FREEHOLD ROYALTIES LTD.
Refreshing Estimates For Permian Acquisition
Our Conclusion
We have updated our model for the acquisition of Permian assets
announced this morning by Freehold. Our post acquisition estimates for
FRU’s U.S. segment include ~$18MM of incremental operating income on
our 2024 estimates, assuming US$80/Bbl WTI, which is above the current
strip (~US$70/Bbl WTI in 2024E). The funds flow impact next year is
somewhat muted however given the increased interest costs that accompany
the deal, as the acquisition was funded through the company’s credit facility.
Our cash flow per share increase in 2024E is ~4%, and we see ~0.1x
accretion to our 2024 EV/DACF trading multiple on a pre/post basis. We
therefore increase our price target to $16.75/sh (from $16.50/sh) based on a
price target multiple of 9.3x 2024E EV/DACF (our multiple is unchanged).
Our post deal estimates see FRU with a 0.3x net debt to cash flow ratio in
2024, and our payout ratio estimate for 2024 sits at 60% on our base price
deck (67% on recent strip), we therefore expect the company’s dividend will
remain well supported. We maintain our Neutral rating on the shares.
Key Points
Undeveloped acreage footprint could drive organic growth in future
quarters, which would be positive for the shares. We believe the
acquisition of 2,000 gross (4.6 net) future drilling locations could be helpful
for driving production growth from FRU’s U.S. asset base. We continue to
believe that steady and sustained production growth from the U.S. portfolio is
required to help the stock further re-rate in its trading multiple.