Freehold Royalties Ltd. Announces 2013 First Quarter Results
Freehold Royalties Ltd. Announces 2013 First Quarter Results
CALGARY, ALBERTA -- (Marketwired) -- 05/15/13 -- Freehold Royalties Ltd. (Freehold) (TSX:FRU) announces first quarter results for the period ended March 31, 2013.
Results at a Glance
Three Months Ended March 31 ---------------------------- FINANCIAL ($000s, except as noted) 2013 2012 Change ---------------------------------------------------------------------------- Gross revenue 40,637 44,366 -8% Net income 10,493 13,060 -20% Per share, basic and diluted ($) 0.16 0.21 -24% Funds from operations (1) 23,817 25,613 -7% Per share ($) (1) 0.36 0.41 -12% Capital expenditures 14,914 13,245 13% Property and royalty acquisitions (2) - 49,919 -100% Dividends declared 27,897 26,766 4% Per share ($) (3) 0.42 0.42 0% Cash taxes paid (4) 28,831 - - Long-term debt, period end 47,000 18,000 161% Shares outstanding, period end (000s) 66,522 64,993 2% Average shares outstanding (000s) (5) 66,375 62,571 6% OPERATING ---------------------------------------------------------------------------- Average daily production (boe/d) (6) 9,067 8,733 4% Average price realizations ($/boe) (6) 49.09 54.80 -10% Operating netback ($/boe) (1) (6) 43.32 49.48 -12% ----------------------------------------------------------------------------
(1) See Additional GAAP Measures and Non-GAAP Financial Measures.
(2) Net of adjustments.
(3) Based on the number of shares issued and outstanding at each record date.
(4) Comprised of $22.6 million for the 2012 tax year and $6.2 million for the 2013 tax year (instalm ents).
(5) Weighted average number of shares outstanding during the period, basic.
(6) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).
May Dividend Announcement
The Board of Directors has declared the May dividend of $0.14 per share, which will be paid on June 17, 2013 to shareholders of record on May 31, 2013. This dividend is designated as an eligible dividend for Canadian income tax purposes. Including the June 17 payment, our 12-month trailing dividends total $1.68 per share. Our monthly dividend has remained steady, at $0.14 per share since January 2010.
We are pleased to announce that Mr. Scott Hadley will join Freehold on June 3, 2013, as Vice-President, Exploration, taking over from Mr. J. Frank George who will be appointed Vice-President, Special Projects. Mr. Hadley is a Professional Geologist with 25 years of experience working primarily in the Western Canada and Michigan Basins. He joins Freehold from Santonia Energy Inc. (previously Fairborne Energy Ltd.), where he has held positions of increasing responsibility since 2002, most recently as Vice-President Exploration.
2013 First Quarter Highlights
-- Average production for the first quarter rose 4%, while average price realizations fell 10%, resulting in an 8% decline in gross revenue compared to the first quarter of 2012. -- Production increases were mainly the result of last year's drilling activities and acquisitions. Oil and natural gas liquids (NGL) production increased 8% in the quarter, while natural gas production declined 4%. Natural gas production accounted for 35% of boe production in the quarter but only 10% of gross revenue as a result of weak prices. -- Production for the quarter was positively affected by 450 boe per day (Q1 2012 - 550 boe per day) of prior period adjustments, about half of which were due to our ongoing audit program. -- Royalty production remained level compared to the first quarter last year (accounting for 71% of production), while working interest production increased 14% as a result of high activity levels, particularly on our mineral title lands in southeast Saskatchewan. However, working interest production was down 18% from the fourth quarter of 2012, as the preceding quarter included positive prior period adjustments as well as significant flush production from newly completed horizontal wells. -- Over the past two years, the composition of our oil production has become lighter, largely as a result of our exposure to the Bakken and Cardium light oil plays. Our production mix for the first quarter of 2013 was approximately 65% liquids (34% light and medium oil, 26% heavy oil, and 5% NGL) and 35% natural gas. -- Funds from operations of $23.8 million was 7% lower than the first quarter of 2012, largely due to lower realized oil prices. The effect of general and administrative and share based compensation charges on funds from operations is typically high in the first quarter as approximately 50% of our annual budget for these items occurs in the quarter. -- Net income of $10.5 million was 20% lower than the first quarter last year, mainly as a result of lower realized prices. Non-cash charges included in net income amounted to $15.5 million (Q1 2012 - $16.5 million). -- Dividends for the first quarter of 2013 totalled $0.42 per share, unchanged from the prior year. -- Average participation in our DRIP was 16% (Q1 2012 - 26%), allowing us to retain $4.4 million (Q1 2012 - $6.8 million) in dividend payments by issuing shares from treasury. -- Net capital expenditures on our working interest properties totalled $14.9 million, the majority of which was invested on our mineral title lands in in southeast Saskatchewan. -- Long-term debt was $47 million at March 31, 2013, up from $18 million at December 31, 2012. -- During the quarter, we paid $28.8 million in corporate taxes ($22.6 million for estimated 2012 taxes and $6.2 million in instalments for estimated 2013 taxes). The large cash outlay for income taxes in 2013 is a unique event and one that we have prepared for and have the financial capacity to handle. Over the past two years, we have retained excess cash and have paid down debt in anticipation of the 2013 tax bill. We expect corporate taxes will normalize in 2014, at approximately 20% of pre-tax funds from operations.
