2021 was a very active year for Freehold – a year in which we added to and established royalty positions in some of the best oil and gas basins across North America, with our fourth quarter results showcasing the acquisition work completed largely in the second half of the year. Through our efforts, we have strengthened Freehold’s asset base, balance sheet, and the long-term sustainability of our business.
- Achieved record average production levels in Q4-2021 of 14,005 boe/d. This was driven by strong activity levels and acquisitions completed throughout our North American portfolio
- Canadian oil and gas royalty volumes grew 4% Q3-2021 to Q4-2021, averaging 9,930 boe/d. Growth in the portfolio was driven by focused royalty optimization activities, compliance initiatives and increased third-party drilling
- U.S. oil and gas royalty production averaged 4,075 boe/d in Q4-2021, up from 257 boe/d in Q4-2020. Increased volumes were the result of acquisitions completed throughout the year and strong third-party activity levels
- 76% increase in gross wells drilled on Freehold’s royalty lands in 2021 versus 2020. In total, Freehold had 655 gross (17.5 net) wells drilled in 2021, with the expectation to see continued strong momentum in activity into 2022
- Recorded a netback(1) of $53.58/boe in Q4-2021, showcasing the quality of assets in the portfolio, particularly the U.S. portfolio which benefits from Gulf Coast pricing premiums for both oil and natural gas
- Funds from operations in Q4-2021 of $68.8 million ($0.46/share) is the highest total amount in our 25-year history
- Increased our monthly dividend every quarter in 2021. As part of today’s results, the monthly dividend will be increased to $0.08/share ($0.96 annualized), the highest dividend level since late 2015
- Net debt(1) of $101.2 million at year end 2021, representing 0.5 times trailing funds from operations
- 2021 proved plus probable reserves growth of 69% and 34% on a per share measure
(1) See Non-GAAP Financial Ratios and Other Financial Measure
The new look Freehold is well positioned to participate in a higher commodity price environment. Based on the mid point of production guidance and US$75.00/bbl West Texas Intermediate and US$4.00/NYMEX, 2022 funds from operations is expected to range between $230-$250 million. Enhanced business strength within the portfolio provides significant optionality for Freehold to: (i) reduce Company net debt to zero by year end 2022 (in the absence of further acquisition work); (ii) continue our measured pace of dividend growth toward a 60% payout ratio; and (iii) continued disciplined acquisition work to grow our Company ahead of the drill bit across North America.
Our team is energized and are looking forward to 2022. I would like to thank our shareholders for their support in our repositioning and restructuring initiatives over the past year and thank our Board and employees for the contribution of ideas and inspiration as we continue to build this great company.
David M. Spyker, President and Chief Executive Officer
Operating and Financial Highlights
|Three Months Ended December 31||Year Ended December 31|
|FINANCIAL ($000s, except as noted)||2021||2020||Change||2021||2020||Change|
|Royalty and other revenue||73,642||25,793||186%||206,191||89,958||129%|
|Net income (loss)||31,178||373||nm||72,084||(13,931)||nm|
|Per share, basic ($) (1)||0.21||–||nm||0.53||(0.12)||nm|
|Cash flows from operations||59,700||20,610||190%||162,021||65,767||146%|
|Funds from operations||68,773||22,129||211%||189,649||72,891||160%|
|Per share, basic ($) (1)||0.46||0.19||142%||1.39||0.61||128%|
|Acquisitions and related expenditures||67,906||222||nm||377,002||7,058||nm|
|Per share ($) (2)||0.16||0.045||256%||0.45||0.33||36%|
|Per share ($) (2)||0.17||0.05||240%||0.49||0.2975||65%|
|Payout ratio (%) (3)||35%||24%||11%||33%||54%||(21%)|
|Long term debt||146,000||93,000||57%||146,000||93,000||57%|
|Net debt (3)||101,229||65,765||54%||101,229||65,765||54%|
|Shares outstanding, period end (000s)||150,612||118,788||27%||150,612||118,788||27%|
|Average shares outstanding (000s) (1)||150,585||118,747||27%||136,510||118,685||15%|
|Light and medium oil (bbl/d)||5,401||3,280||65%||4,342||3,449||26%|
|Heavy oil (bbl/d)||1,254||1,132||11%||1,184||1,063||11%|
|Total liquids (bbl/d)||8,219||5,239||57%||6,743||5,355||26%|
|Natural gas (Mcf/d)||34,700||26,656||30%||30,608||26,558||15%|
|Total production (boe/d) (4)||14,005||9,681||45%||11,844||9,781||21%|
|Oil and NGL (%)||59%||54%||5%||57%||55%||1%|
|Petroleum and natural gas realized price ($/boe) (4)||57.44||28.16||104%||47.73||24.56||94%|
|Cash costs ($/boe) (3) (4)||3.57||4.03||(11%)||3.71||4.60||(19%)|
|Netback ($/boe) (3) (4)||53.58||24.93||115%||43.99||20.53||114%|
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 Ratios and Other Financial Measure
(4) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe)
The Board of Directors has declared a dividend of $0.08 per share to be paid on April 18, 2022, to shareholders of record on March 31, 2022. The dividend to be paid on April 18, 2022, represents a 33% increase over the $0.06 per common share dividend to be paid on March 15, 2022, to shareholders on record on February 28, 2022. The dividend is designated as an eligible dividend for Canadian income tax purposes.
