Mr. Tom Mullane reports

FREEHOLD ROYALTIES LTD. ANNOUNCES STRONG GROWTH IN FUNDS FROM OPERATIONS AND THIRD QUARTER RESULTS

Freehold Royalties Ltd. has released its results for the third quarter ended Sept. 30, 2018.

                                          RESULTS AT A GLANCE 
                              (in thousands, unless otherwise indicated) 
 
                                           Three months ended Sept. 30,    Nine months ended Sept. 30,   
                                                    2018          2017             2018          2017  
Financial      
Royalty and other revenue                       $ 40,815      $ 33,938         $120,334      $113,459  
Net income                                         8,389           103           18,198        20,275   
Per share, basic and diluted ($)                    0.07             -             0.15          0.17    
Funds from operations                             35,900        27,927          102,824        91,765    
Per share, basic ($)                                0.30          0.24             0.87          0.78    
Operating income                                  39,225        31,246          115,214       103,565   
Operating income from royalties (%)                   99            99               99            95        
Acquisitions                                      17,915          (146)          51,493        34,473    
Working interest dispositions                          1         2,969            8,138        32,065    
Dividends declared                                18,634        17,714           55,285        50,757     
Per share ($)                                     0.1575          0.15             0.47          0.43       
Net debt                                          78,657        38,274           78,657        38,274       
Operating                                                                        
Royalty production (boe/d)                        10,322        10,919           10,854        10,964    
Total production (boe/d)                          11,002        12,036           11,572        12,456   
Oil and NGL (%)                                       54            56               54            56      
Average price realizations ($/boe)                 38.95         29.67            36.76         32.54     
Operating netback ($/boe)                          38.74         28.22            36.47         30.46     

President's message

Tom Mullan, president and chief executive officer of Freehold Royalties, commented: "Stronger crude prices and lower cash costs drove third quarter growth in Freehold's funds from operations. Reflecting lower volumes year to date, we are revising our 2018 production guidance by 4 per cent to a range of 11,250 to 11,500 boe/d [barrels of oil equivalent per day]. Reduced volumes are associated with lower third party production additions, natural gas and heavy oil curtailments, and fewer audit recoveries. We will continue to monitor industry activity and will provide 2019 guidance as part of our fourth quarter results.

"Looking forward, we anticipate some near-term headwinds associated with Canadian energy. However, many of our prospects are light oil opportunities in Saskatchewan, where pricing is better. As we saw in Q3 2018, we see more industry drilling occurring where there are lighter oil opportunities and the economics are superior.

"As we have for the past 22 years, we will continue to strive to preserve our balance sheet and maintain an attractive dividend, thus providing investors with a lower-risk oil and gas investment."

Dividend announcement

The company has declared a dividend of 5.25 cents per common share to be paid on Dec. 17, 2018, to shareholders of record on Nov. 30, 2018. The dividend is designated as an eligible dividend for Canadian income tax purposes.

2018 third quarter highlights

Freehold Royalties delivered strong financial results in the third quarter of 2018. Highlights include:

• Funds from operations totalled $35.9-million, an increase of 29 per cent, compared with Q3 2017, and 4 per cent, compared with the previous quarter. Higher funds from operations was largely driven by better oil and natural gas liquids (NGL) prices. On a per-share basis, funds from operations was 30 cents per share in Q3 2018, up from 24 cents per share in Q3 2017 and 29 cents per share in Q2 2018.
• Freehold's royalty production averaged 10,322 boe/d, down 5 per cent, compared with Q3 2017, and 7 per cent, compared with Q2 2018. Reduced volumes are associated with lower third party production additions, natural gas and heavy oil curtailments, and fewer audit recoveries (75 boe/d in Q3 2018 versus 700 boe/d in Q3 2017). Historically, the company has seen a slight drop in royalty production from Q2 to Q3, with a rebound in Q4.
• Royalty interests accounted for 94 per cent of total production and contributed 99 per cent of operating income in Q3 2018.
• Working interest production declined by 39 per cent to 680 boe/d in Q3 2018, compared with Q3 2017, largely due to dispositions, aligned with the company's strategy.
• Wells drilled on the company's royalty lands totalled 175 (6.3 net) in the quarter, compared with 144 (6.4 net) in Q3 2017. Approximately 80 per cent of non-unit activity was focused on the company's gross overriding royalty lands (GORR), while approximately 20 per cent targeted prospects on the company's mineral title land. For the first nine months of 2018, 499 gross (13.9 net) wells were drilled, compared with 352 gross (16.6 net) during the same period last year.
• Freehold generated $16.4-million in free cash flow, over and above the company's dividend, which it applied to acquisitions completed during the quarter. At Sept. 30, 2018, net debt totalled $78.7-million, resulting in a net debt to funds from operations ratio of 0.6.
• Freehold allocated $17.9-million toward acquisition activities in Q3 2018. In August, Freehold closed the purchase of 64,000 acres of royalty lands with approximately 90 boe/d of production (one-third oil and NGL) across central Alberta and the Deep basin for $5.9-million and the assignment of certain minor working interest assets. In September, Freehold closed the purchase of a GORR across 109,000 acres of land with prospectivity for the Clearwater formation in the Jarvie and Nipisi areas of Alberta for $12-million.
• In Q3 2018, Freehold issued 19 new lease agreements with 13 companies, compared with 18 issued in Q2 2018 and 30 leases in Q3 2017, highlighting the success of the company's leasing team. As of Sept. 30, 2018 (year to date), the company completed 95 new lease agreements on its royalty lands. Since the inception of its leasing team in January, 2017, the company completed 195 new lease agreements.
• Cash costs for the quarter totalled $4.46 per boe, down from $4.80 per boe in Q3 2017. For 2018, the company is forecasting cash costs of approximately $5 per boe.
• Dividends declared for Q3 2018 totalled 15.75 cents per share, up 5 per cent when compared with the same quarter of the previous year. In March, 2018, Freehold announced an increase to its monthly dividend from five cents to 5.25 cents per share commencing in April, 2018.
• Basic payout ratio (dividends declared divided by funds from operations) for Q3 2018 totalled 52 per cent, while the adjusted payout ratio (cash dividends plus capital expenditures divided by funds from operations) for the same period was 54 per cent.

