Freehold Royalties Ltd.
(FRU-T) C$13.87
CF Miss on One-time Items; Waiting on H2/22 U.S. Growth
Event
Reports Q2/22 Results
Impact: SLIGHTLY NEGATIVE
Slight Volume Miss, CFPS Falls Short, Largely Due to Non-reoccurring Items:
Q2/22 production averaged 13.5 mBOE/d, which fell slightly below TD (13.9 mBOE/ d) and consensus (14.0 mBOE/d). Volumes contracted 2% q/q. On a regional basis, Canadian royalty production averaged ~9.7 mBOE/d (-2% q/q), while U.S. production atrophied 3% q/q to 3.8 mBOE/d. CFPS of $0.55 fell below TD/consensus of $0.61. Nearly the entire CF shortfall can be attributed to a $5.8mm ($0.04/share) in largely non-reoccurring cash-based compensation.
Our View: Although on an absolute basis, Q2/22 production erosion of 2% was only slightly shy of expectations, this comes against the backdrop of sequential organic q/q growth of between 2-9% for the other oil and gas royalty companies under coverage across both sides of the Canada/U.S. border — (TPZ +2%, KRP +3%, VNOM 6%, PSK +9%). Given that well permits and drilling activity are tracking their expectations, it appears to be an issue with longer-cycle times rather than third-party interest in the acreage or well performance.
2022 Production Guidance Unchanged, Despite Subsequent Acquisitions: On July 7, Freehold announced acquisitions of Q4/22E production of ~0.8 mBOE/d — with closing dates in August and September (see here). At that time, Freehold stated that it would provide an update on its 2022 guidance with Q2/22 results. However, the pre-acquisition guidance range has been maintained at 13,750-14,750 BOE/d (i.e., the acquisition fits within the existing range).
Dividend Increase. 13% Bump Brings Yield to 8%: After taking a pause in Q1/22 from a stretch of six sequential dividend increases, FRU once again bumped the dividend. The new monthly dividend level ($0.09/share) consumes 57% of 2023E CF at US$80 WTI.
TD Investment Conclusion
FRU's production growth has been slower than peers under coverage in H1/22. However, the company is still generating material FCF (13% of market cap in 2023E at US$80 WTI) and returning the majority of that to shareholders via the dividend. Although we continue to believe U.S. assets will provide growth as the year progresses, in our view, this has not been reflected in its share price, given the discounted valuation versus peers.