July 31, 2023
Freehold Royalties Ltd. Q2/23 – On the Mark
Our view: Freehold posted in-line Q2/23 results, with solid momentum in drilling/leasing activity across the portfolio. Management reiterated 2023 production guidance and provided some incremental detail on activity in the Canada/US segments on the Q2/23 conference call earlier today. We believe the company is well positioned into the second half with select producers in the US poised to add significant volumes late in the year. Freehold remains on our Canadian Small Cap Conviction List.
Key points:
Q2/23 results broadly in line. Q2/23 production of 14,667 boe/d (62% liquids) were in line with RBC/consensus estimates of 14,572/14,614 boe/d, inclusive of a 225 boe/d impact from Canadian wildfires. CFPS of $0.35 was in line with RBC/consensus estimates of $0.35/$0.36; key variances and estimate changes are detailed in Exhibit 1. Freehold posted a 77% Q2/23 payout ratio with $41 million in dividends paid ($1.08/share annually).
Guidance reiterated despite wildfire impacts. 2023E guidance of 14,500-15,500 boe/d (+6% y/y at the midpoint) remains unchanged, split between a moderate US growth outlook (Permian, Eagle Ford), and flat-to- moderate growth in Canada led by Clearwater, Viking, SE Sask, Spirit River, and emerging Mannville heavy oil. We note that the latest update features a modest tweak in liquids mix within 2023 guidance, now incorporating a 62% liquids mix (previously 64%).
Solid momentum on drilling/leasing activity. Freehold highlighted 55/124 gross (1.4/0.4 net) wells drilled across Canada/US in Q2/23, with 89% of gross wells targeting oil/liquids. Management highlighted key areas with increased drilling/leasing activity in Canada (SE Sask and Mannville heavy oil) along with continued strength in the US (Permian and Eagle Ford). Furthermore, the company signed 67 new leases signed with 16 counterparties ($1.0 million in bonus revenue).
Healthy balance sheet, flexibility for potential M&A. Freehold exited Q2/23 with net debt of $131 million (RBCe: $133 million), which also factors in a $24.4 million reclassification of income tax deposits from current to non-current assets. We now place net debt (cash) at $84/($24) million in 2023E/24E mapping to a D/CF ratio of 0.3x/nmf; comparatively, royalty peers average 1.1x/0.6x 2023E/24E D/CF. We do not model M&A, though we believe Freehold remains actively involved in assessing potential opportunities to further supplement the portfolio.
Reiterate Outperform. We maintain our Outperform rating and $19/share target price, reflecting Freehold’s high-margin, inflation-protected royalty model, diversified portfolio, and discounted valuation. Freehold trades at 8.9x/7.6x EV/DACF in 2023E/24E (Exhibit 4), trailing Canadian royalty peers at 13.8x/11.9x and NAm O&G royalty peers at 10.2x/9.2x.