PrairieSky Royalty Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 24, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. PrairieSky Royalty Ltd. Announces their 3rd quarter 2023 Financial Results. After the speakers' presentation, there will be a question and answer to withdraw your question. Please be advised that today's conference is being recorded.

Operator

I would now like to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.

Speaker 1

Thank you, Michelle, and good morning, everyone, and thank you for dialing into the PrairieSky Q3 2023 earnings call. On the call from PSK are Pam Kazell, CFO Dan Bertram, CCO and myself, Andrew Phillips. There's certain forward looking information in my commentary today, so I would ask investors to review the forward looking statements qualifier in our press release and MDA. Prairie Sky achieved its highest total production in the 3rd quarter since our IPO at 25,469 BOE per day. This included 12,084 barrels per day of crude oil royalties, up 6% from the same quarter in 2022.

Speaker 1

Natural gas volumes were positively impacted by the return of shut in volumes from wildfires and a significant well pad at Wembley placed on production. 246 spuds occurred on Prairie Sky lands over Q3 at an average royalty rate of 7.1%. 45 of these were Clearwater oil wells and 92 of the total were Viking oil wells. 35 Mandeville Stack multilateral and fishbone wells were drilled, which is on pace with our record 37 wells in Q3 2022. Leasing activity remains very strong as it has for the last 2 years and we entered into 46 new leasing arrangements with 40 different counterparties.

Speaker 1

Leasing was spread across the entire basin with a focus on oil. Our team executed on $15,600,000 in acquisitions throughout the quarter, focus on the Manville stack play in the heavy oil fairway. These lands will see immediate activity and provide strong returns allowing us to compound at a faster rate. Given our fee mineral title, seismic and relationships with top tier developers, we expect to remain active adding to this opportunity set. These lands will provide decades of inventory to an already industry leading opportunity set.

Speaker 1

Prairie Sky will review its capital allocation priorities in February and make its decision on the dividend at that time. Using strip pricing, we'll be in a net cash position in 18 months. After achieving 22% oil growth in 2022 6% year to date, We are confident that our strong organic growth rates will continue in this pricing environment. The transformation of the primary heavy oil region in Western Canada with new drilling techniques will benefit our shareholders for years to come. I will now turn the call over to Pam to walk through the financials.

Speaker 2

Thank you, Andrew. Good morning, everyone. 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 Q3 2023. As Andrew mentioned, this was a record Q3 for Prairie Sky Royalty volumes, which totaled 25,469 BOE per day. Oil royalty production volumes averaged 12,084 barrels per day, a decrease from Q2 2023, which was expected as fewer new wells come on stream following spring breakup.

Speaker 2

Oil royalty production increased 6% over Q3 2022 with strong production growth in the Clearwater and Mandel Stack. We anticipate higher oil royalty volumes into Q4 and 2024 due to the level of activity on our land. Prairie Sky generated $102,800,000 of oil royalty revenue in the quarter at a realized price of $92.53 per barrel. Natural gas royalty volumes averaged 64,100,000 a day and NGL royalty volumes averaged 2,702 quarter, bringing total royalty production revenue to $127,400,000 Other revenue totaled $5,700,000 and included $3,600,000 of bonus consideration for entering into 46 new leases with 40 different counterparties. In addition, and $1,100,000 of other income.

Speaker 2

Cash administrative expenses totaled $17,900,000 in the quarter and included a $13,300,000 onetime payment. This was a cash outflow for the period, but had a lesser impact on net income as $10,500,000 of the payment had been accrued over the past 4 years until payout primarily a stock based compensation. PrairieSky recorded a current tax expense of $14,900,000 in the quarter. Entering the year Prairie Sky had $1,550,000,000 of tax pools to offset future taxable income. So So in 2023, the first $155,000,000 of cash flow is tax free with remainder taxed at our statutory tax rate of approximately 23.5%.

