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Overriding Royalty
In 2009, Caledonian Royalty Corporation negotiated the purchase of a 5
percent gross overriding royalty on the oil and gas properties of
Compton Petroleum Corporation, a mid-sized Canadian energy producer for
a total cost of $100 million. This unique investment opportunity, which
is comprised of an initial 2.5 percent royalty with an option on an
additional 2.5 percent royalty, has not been available in the Canadian
oil and gas sector historically.
The royalty covers existing production and potential future production
from a large undeveloped land base. Royalty Units offered by Caledonian
Royalty Corporation allow investors to participate in the royalty
opportunity with the following features:
- Top line cash flow stream based upon gross revenues;
- A registered interest in land representing a secure source of revenue;
- The royalty ranks ahead of banks and other creditors;
- The investment is weighted to natural gas which enables investors to
participate in the expected recovery of natural gas markets.
As a result of the recent economic downturn and decline in crude oil and
natural gas prices, it has become challenging for smaller and
medium-sized oil and gas companies to raise new equity or debt capital.
In addition, the banking industry has generally reduced its exposure to
the resource sector as a result of internal constraints. Caledonian’s
purchase of the gross overriding royalty enables Compton to raise funds
at a reasonable cost while retaining control of the assets. Investors in
this broadly structured royalty have a low-risk, high-yield
participation in cash flow from Compton’s properties that is not
burdened by rising operating and capital costs.
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