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analysis

On today’s Breakouts report, there are 83 stocks on the positive breakouts list (stocks with positive price momentum), and 16 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is on the positive breakouts list and was discussed in the spring. Given its remarkable performance, the share price has more than doubled year-to-date, it’s worth taking another look at the company as the strong fundamentals remain intact. Discussed today is Freehold Royalties Ltd. (FRU-T).

For cautious investors, this security may represent a defensive way to play the energy rally. For 2021, management anticipates royalty volumes will be 57 per cent weighted to oil and natural gas liquids (80 per cent of revenue) and 43 per cent to natural gas. Consequently, the share price often tracks the price of oil.

Year-to-date, the energy sector is the top performing sector in the S&P/TSX composite index, rising 51 per cent, more than double the price return of the S&P/TSX Composite Index, which has rallied 23 per cent. Freehold has been an outperformer with its share price up 137 per cent in 2021.

The stock offers investors a nearly 5 per cent dividend yield along with a forecast price return of 20 per cent for a potential total return of 25 per cent forecast over the next year.

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based Freehold provides investors with a defensive way to invest in the energy sector.

Freehold receives royalties from over 300 operators across North America. Freehold receives royalties from companies such as ConocoPhillips, Husky Energy, Cenovus Energy, Crescent Point Energy, ExxonMobil, Tourmaline Oil, and Torc Oil and Gas. The company’s royalty model enables the company to share in production revenue, receiving royalty income. However, given that the company is not an operator, it is not exposed to rising capital and operating costs or exploration risk.

For 2022, management is forecasting production of between 13,500 and 14,500 barrel of oil equivalent per day, which represents a 26-per-cent increase over its second-quarter 2021 average production volumes. Management anticipates royalty volumes will be 40 per cent weighted to light and medium oil, 8 per cent to heavy oil, 12 per cent to natural gas liquids, and 40 per cent to natural gas.

Investment thesis

  • Defensive way to invest in the energy sector.
  • Commodity prices continue to rise along with drilling activity.
  • High dividend yield.
  • Rising dividends with a conservative payout ratio.
  • Healthy balance sheet.
  • Royalty portfolio diversification and production growth from its recently acquired U.S. royalty assets.
  • Attractive valuation with room for multiple expansion.
  • Solid economic conditions.
  • Key risk to consider: if there is future material, prolonged weakness in energy prices.

Quarterly earnings results

After the market closed on Aug. 10, the company reported better-than-expected second-quarter financial results. Cash flow per share came in at 31 cents, just above the consensus estimate of 29.5 cents. The company reported average daily production of 11,137 barrels of oil equivalent per day, up 20 per cent year-over-year and up 2 per cent sequentially.

On the earnings call, president and chief executive officer Dave Spyker commented in future acquisition opportunities, “Just on what we’re looking for in an acquisition, first off, it has to be accretive on cash flow, production, and reserves per share basis. We’re really focusing on high-quality counterparties and to ensure that we’ll see continued development. We want to make sure that we call Tier 1 acreage positions, and we’re looking in basins that provide economic development at less than $40 WTI (West Texas Intermediate crude oil). So again, it can survive any volatility in the industry. We want to make sure that those lands will still get drilled and contribute to organic growth. And lastly, they do have to have significant development opportunities, so that someone can continue to develop those lands and grow them year-over-year into the future, so that every deal that we’re doing is layering on a little bit more organic growth.”

He added, “Overall, the portfolio is improving, so that we can see a line of sight to growing production year-over-year without having to rely on acquisitions like we have in the past. If we look at this year, we’re expecting significant production growth between ‘21 into 2022, and to achieve that, we don’t have to do another acquisition for the next 18 months at least. And so that’s a significant change in our portfolio and also allows us to be very selective and very patient in the type of deals that we’re looking for, the bid level that we’re comfortable with. And with the deal flow that we’re seeing right now, if we don’t find that metrics on the ones that are on our table right now, we’re comfortable that there’s more opportunities coming up shortly. So that patience has allowed us to get the right assets that we want in our portfolio.”

The following trading day, Freehold’s share price rallied 8 per cent on very high volume with over 2.5-million shares traded, well above the three-month daily average trading volume of roughly 1.1-million shares.