Speaker 2

PrairieSky generated quarterly funds from operations of $93,800,000 or $0.39 per common share and declared dividends of $57,300,000 or 0.24 were used to retire bank debt. Net debt at September 30, 2023 was $253,700,000 a decrease of 19% since December 31, 2022. Prairie Sky has generated approximately $2,500,000,000 in funds from operations and returned $1,800,000,000 to shareholders through dividends and buybacks since our IPO. We will now turn it over to the moderator to proceed with the Q and A.

Operator

Oneone on your telephone and wait for your name to be announced. The first question comes from Aaron Bilkoski with TD Cowen. Your line is open.

Speaker 3

Good morning. I would be interested to know who the most active drillers are on your Mandeville stack acreage. And I guess a follow-up question to that is where do you see industry activity levels on your land, specifically in the Mandel stack next year?

Speaker 1

Yes. Thanks for the question. Good morning, Aaron. The 2 most active drillers on our lands are Canadian Natural Resources and Caltex Trilogy, which is a newly formed private company. It was formed actually about a year and a half ago, but they've been quite active.

Speaker 1

They did a large lease arrangement with us on our fee and then have added Lands in between, throughout that period. But I think they're just over 2,000 barrels a day and likely exit close to 5,000. So it's a pretty substantial growth rate and then Canadian Natural through their Devon Canada acquisition acquired the largest position in the area. So they were our incumbent largest royalty pair going into this new technological advancements In the play. And then to answer your second question in terms of activity, we expect that there'll be a significant uplift in activity on this kind of man built stock play next year.

Speaker 1

I'm not sure that it will outpace the Clearwater next year, but it will be It's going to start to get close just given all the leasing arrangements we've entered into in the play and it's very good economics into these prices.

Speaker 3

Thanks, Andrew. I also have a follow-up question for, I guess, probably Pam is best suited to answer this. How should I be thinking about G and A in the first half of twenty twenty four given long term incentive plan payments in Q1 and potentially DSUs held by the retiring board members coming in Q2.

Speaker 2

Yes. So thanks for the question, Erin. In Q1, we will give guidance, I guess, in February with our year end call, but we would expect just given the increase in our share price compared to when some of the long term incentive grants We're granted to the executive to be higher than Q1 of last year. And then with retiring board members, all of the deferred share units for all of our board members sit in accounts payable. So they are in our net debt So we would anticipate paying out some of those next year.

Speaker 2

But of course, directors do have the opportunity to Hold on to their DSUs for 18 months following departure. So the timing of those payments will be dependent upon when the directors decide to exercise those DSUs.

Speaker 3

That's very helpful. Thanks, Tom.

Operator

Please standby for our next question. The next question comes from Jamie Cubic with CIBC. Your line is open.

Speaker 4

Yes. Good morning and thanks for taking my question here. We did have a smaller acquisition in the quarter, but in the disclosures indicated it was on producing and non producing properties. Can you just Talk a little bit more about what that acquisition entails and how we should think about it going forward?

Speaker 1

You bet. Jamie, thanks for the question. And it entails over 50 secondtions of oil sands, right? So it's primarily undeveloped, Almost exclusively undeveloped. There's a small producing property that the operator will take along with it, but that's a very minor royalty.

Speaker 1

We do expect immediate activity on it on the one acquisition that totaled $10,000,000 They're right now acquiring surface leases and they expect to run a rig all of next year on those lands. So should be a pretty significant IRR for the company just given the immediate activity And the multi zone nature of the land. So it's again it's a unique area because it's within that oil sands tenure. So you get 15 years on the leases and then upon reaching a minimum amount of production it's held in perpetuity effectively. So We're expecting immediate activity on those lands and should be some positive growth rates on those newly acquired lands in 2024.

Speaker 4

Okay, great. And then in your remarks, you did talk about looking at the dividend in 2020 for can you just talk about capital allocation, how you're thinking about the NCIB and what you would need to see for potential dividend increase, just things around that nature, Andrew and Pam?

Speaker 1

You bet. So right now the dividend $29,000,000 annually or $0.96 per share per year. We obviously are seeing organic growth in the business. And when we look into February, there's a good opportunity, I think, for a dividend increase. But I think we look out over the next 10 years, we should be able to increase it annually more ratably alongside the growth of the business and still have a lot of excess cash flow.

