Currently have a $17.00 target. GLTA
FREEHOLD ROYALTIES LTD.
Q2/23 First Look: Production Beat And Cash Flow Miss
Freehold reported Q2/23 results with slightly better production and slightly
weaker cash flows versus estimates. Canadian volumes were stronger than
expected, despite production outages related to wildfires and spring break-
up. Cash flows were below expectations primarily due to weaker price
realizations versus our estimates on the quarter. We see the cash flow miss
as being a slight negative, but expect there to be minimal changes to Street
estimates with guidance maintained for 2023. Our recent estimates suggest
FRU having a payout ratio of 68% in 2023, and we are therefore not
expecting a further dividend increase this year. The stock trades at 8.3x
2024E EV/DACF and a free cash flow yield of 12%, versus royalty peers at
11.3x and 9%, respectively.
Key Points
Production slightly better than estimates, and cash flow slightly
weaker, for Q2/23. Production of 14.7 MBoe/d was slightly better than our
estimate of 14.5 MBoe/d and the Street at 14.6 MBoe/d. Cash flow of
$0.35/sh came in below our estimate of $0.36/sh and the Street at $0.36/sh.
Freehold reported U.S. production of 4.9 MBoe/d for the quarter, slightly
below our estimate of 5.0 MBoe/d, and Canadian production of 9.8 MBoe/d
which was above our estimate of 9.5 MBoe/d.
Canadian portfolio continues to perform favorably, although both
Canadian and U.S. drilling activity was down in Q2/23 versus Q2/22.
Despite wildfires and spring break-up, Canadian production volumes were
consistent with Q1/23 levels. Drilling activity in Canada is up by 2% on a net
measure versus 2022 levels, even with the impact of wildfires and spring
break-up, which resulted in 1.4 net wells drilled in Q2/23, down from 2.3 net
wells in Q2/22. Drilling activity on FRU’s U.S. royalty assets declined to 0.4
net wells (down from 0.8 net wells in Q1/23). Management noted, however,
that the number of active rigs on the company’s U.S. lands increased to 31 in
April, and current rig activity has been in line with 2022 levels, which we see
as a favorable update. Management also noted that several multi-well pads
in the Permian are in the process of being completed, which could favorably
impact production in H2/23. We believe organic growth in U.S. production
volumes would be positive for the shares. Year-to-date total drilling on FRU’s
acreage stands at 9.5 net wells, up from 9.2 in 2022.
Guidance and dividend level unchanged, and we expect free cash flow
will continue to be dedicated to debt reduction. The company maintained
production and cash flow guidance for 2023, and the current dividend level
was unchanged. We expect FRU will look to utilize free cash flow for debt
reduction, and seek to further acquire assets in its US segment.
Conference call scheduled for 11am EST today. Dial in number is 1-800-
898-3989.