Mr. David Spyker reports

FREEHOLD ROYALTIES ANNOUNCES RECORD SETTING FOURTH QUARTER AND YEAR-END RESULTS

Freehold Royalties Ltd. has released fourth quarter and 2022 results for the period ended Dec. 31, 2022.

President's message

"Two thousand twenty-two was a year of records for Freehold, the result of the significant work done over the last three years to establish the company as a premier North American energy royalty company. Our expansion and optimization efforts have resulted in a new look Freehold, with the scale and asset base that will enable sustainable, long-term value creation for our shareholders. By targeting plays across North America, our asset base, development inventory and revenue generation is underpinned by exceptionally high-quality payors in many of the top-tier operating areas across North America. Freehold's fourth quarter and full-year 2022 results reflect this quality.

"Our record revenue, funds from operations and production performance in 2022 was due in part to the record level of industry activity that occurred on our lands in 2022. Despite commodity prices being lower in the second half of the year, drilling on our lands remained strong, especially within our U.S. acreage, highlighting the quality of both our portfolio and payors. The enhancement to the scale of our business is illustrated by the record level of dividends paid to our shareholders, while maintaining our core strategies of low leverage and sustainability along with patient and opportunistic portfolio reinvestment. In 2022, in the absence of acquisitions, proved reserve replacement was 115 per cent.

"A snapshot of our record setting achievements in 2022 are as follows:

• "$393-million in revenue;
• "$316-million in funds from operations;
• "$142-million in dividends paid;
• "14,101 boe/d [barrels of oil equivalent per day] average production;
• "1,057 gross wells drilled;
• "$75.14/boe average realized price ($68.12/boe in Canada and $90.64/boe in the U.S.).

"After incorporating the capital programs of our top drillers, we are forecasting 2023 royalty production to average between 14,500 and 15,500 boe/d. Based on this production guidance and our underlying commodity and exchange rate assumptions for 2023, funds from operations is expected to be between $250[-million] and $280-million. We will continue to position our dividend at approximately 60 per cent of forward-looking funds from operations. With the improvement to our underlying asset base, payor quality and financial flexibility, we can maintain our current monthly dividend level through prolonged periods of lower pricing, should those conditions exist in the future.

"Early in 2023, we announced the release of our sustainability report, highlighting the company's focus on responsibly growing and enhancing our business through environmental, social and governance (ESG) initiatives. As a publicly traded energy royalty company with assets both in Canada and the U.S., Freehold strives to generate shareholder value by maintaining a strong balance sheet, focusing on the long-term sustainability of our business, and partnering with high-quality operators across North America who are aligned with our views on the importance of sustainability and ESG performance. The report can be found on our website.

"Two thousand-twenty-two represented a very successful year for Freehold as the company moved forward with a measured advancement of our North American strategy. I would like to thank our employees, shareholders, board of directors and all those who have supported Freehold through 2022," said David M. Spyker, president and chief executive officer.

Dividend announcement

The board of directors of Freehold has declared a monthly dividend of nine cents per share to be paid on April 17, 2023, to shareholders of record on March 31, 2023. The dividend is designated as an eligible dividend for Canadian income tax purposes.

Fourth quarter highlights:

