This has been an exceptionally strong year for Canadian oil and gas royalty specialist Source Rock Royalties (TSXV:SRR) as it reported a record quarterly royalty revenue of C$1.9 million, an 82% increase on the year and a 25% rise on the quarter. May has been the company’s best month ever with royalty revenue reaching C$681,323. The latest results build on a similarly strong first quarter of 2022 and very decent revenues last year.
In July, the company paid out a quarterly cash dividend of C$0.015 per common share.
Source Rock Royalties specialises mostly in light oil royalties in the Western Canadian Sedimentary Basin, a massive minerals-rich part of Western Canada which includes Saskatchewan, Alberta, parts of Manitoba, British Columbia and a corner of the Northwest Territories. A smaller portion of its portfolio, roughly 8%, is in natural gas liquids.
The firm’s quarterly adjusted EBITDA also jumped 81% on the year to C$1.715 million, or C$0.038 per share. Funds from operations reached a record C$1.429 million, or C$0.032 per share, while quarterly royalty production averaged 168 barrels of oil equivalent per day.
“Royalty production in the second quarter of was steady and robust commodity prices drove record quarterly royalty revenue as well as a new high mark for monthly royalty revenue,” said Brad Docherty, President and Chief Executive.
But Docherty also signalled caution in the face of fast-changing inflation, unstable economic growth and commodity prices.
“We continue to identify, pursue and negotiate numerous potential royalty acquisitions, but commodity price strength and volatility has led us to be patient and prudent. We remain focused on royalty acquisitions that fit our corporate mandate and that can be completed at metrics that align with the significant valuation compression that has occurred across the Canadian oil and gas industry, including the royalty companies,” he added.
Oil prices have zigzagged violently this year, first rising after Russia’s attack on Ukraine and later petering out as China signalled weaker economic growth. But while the geopolitical situation in Europe remains unstable it would be too soon to assume that oil prices will remain at current levels.
Strong cash flow position allows freedom to expand
The firm is in a very good position in terms of free cash flow which currently makes up close to 45% of its market cap of around C$36.4 million, and it holds no debt. The company’s largest shareholder is the very stable Canadian CN Rail Pension fund, holding a 21% stake, while management holds another 9.5%.
The sharp increase in interest rates has worked in the company’s favour – Canadian interest rates have jumped from 0.25% in January to 2.5% in July against the background of 8% inflation – which is providing Source Rock with enough interest on its cash balance to cover close to a half of its business outgoings. This is giving the company the enviable flexibility to expand or diversify its portfolio of royalties.
Very scalable business model
Source Rock’s strategy is to run a very scalable business. The company says that while top-line royalty revenue and royalty production growth are important to the long-term success of Source Rock’s business, management views a strong operating netback per barrel as the key metric for the success and sustainability of the business.
In the latest quarter Source Rock achieved an operating netback of $112.22 per boe and a corporate netback of $93.51 per boe.
