Freehold Royalties Ltd.

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And third party drilling activity on our lands. Joining me on the call this morning are Dave Henry, our CFO, and Rob King, our VP of Business Development. Approximately 18 months after Freehold's initial large scale expansion in the US, the company continues to execute its North American strategy, providing shareholders a sustainable dividend, low leverage, and diversification to royalty payers operating in core oil and gas plays throughout North America. Through the efforts of our team, we are a bigger, better company, and will continue to showcase this moving forward. Key highlights for the quarter included. Bigger and better resulted in a second consecutive quarter of records funds from operations of $72 million, or $0.48 per share. This was driven by production of 13,676 BOE a day and the continued strength in commodity prices. Drilling activity remains strong on our lands, with 244 gross wells drilled, and this is approximately the same number of wells as drilled in the previous quarter, and 132% higher than Q1 of last year. Our asset base is very well positioned in the most actively drilled plays across North America, and is being developed by top tier operators. The ramp up over the past two quarters in Canadian drilling activity is already showing up in our quarterly results. In the US, these strong activity levels will show up as production in Q2 and beyond, as the cycle time to go from a permit or well license to production is typically nine months in the US, as compared to three months in Canada. Our Canadian production was down approximately 1% quarter over quarter, and this was driven by cold weather impacts that started late last year and continued into mid-February. March production has fully recovered. We averaged nine drilling rigs on our lands in Q1, drilling a total of 144 wells, with primary targets being the Viking, Clearwater, Cardium, and Light Oil in Southeast Saskatchewan. Our US production was down 5% quarter over quarter, primarily driven by the timing of bringing new wells on stream. The asset overall continues to be very well supported by drilling activity with 17 rigs active, primarily on our core Permian and Eagle Ford land base. After increasing our dividend every quarter in 2021, we are maintaining our monthly payout at $0.08 a share. Current dividend levels imply approximately a 55% payout ratio for 2022 under our current commodity price and production assumptions, with the expectation to review dividend levels again as part of our Q2 2022 results in August. Given the suite of opportunities we see to reinvest in royalties on both sides of the border, we are preserving dry powder to pursue acquisitions. We currently believe this is the best return for our shareholders, as we see a number of high-quality opportunities to continue to enhance our underlying royalty portfolio. With this, subsequent to quarter end, we entered into a definitive agreement to acquire mineral title and overriding royalty interests across approximately 1100 net royalty acres, which equates to about 220,000 gross acres in our core Midland Basin of the Permian for US $15.5 million. This is a tuck-in to our Permian royalty lands that were acquired in October of last year. Leasing activity in both Canada and the US continues to strengthen, with bonus and rental considerations approaching $1 million in the quarter. I will now pass the call to Dave Henry to walk through some of the financial highlights. Thanks Dave, and

good morning 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 the company from traditional oil and gas E&P companies. For the second straight quarter, we delivered record funds from operations, generating $72 million over the quarter or $0.48 per share. This represented a 122% improvement versus the same period in 2021, and a 5% gain versus the previous quarter. Continued strength in commodity prices, including the premium prices Freehold receives for US volumes, drove much of the outperformance. Freehold's average realized US crude oil price was $119 per barrel during Q1 2022, up 80% versus the same period in 2021, while Freehold's average realized US natural gas price was $6.54 per MCF, up 106% versus the same period in 2021. In Canada, Freehold's average realized crude oil price was $104 per barrel during Q1 2022, up 79% versus the same period in 2021. Freehold realized a natural gas price of $4.20 per MCF in Canada for the first quarter, up 65% versus the same period in 2021. Freehold's dividend payout totaled 38% for Q1 2022 versus 24% in Q1 2021, which reflected two months of Q1 2022 dividend pay at $0.06 per share prior to March's increase. As previously mentioned, we are maintaining our monthly dividend at $0.08 per share, reflecting what we see as a balance between managing our financial leverage and portfolio reinvestment in a volatile commodity price environment. For Q1 2022, cash cost totaled $3.70 per barrel, equivalent, down from $4.37 per BOE in Q1 2021 due to stronger production volumes. Freehold has cost-effectively integrated our US acquisitions into the company's operations, leading to the cost per barrel improvement. In Q1 2022, Freehold reported current income tax expenses in Canada and the US of $6.4 million and $2.6 million respectively, driven by stronger commodity prices and increased production volumes. This represents the first quarter of material current income tax expense since 2014. Given Freehold's current tax pool inventory, current tax rates realized in Q1 2022 as a percentage of funds from operations can be used to estimate cash taxes for the remainder of the year. Net debt totaled $63 million at quarter end, representing 0.3 times net debt to 12-month trailing funds from operations. Overall, Freehold's net debt decreased by $39 million versus Q4 2021. The decrease in net debt reflected stronger funds from operations relative to dividend commitments. 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 and disciplined acquisition work. Now back to Dave for his final remarks. Thanks, Dave.

