 19% in the U.S. on a gross basis. The majority of wells drilled (greater than 88%) focused on oil or liquids prospects.
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)|
|United States (2)||34||0.2||–||–||84||0.5||–||–|
(1) Equivalent net wells are the aggregate of the numbers obtained by multiplying each gross well by our royalty interest percentage
(2) U.S. drilling locations are typically more prolific than Canadian locations, with drilling including acquisition activity from the effective date of each transaction
Fourth Quarter 2021 Guidance Update
After incorporating Q3-2021 results and including all of the recent acquisition work completed by Freehold, we are implementing guidance for Q4-2021. The following table summarizes our key operating assumptions for Q4-2021 where production is expected to be weighted approximately 60% oil and NGL’s and 40% natural gas:
|Q4 2021||November 10, 2021|
|Average Production (boe/d) (1) (2)||13,500-13,750|
|West Texas Intermediate crude oil (US$/bbl)||$82.00|
|Edmonton Light Sweet crude oil (Cdn$/bbl)||$95.00|
|AECO natural gas (Cdn$/Mcf)||$5.00|
|NYMEX natural gas (US$/Mcf)||$5.00|
|Exchange rate (US$/Cdn$)||0.80|
(1) Previously, Freehold provided full year 2021 guidance of 10,500-11,000 boe/d on March 4, 2021 and second half of 2021 guidance of 11,750 – 12,250 boe/d on September 8, 2021. Freehold is currently forecasting full year 2021 guidance of 11,500-12,000 boe/d (9% heavy oil, 38% light and medium oil, 10% NGL’s and 43% natural gas) and second half of 2021 guidance of 12,250-12,750 boe/d (9% heavy oil, 38% light and medium oil, 10% NGL’s and 43% natural gas).
(2) Fourth quarter 2021 guidance is expected to consist of 8% heavy oil, 41% light and medium oil, 11% NGL’s and 40% natural gas
With Freehold’s most recent acquisitions, we are updating our 2022 production guidance in addition to introducing commodity price guidance. The following table summarizes our key operating assumptions for 2022 where production is expected to be weighted approximately 60% oil and NGL’s and 40% natural gas:
|2022 Average||November 10, 2021|
|Average Production (boe/d) (1)(2)||13,750-14,750|
|West Texas Intermediate crude oil (US$/bbl)||$75.00|
|Edmonton Light Sweet crude oil (Cdn$/bbl)||$88.00|
|AECO natural gas (Cdn$/Mcf)||$4.00|
|NYMEX natural gas (US$/Mcf)||$4.00|
|Exchange rate (US$/Cdn$)||0.80|
(1) Previously, Freehold provided full year 2022 guidance of 13,500-14,500 boe/d on September 8, 2021
(2) 2022 guidance is expected to consist of 8% heavy oil, 41% light and medium oil, 11% NGL’s and 40% natural gas
On November 10, 2021, Freehold’s Board of Directors approved the filing of a preliminary short form base shelf prospectus with securities regulators in each province and territory of Canada. Upon filing of the final base short form shelf prospectus, Freehold will be able to, from time to time, offer and sell common shares, preferred shares, subscription receipts, warrants and units at an aggregate amount of up to $500 million during the next 25-month period following the filing of such final base short form shelf prospectus. Freehold has no immediate plans to raise equity capital however, the filing of a shelf prospectus is a natural and prudent step for the Company for financial flexibility and as it continues to improve and expand its asset base. Freehold anticipates filing the preliminary short form base shelf prospectus on or about November 12, 2021.
Conference Call Details
A conference call to discuss financial and operational results for the three months ended September 30, 2021 will be held for the investment community on Wednesday November 10, 2021 beginning at 4:00 PM MDT (6:00PM EST). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-800-806-5484 (toll free in North America) participant passcode is 1753446#