Freehold Royalties Ltd T.FRU

Alternate Symbol(s): FRHLF

Freehold Royalties Ltd. is a Canada-based royalty company. The Company manages non-government portfolios of oil and natural gas royalties in Canada with an expanding land base in the United States. Its primary focus is to acquire and actively manage royalties, while providing a lower risk income vehicle for its shareholders. Its total land holdings encompass approximately 6.2 million gross acres in Canada. It has royalty interests in more than 19,000 producing wells and almost 400 units spanning five provinces and eight states and receives royalty income from over 360 industry operators throughout North America. It has two geographical segments: Canada, which includes exploration and evaluation assets and the petroleum and natural gas interests in Western Canada, and US includes petroleum and natural gas interests primarily held in the Permian (Midland and Delaware), Eagle Ford, Haynesville and Bakken basins largely located in the states of Texas, Louisiana, and North Dakota.

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Freehold Royalties Ltd > Excerpt from Latest Nuttall Article

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Comment by DeanEdmontonon Jun 02, 2022 1:31pm

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Post# 34727104

RE:Excerpt from Latest Nuttall Article

You have to remember Nuttal has been a bull on oil for many years. He has consistently been wrong during that time, the funds he managed lost a lot of value. The current run up in oil prices is the first time he has been right in ten years. His whole premise rests on oil staying at or above $100.

retiredcf wrote: We estimate the average Canadian energy stock currently trades at an estimated 2.7 times enterprise value to cash flow and a 25-per-cent free cash flow yield at US$100 WTI. How, with one simple act, can a board force a rerating in trading valuation back closer to historical levels of seven times or more? Maintain flat production, eliminate debt or at least get down to fortress-like strength, and then use every single dollar of free cash flow to buy back shares.

The timeline to such a rerating is surprisingly short, given that the average Canadian energy company approaching debt-free status by the first quarter of next year will be able to buy back all its outstanding shares in just four years with free cash flow at US$100 WTI.

After all, what is the value of the very last share of a debt-free company that has billions of dollars of annual free cash flow and 15 years on average of stay-flat production? How can a share price not meaningfully rise, assuming flat oil prices, if 25 per cent of the outstanding shares are being cancelled each year via the use of significant issuer bids?

Looking forward to the next several years, should oil stay at current prices and the sector approaches debt-free status by early next year while having adequate drilling inventory so as to not have to use free cash flow for M&A, companies face a unique problem: unprecedented free cash flow with limited ways to spend it.

My advice to companies is this: If you no longer have any debt to pay off, if you have adequate inventory depth and don’t have to buy more land, and given that depressed valuations cannot justify production growth, there is only one thing left to do with the free cash flow … give it all back to shareholders.

It is, therefore, not unfathomable that the energy sector could soon pay the equivalent of a 25-per-cent dividend yield if oil stays at US$100 WTI, and therein lies the power. Will stocks trade at an implied 25-per-cent dividend yield if investors view the dividend as sustainable? I would suggest not.

A rerating to a 10-per-cent yield, which (given debt-free status and 15 years of identifiable free cash flow) seems like a reasonable valuation level, would mean a 150-per-cent rally in energy stocks from current levels. Still think you’re late to the oil party?

Eric Nuttall is a partner and senior portfolio manager with Ninepoint Partners LP.