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Freedom20Financial

Freedom20Financial. TSE:PSD. Executive Summary. PSD is a true defensive play on natural gas pricing and E&P activity in Alberta with the capability of generating strong free cash flow for shareholders. Talk about story on how you found this stock perhaps. Strong FCF Generation.

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Freedom20Financial

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  1. Freedom20Financial TSE:PSD

  2. Executive Summary PSD is a true defensive play on natural gas pricing and E&P activity in Alberta with the capability of generating strong free cash flow for shareholders. Talk about story on how you found this stock perhaps Strong FCF Generation Attractive Valuation Emphasis on Shareholder Value Wide Economic Moat Leading player in niche industry Share buybacks Virtually zero incremental cost No substitute for data Super high margins 2% dividend with shitload of FCF No net income because of depreciation (wiped out of everybody’s screens prob) Recommendation: BUY Little textboxes outlining characteristics…FCF Yield80-85% EBITDA MarginLarge Player in niche industryStrong and Stable DividendUnique Accounting Competitive Advantage Target $4.31 Upside of 17% Current $3.77 Target Price Animation 20 second slide Unique Accounting-overstated CAPEX FCF Yield > 15% Competitive Advantages 80-85% EBITDA Margin Large Player in niche industry Strong and Stable Dividend

  3. M&A activity (also joint ventures) result in transfer fees paid to PSD to re-license the data (at approx. 50% of the original sale price of the license) and can be quite substantial • Ex. Encana paid PSD a $5-10mm fee (2011) • Required level of drilling activity must be met in order to retain the drilling license • Land reverts back to the Crown every 3-5 years to be re-licensed to other drilling companies • Seismic data is non-transferable and must be repurchased from PSD Condense high barriers to entry and expand the revenue model to two more boxes: data library and participation surveys, perhaps take revenue breakdown out of this slide altogether Market share Business model: 2D v 3D revenue Market share Clients Business Model Data library is relicensed perpetually at zero incremental cost Business Description Revenue Sources • Pulse Seismic is a market leader in the acquisition, marketing and licensing of seismic data to the Western Canadian energy sector • PSD owns a proprietary library of high-quality 2D and 3D data covering the rich sedimentary basin and is essential to oil and gas drilling Data Library Participation Surveys • Seismic data is a necessity for each E&P project • Data library is re-licensed perpetually to Oil & Gas companies • PSD assumes zero drilling risk • Vintage data in library (> 10 years) can be re-processed and re-licensed Mineral Rights Turnover M&A Generated Transfer Fees Strong Market Share High Margins, Low Cost Perpetual Licensing • Data is exclusive to geography, discourages players from surveying land for which existing data exists • Pricing power  E&P company cannot shop around for data • High quality data is extremely expensive; costs range up to $50k per km2 of 3D data • Reputation of data solicits underwriting of 70 – 75% of the CAPEX for new surveys by clients • Pulse has an existing controlling position in Western Canada with a data library costing $3.5bn to recreate • Barriers to entry create competitive advantage in most attractive plays to drill for natural gas ~Zero Incremental Cost 2D 3D 1% of development cost; average well cost of $13mm Land sales Avg. return of surveys: 161% Competitive Advantages • Pricing power in most attractive plays for gas • Oligopoly sustained through high barriers to entry: expensive to produce data, hence only one data provider per geographic location • 70% survey cost underwriting • 100% of data remains proprietary

  4. Stoney report has breakdown 2D v 3D Company Summary Committed Leadership Revenue Breakdown Experience • CEO Neal Coleman and CFO Pamela Wicks has combined 24 years with PSD Focused on Shareholders • Chairman Robert Robotti owns 2% of shares outstanding, and also indirectly through a 14.8% stake held by Ravenswood Management where he is a principal • Incentive plan is based upon shareholder free cash flow per share New Data 3D Data : 28,300 km2 2D Data: 340,000 km Proven Track Record • Acquisition of Divestco in 2010 • Immediately accretive to earnings and doubled its library Alberta and BC? Capital Structure Historical Performance LTM Financials Data Library $0.92 Sources: Capital IQ, Corporate Presentation • Looking to change incentive plan to minimum threshold of return on invested capital in data library for 2013 compensation

  5. Highest price since..due toInsert graph of Natural gas price bbg Low interest rate and gas prices  junior and inter. More financing to acquire and explore  Current Environment Low Interest Rate spurs activity for smaller players Natural Gas Prices highest since 2010 BMO Jr. Gas Index M n A has picked up this year due to better prices and more confidence CDN Interest Rate “…we sold a lot of 2D in 2007…I believe one of the main reasons for that was we had higher commodity prices, we had higher gas prices that led to the financing of a lot more junior companies.” - Neal Coleman, 2013 Q3 Earnings Call Western Canada Outlook • Long-term, capital intensive • Focus of WCSB activity Major Players Oil & Gas Play Montney Play Areas of major and long term CAPEX focus Price is currently linked to natural gas drilling, E n P programs from large oil players, Duvernay Play Natural Gas Drilling (# of wells) LNG projects in Kitimat & Prince Rupert seeks to revive drilling and clear up glut of supply. Reviving Exports LNG Terminals 2013 E n P activity lowest in years, bound to bounce back etc. etc. LNG Terminals Land Sales Transportation bottlenecks are set to be cleared with LNG terminals set up in Alberta, prices were depressed because of US shale gas supply Transportation bottlenecks are set to be cleared with LNG terminals set up in Alberta, prices were depressed because of US shale gas supply

