CIBCEQUITY RESEARCH
August 9, 2022 Earnings Update
FREEHOLD ROYALTIES LTD.
Q2/22 Results: Dividend Increase Accompanies Production And
Cash Flow Miss
Our Conclusion
Freehold restored its dividend to 2015 levels, moving to $1.08/sh annually
(7.8% yield), which we see as being a favourable signal and offering a
competitive yield in the current environment. The dividend increase also
should (somewhat) offset a production and cash flow miss posted with
Q2/22, with the miss versus our estimates primarily being due to sluggish
U.S. production volumes and one-time stock-based compensation charges.
Production guidance for 2022 was left unchanged versus prior, which is likely
conservatism on the part of management, but does drive negative cash flow
revisions to our model. Although our changes are minor overall, our 2022
production expectations do sit below the mid-point of guidance, and we do
believe growth in the U.S. assets is required to see the stock regain its
momentum. We maintain our Neutral rating and decrease our price target
from $19 to $18.
Key Points
Production and cash flow for Q2/22 came in below estimates. Production
of 13.5 MBoe/d came in below consensus of ~14 Mboe/d and also missed
our estimate of 13.8 MBoe/d, mostly driven by lower natural gas volumes.
Reported cash flow of $0.56/sh was below our estimate of $0.60/sh and the
Street at $0.61/sh. Cash flow netbacks were robust during the quarter at
~$79/Boe; however, cash flow per share came in lower than we were
expecting, with higher-than-expected stock-based compensation charges
and lower production volumes.
Increased U.S. drilling activity through Q2 should see volumes grow
into H2/22 (and 2023) to help offset a sluggish start to 2022. U.S.
production averaged 3,761 Boe/d during the quarter, down from Q1/22 levels
of 3,883 Boe/d (we were looking for ~4,000 Boe/d). Drilling activity on FRU’s
U.S. royalty assets increased to 0.7 net wells (up from 0.4 net wells in
Q1/22), which is a favourable signal towards production growth returning in
H2/22, depending on tie-in activity. Management has noted that lower-than-
expected completion activities resulted in reduced wells being brought on
production through H1/22.
Dividend increased by 13%, which offers a partial offset to a slightly
weaker-than-expected production guide for 2022. We believe the
dividend increase was largely expected, but still see the increased
shareholder return allocation as a favourable point on the quarter. We see
production guidance being maintained at a mid-point of 14,250 Boe/d for
2022 as likely being taken as directionally weaker. That said, we still see the
leaner guide as only being slightly lower than consensus estimates at 14,500
Boe/d for 2022, which should drive limited estimate revisions as a result.