Oil and gas royalty company Source Rock Royalties (TSXV:SRR) put out some excellent numbers yesterday with not only record quarterly revenue, but an increase of 169% against Q4 2020. The numbers were for Q4 2021, and saw the company register C$1.2m royalty revenue plus a huge increase in funds from operations.
Annual royalty revenue was also up 210% for last year against 2020 and Source Rock said it would be paying out a dividend of five cents, a payout ratio of 40%.
Source Rock is a pure-play oil and gas royalty company which focuses on existing, light oil interests. These are mainly concentrated in Saskatchewan and Alberta. It targets a balanced growth and yield business model, using funds from existing operations to buy into more royalty deals and also to pay dividends. It leverages niche industry relationships to find new royalty opportunities.
“Renewed strength in oil prices led to robust drilling activity on portions of our royalty lands in 2021, with a particularly strong amount of conventional Frobisher drilling occurring in S.E. Saskatchewan,” said Brad Docherty, CEO of Source Rock Royalties. “With an acceleration of oil and natural gas prices in 2022, we anticipate that activity levels will remain strong near term. We are unhedged on our royalty production so have full exposure to the ongoing strength in oil and natural gas prices.”
Docherty said Source Rock Royalties has approximately C$14.5m on its balance sheet, no debt at all, and is “currently assessing numerous acquisition opportunities to expand and diversify our portfolio of royalties.”
Backing out the cash raised by the company in its IPO which has not yet been deployed, it is currently trading at 6x EV/EBITDA which makes is stunningly cheap for a royalty company that has no operations and a two person headcount. The positive numbers are not surprising, given that Source Rock is operating in a sector which is commanding higher prices at the moment and potentially on course for record energy prices in 2022. The company is also a yield play, which is going to make it interesting for bigger investors who are still hunting for yield, regardless of the underlying sector.
The only publicly-listed gas and oil royalty company in Canada
Source Rock Royalties is the only publicly listed junior oil and gas royalty company in Canada. It works to identify a unique assortment of royalty acquisitions and potential partnership arrangements with exploration and production companies that have operations in the Western Canadian Sedimentary Basin. Royalty capital is an attractive option for junior and mid-cap producers, who despite strong commodity prices are grappling with low equity valuations and fragile relationships with lenders.
Source Rock is 9.5% owned by the management team and directors, with a further 21% in the hands of the CN Rail Pension Fund. The company’s goal as a provider of royalty capital is to have mutually aligned interests with partner royalty payors and assist with the efficient and successful development of the lands. It also continues to identify interesting opportunities to acquire existing royalties of varying sizes. It has an eight year track record of executing on this balanced growth and yield business model.
