Freehold Royalties Ltd T.FRU

RBC 2

[retiredcf]

Their upside scenario target is $24.00. GLTA

November 8, 2024

Outperform

TSX: FRU; CAD 13.84

Price Target CAD 17.00

Freehold Royalties Ltd.
Q3/24 Model Update - In-Line Quarter

Our view: Freehold's Q3/24 results were in-line with Street expectations, with 2024 FY production guidance unchanged. The company noted active oil drilling activity across the portfolio, particularly in the US where activity reached a multi-year high. FRU remains focused on M&A (US biased), though we expect a slower pace (and smaller deals) on increased competition. FRU will host an investor day on December 3, 2024 at 10am MT in Calgary.

Key points:

• Q3/24 results - In-Line. Q3/24 volumes averaged 14,608 boe/d (64% liquids), tracking in-line with RBC estimates of 14,651 (Street: 15,120 boe/d). CFPS mapped to $0.37 which was in-line with RBC/Street estimates of $0.36/$0.37. Freehold posted a 73% payout ratio in Q3/24 with $41 million in dividends paid ($1.08/share annually) in context of $56 million in CF.

• 2024 outlook - Reiterated. Freehold reiterated 2024 royalty production guidance of 14.7-15.7 mboe/d (+3% y/y at the midpoint). Management expects moderate growth in the US primarily driven by the Permian, and a flattish outlook for Canadian volumes with activity centered in the Clearwater, Viking, SE Sask, and emerging Mannville heavy oil activity.

• Active Drilling, Leasing and DUCs. FRU noted 96 gross Canadian wells were drilled (+41% y/y) which represented the highest level of Canadian heavy oil drilling activity for the company in the last several years (49 wells in the Clearwater/Mannville Stack). Management noted robust leasing during the quarter with 11 new leases signed (Sask, Mannville stack and Cardium), weighted to key oil plays with seven counterparties. The company saw 182 (0.8 net) wells drilled on its lands with the United States (70% Permian/30% Eagle Ford) seeing 65% of FRU's activity, up 14% y/y. The company noted 503 (gross) DUCs and 387 licensed wells on US lands, foreshadowing volume growth.

• Balance sheet - In good shape. Freehold exited Q3/24 with $187 million in net debt (RBC: $184 million), down $12 million sequentially and mapping to 0.8x D/CF. We forecast continued debt reduction with 2024/25/26 net debt at $172/$110/$50 million. Our estimates do not model in potential M&A, though Freehold remains active in evaluating opportunities across North America to further supplement the portfolio. Additionally, we forecast FRU maintains its base dividend of $1.08/share (annually), which maps to 2024/25/26 payout ratios of 68%/72%/72%, and we expect rateable increases alongside production growth going forward.

• Reiterate Outperform. We maintain our rating and $17/share PT, reflecting Freehold’s high-margin, inflation-protected model, diversified portfolio, and discounted valuation. Freehold trades at 9.4x/9.4x/9.4x EV/EBITDA in 2024E/25E/26E (Ex. 2), trailing Canadian royalty peers at 13.1x/11.6x and NAm O&G royalty peers at 12.5x/11.3x/9.5x. While we see FRU as an inexpensive stock, we do see a lower multiple vs Cdn peers as reasonable given an overall lower pace of growth.