low risk, income focused, exposure to oil & gas … presentation 2015 03.pdflow risk, income...

| Corporate Presentation | March 2015 | Strictly Private and Confidential

Low risk, income focused, exposure to oil & gas

production and commodity prices

2 | Corporate Presentation | Strictly Private and Confidential

An Introduction to Our Business

Caledonian Royalty Corporation

Is a specialist investment management firm, headquartered in Calgary, Alberta,

which acquires and manages asset backed, commodity-based cash flow

yielding investments.

Focuses on providing high yield to investors through low risk oil and gas

acquisitions in the form of royalties.

Minimizes risk by obtaining title to oil and gas lands and structuring royalties as

the most senior claim where possible.

Principals and executives have seen through a number of market cycles and

have experience and expertise in making opportunistic acquisitions in all

conditions.


A Solid Heritage – Experience, Execution, Expertise and

Results

Solid Management Team

James S. Kinnear,

Founder, Chairman, CEO & Director

B.Sc., CFA, D.Comm. (Hon.)

Management team led by James S. Kinnear,

founder and former CEO of Pengrowth Energy

Trust.

Mr Kinnear and the Caledonian Management

Team collectively have more than 160 years

experience acquiring petroleum and natural gas

properties and sourcing capital to support

acquisitions.

Proven investment approach – Caledonian

employs a similar investment approach to that

developed by its senior management while at

Pengrowth where they grew entity value from

$12.5 million to over $4 billion over 20 years,

and paid out $4.2 billion in cash

distributions achieving a compound annual

rate of return of 14% including reinvestment.


Caledonian Management – A Solid Heritage

Charles V. Selby,

B.Sc. (Hon.), P.Eng.,

J.D., President

Over 30 years of

experience in strategy

and negotiations. At

Pengrowth participated in

more than 50 asset and

corporate acquisitions and

20 public equity raises.

Extensive independent

energy experience.

Grant A. Henschel, B.Sc., P.Eng,

Senior Evaluations Engineer

Over 30 years of

experience in reserves

evaluation, sourcing and

evaluating domestic and

international acquisition

opportunities.

Mark Smith, CGA,

Controller

Over 10 years of

experience in operational

accounting, treasury and

financial accounting both in

domestic and international oil

and gas companies.

Over 30 years experience in

A&D and Land experience.

David has executed over $5

billion in corporate and asset

acquisitions and divestitures

and has directed land

departments from small to

major exploration and

production companies.

David Horn,

Vice President,

Business

Development


Why Invest In Oil & Gas

Owning an interest in Oil & Gas represents ownership in some of the most widely used and valuable

commodities in the world.

Oil & Gas are “real assets”

Real assets provide protection against inflation.

Real assets have relatively low correlation with financial assets such as stocks and bonds.

Oil & Gas properties can have long economic lives

A long tail of cash flows can be produced.

Technological advancement may increase the amount of economically recoverable oil & gas –

further expanding the magnitude and length of cash flows.

The use of Oil & Gas is pervasive in the Global economy

The uses of Oil & Gas include: transportation fuels, fuel oils for heating and electricity

generation, asphalt and road oil, and the feedstocks used to make chemicals, plastics, and

synthetic materials found in nearly everything we use today.

There are no viable substitutes that could meet global demand for the current uses of oil and

gas.

Extensive consumption of oil and gas will persist into the future.


Market Opportunity – A distressed oil and gas industry

The ‘Shale revolution’ has resulted in depressed oil and natural gas prices in North America.

Downstream oil and gas companies face significant challenges:

Operating cash flows are reduced

Project and operating economics have deteriorated and are challenged in some cases

Internally sourced capital is insufficient to fund drilling programs

Ability to grow production limited

Ability to replace base declines challenged

Balance sheets are stretched

Pressure from creditors

Reduced engineering reserve valuations

Results in reduced borrowing base pressure to reduce leverage from creditors

As a result companies will raise capital

Equity issuance

Asset sales

Alternative capital sources - Royalties

Cashed up investors can acquire quality assets at attractive prices

… there is a buyers market


The North American Oil and Gas Market

Notwithstanding the present challenges, the current market presents

attractive characteristics for new investment entry.

