/NOT FOR DISSEMINATION IN THE UNITED STATES. FAILURE TO COMPLY WITH THIS
RESTRICTION MAY CONSTITUTE A VIOLATION OF UNITED STATES SECURITIES LAW./
TSX: FRU
CALGARY, AB, Nov. 24, 2020 /CNW/ - Freehold Royalties
Ltd. (Freehold) (TSX: FRU) has entered into a definitive agreement
with a private seller to acquire a diversified, high quality, U.S.
royalty package (the Acquired Assets) for US$58 million (the U.S. Royalty Transaction). The
Acquired Assets will play a key role in strengthening the
resiliency of our portfolio in a volatile oil price environment,
enhancing the near-term and long-term sustainability of Freehold's
dividend and providing option value to return capital to our
shareholders through multiple years of free cash flow growth. The
U.S. Royalty Transaction is in-line with our strategy to be a
premier royalty company, be positioned in high quality development
areas across North America and
deliver growth and low risk attractive returns for our
shareholders.
The U.S. Royalty Transaction will be funded through a
combination of $43 million bought
deal treasury offering of subscription receipts (the Public
Offering) led by RBC Capital Markets and TD Securities Inc. on
behalf of a syndicate of underwriters, a concurrent $13.4 million private placement of subscription
receipts to CN Pension Trust Funds (as defined below) (the Private
Placement) and utilization of Freehold's existing credit
facility.
Transaction Highlights
- 400,000 gross acres of mineral title and overriding royalty
interest across 12 basins in eight states; predominantly weighted
towards high quality, commodity price resilient areas of the
Permian and Eagle Ford basins which continue to see active drilling
and development
- 2021 forecast estimated royalty production from the Acquired
Assets of 1,150 boe/d (62% liquids), projected to grow to 1,450
boe/d by 2022. Approximately 70% of this near-term development is
underpinned by drilled but uncompleted wells (DUCs)
- The Acquired Assets are expected to generate funds from
operations of $12 million in
2021
- Diversified portfolio of 100+ well capitalized U.S. royalty
payors and exposure to over 1,800 producing wells
- The Acquired Assets attracted approximately 1.2% of all lower
48 U.S. onshore E&P spending over the past five years.
Currently, there are five active rigs and 31 gross wells were
drilled on the lands from April to September, similar to drilling
activity levels on Freehold's entire Canadian portfolio during the
same period
- Over 2,400 development locations with 70% of the portfolio
providing economic returns for the producer at West Texas
Intermediate (WTI) oil prices of US$40/bbl; over 90% of development locations
economic at US$45/bbl WTI
- Significantly enhances Freehold's existing portfolio and is
accretive to production per share, operating netback, liquids
weighting and growth profile. The U.S. Royalty Transaction is
accretive to funds from operations per share by approximately 5%
based on actual results for the first nine months of 2020. Funds
from operations per share accretion for 2021 is expected to be
similar
Strategic Rationale
The transaction is in-line with Freehold's objective to
continually enhance and position its royalty portfolio into the
most economic and active development plays in North America, part of which includes
expanding our U.S. footprint. After closing the U.S. Royalty
Transaction, production and funds from operations from the Acquired
Assets will represent approximately 11% and 16% of the portfolio,
respectively. In addition, after closing the U.S. Royalty
Transaction, Freehold is forecasting production volumes to average
between 10,000-10,500 boe/d for 2021.
The Acquired Assets enhance our near-term growth profile and
further position Freehold "ahead of the drill bit" with royalty
acres that we believe will attract capital at or below the current
WTI price environment. The U.S. Royalty Transaction further
enhances the sustainability of Freehold's dividend while
maintaining the core aspects of Freehold's strategy including its
60-80% dividend payout and maintaining conservative leverage ratios
of less than 1.5x debt to funds from operations. The U.S. Royalty
Transaction complements our ESG approach of aligning with competent
and reputable payors in jurisdictions that support growth and
responsible development.
Acquisition Financing
Freehold has entered into an agreement with RBC Capital Markets
and TD Securities Inc., on behalf of a syndicate of underwriters
(the Underwriters) to issue, on a bought deal basis, 8,960,000
subscription receipts (Subscription Receipts) at a price of
$4.80 per Subscription Receipt (the
Issue Price) for gross proceeds of approximately $43 million pursuant to the Public Offering. Each
Subscription Receipt will entitle the holder thereof to receive one
common share of Freehold upon closing of the U.S. Royalty
Transaction. The Underwriters have been granted an over-allotment
option exercisable in whole or in part, until 30 days following the
closing of the Public Offering to purchase up to 896,000 additional
Subscription Receipts on the same terms as the Public Offering.
