Freehold Royalties Ltd. (Freehold or the Company) (TSX:FRU)
announces fourth quarter and annual results for the period ended
December 31, 2020.
Operating and Financial
Highlights
|
Three Months Ended December 31 |
Twelve Months Ended December 31 |
FINANCIAL ($000s, except as noted) |
2020 |
2019 |
Change |
2020 |
2019 |
Change |
Royalty and other revenue |
25,793 |
36,827 |
-30% |
89,958 |
140,837 |
-36% |
Net income (loss) |
373 |
6113 |
-94% |
(13,931) |
5,193 |
nm |
Per share, basic and diluted ($)(1) |
- |
0.05 |
-100% |
(0.12) |
0.04 |
nm |
Cash flows from operations |
20,610 |
27,954 |
-26% |
65,767 |
105,801 |
-38% |
Funds from operations |
22,129 |
30,659 |
-28% |
72,891 |
118,098 |
-38% |
Per share, basic ($) (1) |
0.19 |
0.26 |
-27% |
0.61 |
1.00 |
-39% |
Acquisitions and related expenditures |
222 |
2,727 |
-92% |
7,058 |
49,689 |
-86% |
Dividends Paid |
5,343 |
18,675 |
-71% |
39,158 |
74,663 |
-48% |
Per share ($) (2) |
0.045 |
0.1575 |
-71% |
0.3300 |
0.6300 |
-48% |
Dividends declared |
5,938 |
18,683 |
-68% |
35,306 |
74,663 |
-53% |
Per share ($) (2) |
0.0500 |
0.1575 |
-68% |
0.2975 |
0.6300 |
-53% |
Payout ratio (3) |
24% |
61% |
-37% |
54% |
63% |
-9% |
Long term debt |
93,000 |
109,000 |
-15% |
93,000 |
109,000 |
-15% |
Net debt |
65,765 |
94,634 |
-31% |
65,765 |
94,634 |
-31% |
Shares outstanding, period end (000s) |
118,788 |
118,623 |
- |
118,788 |
118,623 |
- |
Average shares outstanding (000s) (1) |
118,747 |
118,568 |
- |
118,685 |
118,486 |
- |
OPERATING |
|
|
|
|
|
|
Royalty production (boe/d) (4) |
9,563 |
10,315 |
-7% |
9,605 |
10,229 |
-6% |
Light and medium oil (bbl/d) |
3,239 |
4,024 |
-20% |
3,449 |
3,814 |
-10% |
Heavy oil (bbl/d) |
1,173 |
1,089 |
8% |
1,018 |
1,034 |
-2% |
NGL (bbl/d) |
813 |
799 |
2% |
827 |
853 |
-3% |
Total liquids (bbl/d) |
5,225 |
5,912 |
-12% |
5,294 |
5,701 |
-7% |
Natural gas (Mcf/d) |
26,027 |
26,416 |
-1% |
25,868 |
27,166 |
-5% |
Total production (boe/d) (4) |
9,681 |
10,740 |
-10% |
9,781 |
10,628 |
-8% |
Oil and NGL (%) |
54 |
57 |
-4% |
55 |
56 |
-2% |
Average price realizations ($/boe) (4) |
28.16 |
37.04 |
-24% |
24.56 |
35.78 |
-31% |
Cash Costs ($/boe) (3) (4) |
4.11 |
5.10 |
-19% |
4.63 |
5.30 |
-13% |
Operating netback ($/boe) (3) (4) |
28.64 |
36.19 |
-21% |
24.56 |
35.28 |
-30% |
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)
President’s Message
2020 was a significant year for Freehold, one in
which we undertook a number of key initiatives to underpin the
long-term sustainability of our business and reinforce Freehold’s
identity as a lower risk income vehicle for our shareholders. This
was accomplished despite the challenging backdrop of COVID-19 and
the sharp decline in oil prices.
Our team worked hard to identify acquisition
opportunities in the bottom of the price cycle and in November we
announced the acquisition of a diversified U.S. royalty package
that solidified our position as the only publicly traded North
American focused oil and gas royalty company. This transaction
added a growing production stream to our portfolio and broadens the
opportunity set in front of us to further enhance our
portfolio.
In April, we completed a divestment of the
majority of our remaining working interest assets, allowing for
increased focus on our core royalty business and driving our cash
costs down to the lowest level in our 24-year history.
