NOT FOR DISSEMINATION IN THE UNITED STATES. FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF UNITED STATES SECURITIES LAW
CALGARY, Alberta, September 8th, 2021 – Freehold Royalties Ltd. (Freehold or the Company) (TSX) has entered into a definitive agreement (the Definitive Agreement) with a private seller to acquire high-quality U.S. royalty assets located in the Eagle Ford oil basin in Texas (the Acquired Assets) for US$180 million (CAD$227 million) (the U.S. Royalty Transaction). The Acquired Assets significantly enhance the quality of Freehold’s North American royalty portfolio, improving both the near-term and long-term sustainability of Freehold’s dividend while providing further option value to return capital to our shareholders through multiple years of free cash flow growth. The U.S. Royalty Transaction further advances Freehold’s strategy of being positioned in the highest quality development areas across North America, delivering growth and low-risk attractive returns to our shareholders.
The U.S. Royalty Transaction will be funded through a combination of a CAD$150 million bought deal treasury offering (the Offering) of subscription receipts of the Company (the Subscription Receipts) led by RBC Capital Markets and TD Securities Inc. on behalf of a syndicate of underwriters (the Underwriters) and utilization of Freehold’s credit facility.
U.S. Royalty Transaction Highlights
- Concentrated royalty land position in the core of the Eagle Ford oil basin in Texas across approximately 92,000 gross drilling unit acres with an average royalty rate of approximately 1.8%.
- 2022 forecasted royalty production of 2,500 boe/d (73% liquids) is expected to generate funds from operations of approximately $46 million in 2022.
- Significant multi-year inventory with approximately 500 gross future drilling locations identified for development. Development is expected to be supported by a well-capitalized investment-grade producer.
- Development and future drilling expected to be economic at US$30/bbl West Texas Intermediate (WTI).
- Strong well performance with average 90-day initial gross production rates of 1,200 boe/d (from 2018 through 2020) per well and average realized price of approximately $56/boe (first half of 2021). This compares favorably to Freehold’s average realized price of approximately $41/boe for the first half of 2021.
- Activity on the Acquired Assets has shown strong resilience and recovery with well completions in the first half of 2021 in-line with the same time period in 2019.
- The U.S. Royalty Transaction is immediately accretive to funds from operations per share by approximately 14% based on actual results for the first half of 2021 and is expected to be similarly accretive to funds from operations per share in 2022.
Strategic Rationale
The U.S. Royalty Transaction is a key element of Freehold’s strategy to continually enhance and position its royalty portfolio in 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 18% and 22% of the portfolio, respectively (based on the first half of 2021 actuals). In addition, after closing the U.S. Royalty Transaction, Freehold is forecasting production volumes to average between 11,750-12,250 boe/d for the second half of 2021 and expect production volumes to average 13,500-14,500 boe/d for 2022, representing 40%-50% growth in production over 2020. This growth in our portfolio is a culmination of focused execution of our business plan in 2021.
The Acquired Assets provide immediate production growth and further position Freehold “ahead of the drill bit” with royalty acres that we believe will continue to attract capital in the current WTI price environment, and at WTI prices well below current levels. The U.S. Royalty Transaction further underpins the sustainability of Freehold’s dividend while maintaining the core aspects of Freehold’s strategy, including maintaining conservative leverage ratios of less than 1.5x debt to funds from operations. The U.S. Royalty Transaction complements our environmental, social, and governance approach by aligning with competent and reputable payors in jurisdictions that support growth and responsible development.
Definitive Agreement
Concurrently, with the execution of the Definitive Agreement, Freehold will pay a deposit of US$27 million to be held in escrow by an escrow agent pending closing of the U.S. Royalty Transaction. The deposit will be credited to the purchase price of the Acquired Assets upon closing, provided that if the U.S. Royalty Transaction does not close for any reason other than for breach of the Definitive Agreement by Freehold, the deposit will be refunded to Freehold. In addition, if the U.S. Royalty Transaction does not close as a result of a breach of the Definitive Agreement by the seller, Freehold shall be entitled to an additional payment by the seller of US$27 million. The Definitive Agreement also contains customary representations, warranties, covenants, and conditions. Closing of the U.S. Royalty Transaction is subject to customary confirmatory due diligence and is expected to occur on or about September 28, 2021. In addition to customary purchase price adjustments, the Definitive Agreement provides for adjustments to the purchase price for any title defects for which Freehold gives notice to the seller prior to closing of the Acquisition, provided that in certain circumstances the seller will have the right to attempt to cure such title defects following the closing of the U.S. Royalty Transaction. Any unremedied title defects could also result in a portion of the Acquired Assets not being acquired by Freehold pursuant to the U.S. Royalty Transaction. Pursuant to the Definitive Agreement, the effective date of the U.S. Royalty Transaction is April 1, 2021.
Acquisition Financing
Freehold has entered into an agreement with RBC Capital Markets and TD Securities Inc., on behalf of the Underwriters, to issue, on a bought deal basis, 16,580,000 Subscription Receipts at a price of $9.05 per Subscription Receipt (the Issue Price) for gross proceeds of approximately $150 million pursuant to the 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 Offering to purchase up to 2,487,000 additional Subscription Receipts on the same terms as the Offering.
The gross proceeds from the sale of Subscription Receipts pursuant to the Offering 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 November 30, 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 Offering 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 November 30, 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 Offering is 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 Offering is expected to occur on or about September 22, 2021.