Speaker 1

So given that the business will be in a debt preposition within the next 18 months, I think it's reasonable to expect a dividend increase, but We'll evaluate it in February when we look at strip pricing, current activity levels on the land and the opportunities set in front of us.

Speaker 4

Okay, thanks. And maybe last one from me. Can you just talk about the M and A environment? Prairie Sky has been Fairly quiet on this side, over the last little while. Can you talk about how you're viewing M and A opportunities and things of that nature?

Speaker 1

Yes, you bet. I think the interesting thing is that $90 crude we're typically Fairly inactive. Almost all the M and A we've done over the last decade has been in kind of $40 to $60 price environment. So We're typically inactive on the larger assets at this part of the cycle. Where we've been fortunate is unlike a few other times when there is Really good pricing like 2014 or 2017.

Speaker 1

We've been able to find these kind of large undeveloped land packages that have significant IRRs for the company and long term resource potential on this new Mandeville stack, which is very similar to the Clearwater in terms of IPs and resource in place. So We've been fortunate that we've been able to add a significant land position in that play. Land prices have gone up almost fivefold since we even over the last year and almost twentyfold since we first started acquiring land in there. So We may be priced out of that play completely now, but we've got a very large land position that will give us decades of drilling inventory. So we're quite pleased with that.

Speaker 1

It looks like There will be a significant growth play similar to the Clearwater. And so again, with the strong organic growth rates within the business, It's challenging to find something that's growing at a faster pace than your existing business. So for now, we're quite comfortable with the portfolio we have and we'll continue to Focus on land leasing at this higher part of the cycle.

Speaker 4

Okay. Thanks for the color. I'll turn it back.

Operator

Please stand by for our next question. The next question comes from Jeremy McCray with Raymond James. Your line is open.

Speaker 5

Hi, guys. This is a bit off of Jamie's question here too. When you talk about a lot about the Clearwater and the Manville growth, What would be like the other kind of place to watch here that could surprise us next year? I'm just thinking like is there anything in the Duvernay and the Montney that could surprise us in terms of additional production growth Or other places than those?

Speaker 1

Yes. No, thanks for the question. I think In the Duvernay, the Shell Duvernay, we do expect some growth there in the double digits, don't know exactly where it'll land. And then in the Montney, we've seen some significant licensing on some of our core lands. Obviously, we had a big tailwind from large pads that went on in Wembley this previous quarter, but we have seen some license subsequent to the quarter end.

Speaker 1

So we do expect growth there. And then probably the other one that's kind of more under The radar is in Southern Alberta, there's light oil play in the Basel man build that started to gain some momentum. We have a huge land position in Southern Alberta. And some of the top wells as I know you've noted Jeremy have come out of that region. So that's a light oil play with liquids rich solution gas and we're starting to see licensing pickup there significantly and if you break out the Mandeville drilling actually in Q3, There's double digits over 10 wells drilled in the on that light oil place.

Speaker 1

So that's one that's kind of under the radar that could provide some light oil growth as well.

Speaker 5

And when you say the leasing that you're seeing from different operators like that we saw for Q3, And what you've kind of maybe seen so far like in the 1st month of October here, like is it picking up more aggressively than what you saw Last year, even though oil prices are down? Or is it the same? Is it like when you sign these new leases, Are they for more multiple wells or are they just for single wells? I'm just trying to get a better sense of the leasing activity numbers that were reported. Yes.

Speaker 5

So Yes.

Speaker 1

No, for sure. And it's one of the interesting things we're seeing is different from Sure. If you look at the 40 different companies at least from us in this quarter, it's similar leasing activity levels, similar land They're releasing and similar, I guess total acreage numbers. What's unique is it's a lot more different companies. So there's been A lot of new capital formation in the basin this year.

Speaker 1

There's 2 private companies both that have lease arrangements with us that were out doing financings A week ago that they've leased what we consider some excellent land. So there's just a lot more different companies, similar levels of leasing in terms of total acreage, Jeremy.

Speaker 5

Okay. Okay, perfect. Thanks, guys.