So we remain enthusiastic going forward, as the prospects to continue to grow our business are robust. There has been a steady trending up of capital spending on our royalty lands, both in Canada and the U.S. Our high margins offer significant option value to provide returns to our shareholders. We will continue to pay down debt to maintain maximum balance sheet flexibility to support our M&A ambitions. We are continuing our measured pace of moving our dividend toward a 60% payout ratio, and we see tremendous opportunities set in front of us to continue with disciplined value enhancing acquisition work. So thank you, and we'll 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 your hands up before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. So please press star 1 at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Luke Davis from RBC. Please go ahead. Your line is open.

Thanks, and good morning, guys. Just wondering if you can elaborate a little bit on timing issues in the U.S. Where are volumes kind of tracking now, and how should we think about that for the balance of the year?

Yeah, so in the U.S., from a timing perspective, we see that drilling activity, that strong drilling activity translating into volumes in the latter part of Q2 into the second half of 2022. And so we're still expecting growth on the U.S. assets throughout the year to be in the 15 to 20 percent range from Q1 to exit of this year. And again, that's based on the drilling inventory that we have, based on the ducks and permits that we see in front of us right now, and as those convert over the coming months into wells. I've got Rob here, and he can probably give you a little bit of color of what we're seeing right now for duck and permit count, and I think that would help give you some perspective,

Luke. Thanks, Dave. Hi, Luke. So maybe put a bit of context around about how many net wells we're looking to need to maintain our production of the U.S. on a flat basis. And it's about two net wells, plus or minus a quarter net well. There's a lot of assumptions that go into that, two number, but that's about a good number to use. And we look at how many drilled but uncompleted wells we have on our assets at the end of the quarter. It's about 1.5 net wells that were ducks, and then we also, on top of that, had about 1.7 net wells that were permits. So kind of both of those combined are about 3.1, what we call net activity wells. And a bit of context on those ducks, we see those being turned in line into production somewhere on the average. It could be zero months. It could be on average in the U.S. We've seen post-COVID about five months. So that's sort of the time frame on the ducks. And then the permits, you can probably use somewhere in a six to 18-month time period, those permits get drilled and then also get completed and brought on production.

That's helpful. So maybe within your guidance, have you split Canada and U.S. volumes, and have you tweaked that at all, just giving a slower start?

We haven't split Canada and U.S. in our guidance. And based on the modeling that we're doing, the guidance is still appropriate, given where we are in Q1 and where we see the portfolio continuing to ramp up through the year.

All right, makes sense. On M&A, another tuck-in post-quarter, I was wondering if you can give us some details on what sort of opportunities you're seeing in the market and where valuations are sitting now, kind of how they've moved, and maybe just break that down a little bit between Canada and the U.S. if we could.

Sure. Maybe touching on the tuck-in acquisition, just briefly first, that was $15.5 million in the Midland Basin. Key operators there, two in the public with Pioneer and Surge, two on the private with Endeavour and, I'm sorry, Pioneer and SM and then a private Endeavour and Surge. And on that transaction, it was about high teams on both the IRR as well as on a cash flow, near-term cash flow yield basis, using strip prices back in early March timeframe. So that kind of gives you a bit of a direction in terms of where we're seeing the acquisition prices stacking up. In terms of activity, just to give some numbers on what opportunities came across our desk in both the U.S. and Canada this quarter, we had about $2.5 billion of opportunities that came across our desk across 30 deals. About 80% of that was U.S., 20% Canada. In terms of what we actually evaluated that fit our acquisition criteria, that was about 15 transactions, so we sort of eliminated half right away with just over $2 billion of opportunities. In terms of what we actually bid on, it was a much smaller number from that 15 that we actually evaluated. We bid on three opportunities and we're successful on the one top-camp deal. In terms of forward expectations, there's a lot of opportunities that continue to be in the market, in particular on the U.S. side. This high-continued, constructive commodity pricing has really brought forward a number of sellers all across the side spectrum, to be honest.

