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analysis

On today’s Breakouts report, there are 25 stocks on the positive breakouts list (stocks with positive price momentum), and 28 stocks are on the negative breakouts list (stocks with negative price momentum).

The positive breakouts list is dominated by the energy sector, representing 88 per cent of the stocks on the positive breakouts list.

Discussed today is an energy stock that appeared on the positive breakouts list last week - Freehold Royalties Ltd. (FRU-T). For income investors, this security may represent a defensive way to play the energy rally. The stock offers investors an attractive dividend yield of 5.9 per cent combined with a forecast price return of 24 per cent for a potential total return of 30 per cent over the next year.

Year-to-date, the energy sector is the top performing sector in the S&P/TSX composite index with a gain of 44 per cent compared to a 2-per-cent loss for the broader index.

A brief outline on Freehold 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 350 operators across North America. Freehold receives royalties from companies that includeConocoPhillips, 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 13,750 barrel of oil equivalent per day and 14,750 boe/d. Management anticipates royalty volumes will be 41-per-cent weighted to light and medium oil, 8 per cent to heavy oil, 11 per cent to natural gas liquids and 40 per cent to natural gas.

Investment thesis

  • Defensive way to invest in the energy sector.
  • Soaring commodity prices with strong supply/demand fundamentals.
  • Diversified royalty assets with exposure to both oil and natural gas.
  • High dividend yield with a conservative payout ratio.
  • Ability to increase its dividend with strong cash flow generation.
  • Healthy balance sheet. Net debt-to-12 month trailing funds from operation of 0.3 times at the end of the first quarter.
  • Acquisition opportunities supporting production growth.
  • Key risk to consider: volatility in commodity prices.

Quarterly earnings results

After the market closed on May 10, the company reported its first-quarter financial results.

Cash flow per share came in at 48 cents, relatively in-line with the consensus estimate of 49 cents. The company reported average daily production of 13,676 boe/d, up 25 per cent year-over-year.

During the quarter, 244 gross wells were drilled with 144 gross wells from its Canadian royalty lands and 100 gross wells from its U.S. lands. Canadian production was down 1 per cent sequentially, impacted by cold weather. The company’s U.S. production was down 5 per cent quarter-over-quarter due to the timing of bringing new wells on stream.

On the earnings call, vice-president of business development Rob King commented on acquisition opportunities, saying: “In terms of activity, just to give some numbers on what opportunities came across our desks in both U.S. and Canada this quarter, we had about $2.5 billion of opportunities that came across our desk, across 30 deals. About 80 per cent of that was U.S., 20 per cent Canada. In terms of what we actually evaluated that fit our acquisition criteria that was about 15 transactions. So we sort of eliminated half right away. There [were] just over $2 billion of opportunities. In terms of what we actually bid on, it’s a much smaller number from that 15 that we actually evaluated. We bid on three opportunities, and we’re successful on the one tuck-in deal. In terms of forward expectations, there’s a lot of opportunities that continue to be in the market, in particular on the U.S. side. This high continued constructive commodity pricing has really brought forward a number of sellers, really all across the size spectrum, to be honest.”

At the annual meeting of shareholders held on May 10, chairman of the board Marvin Romanow said, “Looking forward, our portfolio is forecast to provide organic production growth on an annual basis for the next number of years. Although we expect this growth to be choppy, on a quarter-to-quarter basis as it’s difficult for us to predict exactly, which quarter wells will be drilled and operators make those decisions on an ongoing basis. All of this is a very significant step forward in the sustainability of our business. Our portfolio is positioned in North America with very low breakeven prices required to support drilling, and what this means is that we expect this strong production performance even if commodity prices weaken significantly from current levels.”

He added, “The acquisition of high-quality assets will continue to be a core element of our growing business.”

On May 11, Freehold’s share price was relatively unchanged, declining 13 cents or 1 per cent.

After the market closes on Aug. 9, the company will be releasing its second-quarter financial results. The consensus cash flow per share estimate is 56 cents.

Dividend policy

The company pays its shareholders a monthly dividend of 8 cents per share or 96 cents per share yearly, equating to a current annualized yield of 5.9 per cent.

The payout ratio stood at 38 per cent in the first quarter. Management targets a payout ratio of between 60 per cent and 80 per cent suggesting there is room for additional dividend increases.

Analysts’ recommendations

There are 14 firms that provide research coverage on this small-cap stock with a market capitalization of $2.4-billion, of which 12 analysts have buy-equivalent recommendations and two analysts have neutral recommendations (BMO’s Ray Kwan and Scotiabank’s Jason Bouvier).

