Freehold Royalties Ltd. (Freehold or the Company) (TSX:FRU)
announces second quarter results for the period ended June 30,
2022.
Operating and Financial Highlights
| |
Three Months Ended June 30 |
Three Months Ended March 31 |
|
FINANCIAL ($ millions, except as noted) |
2022 |
|
2021 |
|
Change |
2022 |
|
Change |
|
Funds from operations |
83.8 |
|
40.2 |
|
109 |
% |
71.9 |
|
17 |
% |
| Funds from operations per
share, basic ($) (1) |
0.56 |
|
0.31 |
|
81 |
% |
0.48 |
|
17 |
% |
| Acquisitions and related
expenditures |
20.7 |
|
0.9 |
|
nm |
|
1.3 |
|
nm |
|
| Dividends paid per share ($)
(2) |
0.24 |
|
0.10 |
|
140 |
% |
0.18 |
|
33 |
% |
| Payout ratio (%) (3) |
43 |
% |
33 |
% |
10 |
% |
38 |
% |
5 |
% |
| Net debt |
33.1 |
|
40.8 |
|
(19 |
%) |
62.6 |
|
(46 |
%) |
|
OPERATING |
|
|
|
|
|
|
Total production (boe/d) (4) |
13,453 |
|
11,137 |
|
21 |
% |
13,676 |
|
(2 |
%) |
| Oil and NGL (%) |
61 |
% |
58 |
% |
3 |
% |
60 |
% |
1 |
% |
| Petroleum and natural gas
realized price ($/boe) (4) |
87.55 |
|
44.22 |
|
98 |
% |
69.71 |
|
26 |
% |
| Cash costs excluding stock
based compensation ($/boe) (3) (4) |
3.61 |
|
3.13 |
|
15 |
% |
3.70 |
|
(2 |
%) |
| Cash costs ($/boe) (3)
(4) |
8.38 |
|
4.48 |
|
87 |
% |
3.70 |
|
126 |
% |
| Netback ($/boe) (3) (4) |
78.80 |
|
39.83 |
|
98 |
% |
66.17 |
|
19 |
% |
|
ROYALTY INTEREST DRILLING (gross / net) |
|
|
|
|
|
|
Canada |
76 / 2.3 |
|
59/ 2.1 |
|
28% / 10% |
143 / 5.8 |
|
(47%) / (61%) |
| United States |
148 / 0.7 |
|
32 / 0.2 |
|
492% / 250% |
93 / 0.4 |
|
59% / 75% |
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)
President’s Message
The second quarter of 2022 represents the third
consecutive quarter of record funds from operations, fueled by the
execution of Freehold’s North American strategy. By expanding the
Company’s asset base to the premier basins across North America,
Freehold has enhanced the sustainability of the Company’s cash flow
profile which underpins our ability to grow our dividend and
enhance our portfolio through reinvestment. Record funds from
operations are a function of the structural shift in Freehold’s
business yielding a larger exposure to US pricing, with US realized
pricing in the second quarter 19% higher on an oil equivalent basis
than our Canadian realized pricing.
With the quality and resiliency of Freehold’s
current asset base, further improved by three recent US
acquisitions, we will be increasing our monthly dividend by 13%
from $0.08/share to $0.09/share. We see this increase as striking a
balance between returning capital to shareholders and maintaining
balance sheet strength while retaining the optionality to pursue
strategic acquisition opportunities.
Volumes of 13,453 boe/d showed a decline from
the previous quarter, although are up 21% from Q2-2021. Canadian
volumes were flat quarter over quarter with spring breakup
impacting activity levels. For our US assets, we continue to expect
back half weighted growth in production through 2022 given a
pronounced uptrend in spuds and permitted wells through the first
half of 2022.
