CALGARY, ALBERTA–(Marketwired – May 2, 2016) – Freehold Royalties Ltd. (“Freehold” or the “Company”) (TSX:FRU) announced today that it has entered into a definitive agreement with Husky Energy Inc. (“Husky”) to acquire an extensive suite of royalty production and lands (the “Husky Assets”) for an aggregate purchase price of $165 million, prior to normal closing adjustments (the “Transaction”). The effective date of the Transaction will be January 1, 2016 with closing expected to occur on or about May 25, 2016, subject to regulatory approval and certain other closing conditions.
The Transaction will be funded by a $165 million bought deal equity financing (the “Public Offering”) led by RBC Capital Markets, CIBC and TD Securities Inc. on behalf of a syndicate of underwriters plus a $20 million concurrent private placement to CN Pension Trust Funds (as defined below) (the “Private Placement” and collectively, with the Public Offering, the “Financing”).
Acquisition Highlights
- The acquisition of the Husky Assets will significantly enhance the Company’s existing royalty asset base, adding an expected 1,700 boe/d (70% natural gas) of 2016 annualized royalty production and $11.4 million of 2016 annualized operating income (62% from oil and natural gas liquids). The Transaction is expected to increase royalties as a percentage of 2016 funds from operations to 94%.
- Freehold’s total fee lands will increase by 47% to approximately 1.0 million acres, while total royalty lands will increase by 74% to approximately 5.9 million acres. Freehold sees considerable upside through the addition of southeast Saskatchewan and Deep Basin assets while establishing a new key area in southwest Saskatchewan through the development of the Shaunavon oil trend.
- The Transaction is expected to be approximately 2% accretive to 2016 funds from operations per share (on an annualized basis excluding one-time G&A integration costs and based on 100% equity financing).
- Based on the equity financing details described below and our latest production guidance, Freehold’s 2016 expected net debt to funds from operations and basic payout ratio (including DRIP proceeds) improves to an estimated 1.7 times and 82%, respectively.
- The Husky Assets’ production base has a low decline of approximately 17% per year.
- Low counterparty risk is driven by a portfolio of well-established producers with a long history of development in Western Canada.
Increased 2016 Production Guidance
Assuming closing of the Transaction, Freehold has increased its 2016 average production guidance to 11,400 boe/d (previously 9,800 boe/d). The increase in production guidance reflects the additional production associated with the Husky Assets (approximately 1,000 boe/d in 2016 from the expected closing date of May 25, 2016 until the end of 2016) plus an increase in expected 2016 production (approximately 600 boe/d) associated with active drilling on our royalty lands in the first quarter of 2016, lower than expected shut-in heavy oil volumes and positive prior period adjustments.
Freehold expects to release its Q1 2016 results after market on May 11, 2016, where it will provide further disclosure on operating and financial assumptions for 2016.
Acquisition Financing
Freehold has entered into an agreement with RBC Capital Markets, CIBC and TD Securities, on behalf of a syndicate of underwriters, to issue, on a bought deal basis, 14,286,000 common shares at a price of $11.55 per share (the “Issue Price”) for gross proceeds of approximately $165 million pursuant to the Public Offering. Freehold has also granted the underwriters an over-allotment option to purchase, on the same terms, up to an additional 2,142,900 common shares at the Issue Price. The over-allotment option is exercisable by the underwriters, in whole or in part, at any time for a period of 30 days following the closing of the Public Offering.
Concurrent with the closing of the Public Offering, the pension trust funds for employees of Canadian National Railway Company (“CN Pension Trust Funds”) intend to purchase approximately 1,732,000 common shares on a non-brokered private placement basis at the Issue Price for gross proceeds of approximately $20 million pursuant to the Private Placement.
The aggregate gross proceeds to be raised by the Company pursuant to the Financing will be approximately $185 million before giving effect to any exercise of the over-allotment option by the underwriters. If the underwriters exercise the over-allotment in full, the aggregate gross proceeds to be raised by the Company pursuant to the Financing will be approximately $210 million.
Freehold expects to use the net proceeds from the Financing to complete the Transaction and the remainder to pay down a portion of its outstanding indebtedness.
Completion of the Financing is subject to certain conditions including customary regulatory and stock exchange approvals. In addition, the Public Offering will require that the Transaction close at or before the closing time of the Public Offering unless otherwise agreed to by the underwriters and Freehold. The common shares to be sold under the Public Offering will be offered in all provinces of Canada (excluding Quebec) by way of a short form prospectus. The closing of the Financing is expected to occur on or about May 25, 2016, but in any event before May 31, 2016.