PrairieSky Royalty Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to PrairieSky Royalty LTV Announces Their Annual and Fourth Quarter 2023 Financial Results. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Andrew Phillips, President and Chief Executive Officer. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone, and you for dialing into the PrairieSky year end conference call. On the call from PrairieSky are Pan Kizal, CFO Dan Bertram, CCO Michael Murphy, VP, Geosciences and Capital Markets as well as myself, Andrew Phillips. There is certain forward looking information in my commentary today, I would ask investors review the forward looking statements qualified in our press release and MD and A. As we approach our 10th year as a publicly traded company, our team continues to strive to improve our business over the next 10 years. Industry leading organic growth rates in our liquids portfolio are the result of assets acquired years ago.

Speaker 1

2023 was another great year on multiple levels. Organic oil growth was approximately 6% and the 4,500,000 barrels of produced royalty oil were organically replaced by drilling. Of note, our $14,000,000 fee title acquisition, which closed near year end, was not included the 2023 reserve report. During the quarter, there were 197 wells spot on our lands, bringing total wells spot to 8 0 4 wells in 2023. This included 147 Clearwater wells, 139 Manville heavy oil wells and 236 Viking wells.

Speaker 1

We also saw our 1st helium well drilled on our acreage. We estimate that $2,000,000,000 of gross capital and $112,000,000 of net capital was spent on PrairieSky Realty Lands in 20 23. Based on an estimated $26,700,000,000 of gross capital on conventional oil and gas assets spent in 2023, approximately 7.5% of industry capital was spent on PrairieSky lands. Net capital increased 38% year over year, although this is partially inflation related. The increase led to PrairieSky's strong oil royalty production growth.

Speaker 1

Leasing activity remains at high levels. Throughout the year, we entered into 202 new leasing arrangements with 110 separate counterparties. This resulted in $26,000,000 in bonus consideration over 2023 and $11,200,000 in Q4. Leasing activity was strong across the base primarily for oil targets. Strong recent well data and lower costs have resulted in stronger producer interest in the Duvernay Shale, and we expect light oil growth from this play over the next 10 years.

Speaker 1

The moat around our business is our irreplicable fee mineral title land base. We also have seen stronger interest in viewing our large seismic database as operators are conducting exploration to expand their drilling inventory. PrairieSky controls 54,200 linear kilometers of 2 d seismic and 20,100 square kilometers of 3 d seismic. Our seismic data is continually improving as we receive a copy when a producer reprocesses the data. This data is available to the 3rd party leasing our lands and we all see that to develop prospects for industry which we can then lease.

Speaker 1

Our compliance group who are always busy returned land to inventory and brought in $6,600,000 throughout 2023. As we look into 2024, our team will continue to focus on controlling costs, compliance, leasing our large undeveloped land base and executing on high return acquisitions. We are pleased to announce a 4% increase to our annual dividend, bringing it to $1 per share and $0.25 per share quarterly. This increase is effective for the March 29, 2024 record date. We'll use excess cash flow above the dividend to retire bank debt and execute on high return on invested capital acquisition opportunities, if available.

Speaker 1

I'd like to thank our staff for the continued hard work and our shareholders for their support. I'll now 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 our forward looking statements qualifier in our press release and MD and A for Q4 and the year ended December 31, 2023. PrairieSky had a strong Q4, which closed out another year of organic oil royalty production growth and momentum in leasing activity. PrairieSky's Q4 royalty production averaged 25,608 BOE per day and included a record 12,844 barrels per day of oil, 6% higher than Q4 of 2022.

Speaker 2

NGL royalty volumes averaged 2,697 barrels per day, flat with Q4 2022 and natural gas royalty volumes averaged 60,400,000 a day, down 9% from Q4 2022. Annually, royalty production averaged 24,857 BOE per day with a record oil royalty volumes of 12,438 barrels per day, an increase of 6% year over year with growth primarily in the Clearwater and Manville heavy oil plays. PrairieSky's Q4 royalty production revenue totaled $122,000,000 generated 90% from liquids royalty volumes. Annually, royalty production revenue totaled $474,600,000, 88 percent from liquids. In 2023, realized oil pricing of $82.52 per barrel was 82 percent of Edmonton Par and NGL realized pricing of $47.60 per barrel was 47 percent of Edmonton par pricing.

Speaker 2

We anticipate 2024 price realizations to be in line with 2023. Realized natural gas pricing was $2.60 per Mcf, with approximately 90% of our volumes sold at monthly and daily AECO pricing and approximately 10% being sold at Tsumap pricing. Other revenue totaled $14,600,000 in the quarter and included $11,400,000 of bonus consideration. This brought annual bonus consideration to $26,000,000 and total other revenues to $38,600,000 the highest total since 2017. PrairieSky is forecasting other revenue in the range of 25 $1,000,000 to $30,000,000 in 2024, including lease rentals, bonus consideration and other revenue.

Speaker 2

Compliance recoveries will be incremental to this amount and included in royalty revenue. Looking forward, PrairieSky's 2024 annual pricing sensitivities, which are all net of taxes, are as follows: a $5 per barrel change in U. S. Dollar WTI would increase or decrease funds from operations approximately $22,500,000 a $0.25 per Mcf change in AECO would increase or decrease funds from operations approximately 4,000,000 a $0.01 change in the U. S.

