Freehold Royalties Ltd T.FRU

RBC

[retiredcf]

June 4, 2024

Freehold Royalties Ltd.
Highlights from the 2024 RBC Global Energy, Power & Infrastructure Conference

TSX: FRU | CAD 13.83 | Outperform | Price Target CAD 18.00

Sentiment: Neutral

Our view: We hosted Freehold Royalties Ltd. at the 2024 Global Energy, Power & Infrastructure Conference with Rob King (COO) and David Hendry (VP Finance, CFO) presenting. Management continues to emphasize a focus on operational sustainability and the pursuit of accretive M&A, while balancing these initiatives with return of shareholders' capital (mainly via the base dividend).

• Conference Takeaways. Freehold continues to focus on the United States which it reiterated as the main engine of growth, complementing stability amid the Canadian portfolio; the company's recent $112 million acquisition brought an incremental ~600 boe/d of royalty volumes online (85% liquids) in the Midland and Delaware basins.

• M&A Market. Management remains focused on US M&A opportunities given a larger opportunity set, mineral title land availability, and favourable product pricing (relative to Canada). Management also noted some interest in gas opportunities in the US. In Canada, recent producer dispositions of non-core assets have opened the door for select acquirers to evaluate royalty financing. Higher valuations and buoyant competition have impacted US M&A to some degree, though opportunities are plentiful and will be evaluated on a case-by-case basis.

• Updates on the US, Canada. Freehold's operational portfolio consists of 400 payors across eight states and five provinces with no payor representing more than 15% of revenue, representing significant diversification. This diverse partner group spent roughly $8 billion in capital on FRU's land in 2023, compared to $6 billion in 2022, leading to Canadian/US production of roughly 9,600/5,700 boe/d of 55%/79% liquids. Canada's optimization-focused profile provides higher aggregate volumes on the back of low decline, predictable base production; however, a higher 20%/19% oil/gas premium realized in the US brings the portfolios to a 53%/47% revenue split.

• Return of Capital. Balancing return of capital, debt reduction, and potential M&A. Freehold has prioritized a sustainable dividend targeting a 60% payout ratio at US$75/bbl WTI with the current dividend covered down to US$50/bbl. Management prefers to remain at the lower end of its target payout range with excess cash flow allocated to debt reduction and potential M&A. Freehold reviews its base dividend ($1.08/share) quarterly, though the team anticipates future dividend increases are likely to be tied to M&A.

• Focused on ESG. Freehold remains a net zero emitter by way of carbon credit purchases, but the company has also highlighted over 60% of its top 20 royalty payors have defined scope 1 & 2 reduction targets. The company released its latest sustainability report in October 2023 (see here).