  6. LNG Terminals in Construction Horizontal Well with Multi-Stage Frac Technology Catalysts Chevron acquired additional 68,000 acres in the Duvernay in August 2013: “…we have been encouraged by the reservoir data and production performance from our exploration drilling program on our KaybobDuvernay leases. We are pleased to add to our acreage in this play as we advance our program…” - Jeff Lehmann, Chevron Canada President Increasing Presence from Large Players Better-than-expected Resource Estimates Incentivizes Future Drilling Need for More 3D Data

  7. Relative Valuation Considerations EV/EBITDA Multiple - Peers Revenue Segments EBITDA Margins - Peers Avg. 40% Avg.4.7x TGS Nopec: Diversified Dawson: Diversified Pulse Seismic: Pure Play Lack of comparable operations within industry Precedent Transactions Replacement Value Limited universe for seismic transactions Cost to recreate PSD’s library ~$3bn

  8. E&P Cycle EBITDA Focus Explain Unpredictability of Revenue DCF Inputs CAPEX Rationale WACC DCF Valuation Revenue Growth per Scenario End of run-up Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull Bear Case: No exceptional data sale assumed Base Case: Assumed a large data sale of $20 million in 2016 Bull Case: Assumed extraordinary M&A activity and data sale of $20 million in 2015 and 2017 Graph is fine, want three bars for 2014-2018 for bear, base, bull cases projecting revenue; little boxes on top of different years to describe which assumptions we made DCF Inputs Sensitivity Analysis (Base) 2% size premium added to WACC

  9. Valuation Summary

  10. Perfect buying opportunity Why isnt it priced in? doubled in 3 years E&P Companies Risks 2D Substitutes: Cheaper but sub-par to 3D Bigger, Faster, Stronger • New terminals in BC • New fracking techniques, long horizontal well lengths means larger surveying land needed • Page 9 of TD has a good graph Dashed box saying how it is the leading player in Alberta with Seitel and only will continue to grow, appendix will have list of small 100km buys they have had Per Q3 transcript, not looking to acquire small patches, looking to acquire a ton of data in one go if possible Price chart at takeover Takeover potential Continuing Land Transfers • Important to note that this was all before Divestco acquisition which ~doubled its data library for 75mm • 13,500 of 3D and 82,000 of 2D • Average premium at time of takeovers were ~20%+ • Record land sales last two years ~7bn • Mineral Rights in Alberta plays perfectly into PSD’s favour • 81% of land is owned by the provincial government and 19% is owned by federal • Land is reverted to the Crown perpetually on a 3-5 year basis Historic Land Sales graph, highlight 2014

  11. We reiterate a BUY rating with one-year target price of $XX • Strong FCF generation • Sustainable business model • Perfect Storm • Improving M & A environment • E & P activity also picking up Conclusion Reiterate BUY: Target $4.31 No significant risks Improving Operating Environment Strong FCF Generation Sustainable Business Model

  12. Q & A Rebecca Yao 3A BAFM Derek Wan 3A BAFM

  13. Recent Activity Initial Target Price Upside of 23% Current $3.50 Target $4.31 PSD saw a run-up of 9% over the last week. Shares rose from $3.50 to as high as $3.83.

  14. Share Buybacks and Insider Buying Consistently max out NCIB and returns FCF to shareholders 2012 Capital Allocation • Consistently max out 10% buyback a year, uses cash flow to buy back shares • average price that they buy shares back has been around $3.36/share this year for ~2.2mm shares, average weighted price of buyback at $3.86/share in Q32013 • Purchased back ~5mm shares during 2012 with an estimated average weighted price of $2.09/share • Pays $0.08 dividend a year • Despite poor Q4 results, Management has reiterated that it does not intend to cut the dividend Chart of insider buying Source: Capital IQ • Neal Coleman and Pamela Wicks has bought additional shares since heading the company in 2012 • Both have bought stock in the open market over the last year at an average price of ~3.20 • Insiders currently own 6.01% of shares outstanding • Significant liquidity on the stock despite low market cap, as it has a 93% float

  15. Executive Compensation Emphasis on Delivering Value to Shareholders • Short-Term and Long-Term Incentive Plan encourages near term and 2 - 5 year value creation • Performance measured by FCF generated per share • Paid 3.5% of FCF generated over base SFCF threshold, 2012  $0.21/share, incentive plan capped at $1.2mn • Encourages buy backs and cash flow generation Sources: Bloomberg, Corporate Document

