Freehold Royalties is an oil and gas royalty company with assets predominantly in western Canada. The company receives oil and natural gas revenue from approximately 300 industry operators with royalty rates varying from less than 1% to 22.5%. The royalty volumes are weighted by nearly 55% oil and natural gas liquids (NGL) and 45% natural gas. Freehold does not incur any capital costs to drill or equip the wells for production. Its land holdings total more than 6.8 million gross acres, which is one of the largest independently owned royalty land portfolios in Canada. The company continues to add low decline, growth assets to its portfolio at a fast pace. Freehold owns a diverse portfolio of properties in western Canada. Its royalties as a percentage of production have remained above 95%. About 10% of industry drilling within western Canada is on Freehold land. Given its strong reputation, the company can conveniently create new leases on its royalty lands.Investment Data
- Opportunity Score: 23
- Ticker: TSE:FRU
- Sector: Energy
- Industry: Oil & Gas - E&P
- Market Cap: 0.34B
- P/E: 64.70
- Dividend Yield: 22.26
- Dividend Payout Ratio: 999.99
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
Revenue Growth & Market Exposure
Freehold has one of the largest independently owned portfolios of royalty lands in Canada, with land holdings totalling more than 6.8 million gross acres. The company is focusing on growing volumes through quality acquisitions and organic growth through leasing and third-party drilling. Third-party drilling is beneficial for Freehold Royalties as it offsets most of the production decline on Freehold’s royalty portfolio without the need of own capital investment. Freehold is focusing on increasing activity on its royalty lands and has already created 102 new leases in 2018 with 100 more expected in 2019.
Freehold Royalties is a pure play royalty company, with royalty production representing 94% of total volumes and over 99% of operating income. The company reported more than 50% increase in royalty production over the last three years and more than 15% since 2015. Freehold acquires royalties with acceptable risk profiles and long economic life. The company receives royalty income from nearly 300 industry operators and royalty rates vary from less than 1% to 22.5%. Some of Freehold’s leading royalty payers are Canadian Natural Resources, Cenovus, ConocoPhillips, Husky Energy, Cardinal Energy, etc.
Freehold Royalties is an opportunistic acquirer and has completed over $300 million in royalty transactions over the past three years. These acquisitions have been successfully contributing to its portfolio of low decline and growing asset base. Freehold’s cash costs are less than $5/ boe which helps in generating sustainable cash flows. Its quality asset base has a large untapped upside with more than 21,000 potential locations on its royalty lands and over 40 years of future development.
Freehold has a solid history of growing its royalty production while reducing its working interest volumes. The company is targeting dividends within a payout ratio of 60%-80%. It has generated a 13% average annual return in the past. The company last raised its dividend by 5% and has an annual average dividend yield of more than 9%. It’s a high yield stock.Freehold has been maintaining its monthly dividend at $0.0525 per share consistently with its current dividend strategy.
Freehold Royalties is positioned to gain from its multi-year oil weighted drilling inventory. Its undiscounted/not discounted royalty portfolio is valued at $7 billion and the majority of value is associated with oil-focused assets. It is expecting to generate ~$10/share of free cash flow keeping production and commodity prices flat. About $47 million in acquisition deals, year-to-date, were funded via Freehold’s free cash flow. The company continues to generate free cash flow over and above its dividend at the current commodity price levels.
As a dividend-paying oil and gas royalty company, Freehold Royalties acquires and actively manages royalties, while providing a lower risk income vehicle for its shareholders. Royalties provide top-line revenue without exposure to capital and environmental costs. Freehold is in a good position to leverage from rising oil prices without the exposure to an end of asset life liability. An increase of $10/ bbl in oil prices can increase its free cash flow by more than 20%. The company is also favourably placed to drive oil and gas development on its lands through lease out programs. A strong balance sheet with low-risk business further grants it financial flexibility. Freehold is targeting to generate between $4.00-$5.00/share of funds flow for its shareholders over the next five years.
Freehold Royalties’ quality assets with multi-year upside grants it an edge over the competition. The company will continue to receive revenue from oil and natural gas properties as reserves are produced over the economic life of the properties. Royalties should continue to provide the free cash flow to fund acquisitions and further grow its royalty portfolio.
Freehold has achieved growth in net drilling on its royalty lands as well as growth in net wells that reflects the quality and resilience of its underlying royalty portfolio. It is a defensive oil and gas investment generating significant funds from operations at current commodity price levels. Given its low risk, long-life asset base and solid acquisitions, the company should comfortably continue its dividend growth streak in the future.
This type of business is unconventional and difficult to compare against other companies. Unfortunately, the dividend has not historically been consistent and the oil scene is also inconsistent. With that said, the dividend appears to be safe from a free cash flow perspective. This is strictly an income play in my opinion. Have a look at some of the analyst comments from BNN on Stockchase.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.