Given the extended cycle times in the US for
permitting wells to generating sales production, and with some of
Freehold’s more active US producers facing further headwinds caused
by global supply chain challenges and crew availability, there have
been delays in bringing new wells on production. Despite these
delays, the level of well permitting, drilling activity, and
revenue generating capacity of our US assets have exceeded
expectations. We anticipate that some of the production additions
expected in the first half of 2022 have been delayed to the second
half of 2022. This has resulted in softer H1-2022 US production
than originally expected and slightly lower forecast full year 2022
average production, before taking into account the production
additions associated with our recently announced acquisitions.
Activity levels remained robust through the
first half of 2022, with the seasonal slowdown in Canada associated
with spring breakup partially offset by a sizeable increase in
drilling across the Company’s US asset base. Within our North
American portfolio Freehold has exposure to a strong suite of
well-capitalized public and private operators across all the
premier basins including the Eagle Ford, Midland in the Permian,
Clearwater and the Deep Basin.
As previously announced and subsequent to
quarter end, Freehold entered into definitive agreements with two
private sellers to acquire mineral title and royalty assets located
predominantly in Howard County in the Midland basin for $123
million and in the Eagle Ford basin for $32 million.
2022 has been an exciting year for Freehold as
we continue to incorporate the US portfolio expansion into our
business. This expansion, which started in late 2020, and continues
to this day with our recent Midland and Eagle Ford deals has
provided us the opportunity to materially grow our production base
and drilling inventory, has delivered three consecutive quarters of
record funds from operations, and has allowed us to restore our
monthly dividend to 2015 levels of $0.09/share, all while
maintaining balance sheet strength.
Dividend Announcement
The Board of Directors of Freehold (the Board)
has declared a dividend of $0.09 per share to be paid on September
15, 2022, to shareholders of record on August 31, 2022. The
dividend to be paid on September 15, 2022, represents a 13%
increase over the $0.08 per common share dividend to be paid on
August 15, 2022, to shareholders on record on July 29, 2022. The
dividend is designated as an eligible dividend for Canadian income
tax purposes.
Subsequent Events
On July 7th, 2022, Freehold announced that it
had entered into definitive agreements with two private sellers to
acquire high-quality US mineral title and royalty assets located in
the Midland basin predominantly in Howard County, Texas (the
“Howard County Midland Assets”) for $123 million and in the Eagle
Ford basin in Texas (the Eagle Ford Assets) for $32 million (net of
estimates for exchange rate and customary closing
adjustments).
The Howard County Midland Assets consist of a
concentrated mineral title and royalty land position across 51,000
gross acres (approximately 4,400 Net Royalty Acres (NRA)(2))with an
average royalty rate of 1.1%. These assets are expected to provide
a significant growth wedge through 2023, growing from an expected
Q4-2022 average production of 550 boe/d (95% liquids) to average
750 boe/d in 2023 (95% liquids). Barrels produced from these assets
will provide a meaningful uplift to Freehold’s realized commodity
prices given the $115/boe H1-2022 realized price (for reference,
the realized commodity price in H1-2022 for Freehold’s existing
asset base was $78.60/boe). This near-term growth is expected to
come through a combination of well funded public and private
entities. The acquisition of the Howard Country Midland
Assets closed August 4, 2022, and the purchase price was funded
with cash flow and Freehold’s existing credit capacity.
The Eagle Ford Assets consist of 41,000 gross
acres (approximately 2,500 NRA(2)) spread across the Eagle Ford
basin with an average royalty rate of 0.8%. Low volatility
production is expected to grow from 210 boe/d in Q4-2022 (78%
liquids) to average 250 boe/d in 2023 (76% liquids), increasing
Freehold’s forecasted Eagle Ford production by approximately 10% to
2,800 boe/d in 2023. Similar to the Howard Country Midland Assets,
the Eagle Ford Assets will provide an increase to Freehold’s
realized pricing with a H1-2022 realized price of $88/boe (78%
liquids weighting). A diversified group of large payors are
expected to drive the majority of development on these assets. The
acquisition of the Eagle Ford Assets is expected to close September
2022 and purchase price is expected to be funded by Freehold’s
existing credit capacity.