Okay, that's helpful. Maybe the final one for me. Just wondering how you're thinking about hedging in the context of M&A. I know you guys haven't done it historically, but just given how much volatility we've seen in pricing, are you considering or have you considered just hedging out any acquisitions going forward just to sort of lock in your returns and kind of set that base?

Hi, Luke. It's Dave Hendry here. Every quarter we do look at dividends from a context, but for us, considering our cash flow profile and our current debt leverage, that it's not something which really fits within our strategy. As far as sort of applying a hedge to a particular transaction, we would absolutely look at it, but it depends on the merits of the transaction and do we feel that important enough to actually lock in. For a deal like the one we just closed on the smaller side, we wouldn't put in a hedge position for it. It would have to be an acquisition that's meaningful, that we needed the surety of the cash flow.

Great. That's all been super helpful. Thanks, guys.

Thanks,

Luke. Thank you. Once again, please press star 1 on the device's keypad if you have a question. Please press star 1. We have another question now from Jamie Kubik from CIBC. Please go ahead. Your line is open.

Good morning and thanks for taking my question. Just expanding a little bit on Luke's question with respect to the U.S., I mean, you talk a fair bit about timing issues on this asset. Can you talk a bit about where production has trended versus your original expectations and I guess what gives you comfort that the timing issues will get resolved in future quarters here?

Yeah. Maybe what gives us comfort on the activity as we look into 2022, just a bit more context around those net ducks and net permits numbers that I was mentioning to Luke. That's 1.4 net ducks. That actually is up 20% quarter over quarter. We added 20% to the duck inventory between Q4 and Q1. While that has an impact on and did have an impact on Q1 production, that gives us confidence that over the next six months, that's the average timeframe in the basins that we care about in the U.S. And then it's another five to six months from when the well is spud to when it's completed and brought online. So those net active, those permits give us confidence in the six to 18 month timeframe in terms of where, when that production will come online. And put some context on the increase in the permits, that was also a 17% increase quarter over quarter and an increase of 50% year over year in terms of the permits that we have on our lands at the end of Q1.

I think, Jay, as you know, compares to your initial evaluation work, you know, the acquisitions, you know, are certainly meeting expectations. And what we are seeing is drilling, you know, on lands that we didn't expect to see drilling. So, you know, we essentially, you know, backstop the acquisition work with drilling on the core lands in the Permian and Eagleford, but we're certainly seeing, you know, quite a bit of activity outside of those areas. So, you know, as far as the expectations from the deal, you're probably a little bit, you know, choppier on the production growth side, but you're certainly really happy with the activity level we're seeing and how that's going to build up going forward.

Okay, and then maybe just another one. We have heard of some, you know, timing related issues with respect to completion crews in the US compared to wells that are drilled. And you touched on that, I think, a little bit with Luke's question there also. Can you just expand on maybe what you're seeing in real time with respect to wells that are drilled and, you know, some of the time to completion compared to maybe what you expected? Yeah,

I mean, I think we're in a little bit of a different spot. We're 75% of our payers in the US are large investment grade companies. And so, you know, I think that tends to, they have a better access to services than we've certainly seen in some other, the smaller private end of the operators. Yeah, I think we're, yeah, I think that's...

Yeah, that's probably fair. And I think that, you know, we're, you know, I think if anything, you know, we're seeing a little bit of contraction on cycle times compared to historically just, you know, with the duck count coming down in the US over the last couple of years that, you know, prioritizing on drilled wells. So, a little bit of compression in timing there that, you know, we'll see will benefit us. But I think, you know, Rob nailed it as far as, you know, just the quality of the payers that we have and their access to equipment.

Okay, that's it for me. Thank you guys.

Yeah, thanks, Jamie.

Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Spiker.

All right. Thanks for everyone's questions and participation in the call this morning. We appreciate your continued interest in the company and we're always happy to share our results with you. Have a good day.

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Good morning, ladies and gentlemen. Your conference is now ready to the first David Spiker. Please go ahead.

After busy 20.

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