Operator

Our next question comes from Patrick O'Rourke with ATB Capital Markets. Your line is open.

Speaker 6

Hey, good morning guys. Hopefully, I'm not plugging a bit of a dead horse here because we've talked a lot about the Mandeville so far. But I'm just kind of curious and you got a bit into the leasing activity. Like where do you think you are in terms of the leasing cycle, in terms of the asset quality that's I know you've had well capitalized incumbents. You mentioned new capital formation juniors there.

Speaker 6

Guys have been working This fairway and it's become extremely competitive. So what sort of diamonds are left in the rough and how does this sort of play out over the next couple of years or does it start to kind of tail off or taper off?

Speaker 1

Yes. It's a good question. Thanks for the question, Patrick. One of the interesting The original play was kind of the Sparky and then now we have the Waseca, the Rex, The coming there is people trying kind of the fan wells or fishbone wells in less consolidated reservoirs. So As you move into the Saskatchewan side, there's actually quite a significant resource there as well.

Speaker 1

And we've actually just started to do some leasing on the Saskatchewan side For similar type plays. So I think what's unique is the Mandeville, obviously, the biggest producing formation in Alberta, the world's 4th largest oil producer. It's a massive resource and people are testing this play in a number of different zones. So I think because it's zonal, We believe there'll be still a few years ahead of people uncovering new opportunities in different places where it'll work. And We've actually seen some leasing on a light oil play for a similar type of technology where they're going to try multilateral.

Speaker 1

So So again, I do think, they're still years ahead of opportunities. And there was one operator that was Baytex, which Made a discovery and they announced it called Morinville. That's about 1,000 meters. So everyone's kind of targeted between 406 100 meters and that whole fairway is Pretty active, but they jumped a little further west and it seemed to work there. Sometimes we have slightly better oil quality, you can handle smaller grain size.

Speaker 1

So We believe there's some pretty significant potential between 600 and 1000 meters as well. So it's pretty significant formation in Alberta and we think This technology can unlock quite a bit more oil potential. So hopefully that answers your question.

Speaker 6

Yes. No, that's terrific. And then sort of just moving over, there's been a little bit of volatility in terms of the oil and NGL, Gas oil ratios, gas liquids ratios over the last couple of quarters, you have wildfires here. Most of the Or almost all of the new drilling that you're seeing on your land is targeting oil formations. Just wondering sort of how you envision the rate of change in that gas oil ratio over the next couple of years.

Speaker 1

Yes. We do just given Significant amount of oil drilling. We do expect the oil drilling to continue to become a bigger part of the mix. I think if you go all the way back to our IPO, which is almost a decade So, we were 40% oil and liquids and 60% natural gas. Today, it's completely reversed.

Speaker 1

We're 60% oil and liquids and 40% natural gas. The one thing we have accumulated is a basket of options in the Deep Basin and in the Montney. So you see situations like This last quarter where one single well pad can significantly impact the natural gas volumes. So just given you don't need a huge amount of drilling impact gas volumes. It will be lumpier as you mentioned.

Speaker 1

But again, the oil volumes we expect to continue to grow just given the strong leasing activity. But there will always be volatility in terms of in the short term like in the quarters because you've got 42,800 well where you're collecting royalties on monthly And then another 850 or so wells that get drilled on an annual basis and the pace at which they come on really impacts the quarterly volumes. But If you look out on an annual basis, it smooths out pretty well.

Speaker 3

Okay. Thank you.

Speaker 1

And one other just follow-up just to your question. A lot of the gas volumes we've seen over the last 2 years have been associated gas. So a third of our gas volumes are now just associated with oil drilling. So a lot of that oil drilling is actually giving us a bit of a gas boost as well. Thank you.

Operator

I show no further questions at this time. I would now like to turn the call back over to Andrew for closing remarks.

Speaker 1

Thank you everyone for dialing into the PrairieSky Q3 conference call and please feel free to call Pam, Myself or Dan, if you have any further questions. Have a great day.

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Earnings Conference Call
PrairieSky Royalty Q3 2023
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