These acquisitions enhance the quality of
Freehold’s North American royalty portfolio through further
strengthening of our peer leading realized commodity pricing,
building on the production growth platform we have established in
the Permian and Eagle Ford basins, and continuing to position our
portfolio in the highest quality oil and gas development areas
across North America.
|
Summary of US Acquisitions |
Howard County Midland Assets |
Eagle Ford Assets |
|
Purchase
Price(1)(millions) |
$123 |
$32 |
|
Net Royalty
Acres(2) |
4,400 |
2,500 |
|
2023E Average Production (boe/d) |
750 |
250 |
|
2023E Funds from
Operations(3)(millions) |
$23 |
$5 |
(1) Howard County Midland Assets closed on
August 4, 2022. Howard Country Midland Assets and Eagle Ford Assets
purchase price includes estimated exchange rates and reductions for
closing adjustments.(2) Net royalty acreage or NRA represents
mineral ownership normalized to a 12.5% royalty, which is a term
commonly used by U.S. oil and gas companies in describing royalty
acreage. NRA does not reflect Freehold's actual royalty interest in
the royalty lands.(3) Assumes a West Texas Intermediate price of
US$80/barrel of oil and a NYMEX natural gas price of US$4.50/Mcf
and an exchange rate of US$0.80 for every CDN$1.00.
Second Quarter Highlights
- Announced the appointment of Sylvia Barnes and Valerie Mitchell
to the Board. Both individuals are US based and bring a wealth of
US business knowledge and experience to complement the skills and
experience of our current Board members.
- Dividends declared for Q2-2022 totaled $36.2 million ($0.24 per
share), up 150% in total versus the same period in 2021 when
Freehold declared dividends of $14.5 million ($0.11 per share).
Freehold’s dividend payout ratio(1) for Q2-2022 was 43% versus 33%
during the same period in 2021.
- Delivered third straight quarter of record level total funds
from operations in Q2-2022 of $83.8 million ($0.56/share).
- Recorded a realized price of $87.55/boe over Q2-2022 on a
corporate measure, up 86% versus the same period last year and 26%
versus the previous quarter. Realized pricing from Freehold’s US
portfolio totalled $99.16/boe for the quarter versus $83.04/boe
within our Canadian portfolio. Pricing from both the US and
Canadian portfolios were up materially versus the previous quarter
and the same period in 2021.
- Cash costs(1) for the quarter totalled $8.38/boe, up 87% versus
the same period in 2021. Almost 100% of the increase year-over-year
was driven by higher cash payout on share-based compensation
(share-based compensation payouts occur annually in Q2) and also
includes the cash settlement of redeemed deferred share units from
a retiring director.
- Recorded a netback(1) of $78.80/boe in Q2-2022, up 19% over
Q1-2022.
- Production averaged 13,453 boe/d in Q2-2022, an increase of 21%
over Q2-2021 and a slight decrease of 2% over Q1-2022. Canadian oil
and gas royalty volumes declined 0.5% in Q2-2022 relative to
Q1-2022, averaging 9,692 boe/d. This decline was mainly due to
limited activity during the spring breakup period. However,
activity levels began to show a strong recovery in June.
- US oil and gas royalty production averaged 3,761 boe/d in
Q2-2022, down slightly from 3,883 boe/d in Q1-2022. Volumes in the
US were negatively affected by a combination of lower completion
activities and lower net royalty interest wells brought on
production during the quarter. New wells spuds have been strong in
the first half of 2022 with Q2-2022 increasing meaningfully over
Q1-2022. This drilling activity will result in production additions
starting in the second half of 2022 and into 2023.
- Achieved a 146% increase in gross wells drilled on our royalty
lands in Q2-2022 versus Q2-2021. In total, Freehold had 224 gross
(3.0 net) wells drilled in Q2-2022, slightly down on a gross and
net basis versus Q1-2022 given the higher proportion of wells
drilled coming from US assets. At the end of Q2-2022 there were
five rigs drilling on our Canadian lands and 28 rigs drilling on
our US lands.
- Net debt(1) of $33.1 million at Q2-2022, represents 0.1 times
trailing funds from operations.
