CALGARY, Alberta, March 07, 2019 (GLOBE NEWSWIRE) -- Freehold Royalties Ltd. (Freehold) (TSX:FRU) announced fourth quarter and year-end results for the period ended December 31, 2018.
Results at a Glance
| Three Months Ended | Twelve Months Ended | |||||||
| December 31 | December 31 | |||||||
| FINANCIAL ($000s, except as noted) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||
| Royalty and other revenue | 24,902 | 38,435 | -35 | % | 145,236 | 151,894 | -4 | % |
| Funds from operations | 18,463 | 32,023 | -42 | % | 121,287 | 123,788 | -2 | % |
| Per share, basic ($) | 0.16 | 0.27 | -41 | % | 1.03 | 1.05 | -2 | % |
| Acquisitions | 10,247 | 52,270 | -80 | % | 61,740 | 86,743 | -29 | % |
| Dividends declared | 18,643 | 17,722 | 5 | % | 73,928 | 68,479 | 8 | % |
| Per share ($) (1) | 0.1575 | 0.15 | 5 | % | 0.6250 | 0.58 | 8 | % |
| Net debt | 89,375 | 68,621 | 30 | % | 89,375 | 68,621 | 30 | % |
| Shares outstanding, period end (000s) | 118,403 | 118,183 | - | 118,403 | 118,183 | - | ||
| OPERATING | ||||||||
| Royalty production (boe/d) (2) | 10,312 | 10,960 | -6 | % | 10,718 | 10,963 | -2 | % |
| Total production (boe/d)(2) | 10,929 | 12,032 | -9 | % | 11,410 | 12,350 | -8 | % |
| Oil and NGL (%) | 56 | 53 | 6 | % | 54 | 55 | -2 | % |
| Average price realizations ($/boe) (2) | 23.40 | 33.59 | -30 | % | 33.54 | 32.80 | 2 | % |
| Operating netback ($/boe) (2) (3) | 23.33 | 32.66 | -29 | % | 33.30 | 31.00 | 7 | % |
(1) Based on the number of shares outstanding at each record date.
(2) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).
(3) See Non-GAPP Financial Measures.
President's Message
2018 was another successful year for Freehold as we maintained our identity as a lower risk oil and gas investment.
We became a pure play royalty company, with royalty production averaging 10,718 boe/d for the year, representing 94% of total volumes and over 99% of operating income. Despite egress and infrastructure constraints within Canada that drove commodity prices lower, our liquids weighted royalty portfolio continues to attract capital as gross spending on our land increased by approximately 50% year-over-year. On the acquisition front, we completed $62 million in transactions adding a combination of low decline and emerging royalty assets. We are forecasting royalty production to average 9,900 boe/d -10,300 boe/d in 2019. This does not include our non-core working interest production, which we will be continuing to reduce.
We are maintaining our monthly dividend at $0.0525 per share. This is consistent with our dividend strategy of positioning our adjusted payout between 60%-80% of funds from operations. Our forecasted adjusted payout ratio for 2019 is 76%. We continue to maintain significant financial flexibility with our 2019 net debt to funds from operations expected to be 0.7 times, at the lower end of our leverage thresholds.
Early in the year, we held our inaugural Investor Day, unveiling our Asset Book which highlights the quality of our asset base as well as our multi-year upside on Freehold’s royalty lands. As a leading royalty company, Freehold’s objective is to deliver lower risk attractive returns to shareholders over the long term, which we believe we have continued to provide during 2018.
Thomas J. Mullane
President and CEO
Dividend Announcement
With uncertainty around commodity prices and other macroeconomic factors in Canada, Freehold's Board of Directors (the Board) has approved maintaining its monthly dividend at $0.0525 per share or $0.63 per share annualized. We will continue to review our dividend level quarterly. The Board has declared a dividend of $0.0525 per common share to be paid on April 15, 2019 to shareholders of record on March 31, 2019. The dividend is designated as an eligible dividend for Canadian income tax purposes.
Current payout levels are in-line with our previously stated dividend policy which outlines a 60%-80% adjusted payout ratio based on forward looking funds from operations. Based on our current guidance and commodity price assumptions, and assuming no significant changes in the current business environment, we expect to maintain the current dividend rate through 2019. However, we will continue to evaluate the commodity price environment and adjust the dividend level if necessary.
2018 Highlights
Fourth Quarter Results
Despite a very challenging business environment, Freehold continued to execute on its strategy in the fourth quarter of 2018. Highlights included:
Q4 Brings Increased Activity on our Royalty Lands
Including drilling associated with acquisitions, 719 (21.3 net) wells were drilled on our royalty lands in 2018, a 55% increase versus 2017 on a gross measure and a 4% decrease on a net measure. Of the net wells drilled, 27% were drilled on mineral title lands (139 gross non-unit wells). There was a continued shift towards oil investment on our royalty lands, with 94% of the drilling focused on oil targets. Activity continues to be driven by well-capitalized operators in the southwest Saskatchewan Viking, southeast Saskatchewan Mississippian carbonates, central Alberta Mannville heavy and light oil plays, and west central Alberta Cardium oil. Looking into 2019, we remain optimistic that activity levels will remain strong on our royalty lands, similar to 2018, with strong results expected in the Alberta and Saskatchewan Viking.