We would like to recognize Susan MacKenzie, who is not standing for re-election and will retire from the Board of Freehold at the Annual Meeting to be held on May 10, 2022. Ms. MacKenzie was appointed to the Board in 2014. She serves on the Governance, Nominating and Compensation (“GNC”) and Reserves Committees and was Chair of the GNC Committee from May 2015 until May 2021. Ms. MacKenzie was instrumental in advancing our governance and executive compensation practices and enhancing our disclosure. We would like to thank her for her dedication, wisdom and leadership throughout her tenure on the Board.
Fourth Quarter Highlights
- Freehold’s production averaged a record 14,005 boe/d during Q4-2021, ahead of fourth quarter guidance of 13,500-13,750 boe/d. Variance relative to guidance reflected better than expected production from Canada, with Deep Basin NGL volumes and Eagle Ford production in the U.S. coming in ahead of expectations. Production volumes grew 45% compared to the same period last year and 24% compared to Q3-2021.
- Production from Freehold’s Canadian assets averaged 9,930 boe/d during Q4-2021, up 5% from the same period in 2020 and 4% from the previous quarter in the absence of material acquisitions. Gains in production were reflective of increased third-party spending on Freehold royalty lands, including a number of intermediate producers that increased drilling activity over the quarter.
- U.S. production averaged 4,075 boe/d during Q4-2021, up significantly versus the same period in 2020 and 133% from the previous quarter. This increase versus the same period in 2020 and quarter-over-quarter reflects acquisitions completed throughout the year, as Freehold completed $368 million in U.S. royalty transactions in 2021.
- Funds from operations totaled a record $68.8 million, or $0.46 per share. This represents a 211% increase from the $22.1 million ($0.19 per share) generated in Q4-2020 and a 43% increase from the $48.2 million ($0.36 per share) in Q3-2021. The strong recovery in funds from operations compared to Q4-2020 was due to higher royalty production resulting from Freehold’s acquisitions of U.S. royalty properties, increased third-party drilling activities and higher commodity pricing reflecting a significant improvement in crude oil benchmark pricing alongside better realized pricing from the expansion of the Company’s U.S. portfolio.
- Gross wells drilled on Freehold’s royalty lands totaled 250 in the quarter, more than double the level of activity we saw during the same period in 2020 as operators increased their spending on Freehold royalty lands as commodity prices displayed positive momentum. Currently there are 17 rigs and 12 rigs drilling on Freehold’s U.S. and Canadian royalty acreage respectively.
- In October 2021, Freehold closed its acquisition of concentrated, high quality U.S. royalty assets in the Midland basin in Texas for US$53 million ($68 million) (the Midland Assets) from OneMap Mineral Services LLC. The Midland Assets, 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.
- Dividends declared for Q4-2021 totaled $0.17 per share, up from $0.05 per share in Q4-2020 and a 21% improvement from Q3-2021 levels. Freehold’s payout ratio (1) was 35% for the quarter, versus 24% during the same quarter in 2020.
- Q4-2021 net income totaled $31.2 million compared to $0.4 million in Q4-2020. The higher net income reflected increased revenues due to improving commodity prices and growth in production volumes.
- Long term debt at December 31, 2021 was $146 million, an increase of $20 million from Q3-2021 as we partially financed the Midland Assets by utilizing our credit facility. Total debt was up $53 million from December 31, 2020.
- Cash costs (1) for the quarter totaled $3.57/boe, down from $4.03/boe in Q4-2020. This boe decrease reflects increased production volumes.
(1) See Non-GAAP Financial Ratios and Other Financial Measure
- Dividends declared for 2021 totaled $68.6 million ($0.49 per share), up 94% versus 2020 when Freehold declared dividends of $35.3 million ($0.30 per share). Freehold’s dividend payout for 2021 totaled 33%, below our guided dividend payout floor of 60% as we navigated commodity price volatility through much of the year.
