AGM 2021

May 11, 2021

Annual and Special Meeting. My name is Marvin Romanow, and I am Chairman of Freehold. First of all, let me begin by apologizing for being seven minutes late. We had some technical difficulties making the connection, but all of my technical people assure me that we're online, live, and moving forward. Before I get into the standard procedures of the meeting, I would like to go over a couple of highlights for 2020, and then David Spyker, our President and CEO, will provide a presentation at the end of the meeting detailing some of the near-term drivers for Freehold, along with an update associated with our quarter 1 2021 results, which were released earlier this afternoon. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Voting is now open for all resolutions. You are able to vote immediately or wait until the conclusion of any discussion prior to casting your vote. To vote, simply click on For or Withhold or Against as applicable. You will see a confirmation immediately above the voting buttons once you have submitted your choice. The polls will remain open until shortly following the discussion on the resolutions later in the meeting. Registered shareholders and duly appointed proxy holders may submit questions electronically during the formal portion of the meeting. All other guests may submit questions electronically after the corporate presentation. To ask a question during the meeting, select the Message tab, type your comment, then click the Send button. Let me begin by reviewing a few 2020 highlights. As everyone is well aware, 2020 was a difficult year as we dealt with the impacts of the COVID pandemic. At Freehold, we are proud of how we managed these unprecedented challenges while the company executed on a number of strategic initiatives during the year. These included, we successfully implemented a work-from-home program without a major interruption. In line with Alberta Health guidelines, we continue to have a large percentage of our staff from home, and we feel we have executed on this transition without major disruptions or impact on productivity. Very importantly, I would like to thank our staff for their hard work during this period of transition. We are optimistic at this point things will be back to normal soon. Our board executed a change in leadership with the promotion of David Spyker to CEO. As a board, we remain focused on maximizing value for our shareholders, and the promotion of Mr. Spyker was important to execute our strategy through the next phase of growth for Freehold. Financially, despite multi-decade lows for crude oil prices, Freehold was able to manage dividend and debt levels, preserving Freehold's identity as a low-risk income provider. We paid 54% of our 2020 funds from operations in dividends. This was the low end of our target 60%-80% payout range. This reflected better than forecasted production and funds from operations in the second half of 2020. We are very mindful of our target 60%-80% payout ratio and will move into that zone cautiously as we keep an eye on commodity prices, and I believe there are some current risks to the robust prices we're seeing today, keeping our eye on debt levels and keeping our eye on investment opportunities. We have subsequently increased our dividends three times in 2021 from CAD 0.015 per share per month to CAD 0.04 per share per month. This reflected improved commodity prices and activity levels and production on our royalty lands. We reduced our long-term debt by 15% year-over-year, exiting 2020 at the low end of our leverage targets. Overall, we maintained a strong financial position, able to execute our strategy of flowing our cash flow through to dividends while executing strategic acquisitions periodically. On the operations front, we achieved a number of key milestones as well. We achieved the lowest cash costs in Freehold's history, reflecting reduced operating, administrative, and interest charges. We made across-the-board salary reductions impacting staff and directors, reflecting weakness associated with COVID-19 and lower oil prices. We were also able to dispose of working interest assets in the second quarter of 2020, further enhancing Freehold's identity as a pure-play royalty vehicle. With cash costs at less than $5 per barrel of oil equivalent or BOE, we feel we have increased the sustainability of our dividend moving forward. We also completed Freehold's first major U.S. royalty transaction, adding royalty acres in eight states and in 12 basins. This transaction added 1,250 BOEs or about 11% of our production to our base, and was primarily focused in the Permian and the Eagle Ford. It was accretive to funds from operations. It was accretive to netback and positions us in attractive growth basins, including the Permian and Eagle Ford oil basins and the Haynesville Gas basin. We financed the transaction through debt plus a successful equity offering. This represents one of the first equity raises by a Canadian energy producer over the last three years, reinforcing the strength of our company and the resilience of our business. The expansion into the U.S. provides the underlying growth profile of our assets and enhances the option value created by strong drilling in basins with excellent reserve potential and low price breakevens. Our staff worked diligently over