PrairieSky Royalty Q1 2024 Earnings Call Transcript

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April 23, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to PrairieSky Royalty Announces Their First Quarter 2024 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Please go ahead.

Speaker 1

Thank you very much, operator, and good morning, everyone. Thank you for dialing into the PrairieSky Q1 2024 conference call. On the call from PrairieSky are Pam Kazell, Dan Bertram, Mike Murphy and myself, Andrew Phillips. Before we begin, there is 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. Q1 of 2024 saw PrairieSky receive 13,142 barrels of royalty oil volumes, a record for the company.

Speaker 1

Natural gas and NGL volumes remained steady. 50 new leases with 42 counterparties marked another strong quarter for leasing and generated $4,200,000 in bonus revenue. 2 notable developments took place over the Q1. Firstly, our largest royalty payer added 2 new polymer and water floods and commercialized and went to development of a secondary recovery in its 2 core areas. The significance of this from a royalty owner is a potential doubling of the recoverable oil per section at no additional capital for our business.

Speaker 1

These are now in the money call options. Secondly, new discoveries in a variety of Manville heavy oil stacked zones grew our inventory of royalty development wells. For context from 1994 to 2014 approximately 1500 cold flow heavy wells were drilled per year. This kept production steady around 3 50,000 barrels per day. From 2014 to today, less than 2 50 wells per year were drilled and production dropped to 150,000 barrels per day.

Speaker 1

Given the stack pay, lack of bottom water, individual well economics and total oil in place, the area should be able to grow back to its previous highs and potentially surpass them. PrairieSky shareholders are now positioned with the largest royalty position in the region. Our 2025 Investor Day will provide a deep dive into this play and also highlight all of the active water and polymer floods across our asset base. These are important assets as they lower our base declines and enhance the durability of our asset base. I will now pass call to Pam to walk through the financial results.

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 to review the forward looking statements qualifier in our press release and MD and A for the 3 months ended March 31, 2024. PrairieSky delivered another record quarter of oil royalty production, which averaged 13,142 barrels per day.

Speaker 2

This represents an 8% increase in oil royalty volumes over Q1 2023 and demonstrates a strong level of activity across our land base. NGL royalty volumes averaged 2,535 barrels per day and natural gas averaged 62,100,000 a day, bringing total royalty volumes to 26,027 BOE per day, up 5% over Q1 2023. We did see lower spuds in the quarter as compared to the prior year. Based on licensing, commodity pricing and current third party budgets in the Mandeville and Clearwater, we anticipate drilling activity on our oil assets to remain robust in 2024. Oil royalty production volumes in Q2 will be negatively impacted by the unplanned outage at a 3rd party gas plant, which is impacting producers in the Nipissippi area.

Speaker 2

The estimated net impact to Prairie is 500 barrels per day. The current timing of a restart of the plant is unknown and our key producer in the area is reviewing alternatives to bring production back online. Royalty production revenue totaled $113,200,000 which was 91% from liquids. Other revenue totaled $7,500,000 in the quarter and included $4,200,000 of bonus consideration from entering into 50 new leases with 42 different counterparties. Leasing was primarily focused in the Duvernay Light Oil and Manville Heavy Oil regions.

Speaker 2

PrairieSky is forecasting other revenue in the range of $25,000,000 to $30,000,000 in 2024, including lease rentals, bonus consideration and other revenue. Cash administrative expenses in the quarter included annual employee officer and director payments for the year. As mentioned on our year end call, we expect 20.24 cash administrative expenses to be in the range of $35,000,000 to $40,000,000 due to strong stock performance impacting share based compensation. With retirements from our Board of Directors this year and last year, we anticipate certain payments under the deferred share unit plan, which are incorporated into our estimate. Directors that retired at the AGM yesterday have until December 15, 2025, to redeem their DSUs.

Speaker 2

Current income tax expense totaled $14,700,000 in Q1. Entering into 2024, PrairieSky has $1,400,000,000 of tax pools to offset future taxable income, deductible at 10% per year. For 2024, that means the first $140,000,000 of pretax cash flow is tax free, with incremental cash flow tax at 23.6 percent. During the quarter, PrairieSky's funds from operations totaled $83,000,000 and we declared dividends of $59,700,000 or $0.25 per share. PrairieSky's net debt at March 31, 2024 totaled 208,300,000 6% from December 31, 2023, when net debt totaled $222,100,000 We will now turn it over to the moderator to proceed with the Q and A.

Operator

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

Speaker 3

Hey, guys. Good morning. I'm just curious in terms of the lease bonus payments that you guys are seeing here, you do provide the number that you sign on a quarterly basis and the number of offset operators. I'm wondering if you could provide maybe a little bit more color on that in terms of that makeup. And then the second element to that would be, of course, how the actual per acre sort of valuations of those have been trending over the last couple of years?

Speaker 1

You bet. No, thanks for the question, Patrick. And, yes, leasing has been the highest in the company's history over the last 2 years. And it does vary from quarter to quarter and can be lumpy like we saw in Q4. We had a very large lease issuance bonus and that was longer term leases for the Duvernay shale play in the West Shale Basin.

