Source Rock Royalties Ltd. acquires and manages oil and gas royalties and mineral title interests. The company has a light oil focused portfolio of royalty interests concentrated in S.E. Saskatchewan, east-central Alberta, west-central Alberta, and west-central Saskatchewan. Source Rock Royalties Ltd. was incorporated in 2012 and is headquartered in Calgary, Canada.

Canada

Source Rock Royalties Ltd.

Energy

The company tries to pay dividends regularly but only sometimes does so. It has paid dividends in roughly half the past ten years. Dividend per share (DPS) has grown yearly, and there is a clear trend. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded nearly all its peers. The company distributes nearly all its profit as dividends (payout ratio above 90%, a negative factor). It will not be easy to sustain such an extreme payout ratio. It may also indicate a company's lack of profitable growth opportunities, which suggests doubtful prospects. On average, the company pays dividends five times a year, which may appeal to investors valuing a regular income stream. 

SRR.V reported revenue of CAD 8mn in the last 12 months, up 13% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 11% from FY23 to CAD 0.03.

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 2ppts and its growth decelerated by 3ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 76.9% in the last 12 months, a decline from 82.2% in FY22. 

Historically, SRR.V has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 18.2%, down from 39.4% in FY22. 

Source Rock Royalties Ltd. reported a return on equity (RoE) of 5.2% in the last 12 months, down from 12.2% in FY22. 

Another important profitability metric, return on assets (RoA), amounted to 5.0% in the last 12 months, a decrease from 11.6% in FY22. 

In the last 12 months, the return on capital employed (RoCE) declined to 5.2%, below the peers. 

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.6 in the past several years. This ratio implies a good shareholder value creation. 

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

SRR.V has very poor trading liquidity. It will take considerable time for the average private investor to sell a common position under normal market conditions. Liquidity is usually stable and becomes extremely unfavourable on the days with the lowest activity. However, under highly turbulent market conditions, the trading volume tends to improve significantly. Another factor to consider is the substantial number of days with zero trading volumes, i.e., without any ability to sell a position. The stock has a tiny market capitalisation, which usually makes its trading liquidity erratic and unpredictable. 

No other major risks have been identified.

The risk of default is moderate. We note resilient historical revenue growth, robust profitability, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to weak positions in its industry, negligible return on capital, excessive margin volatility, and poor working capital management.

In highly turbulent market conditions, SRR.V is not overly volatile. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low. 

In normal market circumstances, SRR.V is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will move with the index. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to minimal. 

From both historical and forecast perspectives, the stock is slightly overpriced compared to similar stocks. In particular, the stock is overpriced on P/E, 'cheap' on EV/EBITD. 

Source Rock Royalties Ltd.

CA$ 0.84

4

Source Rock Royalties Ltd.

CA$ 0.84

4

Risk factor

Profitability factor

Risk / Profitability

Risk factor

Profitability factor

CA$ 0.84

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