Our 2020 royalty production was very resilient
to the commodity price volatility, declining only 6% year-over-year
despite the slowdown in Western Canada drilling activity and the
production shut-ins that occurred in response to the pricing lows
in the second quarter.
The initiatives we have taken to position our
portfolio “in front of the drill bit” was rewarded in 2020 as
drilling activity ramped up in the second half of the year. In the
fourth quarter, we had more wells drilled on our royalty lands than
we had in Q4-2019 and we see continued strong drilling activity
into 2021.
The groundwork we have set in 2020 has
positioned us for an exciting 2021 as we return to growth,
projecting a 10–15% increase in royalty production year-over-year.
The improved economic conditions are very positive for our
industry. Reflecting our strong belief in our business model, our
healthy balance sheet, the improving commodity price stability, and
our commitment to return value to our shareholders, we will revise
our dividend upward by 50% from $0.02/share to $0.03/share starting
with our April dividend payment.
We want to thank our employees and shareholders
for their patience and support as we navigated 2020. We see an
exciting year ahead for Freehold and its shareholders.
David M. Spyker
President and CEO
Dividend Announcement
With an improved outlook for commodity prices
and a strengthened business model, Freehold's Board of Directors
(the Board) has approved increasing the monthly dividend from $0.02
to $0.03 per share, or $0.36 per share annualized. The $0.03 per
share dividend will commence on April 15, 2021 and will be paid to
shareholders of record on March 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 substantially,
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 positioning and business
strength.
Subsequent Event
U.S. Royalty Acquisition
On January 5, 2021, Freehold closed the
acquisition of U.S. royalty properties for US$58 million ($74
million) net of customary adjustments financed by $60.7 million of
proceeds from an equity financing and utilization of Freehold’s
credit facilities. The acquisition included 400,000 gross drilling
unit acres of mineral title and overriding royalty interests across
12 basins in eight states; predominantly weighted towards the
Permian and Eagle Ford basins. 2021 production associated with the
acquired assets is forecast at 1,250 boe/d. The acquired assets are
well capitalized having seen approximately 1.5% of all Lower-48
E&P capital spending over the past five years.
Freehold also closed two additional U.S. royalty
transactions subsequent to year-end, complementing our positions in
the Bakken and Permian basins. Total consideration associated with
these transactions was approximately $4.7 million and the assets
are estimated to add 75 boe/d to 2021 average production.
Fourth Quarter Highlights
- Dividends declared for Q4-2020
totaled $0.05 per share, up 11% from Q3-2020 with the December
increase to $0.02 per share. Our payout ratio (1) totaled 24% for
the quarter and 54% for the year.
- With decreasing
volatility in oil prices and strength in operations, on November
10, 2020, Freehold announced a 33% increase to the monthly dividend
to $0.02 per share (annualized $0.24 per share). The first payment
at the revised dividend level was paid to shareholders on record as
of December 31, 2020 on January 15, 2021.
- Funds from
operations for Q4-2020 totaled $22.1 million, an increase of 11%
from Q3-2020. On a per share basis, funds from operations totaled
$0.19 per share in Q4-2020, a 12 % increase from the $0.17 per
share in Q3-2020.
- At December 31,
2020, net debt totaled $65.8 million, down from $81.7 million in
Q3-2020, implying a net debt to 12-month trailing funds from
operations ratio of 0.9 times. The decrease in net debt over the
previous quarter reflected excess free cash flow over and above our
dividend and acquisition capital in Q4-2020.
- Cash costs (1)
for the quarter totaled $4.11/boe, up from $3.70/boe in Q3-2020 but
down from $5.10/boe achieved during the same period last year. The
decrease year-over-year reflects reduced debt levels and lower
interest charges, the disposition of working interest properties,
and lower G&A costs.
- Q4-2020 net
income totaled $0.4 million, flat versus Q3-2020.
- Freehold’s total
royalty production averaged 9,563 boe/d, up 5% versus the previous
quarter.
- Royalty oil
production, which has higher operating netbacks (1) and returns,
averaged 5,225 boe/d in Q4-2020, increasing 4% when compared to the
previous quarter, as wells returned from being shut-in.
- Wells drilled on
our royalty lands totaled 111 (4.9 net) in the quarter, up on a net
measure versus 186 (4.5 net) drilled during the same period in
2019.
|
(1) |
See Non-GAAP Financial Measures |
2020 Highlights
- Dividends
declared for 2020 totaled $35.3 million ($0.30 per share), down 53%
versus 2019 when Freehold declared dividends of $74.7 million
($0.63 per share). Our dividend payout ratio (1) for 2020 totaled
54%.
