Here's What Franco-Nevada's Oil and Gas Portfolio Looks Like

Franco-Nevada (FNV -1.30%) has the bulk of its assets invested in precious metals streaming arrangements, but the company has recently said that it intends to diversify its portfolio more toward the energy industry. Franco-Nevada already has some royalty and other interests in oil and gas ventures, and a look at how these existing assets are performing should shed some light on what the natural resources financing company will look for as it seeks additional energy assets in the future.

Franco-Nevada's oil and gas assets

Here's a summary list of all of Franco-Nevada's assets in the oil and gas industry, as listed on its website:

Data source: Franco-Nevada.

Where Franco-Nevada has been with energy

As you can see, Franco-Nevada hasn't truly emphasized oil and gas as a major part of its portfolio until recently. By far, the most important asset historically for Franco-Nevada has been the Weyburn unit, which is located about 130 kilometers southwest of the Saskatchewan capital of Regina. Franco-Nevada holds a net royalty interest of 11.71% in Weyburn, as well as a 0.44% overriding royalty and a 2.56% working interest. Cenovus Energy is the producer, and with more than 200 square kilometers, the Weyburn unit currently produces about 25,000 barrels per day of oil equivalent and has a reserve life of about 50 years.

However, Franco-Nevada's other longtime energy assets are much smaller. The Midale unit in southeastern Saskatchewan produces only 4,600 barrels of oil per day, and Franco-Nevada has only a 1.14% overriding royalty and a 1.59% working interest in the unit. The Edson property lies about 200 kilometers west of Edmonton, and the natural gas play produces about 1.6 million cubic feet of natural gas and 90 barrels of natural gas liquids daily. Franco-Nevada's interest in Edson consists of a 15% overriding royalty interest.

A hodgepodge of even smaller assets produces minimal revenue. These assets are scattered across British Columbia, Alberta, Saskatchewan, and Manitoba and generally consist of high-quality oil plays and natural gas from both shallow gas formations and deeper conventional gas targets.

Image source: Franco-Nevada.

How Franco-Nevada is ramping up its energy activity

Yet Franco-Nevada recently decided that energy would be the high-priority area for acquisitions, and it has made two major purchases that promise to transform its mix between precious metals and the oil and gas industry. Late last year, Franco-Nevada bought royalty rights in the STACK shale play in Oklahoma's Anadarko Basin, paying $100 million for what amounts to an effective royalty rate of 1.61%. Ramp-up for the asset has been relatively slow, with the company claiming just $600,000 in revenue during the first quarter of 2017. However, Franco-Nevada has high hopes for the play going forward.

Also in the pipeline is the Midland Basin, where Franco-Nevada agreed in March to purchase a portfolio of oil and gas royalties for $110 million. The deal hasn't yet closed, but Franco-Nevada is optimistic about the potential for further growth in energy from the purchase as horizontal drilling activity starts to increase in the area. The company expects the overall royalty rate to average just 0.14%, but over a huge swath of the basin, incorporating a gross area of about 675,000 acres. Franco-Nevada expects the deal to be complete by the end of the second quarter and add further to anticipated growth in revenue from energy for 2017.

Energy is a key strategic driver for Franco-Nevada going forward, and the company is aggressively pursuing opportunities in the oil and gas industry. With so many exploration and production companies struggling under the weight of low energy prices, Franco-Nevada should be able to negotiate favorable terms in exchange for vital financing to the industry going forward.