AGM 2020

May 5, 2020

Welcome to the annual and special meeting of shareholders of Freehold Royalties. I will now turn the meeting over to Marvin Romanow, Chair of the Board. Please go ahead. Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to the annual and special meeting of shareholders of Freehold Royalties Limited. My name is Marvin Romanow, and I am the Chair of the Board of Freehold. The impact of COVID-19 pandemic has been profound on all aspects of our lives. This disease has surfaced health, work, anxiety, business, economic, and security issues to only name a few. Virtually no industry has been unaffected. My heart goes out to all of those who have had their health, work, and businesses impacted. At Freehold, our first response priority has been the health and safety of our employees. We closed our head office and moved to work from home in early March. We quickly and successfully adapted to this new environment. Our very low level of field operations facilitated this transition. I want to thank all of our employees, our partners, customers, and service providers for the excellent execution of this transition. In the coming weeks, as economies reopen, we will be reviewing the requirements and recommendations of governments, regulators, and public health officials. We all hope the worst is behind us. I would like to thank our shareholders and guests for attending today, particularly with this new format. With COVID-19 rules restricting gatherings, we are adjusting to an online meeting. 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 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. After the formal part of the meeting, Thomas J. Mullane, our President and CEO, will provide a brief presentation detailing historic results, but most importantly, providing an overview on how we expect to position Freehold into the future. Our board and management team understand the frustrations of our shareholders. Despite relative outperformance versus our oil and gas producer peers, Freehold's share price is at a multi-decade low. We continue to position Freehold as a defensive oil and gas investment able to generate a meaningful dividend at current commodity price levels while maintaining conservative payout and debt levels to ensure long-term sustainability for our shareholders. At this point, I'd like to direct you to slide 2 of the presentation available on this site. The COVID-19 health crisis was declared a global pandemic by the World Health Organization in early March. In total, there are now greater than 3.5 million cases worldwide, with more than 60,000 cases in Canada. As the number of outbreaks has increased, we have seen global coordination among governments and populations to curb the spread. The result of these actions has reduced global crude oil demand by approximately 30%-40%. Furthering even more supply-demand imbalance, OPEC and Russia's inability to agree on production cut in March, followed by a production cut the following month that did not match the weakened demand, positioned crude oil at multi-decade lows. For the first time in history, we tested negative oil prices. Additionally, in North America, there remains a concern associated with the near-term storage at major refining centers, and that is that they are near capacity. This has put further downward pressure on regional prices and differentials and further exposes Canada's ability or inability, more properly said, to move crude oil in this environment. Although this demand hit is very significant, we're in the business for the long term. Over time, economies, markets, and demand will recover, and hydrocarbon products will again be in demand. I'd like you to turn now to slide 3 of the presentation. As a royalty company, Freehold benefits from a high margin production base able to generate significant free cash flow. Our revenue comes off the top of the barrel. We do not have responsibility for capital expenditures, operating expense, operators G&A or abandonment and reclamation costs. In 2019, we paid out CAD 75 million in dividends to our shareholders. This is comfortably within our CAD 118 million we had in funds flow from operations that year. We completed just under CAD 50 million in value-enhancing acquisitions in 2019, funded again from funds flow after we paid dividends. We added a diversified oil asset in Canada for about CAD 30 million. We also completed our first United States royalty transaction. Looking forward, we will continue to seek value-enhancing acquisitions in both Canada and the U.S. We expect to grow our U.S. footprint at a measured pace with a near-term focus in North Dakota. With access to capital constraints for oil and gas producers, we expect incremental deal flow in both Canada and the U.S., and indeed, this deal flow can be quite healthy. However, Freehold will be similarly constrained at current commodity prices, and we also have to recognize that the bid-ask spread between sellers and buyers, including ourselves, may be wide with the commodity price volatility. We will, as a result, undertake this in a proactive and cautious approach. Drilling on Freehold's royalty lands declined by only 2% in 2019 compared to 2018. This compares to activity levels in Western Canada falling by more than 20% during this same period. With core areas in attractive play regions, we expect our royalty assets will continue to attract capital as oil prices improve. We continue to position our leverage and dividend for long-term sustainability. We exited the first quarter with net debt of CAD 98 million. Our net debt to funds from operations is 0.9 times cash flow at the end of the first quarter of 2020. This is well below the industry average and in line