- Royalty and
other revenue totaled $90.0 million in 2020, down 36% from the
previous year as weakness in crude oil prices impacted revenue and
production volumes. Total royalty revenue was comprised of 79% oil
and natural gas liquids (NGL’s) as we maintained our crude oil and
liquids focus.
- Funds from
operations in 2020 totaled $72.9 million or $0.61 per share, down
38% from $118.1 million or $1.00 per share in 2019.
- Freehold exited
2020 with long term debt of $93 million, implying debt to trailing
funds from operations of 1.3 times. This compares to $109 million
in long term debt as of year-end 2019 with a 0.9 ratio. Despite
lower funds from operations causing an increase in this ratio, the
absolute decrease in leverage reflected funds from operations
exceeding dividend obligations.
- Freehold
completed $3.3 million in royalty acquisitions in 2020. Much of the
focus was associated with smaller tuck-in deals building on
Freehold’s position in North Dakota. Subsequent to year-end,
Freehold completed its first material U.S. royalty transaction as
previously discussed.
- 2020 royalty
production averaged 9,605 boe/d, a 6% decrease versus the previous
year as reduced third-party royalty drilling additions and shut-in
production negatively impacted volumes. Since late Q2-2020,
however, royalty production has displayed steady growth into
year-end, as producers have increased capital towards third-party
drilling and shut-in volumes have come back on-line.
- Oil and NGL’s
volumes represented 55% of 2020 royalty production, down slightly
from 56% in 2019 as weakness in crude oil prices during the year
resulted in shut-in production which was estimated to have an
annual impact of 365 boe/d.
- In total, 372
(13.6 net) wells were drilled on our royalty lands in 2020, a 35%
and 42% decrease on a gross and net measure respectively, versus
2019. Despite the reduction in drilling year-over-year, Freehold
saw a ramp-up in activity during Q4-2020 with 111 gross (4.9 net)
wells drilled on our royalty lands, a 9% improvement on a net
measure versus the same quarter in 2019. We saw a broadening of
producers drilling on our royalty lands over the fourth quarter
with capital focused on southeast Saskatchewan, the Viking, the
Cardium in northwest Alberta and the Sparky in Central Alberta
driving much of drilling activity for the period.
- Proved plus
probable net reserves (2) totaled 29.4 MMboe as at December 31,
2020, down from 31.7 MMboe as at December 31, 2019. The slight
decrease year-over-year reflected working interest dispositions and
production despite additions from tuck-in acquisitions in North
Dakota, drilling additions and an on-going evaluation of our
undeveloped properties.
|
(1) |
See Non-GAAP Financial Measures |
|
(2) |
A detailed review of Freehold's reserve information, including a
summary of the evaluation of Freehold’s reserves and associated
future net revenues as prepared by Trimble Engineering Associates
Ltd., Freehold’s independent reserves evaluator effective as at
December 31, 2020, is provided in the Annual Information Form
(AIF). A copy of the AIF can be found on Freehold's website at
www.freeholdroyalties.com or www.sedar.com. |
Q4 drilling ahead of 2019 levels
In total, 372 (13.6 net) wells were drilled on
our royalty lands in 2020, a 35% decline on a net measure versus
2019. We saw reduced drilling activity associated with an overall
reduction in North America drilling. Freehold’s royalty land base,
however, continued to outperform activity levels across western
Canada and North Dakota.
In 2020, approximately 49% of gross wells on our
royalty lands targeted prospects in Saskatchewan, 40% in Alberta
and 11% in Manitoba. Producers continue to remain focused on oil
prospects within Freehold’s land base with 87% of prospects drilled
during the year, targeting oil and liquids with 80% of net wells
drilled targeting gross overriding royalty (GORR) prospects with
the remaining 20% drilled on Freehold’s mineral title lands. The
Viking in southwest Saskatchewan, Clearwater in central Alberta,
Cardium in northwest Alberta and Sparky in central Alberta continue
to be key areas of focus, with our top royalty payors remaining
well capitalized.
In Q4-2020, Freehold saw 111 gross (4.9 net)
wells drilled on our royalty lands which was more than double
Q3-2020 activity and an 9% improvement versus the same quarter in
2019. Looking forward, we believe there remains strong momentum
both within our Canadian and U.S. portfolios that is expected to
drive strong third-party drilling and production additions into
2021. The acquisition of U.S. royalty production and royalty lands
subsequent to 2020 is expected to further diversify our royalty
lands, bringing added sustainability to our portfolio and
dividend.
