We hosted David Spyker (President and CEO) and Rob King (COO) for a Retail Presentation today with details below:
M&A remains a key focus, though valuations have expanded. Management remains focused on the US market given higher relative capital investment/growth profile, broad M&A opportunity set, availability of mineral title land, and better productivity/ realized pricing relative to Canada. During Q1/23, the company noted 30 potential deals, of which management evaluated 20 and bid on 3, all of which were in the US. Bid-ask spreads have widened out with management noting competitors have recently transacted at implied returns below Freehold's hurdle rate. Within Canada, the company continues to focus on select plays, highlighting the Clearwater and Montney.
Portfolio repositioning has shifted the organic growth profile favourably. Current production (65%) and revenue (60%) remain weighted to Canada, though management expects Canadian growth to remain fairly modest in the coming years (low single digit), largely driven by the Clearwater and Spirit River gas. We view this favourably given historical declines. The US portfolio is expected to drive the majority of corporate volume growth, led by the Permian with management noting increased operator activity and strong leasing trends. On a revenue basis, management noted the company is now 60-70% weighted to large investment grade payors that are expected to remain fairly stable over time. That said, the US profile tends to be more choppy quarter to quarter given larger drilling programs/batching of wells.
Return of capital at the forefront. Freehold reiterated its focus on returning capital to shareholders through a combination of the base dividend, debt reduction, and strategic M&A to further enhance the portfolio. The team remains focused on targeting roughly a 60% payout ratio, with the dividend reviewed quarterly although future dividend increases are likely to be associated with growth in the broader business. Management has discussed share buybacks, though this currently remains a lower priority given the M&A opportunity set within the US remains robust.