OPPORTUNITY KNOCKS THE ROYALTY ADVANTAGE SEPTEMBER 2016

Transcription

1 OPPORTUNITY KNOCKS THE ROYALTY ADVANTAGE SEPTEMBER 2016

2 Corporate Profile TSX : FRU focused on oil and gas royalties 2016e production (80% royalty production) 11,700 boe/d 2016e operating income from royalties 93% 2016e annualized dividend (1)(2) ($0.04 per month) $0.48/share Current dividend yield (2)(3) 4.0% Market capitalization (2)(3) $1.4 billion Net debt to funds from operations (4) 1.1x 1) Based on current dividend rate 2) Based on FRU closing share price of $11.91 on June 30, ) Based on million shares outstanding as at June 30, ) Based on net debt of $98 million as at June 30, 2016, excluding proforma effects of acquisitions, trailing funds from operations 2

3 Investment Performance (1) Long track record delivering value, cumulative dividends declared per share $30.23 ($1.5 billion in dividends) $ Freehold Royalties Ltd. S&P/TSX Oil and Gas Exploration & Production Index S&P/TSX Composite Index $37 $19 1) From November 25, 1996 to June 30, 2016, with dividend reinvestment. 3

4 Return on Capital Employed (1) 30% 25% Freehold has generated top decile return on capital employed over its history 20% 15% 10% 5% 0% -5% Annual ROCE 3-year trailing 1) Return on capital employed (ROCE) is calculated as net income (loss) before interest and taxes divided by total assets less current liabilities. 4

5 Why Own Freehold Attractive yield 4-5% yield Torque to upside in oil prices Strong balance sheet $10/bbl USD change in WTI ($40 to $50/bbl) increases our free cash flow by 40% 2016E D/CF expected at ~1.1x with over $160 million available on our credit line Large portfolio of attractive drilling opportunities on our royalty lands Core positions in Viking Dodsland and SE Saskatchewan with well capitalized counter parties Estimated >10 years of free drilling based on historical activity levels 5

6 Royalty Focused Cash Flow YTD 94% of Operating Income From Royalties Gross Overriding Royalties 44% 41% Mineral Title Royalties 9% 6% Production Volume Royalties Working Interest 6

7 2016 Free Cash Flow Sensitivities Free Cash Flow Per Share Monthly $0.14 $0.12 $0.10 Funds From Operations Free Cash Flow Capital Spending $0.08 $0.06 Free cash flow available for dividend, even at depressed prices $0.04 $0.02 $0.00 $30/bbl WTI $40/bbl WTI $50/bbl WTI $60/bbl WTI *Identical assumptions to Freehold s August 4, 2016 guidance other than oil prices *Free cash flow per share=funds From Operations Per Share Capital Spending Per Share 7

8 $mm Free Cash Flow Illustration Royalty Free Cash Flow ( ) $9.00 per share $7.00 per share $5.00 per share $3.00 per share West Texas Intermediate $/bbl Free Cash Flow assumes flat royalty production per share, $2.40 G&A costs and $1.00/boe interest charges. 8

9 $ per boe Royalties=Strong Operating Margins $35 $30 $25 Operating Margin ($/boe) Royalties ($/boe) Op costs ($/boe) $20 $15 87% Operating Margin Q2/2016 Freehold realizes significantly higher margins than traditional E&P s $10 $5 $0 9

10 Cash Costs Freehold Royalty model offers a material cost advantage over E&P s $0 $5 $10 $15 $20 $25 $30 $35 Cash Costs ($/boe) (OPEX, Transportation, Royalties, G&A, Interest and Taxes) Source: TD Securities Research Q Peer group includes: ARC, Birchcliff, Bonterra, Bonavista, Crescent Point, Crew, Enerplus, Freehold, Lighstream, Northern Blizzard, Peyto, Pengrowth, Pinecliff, PrairieSky, Penn West, Surge, Twin Butte, Trilogy, TORC, Tourmaline, Vermillion, Whitecap, Zargon 10

