Freehold Royalties Ltd. Announces 2013 Second Quarter Results

Freehold Royalties Ltd. Announces 2013 Second Quarter Results 
CALGARY, ALBERTA -- (Marketwired) -- 08/08/13 -- Freehold Royalties
Ltd. (Freehold) (TSX:FRU) announces second quarter results for the
period ended June 30, 2013.  
Results at a Glance 


 
                            Three Months Ended         Six Months Ended     
                                  June 30                   June 30         
                         ---------------------------------------------------
FINANCIAL ($000s, except                                                    
 as noted)                   2013    2012  Change      2013     2012 Change 
----------------------------------------------------------------------------
Gross revenue              44,109  36,163      22%   84,746   80,529      5%
Net income                 14,292   7,862      82%   24,785   20,922     18%
  Per share, basic and                                                      
   diluted ($)               0.21    0.12      75%     0.37     0.33     12%
Funds from operations                                                       
 (1)                       30,115  20,522      47%   53,932   46,135     17%
  Per share ($) (1)          0.45    0.31      45%     0.81     0.72     13%
Capital expenditures        3,313   6,598     -50%   18,227   19,843     -8%
Property and royalty                                                        
 acquisitions (2)             658     (99)    765%      658   49,820    -99%
Dividends declared         28,019  27,399       2%   55,916   54,165      3%
  Per share ($) (3)          0.42    0.42       0%     0.84     0.84      0%
Long-term debt, period                                                      
 end (4)                   55,000  23,000     139%   55,000   23,000    139%
Shares outstanding,                                                         
 period end (000s)         66,874  65,440       2%   66,874   65,440      2%
Average shares                                                              
 outstanding (000s) (5)    66,649  65,159       2%   66,512   63,865      4%
OPERATING                                                                   
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Average daily production                                                    
 (boe/d) (6)                8,714   8,501       3%    8,889    8,617      3%
Average price                                                               
 realizations ($/boe)                                                       
 (6)                        54.66   45.74      20%    51.84    50.33      3%
Operating netback                                                           
 ($/boe) (1) (6)            47.80   40.64      18%    45.53    45.12      1%
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(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) Net debt as at June 30, 2013 was $50.6 million, down $4.9 million from  
    $55.5 million at March 31, 2013.                                        
(5) Weighted average number of shares outstanding during the period, basic. 
(6) See Conversion of Natural Gas to Barrels of Oil Equivalent (boe).       

 
August Dividend Announcement  
The Board of Directors has declared the August dividend of $0.14 per
share, which will be paid on September 16, 2013 to shareholders of
record on August 31, 2013. This dividend is designated as an eligible
dividend for Canadian income tax purposes. Including the September 16
payment, our 12-month trailing dividends total $1.68 per share.  
2013 Second Quarter Highlights 


 
--  Average production for the second quarter rose 3%, and average price
    realizations climbed 20%, resulting in a 22% increase in gross revenue
    compared to the second quarter of 2012. 
    
--  Natural gas production accounted for 39% of boe production in the
    quarter but only 12% of gross revenue. 
    
--  Royalty production declined 4% (accounting for 71% of production), while
    working interest production increased 23% as a result of increased
    activity levels, particularly on our mineral title lands. 
    
--  Oil and NGL production declined 2% in the quarter, while natural gas
    production rose 9%. Both periods included positive prior period
    adjustments to royalty production, mainly due to our ongoing audit
    program. In the second quarter of 2013, positive prior period
    adjustments were 400 boe per day (100% natural gas), whereas in the
    second quarter last year, prior period adjustments were 500 boe per day
    (80% oil). 
    
--  Funds from operations totalled $30.1 million in the second quarter, up
    47%, mainly due to higher realized prices. 
    
--  Net income of $14.3 million was 82% higher, mainly due to higher
    realized prices. Non-cash charges included in net income amounted to
    $15.9 million (Q2 2012 - $12.8 million). 
    
--  Dividends for the second quarter of 2013 totalled $0.42 per share,
    unchanged from the prior year. 
    
--  Average participation in our DRIP was 25% (Q2 2012 - 25%), allowing us
    to retain $6.9 million (Q2 2012 - $6.9 million) in dividend payments by
    issuing shares from treasury. 
    
--  Net capital expenditures on our working interest properties totalled
    $3.3 million, the majority of which was invested on our mineral title
    lands. 
    
--  In June 2013, we acquired seismic and a royalty interest on certain
    undeveloped land and a commitment from an operator to drill wells on
    these and other Freehold royalty lands in Alberta. The agreement calls
    for a maximum expenditure of $0.9 million and as at June 30, 2013,
    Freehold had spent $0.7 million. 
    
--  The current tax liability was reduced to $nil at June 30, 2013 from
    $23.1 million at December 31, 2012, as income taxes for the 2012 tax
    year were paid. 
    