• Funds from operations in Q4 2022 totalled $80-million (53 cents/share), which compares with $68.8-million (46 cents/share) in Q4 2021 and $80.8-million (54 cents/share) in Q3 2022. The increase versus the same period in 2021 reflects stronger pricing and an increase in production levels from acquisitions and from higher overall levels of activity on the company's lands.
• Dividends declared for Q4 2022 totalled $40.7-million (27 cents/share), up 59 per cent versus the same period in 2021 when Freehold declared dividends of $25.6-million (17 cents/share). Freehold's dividend payout ratio for Q4 2022 was 51 per cent versus 35 per cent during the same period in 2021. Freehold has increased its dividend 500 per cent since the COVID-related lows and continues to target its payout at approximately 60 per cent of forward-looking funds from operations, with the ability to weather a higher payout in the event of a pullback in commodity prices.
• Realized price of $69.76/boe in Q4 2022, up 21 per cent versus the same period last year and down 6 per cent versus the previous quarter. Freehold benefited from more favourable U.S. realized pricing of $88.17/boe, 47 per cent higher than Canada ($59.85/boe).
• Recorded a netback of $63.92/boe in Q4 2022, up 19 per cent over Q4 2021 but down 8 per cent versus Q3-2022 on lower commodity prices.
• Achieved record production for the second straight quarter averaging 15,041 boe/d in Q4 2022, an increase of 7 per cent over Q4 2021 and 6 per cent over Q3 2022. Volumes were aided by strong activity levels and higher net interest in wells drilled within the Viking, Eagle Ford and Clearwater portfolios.
• Q4 2022 Canadian oil and gas royalty volumes were up 2 per cent over Q3 2022, averaging 9,777 boe/d. This quarterly organic growth was driven by production additions in Viking, Clearwater, Deep Basin and Cardium. Freehold has realized early success associated with the development of the southern and northwestern parts of the Clearwater as higher-growth exploration and production develop the more exploratory parts of that play.
• U.S. oil and gas royalty production averaged 5,264 boe/d, up 13 per cent from 4,653 boe/d in Q3 2022. Q4 2022 volumes reflected the first full quarter of volumes from the Howard county Midland (up more than 50 per cent since closing) and Eagle Ford acquisitions which closed in August, 2022.
• Within Freehold's diversified royalties team, it has seen a robust opportunity set since the team's inception in January, 2022. The group is advancing the technical due diligence on several modest-sized development-stage opportunities, including potash, while also continuing to refine the long-term investment strategy.
• Net debt of $127.9-million at Q4 2022 represents 0.4 times trailing funds from operations and well within the company's leverage strategy of less than 1.5 times funds from operations.
• Cash costs for the quarter totalled $5.17/boe, up 45 per cent versus the same period in 2021. This increase was driven by a material increase in interest costs (up 145 per cent versus Q4 2021) and broad inflationary pressures.

2022 highlights:

• Royalty and other revenue totalled $393-million, up 88 per cent over 2021 with higher production volumes and a strong commodity price environment driving the strong performance. Revenue from the United States accounted for 37 per cent of the total. Oil and NGLs (natural gas liquids) represented 82 per cent of revenue for the year.
• Record funds from operations in 2022 of $316.5-million ($2.10/share). This compares with $189.6-million ($1.39/share) in 2021. The increase reflects significant increases in third party drilling on the company's lands, strength in commodity prices and additions from acquisitions completed through 2022.
• Production volumes averaged 14,101 boe/d for 2022, an increase of 19 per cent over 2021. Canadian volumes of 9,706 boe/d were approximately flat to 2021 and U.S. volumes of 4,395 boe/d were up over 100 per cent due to acquisition activity and an increase in drilling activity.
• Dividends paid for the year totalled $141.6-million (94 cents/share), an increase of 128 per cent over 2021. Freehold's dividend payout ratio of 45 per cent for 2022 was an increase from 33 per cent in 2021.
• During 2022, $190.8-million was allocated to portfolio reinvestment via acquisitions as Freehold continued to execute on its North American strategy. The focus of the 2022 acquisitions was on the continued enhancement of its U.S. portfolio, with transactions completed in Permian and Eagle Ford as well as targeted Canadian growth areas such as the early-stage Clearwater opportunity that is expected to support Canadian volumes in 2023 and beyond.
• Proved and probable oil and natural gas reserves totalled 54.5 million boe as at Decm 31, 2022, up from 49.8 mmboe as at Dec. 31, 2021. Freehold replaced 160 per cent of proved reserves and 190 per cent of proved plus probable reserves. In the absence of acquisitions, proved reserve replacement was 115 per cent.
• Proved developed producing reserves totalled 25.6 mmboe as of year-end 2022, a 12-per-cent improvement versus 2021. Increased reserve additions were the result of acquisitions, infill drilling and improved recovery within Freehold's portfolio.

