Freehold Royalties Ltd. (FRU) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen, for taking your seats. We've got 30 seconds to show time here. So first of all, before we get going, I'd like to just welcome everybody here. Thank you for coming to our Annual General Meeting. The second thing I'd like to say is most of you noticed, we've had sandwiches and drinks back there. I want you to know that we have paid for all of them. So I do not want to see any of them left there when the meeting is over. We are a value-driven company. Okay. As I said, welcome, I would like to thank you again for attending our 2023 Annual Meeting. My name is Marvin Romanow, and I'm the Chairman of Freehold. And today's meeting marks our 26th Annual Meeting in our history. And we've had a lot of ups and downs in our industry, but we take pride in the returns that we've delivered to the shareholders over our history. I would also like to advise you at this time that the meeting is being webcast. It's being webcast audio only and all references to monetary values in my presentation and David Spyker presentation are in Canadian dollars. So before we get into the formal procedure of the meeting, I would like to highlight a few business issues and the strength of the company that you own. Since embarking on a significant change in strategy through the expansion of our U.S. portfolio in November of 2020 and just take yourself back to November of 2020. This was the early days of the pandemic. This was before vaccines were available. We had just recovered from negative oil prices, something that hasn't occurred in our industry in 150 years, and we embarked on an asset acquisition strategy in the United States in the depths of the pandemic. I think it was bold. I think it was courageous. I think it was thoughtful. And most importantly to you, it was successful. So since then, we have returned over 245% through share price appreciation and dividend repayment. And that is the top performing publicly traded royalty company over that period. That's performance. The move to the United States was not an easy decision for the Board of Directors and management. It involved a material change of strategy for the company. It also involves some changes to management that better position Freehold to deliver value for our shareholders. And looking back now, Freehold's North American expansion has made us a materially better company in several ways. And let me go through these several attributes that I think are important. So to begin with, firstly, the size and scale of the U.S. opportunity remains relatively untapped. We estimate the value of minerals as an asset class within the United States at approximately $1 trillion. I know that's a number that's hard to follow them. It's got a lot of zeros, but I think you get the grasp of that. It's $1,000 billion with 5% of this being held by publicly traded companies, 45% is held by private equity institutions and 50% is held by mineral title owners. To put this in perspective, what we see there is approximately 10x the level of opportunities on the business development side versus transactions that are sourced in Canada. As a result, our U.S. expansion has provided added depth and quality to Freehold's portfolio. Let me go through a couple of more characteristics. We have acquired more reserves for less dollars than we would realize in Canada, whether it be by the number of benches that we have access to and benches are geological zones for the nontechnical folks in the crowd or the absolute number of locations we have within a specific play. The move to the U.S. has enhanced the return profile for Freehold's investors and made the company more sustainable to volatility in commodity prices. And if you watch the recent environment, we've gone from $120 WTI down to the low 60s and now we're back in the low 70s. So that's a lot of volatility. And I believe that's an important characteristic in vector should look at is how companies are sustainable through that. If you also look at our 2022 results on a proven reserve basis, we had 115% of our 2022 production replaced organically through free drilling that occurs on our royalty lands. We invested no capital to do that. We positioned ourselves in good acreage, and the operators chose to drill it, and they made us 115% sustainable over 2022. And this is the first time in many years, we've been able to achieve that, and it really is a testament to the strength of our portfolio. Our expansion into the U.S. has also improved our sustainability through superior pricing. And for example, in 2022, our average U.S. realized price was just under $91 a BOE. Our Canadian average was $68 a BOE. Since embarking on this North American strategy, our average commodity price we've achieved has improved 15% on a realized basis during this period. And this is closer proximity to markets a more friendly regulatory environment, less