11 Counter Cyclical Acquirer Year Area Cost ($ millions) Initial Production Acquired (boe/d) 2005 Petrovera (CNRL) 352 3, AB./SK AB., SK. and BC NW AB AB., SK. and BC Numerous small acquisitions SK./MB./AB , SK./AB./BC , YTD SK./AB ,700 Total: $1,378 10,930 Our acquired assets continue to generate significant free cash flow. 11

12 3-Year Track Record E Production (boe/d) 9,180 10,945 11,700 Heavy oil % of production Royalty interest as a % of production 24% 20% <20% 74% 76% 80% Royalty acres (mm) Tax pools (mm) $473 $966 >$1,000 Net Debt/Funds from Operations 1.0x 1.4x 1.1x Acquisitions (mm) $248 $410 $163 12

13 Per Share Metrics Royalty production (boe/d) per million shares $2.00 Funds from operations per share $1.50 $ $ E $

14 Per Share Metrics $32 Accumulated Dividends per share 50,000 Royalty acres per million shares $30 40,000 $28 $26 30,000 $24 20,000 $22 10,000 $ E 14

15 Royalty Net Drilling Trends * Includes wells drilled from January 1 st on our acquisition lands 15

16 Quality Long Life Asset Base +10 years of future drilling potential (3) 130+ Locations Belly River, Mannville, Pekisko, Devonian Royalty drill location on Freehold land holdings Jan 2014 current (1) Freehold Royalties Ltd. land holdings Widely Diversified Portfolio 550+ Locations Mannville Heavy Oil Play 950+ Locations Viking Light Oil Play (~40% booked) Locations (2) 400+ Locations Deep Basin Resource Plays Cardium, Glauconite, Falher, Wilrich, Montney Duvernay 760+ Locations Mississippian and Bakken Light Oil Plays 190+ Locations Shaunavon Light Oil Play 130+ Locations Glauconite, Ellerslie, Sunburst, Cantaur 1. Average 2005 to 2014 royalty well count excluding unit lands is 287 wells per year. 2. Future locations based on internal reservoir trend mapping as well as proximity to current industry activity. Reserve report recognizes ~40% of the locations. 3. Additional inventory growth expected as FRU technical teams identify offset activity for new pool extensions, downspacing on resource plays etc. 16

17 Diversified Royalty Payors 1. Diversified group of payors: Top 30 account for over 80% of royalty revenue on a trailing 12 month basis. 17

18 Dividend History Dividend ($/share) $3.00 $2.91 Selling Price ($/boe) $80 $2.50 $70 $2.10 $60 $2.00 $1.50 $1.92 $1.70 $1.73 $1.56 $1.32 $1.31 $1.92 $1.40 $1.68 $1.68 $1.68 $1.68 $1.68 $50 $40 $1.00 $1.10 $0.78 $0.65 $1.00 $30 $20 $0.50 $0.13 $10 $0.00 $0 Annual Dividend ($/share) Freehold's Average Selling Price ($/boe) 18

19 Strong Financial Position Debt to Funds from Operations* (multiple) ~$160 million available credit capacity (at June 30, 2016) Sector Average Freehold 19

20 Long Term Value Creation Maintain conservatism through balance sheet and dividend policy Focused collection of royalty payments through strong audit function Growth through acquisitions, free drilling, creation of royalties and lease outs 20

21 Near Term Priorities Continue to pursue acquisitions Allocate a high portion of free cash flow to our shareholders Be proactive in leasing out our mineral title land position 21

22 Why Own Freehold attractive yield long track record of generating strong returns conservatively managed with a strong balance sheet torque to oil upside positioned in the highest netback plays >10yrs of free drilling on our royalty lands 22

23 Supplemental Information

24 2016 Guidance 2016 Annual Average Aug 4, 2016 May 11, 2016 Mar 3, 2016 Nov 12, 2015 Daily production (boe/d) 11,700 11,400 9,800 9,800 WTI oil price U.S./bbl $40.00 $40.00 $35.00 $50.00 Western Canadian Select $/bbl $34.00 $34.00 $31.00 $47.00 AECO $/mcf $2.00 $1.80 $2.00 $2.75 Exchange rate CN$/US$ $0.76 $0.77 $0.72 $0.76 Operating costs ($/boe) $3.75 $4.00 $4.75 $5.00 G&A ($/boe) $2.40 $2.50 $2.65 $2.85 Strong upward production guidance trend 24

