NOT FOR DISSEMINATION IN THE UNITED STATES. FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF UNITED STATES SECURITIES LAW.
CALGARY, Alberta, November 24, 2020 – Freehold Royalties Ltd. (Freehold) (TSX) 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, positioned in high-quality development areas across North America, delivering 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 are 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.
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.