the quarter to incorporate these new assets, with results to date coming in better than forecast. In terms of share price performance for the year, not unlike equity markets in general, and more specifically, energy equities, Freehold's share price exhibited considerable volatility in 2020, driven by the uncertainty around COVID and the underlying commodity price environment. For the first time in memorable history, we saw negative oil prices during this period. Overall, Freehold's share price declined by 24% during the calendar year. However, quarter one of 2020 to quarter one of 2021 saw an increase of over 140%. Furthermore, Freehold was the number one oil and gas royalty company in 2020 throughout North America, with that outperformance continuing into early 2021. For 2021 year to date, we have seen our share price improve by more than 60%. Now, we are not completely satisfied with our 2020 share price performance. We do, however, believe we have completed a number of key strategic objectives that bode well for 2021 and beyond, and we are seeing that show up in the numbers year to date. That concludes my opening business and strategy comments. We will now turn to the formal part of the meeting. To make the best use of our time, we have prearranged with certain persons attending to move and second the resolutions, which we'll consider in one motion today and which are set out in the notice of meeting. While all matters are to be considered, they will be put forward in a single motion. Shareholders will be able to vote on each of the matters separately by electronic ballot. If you have already sent in your proxy, your vote has already been counted, and you do not need to vote at this meeting. Questions in respect of a motion can be submitted electronically on the virtual platform by any registered shareholder or duly appointed proxy holder by following the instructions on the platform. Questions will be answered in relation to each item of business. We ask that questions during the formal part of the meeting only refer to the matter set out in the notice of meeting. Following the formal part of the meeting, David Spyker, our CEO, will be making a presentation regarding the operations and future plans of Freehold. He and I will be happy to answer any additional questions at that time. The meeting will now come to order. I am the chairman of Freehold and will act as the chairman of the meeting. Ted Brown, partner of Burnet, Duckworth & Palmer LLP, will act as secretary of the meeting, and Computershare Trust Company of Canada, through its representatives, will act as scrutineer. I have received a declaration as to the mailing of the notice of annual and special meeting of shareholders, information circular, instrument of proxy, and the annual report to shareholders. I direct that this declaration, together with copies of the documents mailed to the shareholders, be kept by the secretary with the minutes of this meeting. A quorum for a meeting of shareholders of the corporation is 25% or greater of the outstanding common shares present in person or by proxy. There is a quorum present at the meeting today. In excess of 59% of the shares have been voted by proxy, and the interim scrutineer's report indicates that between 93%-99% of the shares voted have voted in favor of each of the matters to be considered at today's meeting. I now declare the meeting to be regularly called and properly constituted for the transaction of business. As I indicated earlier, the polls are now open on all resolutions. Once discussion on all items of business has concluded, voting will be closed on all resolutions. Particulars of the votes cast on all matters may be obtained from the secretary after the meeting and will be available via news release after the meeting. The annual financial report to shareholders, which includes the financial statements of the corporation for the fiscal year ended December 31st, 2020, and the auditor's report for the same period, was mailed to those shareholders who requested it and is available on Freehold's website as well as on its profile at sedar.com. As noted earlier, to make the best use of our time, I will be asking for a motion to consider, and if thought appropriate, approve each of the remaining items of business set forth in Freehold's notice of annual and special meeting and management information circular. However, before doing so, I will speak to the first remaining item of business, the nomination and election of the directors of Freehold. According to a governance agreement between Freehold and Rife Resources Management, Rife has the right to nominate two individuals for election as directors. Rife has nominated Peter Harrison and David Spyker for election as directors of the corporation. In accordance with the governance agreement and the advance notice bylaw of Freehold, the only individuals entitled to be nominated as directors at this meeting are the persons named as nominees in the information circular. Therefore, as directed by the board, in accordance with the notice of meeting and information circular, Gary Bugeaud, Peter Harrison, Douglas Kay, Art Korpach, Susan MacKenzie, Marvin Romanow, David Spyker, and Aidan Walsh are hereby nominated as directors of Freehold Royalties Ltd. to hold office until the next annual election of directors or until