(1) See Non-GAAP Financial Ratios and Other Financial
Measure
Drilling and Leasing Activity
In total, 224 gross wells were drilled on
Freehold’s royalty lands in Q2-2022, a 146% increase versus the
same period in 2021. For the first six months of 2022, 460 gross
wells were drilled on Freehold’s land, this compares to 196 gross
wells for the same period in 2021. The significant increase in
drilling activity is attributed to the recovery of commodity prices
and our US and Canadian royalty acquisitions.
Of the total wells drilled in Q2-2022,
approximately 59% of gross wells on Freehold royalty lands targeted
prospects in Texas, 22% in Alberta, and 13% in Saskatchewan with
the balance spread across other regions. More broadly, 61% of all
gross wells drilled targeted US prospects with the remainder
targeting Canadian prospects.
Canada
With spring break-up occurring for the majority
of second quarter, third-party drilling activity within Freehold’s
Canadian portfolio was down compared to levels seen in the previous
period. In total, Freehold had 76 gross locations drilled on its
royalty lands during the quarter. This compared to 59 gross
locations drilled in Canada during the same period in 2021. For the
first six months of 2022, 220 gross locations were drilled on
Freehold’s Canadian land, a 50% increase over the 146 gross
locations drilled in the same period in 2021. Approximately 83% of
gross wells drilled on Freehold’s Canadian lands targeted gross
overriding royalty (GORR) prospects, with the remaining 17%
targeting mineral title prospects.
While producers continue to remain disciplined
in setting their capital programs, we continue to see significant
and broad increases in drilling activity across our Canadian
portfolio compared to 2021.
During Q2-2022, Freehold generated $0.5 million
in bonus and rental revenue, entering into 17 distinct leasing
arrangements with 8 different counterparties. For the first half of
2022 new leasing has already surpassed full year 2021 levels and is
on trend to be as strong as 2019 activity levels.
US
Drilling activity levels on Freehold’s US lands
were generally above expectations for the quarter with most
activity targeting light oil prospects in the Midland and Eagle
Ford basins, a trend in-line with the previous quarter. New wells
drilled on Freehold’s US assets continue to be led by public
operators, however the proportion of wells drilled by private
operators has increased in Q2-2022 compared to Q1-2022.
Freehold’s inventory of permitted wells and
spuds increased materially during the quarter and first half of
2022, indicative of the broad increase in overall industry activity
during this time. Given the average timeline in the US for
permitting wells to generating sales production and spudding wells
to generating sales production of approximately 9 months and 5
months respectively, this build in inventory is expected to provide
production growth in the second half of 2022 and into 2023.
Overall, 148 gross wells were drilled on our US
royalty lands during Q2-2022, which compares to 32 gross wells
during the same period in 2021 and 100 gross wells in Q1-2022.
Approximately 80% of gross wells drilled on Freehold’s US lands
targeted mineral title prospects with the remaining 20% targeting
GORR prospects. Q2-2022 was the strongest drilling quarter on the
US royalty lands currently owned by Freehold since Q1-2020 (most of
such lands were acquired after Q1-2020).