transportation cost and quality of product. Those all are important drivers that are important things to consider where you think about where you want to invest. One of the key drivers in going to that basin was to ensure consistent drilling on our asset base. And when we evaluate many of the plays in our land base in the United States, they are capable of supporting drilling in a $40 to $50 barrel price environment. And again, that better pricing and economics and low breakevens makes us more sustainable. Given the proximity to multiple pricing points along with a more friendly business environment, where infrastructure advancements are not tied up for years and bureaucratic delays, we expect the U.S. will have a premium pricing environment for years to come. Thirdly, our Canadian and U.S. portfolios enable a broader footprint for our shareholders to participate in North American oil and gas development, including an improved roster of payers drilling on our royalty lands. 70% of our payers of our American royalties are investment grade. In 2022, over $4 billion in industry capital was spent by over 350 industry players on Freehold's royalty lands. This was a record for the company. Our current portfolio provides multiple years of upside to emerging oil and gas plays, including the Permian, the Eagle Ford and in Canada, the Viking and the Clearwater. Under the current commodity and price environment and even lower, we look like we have a 10-year drilling inventory. Our management and Board have been very consistent in the execution of our business strategy with the goal of providing shareholders a strong balance of returns. Since the lows of COVID that I referred to earlier, Freehold has provided a consistent income source for shareholders always providing a dividend. From our $10 a share IPO 26 years ago, Freehold has returned approximately $2 billion in dividends over its history. That's over $34 a share in cumulative dividends. With the improvement in commodity prices from the lows of 2020, Freehold has increased our dividend by over 500%. And we have a current yield of about 7%. It's one of the top returns on the TSX Energy Index. And at the price environment that we're experiencing and expecting, this represents roughly 60% of our forecast cash flow. And we are able to maintain this dividend without having to borrow to pay for our dividend down to a sub USD 50 WTI pricing environment. Since the depths of COVID, we have invested $500 million to expand our North American royalty portfolio. We believe this investment has made Freehold a better company and positioned it deliver for multiple years down the road for our shareholders. Moving to more recent times. In 2022, we invested $190 million in royalty transactions, adding to positions in the Howard County, the Permian, and expanding already a strong land base in the Clearwater in Canada, 2 of the most active oil and gas plays in North America. Our business development team and many of them are here today, so feel free to reach out and say hello to them after the meeting. They see a strong suite of opportunities in the near term, and they're committed to maintain a consistent return threshold when executing on transactions while also ensuring we remain committed to improving our underlying royalty portfolio through each transaction. Our goal is not simply to get bigger, bigger is okay, but what we really focus on and making sure every transaction gets us better. We exited 2022 with a net debt to trailing funds flow of operations of 0.4x. It's one of the lowest in the oil and gas industry, notwithstanding that we could perhaps handle a bit more debt because we don't have operating costs or royalties to pay or capital costs. Notwithstanding that, we have an extraordinarily strong balance sheet. We also continue to man considerable financial flexibility through our existing credit lines. They're less than half drawn and we have raised proceeds through 2 successful equity raises over the last 3 years. And hopefully, many of you had a chance to participate in those because those have returned strong returns. And while these were done at considerably lower prices than our current share prices, they were accretive both in and certainly now. In tandem with the shift in our strategy, our Board executed a change in leadership with the promotion of Dave Spyker, an internal candidate. He was formerly the Chief Operating Officer. We promoted him to CEO in January of 2021. And over the last several years, he has proved he was the right individual to execute our North American strategy. I would like to thank him personally as a shareholder as Chairman and as a colleague to doing such a great job with his team and they all exhibit this great talent of leadership, skill and drive, and they really delivered in 2022. Thank you, Dave. Take note, that's my daughter and my wife there. Generally, there's no applause at AGMs. That