Royalty Interest Drilling
|
Three Months Ended December 31 |
Twelve Months Ended December 31 |
|
2020 |
2019 |
2020 |
2019 |
|
Gross |
Net (1) |
Gross |
Net (1) |
Gross |
Net (1) |
Gross |
Net (1) |
Total |
111 |
4.9 |
186 |
4.5 |
372 |
13.6 |
641 |
20.8 |
(1) Equivalent net wells are the aggregate of the numbers
obtained by multiplying each gross well by our royalty interest
percentage.
2021 Guidance
The following table summarizes our key operating
assumptions for 2021.
- With the resurgence in drilling
activity on Freehold’s lands, we are increasing our 2021 guidance
and assuming an average royalty production range of 10,500 boe/d to
11,000 boe/d. Royalty volumes are expected to be weighted
approximately 55% oil and NGL’s and 45% natural gas.
- We are assuming WTI and Edmonton
Light Sweet oil price assumptions of US$50.00/bbl and $58.00/bbl
respectively, and AECO at $2.75/mcf.
|
|
Guidance Dated |
2021 Annual Average |
|
Mar. 4, 2021 |
Royalty
production |
boe/d |
10,500-11,000 |
West
Texas Intermediate crude oil |
US$/bbl |
50.00 |
Edmonton
Light Sweet crude oil |
Cdn$/bbl |
58.00 |
AECO
natural gas |
Cdn$/Mcf |
2.75 |
Exchange rate |
Cdn$/US$ |
0.79 |
(1) See Non-GAAP Financial Measures.
2020 Reserves Information
Freehold’s reserve information, including a
summary of the evaluation of Freehold’s reserve and associated
future net revenue as prepared by Trimble Engineering Associates
Ltd., Freehold’s independent reserve evaluator effective as at
December 31, 2020 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, 2020 will be
held for the investment community on Friday March 5, 2021 beginning
at 7:00 AM MST (9:00 AM ET). To participate in the conference call,
approximately 10 minutes prior to the conference call, please dial
1-866-696-5910 (toll-free in North America) participant passcode is
5856352#.
Forward-Looking StatementsThis
news release offers our assessment of Freehold’s future plans and
operations as at March 4, 2021 and contains forward-looking
statements that we believe allow readers to better understand our
business and prospects. These forward-looking statements include
our expectations for the following:
- our expectation of continued strong
drilling activity in 2021;
- our projection of a 10–15% increase
in royalty production year-over-year;
- our commitment to return value to
our shareholders;
- our outlook for commodity prices
including supply and demand factors relating to crude oil, heavy
oil and natural gas;
- our expectation of seeing
meaningful, high quality, acquisition opportunities across North
America;
- our intent to retain financial
flexibility to pursue acquisition opportunities and enhance our
portfolio positioning and business strength;
- 2021 forecast production associated
with various U.S. royalty asset acquisitions;
- our expectation of strong
third-party drilling and production additions within our Canadian
and U.S. portfolios in 2021;
- our expectation that the
acquisition of U.S royalty production and royalty lands will
further diversify our royalty lands, bringing added sustainability
to our portfolio and dividend;
- 2021 guidance including average
royalty production (including commodity weighting) and commodity
prices; and
- our dividend policy and
expectations for future dividends.
By their nature, forward-looking statements are
subject to numerous risks and uncertainties, some of which are
beyond our control, including the impact of the COVID-19 pandemic
on economic activity and demand for oil and natural gas, general
economic conditions, industry conditions, volatility of commodity
prices, currency fluctuations, imprecision of reserve estimates,
royalties, environmental risks, taxation, regulation, changes in
tax or other legislation, competition from other industry
participants, the lack of availability of qualified personnel or
management, stock market volatility, and our ability to access
sufficient capital from internal and external sources. Risks are
described in more detail in our AIF for the year ended December 31,
2020 available at www.sedar.com.
With respect to forward-looking statements
contained in this news release, we have made assumptions regarding,
among other things, future commodity prices, future capital
expenditure levels, future production levels, future exchange
rates, future tax rates, future legislation, the cost of developing
and producing our assets, our ability and the ability of our
lessees to obtain equipment in a timely manner to carry out
development activities, our ability to market our oil and gas
successfully to current and new customers, our expectation for the
consumption of crude oil and natural gas, our expectation for
industry drilling levels, our ability to obtain financing on
acceptable terms, shut-in production, production additions from our
audit function and our ability to add production and reserves
through development and acquisition activities. Additional
operating assumptions with respect to the forward-looking
statements referred to above are detailed in the body of this news
release.