ROYALTY INTEREST DRILLING
| Three Months Ended December 31 (1) | Twelve Months Ended December 31 (1) | |||||||
| 2018 | 2017 | 2018 | 2017 | |||||
| Equivalent | Equivalent | Equivalent | Equivalent | |||||
| Gross | Net (2) | Gross | Net (2) | Gross | Net (2) | Gross | Net (2) | |
| Non-unitized wells | 170 | 7.3 | 71 | 5.6 | 469 | 20.4 | 367 | 21.9 |
| Unitized wells (3) | 50 | 0.1 | 41 | 0.1 | 250 | 0.9 | 97 | 0.4 |
| Total | 220 | 7.4 | 112 | 5.7 | 719 | 21.3 | 464 | 22.3 |
(1) Counts include wells drilled on acquired lands from January 1 through December 31 of the year the acquisition was made, other than the December 2017 acquisition (this may differ from the closing date of the acquisitions).
(2) Equivalent net wells are the aggregate of the numbers obtained by multiplying each gross well by our royalty interest percentage.
(3) Unitized wells are in production units wherein we generally have small royalty interests in hundreds of wells.
2019 Guidance
The following table summarizes our key operating assumptions for 2019.
Key Operating Assumptions
| Guidance Dated | ||
| 2019 Annual Average | Mar. 7, 2019 | |
| Royalty production (excludes working interest production) | boe/d | 9,900-10,300 |
| West Texas Intermediate crude oil | US$/bbl | 55.00 |
| Edmonton Light Sweet crude oil | Cdn$/bbl | 61.00 |
| AECO natural gas | Cdn$/Mcf | 1.60 |
| Exchange rate | Cdn$/US$ | 0.76 |
| General and administrative costs (1) | $/boe | 3.00 |
| Weighted average shares outstanding | millions | 119 |
Recognizing the cyclical nature of the oil and gas industry, we continue to closely monitor commodity prices and industry trends for signs of changing market conditions. We caution that it is inherently difficult to predict activity levels on our royalty lands since we have no operational control. As well, significant changes (positive or negative) in commodity prices (including Canadian oil price differentials), foreign exchange rates, or production rates may result in adjustments to the dividend rate.
2018 Reserves Information
Freehold's reserves information is included in our AIF which is available on SEDAR at www.sedar.com and Freehold's website at www.freeholdroyalties.com
Advance Notice By-Law
Freehold announced that its Board today approved the adoption of an advance notice by-law. The by-law fixes a deadline by which shareholders must submit a notice of director nominations to Freehold prior to any annual or special meeting of shareholders where directors are to be elected and sets forth the information that a shareholder must include in the notice for it to be valid.
Specifically, the by-law requires advance notice to Freehold in circumstances where nominations of persons for election as a director of Freehold are made by shareholders other than pursuant to: (i) a requisition of a meeting made pursuant to the provisions of the Business Corporations Act (Alberta); or (ii) shareholder proposal made pursuant to the provisions of the Business Corporations Act (Alberta).
In the case of an annual meeting of shareholders, notice to Freehold must be made not less than 30 days prior to the date of the annual meeting. In the event that the annual meeting is to be held on a date that is less than 50 days after the date on which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the 10th day following such public announcement.
In the case of a special meeting of shareholders (which is not also an annual meeting), notice to Freehold must be made not later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting was made.
If Freehold determines to use the notice-and-access provisions under National Instrument 54-101 - Communication with Beneficial Owners of Securities of a Reporting Issuer for delivery of proxy related materials in respect of either an annual or special meeting of shareholders and provided Freehold's first public announcement of the date of such meeting is at least 50 days before the date of the applicable meeting then the notice of a shareholder's director nomination must be received not later than the close of business on the 40th day before the date of the applicable meeting.
The by-law is effective immediately. At the next meeting of shareholders of Freehold, shareholders will be asked to confirm and ratify the by-law. If the by-law is not confirmed and ratified at the next meeting of shareholders of Freehold, the by-law will cease to have effect as of such date. A copy of the by-law is available on www.sedar.com and on our website at www.freeholdroyalties.com.
Conference Call Details
A conference call to discuss financial and operational results for the period ended December 31, 2018 will be held for the investment community on Friday, March 8, 2019 beginning at 7:00 am MT (9:00 am ET). 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 access code 6745430#.
Availability on SEDAR
Freehold’s 2018 audited financial statements and accompanying Management’s Discussion and Analysis (MD&A) and AIF are being filed today with Canadian securities regulators and will be available at www.sedar.com and on our website at www.freeholdroyalties.com.
Forward-Looking Statements
This news release offers our assessment of Freehold’s future plans and operations as at March 7, 2019 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:
By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, including the impact of 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 Annual Information Form 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. The key 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, basic payout ratio and adjusted 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.
Operating income is calculated as royalty and other revenue less royalty and operating expenses. It shows the profitability of our revenue streams as it provides the cash margin for product sold after directly related expenses. Operating netback, which is calculated as average unit sales price less royalty and operating expenses, represents the cash margin for product sold, calculated on a per boe basis.
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. Basic payout ratio is calculated as dividends declared as a percentage of funds from operations. Adjusted payout ratio is calculated as dividends paid plus capital expenditures as a percentage of funds from operations.
Free cash flow is calculated by subtracting capital expenditures from funds from operations. Free cash flow is a measure often used by dividend paying companies to determine cash available for payment of dividends, paying down debt or 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 royalty expense, operating expense, G&A 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 Donohue
Manager, Investor Relations and Capital Markets
t. 403.221.0833
f. 403.221.0888
tf. 1.888.257.1873
e. mdonohue@rife.com
w. www.freeholdroyalties.com