their successors are elected or appointed, subject to the provisions of the Business Corporations Act of Alberta and the bylaws of Freehold Royalties Ltd. Mr. Secretary, have any questions been received on this matter? No. No questions have been received. There have been no questions received. Thank you, Ted. I now ask for a motion to approve each of the remaining items of business set forth in Freehold's notice of annual and special meeting and management information circular. Mr. Chairman, I move that the firm of KPMG LLP Chartered Accountants be appointed auditors of Freehold until the next annual meeting or until their successors are appointed, that the resolution set forth in Freehold's information circular regarding Freehold's approach to executive compensation be approved and adopted, and that the resolution in the form set forth in Freehold's information circular regarding an amendment to Freehold's bylaws be approved and adopted. Mr. Chairman, I second the motion. Mr. Secretary, have any questions been received on this motion? No. No questions have been received. Thank you, Ted. If you have not already, please register your votes by selecting either the for, or withhold, or against buttons next to the applicable matters. Once the electronic balloting closes, the voting pages will disappear and your votes will automatically be submitted. We will have a brief pause for about 60 seconds before we close the polls. 30 more seconds. The polls are now closed. We will pause for a moment while the results are tabulated. I've been advised by the scrutineer that each of the matters considered today has been approved by the requisite majorities. I direct that the scrutineer's report be annexed to the minutes of this meeting as a schedule. As mentioned earlier, the detailed results of the vote will be made available in a news release to be issued by Freehold and in a report of voting results to be filed on SEDAR. As the business of this meeting has been completed, I declare the formal portion of the meeting terminated. David Spyker, our CEO, will now provide an update on Freehold's activities. Please stay in the virtual interface for the management presentation. Following his presentation, we will be able to answer any questions you have. You can submit your questions at any time. Thank you, Mr. Chairman. Good afternoon. I'm pleased to welcome everyone to our AGM for the 2020 operating year. It was an excellent year, and I'm excited to discuss the highlights with you. My name is David M. Spyker, and I'm proud to be the President and CEO of this exceptional royalty company, one that has top-tier assets and top-tier people. My goal is to continue building this great company by expanding our royalty portfolio with prudent investments in the top oil and gas basins across North America. These areas have proven oil and gas development opportunities and will continue to attract capital for years to come. We will generate a superior free cash flow stream, which we will return to our shareholders as dividends or by continuing to improve our underlying royalty portfolio. The work completed in 2020 that Marvin spoke about has positioned us not only for 2021 but for multiple years into the future. We have looked beyond just a property focus, and in the past year, we have prioritized our employees' health and safety with our employees working remotely. Through these unusual circumstances, our team has been highly resilient and adaptive and continued to advance key strategic initiatives. We have strived to enhance the teams and workflows that we have put in place to build value through business development, to ensure strong financial oversight, to foster a collaborative approach to audit and compliance, and to strengthen our high-performance culture through a focus on innovation. This is the heart and soul of our business that drives our vision forward. We worked very hard in 2020 to ensure that when commodity prices rebounded, we maintained our balance sheet flexibility. This was achieved by reducing our cost structure and through improvements in our asset base that have provided shareholders with a more sustainable production base. Through this work, we are pleased to see our production restored to 10,944 BOE a day in the first quarter of this year, above the 10,600 BOE a day average we'd achieved over the three years prior to the pandemic. Due to a pullback in drilling activity and industry-wide shut-ins associated with the oil price collapse, 2020 production averaged 9,780 BOE a day. Looking into 2021, and aided by strong third-party production additions and the quality acquisition work completed earlier in the year, we are forecasting production volumes to average in a range of 10,500-11,000 BOE a day this year. Based on our year-end 2020 reserves evaluation, our reserve life index is just over 10 years. This means that we are able to produce at our current production levels for another 10 years without completing another deal or having another payor added to our reserve base through third-party drilling. While we are pleased with this number, we want to point out it will continue to grow as we book the significant reserves associated with the U.S. acquisition work we have done in 2021, and as our multi-year inventory of drilling locations that are not captured in the reserve report are