with our own targets to be in the range of 0.5-1.5 times debt to cash flow. Our dividend payout for 2019 totaled 63%, again within our payout target range of 60%-80%. Subsequent to year-end, Freehold revised its monthly dividend from CAD 0.0525 per share to CAD 0.015 per share. Again, those numbers are on a monthly basis. The reduction represented a proactive step to ensure sustainability in our business given weakness in crude oil prices. We set our dividend at a level to be within our target payout range while accommodating some weakness in prices, some weakness in price differentials, and some drop in production from current production levels. In response to these unprecedented conditions and reinforcing the alignment with shareholders, your board has reduced their annual cash retainer by 15%. Our CEO has had his compensation and salary and benefits reduced by 15%. Employees took graduated salary rollbacks depending on their level of compensation, and we initiated a number of additional cost-cutting measures to reduce G&A, including renegotiating numerous contract rates, utilizing fewer contractors, lower IT spending, and other areas that went through our entire G&A spectrum. I'll now ask you to move to slide 4 in the presentation. For the period January 1st, 2019, to December 31st, 2019, our total shareholder return was down 4%, and that included dividends. This outperformed our peer group, and while we are not happy with this performance, we believe that through our efforts, we have positioned Freehold for success in both the near and the long term. Moving on to slide 5. Looking at the three-year performance, we are again not happy about this absolute number with total shareholder return, including dividends down 36% over this period, but we have again outperformed the majority of our peers, which again, we feel reflects the execution of our lower risk strategy. Included in our resolutions today is a resolution for a reduction in stated capital. This reduction is needed to give us ample room to continue to pay our dividend and have this model sustainable into the foreseeable future. Our CEO, Tom Mullane, will cover our corporate activities with a presentation after we complete the formal part of the meeting. We will start the formal part of the meeting now. To make the best use of our time, we have pre-arranged with certain persons attending to move and second the resolutions which we will consider in one single motion today, which are set out in the notice of meeting. While all matters to be considered will be put forward via single motion, shareholders will be entitled 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 matters set out in the notice of meeting. Following the formal part of the meeting, Tom will be making a presentation regarding the operations and our future plans. 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 representative, will act as scrutineer. I have received the 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. In addition, in excess of 60% of the shares have been voted by proxy, and the interim scrutineer's report indicates that between 94%-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 a news release after the meeting. I would like to present the annual financial report to shareholders, which includes the financial statements of the corporation for the fiscal year ended December 31st, 2019, and the auditor's report for this same period. A copy of this report was mailed to those shareholders who requested it. It is available on Freehold's website, and it is also available on our 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 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 Tom Mullane 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 and in accordance with the notice of meeting and information circular, Gary Bugeaud, Peter Harrison, Douglas Kay, Art Korpach, Susan MacKenzie, Tom Mullane, Marvin Romanow, and Aidan Walsh are hereby nominated as directors of Freehold Royalties Limited 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 Limited. Mr. Secretary, have any questions been received on this matter? No, Mr. Chairman. No questions have been 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 meeting 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 the Freehold information circular regarding the reduction in the stated capital of Freehold be approved and adopted. Mr. Chairman, I second the motion. Mr. Secretary, have any questions been received on this motion? No, Mr. Chairman. Thank you, Ted. No questions have been received. If you have not already, please register your votes by selecting either the For button, the Withhold button, or the Against button next to the applicable matter. Once electronic balloting closes, the voting page will disappear, and your votes will be automatically submitted. At this point, we will pause for 1 minute or 60 seconds before we close the polls. As there is no further discussion, the polls are now closed. We will pause for another more brief moment while the results are tabulated. I have 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. 