PrairieSky Royalty Q2 2023 Earnings Call Transcript

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July 18, 2023

There are 5 speakers on the call.

Operator

Good day, and welcome to PrairieSky Royalty Limited Announces Your Second Quarter 2023 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call is being recorded.

Operator

I would now like to hand the call over to Andrew Phillips, President and CEO. You may begin.

Speaker 1

Thank you and good morning and thanks for dialing into the PrairieSky Q2 2023 earnings call. On the call from PrairieSky are Cam Proctor, COO Pam Kizal, CFO and myself, Andrew Phillips. There's certain forward looking information in my commentary today, so I'd ask investors to review the forward looking statements qualified in our press release and MD and A. I'll walk through the operations report and then turn the call over to Pam to summarize the financials. Q2 is another solid quarter for PrairieSky operationally and financially.

Speaker 1

Oil royalty volumes grew organically to 12,607 barrels per day and are now 6% higher Over the 1st 6 months of 2023 when compared with the 1st 6 months of 2022. There were 148 wells spud in Q2, which were 92% oil. Although activity in the quarter was moderated by seasonal breakup, the number of wells drilled was up 21% from 122 wells spud in Q2 2022. The Viking was the most actively drilled play with 43 wells spud followed by the Clearwater with 33 wells, 32 light and heavy Mandeville oil wells and 5 Mandeville wells at Lindbergh. Additional oil activity Took place across the portfolio, including wells spud in the Duvernay and Mississippian.

Speaker 1

There were also 11 Montney natural gas wells spud. The average royalty rates for wallet spot in the quarter was 5.8%. Leasing activity remains robust and the company received 5,700,000 and bonus revenue and entered into 39 new leases with 37 counterparts. A number of large leasing arrangements Are part of this total, including significant including a significant light oil arrangement with well commitments where an inflection in recent well results has been noted. We leased 167 secondtions of land this quarter versus 82 secondtions a quarter ago as companies are looking to expand their inventory And numerous new start ups have been active on the leasing front.

Speaker 1

Dollars 15,000,000 was spent on undeveloped land in the Mandeville Stack play. There is large oil in place on the lands and multilateral drilling will see this play continue to expand. With narrow differentials And thick pay packages, there is significant potential on both our fee title and newly acquired lands. As profitability of Canadian oil producers continue And producer balance sheets remain healthy. We see growing capital expenditures in the Western Canadian Sedimentary Basin over the next 5 years.

Speaker 1

Thank you, and I'll turn the call over to Pam to walk through the financials.

Speaker 2

Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there are certain forward looking information in the notes today, So I would remind investors to review the forward looking statements qualifier in our press release and MD and A for Q2 2023. PrairieSky's oil royalty production volumes grew to a record 12,607 barrels per day in the quarter and drove 83% of our royalty revenues. This 3% increase in production over Q1 was predominantly from oil volumes in the Viking, Manville Heavy Oil and Clearwater Place, which more than offset natural declines and the negative impacts of the Alberta wildfires, which we estimate lowered average royalty production For oil by 135 barrels per day and revenue by $900,000 in the quarter, PrairieSky's realized price was $7,805 per barrel, which listen only mode.

Speaker 2

Combined with our record oil production generated oil royalty revenues of $89,600,000 Natural gas royalty revenues averaged $53,800,000 a day below Q1 2023 as a result of operational downtime due to the wildfires, which we estimate reduced volumes by $2,500,000 a day and revenue by $400,000 and the impact of a one time prior period adjustment, which reduced quarterly volumes by 4 $500,000 a day and reduced revenue by $400,000 PrairieSky's realized natural gas price with $2.23 per Mcf and generated natural gas revenue of $10,900,000 NGL royalty volumes averaged 19 43 barrels per day in the quarter. NGL royalty volumes were lower due to the wildfires, which we reduced volumes by 200 barrels per day in the quarter and revenue by $500,000 The one time prior period adjustment I discussed for natural gas lowered NGL royalty volumes by 370 barrels per day and revenue by $1,600,000 After accounting for these adjustments, NGL royalty revenue totaled $7,900,000 with a realized price of $44.77 per barrel. Total royalty production averaged 23,517 BOE per day and generated $108,400,000 of royalty production revenue. We anticipate that the wildfire volumes will be back on production for Q3. Also, the prior period adjustment I described has a one time impact on revenue and volumes.

Speaker 2

During the quarter, the compliance group also collected $2,000,000 in underpayments, which offset the full revenue impact of the prior period overpayment. Other revenue totaled $9,000,000 and included $2,600,000 in lease rentals, dollars 700,000 of other income, including $600,000 Potash revenue and $5,700,000 of bonus consideration for entering into 39 new leases with 37 different counterparties. New leasing is a leading indicator of future field activity, and we anticipate near term drilling on many of these new leases. Cash expenses in the quarter were production and mineral taxes of $1,400,000 and cash administrative expenses, which totaled $7,200,000 or 3.36 per BOE. Cash administrative expense was higher than Q2 of last year due to the payment of its deferred share units to retiring director.