Drilling and leasing activity

In total, 1,057 gross wells were drilled on Freehold's royalty lands in 2022, a 61-per-cent increase versus 2021. Over all, Freehold saw increased drilling activity associated with the expansion of its North American portfolio along with broad increases in capital spending and efficiencies associated with its royalty payors. In total, Freehold estimates approximately $4-billion of industry capital was spent on Freehold's royalty lands in 2022, approximately $1-billion ($40-million net) in Canada and $3-billion ($16-million net) in the U.S.

In 2022, approximately 24 per cent of gross wells on Freehold royalty lands targeted prospects in Alberta, 21 per cent in Saskatchewan and 47 per cent in Texas with the balance spread across other regions. Producers continue to remain focused on oil prospects with 94 per cent of wells drilled targeting oil. Of the gross wells drilled in 2022, approximately 34 per cent were drilled on Freehold's gross overriding royalty (GORR) prospects in Canada, 8 per cent targeted mineral title prospects in Canada and 52 per cent were drilled on Freehold's U.S. royalty acreage (83-per-cent mineral title) with the remainder drilled on unit acreage. The Viking in southwest Saskatchewan, Mississippian in southeast Saskatchewan, Clearwater and Cardium in central Alberta, Eagle Ford and Permian in Texas and North Dakota continue to be the areas of focus within Freehold's portfolio.

Canada

Canadian drilling rebounded to 2018 levels with 503 gross wells drilled in 2022. Drilling in Canada was led by the Viking where 128 gross wells were spudded in 2022, up 16 per cent versus 2021. Operators on Freehold's southeast Saskatchewan acreage were also very active in 2022 with 84 gross wells drilled. During the year, the company saw an increased production contribution from some impactful areas such as the Deep Basin and Spirit River, in addition to an increase in Cardium wells drilled. Notably, Clearwater was the fourth most active region in the company's Canadian portfolio with 62 wells, up 9 per cent over 2021. During the year, Freehold entered into 80 new leases, bringing 2022 bonus and lease rental revenue to $2.1-million. This represented almost a 165-per-cent increase over leasing activity in 2021.

The 503 gross locations drilled within Freehold's Canadian portfolio in 2022 compared with 440 gross locations during the same period in 2021. For Q4 2022, 137 gross locations were drilled on Freehold's Canadian land, representing an 8-per-cent decrease over the same period in 2021, although it was up 19 per cent on a net basis, as the average royalty rate per well drilled was higher in 2022.

U.S.

Activity on Freehold's U.S. assets was very strong in the back half of the year, driven by a pickup in activity in Eagle Ford and mineral title drilling in the Midland in addition to benefiting from a higher-average net royalty interest on wells drilled in H2 2022. Ninety per cent of activity on the company's lands in 2022 came from the Permian and Eagle Ford, the two highest-productivity oil basins in the U.S. In Midland, 302 wells were spudded in 2022, up substantially over 2021 given the increase in industry activity year-over-year. The company also added to its Midland mineral title acreage in 2022 and saw strong activity in Howard county, one of the fastest-growing areas within the Midland basin. Third party activity on its Eagle Ford acreage was very strong throughout 2022, with 160 gross wells spudded.

Approximately 83 per cent of wells drilled on Freehold's U.S. lands were on mineral title lands with the remaining 17 per cent targeting GORR lands in 2022.

Although Freehold's U.S. net well additions were lower than in Canada, U.S. wells are significantly more prolific as they generally come on production at approximately 10 times that of an average Canadian well in Freehold's portfolio. The company also notes that it is seeing upward of six to nine months from initial licence to first production within our U.S. royalty assets (compared with three to four months in Canada, on average).

2023 guidance

After incorporating the company's commodity and operating assumptions for 2023 along with its expectation for third party development amongst its royalty payors, Freehold is introducing its 2023 guidance. The attached table summarizes Freehold's key operating assumptions for 2023, where production is expected to be weighted approximately 64 per cent oil and NGLs and 36 per cent natural gas.

Conference call details

A conference call to discuss financial and operational results for the period ended Dec. 31, 2022, will be held for the investment community on Thursday, March 2, 2023, beginning at 7 a.m. MST (9 a.m. EST). To participate in the conference call, approximately 10 minutes prior to the call, please dial 1-800-898-3989 (toll-free in North America); participant passcode is 7121948 followed by the pound key.

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