In Sept., management raised its guidance and now targets production of between 11,750 boe/d and 12,250 boe/d in the second half of 2021, up from its previous guidance of between 11,000 and 11,500 boe/d.

After the market closes on Nov. 10, the company will be releasing its third-quarter financial results. The consensus cash flow per share estimate is 36 cents. Management is hosting a conference call to discuss its results that day at 6 p.m. ET.

Dividend policy

Management has announced dividend increases with the release of its quarterly earnings results for the past four consecutive quarters.

Most recently, the monthly dividend was raised to its present level of 5 cents per share, up from 4 cents, in August. This equates to 60 cents per share on a yearly basis and a current annualized dividend yield of 4.9 per cent.

The payout ratio stood at 33 per cent in the second quarter and 24 per cent in the first quarter. The company targets a payout ratio of between 60 per cent to 80 per cent over the long-term, suggesting there is room for additional dividend increases.

Analysts’ recommendations

There are 15 firms that provide research coverage on this small-cap stock with a market capitalization of just under $1.9-billion. Twelve analysts have buy recommendations, two have neutral recommendations, and an analyst from ISS-EVA has an “underweight” recommendation.

The firms providing research coverage on the company are: Acumen Capital, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, Eight Capital, iA Capital Markets, ISS-EVA, National Bank Financial, Peters & Co., Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.

Financial forecasts

The Street is forecasting cash flow per share to come in at $1.37 in 2021 and $1.67 in 2022.

Earnings forecasts have been rising. Three months ago, the consensus cash flow per share estimates were $1.21 in 2021 and $1.25 in 2022.

Valuation

The stock is commonly valued on an enterprise value-to-debt adjusted cash flow basis.

The average one-year target price is $14.82, suggesting there is 20 per cent upside potential in the share price over the next 12 months. Individual target prices provided by 14 firms are: $12 (BMO’s Ray Kwan), three at $13.50, $14, two at $14.50, two at $15, two at $16, two at $16.50, and $17 (from Trevor Reynolds at Acumen Capital).

Revised recommendations

Since the beginning of the fourth-quarter, nine analysts have raised their target prices.

  • Acumen’s Trevor Reynolds to $17 (the high on the Street) from $14.
  • Canaccord’s Anthony Petrucci to $14 from $12.
  • CIBC’s Jamie Kubik to $16 from $14.
  • Desjardins’ Chris MacCulloch to $16.50 from $15.
  • IA Capital Markets’ Elias Foscolos to $16.50 from $14.
  • Peters’ Cindy Luu to $14.50 from $14.
  • Raymond James’ Jeremy McCrea to $16 from $13.
  • RBC’s Luke Davis to $15 from $13.50.
  • Scotia Capital’s Jason Bouvier to $13.50 from $11.

Insider transaction activity

So far in the second half of 2021, there has not been any trading activity in the public market reported by insiders.

Chart watch

Freehold’s share price has more than doubled so far this year, rallying 137 per cent.

In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $14. After that, there is resistance between $16 and $16.50. Should the stock price retreat, there is strong downside support around $10, near its 50-day moving average (at $10.69).

