CALGARY, Alberta – Freehold Royalties Ltd. (Freehold or the Company) (TSX:FRU) announces first quarter results for the period ended March 31, 2023.
President’s Message
The execution of Freehold’s North American strategy continued during the first quarter. From the COVID related lows of 2020, when Freehold embarked on our North American expansion, the Company has grown its production by over 50%, its revenues by 75%, while maintaining the Company’s core identity of providing shareholders with a consistent growing dividend while maintaining low leverage.
As a larger and a more balanced North American entity, Freehold remains well positioned to endure all stages of the commodity cycle, similar to what we realized during Q1-2023. We believe much of the work completed over the past three years has been highlighted during the first quarter, as Freehold was able to deliver consistent, sustainable returns to its shareholders.
Our first quarter highlights included:
- $77 million in revenue;
- $59 million in funds from operations ($0.39/share(1));
- $41 million in dividends paid ($0.27/share);
- Average production of 14,724 boe/d (9,822 boe/d in Canada and 4,902 boe/d in the U.S.);
- 349 gross wells drilled, 175 wells in Canada and 174 wells in the U.S.;
- $56.99/boe average realized price ($69.68/boe in the U.S. and $50.66/boe in Canada)
(1) See Non-GAAP Financial Ratios and Other Financial Measures
We continued our operational momentum into 2023 with strong drilling activity on both sides of the border (the highest it has been on a net well basis since early 2017) and growing Canadian production (the highest it has been since late 2019). Our Clearwater assets represented a key growth driver, averaging 450 boe/d, an increase of 25% from the previous quarter. Strength in Canadian production has been achieved with only a modest investment over the last three years.
Despite commodity prices retreating from the prior quarter and from the same period in 2022, activity levels on both our Canadian and U.S. royalty lands maintained the momentum from our record year in 2022. We have continued to see strong year-to-date leasing activity and a suite of well funded operators allocating capital to drilling on our royalty lands, driven by continued development in plays such as the Permian, Eagle Ford, Clearwater, Viking and Cardium. Through the first quarter of 2023, we have consistently had between 30-40 drilling rigs active on our acreage, with rigs on our U.S land base averaging over 30 in March, setting the highwater mark since owning the assets. While drilling will slow down in Canada in the near-term associated with spring break-up, we expect strong activity through the second quarter within our U.S. land base, a benefit of our North American portfolio.
Funds flow and production volumes were in-line with our expectation for Q1-2023 and as a result, we are maintaining our 2023 production guidance of 14,500-15,500 boe/d. We also reiterate our funds flow range of between $250-$280 million, underpinned by our West Texas Intermediate (WTI) pricing assumption of US$80/bbl. At these levels, our current dividend implies a dividend payout ratio(1) of approximately 60%. We believe this level is right sized to provide a robust dividend yield, while retaining optionality for further dividend increases, portfolio reinvestment and/or maintaining flexibility in our balance sheet.
Subsequent to quarter-end, a number of producers have shut-in production on Freehold’s royalty lands associated with the ongoing wildfire situation in Alberta. We believe up to 25% of our Canadian production could be impacted by these shut-ins but given the preliminary and ongoing nature of the situation, Freehold does not have an estimate of the impact at this time. Freehold is thankful for the efforts of all personnel engaged in fighting these dangerous wildfires and extend our sympathy to those displaced from their homes in the areas of the fires.
David M. Spyker, President and Chief Executive Officer
Dividend Announcement
The Board of Directors of Freehold has declared a monthly dividend of $0.09 per share to be paid on June 15, 2023, to shareholders of record on May 31, 2023. The dividend is designated as an eligible dividend for Canadian income tax purposes.
Director Retirement
Art Korpach will not be standing for re-election and will retire from Freehold’s Board of Directors at the Annual General Meeting. Mr. Korpach was appointed to the Board in May 2012 and was Chair of the Compensation Committee from 2012 to 2015 and served as Chair of the Audit Committee from 2015 to 2022. Mr. Korpach was instrumental in providing valuable strategic input to Freehold through a number of transactions during his term, as we benefitted from his extensive transaction experience. We would like to thank Art for his hard work, wisdom, and leadership throughout his time on the Board and wish him well in his future endeavors.
