May 10, 2023
Freehold Royalties Ltd. Q1/23 – Outlook intact
Our view: Freehold delivered in-line Q1/23 results, with solid momentum in Canada offsetting slightly softer volumes in the US. The company reiterated 2023 guidance, but noted it remains too early to fully assess the impact of wildfires in Q2. Management continues to evaluate M&A opportunities across North America, which remains a key driver of potential upside, in our view. Freehold remains on our Canadian Small Cap Conviction List; we reiterate our Outperform rating and $20/sh target price.
Key points:
Q1/23 results generally in line. Q1/23 production of 14,724 boe/d (62% liquids) were in line with RBC/consensus estimates of 14,727/14,836 boe/ d. CFPS of $0.39 was in line with/slightly below RBC/consensus estimates of $0.39/$0.41; key variances and estimate changes are detailed in Exhibit 1.
Guidance reiterated despite wildfire impacts. Management reiterated 2023 royalty production guidance of 14,500-15,500 boe/d (+6% y/y at the midpoint), underpinned by a moderate growth outlook in the US (Permian, Eagle Ford), and flat-to-moderate growth in Canada (Clearwater, Viking, SE Sask, Spirit River). Freehold reiterated initial commentary regarding Alberta wildfires; early estimates suggest ~25% of Canadian production may have been temporarily impacted. We currently expect outages will be immaterial with many projects already partially or fully restarted.
Dividend sustainability remains top of mind. Freehold's current dividend of $1.08/share (7.6% yield) was increased substantially through 2021/22, though management has reiterated its focus on sustainability, estimating it is currently covered to ~US$50/bbl WTI. Excess free cash is expected to be allocated toward debt reduction to provide increased flexibility for potential M&A, with rateable dividend increases likely aligned with growth in the underlying business. We currently model effective payout ratios of 59%/53% in 2023E/24E on our RBC outlook (73%/72% at strip).
Strong balance sheet provides flexibility for further M&A. Our updated estimates point to net debt (cash) balances of $50/($98) million in 2023E/24E, compared to NAm peers averaging 1.0x D/CF in 2023E; the majority move into net cash positions into 2024E. We do not model M&A, though we believe management will remain actively involved in potential opportunities to further supplement the portfolio; the company completed $377/$191 million in acquisitions in 2021/2022.
Reiterate Outperform. We maintain our Outperform rating and $20/share target price, reflecting Freehold’s high-margin, inflation-protected royalty model, diversified portfolio, and discounted valuation. Freehold trades at 7.8x/6.6x EV/DACF in 2023E/24E (Exhibit 3), trailing Canadian royalty peers at 11.2x/9.5x and NAm O&G royalty peers at 8.8x/7.8x.
Conference call details. May 11 at 9 AM ET. Dial-in: 1-800-898-3989.