Freehold Royalties Ltd.

This conference has

been recorded. This conference has been recorded. 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 Mr. David Spiker. Please go ahead.

Good afternoon and thank you for joining us. On the call with me today are David Henry, our CFO, Rob King, our VP Business Development, and Matt Donahue, our Manager of Investor Relations and Capital Markets. The third quarter of 2021 marked the start of a significant transformation for Freehold, as the company was able to close on more than $250 million in portfolio enhancing transactions. These transactions were focused on core U.S. and Canadian oil basins, and further solidify Freehold's position as a North American royalty company. To start this afternoon, I would like to talk about the dividend increase, and then we'll focus on the excellent operational and financial performance that we've had. With the strength in our business model, we're continuing our measured approach to setting Freehold's monthly dividend, increasing it by 20% from 5 cents a share to 6 cents a share, or 72 cents a share annualized. This represents our fifth increase over the past five quarters. Projected 2021 payout levels are below our stated dividend policy levels, which outlines a payout ratio starting at 60% over the long term, based on forward-looking funds from operations. We feel this dividend increase strikes a balance between returning value to our shareholders, managing our balance sheet, and positioning Freehold to remain active on the acquisition front. The opportunities to further build on the quality of our portfolio remains robust within both U.S. and Canada, and we view it as important to retain the flexibility to evaluate and acquire assets that continue to make us better. On the acquisition front, we were very busy. We announced four transactions, which expanded our position in the U.S. Eagleford and Permian Plays, along with building on our already strong position in the Clearwater. The largest transaction, which closed late in the quarter, was the acquisition of a -in-class Eagleford Basin asset for approximately U.S. $160 million, about $200 million Canadian. This Eagleford property will significantly enhance the quality of Freehold's North American portfolio, projecting to add 2,500 B.E. day of production in 2022, improving both the near-term and long-term sustainability of Freehold's dividend, while providing further option value to return capital to shareholders through multiple years of free cash flow growth. After quarter end, Freehold announced that it had closed its previously disclosed transaction to acquire concentrated, high-quality U.S. Royalty assets in the Midland Basin for approximately U.S. $55 million, or about $69 million Canadian. The Midland assets, in conjunction with the focused acquisition work completed -to-date, are expected to add multiple years of production and funds flow growth. The growth of the U.S. portfolio is in line with Freehold's strategy to add to our North American portfolio, focusing in on high-quality development areas with multiple years of drilling upside and growth. These acquisitions were funded through a combination of Freehold's previously announced bought-deal equity financing, in which we issued 19.1 million subscription receipts at a price of $9.05 per share, and the utilization of our credit facility and our funds from operations. On the operations front, production for the quarter averaged 11,265 BUE a day, representing a 23% improvement over Q3 2020 and a slight gain versus the previous quarter. The U.S. portfolio averaged 1,748 BUE a day in Q3, a 13% increase from 1544 in Q2. Growth in volumes reflect better well performance, slightly better than forecast activity levels, and the integration of U.S. royalty acquisitions that have been completed so far this year. In Canada, production averaged 9,517 BUE a day for the quarter, up 5% from the same period in 2020, and essentially flat relative to the previous quarter. With the ramp-up in activity on our royalty lands in Q3, we expect Freehold's Canadian portfolio to deliver organic growth into year-end. After realizing actual results of the first three quarters of 2021, and with Freehold's most recent acquisitions now closed, we are implementing guidance for the fourth quarter and expect production volumes to range between 13,500 to 13,750 BUE a day during the period, weighted approximately 60% to oil and NGLs and 40% natural gas. For 2022, Freehold is increasing our previous guidance and is now projecting volumes to average between 13,750 BUE a day to 14,750 BUE a day, with the same weighting of 60% crude oil and NGLs and 40% natural gas. On the drilling front, we had 179 growths, six net wells drilled on our lands in Q3, a substantial 450% improvement on a growth basis versus the same period in 2020, as activity continued to return to our land supported by higher commodity pricing and our expanding U.S. land base. For the quarter, drilling was very well balanced across our core play areas, with 27 growth wells drilled in the Viking, 24 in Southeast Saskatchewan, 18 in the Cardiam, 18 in the Spirit River, 17 in the Clearwater, 14 in the Eagleford, and 11 wells targeting the Midland-Delaware basins. For the first nine months of 2021, 375 growths, 11.8 net wells were drilled on Freehold royalty lands compared to 261 growths, 8.7 net drilled during the same period last year. In Q3 2021, approximately 70% of all growth locations on Freehold's Canadian assets targeted gore prospects, with 25% focused on Freehold's mineral title lands and 5% from unit wells. 44% of all locations drilled targeted prospects in Alberta, 37% in Saskatchewan, and 19% in the U.S. on a growth basis. Almost 90% of wells drilled focused on oils or liquids prospects. This improved activity was driven by a broad increase in overall industry spending across North America. With the upward move in crude oil pricing, activity continues to increase on Freehold royalty lands, with approximately 20 rigs, 6 in Canada, and 14 in the U.S. running on our lands as of last week. We have considerable optimism heading into the final quarter of 2021 and into 2022, and will continue to focus on positioning Freehold to be a premier North American royalty company with a strong balance sheet, a sustainable dividend, and prospects for growth in top-tier oil and gas operating areas. I will now pass the call to Dave Henry to walk through some of the financial highlights.