Royalty Interest Drilling
|
|
Three Months Ended June 30 |
Six Months Ended June 30 |
|
|
2022 |
2021 |
2022 |
2021 |
|
|
Gross |
Net(1) |
Gross |
Net(1) |
Gross |
Net(1) |
Gross |
Net(1) |
| Canada |
76 |
2.3 |
59 |
2.1 |
219 |
8.1 |
146 |
5.5 |
|
United States |
148 |
0.7 |
32 |
0.2 |
241 |
1.1 |
50 |
0.3 |
|
Total |
224 |
3.0 |
91 |
2.3 |
460 |
9.2 |
196 |
5.8 |
(1) Equivalent net wells are the aggregate of the numbers
obtained by multiplying each gross well by our royalty interest
percentage
2022 Guidance Update
After realizing actual results for the first
half of 2022 and incorporating Freehold’s most recent and upcoming
US acquisitions, we are updating guidance for 2022. 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 Guidance |
|
Guidance Dated August 9, 2022 |
Guidance Dated May 10, 2022 |
|
Average production (boe/d) (1) |
|
13,750-14,750 |
13,750-14,750 |
|
Funds from operations ($mm) |
|
$300-$320 |
$230-$250 |
|
West Texas Intermediate crude oil (US$/bbl) |
|
$97.00 |
$75.00 |
|
Edmonton Light Sweet crude oil (cdn$/bbl) |
|
$120.00 |
$88.00 |
|
AECO natural gas (Cdn$/Mcf) |
|
$5.00 |
$4.00 |
|
NYMEX natural gas (US$/Mcf) |
|
$5.00 |
4.00 |
|
Exchange rate (US$/Cdn$) |
|
0.79 |
0.80 |
(1) 2022 production is expected to consist of 8%
heavy oil, 41% light and medium oil, 11% NGL’s and 40% natural
gas
Conference Call Details
A conference call to discuss financial and
operational results for the period ended June 30, 2022, will be
held for the investment community on Wednesday August 10, 2022,
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 2666556#.
| For further
information, contact: |
| |
|
| Freehold Royalties
Ltd. |
| Matt Donohue |
| Manager, Investor
Relations & Capital Markets |
| t. |
403.221.0833 |
| f. |
403.221.0888 |
| tf. |
1.888.257.1873 |
| e. |
mdonohue@rife.com |
| w. |
www.freeholdroyalties.com |
Select Quarterly
Information
|
|
2022 |
2021 |
2020 |
|
Financial ($000s, except as noted) |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
|
Royalty and other revenue |
108,495 |
87,605 |
75,202 |
51,423 |
45,353 |
37,014 |
25,882 |
23,156 |
|
Net Income (loss) |
66,875 |
38,395 |
31,178 |
22,726 |
12,545 |
5,635 |
373 |
139 |
|
Per share, basic ($)(1) |
$0.44 |
$0.25 |
$0.21 |
$0.17 |
$0.10 |
$0.04 |
$- |
$- |
|
Cash flows from operations |
75,443 |
69,300 |
59,700 |
43,911 |
33,420 |
24,990 |
20,610 |
1,130 |
|
Funds from operations |
83,846 |
71,893 |
68,773 |
48,247 |
40,208 |
32,421 |
22,129 |
19,893 |
|
Per share, basic ($)(1) |
$0.56 |
$0.48 |
$0.46 |
$0.36 |
$0.31 |
$0.25 |
$0.19 |
$0.17 |
|
Acquisitions and related expenditures |
20,661 |
1,294 |
67,906 |
228,382 |
930 |
79,782 |
222 |
485 |
|
Dividends paid |
36,150 |
27,112 |
24,094 |
17,095 |
13,147 |
7,633 |
5,342 |
5,342 |
|
Per share ($)(2) |
$0.24 |
$0.18 |
$0.16 |
$0.13 |
$0.10 |
$0.06 |
$0.045 |
$0.045 |
|
Dividends declared |
36,151 |
30,124 |
25,598 |
19,364 |
14,464 |
9,201 |
5,938 |
5,342 |
|
Per share ($)(2) |
$0.24 |
$0.20 |
$0.17 |
$0.14 |
$0.11 |
$0.07 |
$0.05 |
$0.045 |
|
Payout ratio (%)(3) |
43% |
38% |
35% |
35% |
33% |
24% |
24% |
27% |
|
Long term debt |
86,000 |
105,000 |
146,000 |
126,000 |
78,000 |
96,000 |
93,000 |
107,000 |
|
Net debt |
33,095 |
62,578 |
101,229 |
75,278 |
40,751 |
64,797 |
65,765 |
81,678 |
|
Shares outstanding, period end (000s) |
150,640 |
150,626 |