Concurrent with the closing of the Public Offering, Freehold
will also complete a non-brokered private placement of 2,800,000
subscription receipts to the pension trust funds for employees of
Canadian National Railway Company (CN Pension Trust Funds) at a
price per Subscription Receipt equal to the Issue Price, for
proceeds of approximately $13.4
million pursuant to the Private Placement. After closing the
U.S. Royalty Transaction, CN Pension Trust Funds will maintain
their previous ownership level in Freehold at approximately
22%.
The gross proceeds from the sale of Subscription Receipts
pursuant to the Public Offering and Private Placement will be held
in escrow pending the completion of the U.S. Royalty Transaction.
If all outstanding conditions to the completion of the U.S. Royalty
Transaction (other than funding) are met on or before March 1, 2021, the net proceeds from the sale of
the Subscription Receipts will be released from escrow to Freehold
or as otherwise directed by Freehold. Upon release of the escrowed
funds to Freehold, the holders of Subscription Receipts (without
any action or payment of any additional consideration on the part
of the holder) will receive one common share of Freehold for each
Subscription Receipt held.
Holders of the Subscription Receipts will be entitled to receive
payments per Subscription Receipt equal to the cash dividends paid
on Freehold's common shares (the Dividend Equivalent Payments), if
any, actually paid or payable to holders of such common shares in
respect of all record dates for such dividends occurring from the
closing date of the Public Offering and Private Placement to, but
excluding, the last day on which the Subscription Receipts remain
outstanding, to be paid to holders of Subscription Receipts
concurrently with the payment date of each such dividend. The
Dividend Equivalent Payments will be made regardless of whether the
U.S Royalty Transaction is completed or not. If the U.S. Royalty
Transaction is not completed at or before 5:00 p.m. (Calgary time) on March
1, 2021, then the subscription price for the Subscription
Receipts will be returned to holders of Subscription Receipts,
together with any unpaid Dividend Equivalent Payments.
Upon release of the escrowed funds to Freehold such funds are
anticipated to be used to pay a portion of the purchase price
for the Acquired Assets with the remainder of the purchase price
funded by drawing on our existing credit
facilities. Completion of the Public Offering and Private
Placement are subject to certain conditions including normal
regulatory and Toronto Stock Exchange approvals. The Subscription
Receipts will be offered via short form prospectus in each of the
provinces of Canada, other than
Québec, and to Qualified Institutional Buyers in the United States pursuant to the registration
exemptions provided by Rule 144A of the Securities Act of 1933, and
internationally as permitted. Closing of the Public Offering and
Private Placement is expected to occur on or about December 9, 2020. Closing of the U.S. Royalty
Transaction is subject to customary confirmatory due diligence and
closing is expected to occur on or about January 5, 2021.
This press release is not an offer of the securities for
sale in the United States. The
securities may not be offered or sold in the United States absent registration or an
available exemption from the registration requirements of the U.S.
Securities Act of 1933, as amended (the "U.S. Securities Act") and
applicable U.S. state securities laws. Freehold will not make any
public offering of the securities in the
United States. This press release shall not constitute an
offer to sell or the solicitation of an offer to buy, nor shall
there be any sale of these securities, in any jurisdiction in which
such offer, solicitation or sale would be unlawful.
Forward-Looking Statements
This news release offers our assessment of Freehold's future
plans and operations as at November 24,
2020 and contains forward-looking information including,
without limitation, forward-looking information with regards to the
expected terms and conditions of the U.S. Royalty Transaction; the
expected timing for closing of the U.S. Royalty Transaction; the
expected attributes and benefits to be derived by Freehold pursuant
to the U.S. Royalty Transaction; the expectation that the U.S.
Royalty Transaction will enhance the long-term sustainability of
Freehold's dividend and provide option value to return capital to
Freehold's shareholders through multi-years of free cash flow
growth; Freehold's intent to deliver growth and low risk attractive
returns for our shareholders; expected 2021 and 2022 average net
daily production (including the liquids weighting of such
production) and 2021 funds from operations from the U.S. Royalty
Transaction; the number of potential drilling locations associated
with the Acquired Assets including how many are economic at
different commodity price levels; the expectation that U.S. Royalty
Transaction will be accretive to production per share, netback,
liquids weighting and growth profile; the expectation that 2021
funds from operations accretion from the Acquired Assets will be
similar to accretion in 2020; the percentage of production and
funds flow from operations that the Acquired Assets are expected to
account for relative to Freehold's aggregate production and funds
flow from operations; the expected 2021 average net daily
production for Freehold; the expectation that the Acquired Assets
will enhance our near-term growth profile and further position with
royalty acres we believe will attract capital at or below the
current WTI price environment; the expectation that the U.S.