Thanks,

Dave,

and good afternoon, everyone. As commodity prices improved over the quarter, Freehold continued to deliver on the core financial aspects of its return proposition, providing a meaningful dividend while also providing investors with a lower-risk investment, differentiating itself from traditional oil and gas E&P companies. Royalty and other revenue totaled $50.9 million for Q3 2021, up 13% from the previous quarter and 120% when compared to the same period last year. Funds from operations for Q3 2021 totaled $48.2 million, an all-time record for Freehold, up 20% versus the previous quarter, and 143% for the same period in 2020. This significant increase in funds flow from operation provides added financial strength and flexibility in how we manage our business. On a per-share basis, funds from operations was $0.36 per share during Q3, representing a level not achieved since 2014. Freehold's royalty revenue and funds flow benefited from the strong upward momentum in oil price and natural gas prices, while growing production, particularly in the U.S., which receives better pricing relative to our Canadian assets. Freehold's dividend payout totaled 35% for Q3 2021, up slightly from Q2 2021, and 8% from Q3 2020. As previously mentioned, we are increasing our monthly dividend from $0.05 per share to $0.06 per share, reflecting a measured response to an improved commodity price outlook, strong production volumes, and increasing third-party spending on our royalty lands in 2021, which is expected to continue into 2022. For Q3 2021, cash costs totaled $2.49 per BOE, the lowest in Freehold's history, down materially from $4.48 per BOE in Q2 2021, and $3.70 per BOE during the same period in 2020. We continue to drive efficiencies in this area through reduced G&A and operating costs, while increasing production volumes. Acquisitions completed late in the quarter and after quarter end are expected to only add a marginal amount of G&A as we continue to drive optimization on our cost structure, resulting in a better net back to our shareholders. Net debt totalled $75.3 million on September 30, representing 0.5 times net debt to 12-month trailing funds from operations. Overall, Freehold's net debt increased by $35 million versus the previous quarter, but was still lower than September 30, 2020. The increase in net debt reflects acquisitions completed over the quarter, with stronger funds from operations also meaningfully contributing to the funding of these acquisitions. Freehold's prudent strategy of maintaining net debt to funds flow well below 1.5 times, alongside a longer-term dividend payout target starting at 60% of funds from operations, provides protection to the business from commodity price volatility, while maintaining capacity to continue to grow through strategic acquisitions. And current with the closing of the Eagleford transaction highlighted earlier, Freehold amended its credit facility with a syndicate of four Canadian banks, increasing the committed revolving facility to $285 million and maintaining the operating facility at $15 million. The amended credit facility includes a permitted increase in the committed revolving facility of up to $360 million, subject to lender's consent. Both the committed, revolving, and operating facilities mature September 28, 2024. Lastly, Freehold's board has approved the filing of preliminary -form-based shelf prospectus. Upon filing the final base short-form shelf prospectus, Freehold will be able to, from time to time, offer and sell common shares, preferred shares, subscription receipts, warrants, and units on an aggregate amount of up to $500 million during the next 25-month period. Freehold has no immediate plans to raise equity capital, however. The filing of a shelf prospectus is a natural and prudent step for the company for financial flexibility as it continues to enhance and expand its asset base and drive continued business improvement. Now back to Dave for his final remarks.