generally doesn't happen. So just please note that when you give me the after-comment criticism. They can know it's very good. In addition, last month, we announced the promotion of Rob King to Chief Operating Officer; Susan Nagy, who is also here the Vice President of Business Development. And both Rob and Susan played instrumental roles in developing and executing our revised strategy and will continue to play a key role going forward. These are clear indicators of the bench strength we maintain within our organization. Overall, 2022 was a year of records for the company with freehold achieving record revenue, record funds from operations, record dividends paid, record production and record drilling. While we're excited about what we have achieved over the past 25 years, we are equally enthusiastic about what the next 25 years holds for freehold and our shareholders. For those attending this AGM for the first time or those new to Freeholder or Freehold, I would like to take this opportunity to introduce you to our executive team, and I'm going to ask each one of them to stand when they're introduced. And no need for applause here. We don't want it to go to their heads. Dave Spyker, President and CEO; Rob King, Chief Operating Officer. Rob is right over here, David Henry, Vice President and Chief Financial Officer; Ian Hantke, Vice President of Diversified Royalties; and Susan Nagy, Vice President of Business Development. Thank you. For the purposes of the meeting today, voting on all matters except for termination of the meeting will be conducted by ballot. I would like to introduce our director standing for re-election today. And again, would you please stand when your name is called, and please withhold your applause; Sylvia Barnes; Gary Bough; Peter Harrison, Maureen Howe, Douglas Kay, Valerie Mitchell; myself, Marvin Romanow, David Spyker. He gets a lot of attention that Dave and Aidan Walsh. Thank you very much. I would also like to introduce the representatives from KPMG, our auditors, and I'd ask you to stand up as well, Heather Steinle, and Lindsay Phone. I would also and we would also like to recognize Arthur Korpach, who is not standing for re-election and who will retire for the Board in about 25 minutes. Mr. Korpach was appointed to the Board in May 9, 2012. That is 11 years almost to the day. He was Chairman of the Compensation Committee from 2012 to 2015. He also cured the chair of the Audit Committee from 2015 to 2022. He was instrumental in helping us through a number of transactions. He's a former banker and is very knowledgeable in that space, and this included the advancement of our U.S. portfolio, and we greatly benefited from his transaction experience. Art has always provided excellent insight. He is well informed. He has extremely deep industry knowledge, and he delivers all of this in a concise and effective manner. He was a guy who really wanted on your side. So we would like to thank you, Art, for your very hard work. wisdom and leadership throughout his tenure was superb. We will miss you, Art. I will miss you. Could you please stand and be acknowledged. You guys are really good. One component in the advancement of our ESG strategy was driven by Freehold's commitment to achieving 30% gender diversity to our Board composition. We reached this target in 2022 with the appointment of Sylvia Barnes and Valerie Mitchell to the Board. And first of all, I want to say these are extraordinarily capable directors. They just also happen to be women, and we're happy to have them on board, and we are very fortunate to have them on board. Ms. Barnes, who stood up earlier as a seasoned Board member. She's a business leader and Co-Founder of Tanda Resources, a privately held energy advisory firm focused on upstream investments in consulting, and she's based in Houston, Texas. Her Board expertise includes ESG audit, compensation and risk management. As Barnes has over 30 years of experience in energy investment banking and has a background in engineering. And one of our most astute observations today is how much you like the climate in Calgary today. We do live in a relative world, don't we. That was good Sylvia. Thank you for us locals who like to complain about it. Valerie Mitchell is President and Chief Operating Officer at TriEnergy, a private independent oil and gas acquisition, development and exploration company based in Oklahoma City. She oversees all aspects of company strategy and growth, including operations, reserves, acquisitions, human resources, IT, ESG, the buck stops always at the CEO level, it never gets to the Chairman, and she has over 25 years of experience in the energy industry. We are very fortunate to have both Sylvia and Valerie join our Board. They have a wealth of knowledge and trust me, in their meetings, they have delivered commitment skills and the experience that's valuable not only for our operations in the United States, which