Freehold Royalties buys 3% Duvernay royalty from Refraction Energy for up to C$65 million

Freehold Royalties Ltd. agreed on Tuesday to buy a 3% gross overriding royalty on more than 179 sections of undeveloped Duvernay land in west-central Alberta, for up to C$65 million in cash.

Refraction Energy Corp. operates the lands. Freehold will pay C$20 million when the deal closes, which it expects in the fourth quarter of 2026, and the rest in tranches over 2027 and 2028 as development advances. The total includes a C$5 million performance payment tied to production milestones that Freehold expects in 2028.

For Freehold shareholders, the structure limits what the company pays before any wells exist. The later tranches coincide with stages of development, so Freehold pays more only as Refraction advances the lands, and it collects a share of revenue if wells are drilled.

Freehold sees the Duvernay royalty reaching 5% to 10% of Canadian output

Freehold said production from the lands could grow to between 5% and 10% of its total Canadian production over the next decade. Canadian output averaged 8,445 barrels of oil equivalent a day in the third quarter, so on that base the range works out to roughly 420 to 845 barrels a day. The base will change as other Canadian volumes move.

The price also converts to a rate per section. Spread across 179 sections, the maximum payment is about C$363,000 a section, and the true figure is lower because the acreage exceeds 179 sections. Only C$20 million is due at closing, and the later tranches follow development.

Freehold also holds an option to invest alongside the operator in additional lands around the block. Refraction describes itself as a Calgary-based exploration and production company that acquires, develops and operates oil and gas assets across the Western Canadian Sedimentary Basin, partnered with Houston-based Carnelian Energy Capital Management, L.P.

The Alberta Energy Regulator, using an evaluation by McDaniel and Associates Consultants Ltd., assessed total proved plus probable Duvernay reserves at 5.57 billion barrels of oil equivalent. That figure combines 17.7 trillion cubic feet of gas, 1.74 billion barrels of oil and 0.89 billion barrels of condensate. The regulator notes the estimates are effective December 31, 2023, and may not compare directly with company reserves.

Freehold cut net debt to C$234 million before agreeing the Duvernay purchase

Freehold reported third-quarter funds from operations of C$80 million, or C$0.49 a share, up 37% from a year earlier. It cut net debt by C$17 million to C$234 million, which is 0.9 times trailing funds from operations against 1.0 times at the end of the second quarter.

Dividends took C$44 million in the quarter, a 55% payout ratio. The company declared a monthly dividend of C$0.09 a share, payable December 15 to holders of record on November 30.

On the same day, Freehold amended and restated its credit facilities with its Canadian bank syndicate. Maturity moves from November 2028 to November 2030, and the facilities provide C$500 million of capacity with an accordion of up to C$100 million more, subject to lender consent.

The Duvernay commitment is small beside Freehold's past deal making. Acquisitions and related spending totalled C$277 million in the fourth quarter of 2024, against C$16.9 million in the latest quarter, which went mainly to undeveloped Permian Basin mineral title and royalty lands.

Operators drilled 120 gross wells on Freehold's Canadian lands in the third quarter

Canadian drilling on Freehold lands rose from 74 gross wells in the second quarter to 120 in the third. Southeast Saskatchewan accounted for 42 of them and the Clearwater for 18, and Clearwater output reached nearly 7% of Freehold's Canadian production.

Across Canada and the United States, operators drilled 412 gross wells, or 4.2 net, compared with 300 gross and 2.7 net in the prior quarter. Freehold's realized price averaged C$66.83 a barrel of oil equivalent, up from C$48.92 a year earlier.

David M. Spyker, Freehold's President and Chief Executive Officer, wrote in the president's message of the quarterly release: "We look forward to working with our partner to grow the asset to its full potential over the next several years."

Freehold expects the Duvernay transaction to close in the fourth quarter of 2026, when the first C$20 million tranche falls due.