Freehold Royalties Ltd. Q3/23 – Consistency Is Key
Our view: Freehold's Q3/23 results were generally as expected, though US volumes trended ahead of our expectations driven by multi-well pads coming online in the Permian and Eagle Ford. The company noted record leasing, which we expect will serve as a tailwind into year-end, with key oil plays driving the bulk of activity. Management remains focused on M&A, consistently evaluating deals with a bias to the US, though we believe valuations have moved higher in the context of increased competition.
Key points:
Q3/23 results generally as expected. Q3/23 volumes averaged 14,605 boe/d (63% liquids), tracking in line with RBC/consensus estimates of 14,692/14,643 boe/d; Q3 volumes reflected a negative 240 boe/d PPA associated with Canadian wildfires. CFPS mapped to $0.43 which was in line with RBC/consensus estimates of $0.42/$0.43; key variances and estimate changes are detailed in Exhibit 1. Freehold posted a 62% Q3/23 payout ratio with $41 million in dividends paid ($1.08/share annually).
Guidance unchanged. Freehold reiterated 2023E guidance of 14,500-15,500 boe/d (+6% y/y at the midpoint) with management maintaining a moderate US growth outlook led by the Permian and Eagle Ford, compared to a flat-to-moderate outlook for Canada led by the Clearwater, Viking, SE Sask, Spirit River, and emerging Mannville heavy oil. Management plans to release 2024 guidance with Q4/23 results.
US uplift on several multi-well pads. Management continues to characterize the US assets as 'sawtooth' given a more variable profile relative to Canada, with confidence in internal forecasting improving over time. Q3/23 US volumes reached record levels of 5,427 boe/d on flush volumes from multi-well pads; Freehold expects ~3-5% organic US growth over the next year and sees over 13 years of multi-zone oil-weighted drilling inventory on US lands (Exhibit 3).
Balance sheet improving, flexibility for future M&A. Freehold exited Q3/23 with $107 million in net debt (RBCe: $107 million), down $24 million sequentially. We forecast continued debt reduction with 2023E/24E/25E net debt (cash) at $75/($48)/($148) million. Our estimates do not model in potential M&A, though Freehold remains active in evaluating opportunities across North America to further supplement the portfolio. Additionally, we maintain the base dividend of $1.08/share annually, which maps to 2023E/24E/25E payout ratios of 65%/57%/62%.
Reiterate Outperform. We maintain our rating and $19/share target price, reflecting Freehold’s high-margin, inflation-protected model, diversified portfolio, and discounted valuation. Freehold trades at 7.2x/7.5x EV/DACF in 2024E/25E (Exhibit 5), trailing Canadian royalty peers at 10.6x/10.7x and NAm O&G royalty peers at 8.5x/8.2x. Freehold will host its Q3/23 conference call on November 9th at 9 AM ET; dial-in: 1-800-952-5114.