Canada's Largest Landowner Offers 11% Returns Compounded?

The ROI Club Monthly - June 2024

Disclaimer: This article is for informational purposes only and should not be considered as financial advice. Always consult with a professional financial advisor before making any investment decisions.

Welcome to the ROI club, a private publication where members get access to my equity research and explore hidden investment opportunities that I believe trade for less than they are really worth.

Today I’ll be sharing a (hopefully) concise summary of my take on a company the combines two of my favourite investment classes: land + energy royalties. A free preview is given, with a deep dive including: what I think the company is worth, how much I am buying and what role it’s playing in my portfolios available to premium members.

Before we jump in, a quick reminder to get your tickets to my Uncle Rick’s investment symposium: RULE SYMPOSIUM - GET YOUR TICKETS HERE

Investment Idea: PrairieSky Royalty Ltd. is Canada’s largest private landowner, if one includes their interest in government-owned property they have various claims on over 18.3 Million acres.

The company has a truly fascinating and long history, highlights of which include:

1. Its roots trace back to 1881 when Canadian Pacific Railway (CPR) was granted 25 million acres of land, including mineral rights, for building a cross-country railroad.

2. Corporate Evolution: The Co. went through several corporate iterations, including Canadian Pacific Oil and Gas (1958), PanCanadian Petroleum (1971), and Encana (2002). PSK was formed in 2014 and acquired mineral interests from Encana.

Executive Summary:

PrairieSky is a pure-play royalty company holding extensive crude oil and natural gas royalty interests across approximately 18.2 million acres in Western Canada, including 9.7 million acres of fee simple mineral title lands. This is important as fee-simple royalties exist in perpetuity and do not require payment to the crown.

Their growth strategy encourages third-party development of its properties while strategically acquiring additional petroleum and natural gas royalty assets for long-term value enhancement. This provides them with a capital light, inflation benefitting business with a ton of flexibility to deploy capital where management deems fit and when it’s most advantageous throughout a commodity cycle.

Capital allocation prowess evidenced by CFO growing at nearly 10% CAGR while CAPEX has DECREASED on an annualised basis. IOW = pay less, get more.

Investment Thesis:

PrairieSky Royalty Ltd. is attractive due to its 18.3 million acres of royalty interests, which act as an inflation hedge. Their superior business model is evident in its net income growth matching revenue growth through commodity price cycles. Dividends and acreage per share have grown at 4.6% and 7% annually which I expect to continue for many decades given their vast reserves.

I estimate fair value to be around $33 USD, with investors being paid to wait via quarterly dividends hence my eagerness to make it a keystone in ‘The Maverick Life’ income portfolio.

Valuation Deep Dive: PSK

Check out my entire breakdown and model of the investment idea inside the club..