Freehold exits slump in good shape

This oil and gas stock took advantage of the oil slump by making acquisitions at the bottom of the cycle.


Freehold doesn’t pay any costs to pump oil and gas from its properties. It receives royalties from producers that operate on its land.

Despite the challenging backdrop of COVID-19 and the sharp decline in oil prices in 2020, Freehold Royalties was able to undertake a number of initiatives that should serve it in good stead. In particular, the company took advantage of the bottom of the price cycle to pursue acquisitions in the US.

Altogether, Freehold completed $3.3 million in royalty acquisitions in 2020. Much of the focus was on smaller tuck-in deals building on the company’s position in North Dakota. But at the end of the year it completed its first material US royalty transactions, complementing its positions in the Bakken basin in midwestern Canada and the US, and the Permian basin in the southwestern US.

Freehold Royalties Ltd. (TSX—FRU) acquires and manages oil and natural gas properties. The company does not pay any of the costs to extract the oil and natural gas from its properties. Instead, it receives royalty income from gross production revenues earned by the producers that operate on its lands.

Low crude oil prices hurt 2020 results

Low commodity prices negatively affected the company’s 2020 financial results. For the year ended Dec. 31, 2020, Freehold’s cash flow was $72.9 million, or $0.61 a share, down from $118.1 million, or $1.00 a share, in 2019.

Royalty and other revenues fell 36 per cent to $90.0 million as weakness in crude oil prices impacted revenue and production volume.

Nonetheless, Freehold ended the year with a net-debt-to-cash-flow ratio of 1.3, well within our comfort zone of no more than two times.

Even better for shareholders, the company says the outlook for commodity prices and its business model has improved. Consequently, it’s raised its monthly dividend to $0.03 a share from $0.02. That works out to a dividend payout ratio of 33 per cent based on 2020 estimated cash flow, well below management’s target of 60 to 80 per cent.

Acquisition prospects look good

Freehold is taking a conservative stance toward the dividend for now. That’s because the supply-demand balance for oil continues to be tenuous. The company sees further acquisition opportunities across North America and its wants to retain financial flexibility. But prospects for future dividend increases look good.

After all, the improvement in oil prices, if they remain buoyant, will help boost Freehold’s cash flow considerably. Then too, the company projects its production will increase by 10 to 15 per cent this year. Cash flow per share, therefore, is expected to increase by over 80 per cent this year.

Freehold trades at a reasonable multiple of the cash flow it’s expected to earn this year and its annual dividend offers a decent yield. Freehold Royalties is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the April 30, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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