  16. Major Shareholders Major Shareholders and Related Parties Top Shareholder Robotti & Co. (Private Firm) Parent Ravenswood Management Co., LLC General Partner Ravenswood Investment Co. (Private) Total Shares Outstanding ~59.3mm Pulse Seismic Inc. Sources: Bloomberg, Corporate Document

  17. FCF Generation Historical FCF Yield Heavily discounted for the amount of FCF it generates Pulse Seismic is one of six Energy companies on the TSX to generate >10% FCF Yield last year Highest EBITDA margin %, yet trading at one of the lower EV/EBITDA multiples

  18. INSERT Correlation GRAPH Isnt really any because when oil n gas companies reduce capex in times of low commodity prices, they buy off-the-shelf data rather than shoot participating Natural Gas Prices Correlation Little correlation to natural gas prices (R2 = -0.34) Natural Gas PSD Correlation may arise with 2D sales as junior players are sensitive to gas prices. PSD as a whole is not correlated because of the focus on 3D and intermediate to large clientele. Source: Capital IQ

  19. Amortization We posted a record level of seismic data library amortization, a non-cash expense during the first 9 months of this year. $29 million of the $49 million library amortization expense, relates to the initial 50% amortization provision recorded upon completion of the 2013 3D surveys. This high amortization expense often results in Pulse having low or no earnings. And in this case, for the 9 months ended September 30, we show a $16.3 million loss. Neal Coleman -2013 Q3 Earnings Call

  20. Low Fixed Cost Base Longevity of 2D Library Distribution of Costs Draw graph for fixed cost over the years Another graph for the cost underwriting Excess CAPEX = Growth from acquisition of data (i.e. Divestco) Maintenance CAPEX Proxy Repeat Revenues on Surveys "Virtually all capital expenditures are additive to our library, as we have minimal true "maintenance" capital expenditurerequirements. However, we estimate that approximately $25.0 MM of net cash capital expenditures are required annually tooffset declines…” – Seitel Inc. (2012 10-K) Seitel Inc. 2012 CAPEX: $87.5mm Maintenance CAPEX: ~ 30% 516% return to date on 7 surveys shot in 2004 Minimal SG&A and virtually zero COGS CAPEX funded 70-80% Minimal maintenance Capital allocation to growth Pulse Seismic 2012 CAPEX*: $11.5mm Maintenance CAPEX: ~ 30% x 11.5mm = $3.5mm annually Minimal CAPEX required ($3.5M) – can sit on existing library * ”true” CAPEX calculated as Gross CAPEX – Participation Survey Revenue Source: Capital IQ, Company Documents

  21. Low Analyst Coverage Only smaller, boutique shops are currently covering PSD Historical chart of Price targets, initiating coverage, shop, etc. Source: Capital IQ Investment Research

  22. Beta and WACC Regressed 5Y Beta of 0.11 • Does not reflect true risk of PSD compared to market • No comparable index for PSD Industry WACC PSD’s pure play nature and small cap (~$210mm) suggests a premium on beta and WACC. Source: Capital IQ, NYU Stern, Bloomberg

  23. Comparables PSD is the only pure play data library in Canada Source: Capital IQ

  24. DCF - Summary

  25. DCF - Detailed

  26. MontneyPlay • Forecasted increase activity in Montney through 2020 • Horn River provides demand for seismic data Source: Capital IQ

  27. Duvernay Well-positioned in the Duvernay Three 3D surveys totaling over 1,180 sq. km completed in 2013 Source: Capital IQ

  28. West Canada LNG Projects • Prince Rupert LNG – BG Group • Pacific Northwest LNG – Petronas, Progress • Kitimat LNG – Apache Canada, Chevron Canada • LNG Canada – Shell, PetroChina, Korea Gas Corp, Mitsubishi

  29. Technological advances in seismic 2D’s grid gathers less data points 3D is much clearer • Seismic data was first used in 1940s to explore the WCSB • 1970s digital recording was starting to be used where it gave a much clearer picture to 2D • 1980s and 1990s 3D was introduced; drastically improved quality again • adds depth to the picture, reduced each signal grid to 25m or less compared to 2D of 1km http://www.basins.utah.edu/Classes/SSS/pdfs/Cartwright%20and%20Huuse.pdfhttp://www.mustagh.com/abstract/OPI_3D.html

  30. Technological advances in drilling • Horizontal drilling • Up to 10,000 feet vertical and one mile horizontally • Costly but gives cost advantages • More efficient and higher recovery rate (produces up to 20x more) • Average oil supply cost, vertical: $64/barrel, horizontal $40/barrel in WCSB for 2012 • Hydraulic Fracturing “Multistage Fracking” • Supplement to horizontal drilling • Breaks the rocks to unearth moreof the hydrocarbon (mostly for shale gas) http://www.forbes.com/sites/davidblackmon/2013/01/28/horizontal-drilling-a-technological-marvel-ignored/ http://www.oilandgasinquirer.com/index.php/news/general/484-horizontal-oil-wells-deliver-cost-advantage-says-ceri-study

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