Speaker 1

And then this quarter we're kind of back to the more run rate or what you can expect quarter to quarter from the company. One of the interesting things just to talk about the composition of it a little bit is most of the leasing we've done over the last 2 years, operators had near term plans for the land, so they were shorter term leases. And in a lot of cases, a year or 2 goes by fairly quickly. So we've been doing a lot of re leasing of the same lands just couple of years later. And the price on a per acre basis to answer the second part of your question has been trending slightly higher, along with the offsetting Crown Lands.

Speaker 3

Okay, thanks. And then maybe just to switch gears, I know you guys get poked on this almost every quarter, but in terms of return of capital policy, one thing that struck me yesterday at the AGM was that you obviously, you've held the Texas Pacific Land Trust as sort of gold standard in the energy royalty business and that a lot of their return of capital policy has been focused on the NCIB. I look at it, we model it out, you're probably hitting net debt payout mid year 2025 on our numbers and you guys can corroborate that if you will. But how are you thinking about the potential to execute on NCIB here? Would it happen ahead of hitting that payout or do you have to start sort of fully get to 0 debt before we'll see any true NCIB execution?

Speaker 1

Yes. And just to talk a little bit about thanks for the question. And I think on the return of capital piece, we obviously have the dividend, which is $239,000,000 annually. So any excess cash flow right now is just going towards paying off the debt. I think if you look at how we did it historically, we weren't seeing good M and A opportunities in 2017, 2018, 2019.

Speaker 1

For the most part, we saw better value in buying back stock, better long term returns for shareholders and buying appraised Sky share. And we're unique in that we always have that option. So we bought back about $40,000,000 a year of stock each consecutive year. And then during COVID, when things got dislocated, we bought back $100,000,000 in August of 2020. And right now, our cost of debt has gone up materially.

Speaker 1

We borrowed to execute on the Heritage acquisition, which we closed December 2021. We borrowed $728,000,000 That's been repaid for the most part. As you mentioned, it will be somewhere in the middle of next year where it's completely repaid. And so as we're moving towards that, we've got to start thinking about the excess cash. And I think there is an opportunity to even build some cash in this environment.

Speaker 1

I think you just want to have those options going forward to either make a great acquisition, which has a high return on invested capital or conversely buyback more shares. And I think if you look at where the business sits today for the next 10 years versus the last 10, we IPOed with 5,200,000 acres and 130,000,000 shares. Today, we have 239 1,000,000 shares and we have 18,300,000 acres and some of the highest quality acreage, some of the faster growing parts of the basin. You don't want to dilute that great asset base. So I think we it'll definitely be a return to shareholders.

Speaker 1

We won't have a defined plan. We'll just do it. We'll do what makes the most sense when we sit as a Board and discuss it. But the buybacks will start to come into play sometime in the next year or so. We'll start to think about how to implement those.

Speaker 1

So sorry, that's probably too long an answer for you, but

Speaker 3

I think you spoke for about as long as

Speaker 1

I frame the question for, so that was perfect. Thanks. Thanks for the questions, Patrick.

Operator

Please stand by for our next question. Our next question comes from Jeremy MacRae with BMO. Your line is

Speaker 4

I wonder if you can describe the type of wells that are coming on now just with the amount of wells that were split this quarter versus where we were Q1 of 2023. Are the wells IP rates getting higher? Are you seeing less decline with the more conventional type of wells? Are they more oilier? Just any kind of indication of how the wells this quarter are comparing to wells that we saw in Q1 of 2023?

Speaker 1

Yes, it's a good question. And the composition of the wells in terms of how many more conventional wells versus multistage frac wells is reasonably similar. I think the one difference is there's every year it seems there's more refinements in production techniques and drilling techniques and better fluid systems. And so we are seeing slightly better IP90s from the wells. And in addition, a lot of these wells now are getting drilled in already pressurized waterflood areas.

Speaker 1

So the 1st year declines on those are a little more muted. So I think that's kind of benefiting the company a little bit from the total production standpoint.

Speaker 4

Okay. And then I think just like a question we always kind of want to ask on terms of M and A, is there opportunity out there? Is it anything more interesting, less interesting? Just maybe just a quick comment on that.

Speaker 1

Sure. Yes. And I mean we're we actually had a good slide at the AGM that just showed when our over the last we've been public for 10 years and when we did our M and A and on the y axis was WTI price and it was typically $40 to $60 crude when we executed on our acquisitions. And that's usually when we went in with net cash. I think today you're in an environment where you're CAD110 light narrow heavy oil differentials.

Speaker 1

There's a lot of capital sloshing around. The businesses are typically flushed with cash. So it's I think it's more of an environment where there's less quality opportunities that exist out there. Okay. Thanks, Andrew.

Speaker 1

Thanks for your question.

Operator

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

Speaker 1

Well, thank you very much everyone for dialing into the PrairieSky earnings call and hope everybody has a great Q2.

Operator

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

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Earnings Conference Call
PrairieSky Royalty Q1 2024
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