Q1 2020 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Prairies Die Ltd first quarter 2020 financial results call. At this time all participants are in listen only mode. After the speaker presentation. There will be question and answer session. So my question during the session. Please press star one telephone.

Please be advised please call is being recorded any t. require any further assistance. Please press star Zero I would now like do you have the conference over to your Speaker Andr Phillips. Please go ahead.

Thank you city a good morning, and thank you for dialing into the praised by royalty Q1 2020 conference call.

On the call from P.S.K., our camp rockers, yellow, because all CFO I myself and your thoughts.

Before I begin I would like to take a moment to drop or style.

Our industry business, the community partners as well as our investor.

This has been a challenging time for industry, but more importantly, our community than families.

Our thoughts are with all of you and I would like to personally wish all these about and hope you stay safe and healthy what we look towards more prosperous times that.

A purchase Guy we had 60 dedicated team members.

Have 60 dedicated team members all of whom had been working from home since early to mid March executive team is very appreciative of all your efforts and ingenuity during our work from home protocol.

We have continued to seamlessly execute on our business plan and his during times like this that I'm reminded what a great altered team we have a crazy Scott.

Following our usual copco provide an operational update and then turn the call over to Pam walk through the financials.

First quarter royalty production totaled 22160, yeah, we per day.

Versus 22007 BOE per day in Q1 2019.

Stable production was achieved without acquiring any producing assets over the past year.

Free cash flow 46.5 million was primarily allocated to the Q1 dividend of 45.4 million.

Other $5 million this bank Catholic shares, but the buyback being accelerated in mid March following a significant decline in oil prices.

Hi, Sky exited the quarter with no debt.

Our strategy from the outside has been to build cash on top of the stable dividend in periods of strength for the industry and deploy that cash when opportunities to improve the business per share present themselves.

In 2017, we generated over $100 million on top of the $175 million dividends and carried approximately 100 million on our balance sheet.

Quality opportunities presented themselves and we were able to deploy this capital to acquire premier royalty assets improved the per share value of the business.

Today, the business continues to be debt free which is an optimal capital structure in this volatile environment.

On capital allocation, we have adjusted the dividend to allow the company to deploy the excess cash flow towards acquisitions and weren't buyback.

Craig I currently trades at just over $100 Craker has a long duration low decline high margin cash flow stream and lands on the best parts of the cost curve in the basin.

As a result, the hurdle rates for acquisitions are high.

Fortunately, we can continue to buy more of this high quality business through our issuer bid work on opportunities that we create or which present themselves.

On cashing in a management proactively took a significant total competition reduction in December 2019 prior to the recent all price decline.

This reduction represent over $1 million annually and we shared amongst the three executives. In addition, our compensation program is heavily weighted towards share price performance, which has resulted in management realizing a fraction approximately one third of the target compensation.

As long term incentive born stuff.

This business is managed by three senior executives down from five.

Three years ago with all of US investing the majority of our network praise Guy shares we're shareholders first and we continue to focus on ways to improve the per share value as well the GNS efficiencies across the organization.

The compliance group was.

Was and continues to be busy and collected $1.8 million over the first quarter.

Shut in volumes have been close to 10% so far but are expected to increase substantially in may as most companies had their nominations in for April prior to the collapse in oil we're supportive of the decisions and are working collaborative collaboratively with our industry partners.

As you all will be stored in the reservoir until better pricing can be achieved.

The challenges rising from the recent price class will create opportunities for price Guy and we are in a strong position to execute on.

Thank you to our shareholders for their continued support to our employees, who continue to deliver results from their home office work environments.

I will now turn the call to Pam to discuss financials.

Thank you Andrew Good morning, everyone before I get started I will be including certain forward looking information in my remarks today as such I would refer all participants on this call. Please reference the forward looking information section of our Mdna at March 31st as well as in the press release issued on April 22020.

During the first quarter price Cogenerator funds from operations, a 46.5 million or 20 cents per share.

Cash flows generated primarily from royalty production revenue of 49.1 million on average production volumes of 22160 BLE per day.

Production volumes were consistent with Q1 2019, when production averaged 22007 Boe per day, and Q4 2019, when production volumes averaged 22203 Boe per day.

Production was comprised of oil volumes of 8582 barrels per day NGL volumes of 2010 45 barrels per day and natural gas volumes of 63.8 million per day.

Well in line with were down from Q4 2019, primarily as a result of lower sliding scale volumes due to the decline in oil prices in March and fewer compliance volumes.

Given the current oil price environment, there will be production volume shut ins on our land.

Currently we estimate that approximately 10% of Q1 2020 oil production will be shut in for April growing to approximately 20% in may.

The situation is continue to evolve.

Excuse me and we're working with producers on a property to make the appropriate long term business decisions, which could result in additional Shannon.

[noise] NGL and natural gas volumes, both increase from Q4 2019 as a result of the Montney wells that came on in the back half of 2019.

These wells generate significant part condensate, which boosted NGL price realizations in the quarter.

Although drilling activity on our natural gas properties has remained modest natural gas makes up close to half of our production volumes and we have royalty properties on plays across Western Canada, providing significant exposure to natural gas.