developed and placed on production. The U.S. acquisition work, which was completed in Q1 this year, is a significant contributor to our production. More importantly, the quality and characteristics of this new asset base is such that, combined with our existing portfolio in Canada, we project low to no decline production for Freehold for a number of years to come. This is different from our history, where we often had to manage production declines within the portfolio through acquisitions. As mentioned earlier, we continue to remain focused on positioning Freehold in the top plays in North America, which increases the sustainability and resiliency of our portfolio. As shown in the chart, we have meaningful positions in the Clearwater, Midland, Delaware, Haynesville, Eagle Ford, Bakken, Shaunavon, and Viking plays. These are generally considered the best of the best oil and gas plays within North America and will support multiple years of drilling and development. As we exited 2020, oil prices continued to strengthen through the first quarter of 2021. Accordingly, our funds from operations increased to CAD 32.4 million in Q1, a 60% increase from the same period last year. This equates to CAD 0.25 per share and is restored back to the per-share levels we had in 2019 prior to the pandemic. At current commodity price levels, we are excited about the strong fundamentals of our business with strong balance sheet capacity, room to grow the dividend, and/or to complete value-enhancing acquisitions with our free cash flow. Our lower risk, low cost, high margin business model is one that proved very resilient through a tumultuous 2020. We exited the year with a strong balance sheet, and that continued to the first quarter with net debt exiting the period at CAD 64.8 million. To protect our balance sheet and maintain flexibility to complete opportunistic acquisitions, we reduced Freehold's dividend in April of last year. This was in response to prevailing commodity price weakness and uncertainty around COVID-19. Today, as prices have stabilized and displayed upward momentum, we are announcing an increase in our monthly payout by 33%, from CAD 0.03 to CAD 0.04 per share. This dividend increase represents the third increase this year and reflects our confidence in the improving business outlook. We will continue in our measured approach to restoring the dividend to the lower end of the targeted 60%-80% payout range. The move today will see us slightly below that level based on our forecast for the next 12 months of funds from operations. We feel it is important that we continue to manage our conservative debt levels and leave some flexibility to pursue the value-enhancing acquisition work I talked about earlier. We have taken significant steps to improve the quality and resiliency of our company. Our cash costs are at all-time lows, which increases the funds flow available to return to our shareholders through dividends. Our focus is 100% on the royalty business, with the vast majority of our working interest asset base eliminated last year. We have restructured our organization to drive additional value through a dedicated business development team. We are positioned to take advantage of development in the best plays across North America. We are seeing drilling activity pick up across our portfolio as commodity price confidence is restored within the industry. Our royalty model allows you as a shareholder to participate in oil and gas development through a carefully selected asset base across North America. We have a balanced portfolio, weighted 55% to oil and natural gas liquids production, and this 55% generates 80% of our revenue. As a royalty company, we have no exposure to operating costs, capital costs, or abandonment and reclamation costs. As a result, we maintain a greater than a 95% operating margin, enabling greater returns to be shared with you, our valued shareholders. For 2021, we also look forward to sharing with you a new ESG report. As a royalty company, we do not have direct greenhouse gas emissions. However, as a participant in the oil and gas industry, we ensure we carefully align with those companies that share the same environmental sustainability views that we have. We want to promote and support responsible oil and gas development on our royalty lands. We have a high-performance culture in our workplace that values diversity and inclusion and encourages the sharing of ideas and thoughts to build a better organization. Last but not least, our corporate governance practices consistently receive top scores by independent evaluators, and this is led by our very engaged and supportive board of directors. This concludes our corporate presentation. Mr. Moderator, are there any questions? There are no questions at this time. Thanks, Matt. If there are no further questions, we thank you for your time today, and we look forward to the future with our course soundly charted. I'll turn the meeting back to the chairman to close. Thank you, Matt and Dave. I would like to thank, again, our employees for an exceptional year that we have had and for their strong performance in this difficult and ever-changing and uncertain circumstances. I'd also like to thank our shareholders for attending and for their continued support. Stay healthy, everyone. Operator, you may now end the call.