Source Rock Royalties ($SRR.V) FY24 results: Quick Review

Royalties for the long term

(All Canadian currency)

Assets

S.E Saskatchewan

Varying Gross Overriding Revenue Royalties (GORRs) in approximately 35,000 gross acres of land located in southeast Saskatchewan, predominantly producing light Oil. Here is where most of the royalty producing wells are established. In 2024, SRR.V has made a small royalty acquisition here, paying ~$27k for a 2% GORR.

Clearwater & Hamilton Lake, Alberta

1.5% GORR in approximately 61,000 largely contiguous acres of land located in central Alberta, producing Heavy Oil from the Clearwater formation. As of December 2024, there where 59 producing wells.

For the Hamilton Lake we already know that there are 89 thousand barrels remaining from the production volume royalty (PVR), which can be converted to a 0.5% GORR or paid out, at the discretion of the payor by 2034. The Hamilton Lake is predominantly Light Oil, as in S.E Saskatchewan.

Important to say GORRs are tied to production and does not represent ownership of the land, these are not mineral interests like other companies have.

Now, let’s look at the Oil reserves from these assets.

Changes in Reserves

We know already that Light Oil comes from Saskatchewan and Hamilton Lake, and Heavy Oil from Clearwater. We also know that Hamilton Lake is a fixed amount of production. So, making it simple, according to this table, both Saskatchewan and Clearwater are adding reserves mainly thanks to ‘improved recovery’. Heavy Oil reserves have grown 23.7% year-over-year while Light Oil have grown 6.12%. All organic growth.

Production

On the production side, S.E Saskatchewan got the most volumes (20 new Horizontal wells started producing), while East-Central Alberta (Hamilton Lake) was second.

Overall, the company has added +21% growth in production (251boe/d in 24 vs. 208 boe/d in 23) 95% liquids. Light oil commands some premium price, as it is easier to deal with than heavy Oil, and the S.E Saskatchewan Oil is sold at Cromer, Manitoba, which commands much smaller differentials to WTI than the WCS barrels sold at Alberta.

Income statement

With the increase in volumes, royalty revenues came at $7.7 million vs. $6.6 million in FY23.

Average realized prices for FY24 where 83.58$/boe, 5% lower than in FY23. This was somehow offset by a 2$/boe decrease in administrative expenses, giving an operating netback of 74,20$/boe vs. 76,30$/boe in FY23 (-3%).

Going forward, growth in natural gas prices (7-5% of Source Rock production) could slightly offset decline in Oil prices. Even so, still the netback is amongst the highest of its peers thanks to the high Light Oil exposure. Moreover, the dividend is covered even at 60$ (Canadian dollars) WTI.

Valuation/ Conclusion

4.4x EV/Royalty Revenue and 5x EV/Netback at 0.85$/share with 9% dividend yield. As a comparison, Freehold Royalties ($FRU.TO) has a multiple ~7-8x EV/Netback and same dividend yield. FRU has a much more diversified asset base and royalty streams and commands a premium.Despite that, the recent noise about OPEC+ capacity expansion and a possible economic recession are giving these Canadian oil royalty companies attractive valuations. World GDP compression in the mid-term is a headwind for Oil, but nevertheless, low Oil prices are already destructing US shale oil supply, while the Saudis need to fund its Vision 2030 programs and might not be happy with the situation right now.

Despite all supply/demand balances, companies like SSR.V, Freehold or PSK are good income generators for a retirement portfolio. No need to trade, just be sure oil is not going to be replaced by something else a decade from now (it won’t). The last oil barrel in North America will come from Canada, and this companies have producing assets for years to come and 90% of their job is to pay dividends. Simple as that.