Peaking shale and total production

Natural gas export capacity

The impact of falling oil prices

The “war on coal”

The current challenging environment provides an opportunity to buy into

a positive long term investment at an attractive price.



Annual US natural gas production rate Bcf/d

Source: Total Production – EIA

Shale Production – Groppe, Long Littell

… shale gas has been the

source of growth

… Shale has significantly larger

decline rates than conventional

production.

First year declines range from

45% to 68%[1]

-

20

40

60

80 00

02

04

06

08

10

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14

Billi

on

Cu

bic

Fe

et

per

da

y

Total

Ex Shale

Shale

[1] EIA, Annual Energy Outlook 2012

… The current price environment

has reduced drilling

… once already completed wells are

connected into distribution

infrastructure base declines will

become prevalent and pricing will

receive support



US Crude oil production rate MBBl/d

Source: Total Production – EIA

Shale Production – EIA DPR

* Total production from DPR used as a proxy for shale production

0

2,000

4,000

6,000

8,000

10,000

Jan-0

7

Jul-07

Jan-0

8

Jul-08

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9

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0

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5

US

Cru

de P

rod

ucti

on

MB

Bl/d

Total

Shale*

Ex Shale … shale oil has been the source

of growth

… The current price environment

has reduced drilling

… once already completed wells are

connected into distribution

infrastructure base declines will

become prevalent and pricing will

receive support

Over the medium term US LNG exports add significant

export capacity

Source: FERC

Approved & Under Construction

1 Sabine, LA 2.76Bcfd

(Cheniere/Sabine Pass LNG)

Estimated Start-up late 2015

2 Freeport, TX 1.8 Bcfd

(Cheniere/Freeport LNG Dev.-

Expansion)

Estimated Start-up - 2018

3 Cameron, LA 1.7 Bcfd

(Sempra Energy)

Estimated Start-up 2018

4 Dominion Cove, MD 0.82 Bcfd

(Dominion Resources)

Estimated Start-up 2017

5 Corpus Christi, TX 2.14 Bcfd

(Cheniere)

Estimated startup 2018

Existing

6 Kenai*, AK 0.20 Bcfd

(Conocophillips)

1-2

6

3

4

… 9.22 Bcf/d of incremental

demand in a market currently

totaling 72 Bcf/d will support

natural gas prices

5


Pipeline exports to Mexico will further support this trend

US pipeline exports to Mexico continue to increase

Pipeline flows to Mexico have more than doubled

during the last five years to over 2Bcf/d

Gas consumption in Mexico is rising as a fuel for

generation of electricity. Consequently the state owned

electric utility ‘Comisión Federal de Electricidad’ has

authorized construction of additional pipeline capacity.

Additional projects are underway to raise capacity to

9 Bcf/d by 2017

Export volumes are forecast to increase from an

average 2 Bcfd in 2014 to 6.5 Bcfd in 2020

Source: Groppe, Long, Littell

… available capacity in 2015 is

~6Bcfd after completion of a new

2.1 Bcfd cross border pipeline in

December 2014.


The War on Coal

The “war on coal” by the Obama administration is having success well in

advance of actual regulations for existing plants.

The recent agreement between the US and China to cut greenhouse gases

will provide further ongoing support.

Approximately 93% of coal consumed in the United States is used in power

generation (1).

US exporters face limited export capacity and are at a geographic

disadvantage to other global coal exporters.

