From RBC
EQUITY RESEARCH
August 9, 2022
Freehold Royalties Ltd.
Q2/22 – Speed Bump
Our view: Q2/22 results were impacted by timing delays in the US. That
said, we expect a strong setup for the second half as new wells come online
and recent acquisitions factor in. The company increased the dividend, now
yielding roughly 8%, among the highest in the industry. We reiterate our
favourable view of the stock given a strong balance sheet, FCF generation,
and insulation from broader inflationary pressure.
Key points:
• Q2/22 impacted by timing delays in the US. Q2/22 volumes of
13,453 boe/d (61% liquids) were roughly 4% below RBCe/consensus of
13,963/13,981 boe/d, with the sequential decline attributable to spring
break-up in Canada and lighter than anticipated completion activity and
lower net royalty interest wells brought on in the US. CFPS mapped to
$0.56, trailing RBCe/consensus of $0.59/$0.60; key variances are noted
in Exhibit 1.
• Guidance unchanged, dividend increased by 13%. Freehold maintained
2022 production guidance at 13,750–14,750 boe/d (60% liquids), with
the company trending toward the low–mid point vs. our prior estimates
toward the upper end. Following breakup, Canadian volumes have
exhibited a recovery and US Q2/22 spuds are expected to drive
production growth through the second half. Freehold’s Howard County
acquisition (note here) closed on August 4, 2022, and the remaining
Eagle Ford asset acquisition is expected to close in September 2022.
Management increased its annual dividend 13% to $1.08/sh ($0.09/sh
monthly), mapping to an ~8% yield.
• Balance sheet supports M&A and dividend growth. Based on our
updated estimates, we see the company carrying a net debt (cash)
balance of $79/($165) million in 2022E/23E, which compares to NAm
royalty peers averaging 0.2x D/CF in 2022E, with a majority moving to
net cash balances in 2023E. We do not model further M&A, though we
believe management will remain actively engaged in the US market. We
currently model an additional 11% dividend increase to $1.20/share in
Q1/23 (41%/43% 2022E/23E effective payout ratio, 47%/61% at strip
pricing).
• Valuation continues to screen favourably versus peers. As shown in
Exhibit 3, Freehold trades at 6.2x/4.5x EV/DACF in 2022E/23E, translating
to a 21%/34% discount to the North American oil & gas royalty group
average. With management’s continued focus on deploying FCF toward
a combination of accretive M&A and dividend growth, we believe
the current discount provides an attractive entry point for long-term
investors.
• Reiterating Outperform. Our rating and price target reflect Freehold’s
high-margin, inflation-protected royalty model, diversified portfolio, and
strong financial outlook. We maintain our $19 price target and highlight
that Freehold remains on RBC’s Global Energy Best Ideas List (note here).
• Conference call details. Management will host a conference call on
August 10, at 9AM ET. Dial-in 1-800-898-3989; passcode 2666556#