Freehold Royalties Ltd.

All participants, please stand by. Your meeting is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the third quarter results conference call. I would now like to turn the meeting over to David Spiker. Please go ahead.

Good afternoon, everyone, and thank you for joining us. With me on the call from Freehold are David Henry, our CFO, Rob King, our Vice President of Business Development, and Matt Donahue, our Manager of Investor Relations and Capital Markets. Before we get into the highlights of the quarter, and it was a really good quarter for us, we wanted to note that alongside government and public health officials, we are actively monitoring COVID-19 updates and following the latest guidance. We prioritized the health and safety of our workforce by directing all employees to work from home initially. Now the burden of public health measures were relaxed in June, our return to office task force worked diligently to develop office safety protocols in alignment with government and public health guidelines. We were able to reopen our office in July with a reduced staff complement and will continue to monitor COVID-19 updates and follow the latest guidance to move to our next phase of return to office. We sincerely appreciate the continued efforts of our staff during this time and we want to thank our shareholders for their ongoing support. So despite these ongoing concerns associated with COVID-19 and the prevailing commodity price environment, Freehold continues to deliver strong returns to shareholders over the quarter. We remain focused on the sustainability of our dividend and providing a consistent income source for our shareholders, while reducing the overall risk profile by reducing leverage and positioning our royalty lands ahead of the drill bit. We continue to highlight that during these periods of weaknesses, our strong margins and simple business models stand the test of time. Operationally, Production on our royalty lands averaged 9,096 BWE a day, essentially flat versus the previous quarter and down approximately 10% versus the same period last year. Shut-in production on our royalty lands averaged about 5% during Q3, an improvement from 9% in the previous quarter, and we exited the quarter with only about 3% shut-ins. Through the remainder of the year and into 2021, we see volume stabilizing in our core plays like the Viking, the Clearwater, Southeast and Southwest Saskatchewan, and North Dakota. This is driven by volumes coming back online and the resumption of third-party drilling on our royalty lands. We were encouraged with the level of drilling on our royalty lands during the third quarter with 32 wells drilled. Recall, the previous quarter had no drilling activity after excluding adjustments as producers responded to weaker crude oil prices. For the first nine months of 2020, we had 261 wells drilled on our royalty lands, slightly higher than our initial expectations. What we're seeing is activity continue to be focused on our core Viking-plated dog land, but we also saw increased drilling in core plays in southeast Saskatchewan, western Saskatchewan heavy oil, cardium oil in west central Alberta, and in liquids rich in natural gas in the deep basin. We believe that with the lower volatility within the crude oil price environment and the stronger natural gas pricing through the winter months, producers will continue to remain active on our royalty lands into breakup of 2021. Given the backdrop for shutting volumes and uncertainty around the pace of third-party drilling, Freehold announced early in Q2 its previously released 2020 guidance was no longer applicable. We're continuing to spend 2020 guidance at this time with the expectation that we will resume 2021 guidance as more information is unveiled on spending levels associated with some of our top drillers. We expect to provide the next update to investors as part of our Q4 2020 results, which will be released in March 2021. As part of our Q3 results, We are increasing our monthly dividend by 33% from 1.5 cents to 2 cents per share, starting in January 2021 for shareholders on record as of December 31, 2020. At the revised monthly dividend level, freehold funds from operations are forecast to be at the low end of the annual payout range of 60% to 80%. With two months remaining in the year, it is our expectation that dividend levels will be at the low end of our payout range for 2020 as well. While increasing the dividend, we continue to maintain the strength of our balance sheet and will continue to pursue value-enhancing acquisitions. At current commodity prices and the revised dividend levels, we expect to pay down approximately $2 to $2.5 million in debt per month, with leverage remaining below 1.5 net debt to funds from operations. I'll now pass the call to Dave Henry to walk through some of the financial highlights.

Thanks, Dave, and good afternoon, everyone. Financially, as crude oil prices stabilize and natural gas prices improve, freehold continues to deliver on the core aspects of its return proposition, a meaningful dividend while providing investors with a lower risk investment, differentiating itself from traditional oil and gas E&P companies. In the third quarter, Freehold generated $23.1 million in royalty and other revenue, up 56% versus Q2 2020, reflecting improved liquids and natural gas pricing, lower cash costs, and stable production volumes. Our royalty portfolio generated an operating net back of $27.20 per BOE during the third quarter, up 61%, when compared to Q2 2020. Funds from operations for Q3 2020 totaled $19.9 million, or 17 cents per share, up 87% and 89%, respectively, versus Q2 2020. Our payout on a dividend paid basis was 27% in the third quarter of 2020, down from 92% during Q2 2020. We target freeholds payout to remain at the lower end of our outlined range of 60 to 80% for 2020 with our year-to-date payout at 67%. As previously mentioned, we increased our monthly dividend for 2021 from 1.5 cents per share to 2 cents per share, reflecting an improved and less volatile crude oil price environment and positive momentum associated with third-party capital on our royalty lands, while still remaining cautious and measured. Cash costs for the quarter totaled $3.70 per BOE, an all-time low for freehold. This was down noticeably from $4.79 per BOE in Q2 2020, the decrease versus Q2 2020, reflects both lower operating and financing charges. The reduction in cash costs was most materially impacted by the disposition of working interest production during the previous quarter, with the forecasted impact on operating costs expected to be approximately $0.35 per BOE. Freehold closed the quarter with $14.4 million reduction in net debt from Q2 2020. Net debt totaled $81.7 million at September 30, 2020, representing a one-time net debt to funds from operations. The decrease in net debt quarter over quarter reflects stronger funds from operations. With oil prices likely to remain range bound for the remainder of 2020 and into the first half of 2021, we expect our long-term debt to EBITDA ratio to comfortably remain covenant compliant. Freehold's prudent strategy of maintaining long-term debt to cash flow below 1.5 times and a dividend payout range of 60% to 80% of funds from operations, providing cushions for potential volatility that may pick up in commodities. Updating our Canada Review Agency reassessments, amounts are consistent with those recorded last quarter. Freehold's Corporate income tax filings for 2015, 2018, and 2019 were reassessed by the CRA in 2021. Pursuant to these reassessments, deductions of $92.6 million of non-capital losses by freehold were denied, resulting in reassessed taxes, interest, and penalties totaling $29.3 million in addition to a denial of $129.9 million of carried forward non-capital losses. Freehold has filed its objection of the reassessment, which required deposits totaling $14.7 million to have been paid to the CRA during the third quarter. Freehold has received legal advice that it should be entitled to deduct the non-capital losses, and as such, Management remains of the opinion that all tax filings to date were filed correctly and that it expects to be successful in its objection to these reassessments, and therefore the deposits paid to the CRA should be refunded with interest. Freehold anticipates the proceedings through the CRA will take approximately one year to resolve. Furthermore, the payments of these deposits does not impact freehold earnings or funds from operations or net debt. Now back to Dave for his final remarks.