Operating and Financial Highlights
Three Months Ended March 31 | Three Months Ended December 31 | ||||||||||
FINANCIAL ($ millions, except as noted) | 2023 | 2022 | Change | 2022 | Change | ||||||
West Texas Intermediate (US$/bbl) | 76.13 | 94.29 | (19 | %) | 82.64 | (8 | %) | ||||
Royalty and other revenue | 76.6 | 87.6 | (13 | %) | 98.5 | (22 | %) | ||||
Funds from operations | 58.6 | 71.9 | (19 | %) | 80.0 | (27 | %) | ||||
Funds from operations per share, basic ($) (1)(3) | 0.39 | 0.48 | (19 | %) | 0.53 | (26 | %) | ||||
Acquisitions and related expenditures | 4.3 | 1.3 | 230 | % | 7.2 | (40 | %) | ||||
Dividends paid per share ($) (2) | 0.27 | 0.18 | 50 | % | 0.27 | – | |||||
Dividend payout ratio (%) (3) | 69 | % | 38 | % | 82 | % | 51 | % | 35 | % | |
Net debt (5) | 115.8 | 62.6 | 85 | % | 127.9 | (9 | %) | ||||
OPERATING | |||||||||||
Total production (boe/d) (4) | 14,724 | 13,676 | 8 | % | 15,041 | (2 | %) | ||||
Oil and NGL (%) | 62 | % | 60 | % | 2 | % | 63 | % | (2 | %) | |
Petroleum and natural gas realized price ($/boe) (4) | 56.99 | 69.71 | (18 | %) | 69.76 | (18 | %) | ||||
Cash costs ($/boe) (3)(4) | 5.82 | 3.70 | 57 | % | 5.17 | 13 | % | ||||
Netback ($/boe) (3) (4) | 50.79 | 66.17 | (23 | %) | 63.92 | (20 | %) | ||||
ROYALTY INTEREST DRILLING (gross / net) | |||||||||||
Canada | 175/ 6.9 | 144/ 5.9 | 22% / 17% | 137/ 6.2 | 28% / 11% | ||||||
U.S. | 174/ 0.8 | 100/ 0.4 | 74%/100% | 156/ 0.9 | 12%/ (11%) |
(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 Measures
(4) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe)
(5) Net debt is a capital management measure
First Quarter Highlights
- WTI prices averaged US$76.13/bbl for Q1-2023, 19% lower than the same period in 2022 and down 8% from the previous quarter.
- Royalty and other revenue totalled $76.6 million in Q1-2023, down 13% from Q1-2022 and 22% versus the previous quarter. Despite higher production volumes, the revenue decrease was driven by a lower commodity price environment.
- Funds from operations in Q1-2023 totalled $58.6 million ($0.39/share(1)), which compares to $71.9 million ($0.48/share(1)) in Q1-2022 and $80.0 million ($0.53/share(1)) in Q4-2022. The decrease versus 2022 is driven by lower oil and natural gas pricing when compared to prior periods.
- Dividends declared for Q1-2023 totaled $40.7 million ($0.27 per share), up 35% versus the same period in 2022 when Freehold declared dividends of $30.1 million ($0.20 per share). Freehold’s dividend payout ratio(1) for Q1-2023 was 69%, versus 38% during the same period in 2022. Freehold has increased its dividend by over 500% since 2020 and continues to target its payout at approximately 60% of forward-looking funds from operations. Royalties remain a high margin asset class, enabling Freehold the ability to maintain our current dividend level even if the payout ratio(1) is above 60% for multiple quarters.
- Realized price of $56.99/boe in Q1-2023, was down 18% versus the same period last year and the previous quarter. Freehold continues to benefit from more favourable U.S. realized pricing of $69.68/boe, 38% higher than Canada ($50.66/boe).
- Recorded a netback(1) of $50.79/boe in Q1-2023, down 23% over Q1-2022 and 21% versus Q4-2022 on lower commodity prices.
- Achieved average production of 14,724 boe/d in Q1-2023, an increase of 8% over Q1-2022 and 2% lower versus Q4-2022. Volumes were impacted by colder weather early in the year and higher declines within the portfolio associated with higher flush production realized in Q4-2022.
- Q1-2023 Canadian oil and gas royalty volumes were up slightly over Q4-2022, averaging 9,822 boe/d, the highest levels since Q1-2020. Gains in volumes were associated with production additions in the Clearwater, Deep Basin, and Cardium. Growth specific to the Clearwater was associated with junior public and private payors developing the southern and northwest areas of the play. Volumes at the end of the quarter were greater than 450 boe/d versus 360 boe/d the previous quarter.
- U.S. oil and gas royalty production averaged 4,902 boe/d, down 7% from 5,264 boe/d in Q4-2022 but up 26% when compared to the same period in 2022. Volumes were impacted by a significant number of new wells brought on production in Q4-2022 and the associated decline from flush production. This quarter over quarter variability in U.S. production is expected and reflected in our full year guidance. In addition, there was some production slowdowns associated with the January cold weather in the Eagle Ford.
- Within Freehold’s Diversified Royalties team, we continue to see a robust opportunity set since the team’s inception in January 2022. The group is advancing the technical due diligence on several modest sized, mineral based, development stage opportunities while continuing to refine the long-term investment strategy.
- Net debt(1) of $115.8 million at the end of Q1-2023, represents 0.4 times trailing funds from operations and well within our leverage strategy of less than 1.5 times funds from operations. Net debt was down from $127.9 million as at year-end.
- Cash costs(1) for the quarter totalled $5.82/boe, up 57% versus the same period in 2022. This increase was driven by a material increase in interest costs (up 172% versus Q1-2022), and broad inflationary pressures.
(1) See Non-GAAP Financial Ratios and Other Financial Measures
Drilling and Leasing Activity
In total, 349 gross wells were drilled on Freehold’s royalty lands in Q1-2023, a 43% increase versus the same quarter in 2022. Overall, Freehold saw strong momentum in drilling on both its Canadian and U.S. royalty portfolios with well capitalized producers remaining active over the period. Producers continue to remain focused on oil prospects on Freehold’s land base with 94% of wells drilled targeting oil and liquids.
