Mr. Tom Mullane reports

FREEHOLD ROYALTIES LTD. ANNOUNCES SECOND QUARTER 2020 RESULTS

Freehold Royalties Ltd. has released its second quarter results for the period ended June 30, 2020.

                                           RESULTS AT A GLANCE
 
                                           Three months ended June 30,      Six months ended June 30,
                                                   2020          2019             2020          2019
Financial ($000s, except as noted)
Royalty and other revenue                     $  14,758     $  35,333        $  41,042     $  70,942
Net income (loss)                                (5,421)        3,430          (14,443)       (3,649)
Per share, basic and diluted ($) (1)              (0.05)         0.03            (0.12)        (0.03)
Cash flows from operations                       13,144        27,816           44,027        47,136
Funds from operations                            10,622        30,095           30,870        59,443
Per share, basic ($) (1)                           0.09          0.25             0.26          0.50
Acquisitions and related expenditures               981        30,973            6,421        31,902
Dividends paid                                    9,790        18,674           28,473        37,322
Per share ($) (2)                                0.0825        0.1575           0.2400        0.3150
Dividends declared                                5,341        18,660           24,026        37,311
Per share ($) (2)                                 0.045        0.1575           0.2025        0.3150
Payout ratio (3)                                    92%           62%              92%           63%
Net debt                                         96,071        98,310           96,071        98,310
Operating
Royalty production (boe/d) (4)                    9,150        10,311            9,884        10,226
Light and medium oil (bbl/d)                      3,313         3,727            3,588         3,731
Heavy oil (bbl/d)                                   872           983            1,055           947
NGL (bbl/d)                                         772           962              822           937
Total liquids (bbl/d)                             4,957         5,672            5,465         5,615
Natural gas (mcf/d)                              25,156        27,834           26,513        27,664
Total production (boe/d) (4)                      9,285        10,664           10,155        10,646
Oil and NGL (%)                                      54            55               55            55
Average price realizations ($/boe) (4)            17.08         35.88            21.75         36.08
Cash costs ($/boe) (3)(4)                          4.79          5.05             5.30          5.72
Operating netback ($/boe) (3)(4)                  16.86         35.36            21.40         35.79

(1) Weighted average number of shares outstanding during the period, basic.
(2) Based on the number of shares issued and outstanding at each record date.
(3) Non-GAAP (generally accepted accounting principles) financial measures.
(4) To provide a single unit of production for analytical purposes, natural gas production and 
    reserves volumes are converted mathematically to equivalent barrels of oil (boe). Freehold uses
    the industry-accepted standard conversion of 6,000 cubic feet of natural gas to one barrel of 
    oil. The 6-to-1 boe ratio is based on an energy equivalency conversion method primarily 
    applicable at the burner tip. It does not represent a value equivalency at the wellhead and is 
    not based on either energy content or current prices. While the boe ratio is useful for 
    comparative measures and observing trends, it does not accurately reflect individual product 
    values and might be misleading, particularly if used in isolation. As well, given that the 
    value ratio, based on the current price of crude oil to natural gas, is significantly different 
    from the 6-to-1 energy equivalency ratio, using a 6-to-1 conversion ratio may be misleading as 
    an indication of value.

President's message

Tom Mullane, president and CEO, commented: "The focus through Q2 2020 was on stabilizing our business in a very dynamic environment. Early in the quarter, we announced a 71-per-cent reduction in our monthly dividend and reduced our general and administrative (G&A) expenses by 15 per cent. These changes were necessary to maintain the sustainability of our business during the sharp drop in oil prices. Our balance sheet remains strong, including a reduction of net debt by $5.7-million compared to Q1 2020 despite volatile commodity pricing, and as further supported by the expectation that our debt to funds from operations will remain below 1.5 times through 2020.

"In addition, we successfully disposed of a large percentage of our remaining working-interest production. This disposition will improve our corporate netbacks and profitability margins while reducing our asset retirement liability.

