From TD this morning Event
Q2/21 Results, Increases Dividend, Announces Asset Acquisitions
Impact: POSITIVE
Volumes Higher than TD Expected, CFPS Beat: Q2/21 production of 11.1 mBOE/
d was above TD (10.7 mBOE/d) and in line with consensus (11.0 mBOE/d). U.S.
production now represents 14% of volumes. CFPS of $0.31 exceeded TD/
consensus ($0.29).
$94mm in Post-Q2 Acquisitions: Subsequent to Q2/21, Freehold acquired new
positions in the Eagle Ford, Permian, and Canadian Clearwater in three deals.
Although a "current production" figure was not provided, Freehold expects the assets
to contribute 635 BOE/d in Q4/21 and grow 50% through 2022 (Exhibit 1).
Another Material Dividend Increase: Freehold is increasing the monthly dividend
to $0.05 (from $0.04). This is the fourth time the company has increased its dividend
since November 2020, when it was $0.015/share per month.
Our View: Given the series of recent DPS increases, combined with the recent
pullback in WTI <US$70/bbl, we believed that FRU would have paused the steady
dividend increases. That said, even at lower-than-current WTI prices (US$65/bbl),
we forecast that the new dividend will consume only 48% of 2022E FCF and FRU
could exit 2022 virtually debt-free (even after the aforenoted acquisitions). We
view this unexpected increase as a positive commitment to continued shareholder
returns and its long-standing payout strategy.
Third-party Wells Tracking Expectations, but Perhaps Timing/Productivity
Create Volume Tailwinds: 84 (2.1 net) wells were drilled on FRU's lands in Q2/21.
Only 0.05 net wells were drilled in the U.S., but given the comparatively high
productivity rates of the plays in the U.S. versus Canada, these figures are not directly
comparable from the perspective of production contribution. One trend we have
noticed across industry with Q2/21 results is increased production guidance (without
capex bumps); this should also result in incremental "free” production tailwinds for
FRU.
TD Investment Conclusion
We continue to recommend investors BUY Freehold, given its ability to generally
maintain (or grow) production at no incremental capital cost, while generating
material FCF to fund a higher-than-current dividend and continue to make tuck-in
acquisitions. It is trading at the highest FCF yield of its royalty peers.