Source Rock Royalties

Overview

Source Rock Royalties (TSXV:SRR) is a Calgary, Canada based company exclusively focused on oil & gas royalties in the provinces of Alberta and Saskatchewan. Source Rock's portfolio primarily consists of royalty interests focused on oil, with concentrations in southeast Saskatchewan, central Alberta and west-central Saskatchewan. The portfolio comprises:

• Various gross overriding royalty interests in southeast Saskatchewan.
• A gross overriding royalty in largely contiguous Clearwater interests in Central Alberta.
• A production volume royalty in Viking mineral rights in east-central Alberta.
• Various gross overriding royalties in central Alberta.
• Various gross overriding royalties in the west-central Saskatchewan Viking light oil play.

Source Rock Royalties offers investors low-risk and low-capital-cost exposure to the oil & gas sector in western Canada. The royalty business model offers the benefit of sharing in production revenue without exposure to the capital costs associated with drilling, development, maintenance, abandonment, environmental and other obligations.

Since its inception, Source Rock Royalties has consistently pursued royalty acquisitions, even amidst significant energy market fluctuations. The company has primarily concentrated on non-marketed royalty acquisitions rather than opportunities marketed through formal third-party processes. Leveraging strong relationships within the oil and gas sector in the Western Canadian Sedimentary Basin, Source Rock identifies and accesses niche royalty acquisitions.

Source Rock acquired new royalties worth nearly C$13 million in 2023 and a total of C$16.5 million since its IPO in March 2022. These acquisitions effectively doubled Source Rock’s royalty acreage, significantly enhancing both its current royalty production and its exposure to potential undeveloped drill locations. Source Rock generated C$6.6 million in royalty revenue in 2023, the highest in its 11-year history.

Source Rock endeavors to keep costs low, thereby maximizing cash flows. Aside from the CEO and CFO, additional technical oil and gas professionals are engaged by Source Rock as consultants on an as-needed basis. Currently, Source Rock Royalties employs only one full-time staff member. The low-cost base ensures consistent cash flows as evidenced by its more than 11-year track record of delivering positive funds from operations.

Strong cash flow allows the company to consistently pay and increase dividends. Source Rock has paid ~$17 million in dividends to shareholders since 2014. Source Rock increased its dividend twice in 2023, for a total increase of 20 percent.

The current monthly dividend is $0.006 and is sustainable given that it can comfortably be funded by current operations even at a lower oil price scenario of C$60/bbl (or US$50/bbl WTI).

The management and board of directors have a proven track record of creating value in the oil & gas industry. The insiders own 9.5 percent of Source Rock’s common shares, aligning their interest to that of the shareholders by directly participating in the same financings as outside shareholders since inception. The company has a strong institutional shareholder base with CN Rail Pension Fund owning approximately 21 percent of Source Rock’s common shares. Source Rock Royalties has a clean capital structure with only ~45 million common shares issued and outstanding.

Source Rock focuses on a balanced growth and yield model, limiting volatility in returns for shareholders. Source Rock offers investors a unique opportunity to gain exposure to the oil & gas sector.

Company Highlights

• Source Rock Royalties is a Calgary, Canada based pure-play oil and gas royalty company, with a focus on Alberta and Saskatchewan; the only junior oil and gas royalty company listed on the TSXV.
• Source Rock concentrates on acquiring royalties in areas with proved reserves, foreseeable future high rate-of-return drilling upside, and partnering with operators that are financially and operationally prudent.
• Owning and managing royalties is a capital-light business model offering the benefit of sharing in production revenue without exposure to the capital costs associated with drilling, development, maintenance, abandonment, environmental and other obligations.
• Source Rock Royalties has a diversified oil-focused portfolio of royalty interests concentrated in southeast Saskatchewan, central Alberta, and west-central Saskatchewan with well-positioned royalty payors. Oil exposure allows for a strong netback (profit) per barrel even during periods of lower commodity prices.
• Source Rock Royalties has a proven track record of executing on its balanced growth and yield business model. The company has achieved 11 years of positive cash flow and provided ~$17 million in dividends back to shareholders since 2014.
• Source Rock Royalties anticipates its current monthly dividend of $0.006 to be comfortably funded with cash flow by current operations down to oil prices of C$60/bbl (or US$50/bbl WTI).
• The management and board of directors have a proven track record of creating value in the oil & gas industry. The insiders own 9.5 percent of Source Rock’s common shares, aligning their interests to that of the shareholders.
• The company has a strong institutional shareholder base with CN Rail Pension Fund owning approximately 21 percent of Source Rock’s common shares.
• Insiders and key shareholders have an average cost on their shares of ~$0.90 (there were never any cheap Founders or seed shares issued).
• Source Rock Royalties does not use debt in its business and always maintains a cash balance (currently ~$2.2 million).

Royalty Assets

Source Rock's current portfolio comprises royalties primarily focused on oil (95 percent), spread across southeast Saskatchewan, central Alberta and west-central Saskatchewan. The company holds varying gross overriding royalties in more than 150,000 gross acres of land. Additionally, Source Rock owns a production volume royalty in Viking mineral interests situated in lands in east-central Alberta.