--  At June 30, 2013, long-term debt was $55 million, and net debt was $50.6
    million, down $4.9 million from March 31, 2013. Net debt at June 30,
    2013 was 0.5 times trailing funds from operations and net debt
    obligations were approximately 14% of total capitalization. 

 
Royalty Drilling  
Drilling on our royalty lands was down, and well licence activity was
also down compared to last year. The reductions follow industry
trends, where drilling was down 20% in the second quarter, largely
due to additional snow accumulations and June rains.  
To date in 2013, royalty drilling has focused primarily on recognized
oil and liquids-rich natural gas trends within the Alberta and
Williston basins, including the Lloydminster heavy oil area, the
Mississippian subcrop and Bakken resource play in southeast
Saskatchewan, and the Cardium light oil play in west central Alberta.
About 80% of the equivalent net wells drilled in the first half of
2013 were oil, similar to last year. Both vertical and horizontal
wells were drilled on our royalty lands, with horizontal drilling
accounting for 60% of the activity, on par with last year.  
Working Interest Activity  
Capital investment in the second quarter of 2013 amounted to $3.3
million, bringing total capital expenditures for the year to date to
$18.2 million. The majority of this activity centered on our mineral
title lands. In the second quarter, we participated in the drilling
of three (0.9 net) wells with a 100% success rate. In southeast
Saskatchewan, we participated in the drilling of one (0.4 net) Bakken
horizontal oil well. In Alberta, we drilled one (0.2 net) horizontal
Viking oil well at Redwater and one (0.3 net) horizontal Glauconitic
liquids-rich natural gas well at Willesden Green. This drilling
activity had little effect on second quarter production but is
expected to add to our production base as the wells are completed and
tied in.  
Guidance Update  
The table below summarizes our key operating assumptions for 2013,
updated to reflect actual results for the first half and our current
expectations for the remainder of the year. The changes reflect the
following factors: 


 
--  As a result of higher than anticipated production in the second quarter,
    we have increased our 2013 production forecast by 100 boe per day. On a
    boe basis, production volumes for 2013 are expected to be approximately
    63% oil and natural gas liquids (NGL) and 37% natural gas, similar to
    our current product mix. We continue to maintain our royalty focus with
    royalty production accounting for 71% of forecasted 2013 production. 
    
--  We are increasing our capital budget for the year by $2.0 million as a
    result of additional drilling at Buck Lake, Alberta, and strong partner
    drilling in southeast Saskatchewan. Capital investment in the second
    half of 2013 is expected to total $13.8 million, with approximately 65%
    allocated to drilling and completions, primarily in southeast
    Saskatchewan and Alberta. This will add roughly 16 (6.0 net) wells. 
    
--  Operating expenses for the year are being increased by $0.30 per boe to
    reflect higher than expected costs in the first half of the year
    (including prior period adjustments and additional snow plowing charges)
    and the upcoming fall turnaround season. 
    
--  Average WTI and WCS oil prices were increased by $3.00 and $6.00 per
    barrel, respectively, while the average AECO natural gas price was
    reduced by $0.50 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. 
    
--  Cash taxes payable in 2013 for the 2012 tax year are $1 million lower as
    our previous estimate was adjusted; as a result instalments for the 2013
    tax year are also $1 million lower.

 
Key Operating Assumptions (1) 


 
                                                       Guidance Dated       
                                               -----------------------------
                                               August 8,   May 15,   Mar. 7,
2013 Annual Average                                 2013      2013      2013
----------------------------------------------------------------------------
Daily production                         boe/d     8,800     8,700     8,500
WTI oil price                          US$/bbl     96.00     93.00     95.00
Western Canada Select (WCS)           Cdn$/bbl     75.00     69.00     71.00
AECO natural gas price                Cdn$/Mcf      3.00      3.50      3.10
Exchange rate                         Cdn$/US$      0.98      0.98      1.00
Operating costs                          $/boe      5.30      5.00      5.00
General and administrative costs                                            
 (2)                                     $/boe      2.60      2.60      2.60
Capital expenditures                $ millions        32        30        30
Dividends paid in shares (DRIP)                                             
 (3)                                $ millions        28        28        28
Long-term debt at year end          $ millions        44        44        48
Cash taxes payable in 2013 for                                              
 2012 tax year (4)                  $ millions        22        23        23
Cash taxes payable for 2013 tax                                             
 year (instalments) (4)             $ millions        24        25        25
Weighted average shares                                                     
 outstanding                          millions        67        67        67
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(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.                                                          

 
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 may
result in adjustments to the dividend rate.  
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 second 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.  
Forward-looking Statements  
This news release offers our assessment of Freehold's future plans
and operations as at August 8, 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; 
    
--  estimated operating expenses; 
    
--  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; and 
 
    
--  maintaining our monthly dividend rate through 2013 and our dividend
    policy.

 
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.  
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 news release 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 news release, 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 reve
nue 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. 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. 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)
ktaylor@rife.com
www.freeholdroyalties.com