Why Freehold Royalties' Flat EPS Masks a Winning Income Play

The energy sector remains a land of volatility, but Freehold Royalties (TSX: FHD) is proving that steady income can thrive even when earnings per share (EPS) hit a temporary speed bump. While Q1 2025 EPS held steady at $0.23—flat compared to Q1 2024—the company’s $91.1 million in royalty revenue and fortress balance sheet reveal a defensive income machine primed to outperform through cycles. For investors seeking stability in a choppy market, here’s why FHD’s fixed dividend and North American asset portfolio warrant a closer look.

The EPS Stagnation: A Temporary Hurdle, Not a Red Flag

Yes, EPS growth has stalled. But this is less about weakness and more about strategic prioritization. Freehold chose to reinvest in high-return U.S. assets (e.g., Permian Basin leases) and maintain its $0.09/month dividend rather than chase short-term EPS gains. Sequentially, EPS dipped from $0.33 in Q4 2024, but this reflects seasonal production dips and higher lease bonus expenses—a cost of entry into premium oil basins.

The bigger picture: royalty revenue is soaring. A 18% quarterly jump to $91.1 million and 23% annual growth signal operational momentum, driven by:
- U.S. dominance: 54% of revenue now flows from U.S. operations, where realized prices are 47% higher than Canadian assets.
- Liquids weighting: 65% of production is oil/NGLs, up from 63% in 2024, locking in exposure to higher-value hydrocarbons.

Debt Discipline: The Shield Against Volatility

Freehold’s net debt of $272.2 million (1.1x net debt/FFO) is a masterclass in conservative leverage. Compare this to peers often flirting with 2.5x+ ratios, and FHD’s 1.1x multiple becomes a risk mitigation powerhouse. Even if commodity prices dip, this low leverage ensures:
- Dividend sustainability: The payout ratio dropped to 65% in Q1, leaving a 35% buffer to absorb price shocks.
- Flexibility for acquisitions: $13.8 million was spent on U.S. land in Q1, with another $10 million+ likely this year to expand Permian exposure.

Dividend Safety: The Bottom Line

The $0.27/share quarterly dividend (equivalent to $1.08 annually) is the star here. Management emphasized it’s sustainable even at prices “well below current levels”, backed by:
- Diversified basins: 71% of drilling activity is in U.S. liquids-rich plays (Permian, Eagle Ford), insulating income from gas price swings.
- Low break-even costs: Cash costs of $7.00/boe mean FHD can profit at oil prices below $60/bbl—a stark contrast to high-cost shale peers.

The PFIC Elephant in the Room

U.S. investors must consider FHD’s Passive Foreign Investment Company (PFIC) status, which complicates tax treatment. However, this is a long-term trade-off:
- Risk vs. reward: PFIC headaches are outweighed by FHD’s 5.8% dividend yield (vs. the S&P 500’s 1.6%) and asset diversification across two of the world’s top basins.
- Structural solution: FHD may explore a U.S. listing or partnership to mitigate this—a topic to watch in 2025 investor calls.

Why Buy Now?

• Income stability: The dividend is rock-solid, with a 12-year history of growth (even through oil’s 2020 crash).
• Undervalued assets: FHD’s royalties are often mispriced by markets focused on short-term EPS. The permian exposure alone justifies a premium.
• Defensive positioning: In a sector rife with debt defaults, FHD’s 1.1x leverage is a moat against recession risks.

The Bottom Line

EPS stagnation isn’t a crisis—it’s a strategic choice to prioritize dividends and growth. With royalty revenue hitting record highs and a balance sheet that laughs at commodity swings, FHD is a must-own for income portfolios. The PFIC hurdle is real but surmountable for long-term holders.

Action to take: Buy FHD.TO near current levels. Set a stop-loss at $6.50 (20% below current price) to protect against extreme oil crashes. For U.S. investors, consider holding in tax-advantaged accounts or pairing with PFIC-compliant ETFs.

The Permian Basin isn’t going anywhere—and neither is Freehold’s dividend.