Good morning, ladies and gentlemen, and welcome to the first quarter results conference call. I would like to turn today's meeting over to Tom Mullane . Please go ahead, sir.
Thank you very much. Please be advised that certain statements on this call constitute forward-looking information. All statements other than those about historical facts may be forward-looking, and we caution the listener. Good morning, and thank you for joining us. With me on the call from Freehold are David Hendry, our CFO, Rob Lamond , our Asset Development VP, Rob King, our VP of Business Development, and Matt Donohue, our Manager of Investor Relations and Capital Markets . Before we get into the highlights for the quarter, we wanted to note that alongside government and public health officials, we are actively monitoring COVID-19 updates and following the latest guidance from Alberta Health Services and other provincial health departments. At Freehold, we want to thank our health workers in Alberta, Saskatchewan, and across Canada for battling COVID-19.
As the COVID-19 pandemic continues to evolve, Freehold is prioritizing the health and safety of our workforce by directing our employees to work- from- home since March of this year. We appreciate the continued efforts of our staff during this time and want to thank our shareholders for their ongoing support. Operation's f irst quarter royalty production averaged 10,618 BOE/d, up 5% versus the same period in 2019 and up 3% over the quarter. Increases in volumes were reflected on robust third-party drilling additions, strong production performance associated with recent acquisitions, and meaningful prior period adjustments, partly relating to our audit function. Royalty liquids production averaged 5,973 BOE/d for the first quarter, up 7% versus the same period in 2019 and up 1% when compared to the previous quarter. Production from Freehold's U.S. royalty assets averaged 222 BOE/d in the first quarter, representing a 32% increase from the previous quarter.
Royalty interest accounted for 96% of total production and 100% of operating income. We had a solid start to the year on the drilling front, with 175 gross, 62 net wells drilled on our royalty lands over the period. That compares to 186 gross, 4.5 net wells drilled in fourth quarter 2019 and 147 gross, 7.3 net wells drilled on our land during the same period in 2018. Drilling continues to be focused in Saskatchewan and Manitoba, which together represented approximately 64% of the gross first quarter drilling, 75% on a net basis. Drilling continues to target oil prospects, specifically the Viking oil play in West Central Saskatchewan and East Central Alberta, with 65 gross, 3.3 net wells drilled during the quarter. The Mississippian Subcrop oil play in Southeast Saskatchewan and Southwest Manitoba saw 29 gross, 1.3 net wells drilled.
The various Mannville oil plays across Saskatchewan and Alberta saw 17 gross and 0.8 net wells drilled. Not including 10 gross, 0.2 net wells drilled on recently acquired Sparky royalty lands in Central Alberta and 7 gross, 0.3 net wells on the Clearwater royalty lands in Northern Alberta. In the quarter, 62% of the gross drilling, 70% net, was on gross overriding royalty lands, 13% gross on the title land, 20% net, and 25% of the gross drilling was on unit interest, and 22% net. Activity continues to be funded under the most favorable operating terms in the industry.
Last month at quarter end, Freehold announced that with continued weakness in crude oil prices due to the COVID-19 pandemic and an OPEC Russia supply war, Freehold's Board of Directors revised the monthly dividend rate from CAD 0.0525 to CAD 0.015 per common share to be paid on May 15th to shareholders on record on April 30th. At the revised monthly dividend level, Freehold's netback operations are forecasted to keep dividend outflows for the remainder of 2020 and are targeting to be at the low end of our payout range of 60%-80%. Adjusting the dividend at this time preserves the strength of our balance sheet and enhances optionality to pursue value-enhancing acquisitions as they present themselves later in the year.
Freehold also announced that due to uncertainty associated with underlying business environment, including the potential voluntary shut-ins of production, regulatory-imposed production curtailments, high crude oil inventories, and continued price volatility, the previously released 2020 guidance is no longer applicable. We expect to provide a revised guidance update in a time of increased stability associated with commodity price environment and our royalty payers' capital programs. Lastly, on April 30th, Freehold disposed of certain working interest properties with estimated production of about 265 BOE/day. As part of the agreement, the purchaser has agreed to assume decommissioning liabilities totaling approximately CAD 3.7 million on these properties. Freehold has agreed to pay CAD 1.7 million into escrow that will be released to the purchaser once the legal interests in the assets are satisfactorily transferred. An additional CAD 0.3 million will be deposited on behalf of the purchaser with various regulators as security deposits.
I'll now pass the call to David to walk through some of the financials.
Thanks, Tom, and good morning, everyone. Financially, while we endured a significant retreat in global oil prices, which commenced in mid-March, Freehold continued to pay a meaningful dividend, which we adjusted for the lower commodity price environment and to manage our debt levels. In the first quarter, Freehold generated CAD 26.3 million in royalty and other revenue, down 26% versus the same period in 2019, reflecting lower commodity prices, partially offset by higher production volumes. Our total royalty revenue was comprised of 83% oil and NGL, which also reflected the decline in oil prices. Our royalty portfolio generated an operating netback of CAD 25.22 per BOE in the first quarter, a 30% decline versus the same period in 2019. Funds from operations for Q1 2020 totaled CAD 20.2 million, down 31% from Q1 2019 levels.