150,612 |
150,585 |
131,490 |
131,463 |
118,788 |
118,746 |
|
Average shares outstanding (000s)(1) |
150,626 |
150,612 |
150,585 |
132,941 |
131,463 |
130,874 |
118,747 |
118,706 |
|
Operating |
|
|
|
|
|
|
|
|
|
Light and medium oil (bbl/d) |
5,378 |
5,305 |
5,401 |
4,038 |
4,102 |
3,811 |
3,239 |
3,384 |
|
Heavy oil (bbl/d) |
1,239 |
1,139 |
1,254 |
1,236 |
1,199 |
1,045 |
1,173 |
791 |
|
NGL (bbl/d) |
1,613 |
1,757 |
1,564 |
1,125 |
1,107 |
1,065 |
824 |
859 |
|
Total liquids (bbl/d) |
8,230 |
8,201 |
8,219 |
6,399 |
6,408 |
5,921 |
5,236 |
5,034 |
|
Natural gas (Mcf/d) |
31,336 |
32,845 |
34,700 |
29,203 |
28,376 |
30,132 |
26,671 |
24,656 |
|
Total production (boe/d)(4) |
13,453 |
13,676 |
14,005 |
11,265 |
11,137 |
10,944 |
9,681 |
9,143 |
|
Oil and NGL (%) |
61% |
60% |
59% |
57% |
58% |
54% |
54% |
55% |
|
Petroleum and natural gas realized price ($/boe)(4) |
87.55 |
69.71 |
57.44 |
49.17 |
44.21 |
37.31 |
28.16 |
26.95 |
|
Cash costs ($/boe)(3)(4) |
8.38 |
3.70 |
3.57 |
2.49 |
4.48 |
4.37 |
4.03 |
3.70 |
|
Netback ($/boe)(3)(4) |
78.80 |
66.17 |
53.58 |
46.60 |
39.83 |
32.94 |
24.85 |
23.79 |
|
Benchmark Prices |
|
|
|
|
|
|
|
|
|
West Texas Intermediate crude oil (US$/bbl) |
108.41 |
94.29 |
77.19 |
70.55 |
66.07 |
57.81 |
42.47 |
40.91 |
|
Exchange rate (Cdn$/US$) |
0.78 |
0.79 |
0.79 |
0.79 |
0.81 |
0.79 |
0.77 |
0.75 |
|
Edmonton Light Sweet crude oil (Cdn$/bbl) |
137.79 |
115.67 |
93.28 |
83.77 |
77.12 |
66.76 |
50.45 |
49.81 |
|
Western Canadian Select crude oil (Cdn$/bbl) |
122.09 |
101.02 |
78.71 |
71.79 |
66.90 |
57.55 |
43.56 |
42.55 |
|
Nymex natural gas (US$/mcf) |
7.17 |
4.64 |
4.75 |
4.35 |
2.95 |
3.50 |
2.26 |
2.00 |
|
AECO 7A Monthly Index (Cdn$/Mcf) |
6.27 |
4.58 |
4.93 |
3.36 |
2.80 |
2.92 |
2.76 |
2.14 |
(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)
Forward-Looking Statements
This news release offers our assessment of
Freehold’s future plans and operations as of August 9, 2022 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:
- the expectation that by expanding the Company’s asset base to
the premier basins across North America, Freehold has enhanced the
sustainability of the Company’s cash flow profile which underpins
our ability to grow our dividend and enhance our portfolio through
reinvestment;
- the expectation of being able to return capital to shareholders
and maintain balance sheet strength while retaining the optionality
to pursue strategic acquisition opportunities;
- the expectation that with respect to our US assets that there
will be growth in production through 2022 and 2023;
- the expected Q4-2022 production and 2023 production from the
Howard County Midland Assets;
- the expectation that the Howard County Midland Assets will
improve Freehold's realized commodity pricing and liquids
weighting;
- the expected Q4-2022 production and 2023 production from the
Eagle Ford Assets;
- the expectation that the Eagle Ford Assets will improve
Freehold's realized commodity pricing and liquids weighting;
- the expected timing of closing and sources of funds for the
acquisition of the Eagle Ford Assets;
- the expected type of operators generating growth and
development on the Howard County Midland Assets and the Eagle Ford
Assets;
- 2022 forecast production (including commodity weightings) and
funds from operations; and
- expectations as to commodity prices.