Royalty drilling

Including drilling associated with acquisitions and unit wells, 499 (13.9 net) wells were drilled on the company's royalty lands during the first nine months of 2018. This represents an increase of 42 per cent on a gross basis and a 16-per-cent decline on a net measure, compared with the same period in 2017. As typical in the third quarter, the company saw a rebound in activity on its royalty lands relative to Q2 2018.

Activity through the first nine months of 2018 was primarily focused on Saskatchewan oil projects. Drilling in the Viking at Dodsland and Mississippian carbonates in southeastern Saskatchewan continues to lead activity in Saskatchewan. In Alberta, Cardium oil drilling continues to drive activity, with a recent uptick in Viking oil development. In Q3 2018, 19 gross Alberta Viking oil wells were drilled on the company's lands, compared with six in the entire first half of 2018. Industry drilled 131 gross wells on the company's non-unit lands in Q3 2018 (299 YTD) and 44 wells on the company's unit lands (200 YTD). Twenty-seven of those non-unit drills were on title land and 104 were on GORR lands. The company's top payers continue to represent some of the most well-capitalized exploration and production companies in Canada.

Guidance update

Disclosed herein are details of some of the changes made to the company's key operating assumptions for 2018, which are based on results for the first nine months of the year and expectations for the remainder of the year.

• The company is revising its 2018 average production range downward by 4 per cent to 11,250 to 11,500 boe/d (previously 11,750 to 12,250 boe/d). There has been lower-than-expected production from royalty drilling, lower-than-typical additions from the company's audit function and production curtailments associated with weakness in natural gas and heavy oil pricing. Volumes are expected to be weighted approximately 54 per cent oil and NGL and 46 per cent natural gas. The company continues to maintain its royalty focus, with royalty production accounting for 94 per cent of forecasted 2018 production and 99 per cent of operating income.
• The company is maintaining its 2018 drilling forecast of 20 net wells.
• The company is maintaining its WTI oil price assumption of $65 (U.S.) per barrel. However, the company has reduced its WCS price assumption to $50 per barrel (previously $55 per barrel) and its Edmonton Light Sweet price assumption to $70 per barrel (previously $76 per barrel), reflecting higher differentials caused by increasing Canadian production levels and limited takeaway capacity.
• The company has reduced its AECO (Alberta Energy Company) natural gas price assumption to $1.55 per thousand cubic feet (previously $1.75 per mcf), reflecting lower-than-expected prices to date.
• Based on its current 5.25 cent per share monthly dividend level, the company expects its 2018 adjusted payout ratio (cash dividends plus capital expenditures divided by funds from operations) to be approximately 64 per cent (previously 55 per cent).
• General and administrative costs remain at $2.50 per barrel of oil equivalent.
• The company has increased its forecast year-end net debt to funds from operations ratio to approximately 0.8 due to acquisitions completed as well as revisions to its production and pricing guidance.

                                            KEY OPERATING ASSUMPTIONS

                                                                        Guidance date                              
2018 annual average                          Nov. 14, 2018       Aug. 2, 2018        May 9, 2018       Mar. 8, 2018 
 
Total daily production (boe/d)            11,250 to 11,500   11,750 to 12,250   11,750 to 12,250   11,750 to 12,250
West Texas Intermediate crude 
oil (U.S. $/bbl)                                     65.00              65.00              65.00              60.00
Edmonton Light Sweet crude 
oil (Canadian $/bbl)                                 70.00              76.00              76.00                N/A 
Western Canadian Select crude 
oil (Canadian $/bbl)                                 50.00              55.00              53.00              45.00
AECO natural gas (Canadian $/mcf)                     1.55               1.75               1.75               2.00
Exchange rate (Canadian $/U.S. $)                     0.77               0.77               0.79               0.80
Operating costs ($/boe)                               1.45               1.45               1.45               1.45
General and administrative 
costs ($/boe)                                         2.50               2.50               2.50               2.50
         

Recognizing the cyclical nature of the oil and gas industry, the company continues to closely monitor commodity prices and industry trends for signs of changing market conditions. The company cautions that it is inherently difficult to predict activity levels on its royalty lands since it has no operational control. As well, significant changes (positive or negative) in commodity prices (including Canadian oil price differentials), foreign exchange rates or production rates may result in adjustments to the dividend rate.

Based on the company's current guidance and commodity price assumptions, and assuming no significant changes in the current business environment, the company expects to maintain the current monthly dividend rate through the next quarter. The company will continue to evaluate the commodity price environment and adjust the dividend levels as necessary (subject to the quarterly review and approval of the company's board of directors).

Conference call details

A conference call to discuss the financial and operational results for the period ended Sept. 30, 2018, will be held for the investment community on Thursday, Nov. 15, 2018, beginning at 7 a.m. MT (9 a.m. ET). To participate in the conference call, please dial 1-800-806-5484 (toll-free in North America) approximately 10 minutes prior to the start of the conference call. The passcode to access the call is 5263079.

Availability on SEDAR

Freehold's third quarter 2018 interim unaudited condensed consolidated financial statements and the accompanying management's discussion and analysis are being filed with Canadian securities regulators. The documents will be available on SEDAR as well as at the company's website.

We seek Safe Harbor.