Thanks, Dave. So on November of this month, November 25, Freehold will celebrate its 25th anniversary of business. The leadership team is committed to continue building on our successful history as we evolve Freehold into the premier North American oil and gas focused royalty company. The current economic conditions are very positive for our industry, and the strength of our royalty model and the strong return proposition and investment that Freehold provides will continue to be showcased going forward. We remain incredibly enthusiastic about the next 12 months. There has been a steady trending up of capital spending and associated production growth on our lands, both in Canada and the U.S. At current commodity price levels, our high royalty margins offer significant option value to provide returns to our shareholders. With today's increase to our monthly dividend, we reiterate that this is the fifth consecutive quarter that we have revised our dividend upwards. The acquisition work that has been completed in Q3, along with the transaction after quarter end, are expected to provide both near and long term value for our shareholders and further our patient execution of our strategy. There has been a tremendous amount of work completed in the transformation of Freehold from a premier Canadian royalty company to a premier North American royalty company. The fourth quarter of this year will be the first period our shareholders will see the full impact of the approximately 320 million of acquisition activity in the third and very early in the fourth quarter. And we are confident that Freehold will deliver record levels of royalty production and funds from operations. I would like to personally thank all of our shareholders for their support over the past 25 years and thank our board and employees that contribute the ideas, the energy, and the inspiration that has made an investment in Freehold a success. Thank you and we will now take questions.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift up your handset before making your selection. If you have a question, please press star 1 on your device's keypad. When prompted by the system, please clearly state your name to register your question. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. We will take the first question. Please go ahead.

Luke Davis. Hey, Luke. Hey, afternoon, guys. Just had a quick one here relating to the shell. Just wondering if you can kind of frame out the thinking behind this. I know you hit on it a little bit, but should we read into that that you're kind of setting up to do something larger or you really just look into kind of enhance flexibility there? And then I guess the second piece of that would just be it is fairly sizable. So just wondering if you can kind of frame out how you came to that 500 million. Any kind of details that would be helpful?

Sure, Luke. It's Dave Hendry here. Yeah, no, we have absolutely no immediate plans to utilize the shell. This was merely about being prepared. So the shell just gives us added flexibility. You know, should a future opportunity come along, we want to make sure that we're adding the best value and being able to communicate it in the best way. So this is purely about being preparedness. As far as on the size of it is, it's what we did is we looked at what peers were putting out from the last shell prospectus is over the last year or so. And, you know, what we found was about a medium of those was about 25 percent. So we took a look at our market cap, 25 percent, and that's around it to around that 500 million dollar mark. And then we looked at, you know, deal opportunities. We want to make sure that it's reasonable size because it's going to be out there for that shell period of 25 months. So that's that was the logic on how we came around 500 million.

Gotcha. Makes sense. Maybe just another one for you, Dave, just just around hedging. I mean, things look really good now. Activities picking up. Margins are high. But the industry is pretty notorious for kind of overestimating pricing. So wondering if you have any updated thoughts on on hedging and how that might look over the next couple of years.

Yeah, so as far as on hedging, it's something we do discuss regularly with our board as far as as you know, whether whether we want to apply it right now. I mean, with our dividend or sorry, our net debt to funds, those projections where we're looking around that more zero point five times is relatively let's call it conservative on the leverage. And so we hedging doesn't really have a lot of logic to it for protecting that one. As far as protecting the dividend side, you know, you still seeing, you know, let's call it a backward data position of the hedging. And so, you know, at this point, you know, we're comfortable with not having a hedging position, but we continue to evaluate it every single quarter with the board.

Gotcha. Thanks for that.

My pleasure, Luke.

Thank you. We will take the next question. Please go ahead.

Hey, Travis. How are you? Hey, guys. Thanks. I have two questions for you. The first, could you give us some colors around the strength of pricing you're seeing, I think specifically in the US on the liquid side as well as the natural gas side. And then I'll have one more as well.

OK, you're going to keep Dave Henry busy. Yeah,

exactly. So, yeah, we to help provide a little bit more details is one of the changes that we made to our MD&A and financial statement disclosure was providing data both on a Canada and a US basis. And so for it's always where, you know, I'm just pointing out to the nine month, just providing a little bit more of a smooth pricing scenario rather than looking at a particular quarter. And where you can see on a crude basis, our realized pricing in the US on oil is about $10 higher. So, you know, you can take a look at it and saying it's for, you know, over the last nine months, we were getting about $68 net on oil, you know, versus in the US, we're at $78. And similarly on a gas basis where, you know, the natural gas realized pricing was, you know, $3.90 relative to $2.60 Canadian. So you're seeing, you know, a dollar delta. And in the third quarter, that was, you know, that natural gas delta was even wider, where it was, you know, $1.40 improvement on that. So we're seeing great realizations in the US. And so our production in the third quarter was about 16% weighted to the US. And obviously with that Eagleford deal, that weighting will go up and you'll continue to see that torque of the improved realizations on, you know, on our US products. And if you look at on a net oil equivalent basis, blended together. So for the first nine months of the year, you know, you're looking at almost $52 a barrel in the US relative to $42. So it's noticeably improvement in the US. And so that's why, you know, we're projecting funds flow to improve proportionally better than, you know, that weighted average percentage of production in the US.

