Freehold Royalties Ltd.
(FRU-T) C$11.40
FRU IR Day Outlines Material Business Improvements
Event
Investor Day Presentation
Impact: SLIGHTLY POSITIVE (Estimates/Target Price/Rating Unchanged)
Freehold hosted a virtual investor-day presentation. Given the relatively short duration (~1 hour), we encourage all interested investors to view the replay. The presentation provides an opportunity to hear directly from the re-energized team.
Provided a Well-reasoned Clear Strategy on U.S. Expansion Initiatives:
Freehold's expansion into the U.S. was driven by the goal to expand its portfolio to plays with among the lowest supply costs in North America, future development opportunities, and organic growth. Given the comparatively large size of the U.S. royalty market, the company continues to see more significant opportunities in the U.S.
Vastly Different Portfolio Comes with Many Benefits: Up until this year, FRU’s exposure to the U.S. was negligible (~150 BOE/d). For 2022, U.S. production is expected to average ~4,900 BOE/d (34% of total). This U.S. exposure offers concentrated production in three key plays (Eagle Ford, Permian, and Bakken), more active rigs (18 vs. seven in Canada), exposure to quality counterparties (Marathon, Pioneer, Conoco, Exxon, and EOG = 70% of BOEPD) and growth potential.
Impressive Aggregate Metrics for U.S. Growth Strategy: In aggregate, Freehold has acquired ~$400 million of U.S. assets, adding 786,000 acres (82% mineral title) at an average CF multiple of 5.7x for assets that the company anticipates will grow 21% y/y. According to FRU, these assets in aggregate are expected to grow organically into 2024.
Expect Modest Dividend Increases and FCF-funded M&A in 2022: The presentation suggested that ~50% of funds flow would be directed towards acquisitions. This implies that ~50% of funds flow would be directed towards the dividend — modestly below the low-end of the long-standing targeted 60-80% range. Under our current US$67/bbl WTI forecast, incremental dividend increases in 2022 could be comparatively modest at 8-30%. Notably, the company sees more opportunities to create value through M&A than an NCIB.
TD Investment Conclusion
Yesterday's IR Day clearly articulated our long-standing Freehold thesis. That is, the business has vastly improved over the past year and offers compelling value relative to its peers and among the highest cash yields in the energy sector.