Having already reported excellent revenue figures for 2021 earlier this year, Canadian oil and gas royalty specialist Source Rock Royalties (TSXV:SRR) continued to impress with an 89% revenue increase in the first quarter of 2022. The Calgary-based firm boosted its royalty revenue to CAD 1.527 million with adjusted EBITDA rising 92% to CAD 1.395 million.
Other metrics the company reported also look very good. It accumulated a record level of quarterly funds from operations of $1,172,431, a 61% increase over the same quarter last year, with the quarterly production averaging 165 barrels of oil equivalent, of which 92% were oil and natural gas liquids. This is a 15% increase over last year’s Q1 output.
Source Rock Royalties paid out a quarterly dividend of $0.015 per share in the form of a “return of capital”, resulting in a payout ratio of 38%. This is a non-GAAP ratio.
A unique oil royalties proposition
Source Rock is a fairly nimble company which specialises in oil and gas royalties rather than the actual extraction and as such doesn’t have to deal with the expenses of drilling, well optimisation, abandoning wellbores and other costs associated with production. All of its royalties lands are based in the Western Canada Sedimentary Basin (WCSB) and are either already producing or prospecting for light oil. The company’s key metric is netback per barrel and light oil provides those, even at times when oil prices are trading at a low end. The operating netback for the quarter stood at $94.07 per boe and a corporate netback at $78.67 per boe.
The Calgary-based firm started trading at the Toronto Stock Exchange in early March this year, shortly after Russia’s invasion of Ukraine pushed up oil prices from $76 a barrel to around $100/bbl.
Brad Docherty, president and chief executive said, “Our first month as a publicly listed company coincided with an acceleration in oil prices and strong production from new drilling on our royalty lands. This resulted in royalty revenue in March far surpassing our prior highest monthly revenue.
“With approximately $15 million ($0.33 per share) in cash on-hand, we are actively (but patiently) evaluating numerous royalty acquisition opportunities. We are keen on expanding and diversifying our portfolio of oil and gas royalties but will do so prudently given the recent material increase in commodity prices, “ he added.
Balanced growth and yield business model
Source Rock’ Royalties’ strategy is focused on supporting a balanced growth and yield business model by increasing the company’s exposure to both long-life base production and future drilling activity by royalty payors.
Since its inception in 2013 Source Rock Royalties has consistently acquired royalties despite a high degree of energy market volatility. Source Rock has almost entirely focused on non-marketed royalty acquisitions, as compared to royalty opportunities marketed through formalised third-party processes. The company has strong relationships in the oil and gas sector in the WCSB and leverages these relationships to identify and access non-marketed royalty acquisitions.
Looking ahead, Source Rock Royalties’ first quarter results only reflect the increase in oil prices between January and end of March. Since then a barrel of oil has become $20 more expensive, which is sure to be reflected in Source Rock’s bottom line in the next quarter.