Use of natural gas for base load generation will continue to grow

Source: (1) EIA use of coal



Oil prices – history suggests a strong rebound

Date Event

% Change in

Oil Price

Length of Oil Price

Decline (in trading days)

% Increase in Oil

Price 1 Year Post-Low

1986 Saudi Market Share War -67.2% 82 79.0%

1988 Oil Glut -43.7% 295 58.4%

1991 Global Recession / End of Gulf War -57.2% 90 5.4%

1998 Asian Crisis -59.6% 484 134.5%

2001 Global Recession -53.1% 290 46.2%

2008 Great Recession -78.4% 119 134.8%

Average -59.9% 227 76.4%

40

50

60

70

80

90

100

110

Jan 1

4

Feb 1

4

Mar

14

Apr

14

May 1

4

Jun 1

4

Jul 14

Aug 1

4

Sep 1

4

Oct 14

Nov 1

4

Dec 1

4

Jan 1

5

Feb 1

5

Oil prices 2014 to Today Peak $107.62, 23 July 2014

Low $44.45, 28 January 2015

Decline for: 130 trading days

… Oil prices fell

58.7%

…Price recovery

1 year

post low ???


Track Record: Pengrowth - 25 Years of Providing High

Cash Yields to Investors

Pengrowth paid

out more than

C$4.2billion in

distributions or

C$42.34 to mid

September

2009

James Kinnear

retired from

Pengrowth in

September

2009

*To September 2009


Track Record: Caledonian - A uninterrupted distribution

track record in a challenging market

To the end of December 2014, Caledonian has paid $35.1 million in distributions to unit

holders ($3.8725 per unit), an average yield of 7.4% p.a. since inception to founding

investors.

Caledonian has paid uninterrupted monthly distributions for the past five years.

$0.00

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Dec 1

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AE

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btu

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Monthly Distribution (cpu)

AECO Gas Spot Price


Executable Deal Flow: Prospective Acquisition Targets

Prospect 1 Vendor holds an average 43% Working interest and is seeking to manufacture a

15% GORR.

Prospective GORR price of $40 million

Letter of intent in place

Evaluation and Land Title

complete

Raising Funds

Prospect 2 Vendor requires funds for two horizontal work-overs and one new well.

GORR over entire company a possibility. Vendor has current production of 1,270

Boe/d.

Prospective GORR price of $10 - $12 million

Engineering and Geology reviewed

Independent Valuation provided by

vendor

Prospect 3 Vendor is seeking to divest a portfolio of ‘mineral fee title land rights’ and royalty

interests.

Royalty production was 742 boe/d (57% oil weighted) .

Provisional value of PDP reserves alone ~$63 million, with 2015 cash flow estimated

at ~$11 million. Potential upside through development of fee lands and recovery in oil

prices.

Initial Engineering review underway

Full access to vendors dataroom

Prospect 4 Vendor is seeking to divest their working interests. Current production is 2,000 Boe/d. In discussions with Vendor

Full access to vendors dataroom

Prospect 5 A third party is seeking to acquire natural gas working interest properties. Caledonian

has been retained to complete diligence on the properties. The third party desires to

reduce their net purchase price through issuing a GORR to Caledonian as part of the

working interest acquisition.

Prospective GORR price $10-$12 million

Waiting on engineering and reserve

data from the vendor


Prospect 1: $40 million royalty acquisition

Caledonian has an exclusive opportunity to acquire a manufactured 15% overriding royalty with

no deductions (“the royalty”) over a high quality, long life, dry gas, coal bed methane (“CBM”)

Mannville (in the Corbett area) play from a Canadian based industry partner (“the vendor”) for

consideration of CDN$40 million.

The royalty has a number of positive characteristics that support

and enhance value to Caledonian unitholders:

The acquisition is expected to be accretive to Caledonian in terms of

production, reserves and cash flow

CBM natural gas production that is not impacted by recent declining oil

prices

A production profile with low and flattening decline rate (consistent with

CBM isotherm theory)

Potential upside through compression optimization

The area underlying the royalty is a core development area for the

vendor


Prospect 1: Characteristics of the acquisition that will

drive increased value to unitholders

Potential upside through:

Long-reach quad-lateral horizontal wells

Compression optimization (field boosters and gas plant suction)

Target of maintaining flat stable total royalty production over 10 years

The area underlying the royalty is a core development area for the vendor

The vendor intends to develop the underlying lands

The asset will be the vendors largest producing area

The vendor maintains and operates over 90% of the production and ownership of all gas

operating plants in the area

There is significant capacity in these natural gas plants for expansion


Prospect 1: Asset Snapshot

Quality Geological Position

The assets coal bed is flanked by deep channels to

the north, east and west of the core operating area

Coals in the Mannville formation are wet, thick (up to

10 meters) and continuous. Coals in the core area

have shown high gas content and permeability.