By their nature, forward-looking statements are
subject to numerous risks and uncertainties, some of which are
beyond our control, including general economic conditions,
inflation and supply chain issues, the impacts of the
Russian-Ukrainian war on commodity prices and the world economy,
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
failure to complete acquisitions on the timing and terms expected,
the failure to satisfy conditions of closing for any acquisitions,
the lack of availability of qualified personnel or management, the
continued impacts of COVID-19 on demand for commodities, stock
market volatility, and our ability to access sufficient capital
from internal and external sources. Risks are described in more
detail in our Annual Information Form for the year ended December
31, 2021 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, the performance of
current wells and future wells drilled by our royalty payors, 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 Ratios and Other
Financial Measure
Within this news release, references are made to
terms commonly used as key performance indicators in the oil and
gas industry. We believe that the non-GAAP financial ratios,
cash costs and netback, and a
supplemental financial measure, payout ratio, are
useful for management and investors to analyze operating
performance and liquidity and we use these terms to facilitate the
understanding and comparability of our results of operations.
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.
Cash costs, which is calculated
on a boe basis, is comprised by the recurring cash based costs,
excluding taxes, reported on the statements of operations. For
Freehold, cash costs are identified as operating expense, general
and administrative expense, cash-based interest, financing and
share-based compensation pay outs. Cash costs allow Freehold to
benchmark how changes in its manageable cash-based cost structure
compare against prior periods.
The netback, which is also
calculated on a boe basis, as average realized price less operating
expenses, general and administrative and cash interest charges,
represents the per boe cash flow amount which allows us to
benchmark how changes in commodity pricing and our cash-based cost
structure compare against prior periods.
The following table presents the computation of
Cash Costs and the Netback:
|
|
Three Months Ended June 30 |
|
Six Months Ended June 30 |
|
$/boe |
2022 |
2021 |
Change |
|
2022 |
2021 |
Change |
|
Royalty and other revenue |
$88.64 |
$44.73 |
98% |
|
$79.88 |
$41.21 |
94% |
|
Production and ad valorem taxes |
(1.46) |
(0.42) |
248% |
|
(1.38) |
(0.35) |
294% |
|
Net revenue |
$87.18 |
$44.31 |
97% |
|
$78.50 |
$40.86 |
92% |
|
Less |
|
|
|
|
|
|
|
|
General and administrative |
(2.69) |
(2.20) |
22% |
|
(2.80) |
(2.73) |
3% |
|
Operating expense |
(0.28) |
(0.25) |
12% |
|
(0.21) |
(0.20) |
5% |
|
Interest and financing cash expense |
(0.64) |
(0.68) |
-6% |
|
(0.65) |
(0.81) |
-20% |
|
Cash payout on share-based compensation |
(4.77) |
(1.35) |
253% |
|
(6.04) |
(4.43) |
36% |
|
Cash costs |
(8.38) |
(4.48) |
87% |
|
(6.04) |
(4.43) |
36% |
|
Netback |
$78.80 |
$39.83 |
98% |
|
$72.46 |
$36.43 |
99% |
Payout ratios are often used
for dividend paying companies in the oil and gas industry to
identify dividend levels in relation to funds from operations that
are also used to finance debt repayments and/or acquisition
opportunities. Payout ratio is calculated as dividends paid as a
percentage of funds from operations.
|
|
Three Months Ended March 31 |
|
Six Months Ended June 30 |
|
(000s) |
2022 |
2021 |
Change |
|
2022 |
2021 |
Change |
|
Dividends paid |
$36,150 |
$13,147 |
175% |
|
$63,262 |
$20,780 |
204% |
|
Funds from operations |
$83,846 |
$40,208 |
109% |
|
$155,739 |
$72,629 |
114% |
|
Payout ratio |
43% |
33% |
10% |
|
41% |
29% |
12% |
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