Our payout totaled 92% in the first quarter of 2020, up from 64% during the same period in 2019. At the revised dividend level, we target Freehold's payout to remain at the low end of our outlined range through the second half of 2020, with the expectation to be greater than 100% for the second quarter of 2020, given the expected commodity prices, differentials, and shut-in production volumes. Freehold generated approximately CAD 11 million in cash flow over our dividends in Q1 2020, which we allocated towards acquisitions and paying down debt. Freehold incurred a first quarter 2020 net loss of CAD 9 million, compared with a CAD 7.1 million net loss recorded during the same period in 2019.
The slightly higher net loss reflected lower volumes due to the retreat in oil prices later in the quarter, as well as an impairment loss of CAD 9.6 million related to Freehold's working interest properties recorded in the current quarter. This compared with a CAD 14.1 million impairment loss recorded during Q1 2019, related to the termination of a specific production volume royalty agreement. Cash cost for the quarter totaled CAD 5.74 per BOE, down from CAD 6.39 per BOE during the same period in 2019. The decrease year-over-year reflects reduced general and administrative charges, deferred payment of stock-based compensation, and increased production volumes. The first quarter typically represents a period of higher G&A for Freehold, based on the seasonal nature of these expenditures. Freehold closed the quarter with a CAD 6 million reduction in long-term debt from year-end 2019, as cash flows exceeded acquisition spending.
Net debt totaled CAD 101.8 million at March 31st, 2020, representing 0.9x net debt to funds based on operations on a trailing 12-month basis. The increase in net debt quarter-over-quarter reflects the decline in oil prices, acquisition activity, a decommissioning liability acquisition, and the higher dividend payout. The oil prices are likely to remain depressed through 2020, we expect our long-term debt to EBITDA ratio to increase through 2020 but remain covenant compliant. Freehold's prudent longer-term debt strategy of maintaining long-term debt to cash flow below 1.5 x and dividend payout range of 60%-80% of funds from operations provides cushion for volatile prices like those currently being experienced. COVID-19 pandemic has caused significant destruction of demand for oil, volatility in commodity prices, and uncertainty regarding the timing for recovery, which has made the preparation of financial forecasts challenging.
As a result, there may be adverse changes in cash flows or debt levels that are currently unforeseen. Now back to Tom for his final remarks.
Looking forward, we expect the next three to six months to represent a challenging period for the North American exploration and production industry. Setting ourselves apart, Freehold provides investors a higher margin business, as we do not pay typical costs associated with oil and gas operations and reclamation, enabling more returns to be transferred to our shareholders. With our revised dividend level, we continue to maintain flexibility in our balance sheet while maintaining sustainability in our dividend. At current share price levels, we feel the return proposition is an attractive entry point for investors and sustainable in the current commodity environment.
In terms of how we expect to allocate f ree cash flow. Our preference is to ensure stability of our sustainability of our dividend and having a clean balance sheet near term to the medium term outlook shifted to value creation through acquisitions to grow and improve our royalty portfolio. The ability to access capital with adequate in debt remains challenged for many E&P producers. We believe we can serve as a financing tool through the creation of new royalties in Canada and in the U.S. If we are unable to complete acquisitions with our free cash flow, we expect to pay down debt. Thank you for joining us, and we will now entertain any questions.
Thank you. For those on the telephone, you may press star one to ask a question at this time. Please ensure the mute function on your telephone is pushed off to allow the signal to reach our equipment. Once again, please press star one if you would like to ask a question at this time. We'll take our first question. Please go ahead, caller. Your line is open.
Hi, good morning. It's Dennis Fong over at Canaccord. I've got a few quick questions. The first is, I understand that you guys have pulled back your production guidance. J ust looking to find out in terms of how you guys look at your shut-ins going into Q2, what are some of the initial indications that you received from the conversations from your royalty payers?
Hey, Rob. Can you [audio distortion]?
Sure can. Thanks Tom . In terms of shut-ins as we look into Q2, maybe just provide a little bit of commentary around that. We usually have about 30-60 days where after a well has been shut in before it hits our books. We've actually been having a very regular and proactive discussions with our key payers just to understand what they're thinking, how they're thinking, when they may be shutting in production, but is anything we might be able to do to mitigate that. That's really kind of feeding into where a lot of our intelligence is as we look at what our production profile could look like through the balance of 2020. We really saw very minimal shut-ins in March timeframe. When I say minimal, it was sort of something much less than 5% and probably even less than that.
Our dialogue with our key payers would sort of point to somewhere in the 5%-10% range of shut-ins for April. Our suspicion is as we get into May and June, that number's going to increase. It could double to the 20% range. That's sort of a modeling assumption that we put in place. Then it'll be obviously highly sensitive in Q3 and Q4 as it relates to what the then current commodity prices will be. That sort of gives a flavor of just how we're thinking about shut-ins right now, Dennis.