Positive BreakoutsNov. 5 close
AAV-TAdvantage Oil & Gas Ltd $7.77
AFN-TAg Growth International Inc $29.86
AC-TAir Canada $26.34
AXU-TAlexco Resource Corp. $2.44
AP-UN-TAllied Properties Real Estate Investment $44.54
HOT-UN-TAmerican Hotel Income Properties REIT LP $4.62
AHC-TApollo HealthCare Corp. $4.34
ARX-TARC Resources Ltd $12.87
AX-UN-TArtis Real Estate Investment Trust $12.10
ATH-TAthabasca Oil Corp $1.24
BIGG-CNBIGG Digital Asssets Inc. $1.81
BEI-UN-TBoardwalk Real Estate Investment Trust $55.04
BNE-TBonterra Energy Corp $7.00
BPF-UN-TBoston Pizza Royalties Income Fund $15.45
BAM-A-TBrookfield Asset Management Inc $76.62
BBU-UN-TBrookfield Business Partners LP $60.90
BIP-UN-TBrookfield Infrastructure Partners LP $74.17
CAE-TCAE Inc $41.60
GOOS-TCanada Goose Holdings Inc. $60.14
CNQ-TCanadian Natural Resources Ltd $54.21
CJ-TCardinal Energy Ltd $5.20
CLS-TCelestica Inc $13.69
CVE-TCenovus Energy Inc $15.59
CG-TCenterra Gold Inc $10.10
CHW-TChesswood Group Ltd $14.27
CHR-TChorus Aviation Inc $4.46
CGX-TCineplex Inc $15.15
CRT-UN-TCT Real Estate Investment Trust $18.10
DXT-TDexterra Group Inc. $9.38
D-UN-TDream Office Real Estate Investment Trust $24.23
DRM-TDREAM Unlimited Corp $32.84
ENB-TEnbridge Inc $53.88
EDV-TEndeavour Mining Corp. $32.99
EFR-TEnergy Fuels Inc $12.78
ERF-TEnerplus Corp $12.70
FSZ-TFiera Capital Corp $10.74
FCC-XFirst Cobalt Corp. $0.35
FR-TFirst Majestic Silver Corp $16.69
FRU-TFreehold Royalties Ltd $12.35
GLXY-TGalaxy Digital Holdings Ltd. $39.77
GMG-XGraphene Manufacturing Group Ltd. $3.86
GCG-A-TGuardian Capital Group Ltd $36.55
HWX-THeadwater Exploration Inc. $4.97
IMG-TIAMGOLD Corp $3.76
IBG-TIBI Group Inc. $12.79
IGM-TIGM Financial Inc $51.06
IIP-UN-TInterRent REIT $18.54
KRR-TKarora Resources Inc. $4.70
KEL-TKelt Exploration Ltd $5.34
LAC-TLithium Americas Corp $40.68
LA-XLos Andes Copper Ltd. $10.60
MPC-TMadison Pacific Properties Inc. $6.99
MAG-TMAG Silver Corp $25.82
MND-TMandalay Resources Corp $2.75
MFI-TMaple Leaf Foods Inc $31.66
ML-XMillennial Lithium Corp. $4.78
GRA-TNanoXplore Inc. $8.05
NGD-TNew Gold Inc $1.90
NVA-TNuVista Energy Ltd $6.59
POU-TParamount Resources Ltd $23.43
PSI-TPason Systems Inc $11.32
PEY-TPeyto Exploration & Development Corp $10.74
PZA-TPizza Pizza Royalty Corp $11.90
PBL-TPollard Banknote Ltd. $51.10
PBH-TPremium Brands Holdings Corp $136.52
PRYM-XPrime Mining Corp. $5.00
PRMW-TPrimo Water Corp. $23.71
REI-UN-TRioCan Real Estate Investment Trust $22.91
RBA-TRitchie Bros Auctioneers Inc $92.67
SSL-TSandstorm Gold Ltd $8.41
SIL-TSilverCrest Metals Inc. $11.29
ZZZ-TSleep Country Canada $37.60
SRU-UN-TSmartCentres Real Estate Investment Trust $32.32
SII-TSprott Inc $53.77
SSRM-TSSR Mining Inc. $21.74
SVI-XStorageVault Canada Inc. $6.59
TVE-TTamarack Valley Energy Ltd. $3.69
TD-TToronto-Dominion Bank $91.45
TOU-TTourmaline Oil Corp $46.22
TRZ-TTransat AT Inc $5.67
TC-TTucows Inc. $114.40
VGCX-TVictoria Gold Corp. $19.06
WJX-TWajax Corp $29.40
Negative Breakouts
ARE-TAecon Group Inc $17.31
AQN-TAlgonquin Power & Utilities Corp $17.77
WEED-TCanopy Growth Corp. $14.56
CRRX-TCareRx Corp. $4.59
HAI-THaivision Systems Inc. $7.66
MRE-TMartinrea International Inc $10.39
NVO-TNovo Resources Corp. $1.54
PAY-TPayfare Inc. $8.66
PRN-TProfound Medical Corp. $14.05
QIPT-XQuipt Home Medical Corp. $6.45
RPI-UN-TRichards Packaging Income Fund $56.99
RAY-A-TStingray Digital Group Inc. $6.59
TUD-XTudor Gold Corp. $2.01
VLNS-TValens Company Inc. $1.76
FORA-TVerticalScope Holdings Inc. $23.75
WFC-TWall Financial Corp. $15.83

Source: Bloomberg and The Globe and Mail

This report is not an investment recommendation. The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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