they're deeply familiar with, but our operation of our company as a whole. That concludes my opening business and strategy comments, and I don't think I've ever made more comments on a single slide in my career. So I have just created another record for Freehold. Thank you for being patient with me. So we will now start the formal part of the meeting. And to make best use of our time, we have prearranged with certain individuals attending to move and second the resolutions, which we will consider in a single motion and which are set out in the notice of meeting. While all matters to be considered will be put forward by a single motion, shareholders will be able to vote on each of the matters separately by 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. We ask that questions during the formal part of this meeting, which we're now in, only refer to matters set out in the notice of meeting. Following this formal part of the meeting, David Spyker will make a presentation regarding the operations of the company and our future plans, and he will add more depth and insight into the comments that I have already provided. At that time, he and I would be happy to answer any additional questions. The meeting will now come to order. I am Chairman of Freehold and will act as Chairman of the meeting. Brianna Gunter, who is at the far right there on my right, will act as Secretary of the meeting and representatives of Computershare Trust Company, Canada, will act as scrutineers. I have received a sworn affidavit as to the mailing of the Notice of Annual Meeting of Shareholders, information circular, instrument of proxy and the annual report to shareholders. I direct that this sworn affidavit together with copies of the documents mailed to shareholders be kept by the secretary with the minutes of the 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 this meeting. In excess of 48% of the shares have been voted by proxy, the interim scrutineer's report indicates that between 92% and 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. We will conduct each vote by way of ballot other than termination of the meeting. I understand that the scrutineers have collected the ballots. If you have a ballot that you have not provided to them yet, please provide it to the scrutineers now. The annual financial report to shareholders, which includes the financial statements of the corporation for the fiscal year ended December 31, 2022, and the auditor's report for the same period was mailed to those shareholders who requested it. There are extra copies of the report available here today. They are also available on our freehold website, and they're also available on SEDAR. As noted earlier, to make best teams at our time, I will be asking for a motion to consider and, if not appropriate, to approve each of the remaining items of business set forth in Freehold's notice of annual meeting and annual Management Information Circular. However, before doing so, I will first speak to the remaining item of business, the nomination and election of Directors of Freehold. According to a governance agreement between freehold and Rife Resources a wholly owned CN entity, Rife has the right to nominate 2 individuals for election as directors. Rife has nominated Peter Harrison and David Spyker for election as Directors of the corporation. In accordance with the governance agreement and the advanced notice bylaw of Freehold, the only individual is 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, Sylvia Barnes, Gary Bugeaud, Peter Harrison, Maureen Howe, Douglas K.; Valerie Mitchell, Marvin Romanow, David Spyker and Aidan Walsh are hereby nominated as directors of Freehold Royalties to hold office until the next annual election of Directors or until the successors are elected or appointed. This is all subject to the provisions of the Business Corporations Act of Alberta and the bylaws of freehold royalties. Is there any discussion or question from any registered shareholder or proxy holder?

Okay. I will limit my remarks to the directors and carry on about something else later. But the first thing I do want to say is kudos for having a meeting in person. I want to thank everyone for doing that because otherwise, there are too many people that are disenfranchised because you have to go through 3 websites, now or your ID number is in all other nonsense. And so it's very difficult for other people to get in on these web crap meetings, as I call them. So anyway, back to the directors.

Well, just thank you for that comment because we, in fact, talked about that and our game plan for the foreseeable future is that we will continue these face-to-face meetings. The survey tells us about 1/3 of our competitors in our space do virtual meetings, about 1/3 do hybrid and a third new face to face. So our game plan is to continue to be in the face-to-face realm of that, but we'll keep an eye on that.