The firms providing research coverage on the company are: Acumen Capital, ATB Capital Markets, BMO Nesbitt Burns, CIBC World Markets, Cormark Securities, Desjardins Securities, Eight Capital, iA Capital Markets, 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 $2.13 in 2022, up from $1.39 reported in 2021, and $1.92 in 2023.

Earnings forecasts have been rising. Four months ago, the consensus cash flow per share estimates were $1.69 in 2022 and $1.62 in 2023.

Valuation

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

The average one-year target price is $20.07, suggesting there is 24 per cent upside potential in the share price over the next 12 months. Individual target prices are: $17 (Scotiabank’s Jason Bouvier), two at $18, two at $19, four at $19.50, two at $20, $22, $23 and $27 (Eight Capital’s Phil Skolnick).

Revised recommendations

In May, two analysts revised their target prices.

  • Acumen’s Trevor Reynolds trimmed his target price by $1 to $20.
  • IA Capital Markets’ Matthew Weekes tweaked his target price to $19.50 from $19.

Insider transaction activity

Quarter-to-date, there has only been one transaction in the public market reported by an insider.

In a relatively small transaction, Ian Hantke, vice-president of diversified royalties, bought 1,277 shares at a price per share of $15.66 on May 31, increasing this specific account’s position to 4,015 shares. The cost of this purchase totaled over $20,000.

Chart watch

Year-to-date, Freehold’s share price has rallied 39 per cent, just shy of the 44 per cent gain for the S&P/TSX Energy Index.

Looking at key technical resistance and support levels, the share price is currently trading around a major ceiling of resistance around the $16 level. The stock has topped out at this level several times over the past few weeks, failing to break and hold materially above this level for a significant period of time. On a pullback, the stock has strong technical support around $14. Over the past three months, the share price has been range-bound, trading largely between $14 and $16.

ESG Risk Rating

Risk provider Sustainalytics has given Freehold a risk score of 13. A score of between 10 and 20 reflects a low risk rating.

POSITIVE BREAKOUTSJune 6 close
ARX-TARC Resources Ltd20.79
ATH-TAthabasca Oil Corp3.15
BTE-TBaytex Energy Corp7.86
BIR-TBirchcliff Energy Ltd12.25
CPG-TCrescent Point Energy Corp12.37
ERF-TEnerplus Corp21.19
IPO-TInPlay Oil Corp.4.58
KEL-TKelt Exploration Ltd7.85
MG-TMagna International Inc84.03
MEG-TMEG Energy Corp23.07
NVA-TNuVista Energy Ltd13.5
OVV-TOvintiv Inc. 74.36
POU-TParamount Resources Ltd39.07
PXT-TParex Resources Inc29.01
PKI-TParkland Fuel Corp38.6
PEY-TPeyto Exploration & Development Corp16.76
PIPE-TPipestone Energy Corp. 6.37
PIF-TPolaris Infrastructure Inc.20.91
RFP-TResolute Forest Products Inc. 20.56
SDE-TSpartan Delta Corp. 15.99
SGY-TSurge Energy Inc12.42
TVE-TTamarack Valley Energy Ltd. 5.94
TWM-TTidewater Midstream and Infrastructure Ltd. 1.67
VET-TVermilion Energy Inc29.39
WCP-TWhitecap Resources Inc11.95
NEGATIVE BREAKOUTS
AR-TArgonaut Gold Inc1.08
ACB-TAurora Cannabis Inc. 1.93
DOO-TBRP Inc84.9
BU-TBurcon NutraScience Corp0.75
CNC-XCanada Nickel Co.2
WEED-TCanopy Growth Corp. 5.13
CRON-TCronos Group Inc. 3.59
DBM-TDoman Building Materials Group Ltd. 6.69
D-UN-TDream Office REIT22.45
DRM-TDREAM Unlimited Corp41.99
ET-TEvertz Technologies Ltd13.56
MHC-U-TFlagship Communities REIT17.27
GCM-TGran Colombia Gold Corp. 4.14
HUT-THut 8 Mining Corp.2.79
IMV-TIMV Inc. 1.12
KSI-Tkneat.com Inc.2.62
LAS/A-TLassonde Industries Inc120.7
MDNA-TMedicenna Therapeutics Corp.1.13
MI-UN-TMinto Apartment REIT17.55
NEXT-TNextSource Materials Inc.2.21
NTR-TNutrien Ltd. 116.03
ONC-TOncolytics Biotech Inc1.31
OGI-TOrganigram Holdings Inc. 1.35
RCI-B-TRogers Communications Inc63.63
S-TSherritt International Corp0.57
REAX-XThe Real Brokerage Inc. 1.78
TCN-TTricon Residential Inc14.91
TUD-XTudor Gold Corp. 1.54

Source: Bloomberg and The Globe and Mail

Please note that 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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