Royalty Transaction will further enhance the sustainability of
Freehold's dividend while maintaining Freehold's strategy including
its 60-80% dividend payout and maintaining conservative leverage
ratios of less than 1.5x debt to funds from operations; the
expected terms of the Public Offering and Private Placement; the
expected terms of the Subscription Receipts; the expected use of
proceeds from the Public Offering and Private Placement, and the
expected timing of closing the Public Offering and Private
Placement.
This forward-looking information is provided to allow readers to
better understand our business and prospects and may not be
suitable for other purposes. By its nature, forward-looking
information is subject to numerous risks and uncertainties, some of
which are beyond our control, including the impact of the COVID-19
pandemic on economic activity and demand for oil and natural gas,
general economic conditions, industry conditions, volatility of
commodity prices, currency fluctuations, imprecision of reserve
estimates, royalties, environmental risks, taxation, regulation,
changes in tax or other legislation, competition from other
industry participants, the lack of availability of qualified
personnel or management, stock market volatility, our ability to
access sufficient capital from internal and external sources. The
closing of the Transaction, Public Offering and Private Placement
could be delayed if Freehold or the other parties are not able to
obtain the necessary regulatory and stock exchange approvals on the
timelines anticipated. The U.S. Royalty Transaction, Public
Offering and Private Placement may not be completed if these
approvals are not obtained or some other condition to the closing
of the U.S. Royalty Transaction is not satisfied. Accordingly,
there is a risk that the U.S. Royalty Transaction, Public Offering
and Private Placement will not be completed within the anticipated
time or at all. Risks are described in more detail in Freehold's
annual information form for the year ended December 31, 2019 which is available under
Freehold's profile on SEDAR at www.sedar.com.
With respect to forward looking information contained in this
press release including relating to the 2021 and 2022 forecast
production and 2021 forecast funds from operations from the
Acquired Assets, we have made assumptions regarding, among other
things; future oil and natural gas prices (for the purposes of the
estimates in this press release we have assumed a West Texas
Intermediate price of US$43/barrel of
oil and a NYMEX natural gas price of US$3.00/MMbtu); future exchange rates (for the
purposes of the estimates in this press release we have assumed an
exchange rate of US$0.77 for every
CDN$1.00); that DUCs will be
completed in the short term and brought on production; that wells
that have been permitted will be drilling and completed within a
customary timeframe; expectations as to additional wells to be
permitted, drilled, completed and brought on production in 2021 and
2022 based on Freehold's review of the geology and economics of the
plays associated with the Acquired Assets; expected production
performance of wells to be drilled and/or brought on production in
2021 and 2022; the ability of our royalty payors to obtain
equipment in a timely manner to carry out development activities;
the ability and willingness of royalty payors to fund development
activities relating to the Acquired Assets; and such other
assumptions as are identified herein.
You are cautioned that the assumptions used in the preparation
of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance
should not be placed on forward looking information. We can give no
assurance that any of the events anticipated will transpire or
occur, or if any of them do, what benefits we will derive from
them. The forward-looking information contained herein is expressly
qualified by this cautionary statement. To the extent any guidance
or forward looking statements herein constitute a financial
outlook, they are included herein to provide readers with an
understanding of management's plans and assumptions for budgeting
purposes and readers are cautioned that the information may not be
appropriate for other purposes. Our policy for updating
forward-looking statements is to update our key operating
assumptions quarterly and, except as required by law, we do not
undertake to update any other forward-looking statements.
You are further cautioned that the preparation of financial
statements in accordance with International Financial Reporting
Standards requires management to make certain judgments and
estimates that affect the reported amounts of assets, liabilities,
revenues, and expenses. These estimates may change, having either a
positive or negative effect on net income, as further information
becomes available and as the economic environment changes.
Drilling Locations
This press release discloses anticipated future drilling or
development locations associated with the Acquired Assets, all of
which are currently considered unbooked locations. Unbooked
locations are generated by internal estimates of Freehold
management based on prospective acreage and an assumption as to the
number of wells that can be drilled per section based on industry
practice and internal review. Unbooked locations do not have
attributed reserves or resources. Unbooked locations have been
identified by management as an estimation of the multi-year
drilling activities on the Acquired Assets based on evaluation of
applicable geologic, seismic, engineering, historic drilling,
production, commodity price assumptions and reserves information.