You are cautioned that the assumptions used in
the preparation of such information, although considered reasonable
at the time of preparation, may prove to be imprecise and, as such,
undue reliance should not be placed on forward-looking statements.
Our actual results, performance, or achievement could differ
materially from those expressed in, or implied by, these
forward-looking statements. We can give no assurance that any of
the events anticipated will transpire or occur, or if any of them
do, what benefits we will derive from them. The forward-looking
information contained in this document is expressly qualified by
this cautionary statement. To the extent any guidance or
forward-looking statements herein constitute a financial outlook,
they are included herein to provide readers with an understanding
of management's plans and assumptions for budgeting purposes and
readers are cautioned that the information may not be appropriate
for other purposes. Our policy for updating forward-looking
statements is to update our key operating assumptions quarterly
and, except as required by law, we do not undertake to update any
other forward-looking statements.
You are further cautioned that the preparation
of financial statements in accordance with International Financial
Reporting Standards (IFRS), which are the Canadian generally
accepted accounting principles (GAAP) for publicly accountable
enterprises, requires management to make certain judgments and
estimates that affect the reported amounts of assets, liabilities,
revenues, and expenses. These estimates may change, having either a
positive or negative effect on net income, as further information
becomes available and as the economic environment changes.
Conversion of Natural Gas to Barrels of
Oil Equivalent (BOE)
To provide a single unit of production for
analytical purposes, natural gas production and reserves volumes
are converted mathematically to equivalent barrels of oil (boe). We
use the industry-accepted standard conversion of six thousand cubic
feet of natural gas to one barrel of oil (6 Mcf = 1 bbl). The 6:1
boe ratio is based on an energy equivalency conversion method
primarily applicable at the burner tip. It does not represent a
value equivalency at the wellhead and is not based on either energy
content or current prices. While the boe ratio is useful for
comparative measures and observing trends, it does not accurately
reflect individual product values and might be misleading,
particularly if used in isolation. As well, given that the value
ratio, based on the current price of crude oil to natural gas, is
significantly different from the 6:1 energy equivalency ratio,
using a 6:1 conversion ratio may be misleading as an indication of
value.
Non-GAAP Financial Measures
Within this news release, references are made to
terms commonly used as key performance indicators in the oil and
gas industry. We believe that operating income, operating netback,
payout ratio, free cash flow and cash costs are useful supplemental
measures for management and investors to analyze operating
performance, financial leverage, and liquidity, and we use these
terms to facilitate the understanding and comparability of our
results of operations and financial position. However, these terms
do not have any standardized meanings prescribed by GAAP and
therefore may not be comparable with the calculations of similar
measures for other entities.
Payout ratios are often used for dividend paying
companies in the oil and gas industry to identify its dividend
levels in relation to the funds it receives and uses in its capital
and operational activities. Freehold’s payout ratio is calculated
as dividends paid as a percentage of funds from operations.
Free cash flow is calculated by subtracting
capital expenditures from funds from operations. In periods where
Freehold has no capital expenditures, this figure is
interchangeable with funds from operations. Free cash flow is a
measure often used by dividend paying companies to determine cash
available for the payment of dividends, reducing debt or available
for investment.
Cash costs is a total of all recurring costs in
the statement of income deducted in determining funds from
operations. For Freehold, cash costs are identified as operating
expense, general & administrative expense, interest expense and
share based compensation payments. It is key to funds from
operations, representing the ability to sustain dividends, repay
debt and fund capital expenditures.
We refer to various per boe figures which
provide meaningful information on our operational performance. We
derive per boe figures by dividing the relevant revenue or cost
figures by the total volume of oil, NGL and natural gas production
during the period, with natural gas converted to equivalent barrels
of oil as described above.
For further information related to these
non-GAAP terms, including reconciliations to the most directly
comparable GAAP terms, see our most recent MD&A.
For further information, contact:Freehold Royalties
Ltd.Matt DonohueManager, Investor Relations and Capital
Markets |
t.f.tf.e.w. |
403.221.0833403.221.08881.888.257.1873mdonohue@rife.com
www.freeholdroyalties.com |
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