Although royalty drilling was down 32% (on an equivalent net basis) from the first quarter last year, well licence activity was up, which is a positive indicator of the ongoing and future development potential on our royalty lands. As at March 31, 2013, there were 68 (5.2 equivalent net) licensed drilling locations on our royalty lands, compared with 48 (2.9 equivalent net) locations at the end of March last year. To date in 2013, royalty drilling has focused primarily on recognized oil trends within the Alberta and Williston basins, including the Lloydminster heavy oil area, the Bakken resource play in southeast Saskatchewan, and the Cardium light oil play in west central Alberta. Almost 90% of the equivalent net wells drilled in the first three months of 2013 were oil, similar to the full year 2012. Both vertical and horizontal wells were drilled on our royalty lands, with horizontal drilling accounting for 68% of the activity, on par with last year.
Working Interest Activity
We participated in the drilling of 29 (8.8 net) wells with a 100% success rate. In southeast Saskatchewan, we participated in the drilling of one (0.4 net) vertical and three (1.2 net) horizontal Frobisher oil wells, and five (3.4 net) Bakken horizontal oil wells. In the Lloydminster area, we participated in three (1.5 net) horizontal Cummings heavy oil wells, two (1.2 net) vertical Sparky heavy oil wells and 12 (0.6 net) vertical wells in the Wildmere Lloydminster "A" Pool Unit, where we also have a royalty interest. In Alberta, we drilled two (0.2 net) horizontal Viking oil wells at Redwater and one (0.3 net) horizontal Cardium oil well at Minnehik Buck Lake.
This drilling activity had little effect on production levels in the first quarter but is expected to add to our production base as the wells are completed and tied in over the next two quarters.
Half of our 2013 capital budget was spent in the first quarter, roughly 70% of which was on our mineral title lands in southeast Saskatchewan. In total, we invested $11.9 million on drilling and completions and $3.0 million on new well facilities and other.
Capital investment in the second quarter of 2013 is expected to total $5 million. As winter drilling extended well into April, second quarter capital will be allocated roughly equally to drilling, facilities, and tie ins.
The table below summarizes our key operating assumptions for 2013, updated to reflect actual results for the first quarter and our current expectations for the remainder of the year. The changes reflect the following factors:
-- As a result of higher than anticipated royalty production in the first quarter, we have increased our 2013 production forecast by 200 boe per day. -- Commodity prices were adjusted to reflect actual prices for the first three months of 2013 (as reported by CAPP) and our expectations for the remainder of the year. Average WTI and WCS oil prices were reduced by $2.00 per barrel, and the average AECO natural gas price was increased by $0.40 per Mcf. -- Under our current production and pricing assumptions (and excluding any potential acquisitions), we anticipate being able to reduce long-term debt to $44 million by the end of this year. Guidance Dated -------------------------- 2013 Annual Average May 15, 2013 Mar. 7, 2013 ---------------------------------------------------------------------------- Daily production boe/d 8,700 8,500 WTI oil price US$/bbl 93.00 95.00 Western Canada Select (WCS) Cdn$/bbl 69.00 71.00 AECO natural gas price Cdn$/Mcf 3.50 3.10 Exchange rate Cdn$/US$ 0.98 1.00 Operating costs $/boe 5.00 5.00 General and administrative costs (2) $/boe 2.60 2.60 Capital expenditures $ millions 30 30 Dividends paid in shares (DRIP) (3) $ millions 28 28 Long-term debt at year end $ millions 44 48 Cash taxes payable in 2013 for 2012 tax year (4) $ millions 23 23 Cash taxes payable for 2013 tax year (instalments) (4) $ millions 25 25 Weighted average shares outstanding millions 67 67 ----------------------------------------------------------------------------
(1) A sensitivity analysis of the potential impact of key variables on funds from operations per share is provided on page 5 of our 2012 Annual MD&A.