Speaker 2

PrairieSky recorded a cash tax expense of $13,000,000 in the quarter. Entering the year, we had $1,550,000,000 of tax pools to of future taxable income. So in 2023, the first $155,000,000 of cash flow is tax free with the remainder tax rate of approximately 23.5 percent. PrairieSky generated quarterly funds from operations of $91,300,000 or $0.38 per common share. During the quarter PrairieSky declared dividends of $57,300,000 or $0.24 per share with the resulting payout ratio of 63%.

Speaker 2

Excess funds from operations above the dividend and are $15,200,000 in acquisitions was used to retire bank debt. Net debt at June 30, 2023 was $275,900,000 Grace Dies generated approximately $2,400,000,000 in funds from operations and returned one $700,000,000 to shareholders through dividends and buybacks since our IPO 9 years ago. We will now turn it over to the moderator to proceed with the Q and A.

Operator

Thank Our first Question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.

Speaker 3

Hey, guys. Good morning. Just a quick question with respect to the acquisition here, sort of undeveloped Manville, primarily a Gore interest here. Is there any sort of Synergies with respect to your fee simple land, do you expect kind of co development between Gore and fee simple? And then are there any capital commitments with respect to this acquisition?

Speaker 1

Good morning, Patrick. And yes, so to answer the last part of the question, there are capital commitments related to the acquisition. They're primarily 15 year oil sands leases and then upon achieving a certain amount of production, they can be continued in perpetuity. And what we like about it is there's multi zone pay within the area that can be developed with both multilaterals and we think with the fishbone design where More unconsolidated. And a lot of this, it's not real exploration.

Speaker 1

It's been proven up on the fee mineral title offsetting in certain cases. So We're quite confident in the development profile of the asset and think it's got some excellent economics, sub 1 year payouts and significant oil in place.

Speaker 3

Okay. And is there any overlap with any existing fee simple land or Is the operator kind of shared between Gore and P Simple lands at all?

Speaker 1

Yes. So We do have the checkerboard fee mineral title within the area. Some of it's leased, some of it Some of it's leased from old leasing arrangements from over 10 years ago, primarily to Devon, Canada, which is now CNRL. And then there's been a lot of new leasing recently in the areas. So there is there are some synergies for sure, both from a surface land perspective, But also a road perspective and a development perspective.

Speaker 3

Okay, great. Thank you very much.

Speaker 1

Thanks for your question.

Operator

Thank you. Our next question comes from Mike Dunn with Stifel First Energy. Your line is open.

Speaker 4

Thanks. Good morning. Andrew, can you provide any more color on the light oil commitments you mentioned earlier With the inflection in well results, what would play in what area?

Speaker 1

Yes. So It's in kind of Western Alberta, it's the Cardium. It's in Lock End. And interestingly enough, like if you look 2 of the top 3 wells in the Cardium and all of Canada, in May, they were in that area. They're Kind of 1,000 barrel a day IPs and we have slightly higher royalties there 18% just given the competitive nature Of the area.

Speaker 1

So we have a multiyear agreement with an operator in the area to with Well commitments. And anyway, the well results have been exceptional and they continue to improve. And there's also liquid Solution gas comes along with the 40 degree crude. And so I think again, it's definitely seen an inflection in quality of the wells with more modern fracking.

Speaker 4

Thanks, Andrew. That's all for me.

Speaker 1

Thanks, Mike.

Operator

Our next question comes from Jamie Kubik with CIBC. Your line is open.

Speaker 4

Yes. Thanks for taking my question. I have two questions. Can you the first one, can you talk a little bit about the royalty rate on New Wells Joe, during the quarter, it was around 5.8%, down a bit from last year. And what drove that reduction and where you That to trend in the back half of twenty twenty based on what you're seeing from activity?

Speaker 1

You bet. So on Your first question and I'll get your second question in a second. Yes, the royalty rate of 5.8%, part of it was so there's a lower amount of drilling activity just because it was a breakup A lot of the drills that were in Q2 would have been in that kind of deep base and winter access only, So more gores. And in addition, there is a number of Montney wells that were drilled that just touched our sections with higher royalties. But of course, The average royalty on that ended up being less than 1%, which kind of dragged the number down.

Speaker 1

So just in terms of expectations in the back half of the year, We expect significantly higher average royalty rates. And again, we've always said we'll always have quarters where we'll be below 6 modestly. But then what we're seeing in general is of the 800 plus wells that get drilled in a year, significantly higher royalties than we've seen in the past. And we expect that to continue in Q3, Q4.

Speaker 4

Okay. Thanks. And second question here, can appreciate that Gas volumes are lower on the quarter due to a few one time charges that hit you there. But how do you think Gas volumes trend for the balance of the year based on the drilling that you've seen so far in the Deep Basin in Montney? Yes, it's

Speaker 1

a good question. So in terms of the PPA, you can basically add that back. And then in terms of the fire volumes, you can just add those back. So That takes you back to a more reasonable level. And then in addition, we had a number of high rate Monument wells come on In Q2, so those should kind of help the back half of the year in terms of gas volumes.

Speaker 1

So I don't know exactly where to land. Of course, we don't give guidance, It should get back to more normalized levels for the rest of the year.

Speaker 4

Okay. That's all for me. Thank you.

Speaker 1

Thanks for your questions.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Andrew Phillips for any closing remarks.

Speaker 1

Thank you very much for dialing in and hope everybody has a great summer.

Operator

Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.

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PrairieSky Royalty Q2 2023
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