"Operationally, Q2 2020 royalty production averaged 9,150 boe/d, down 11 per cent versus the same period last year. The reduction in volumes were primarily associated with shut-in volumes as a result of producer response to low oil pricing. These shut-in volumes represented 11 per cent of production, with much of this production now expected to come back on-line through the third quarter. These relatively low shut-in volumes are a testament to the quality and resiliency of Freehold's royalty portfolio. Given the seasonal nature of drilling in Western Canada (Q2 generally has less activity given operating conditions), combined with the uncertainty associated with COVID-19, drilling was muted on our royalty lands over the period. Since quarter-end, however, we have had indications that our top industry partners are looking to restart drilling operations in the latter part of 2020, which should aid production volumes into 2021.

"In the initial phase of the COVID-19 pandemic, we prioritized the health and safety of our work force by directing all employees to work remotely from home. As Alberta public health measures were relaxed in June, our return-to-office task force worked diligently to develop office safety protocols in alignment with government and public health guidelines. With this preparation, we were able to reopen our office in July with a reduced staff complement. We will continue to monitor COVID-19 updates and follow the latest guidance to move to our next phase of return. We appreciate the continued efforts of our staff during this time, and we want to thank our shareholders for their ongoing support.

"Looking forward, we expect the next three to six months to be a challenging period for the North American exploration and production industry. There remains considerable uncertainty associated with the ultimate impact of COVID-19 as it pertains to supply/demand fundamentals surrounding oil prices. Setting ourselves apart from the broader industry, Freehold has continued to provide investors some level of dividend throughout the different business cycles, as royalties represent a high-margin business, enabling more returns to be transferred to our shareholders. Over our history, Freehold has been able to pay out greater than $32.50 per share in cumulative dividends to its shareholders through varying cycles of the commodity. Moving forward, we expect to revisit our payout on a quarterly basis, with the expectation that dividend levels will increase as cash flows improve."

Dividend announcement

The board of directors has declared a dividend of 1.5 cents per common share, to be paid on Sept. 15, 2020, to shareholders of record on Aug. 31, 2020. The dividend is designated as an eligible dividend for Canadian income tax purposes.

The 2020 payout levels are in line with Freehold's previously stated dividend policy, which outlines a 60- to 80-per-cent payout based on annualized funds from operations. The COVID-19 pandemic, however, has caused significant destruction of demand for oil, volatility in commodity prices and uncertainty regarding the timing for recovery, all of which have made the preparation of financial forecasts challenging. As a result, there may be adverse changes in funds from operations that are currently unforeseen that could require further adjustments to dividend levels. Freehold will continue to evaluate its production expectations and the commodity price environment and adjust the dividend level accordingly.

Q2 2020 highlights

• Freehold's payout ratio (1) totalled 92 per cent for the quarter, compared with 64 per cent during the same period last year. Dividends paid for Q2 2020 totalled 8.25 cents per share, down from Q2 2019 and Q1 2020, when dividends paid totalled 15.75 cents per share. The increased payout reflected April's paid dividends of 5.25 cents per share. To position Freehold's dividend within the guided payout thresholds of 60 to 80 per cent of annualized funds flow, the dividend paid in May and June was lowered to 1.5 cents per share. Previously, Freehold reported its payout ratio on a dividend-declared basis that for Q2 2020 totalled 4.5 cents per share, or 50 per cent relative to funds from operations.
• Through an unprecedented Q2 2020, where Freehold observed depressed crude oil benchmark pricing caused by demand destruction due to geopolitical forces and the COVID-19 pandemic, Freehold demonstrated its superior performance and relatively low risk profile compared with other investments in the petroleum and natural gas industry through continued dividend payouts and the generation of funds from operations.
• Q2 2020 funds from operations totalled $10.6-million or nine cents per share over the quarter, compared with $30.1-million or 25 cents per share in Q2 2019. The reduction in funds from operations from the same period in 2019 and the previous quarter reflected continued weakness in commodity prices, along with reduced production volumes associated with shut-in volumes and no third party drilling. Based on Freehold's share price at quarter-end of $3.52 per share and annualizing Q2 2020 funds from operations, Freehold offers investors a 10-per-cent free cash flow yield, a strong return particularly given the volatility associated with Q2 2020.
• Freehold's royalty production averaged 9,150 boe/d (barrels of oil equivalent per day) during Q2 2020. This represented an 11-per-cent decline compared with the same period last year and a 14-per-cent reduction compared with the previous quarter. Royalty liquids production averaged 4,957 boe/d for Q2 2020, down 13 per cent compared with the same period in 2019 and 17 per cent when compared with the first quarter of 2020. The decline in liquids and overall volumes reflected price driven shut-in volumes during the quarter, along with reduced third party drilling on Freehold's royalty lands.
• Production from Freehold's U.S. royalty assets averaged 74 boe/d in Q2 2020, representing a 69-per-cent reduction from 242 boe/d in Q1 2020, as a result of the temporary shut-in of production due to price declines. This is expected to recover in the third quarter of 2020.
• Over all, 11 per cent of payor's production was shut in during Q2 2020, given historically low crude oil benchmark pricing observed starting in March and lasting through to May.
• Oil and natural gas liquids represented 54 per cent of production in Q2 2020, down slightly from 55 per cent in Q2 2019, as shut-in production was oil weighted.
• Q2 2020 net loss totalled $5.4-million, compared with $3.4-million in net income in Q2 2019. Despite Q2 2020 funds flow of $10.6-million, the higher net loss reflected lower revenues due to the retreat in oil prices and lower production volumes relative to a higher non-cash depletion rate.
• Closing net debt as at June 30, 2020, was $96.1-million, a decrease of $5.7-million compared with the previous quarter. The decrease quarter over quarter reflects continued positive funds from operations despite lower realized commodity pricing and a reduction to Freehold's monthly dividend obligations.
• Cash costs (1) for the quarter totalled $4.79 per boe, down from $5.05 per boe in Q2 2019 and $5.74 per boe in Q1 2020. The decrease in costs year over year reflects lower operating costs associated with Freehold's completed disposition over the quarter, reduced interest charges reflecting lower absolute debt levels and reduced G&A charges.

Note:

1. Non-GAAP financial measures.

Drilling muted through Q2

With crude prices trading at multidecade lows during Q2 2020, largely caused by geopolitical forces combined with demand destruction due to the COVID-19 pandemic, producers chose to preserve capital through a cessation of drilling activities. As a result, there was no drilling activity for this quarter other than prior-period adjustments of 54 (0.4 net) wells drilled. This lag in reporting is largely due to the addition of unit wells that take longer to be made publicly available. This compares with 175 (6.2 net) in Q1 2020 and 127 (2.9 net) royalty wells drilled in Q2 2019. In dialogue with some of the major operators on Freehold's royalty lands, Freehold believes that with continued stability in commodity prices, activity levels will increase through Q3 2020 and year-end on its royalty lands.

                           ROYALTY INTEREST DRILLING
 
                     Three months ended June 30,      Six months ended June 30,
                             2020          2019             2020          2019

                      Gross   Net   Gross   Net      Gross   Net   Gross   Net
                               (1)           (1)              (1)           (1)

Total                    54   0.4     127   2.9        229   6.6     274  10.2

(1) Equivalent net wells are the total of the numbers obtained by multiplying 
    each gross well by Freehold's royalty interest percentage.

Executive retirement

Michael Stone retired as vice-president, land, effective June 30, 2020. The board of directors and management would like to thank Mr. Stone for his dedication and years of service and wish him well in his retirement.

Conference call details

A conference call to discuss the financial and operational results for the period ended June 30, 2020, will be held for the investment community on Thursday, Aug. 13, 2020, beginning at 7 a.m. MT (9 a.m. ET). To participate in the conference call, approximately 10 minutes prior to the conference call, please dial 1-800-898-3989 (toll-free in North America) and use participant passcode 4525123 followed by the pound sign.

We seek Safe Harbor.