Significant Footprint

The area includes 389 gross sections or approximately

250,000 acres

Substantially Undeveloped

Approximately 40% of the area is undeveloped

Drilling Efficiency Improved

Latest drilling designs provide the best production

output per capital invested

Infrastructure Ready

Infrastructure already in place for full field

development


Prospect 1: Development Potential

Drilling has been configured to maximize the use of

long-reach well designs.

Standard well designs are in place for locations where

only one section can be reached

Locations under evaluation include developments that

best proceed following the development of the

evaluated sections

Long Reach Standard Under

Evaluation

Category Gross Sections

Long Reach 66

Standard 14

Under Evaluation 63

Total 143

Long reach drilling design

2-section wells that employs up to 2 mile lateral legs

Coal contact in the long-reach design increases to

12,000 metres


Prospect 1: Development Scenario

Modelling evenly distributed over 10 year period

Production increases in year following capital expenditure period

Large inventories of identified drill locations mean production rates can be maintained at current or

higher levels over more than 10 years

As the GORR holder, Caledonian does not pay for this development, however will receive its 15%

royalty on an average 43% working interest in the area.

… There is significant

upside potential to

Caledonian as the GORR

holder

Forecast Gross Working Interest Production*

* Chart displays production to a 100% working interest. Caledonian’s Royalty is over an average 43% working interest.


Caledonian: A solid base through four initial

transactions

First Transaction - Compton

5% GORR on substantially all Compton’s producing

assets including 310,000 net acres of undeveloped lands.

Properties are located in Alberta.

Second Transaction – WCSB

Portfolio of GORR’s located in Western Canada. GORR

rate percentages from 2.5% to 15% on over 40 producing

oil and gas wells which are managed by qualified

operators.

Third Transaction – Lario Oil & Gas Company

Portfolio of long-life producing non operated working

interests in Alberta which are adjacent and

complementary to a large area of Caledonian’s other

GORR lands.

Fourth Transaction – Athabasca Royalty

100% exposure to natural gas with no production risk. A

direct play on increasing natural gas prices, free from

operating expenses, capital development expenses and

production risk.

$100.0m

$125.3m

$161.0m

$184.3m

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The Royalty Advantage: revenues are a direct play on

commodity prices, with reduced claims on revenues

Royalty Revenues Working Interest Revenues


The Royalty Advantage: A low risk play on commodity

prices

Risk Tower Claim on revenues

Federal & Provincial

Government

Royalties

Secured Creditors

Unsecured Creditors

Equity Holders

Exploration

Development

Working Interests production

Land

Royalties

High

Low


An active growth model

Caledonian plans to complete additional acquisitions to grow and support distributions to unit holders.

Caledonian’s Model of growth through low risk acquisitions

Pro

du

ctio

n

Time

Low Risk Accretive

Acquisition Yield

Vehicle

High Risk

Exploration &

Development

Growth through

acquisitions


Investment Opportunity Recap

Oil & Gas is an attractive commodity to own

Its a real asset, provides protection from inflation and has low correlation with financial assets.

Oil & Gas properties can have long economic lives – cash flows can be expected well into the future.

Its use in the global economy is pervasive and no viable alternative exist.

An attractive time for new capital to enter the market A buyers market

The current environment of low prices (especially for oil) has resulted in financial stressed operators.

Companies are facing significant pressure to raise capital

Quality assets can be acquired at attractive prices by cashed up buyers

Notwithstanding short term challenges the long term prospects for oil and gas prices are strong

Has the experience and expertise necessary to make opportunistic acquisitions to exploit the current

market.

Can quickly deploy capital to pre-identified and screened industry partners

Has a low risk, income focused business model

Provides the royalty advantage

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