Freehold Royalties Ltd.
(FRU-T) C$14.22
Q2 as Expected. We Anticipate H2/23 Permian Growth
Event
Reports Q2/23 Results. Guidance Unchanged.
Impact: NEUTRAL
Production Better Than Expected. CF Meets TD Expectations: Production averaged 14.7 mBOE/d, which was modestly ahead of estimate (14.5 mBOE/d) and Consensus (14.6 mBOE/d). Volumes were flat Q/Q despite wildfires negatively impacting production by 225 BOE/d. Freehold reported Q2 CFPS of $0.35 which was in line with our estimate ($0.35) and modestly below Consensus ($0.37).
Our View: As with the E&Ps that have reported to date, the wildfire impact to Freehold was lower than we expected. We expect modest volume growth through H2/23E as Freehold continues to see robust activity in Canada and several new pads in the Permian contribute to volume growth in the U.S.
After Robust Q1 Drilling, Q2 Activity Slides with Spring Breakup: 1.4 net Canadian wells were drilled in Q2 (down from 6.2 net in Q1). U.S. net wells slipped to 0.4 (from 0.8 in Q1).
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Our View: The sharp decline in Canadian activity was expected given seasonal breakup. Although U.S. activity slid Q/Q, Q1 activity was very strong (up 60% versus Q4/22).
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Freehold mentioned on the conference call that they estimate the company requires ~3 net well per annum turned to production to keep U.S. volumes flat. Given the relatively high IPs from new Permian drilling, even slightly high-than- expected net wells has the potential to add meaningful volumes for Freehold.
Significant New Leasing Activity: 67 new leases were signed in Q2, with 16 counterparties. In total, this provided $1mm in new lease issuance bonuses.
Our View: This continues the trend we had seen last quarter, where third-party continues to show interest both S.E. Sask (Mississippian) and interest in Mannville heavy oil opportunities - likely using multi-lateral horizontal drilling.
TD Investment Conclusion
Freehold offers cross-border diversification, 8% dividend yield (68% payout ratio), 5% y/y growth in 2024E, and is tracking to be debt-free by mid-2024. We anticipate the tie-in of Permian pads to be the driver of modest growth through H2/23+.