Thank you. Thank you. Because as I say, I know how difficult it is to get into these Zoom meetings going through 3 separate websites and all that other nonsense. Okay. Back to the directors. I have a little bit of a problem with a few other directors. Ms. Barnes. Ms. Barnes only owns 6,269 shares. I own almost twice as many. And I think -- I know that the reason is obviously that you're going to give us is that, oh, they have such and such a time to get these shares crap, nonsense. If I can own more shares and she can surely own more shares. And I don't think that the full intent and the heart of our directors there if they own such low number of shares. #2 item. Ms. Barnes is also on another directorship elsewhere plus a committee. And we're already paying people to be here. We're not paying them to be somewhere else. Then comes Ms. Mitchell, young Ms. Mitchell, and I do applaud the fact that she's done very well in her life. Some of us at semis have a difficult time doing that. I can attest to that. including myself. Anyway, she also only owns 6,269. If she's a CEO, my good god. She's got the money in her pocket to have a little more skin in the game with Freehold. So I have to say something about that because I'm not happy about that either, because I mean, hey, we're paying her flight and hotels to fly up here, so she can put some more skin into it as far as I'm concerned. Number 3, and I'm sorry, I'm picking on all the females this year, but Ms. Howe, she just has 27,000 shares, but it's still not enough. However, my big bone with Ms. Howe and it always has been -- she's too busy elsewhere. We don't pay for people to be busy elsewhere. She's got, what, one other directorship and a committee that she's on with that. She's got another directorship with, I think, 2 other committees. I'm sorry, we're paying you already to put your mind in your business and your honey into a chair to do Freehold business and not to get money from elsewhere. And I have to say the same thing about Ms. Mitchell, if she's running a corporation, guess what, folks, she really doesn't have proper time for us. So therefore, I cannot vote and did not vote for any of these 3 females even though I love females, and we have to somehow support each other. But this time, I've put my reasons forth and those with them.

Thanks for your comments, Marika. I'll address, I think, a handful of your observations and hopefully I'll catch all of them, I took some notes here. So we do have a lot of encouragement for both directors and officers to own shares. We have targets for them to meet. We gave them some time to meet those targets, and I expect that we will meet their targets. And I think in fairness, if you look at the Board as a whole, we have continued -- all of us have continued to escalate our ownership. We have put our money where our mouth is, and many of us have a substantial portion of our wealth tied up in the company. And I think you're right. That's the way it should be, and that's the way it's intended to work, and I believe that's the way it will work. With respect to people being too busy to fulfill their duties and their responsibilities, there's a bit of a saying in life that if you want something done, give it to a busy person. And I appreciate there are all of these guidelines with -- that we have from the rating agencies or at least the governance rating agencies, not the credit rating agencies on what overboarding is, overboarding is when you're considered to be on too many boards. None of our directors exceed those thresholds. But the business point I think I'd really make about Sylvia Valerie and Maureen. Maureen is on 3 boards. She's on our board. She's on the Board of Pembina, she's on the board of Methanex. Those are really admirable and respectable companies. She brings a lot of depth and a lot of experience to the Board. She brings her knowledge from her time as an investment analyst. And so, her contributions are not only coming from her skill base, but what she experiences on an ongoing basis. So having engagement in these other boards in our view and in my view, is an asset. It's not a detriment. And we appreciate that she chose to come on to our board because I believe she has many choices. She didn't have to choose us. And with respect to Sylvia and Valerie, I'd make similar comments that we gain a lot of perspective and insight on some of the ins and outs of the United States business environment, basins, specific land tenure issues, regulatory issues that are unique. We have capable people who understand those things within the company, but the added dimension that these big members bring -- give us really an additional competitive advantage, and we're happy to have them on our Board as well. Any more questions or comments on the director slate? I declare those nominated as duly directors -- duly elected directors of Freehold. Particulars of the votes cast on the election of directors will be available via a news release after the meeting. 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 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 and that the resolution set forth in Freehold's information circular regarding Freehold's approach to executive compensation be approved and adopted.

Mr. Chairman, I second the motion.

Thank you, David and Paul. Is there any discussion or question from any registered shareholder or proxy holder? I have been advised by the scrutineers that each of the matters considered today have been approved by the requisite majorities. I direct that the scrutineers report be [indiscernible] to the minutes of this meeting as a schedule. As mentioned earlier, the detailed results of the votes will be made available in a news release to be issued by Freehold and in a report of voting results to be posted on SEDAR. Unless there are any questions from the floor, I would entertain a motion for the meeting to be terminated. But before I ask for that motion, any questions from the floor. And Maria, this is in the formal part of the meeting that you still want to comment because there'll be an opportunity for you to ask questions after the presentation. You want to go now. Good.

I believe I did put a vote for or there was a vote on the ballot in regard to executive compensation. Am I correct? If there was something on the ballot.

That's correct. There were 3 motions directors, compensation and auditor appointment.