That's great color. And then one more just around activity. I mean, guidance for the tail end of this year into 2022, edged higher. We've seen the resilience and pricing continue. Around the services side, I think you mentioned 20 rigs. You know, has that picked up subsequent to the quarter? And how should we think about kind of the pie chart of US, Canada from rig activity through at least the tail end of this year, I guess?

Travis, it's Rob King speaking. This is the latest update. This is up until a couple days ago. We actually have an increase from those 20 rigs across the US and Canadian lands to 24 rigs. So now there's 17 running in the US. Eleven are in the Midland. And the other six are sort of scattered between Eagleford, Bauch and Appalachia. In Canada, we've seen an increase to seven rigs running on our lands, but even split between Alberta and Saskatchewan. Viking and Cardiam are definitely the most active plays with four rigs. Oh, not four rigs. The Viking and Cardiam are definitely the most active right now for us. And so almost every time we update our rig activity, we're sort of seeing an increase ever since sometime early September time frame. So it does give us some pretty solid confidence about what we're going to see in the balance of Q4 and into 22.

OK, perfect. That's all from me. Thank you very much. Thanks, Travis.

Thank you. Once again, please press star 1 on your device's keypad if you have a question. We will take the next question. Please go ahead.

Jeremy McCray. Hey, Jeremy.

Did we lose you, Jeremy?

I'm sorry, I'm unable to hear anyone. If you're using a speakerphone, please lift up your hands to unmute your line. Hearing no response, we will have to go to the next question. Please go ahead.

Elias Foskolas. Hi,

Elias.

Good afternoon. I've got, and thanks for taking my question. I've got a question on the guidance. I appreciate the production guidance. I'm trying to tie in as to what the commodity price guidance, where that kind of, you know, relates to things. I mean, directly, you know, with commodity price guidance, I guess I would be expecting some sort of fund flow or cash flow guidance, but there isn't any there. So can you frame as to, you know, what I'm supposed to get out of the commodity price guidance for Q4 and 22?

Yeah, basically, Elias, what we're doing, you know, first we'll start with the production guidance. You know, just recognizing, you know, the significant evolution of the portfolio throughout the year, you know, just trying to tie all the bits and pieces together of the acquisition work that's been done and, you know, give you some insight into our view of what Q4 shapes up to and then continuing that forward into next year. This is really, it's tying all the acquisition work together. For the production or for the pricing guidance, we're just giving you what we're using in our modeling for pricing. You know, part of it when we talk about the dividend, you know, that pricing there and the midpoint of guidance for us triangulates around, you know, kind of a 50%, you know, payout on pricing. And that's all we're trying to do, just, you know, let the analysts and investors kind of see what we're using in our numbers as we're thinking through our business strategy and plans.

Okay, so I can use that in a sense for the dividend and what I would say the amount of cushion off of that is to redeploy capital, I guess. Would that be correct?

Yeah, and the way we're looking at managing the dividend is that, you know, we think that that level of that pricing, you know, continues to triangulate around that 50%. We still see, you know, considerable opportunity, you know, for acquisitions in front of us right now. And so we think at that level of dividend, you know, we can pay down debt and then get ourselves comfortably to, you know, 0.5 times debt to cash flow and still leave opportunity, available money to, you know, invest on the acquisition front. So we're just trying to strike that balance and kind of lay that out a little bit more clearly for our readers.

Okay, appreciate that. And maybe a bit more of a high level question, given the current commodity prices that are out there and the current drilling activity that you're seeing. Absent of acquisitions, how do you see production on your current stream of assets? Would it be holding relatively flat? What I'm really trying to get at is, are we at a point now where we've got something that's flat, slightly growing, slightly declining, leaving you, you know, the ability to add upside through acquisitions?

Yeah, that's a good question, Elias. And, you know, how we've modeled it right now, you know, we see ourselves essentially flat for the next three years. So, you know, we don't have to deploy capital into acquisitions to, you know, maintain that stable production profile. So, you know, that's a significant difference from, you know, historically what we've had to do with the company and this reflects, you know, how we've really repositioned and restructured the asset base in the last nine months. And so what that's allowed us to do is we can be pretty selective on, you know, the bid level that, you know, we're proceeding with on assets and the exact type of assets that we want to bring into our portfolio. And so we've got a lot more horsepower to run our business with the increased funds flow and with the production profile where we're at, you know, we've got a lot more ability to, you know, to really drive, you know, the value and the location of where we're adding to the portfolio.

Great. Perfect. You answered the question, you know, kind of what I was looking for. So we appreciate that clarity. That's it for me. I'll turn it back. Thanks.

Thanks, Liza.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Spiker.

Thank you for everyone that participated today. Once again, we're very excited with the quarter. We're very excited about going forward. So thank you all. And we'll please don't hesitate to call if anyone has further questions. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.