/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, Sept. 8, 2021 /CNW/ - Freehold Royalties Ltd.
(Freehold or the Company) (TSX: FRU) 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 of 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 been 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.
In connection with entering into the Definitive Agreement with
respect to the U.S. Royalty Transaction, Freehold requested and
received commitments from its syndicate of banks sufficient to
increase its bank credit facilities to $230
million from $180 million,
exercisable at Freehold's discretion. In addition, Freehold has
commenced the process of seeking an increase to the borrowing limit
of the credit facilities above $230
million. Any increase of the credit facilities beyond
$230 million will be subject to
execution of definitive documentation by Freehold and its lenders
providing for such increase.
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 September 8th,
2021 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; the number of potential drilling
locations associated with the Acquired Assets; the expectation that
wells associated with the Acquired Assets will be economic at
US$30/bbl WTI pricing; 2022 average
net daily royalty production (including the liquids weighting of
such production) from the Acquired Assets; the expectation that
development of the Acquired Assets will be supported by a
well-capitalized investment grade producer; the forecasted 2022
funds from operations from the Acquired Assets; the expectation
that accretion for funds from operations in 2022 resulting from the
U.S. Royalty Transaction will be similar to the first half of 2021;
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 average net daily production for Freehold for the second
half of 2021 and for the full year 2022; 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
conservative leverage ratios of less than 1.5x debt to funds from
operations; the expected terms of the Public Offering; the expected
terms of the Subscription Receipts; the expected use of proceeds
from the Offering; the expected timing of closing the Offering; and
the expected increase to Freehold's credit facilities.
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, Offering 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, Offering 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. In addition, to the extent any title defects are
discovered and unremedied it may result in Freehold not acquiring
all of the Acquired Assets. Accordingly, there is a risk that the
U.S. Royalty Transaction, Offering 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, 2020 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 2022 forecast production
and 2022 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$65/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$0.78 for every CDN$1.00); that drilled uncompleted wells will be
completed in the short term and brought on production; that wells
that have been permitted will be drilled 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 2022 net production from the Acquired
Assets is expected to consist of approximately 50% of light oil,
23% of natural gas liquids and 27% of natural gas. In the second
half of 2021 Freehold's aggregate net production is expected to
consist of approximately 9% heavy oil, 39% light and medium oil,
10% natural gas liquids and 42% of natural gas. In 2022 Freehold's
aggregate net production is expected to consist of approximately 8%
heavy oil, 40% light and medium oil, 12% natural gas liquids and
40% natural gas.
Currency
All references in this press release to dollar amounts are to
Canadian dollars unless otherwise indicated.
Initial Production Rates
References in this press release to initial production rates,
other short-term production rates or initial performance measures
relating to new wells are useful in confirming the presence of
hydrocarbons; however, such rates are not determinative of the
rates at which such wells will commence production and decline
thereafter and are not indicative of long-term performance or of
ultimate recovery. Additionally, such rates may also include
recovered "load oil" fluids used in well completion stimulation.
While encouraging, readers are cautioned not to place reliance on
such rates in calculating the aggregate production for the Company.
A pressure transient analysis or well-test interpretation has not
necessarily been carried out in respect of all wells. Accordingly,
the Company cautions that the test results or initial production
rates should be considered to be preliminary.
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 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. 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.