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While he trimmed his estimates for Freehold Royalties Ltd. following its first-quarter earnings release, Desjardins Securities analyst Chris MacCulloch remains bullish on its long-term potential “given its strategic positioning in most of the top oil plays in North America.”
“Unfortunately, 1Q24 results were another missed opportunity for FRU, which suffered various weather-related disruptions, particularly in the Eagle Ford where heavy rainfall negatively impacted output from its GORR [gross overriding royalty] on Marathon Oil’s assets,” he said. “However, operational headwinds have subsided, with management reiterating on the conference call that production has been restored to 15,000 boe/d [barrels of oil equivalent per day]. Arguably, the 1Q24 hiccup was a byproduct of the royalty business model—specifically, the informational lag associated with not operating assets and the inherent difficulty forecasting lumpy well pad additions south of the border. The silver lining is that operator activity remained robust across the broader North American royalty portfolio in 1Q24, which should help smooth longer-term quarterly volatility. Moreover, Canadian production has been remarkably stable despite limited M&A activity, driven in part by growth in the Clearwater where heavy oil volumes recently surpassed 500 boe/d prior to TMX coming online.”
In a note titled Building a diversified North American portfolio—it’s a Marathon, not a sprint, Mr. MacCulloch said he expects Calgary-based Freehold to remain active on the acquisition front, “particularly in the U.S. where it has developed a reputation as a serious and reliable buyer of assets, which has supported additional deal flow.”
“For context, the company highlights $530-billlion of potential mineral title opportunities in the Permian Basin within its corporate presentation, where it can execute transactions at more attractive multiples (vs Canada) at varying scales of capital,” he said. “Ultimately, further scaling of the business model should lay the foundation for future dividend hikes.”
Maintaining a “buy” recommendation for its shares, he trimmed his target to $17 from $17.25. The average is $17.93.