The majority of Source Rock's royalties are derived from top-line revenue, resulting in minimal exposure to deductions linked to production costs from wellbores and the sale of various commodities. Also, the majority of its current royalty payors are financially stable and possess robust capabilities to efficiently operate and enhance the value of the lands in which Source Rock holds royalties. Some of the key royalty payors include Whitecap Resources (TSX:WCP), Rubellite Energy (TSX:RBY), Surge Energy (TSX:SGY), Crescent Point Energy (TSX:CPG) and Anova Resources (Private), among many others.

1. SE Saskatchewan Light Oil Gross Overriding Royalties

The company holds gross overriding royalties in approximately 35,000 gross acres of land in southeast Saskatchewan. The key operators include Whitecap Resources, Vermilion Energy (TSX:VET), Anova Resources (Private), Crescent Point Energy, Tundra Oil & Gas (Private), ROK Resources (TSXV:ROK), Woodland Development (Private) and Saturn Oil & Gas (TSX:SOIL). Future development activities on gross overriding royalty lands will be focused on the Frobisher Formation. The Frobisher Formation, characterized by shallow depths and conventional light oil, does not necessitate hydraulic fracturing, making it one of Canada's most economically viable light oil plays.

2. Clearwater Heavy Oil Gross Overriding Royalty

The company holds a gross overriding royalty in approximately 61,440 net acres of land in the Figure Lake area of central Alberta. Rubellite Energy is the operator of gross overriding royalty lands and the production is entirely from the Clearwater Formation. The gross overriding royalty initially carries a royalty rate of 1.5 percent until the cumulative royalty revenue received by Source Rock matches the purchase price. At that point, the royalty rate decreases to 1 percent. The operator has committed to drill 59 horizontal wells on the lands by June 2026.

3. Hamilton Lake Unit Viking Light Oil Royalty

Source Rock earns a production volume royalty supported by production from Hamilton Lake Unit and Viking lands of Axiom Oil & Gas. Pursuant to the production volume royalty agreement, Source Rock's remaining entitlement to royalty volumes from the Hamilton Lake Unit is as follows:

• 2024 – 75 bbl/d; 2025 – 70 bbl/d; 2026 – 39 bbl/d
• 2027 to 2034 – 20 percent lower on a per-day basis than the prior calendar year; and
• January 1, 2035 – conversion to a 0.50 percent gross overriding royalty in the Hamilton Lake Unit or a $500,000 pay-out, at the discretion of the royalty payor.

4. Central Alberta and Saskatchewan Gross Overriding Royalties

Source Rock owns varying gross overriding royalties in approximately 60,000 gross acres of land located in west-central Saskatchewan and central Alberta. The west-central Saskatchewan gross overriding royalty lands produce predominantly light oil from the Viking and Mannville formations. The Central Alberta gross overriding royalties produce from various formations and include exposure to several low-decline properties that are under waterflood.

Management Team

Brad Docherty – President, Chairman and Chief Executive Officer

Brad Docherty is the Founder of Source Rock Royalties, and has held the positions of president, chief executive officer and chairman of the company since its incorporation. Previously, he was a corporate finance & securities lawyer at Gowlings and served as the president, CEO and director of Exito Energy and Exitio Energy II, both capital pool companies on the TSXV.

Cheryne Lowe – Chief Financial Officer

Cheryne Lowe is a seasoned financial professional with extensive experience in companies listed on the Toronto Stock Exchange and the TSX Venture Exchange. She also brings a background in the upstream oil and gas industry and the Canadian capital markets. Her most recent role was interim CFO at AgJunction (TSX:AJX), an agriculture technology company, which was acquired in late 2021. Previously, she served as CFO and corporate secretary at Pine Cliff Energy (TSX:PNE), and as vice-president finance and CFO at Orlen Upstream Canada and its predecessor, TriOil Resources. Lowe began her career with KPMG and later worked as an Institutional Research Associate with Tristone Capital.

John Bell – Director

John Bell is the president and chief financial officer at WCSB Blockchain Infrastructure. Prior to this, he served as the director of finance at Tidewater Midstream and Infrastructure (TSX:TWM).

Dean Potter – Director

Dean Potter serves as the executive chairman and CEO of Burgess Creek Exploration. Additionally, he is the president at DPX, a private company engaged in petroleum exploration and development. He is a member of the Saskatchewan oil and gas Hall of Fame and has more than 40 years of geological expertise that has been focused on making discoveries in SE Saskatchewan.

Gary McMurren – Director

Gary McMurren is the vice-president of engineering at Southern Energy (TSXV:SOU). He was previously the vice-president of engineering at Gulf Pine Energy Partners. Formerly, he held various engineering roles with Athabasca Oil (TSX:ATH).

Shaun Thiessen – Director

Shaun Thiessen is vice-president of land and business development at Astara Oil. Prior to this, he held the same title at Astra Oil from inception until its sale. Formerly, he was the director of land at PrairieSky Royalty (TSX:PSK).

Scott Rideout – Director

Scott Rideout is vice-president of land at Headwater Exploration (TSX:HWX). He was previously vice-president of land at both Baytex Energy (TSX:BTE) and Raging River Exploration (Private).

June-Marie Innes – Director

June-Marie Innes is currently CFO at Thread Innovations. She previously held progressively more senior roles at Tamarack Valley Energy (TSX:TVE).

Jordan Kevol – Director

Jordan Kevol is currently involved with Westgate Energy, a private oil and gas producer undertaking a listing on the TSXV. Previously, he was the president & CEO of Blackspur Oil.

This profile was written in collaboration with Couloir Capital.