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 issued on SEDAR. As all business of this meeting has been completed, I declare the formal portion of the meeting terminated. Thomas J. Mullane will now provide an update on Freehold's activities. Please stay in this 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. Now I direct you to slide 7 of the presentation, corporate profile. Operationally, we had a very strong first quarter. Production was up 5% year-over-year, 3% quarter-over-quarter, averaging 10,618 BOEs a day for the period. Subsequent to quarter end, we reduced our monthly dividend from, as Marvin mentioned, five and a quarter cents to one and a half cents per share, and we're maintaining a very conservative outlook in the near term. Showing commodity diversity in our portfolio, natural gas represents approximately 43% of total Q1 production and about 14% of our Q1 revenue. We exited Q1 with net debt to trailing funds from operations of 0.9 times. With the retreat in oil prices, we expect this to increase in the near term, and we remain committed to ensuring low debt levels. Turning to slide 8, our investment thesis. Why invest in Freehold? There are three reasons to invest in Freehold. It has an attractive yield, has low costs, and has a long-duration, diversified asset base. When we look at attractive yield, despite the recent weakness in crude oil, we are still able to pay a meaningful payout to our shareholders, which positions Freehold ahead of most of our peers. Over our history, Freehold has paid out greater than CAD 32 a share in dividends to our shareholders. We have low costs. In Q1, we had an operating netback of CAD 25 per BOE. This compared to cash costs of CAD 5.75 a BOE. Our operating margins are typically greater than 95%, which enables Freehold to return most of its profit to the shareholder. We have a long-duration asset base. We maintain considerable diversity in our portfolio. Our average royalty is approximately 2.5%. We have over 300 payers and collect royalties across 5 provinces and 2 countries. We have a 40-year drilling inventory. The quality of our portfolio and our royalty payers positions Freehold to continue this outperformance moving forward. Turning to slide 9, the highlights of our 2020 first quarter results. Production for Q1 2020 was ahead of our forecast as we were able to deliver organic growth within our liquids portfolio. We had a very strong start to the year in terms of drilling on our royalty lands with 175 gross, 6.2 net locations drilled. We continue to see most of the activity centered on oil targets in the portfolio, including the Viking in Saskatchewan and the Clearwater in Central Alberta. Our payout of 92% is higher than we'd like it to be. However, it reflects weaker pricing in March, and we have adjusted the dividend accordingly. Moving to slide 10, dividend revision. As mentioned previously, we reduced our monthly dividend from CAD 0.0525 per share to CAD 0.015 per share with the first revised payment in May. At the revised dividend level, Freehold's funds from operations is forecast to exceed dividend outflows and remain positioned within the 60%-80% payout range. Adjusting the dividend at this time preserves the strength of our balance sheet, and our G&A reductions align with our shareholder interests. Now slide 11, near-term cash flow priorities. Our funds flow in the near term remains focused on maintaining our dividend, reducing our debt, and opportunistically adding acquisitions. In slide 12, we talk about our royalty liquids production. A key takeaway from our quarter was the continued growth of our liquids portfolio. Freehold's liquids volumes increased by 7% versus the same period last year, and grew by 5% versus the previous quarter in the absence of a major acquisition. We see recent successes driven by a combination of the quality of our royalty portfolio and that our payers are relatively well-capitalized. In the short term, production will contract with shut-ins. As the economy revives, we expect production on our land to grow again. On slide 13, we talk about oil price leverage and downside protection. At very low oil prices, we are still able to generate funds flow to meet our dividend obligations. The drilling results are shown. We had a very strong start to drilling on our royalty lands. Activity for the quarter continues to be dominated in Saskatchewan and Manitoba, which together represent approximately 64% of the gross Q1 2020 drilling, 75% on a net basis. Our Viking assets continue to attract the majority of capital within our portfolio, and we see multiple years of inventory remaining in this asset. We have seen a resurgence in activity in southeast Saskatchewan as some of our operators have refocused capital spending on Mississippian targets. Our portfolio is a strong combination of low decline, strong cash flow generating assets, together with growth-oriented core areas, namely our Clearwater and our U.S. royalty acreage positions. Looking at slide 15, industry drilling versus Freehold. Over the last six years, our net well drilling has expanded from 15 to 20-plus net wells, whereas the industry drilling over that same timeframe has decreased approximately from 10,000 wells to 5,000 wells. The light gray line shows our net well drilling expanding over the last six years, as industry drilling in the dark purple columns continues to drop. This highlights the strength and quality of our royalty lands as we get disproportionately more drilling on our lands. Why own Freehold? Slide 16. In conclusion, royalties offer a superior business model when compared to traditional E&P companies, with higher margins, low costs, and a lower risk profile. Our royalty portfolio is a long duration asset that will be providing returns to our shareholders for many years. Slide 17. At this time, I'll turn the meeting back to our chairman. Thank you, Tom. Mr. Secretary, have any questions been received? No, Mr. Chairman. Thank you, Ted. No questions have been received. Since there are no further questions, I would like to thank you for attending our virtual meeting and our shareholders, and thank you for supporting Freehold through these difficult times. Stay healthy, everybody. Operator, you may now terminate the call. This concludes the call. You may now disconnect.