From Scotia this MorningFreehold Royalties Ltd. FRU Expanding US Footprint; Dividend Increased
OUR TAKE: Positive.
FRU’s Q2 cash flow and production modestly beat consensus. The company has increased its dividend by 25% due to an improved commodity price outlook. Further, FRU has acquired ~$94M (~7% of EV) of royalty lands in the Eagle Ford, Permian, and Clearwater. These acquisitions are consistent with FRU’s strategy and compliment the company’s existing lands in these plays.
KEY POINTS Modest Q2 cash flow beat. FRU reported Q2/21 cash flow of $40M vs consensus of ~ $39M (+2%). This cash flow beat was driven by higher than expected liquids production of 6.4 mbbl/d, which was 4% higher than consensus of ~6.2 mbbl/d. Total Q2 production of 11.1 mboe/d was 1% higher than consensus of 11 mboe/d.
Dividend increased. FRU’s monthly dividend has increased from $0.04/sh to $0.05/sh (+25%). On an annualized basis, FRU now has a dividend yield of 6.8% compared to PSK and TPZ of 3.4% and 5.3%, respectively. In 2022E (strip) FRU’s new dividend is ~42% of FCF.
Three acquisitions announced. FRU has agreed to purchase royalty lands in Midland for ~$67M, the Permian and Eagle Ford for ~$19M, and the Clearwater for ~$8M. All three assets were acquired for cash consideration and management does not expect a material increase in G&A due to the acquisitions. The Midland transaction is expected to close in October 2021 and the other two transactions closed in July 2021. The implied EV/ 2022 cash flow multiples ($65 WTI) for the Midland, Eagle Ford and Permian, and Clearwater transactions are 7.5x, 7.1x, and 6.6x, respectively (Exhibit 1). In Midland, management expects production to grow at a 25% CAGR between 2021 and 2024. FRU is also expecting strong production growth from the Eagle Ford and Permian lands which are forecasted to grow from 100 boe/d in Q4/21 to 150 boe/d in 2022 (+50%). Similarly, the Clearwater lands are expected to grow from 55 boe/d in Q4/21 to 100 boe/ d in 2022 (+82%). This transaction has a minimal impact on FRU's balance sheet given its strong FCF profile.
Guidance updated. FRU expects 2H/21 production of 11-11.5 mboe/d. ~55% of FRU’s 2H/21 production will be liquids, which implies 2H/21 liquids production of ~6.1-6.3 mbbl/d. The company's production guidance was updated to reflect the announced acquisitions and strong 1H/21 production. FRU’s 2H/21 guidance assumes WTI of $65/ bbl, Edmonton Light Sweet crude of $75/bbl, and AECO of $3.25/mcf.