From RBC
March 4, 2020Freehold Royalties Ltd.Q4/19: Sustainability is the name of the gameOur view: We are encouraged by the ongoing shift in activity toward oil-weighted plays across Freehold's land base and continue to recommendthe stock driven by best-in-class sustainability metrics. We remainsupportive of the team's continued emphasis on pushing into the USmarket and expect further deal announcements through 2020. ReiterateOP, $11/share target.Key points:Strong close to 2019. Q4/19 volumes of 10,740 boe/d (96% royalty, 55%liquids) were above consensus of 10,600 boe/d (RBC: 10,510 boe/d). CFPSof $0.26 was in line with consensus of $0.26 (RBC: $0.26); key variancesare noted in Exhibit 2. Producer drilling activity on FRU land has beenresilient and focused on oil-weighted drilling; roughly 96% of activity isnow focused on oil plays.2020 outlook in line with consensus. Freehold provided 2020 guidance,including royalty production volumes of 9,750-10,250 boe/d with noassociated development capital. Total volumes are expected to be in therange of 10,400 boe/d (mid-point, 96% royalty), in-line with consensus at10,500 boe/d (RBC: 10,400 boe/d). The company did not provide a budgetfor acquisitions but we would not be surprised if all (or more) of the $34million in free cash flow generated in 2020 is allocated to deals.Expect a continued focus on M&A. Freehold spent $46 million on royaltyacquisitions during 2019, including the company's initial entrance into theUS market (note here). In our view, acquisition activity will remain steadywith a continued push south of the border, primarily focused on liquidsweighted assets. We view the recent addition of Rob King, VP CorporateDevelopment, favourably given his background in upstream M&A andbelieve it supports our perspective.Attractive valuation, leading sustainability metrics. As displayed inExhibit 5, Freehold currently trades at 7.1x EV/DACF, translating to anapproximately 42% discount to the North American royalty group average.While organic growth is expected to lag US peers given muted drillingactivity in Canada, we believe the steep discount is unwarranted given thestability of Freehold’s royalty base combined with a strong balance sheetand FCF profile. In addition, sustainability metrics remain well ahead ofE&P peers as displayed in Exhibit 4; FRU is able to cover its dividend downto sub-US$45/bbl WTI.Recommendation unchanged. Our rating and price target reflectFreehold’s low-risk royalty model, diversified portfolio, and stablefinancial outlook. Our one-year price target remains unchanged at $11/share, reflecting our three-year projected FCF, a 6.0% discount rate, and-1% terminal value. A 1% change to discount rate or terminal value wouldchange our price target by $1–3/share.