Freehold Royalties Ltd.

This conference is being recorded. This conference is being recorded.

All participants please stand by. Your meeting is now ready to begin. Good morning ladies and gentlemen and welcome to the Q2 results conference call. I would now like to turn the meeting over to Mr. David Spiker. Please go ahead.

Good morning everyone and thank you for joining us today. On the call with me from Freehold are Rob King, our COO, Shana Morihara, our CFO, and Todd McBride, our manager of IR. Shana joined our team as CFO in June of this year and we look forward to working together and having the opportunity to introduce her to you, our shareholders, over the coming months. So we've delivered a strong second quarter reflecting the resiliency of our North American portfolio. Despite the uncertainty and caution associated with the constant headlines that are driving volatility in both markets and commodity prices. During the quarter we achieved production of 16,584 BW a day with a liquid weighting of 67%. Both new high watermarks for Freehold as we continue to build and evolve our portfolio. This 9% production growth from the second quarter of last year reflects our strategic acquisitions over the past 12 months which have expanded and strengthened our US positioning, particularly in the Permian Basin. As in Canada, operators in the US continue to drive higher production levels while minimizing rig time and associated costs. During the quarter we had several prolific wells come online producing at rates double that of the performance of the historical offsetting wells. These high productivity wells were key contributors to the production levels achieved this quarter and a reminder of the ongoing advancements in well drilling and completion strategies. Despite there being over 100,000 horizontal wells drilled to date in Texas. Specific to this example, we had 31 new wells drilled on 6 distinct drilling paths across the Permian and Eagleford Basins. And these wells are brought on with initial production rates IP 30s of over 73,000 BW a day. Freehold's average net royalty interest across these 31 wells was 1.1%. More than twice that of Freehold's average US royalty interest. And as such, the culmination of outstanding well results and a higher royalty interest was particularly impactful. For those of you that can see on the screen, we've included a graph that illustrates how these Permian and Eagleford wells compared to other world class unconventional resource plays in North America, such as the Montney and Duvernay in Canada. The production performance curves are very similar and in general, the Permian and Eagleford wells have a much higher oil weighting with Eagleford being similar to the Duvernay and the Permian being oilier than most unconventional Canadian plays. Growth drilling activity in the quarter in the US remained consistent with the prior quarter and increased almost 10% year over year. We ended the quarter with approximately 4.6 net activity wells. And these are wells that have been permitted, as they call in the US or licensed, as we refer to in Canada, plus wells that have been drilled but yet not completed. So recall that we need about four net activity wells to maintain our US production. So at 4.6 net wells, we're well ahead of that pace. We have seen a slowdown in drilling rig activity in both the Permian and Eagleford basins. Both are down about 10% year to date compared to last year. This has been offset by an improvement in drilling efficiencies, as total meters drilled in the horizontal section of the well bore, or the pay interval, is the same as last year, despite the lower rig count. Our largest payers in the US, accounting for approximately 60% of Freehold's US revenue, are Chronic Oil Phillips and ExxonMobil. Both of these companies have maintained a similar market share of drilling rigs in the Midlands and Eagleford basins, as shown on the left-hand chart, respectively, over the past three years. The benefit of exposure to these large, investment-grade companies is that they approach capital programs with a longer-term view, maximizing program efficiencies and reducing activity level volatility. In Canada, we saw seasonal slowdown in drilling activity during spring break-up, while licensing activity remained strong, with a similar number of licenses in the first half of 2025, as through the same time period in 2024. We view this as a positive tailwind for the second half activity. Our key Canadian oil plays grew by 10% compared to the second quarter of last year. These key oil plays are at the Manville, Clearwater Heavy Oil, and Southeast Disguise and Light Oil. These three plays now make up approximately 30% of our Canadian production. So, moving on to financial performance, we had another strong quarter bonus in leasing activity, driving a combined $5.8 million in revenue for the first half of 2025. This increased leasing activity reflects continued operator interest in leasing our Canadian mineral title lands, as well as leasing activity on our expanded U.S. mineral title portfolio. Funds from operations were $57 million in the past year, and $1.5 million in the past year. The first quarter was $1.5 million in the last quarter, or $0.35 per share. Benchmark oil pricing was 11% lower than the previous quarter, dropping almost $8 a barrel to approximately $64 a barrel, the lowest level since the first quarter of 2021. By comparison, however, in that first quarter of 2021, or just over four years ago, our funds from operations was $0.25 a share. At $0.35 a share today, this marks a 40% increase in FFO per share at a similar WTI oil benchmark price. This improvement reflects our initiatives to build our production through the acquisition of high-quality assets in the U.S. that deliver premium-priced light oil barrels and basins with multi-decade drilling inventories. We paid $44 million in dividends to our shareholders in the second quarter, and we invested $12 million to acquire undeveloped mineral title lands in the U.S. These land acquisitions are in the core activity areas of both the Midland and Delaware basins of the Permian, where operators are prioritizing development. Leveraging the ability to develop these lands with the most recent drilling and completion efficiencies, thus optimizing production performance and reserve recoveries, as we referred to earlier. Over 90% of the drilling permits on Freehold's Midland Basin lands this year have been on undeveloped acreage, and we expect to realize returns in the high teens, low 20s percentage range from these investments. We've continued to maintain the strength of our balance sheet with net debt of $271 million at the end of the second quarter, representing a 1.1 times trailing net debt to funds from operations. So with that, we're pleased to take your questions.

Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1 on the device's keypad. You may cancel the 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. We have a first question on the telephone lines. It is from Patrick O'Rourke from ATB Capital Markets. Please go ahead. Your line is open. I'm sorry Mr. O'Rourke has hung up. I will skip to the next question from Kevin Fisk from Scotiabank. Please go ahead. Your line is open. Thanks for taking my question.

Freehold at Strong Liquids Production in Q2, can you walk us through your outlook for liquids production for the rest of the year?

Yeah, thanks Kevin. Sir, I'm going to turn it over to Rob here.

Sure. Hi Kevin. Yeah, so Q2 had very strong NGL volume growth. It was almost on the US side, almost 30%, quarter over quarter. Some of that was reflective of a prior period adjustment where we got some additional liquid volumes in Q1, but there's also additional liquids and frankly some additional oil, clearly from those six pads, 31 wells that Dave talked about. I think where we continue to see liquids growth in both our Canadian assets, as Dave talked about, about 30% of our Canadian volumes are coming from South East Asp, Manville Heavy and Clearwater, where a disproportionate amount of the licensing and leasing activity has been taking place on our lands. And then similarly on the US side, where again it was 4.5, 4.6 net activity wells that Dave talked about, most of that is concentrated within our Midland and Eagleford position, which those liquid weightings tend to be in the 70, 80 plus percent range.

Perfect. Thanks very much.

Thanks Kevin.

Thank you. The next question is from Joseph Schachter from Schachter Energy Research. Please go ahead. Your line is open.

Thank you very much. Good morning, Dave and Rob. This question for me is the Canadian number of wells down by 20, 45 versus 65, and it looks like nothing was going on in the Viking, very little in the Cardian. Is it that because of the higher gas waiting there and given the commodity price that drilling there was slower? And how do you see those two areas moving in terms of activity into the end of the year?

Yeah, I think Dave, you're acting to handle that. On the Cardian, we definitely see that Cardian, despite it being a bit of an oilier type play, still needs stronger gas pricing to make those economics go around. And so, you know, over the last couple of years with the weaker Gaco pricing, we have seen activity levels come off in the Cardian. And so that's just a simple matter of well economics. On the Viking side, that has been a play that typically is a bit more seasonal. We see a lot of drilling activity in the Viking. It comes on in starts in late December and contributes to your Q1 production volumes. And there, you know, we've had relatively consistent activity on that play. But again, we don't see it as a play that's going to represent growth in the portfolio. It's been a very strong performer for us over the last 10 years. But, you know, if we look at other plays in the portfolio that are attracting capital, such as the ones that both Rob and I talked to earlier, that's where we see the growth coming from. Viking, we see that more of a kind of a flat production profile going forward. Great.

So, any question for me? The Belly River is getting a lot of attention from medium guys, but even companies like Tourmaline are talking about 7, 800 BOEs a day, mostly liquids. Do you guys have a lot of exposure in the Belly River? Yeah,

we have a reasonable amount of exposure and we are the benefit right now. Some of that Belly River drilling, some of the leasing in the second quarter of this year was in the Belly River. And so we expect to that area to continue to attract capital and be a growth area for us. I think like you pointed out, it's emerging. It's just starting to come into the limelight. But, you know, certainly it's been active.

Last one for me. How do you see the M&A side and is it from the activity and number of deals you're looking at, is it possible in terms of a deal of some significance, material deal for you guys before you're in?

I think right now we're focusing on, Joseph is on what we call the ground game or acquiring these undeveloped mineral title lands in the US. When we're getting high teens, low to mid-20s returns on that, it's a pretty efficient way to build the portfolio. And you pair that with the fact that where we're seeing all the drilling is on these undrilled spacing units. And again, for as long as the Permian has been around, it's quite amazing how many undrilled lands there are that we're targeting. From a bigger scale perspective, we're not seeing the same level of opportunity that we've seen in prior years. I think that we're hearing that there is some bigger packages that are going to be marketed potentially later this year and into next year. But we don't have a sense of what those look like yet or what the scale and scope would be.

Thanks very much for taking my questions and congratulations on the good growth quarter.

Thanks, Joseph.

Thank you. Once again, please press star 1 on the device's keypad if you have a question. The next question is from Patrick O'Rourke from ATB Capital Markets. Please go ahead. Your line is open.

Hey, good morning, guys. Apologies for before the call seemed to drop on me. And I apologize if this has already been asked because it was off for a moment there. But just sort of walking through some of the variability in the net royalty rates in the US that you guys have seen and thinking about how that relates to the 2.2 ducks and the 2.4 permitted but not yet drilled wells. Can you maybe provide a little bit of color on sort of the concentration and the nature of those ducks that you have outstanding right now?

Yeah, I mean, I don't have the exact NRI percentage in terms of what makes up those, but they're pretty well distributed, I would say. As mentioned, our average net royalty interest in the US is about 0.5%. And I think that would be, in fact, that's baked into that 4.6 calculation over the number of net activity wells that was represented there. Okay.

And then just in terms of the balance sheet capital management and the dividend here, sort of towards the upper end of the payout range, is it still reasonable to expect that dividend growth accompanies the outlook for M&A going forward here?

Hi Patrick, it's Shaina. Thanks for the question. I think at this point we're quite comfortable with our 60% payout ratio in the NISIN per month. I think we'll continue to evaluate that as we look forward with any type of M&A. But I think we're at a good competitive level at this point.

Okay. Thank you very much. Thanks, Patrick.

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

Okay. Thanks everyone for joining us this morning and I look forward to catching up again next quarter. Thank you.

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