There is no certainty that all unbooked drilling locations will be
drilled and if drilled there is no certainty that such locations
will result in additional oil and gas reserves, resources or
production. Freehold has no control on whether any wells will be
actually drilled in respect of such unbooked locations. The
drilling locations on which wells are actually drilled will
ultimately depend upon the capital allocation decisions of royalty
payors who have working interests in respect of such drilling
locations and a number of other factors including, without
limitation, availability of capital, regulatory approvals, oil and
natural gas prices, costs, actual drilling results, additional
reservoir information that is obtained and other factors. While
certain of the unbooked drilling locations have been de-risked by
drilling existing wells in relative close proximity to such
unbooked drilling locations, other unbooked drilling locations are
farther away from existing wells where management has less
information about the characteristics of the reservoir and
therefore there is more uncertainty whether wells will be drilled
in such locations and if drilled there is more uncertainty that
such wells will result in additional oil and gas reserves,
resources or production. Upon purchase of the Acquired Assets,
Freehold will have the reserves associated with the Acquired Assets
evaluated by an independent qualified reserves evaluator in
accordance with the requirements of National Instrument 51-101 –
Standards of Disclosure for Oil and Gas Activities and it
will be determined at such time whether any of the unbooked
drilling locations disclosed herein are booked for the purposes of
such evaluation with associated proved or probable
reserves.
Production
All production disclosed herein is considered net production for
the purposes of National Instrument 51-101 – Standards of
Disclosure for Oil and Gas Activities, which includes
Freehold's working interest (operating and non-operating) share
after deduction of royalty obligations, plus our royalty interests.
Since Freehold has minimal working interest production, net
production is substantially equivalent to Freehold's royalty
interest production. In 2021 net production from the Acquired
Assets is expected to consist of approximately 535 bbls/d of light
and medium oil, 180 bbls/d of natural gas liquids and 2,600 mcf/d
of natural gas and in 2022 net production from the Acquired Assets
is expected to consist of approximately 650 bbls/d of light and
medium oil, 290 bbls/d of natural gas liquids and 3,100 mcf/d of
natural gas. In 2021 Freehold's aggregate net production is
expected to consist of approximately 5,000 bbls/d of light and
medium oil, 630 bbls/d of natural gas liquids and 26,000 mcf/d of
natural gas.
Conversion of Natural Gas to Barrels of Oil Equivalent
(BOE)
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). We use the
industry-accepted standard conversion of six thousand cubic feet of
natural gas to one barrel of oil (6 Mcf = 1 bbl). The 6:1 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 6:1 energy equivalency ratio,
using a 6:1 conversion ratio may be misleading as an indication of
value.
Non-GAAP Financial Measures
Within this news release, references are made to terms commonly
used as key performance indicators in the oil and gas industry. We
believe that operating netback, payout ratio and free cash flow are
useful supplemental measures for management and investors to
analyze operating performance, financial leverage, liquidity and
sustainability of our dividend, and we use these terms to
facilitate the understanding and comparability of our results of
operations and financial position. However, these terms do not have
any standardized meanings prescribed by GAAP and therefore may not
be comparable with the calculations of similar measures for other
entities. Operating netback, which is calculated as average unit
sales price less royalty and operating expenses, represents the
cash margin for product sold, calculated on a per boe basis.
Payout ratios are often used for dividend paying companies in the
oil and gas industry to identify its dividend levels in relation to
the funds it receives and uses in its capital and operational
activities. Freehold's payout ratio is calculated as dividends paid
as a percentage of funds from operations. Free cash flow is
calculated by subtracting capital expenditures from funds from
operations. In periods where Freehold has no capital expenditures,
this figure is interchangeable with funds from operations. Free
cash flow is a measure often used by dividend paying companies to
determine cash available for the payment of dividends, reducing
debt or available for investment. We refer to various per boe
figures which provide meaningful information on our operational
performance. We derive per boe figures by dividing the relevant
revenue or cost figures by the total volume of oil, NGL and natural
gas production during the period, with natural gas converted to
equivalent barrels of oil as described above. For further
information related to these non-GAAP terms, including
reconciliations to the most directly comparable GAAP terms, see our
most recent management's discussion and analysis, which is
available on SEDAR at www.sedar.com.
SOURCE Freehold Royalties Ltd.