(2) Excludes share based and other compensation.
(3) Assumes an average 25% participation rate in Freehold's dividend reinvestment plan, which is subject to change at the participants' discretion.
(4) Corporate tax estimates will vary depending on commodity prices and other factors.
On a boe basis, production volumes for 2013 are expected to be approximately 65% oil and NGL and 35% natural gas, similar to our current product mix. We continue to maintain our royalty focus with royalty production accounting for 70% of forecasted 2013 production.
Recognizing the cyclical nature of the oil and gas industry, we continue to closely monitor commodity prices and industry trends for signs of deteriorating 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 will result in adjustments to the dividend rate. In particular, our 2013 forecast for Western Canada Select pricing assumes an improvement over the first quarter of this year.
Despite commodity price volatility, we have been able to maintain a steady monthly dividend rate of $0.14 ($1.68 annually) per share since January 2010. Based on our current guidance and commodity price assumptions, and assuming there are no significant changes in the current business environment, we expect to maintain the current monthly dividend rate through 2013, subject to the Board's quarterly review and approval.
Availability on SEDAR
Freehold's 2013 first quarter interim unaudited financial statements and accompanying Management's Discussion and Analysis (MD&A) are being filed today with Canadian securities regulators and will be available at www.sedar.com and on our website.
This news release offers our assessment of Freehold's future plans and operations as at May 15, 2013, 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 outlook for commodity prices, including light/heavy oil price differentials; -- changing economic conditions; -- industry drilling, development, and licensing activity on our royalty lands; -- development of working interest properties; -- participation in the DRIP and our use of cash preserved through the DRIP; -- estimated capital budget and expenditures and the timing thereof; -- long-term debt at year end; -- average production and contribution from royalty lands; -- key operating assumptions; -- amounts and rates of income taxes and timing of payment thereof; -- maintaining our monthly dividend rate through 2013 and our dividend policy; and -- the announced officer changes.
Such statements are generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe", and similar expressions (including the negatives thereof). 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.
In this news release, we make references to "flush" production rates, which is the first yield from a flowing oil well during its most productive period. Such "flush" production rates are not determinative of future production rates. Additionally, such rates may also include recovered "load oil" fluids used in well completion stimulation. Readers are cautioned not to place reliance on such rates in estimating future production rates for Freehold.
With respect to forward-looking statements contained in this news release, we have made assumptions regarding, among other things, future oil and gas prices, future capital expenditure levels, future production levels, future exchange rates, future tax rates, future participation rates in the DRIP and use of cash retained through the DRIP, 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 natural 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, 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. 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 IFRS 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.
Additional GAAP Measures
This MD&A contains the term "funds from operations", which does not have a standardized meaning prescribed by GAAP and therefore may not be comparable with the calculations of similar measures for other entities. Funds from operations, as presented, is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to net income or other measures of financial performance calculated in accordance with GAAP. We consider funds from operations to be a key measure of operating performance as it demonstrates Freehold's ability to generate the necessary funds to fund capital expenditures, sustain dividends, and repay debt. We believe that such a measure provides a useful assessment of Freehold's operations on a continuing basis by eliminating certain non-cash charges. It is also used by research analysts to value and compare oil and gas companies, and it is frequently included in their published research when providing investment recommendations. Funds from operations per share is calculated based on the weighted average number of shares outstanding consistent with the calculation of net income per share.
Non-GAAP Financial Measures
Within this MD&A, references are made to terms commonly used as key performance indicators in the oil and natural gas industry. We believe that operating income, operating netback, and net debt to funds from operations 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, which is calculated as gross revenue less royalties and operating expenses, represents the cash margin for product sold. Operating netback, which is calculated as average unit sales price less royalties and operating expenses, represents the cash margin for product sold, calculated on a per boe basis (see Netback Analysis).
Net debt to funds from operations is calculated as net debt (total debt less working capital) as a proportion of funds from operations for the previous twelve months (see Debt Analysis).
In addition, we refer to various per boe figures, such as revenues and costs, also considered non-GAAP measures, which provide meaningful information on our operational performance. We derive per boe figures by dividing the relevant revenue or cost figure by the total volume of oil and natural gas production during the period, with natural gas converted to equivalent barrels of oil as described above. Contacts: Freehold Royalties Ltd. Karen Taylor Manager, Investor Relations and Corporate Secretary 403.221.0891 or Toll Free: 1.888.257.1873 403.221.0888 (FAX) www.freeholdroyalties.com