Speaker 2

To Canadian FX rate would increase or decrease funds from operations approximately $4,000,000 And if the WCS oil differential moved by $1 we would see an increase or decrease in funds from operations of approximately 2,500,000 dollars This impact would be the same for $1 move in the MSW differential. Cash administrative expenses totaled $5,100,000 or $2.14 per BOE in the quarter. We expect 2024 cash administrative expense to be in the range of $35,000,000 to $40,000,000 due to strong stock performance impacting Current income tax expense totaled $14,400,000 in Q4, bringing 2023 current tax to $58,800,000 Entering 2024, PrairieSky has $1,400,000,000 of tax pools to offset future taxable income, which is primarily deductible at 10% per year. For 2024, that means the first $140,000,000 of pre tax cash flow is tax free, with the incremental cash flow tax at 23.6 percent. During the quarter, PrairieSky's funds from operations totaled $111,100,000 and we declared dividends of 57,300,000 dollars or $0.24 per share, with the resulting payout ratio of 52%.

Speaker 2

Annually, PrairieSky generated $382,500,000 in funds from operations, which were used to fund dividends of $229,200,000 with remaining cash flow used primarily to reduce PrairieSky's bank debt. At December 31, 2023, PrairieSky's net debt totaled 222,100,000, a decrease of 30% from December 31, 2020 2. Once again, in 2024, PrairieSky will receive the full pricing reduction related to our sustainable credit facility based on the evaluation by 3rd party rating agency Sustainalytics, which included PrairieSky in its list of the Global 50 Top Rated ESG Companies for 2024. We will now turn it over to the moderator to

Operator

The first question comes from Michael Dunn with Stifel. Your line is now open.

Speaker 3

Thanks. Good morning, all. Couple of questions from me. Just looking at your second half spuds on your lands folks, more Manville and less Viking than if we looked at the second half of twenty twenty two. Just noticing from your reserves disclosures, your of your oil production in 2023, it looks like it was about 52% light, 48% heavy bitumen, kind of the same split as in 2022.

Speaker 3

How do you think the second half activity from 2023 plays out, I guess, into your heavy versus light split into 2024? And maybe any thoughts on the absolute level of oil production in the first half of this year, I guess, relative to Q4?

Speaker 1

Yes. I hate to speculate Michael, sorry. I did speculate on the actual levels of production in the first half of the year. We do expect some growth over the year again with the strong leasing activity and the strong drilling activity we've seen. Then as it ties to the reserves, I do think you're going to see the bitumen reserves go above 50%.

Speaker 1

I think there's been 2023 was a year of multiple discoveries. There was over 9 different horizons within the Mandeville stack that were proved commercial. But of course, because we just booked the one individual well in our reserve report and probably conservatively given their new wells, it didn't add a huge amount of new barrels from a reserve standpoint. But I do think as people start to develop those, which we're already seeing today, there's quite a few rigs running around the Cold Lake region. We should see a significant uptick in those reserves over 2024.

Speaker 3

Thanks. I thought I'd try on the guidance there, Andrew. And then secondly there looking at the your year end reserves, your oil reserves were both flat year over year and of course they're all developed reserves, but your Q4 oil production was up close to 6% year over year. So is that implying a little bit shorter PD like a developed reserve life or is it just exit volumes were lower than the Q4 average? Or how should we think about the, I guess, the lack of oil reserves growth?

Speaker 1

Yes, that's interesting. I think the flat was a pretty good result for us, replacing every barrel that was produced without making any PDP acquisitions. I think one of the things that we saw this year was just from an inflation standpoint on the operating costs and the tail of the wells were truncated. So again, if people can get their operating costs down in future years, you can see that come back. Again, we do believe a lot of those do have long RLIs or reserve life indexes, but I think there was some truncation based on inflation and operating costs on the tail end of the wells.

Speaker 1

Otherwise, we would have seen growth there. But again, it's always a good result when you don't spend money on any PDP acquisitions and you replace every barrel you produce, which generates, right now, over 90% of our cash flow.

Speaker 3

Understood. Makes sense. That's all for me. Thanks folks.

Speaker 1

Thanks for the questions, Mike.

Operator

One moment for the next question. The next question comes from Adam Schwartz with Glau Claire Value Partners. Your line is open.

Speaker 4

Thank you. Good morning. First, the shareholder, thank you for your quality stewardship of the company. We appreciate it. Curious if you can comment on where share buybacks fit into your plan.

Speaker 4

And when you look at the acquisitions for potential M and A, are they more attractive than the stock or the same or how you think about that? Because today it seems like the stock price is in a pretty benign energy price environment and virtually no value for any kind of volume growth or call options that you guys call out in your presentations, which I think are real. And over the long haul, the intrinsic value per share can compound at even higher rates than you've been experiencing if you use this tool. So I'm just curious, buybacks aren't always a good idea, but when the stock is really cheaper and including fairly bearish, not benign assumptions, if you're positive on the outlook on things,

Speaker 1

could be a pretty helpful

Speaker 4

value add action. So just if you can comment on that, I'd appreciate it. Thank you.