Of the 349 gross wells drilled on Freehold’s royalty lands over the quarter, 21% of the drilling occurred in the Permian, 17% targeted the Viking, 15% was focused in the Eagle Ford, 9% in the Cardium with the remainder balanced between plays in both Canada and the U.S. such as the Clearwater, Bakken and Belly River.
By geography, approximately 27% of gross wells on Freehold royalty lands targeted prospects in Alberta, 21% in Saskatchewan and 36% in Texas with the balance distributed across other regions.
Of the gross wells drilled in Q1-2023, approximately 33% were drilled on Freehold’s gross overriding royalty prospects in Canada, 17% were on mineral title prospects in Canada and 50% were drilled on Freehold’s U.S. royalty acreage, with 71% of these U.S. gross wells drilled on Freehold’s mineral title.
During Q1-2023, Freehold entered into 13 new leases with 10 counterparties. Year-to-date, Freehold has entered into 44 new lease agreements with 16 counterparties.
Royalty Interest Drilling
Three Months Ended March 31 | ||||||||
2023 | 2022 | 2023 | 2022 | |||||
Gross | Gross | Change | Net (1) | Net (1) | Change | |||
Canada | 175 | 144 | 22 | % | 6.9 | 5.9 | 17 | % |
United States | 174 | 100 | 74 | % | 0.8 | 0.4 | 100 | % |
Total | 349 | 244 | 43 | % | 7.7 | 6.3 | 22 | % |
(1) Equivalent net wells are the aggregate of the numbers obtained by multiplying each gross well by our royalty interest percentage
Canada
In Q1-2023, Freehold had 175 gross locations drilled within our Canadian portfolio compared to 144 gross locations during Q1-2022, with net wells increasing by 17% to 6.9 net. Q1-2023 was the strongest quarter for drilling on Freehold’s Canadian lands since Q4-2018.
Drilling in Canada was led by the Viking where 58 gross wells were spud in Q1-2023, up 66% versus the same period in 2022. We also saw 32 gross locations drilled targeting the Cardium over the quarter, representing a 45% improvement versus Q1-2022.
Driven by recent industry acquisition activity, we have also seen increased activity within our southeast and southwest Saskatchewan portfolios with a number of smaller public and private entities increasing the spending within these areas, as they target more ambitious growth objectives in their portfolios versus previous operators. In addition, improvements in heavy oil drilling technology, coupled with narrowing heavy oil price differentials later in the quarter, has resulted in an uptick in the level of Sparky and Mannville drilling over the quarter.
U.S.
Overall, 174 gross wells were drilled on our U.S. royalty lands in Q1-2023, which compares to 100 gross wells during Q1-2022 and 156 gross locations during the previous quarter. Q1-2023 represents Freehold’s strongest quarter for U.S. drilling activity, reflecting acquisition activity and sustained strength in industry activity.
In the U.S., operators focused drilling on light oil prospects in the Permian and Eagle Ford with 70% of activity within these basins. In total, we had 75 gross locations targeting prospects in the Permian and 50 gross locations in the Eagle Ford over the quarter. This compares to approximately 75 gross locations combined targeting the Permian and Eagle Ford during the same period last year. We also saw strong activity associated with the Bakken and Haynesville plays, with the diversification of Freehold’s U.S. portfolio a highlight during the quarter. Development of Freehold’s U.S. lands was led by a diverse group of investment grade public companies and growth oriented public and private operators.
Although Freehold’s U.S. net well additions were lower than in Canada, U.S. wells are significantly more prolific as they generally come on production at approximately ten times that of an average Canadian well in our portfolio. However, a U.S. well can take upwards of six to nine months from initial license to first production, compared to three to four months in Canada, on average.
2023 Guidance
Freehold continues to monitor the ongoing wildfire situation in Alberta. We believe there will be an impact on our Q2-2023 and full year production forecast but given the preliminary and ongoing nature of the situation, Freehold does not have an estimate of the impact at this time and will be maintaining our 2023 guidance. We expect to provide an update when we have more information. The following table summarizes our key operating assumptions for 2023, where production is expected to be weighted approximately 64% oil and NGLs and 36% natural gas.
2023 Guidance | ||
Production (boe/d)(1) | 14,500 – 15,500 | |
Funds from operations ($MM) | $250 – $280 | |
West Texas Intermediate crude oil (US$/bbl) | $80.00 | |
AECO natural gas (Cdn$/Mcf) | $3.00 | |
Nymex (US$/Mcf) | $3.00 | |
Exchange rate (US$/Cdn$) | $0.75 |
(1) 2023 production is expected to consist of 8% heavy oil, 45% light and medium oil, 11% NGL’s and 36% natural gas
Conference Call Details
A conference call to discuss financial and operational results for the period ended March 31, 2023, will be held for the investment community on Thursday May 11, 2023, beginning at 7:00 AM MST (9:00 AM EST). To participate in the conference call, approximately 10 minutes prior to the call, please dial 1-800-898-3989 (toll-free in North America) participant passcode is 9055297#.