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 16% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS fell 8% from FY23 to CAD 0.03.

The stock's performance has been mixed in the past six months, with growth following a decline. The stock has lagged its global peers from the same sector and industry (as shown above), underperforming then by 1ppts in total. At the same time, the stock's performance relative to its the peers from the same country and sector is different. The stock outperformed these peers by 2ppts over the past six months and grew 6ppts slower in the past month. With respect to the stock's valuation against its peers, its overall price performance is neutral.

The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 78.3% in the last 12 months, up from 75.5% in FY23. 

Historically, SRR.V has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 19.4%, down from 23.6% in FY23. 

Source Rock Royalties Ltd. reported a return on equity (RoE) of 5.7% in the last 12 months, down from 5.8% in FY23. 

Another important profitability metric, return on assets (RoA), amounted to 5.6% in the last 12 months, a decrease from 5.6% in FY23. 

In the last 12 months, the return on capital employed (RoCE) declined to 5.7%, below the peers. 

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.9 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 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, and excessive margin volatility.

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. 

Based on key historical and expected multiples, the stock is fairly valued relative to its peers. Specifically, the stock is 'expensive' on P/E, undervalued on EV/EBITDA, reasonably priced on P/FCF. 

Source Rock Royalties Ltd.

CA$ 0.81

4

Source Rock Royalties Ltd.

CA$ 0.81

4

Risk factor

Profitability factor

Risk / Profitability

Risk factor

Profitability factor

CA$ 0.81

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