25 Husky Transaction Highlights On May 25, 2016 Freehold acquired a diverse package of royalty assets and fee lands for $165 million. Deal highlights: 1. Accretive to Freehold; at time of deal increasing annualized 2016E production and operating income by 1,700 boe/d and $11.4 million, respectively 2. Adds a diverse royalty portfolio of long life, low decline assets (17% decline/year) 3. Significantly enhances Freehold s existing royalty land base increasing total royalty land holdings by 74% to 5.9 million acres 4. Further strengthens Freehold s position in Saskatchewan both in SE (Mississippian) and SW (Shaunavon oil play) 5. Reliable, proven payors (Apache, Crescent Point, Canadian Natural, Shell, etc.) 25

26 Strong Overlap with Existing Royalties Grande Prairie Multi-Zone Targets Shaunavon Oil Play Mississippian / Bakken Oil Plays Further complements our existing suite of assets 26

27 Managing Royalties for more than 30 years CN PENSION TRUST FUNDS Pension fund for employees of Canadian National Railway 100% ownership 100% ownership Manager of the assets 21% (1) ownership 1) Based on million shares outstanding as at June 30,

28 Counter Party Risk Mitigation Mineral title leases to third parties have default mechanisms for protection and repossession of lessee interest, including the ability to take in kind. We own the land in perpetuity. Gross Overriding Royalty Agreements are interests in land and have remedies which may include the ability to take in kind, file liens, and set-off provisions. Production Volume Royalty Agreements are accompanied by ancillary agreements with secured creditors acknowledging our interest in land and confirming priority of Freehold s royalty over those creditors. This also includes the ability to take production in kind. 28

29 Low Capex as a Percent of Cash Flow Capital Expenditures represent a small percentage of Freehold s Funds from Operations enabling sustainability in a low price environment 150% 125% Sector average 110% 100% 75% Freehold < 10% 50% 25% e 0% * See non-gaap measures. 29

30 FRU Stock Price Tracks Oil Price % oil and NGL production WTI in US$ FRU in C$ % unhedged WTI Oil Price (US$) FRU Share Price (CDN$) 30

31 Proud Owner of Legacy Lands Mineral titles are held in perpetuity Historic land grant to the Hudson s Bay Company (HBC) in 1670 by the King of England The 8s and 26s HBC surrendered land to Canada in 1870 in exchange for cash and 1/20th of lands (Section 8 and ¾ of Section 26) in western Canada (HB Lands) A portion of the HB Lands were purchased by Canpar in 1979 Producing HB Lands were purchased from Canpar by Freehold in

32 Advisories Forward-Looking Information This presentation offers our assessment of Freehold s future plans and operations as at August 4, 2016 and contains forward-looking information including, expectation of Freehold's 2016 net debt to funds from operations, expectation of Freehold s 2016 net average production, expected percentage of 2016 operating income from royalties, expected annualized dividend, expected 2016 average net daily production, expected 2016 heavy oil percentage, expected 2016 tax pools and expected 2016 annualized net operating income from the assets (the "Acquired Assets") acquired by Freehold on May 25, 2016, expectation that Acquired Assets will be accretive to Freehold, expectation of annual declines on current production associated with the Acquired Assets, expectation that the Acquired Assets will increase Freehold s total royalty income and production, expected sensitivities of funds from operations, free cash flow and capital spending to changes in commodity prices and expected future drilling locations. This forward-looking information is provided to allow readers to better understand our business and prospects and may not be suitable for other purposes. By its nature, forward-looking information is subject to numerous risks and uncertainties, some of which are beyond our control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, taxation, royalties, regulation, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility, our ability to access sufficient capital from internal and external sources, counterparties to transactions to satisfy their contractual obligations, third parties' ability and willingness to continue development of lands in which Freehold has an interest as expected, and risks inherent in the oil and gas industry. Risks are described in more detail in Freehold s annual information form for the year ended December 31, 2015 which is available under Freehold s profile on SEDAR at You are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking information. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits we will derive from them. The forward-looking information contained herein is expressly qualified by this cautionary statement. To the extent any guidance or forward looking statements herein constitute a financial outlook, they are included herein to provide readers with an understanding of management's plans and assumptions for budgeting purposes and readers are cautioned that the information may not be appropriate for other purposes. Our policy for updating forward-looking statements is to update our key operating assumptions quarterly and, except as required by law, we do not undertake to update any other forward-looking statements. You are further cautioned that the preparation of financial statements in accordance with International Financial Reporting Standards requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates may change, having either a positive or negative effect on net income, as further information becomes available and as the economic environment changes. All dollar amounts in this presentation are in Canadian dollars, except where noted. 32