Speaker 1

Good morning, Adam. And thanks for the question. And we do see tremendous value in the shares right now. And I will say that when looking at any acquisitions, the hurdle rate is quite a bit higher just given the value we do see in the shares. And I do think it is a unique compounding business over time, generates a lot of cash.

Speaker 1

We've kind of refreshed our 10 year budget. And you generate almost your entire market cap and free cash flow, net of tax, net of G and A and have a business that's likely bigger at the end of that period. So we do see great value in the shares right now. We always trade below intrinsic value. So I think but our priority right now is retiring the debt and any acquisitions that we enter into, the IRR hurdles have to be quite a bit higher.

Speaker 1

So again, it's definitely a higher hurdle rate right now. But the retirement of the debt Interest rates are, again, in a pretty high historical level based on the last 15 years anyway. And we'd like to have the optionality of having all the debt retired. So hopefully that helps answer your question. But we definitely do see value in the buybacks.

Speaker 1

We do have a buyback in place that we could execute on at any time. And I think it will be part of the capital return over the next 3, 5 10 years as part of the returns to our

Speaker 4

comment, it's great for it to be a tool to use if the stock is cheap. If it's not, then don't. But clearly, it stays around here or even meaningfully higher. It still seems very attractive given the prospect. So thank you for everything you guys say.

Speaker 4

You're doing a great job.

Speaker 1

Appreciate the question and thanks for the comments.

Operator

One moment for our next question. The next question comes from Jamie Kubik with CIBC. Your line is open.

Speaker 5

Yes. Good morning. Thanks for taking my question. I've got 2 here for you. I'm hoping you can talk a little bit more about the bonus revenue in the quarter and expand a little bit on it.

Speaker 5

As you know, it was the highest since you've or since 2017. And Pam, your comments indicate that other revenues in 2024 be between $25,000,000 to $30,000,000 But I'm wondering, is there more to do on the bonus side as it relates to the Duvernay? And can you expand a little bit more on that side?

Speaker 1

Yes, you bet. So the bigger leasing arrangements that we entered into in Q4 were West Shale Basin arrangements, Jamie. And think that's where we've seen recently a fair bit of activity. 1 intermediate producer had plans for very significant growth in the area. And I think just with cost coming down and kind of the net being cracked in terms of the technical application of fracking, and we're seeing some very good well results and wells that likely are well over 500,000 barrels on an individual well.

Speaker 1

So again, pretty good results and costs are getting figured out. So I think that's where the majority of the bonus was for last year, particularly Q4. And then what we're seeing is a similar thing happening in the East Shale Basin in both the Westerdale Embayment and the Gose Pine Embayment where some improvements have really changed the EURs there per well and costs have come down there as well. So I do expect some leasing arrangements centered into there as well this year. Just don't know the exact timing of it.

Speaker 1

And as a refresher, the stuff in the West Shale Basin, there's 200,000 acres that we had leased to Encana now, Ovente, upon the IPO that had 8 years till expiry. And again, so we finally have received all that land back and now entering into lease arrangements with well capitalized producers. But what we're more excited about rather than lease bonuses that it's very significant individual well events, and we do see a huge amount of resource there. It's very thick shale. And it will really complement we kind of have pretty good visibility into our growth from the heavy oil portfolio, both in terms of the Mandel stack and the Clearwater.

Speaker 1

But this will complement that growth with some light oil, which is 40 degree API oil and then a lot of liquids rich solution gas. So likely over the next 10 years, the proportion of solution gas goes over a 3rd or significantly over a third of our total gas volumes. So again, some positive there. We're definitely excited about the play. But I do think there will be some more leasing yes,

Speaker 5

yes. Other question is Persky did acquire 22,000,000 properties in the quarter. Did you outline a little bit between the Mandeville stack in Central Alberta as being the areas that you acquired? Can you break apart a little bit further what was acquired in the quarter? What has you excited on that side?

Speaker 5

And can you talk about what the types of opportunities are that are coming across your desk these days?

Speaker 1

Yes, you bet. There are a few royalty packages out there. And as we said with the previous question from Adam, the hurdle rates are definitely high right now for us as a company. The $14,000,000 acquisition, which was mostly fee mineral title and also a handful of gores, That was in Southeastern Alberta. So we see both Manville and Viking potential there.

Speaker 1

We've actually already entered into a lease 2 days after closing that acquisition, which could has the potential to grow that asset in the double digits. And again, it was a really good IRR even on just the PDP. So that's fee mineral title acquisition. That's the last of the old Apache fee mineral title left in Canada. So $8,000,000 and $26,000,000 is primarily.

Speaker 1

And then the €8,000,000 was spent on 6 different private operators to acquire €15,000,000 Oil Sands leases in the Manville stack. So we're expecting some drilling to test those opportunities over the next year. I

Operator

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

Speaker 1

Thank you again everyone for dialing into the PrairieSky conference call and hope everyone has a great rest of the week.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a

Powered by Quartr
Earnings Conference Call
PrairieSky Royalty Q4 2023
00:00 / 00:00