- Royalty and other revenue totaled $206.2 million in 2021, up 129% from the previous year with gains in commodity prices and production growth driving the increase. Total royalty revenue was comprised of 82% oil and NGL’s as we maintained the Company’s crude oil and liquids focus.
- Funds from operations in 2021 totaled $189.6 million or $1.39 per share, up 160% from $72.9 million or $0.61 per share in 2020. This increase reflects strengthening commodity prices and improved production volumes.
- Cash costs for the year totalled $3.71/boe, the lowest in Freehold’s history and down 19% versus the previous year. The reduction versus 2020 reflected reduced operating and general and administrative charges along with growth in production volumes.
- Freehold completed $377.0 million in royalty acquisitions in 2021. Much of the focus was associated with development of Freehold’s North American portfolio which included adding royalty assets in the Eagle Ford, Permian and Haynesville basins in the U.S. and the Clearwater in Canada.
- 2021 production averaged 11,844 boe/d, a 21% increase versus the previous year as increased third-party drilling and acquisition activity drove the increase in production versus the previous year.
- Oil and NGL’s volumes represented 57% of 2021 royalty production, up slightly from 55% in 2020 as positive momentum in third-party drilling activity drove gains in Freehold’s weighting to oil and NGL’s.
- Freehold completed a 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 upon the September 24, 2021 closing of the Eagle Ford asset acquisition.
- 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.
- Proved and probable oil and natural gas reserves totaled 49.8 MMboe as at December 31, 2021, up from 29.4 MMboe as at December 31, 2020. The increase reflects U.S. acquisitions, drilling additions and higher forward commodity pricing.
In total, 655 gross wells were drilled on Freehold’s royalty lands in 2021, a 76% increase versus 2020. Overall, Freehold saw increased drilling activity associated with broad improvements in capital spending associated with its royalty payors. Freehold estimates that ~$800 million in third-party capital was spent in 2021 drilling and completing wells on Freehold’s royalty lands, up from ~$685 million in 2020.
In Canada and the U.S. during 2021, approximately 36% of gross wells on Freehold royalty lands targeted prospects in Alberta, 29% in Saskatchewan and 29% in Texas with the balance spread across other regions. Producers continue to remain focused on oil prospects within Freehold’s land base with 93% of wells drilled targeting oil and liquids. Of the gross wells drilled in 2021, approximately 49% were drilled on Freehold’s gross overriding royalty (GORR) prospects in Canada, 17% were drilled on Freehold’s mineral title prospects in Canada and 33% were drilled on Freehold’s U.S. royalty acreage. The Viking in southwest Saskatchewan, Clearwater and Cardium in central Alberta, Eagle Ford and Permian in Texas along with additional drilling in North Dakota continue to be the areas of focus within Freehold’s portfolio.
In Q4-2021, Freehold saw 250 gross wells drilled on Freehold royalty lands which was more than double Q4-2020 activity. Looking forward, Freehold believes in the quality of both its Canadian and U.S. portfolios and that is expected to drive strong third-party production additions into 2022. The acquisition of additional U.S royalty production and royalty lands in late 2021 is expected to further diversify and enhance Freehold’s asset base.
Royalty Interest Drilling
|Three Months Ended December 31||Year Ended December 31|
|Gross||Net (1)||Gross||Net (1)||Gross||Net (1)||Gross||Net (1)|
|United States (2)||101||0.5||–||–||215||1.2||–||–|
(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, drilling includes acquisition activity from the effective date of each transaction
With Freehold’s most recent acquisitions combined with improved forward commodity benchmark pricing, we are updating 2022 guidance in addition to introducing 2022 guidance on funds from operations. The following table summarizes our key assumptions for 2022.
|2022 Average||March 2, 2022|
|Average production (boe/d) (1)(2)||13,750-14,750|
|Funds from operations (mm)||$230-$250|
|West Texas Intermediate crude oil (US$/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 13,750-14,750 boe/d on November 10, 2021
(2) 2022 production is expected to consist of 8% heavy oil, 41% light and medium oil, 11% NGL’s and 40% natural gas
2021 Reserves Information
Freehold’s reserve information, including a summary of the evaluation of Freehold’s Canadian and U.S. reserves and associated future net revenue as respectively prepared by Trimble Engineering Associates Ltd. and RSC Group, Inc., Freehold’s independent reserve evaluators effective as at December 31, 2021 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, 2021, will be held for the investment community on Thursday March 3, 2022, beginning at 7:00 AM MST (9:00 AM EST). 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 6382629#.