For most precious metals companies, higher oil prices are a pain in the bottom line, but not so for Franco-Nevada Corp.
Franco-Nevada, a royalty company largely focused on the precious metals sector, is showing increasing revenue-generating muscle on the back of rising oil and gas prices and a fossil fuel portfolio it expanded over the past couple of years.
The company's revenues, broken down by segment, show that the importance of oil and gas, both in absolute and proportional terms, has been on the rise in recent quarters.
Its revenue from oil and gas rose from US$28 million in 2015 to US$47 million in 2017. Further, the company guides for higher revenue year over year in 2018, with a projection between US$50 million to US$60 million based on a West Texas Intermediate oil price of US$55 per barrel. It is well on track to hit that mark with first-quarter oil and gas revenue of US$19 million and oil prices over US$70 per barrel in recent days.

The proportion of revenue Franco-Nevada derives from oil and gas jumped in the first quarter to 11% compared to an average of about 6% in the past three fiscal years. So far in the second quarter, with oil prices continuing to climb, that trend looks set to continue.
Franco-Nevada CEO David Harquail said the company's revenue exposure to oil is about proportional, if not more so, to rising oil prices. Harquail also noted that Franco-Nevada's oil and gas revenues can outpace, percentage-wise, climbing oil and gas prices because some of its royalties act like net profit interests, which can mean a greater exposure for Franco-Nevada with upward swings in prices.
Meanwhile, like other royalty holding companies, it is insulated from inflation in mining costs as royalties tend to take a slice of asset revenue, not profit, which can decline when input prices rise.
"Generally, the rising oil prices are a very large negative for the gold industry and the mining industry as well," Harquail said. "The energy component is so tough on the companies. There's only one company that actually profits from rising oil prices and that's Franco-Nevada."
Harquail said Franco-Nevada would assess its oil and gas guidance in the second quarter. Presumably, if oil and gas prices significantly boost revenues, the company would consider lifting it.
