Freehold Royalties Ltd. (TSX:FRU) operates a fairly straightforward business. Its primary focus is acquiring and managing oil and natural gas royalties in western Canada. The company has amassed a diversified portfolio with over 200 operators, reducing its exposure to major downturns in drilling activity. Its largest royalty interest only constitutes 7% of total royalty income. Analysts have grown consistently optimistic over the summer. Royal Bank of Canada lifted its price target in May from $15.00 to $16.00. Toronto-Dominion Bank reaffirmed its “buy” rating and issued a $15.50 price target in June. In July Bank of Montreal upped its price objective…
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Analysts have grown consistently optimistic over the summer.
The deal involves Penn West’s 8.5% royalty from production in part of the Viking oil field in Saskatchewan as well as royalty payments in Alberta, Saskatchewan, and Manitoba. The acquired interests, totaling 280,000 acres of royalty and mineral-title lands, are already near Freehold’s current properties and should add $14.2 million to its operating income this year.
As with most of its business, Freehold is not responsible for any of the capital costs to drill and equip the wells for production and will not incur any costs to operate and maintain the wells.
A business model worth betting on
What better way to bet on rising oil prices than with a company that directly gains from rising prices? With very limited capital expenditure needs, Freehold is a solid bet with limited insolvency risk.
The need for additional financing has forced many operators other than Penn West to sell royalties to Freehold at attractive prices. Freehold completed $200 million in acquisitions last year, representing the second-busiest year in company history.
With a strong balance sheet and one of the lowest leverage ratios in the industry, expect Freehold to continue to capitalize with value-creating deals. Wall Street’s rosy expectations might actually be warranted.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned.