We hosted Dave Spyker (President and CEO) and Dave Hendry (VP Finance and CFO) for a sales desk presentation. See below for additional details:
Details:
US growth remains top of mind. Freehold continues to focus on US-growth bolstered by its recent $115 million acquisition which brought an incremental ~600 boe/d of royalty volumes online (85% liquids growing at 3-6% annually) in the Midland and Delaware basins (see more here). Although higher valuations and increased competition have impacted M&A to some degree, management aims to retain roughly 40% of cash flow to capitalize on accretive opportunities, while the other 60% is distributed to shareholders through its dividend. Notably, management expects 8% y/y organic production growth in the Permian, with the Midland exhibiting a 30%+ production CAGR since January 2020.
Strength through diversification. Freehold's operational portfolio consists of ~360 payors across eight states and five provinces, with no payor representing more than 15% of revenue. This diverse partner group spent roughly $8 billion in capital on FRU's land in 2023, compared to $6 billion in 2022, leading to Canadian/US production of roughly 9,600/5,700 boe/d of 55%/79% liquids. Canada's optimization-focused profile provides higher aggregate volumes on the back of low decline, predictable base production; however, a higher 20%/19% oil/gas premium realized in the US brings the portfolios to a 53%/47% revenue split.
High margin, low overhead, and a track record of returns. Freehold's strong track record includes a ~90% inflation-protected margin, a stable ~7% dividend providing coverage down to US$50/bbl WTI, and a 12% return CAGR to those invested since its IPO in 1997. The company currently trades at a moderate discount, with an EV/DACF of 8.7x/8.2x in 2024E/25E, relative to its royalty- weighted peers at 11.9x/10.9x; FRU remains on our Canadian Small Cap Conviction List.