Freehold Royalty Trust (TSX: FRU-UN)

Formed back in 1996, Freehold Royalty Trust (TSX: FRU-UN) is a Canadian oil and gas trust. With more than two million gross acres of land, Freehold has a wide range of oil and natural gas interests in Alberta and Saskatchewan.

Freehold’s main focus is on royalties. About 75% of their production and 90% of their distributions are based on royalty interests.

So what exactly is a royalty interest?

When it comes to owning oil and gas reserves, there’s two ways to go–working interests and royalty interests. A royalty is simply a payment made on the gross production from an oil or natural gas well.

There are lots of benefits that come along with royalty interests. For example, Freehold doesn’t have to worry about the costs that a working interest would incur. They don’t have to pay operating or capital costs. By having a larger amount of royalty interests, Freehold also has higher netbacks.

Now, whenever we get into a Canadian oil and gas trust, one of the most attractive features is the distribution.

Freehold’s monthly distribution is currently set at $0.15 per unit, which comes out to a nice 10% annual yield.

Let’s look at how Freehold has been performing lately. Here are some of their fourth-quarter highlights:

● Revenue increased 26% to $40.5 million compared to a year ago
● Net income grew 100% to $19.1 million
● Production moved up 3% to 8,591 BOE over the previous quarter
● Operating netbacks jumped 20% over 2006 to $46.47 per BOE
● 100% of production was replaced through acquisitions in 2007

On top of those results, shares have been on the move . . .

Freehold Royalty Trust is a great way for us to play Canada’s booming oil industry. They’ve been able to establish a strong position in Alberta’s and Saskatchewan’s rich oil resources.

If you haven’t realized the advantages that royalty interests can have, get this . . .

For the last ten years over 5,800 new oil and gas wells have been drilled on Freehold’s royalty properties at no cost to the Trust. In other words, Freehold has let other operators pay the bill to develop their assets, which account for about a quarter of their current production.

Our recommendation: Pick up shares of Freehold Royalty Trust (TSX: FRU-UN) at or near $18.90.

Cheers,

Jack Aubrey
Senior Equity Analyst, Residual Income Report