Great. Thanks. My follow-up here as well is, I know you mentioned on your AGM yesterday that there was still a pretty wide bid-ask spread for royalty assets. How are you thinking about this in the context of obviously your current balance sheet strength? I know Tom just made that comment about any excess free cash flow getting put to the balance sheet. Also kind of the appetite to do these type of deals in this type of market, how are you addressing this maybe that slide as well as what are you expecting as maybe near-term catalyst to narrow said bid-ask spread? Thanks.
Yeah. Tom's assessment is right in terms of the priority order of our free cash flow is sort of dividend first, balance sheet second, and then third will be allocation toward the acquisition side of our portfolio. In terms of what we're sort of optimistic in terms of what opportunities might come about is we've had a fair amount of dialogue, particularly with Canadian producers, in terms of what might be possible and are continuing to look at a number of opportunities in the Bakken. It is, cash is, capital is constrained for everyone right now. It is one where we're being very careful. I think our suspicion is our acquisition activity will likely be more second half weighted rather than things within the second quarter as we continue to build our free cash flow position and monitor the level of leverage that we have.
In terms of what narrows that bid-ask spread, and I think a lot of it is a function of time. The longer that prices are at the levels that they're at, that market therapy starts changing people's thought patterns relatively quickly.
Great. Thank you. I'll turn it back.
Thank you. We will now take our next caller. Please go ahead. Your line is open. Go ahead, caller. Your line is open. Please ensure the mute function on your telephone is pushed off.
Hi, Tom. This is Amir over at Cormark. Just a couple quick questions for you. Just on your 2020 outlook, I know there's no formal guidance and I would be glad to follow on the strategy. Could you just give us some color if there are any drilling commitments on your lands? If there is none, where do you see production getting to by year end if there is not drilling taking place?
Yeah, Amir, I'm just wondering if you could repeat that question. It was a little rough for us to hear.
Sure, yeah. Just curious if there are any drilling commitments on your lands some of your royalty companies have to drill on your lands based on the royalty agreements as well. If there are none, or even based on that, where do you see production declining, say, by year-end based on no drilling on your lands?
Yeah, Amir, that's a guidance question, really, and we're not giving guidance right now. I think, Jay, when we look at what Rob has mentioned about cutting, and we think that it's only going to be towards the end of the year before it really starts taking off again. We could use strip price as our indicator. It's very difficult to see a lot of near-term drilling, and it's very difficult to forecast. We don't have guaranteed commitments to drill. We do have some contracts where, in royalty cases, we commit them to drill. Those are going to happen, but those are more long-term. Rob, do you have a comment?
Yeah. Just a couple of points, Amir. Our Q1 net drilling of 6.2 net wells was certainly ahead of expectations. We started the year well from a production standpoint or our royalty production was about the highest it's been in the last two years in the first quarter. We also have a number of net wells that were drilled in Q1. We haven't had any wells drilled on our land since March 17th. It's one where we're not anticipating near-term drilling activity. The other aspect, our decline rate on a corporate basis is 18%. Just in terms of how you're modeling it, an 18% decline offset with pretty robust Q1 production levels as well as robust Q1 drilling levels can help you calibrate your model.
That's helpful. Just a second question on the dividends. Some companies are viewing the dividend cuts more as a temporary suspension or reduction in dividends. Do you see your dividends increasing next year based on how much the strip price is improving next year? Dividends only grow from here as production levels grow?
Amir, we will continue to set our dividend along our 60%-80% payout ratio target. As you noticed in the last couple of years, we've been at the bottom end of that payout ratio, and we probably will continue to be that as we set those targets going forward. As we see prices rebound, we will take a look at strip prices and other factors to set our dividend.
Copy. Thank you.
Thank you. As a reminder, to ask a question, please press star one. We'll take our next caller. Please, go ahead, your line is open.
Hey, good morning, guys. Jamie Kubik from CIBC here. Asking a question financially, but I'm curious on this one if you can offer an answer. A lot of Freehold's tax pools came through the acquisition of working interest properties over the years. Given the disposition at the end of Q1 there or at the end of April, sorry, do you foresee there being any challenges to utilizing pools going forward given how small working interest volumes have become in the corporate profile? Thanks.
David Hendry . We didn't sell all of our working interest by any means. It was roughly around half of it. As far as any challenge from the government or from the CRA, we haven't heard anything back from them with regards to their challenge. The challenge has already been posted, not hidden before this position. This working interest disposition was largely around managing the decommissioning on some later life working interest assets. The other portion of the working interest assets, we continue to operate them, and it's still an important part of the business. We're not expecting any change in our tax pools going forward. Obviously, until we hear something back from CRA, it's hard for us to provide any further details on that.
Okay. That's good. Thank you.
Thank you. As a further reminder, please press star one if you would like to ask a question. At this time, there are no further telephone questions in the queue.
Thank you very much for joining us on our call this morning. Stay healthy, everyone. Thank you.
Thank you. That will now conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Thanks a lot for your help.