33 Advisories cont. Non-GAAP Financial Measures Within this presentation, references are made to terms commonly used as key performance indicators in the oil and natural gas industry. We believe that operating income, net debt to funds from operations, operating margin, free cash flow and return on capital employed are useful supplemental measures for management and investors to analyze operating performance, financial leverage, and liquidity, and we use these terms to facilitate the understanding and comparability of our results of operations and financial position. However, these terms do not have any standardized meanings prescribed by Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable with the calculations of similar measures for other entities. Operating income which is calculated as gross revenue less royalties and operating expenses, represents the cash margin for product sold. Operating margin represents the operating netback versus our realized price. Net debt obligations is long-term debt less working capital (current assets less current liabilities). Net debt to funds from operations is calculated as net debt as a proportion of funds from operations for the previous twelve months. Free cash flow is a measure used by dividend paying companies to provide an estimate of how much cash might be available for the payment of dividends. Free cash flow is calculated by subtracting capital spending from funds from operations. Return on capital employed ( ROCE ) is a financial ratio that measures a company s profitability and is calculated as net income (loss) before interest and taxes divided by total assets less current liabilities. In addition, this presentation refers to various per boe figures, such as revenues and costs, also considered non-gaap measures, which provide meaningful information on Freehold's operational performance. Per boe figures are derived by dividing the relevant revenue or cost figure by the total volume of oil and natural gas production during the period, with natural gas converted to equivalent barrels of oil as described above. See Freehold's most recent management's discussion and analysis, which available on SEDAR at for more details on Freehold's use of Non-GAAP Financial Measures. Drilling Locations This presentation discloses drilling locations in three categories: (i) proved locations; (ii) probable locations; and (iii) unbooked locations. Proved locations and probable locations are derived from the independent reserves evaluation of Freehold's reserves as at December 31, 2015 prepared by Trimble Engineering Associates Ltd. and account for drilling locations that have associated proved and/or probable reserves, as applicable. Unbooked locations are internal estimates based on Freehold's prospective acreage and an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations have been identified by management as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production, pricing assumptions and reserves information. There is no certainty that all unbooked drilling locations will be drilled and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resource or production. All dollar amounts in this presentation are in Canadian dollars, except where noted. 33

34 Advisories cont. Drilling Locations cont. The drilling locations on which wells are drilled will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While the majority of Freehold's unbooked locations are extensions or infills of the drilling patterns already recognized by the independent evaluator, other unbooked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional oil and gas reserves, resources or production. Barrels of Oil Equivalent (boe) ratio: 6 Mcf = 1 barrel. The 6:1 boe ratio is based on an energy equivalency conversion method primarily applicable at the burner tip. It does not represent a value equivalency and is not based on either energy content or current prices. While the boe ratio is useful for comparative measures, it does not accurately reflect individual product values and might be misleading, particularly if used insolation. As well, given the value ratio, based on the current price of crude oil to natural gas, is significantly different from the 6:1 energy equivalency ratio, using a 6:1 conversion ratio may be misleading as an indication of value. All dollar amounts in this presentation are in Canadian dollars, except where noted. 34

35 Investor Relations toll free Telephone website freeholdroyalties.com

36 ROYALTY ADVANTAGE SEPTEMBER 2016