The Company in a Nutshell
- The company owns royalties on 7.3M acres of land in three Canadian provinces and several U.S. states
- Vulnerable to oil and gas prices, despite its ultra low operating cost business model
- Caution: high yield, absence of dividend increases since August 2022, and an increasing payout ratio
Date Reviewed | 8/30/2024 |
Company Name | Freehold Royalties Ltd |
Symbol | FRU.TO |
Sector | Energy |
Industry | Oil & Gas E&P |
Beta | 1.938 |
PRO Rating | 2 |
Dividend Safety | 2 |
Business Model
Freehold Royalties Ltd. is a Canada-based royalty company. The Company manages non-government portfolios of oil and natural gas royalties in Canada with an expanding land base in the United States. Its primary focus is to acquire and actively manage royalties, while providing a lower risk income vehicle for its shareholders. Its total land holdings encompass approximately 6.2 million gross acres in Canada. It has royalty interests in more than 19,000 producing wells and almost 400 units spanning five provinces and eight states and receives royalty income from over 360 industry operators throughout North America. It has two geographical segments: Canada, which includes exploration and evaluation assets and the petroleum and natural gas interests in Western Canada, and US includes petroleum and natural gas interests primarily held in the Permian (Midland and Delaware), Eagle Ford, Haynesville and Bakken basins largely located in the states of Texas, Louisiana, and North Dakota.
Current price | 14.23 |
ROE | 14.00 % |
ROIC | 12.85 % |
Shareholder Yield | 0.00 % |
5-Yr Total Return | 148.05 % |
1-Yr Total Return | 0.75 % |
Next Earnings Date | 11-06-24 |
Latest Quarter Information
What the CEO said:
"Freehold’s oil weighted portfolio, underpinned by premium operators in core basins across North America, delivered 3% year-over-year production growth, averaging 15,221 boe/d for the quarter. Our U.S. production grew 9% over the quarter to 5,599 boe/d – a result of increased activity on our Eagle Ford and Permian assets and a recovery from the extreme weather impacts in Q1-2024. A key contributor to our organic U.S. production growth was a multi-well pad in Midland (Permian) where we have a 5.5% net royalty interest that was brought on-line in the quarter."
What we say:
08-27-2024, Freehold Royalties reported a good quarter with revenue up 11% and FFO per share up 14%. The growth was supported by a 3% higher production and 5% higher WTI oil pricing, 14% higher Edmonton Light sweet crude oil pricing and 18% higher Western Canadian Select heavy crude oil pricing. U.S. production grew 9% over the quarter to 5,599 boe/d – a result of increased activity on FRU's Eagle Ford and Permian assets and a recovery from the extreme weather impacts in Q1-2024. A key contributor to its organic U.S. production growth was a multi-well pad in Midland (Permian) where it has a 5.5% net royalty interest that was brought on-line in the quarter.
Investment Thesis
Freehold Royalties has very low costs that don’t change when commodity prices go up or down because it leases oil-producing land to upstream oil and gas companies who then extract the resources in exchange for royalty payments. It takes about $30M a year for FRU to cover its corporate G&A plus interest expense. This allows the company to fund a $0.09/month dividend with a generous yield. The royalties FRU receives are primarily driven by the price of WTI and Edmonton Light Sweet crude prices, so the company remains exposed to commodity prices, but is insulated from other risks as it doesn’t pay for extraction costs, equipment, etc.
It’s well diversified with broadly-distributed geographically, owning royalties on 7.3M acres several provinces in Canada and states in the U.S.—generating 57% and 43% of its revenues, respectively—and producing a diversified production mix comprised of light and medium oil, heavy oil, natural gas liquids (NGLs), and natural gas.
The company is prudent in its debt management with a target for the net debt to funds from operations ratio below 1.5. Usually active in acquiring more assets and adept at generating good ROIC from them, FRU has been quiet on that front since 2022, possibly because the frenzied M&A pace was driving acquisition prices too high. With oil prices stagnating below US$80 WTI, we might see sellers more willing to sell at lower prices.
Dividend Triangle
5-Yr Rev. Growth | 16.85 % |
5-Yr EPS Growth | 48.95 % |
5-Yr Div Growth | 15.65 % |
Potential Risks
Like most oil and gas companies, the party that started in 2020 is over. In 2023, FRU saw a steady operating performance harmed by choppy commodity prices that were outside of the company’s control. While it doesn’t pay the infrastructure and extraction costs of the wells itself, its client-operators do. They face inflated costs and higher interest on their debt and, with lower commodity prices on top of that, they could reduce their production. FRU’s revenue has fallen after the oil boom of 2022 as have its earnings.
Debt/Equity | 0.15 |
Financial Debt to EBITDA (TTM) | 0.80 |
Current Ratio (Quarterly) | 1.65 |
Credit Score | 91 |
Dividend Growth Perspective
FRU is able to maintain its dividend payment as long as oil prices don’t fall below US$50 WTI. In the meantime, it offers a 7-8% yield!
Nice, right? Not so fast. While the FFO payout ratio seems in order, there has been no dividend increase since August 2022. Though many tout it as a solid defensive play in the oil and gas industry, its dependence on commodity prices has weakened its dividend triangle. Limited share appreciation potential and the absence of dividend increase make this look like a deluxe bond or, worse, a dividend trap unless oil prices rally.
Dividend ($) | 1.08 |
Dividend Yield Fwd | 7.65 % |
Dividend Frequency | Monthly |
Average 5-Yr Yield | 6.35 % |
Payout Ratio (%) | 123.35 |
Cash Payout Ratio (%) | 72.50 |
DGR 1-Yr | 0.00 |
DGR 3-Yr | 53.70 |
DGR 5-Yr | 15.65 |
DGR Streak | |
Chowder Score | 23.30 |
Next DVD PMT | 10-15-24 |
Valuation
Recent Annual Dividend Payment | $ 1.08 |
Expected Dividend Growth Rate Years 1-10 | 0.00% |
Expected Terminal Dividend Growth Rate | 0.00% |
Discount Rate | 10.00% |
Discount Rate (Horizontal) | |||
Margin of Safety | 9.00% | 10.00% | 11.00% |
20% Premium | $ 14.40 | $ 12.96 | $ 11.78 |
10% Premium | $ 13.20 | $ 11.88 | $ 10.80 |
Intrinsic Value | $ 12.00 | $ 10.80 | $ 9.82 |
10% Discount | $ 10.80 | $ 9.72 | $ 8.84 |
20% Discount | $ 9.60 | $ 8.64 | $ 7.85 |
Video Tutorial: How to Read the Stock Cards DDM Valuation
Market Cap | 2 B |
PE Ratio | 14.25 |
Fwd PE | 10.60 |
Price to Book Ratio | 2.30 |
DDM Valuation | 10.8 |
Average 5-Yr PE | 466.91 |
Value Score | 79 |
- All financial metrics are updated weekly.
- The DSR PRO rating and Dividend Safety Score are updated quarterly.
- The analysis (investment thesis, risk potential, dividend growth perspective and DDM calculation) is reviewed every 6 months.
- The PDF format includes only comments (no metrics) and is reviewed every 6 months.