Great guys production volumes in the quarter included 1686 Boe per day appropriate adjustments, which were 56% liquids and included 155 BOE a day from compliance activities and an additional 1522 Boe per day [laughter] other prior period adjustments related to new wells on stream and better well performance.

The compliance group continues to recover missed an incorrect royalties through friends its accounting collecting 1.8 million in the quarter.

There were 170 wells, but in the quarter, primarily in January and February.

There were 168 oil wells bad, which included 86 Viking Wells 22, Mandel heavy oil wells 16, Bakken wells and 12 Clearwater well.

There were also to Mannville natural gas wells, but.

Of the 22 Mandel heavy oil wells 15 were from our choose thermal oil projects at Lindbergh and I mean like.

The average royalty rate of wells, but in the quarter was 8.5%.

Other revenue totaled 3.6 million, including point Sevenmillion and lease rental point 5 million in other income and 2.4 million in bonus consideration on entering into 26 leasing arrangements with 23 different counterparties.

Given the impact of Cobot 19 on the global economy and on the energy industry, we are reducing our outlook for other revenue from 25 million in 2020 to 15 to 17 million primarily as a result of lower anticipated leasing activity. This includes our estimate for compliance revenue.

Cash administrative expenses totaled 7 million or $3.47 per B. Riley and included the annual long term incentive payment of 1.7 million for all staffing executive.

As Andrew mentioned, our staff have been working remotely since March when we implemented our business continuity plan.

Early on a pre sky, we invested in digitizing Oliver records, including our land file.

This investment has enhanced our ability to analyze information over the years and has enabled a smooth transition to working from home.

Due to the impact of lower wtf pricing and higher light and heavy oil differentials on revenue, we recorded a cash tax recovery in the quarter of 2.5 million.

During Q1 praise Guy paid 45.6 million in dividends and repurchase a half a million common shares.

Hi, guys working capital deficiency was 5.2 million at March 31st and price Guy has no long term debt.

Since IPO price guys generated approximately 1.3 billion and funds from operations and returned 1.2 billion to shareholders through approximately 1.1 billion in dividends and the repurchase of 5.7 million common shares.

We'll now turn it over to the moderator to proceed with acuity.

[noise]. Thank you, ladies and gentlemen, Jim a question at this time. Please press the star and then the number one key on your Touchtone phone. Once again that is star one jeffs question to withdraw your question. Please press the pound Keith.

First question comes.

And well see with TD Securities. Your line is now.

Hi, Good morning, guys. I was just curious how comfortable you would be using debt to make acquisitions, we entered library target rich environment.

I think about your use of debt is there a maximum of leverage you look on the balance sheet. If you work season.

Yes. Thanks, the question Aaron I think.

Part of the reason, we have 200 million dollar bank fine with that $50 million accordion is to give us that flexibility and.

What what we're able to do today is if we put cash in the bank on on top of the dividend. We've got a half percent interest when we can get a 6% free cash flow yield what buying back the stock. So we can continue at the repurchasing and if we're successful executing an acquisition we can use leverage at that point and then paid down.

In a short period of time with the excess cash flow by slowing down the the buyback so that kind of gives us the leavers to be flexible when we see good opportunities arise.

That exceed our cost capital and enhance our asset base. So.

And in terms of the total quantum of levers answer the second part of your question.

It really depends on the opportunity and I hate to give you an exact number but again, it's as if it's something we're comfortable makes our business significantly better per share.

The short medium and long term weed.

We find ways to do it.

Thanks for getting off the follow up question on the shut ins.

From.

Nickel perspective.

How far in advance of the shut in or you notified that producer intends to shut in a particular well.

That that's a it's a good question that we actually have the ability under our contract did not allow shut ins without force issuer.

One of the thing we recognize is that although we do have our 98% operating margins, it's better for the producer and it's better for us to get a more value for our crude.

So we've we've allowed 30 day shut ins and then at the end of the 30 day period. We can then reevaluate. It. So one example is there is a private producer that came to us want to shut in all of their volumes for April, which we supported but we'd already not we took the production clients we'd already nominated it but we found a way to actually make money with.

Shall bye.

Getting out of that contract. So there there was a way for us actually incrementally make money and shut in the volumes and preserves the value. There. So again were we worked collaboratively with all the producers and we have 325 of them. So we've been extremely busy in conversations.

With both the markers on one side and then those producers on the other but we're definitely work with them and want to do well.

Okay.

I mentioned that you can see shut ins of up to 20% come me.

Is that based on shutting request that you've seen or is that based on just broader industry trends.

Yes, the 10% the actual number that we've we've we've seen 20 percents, what we've been told by industry. My view and this is my view on these is going to be significantly higher than that.

In may but time will tell that again not the that's what we've been given as guidance Aaron and that's kind of what we have to go off of but my views as it should be higher than that in may.

Oh, you turn it bookmark bench.

I do know I wouldnt I'd be I'd be speculating in the market as you know the market. So volatile there and it really depends on a lot of the contracts that producers had in place as well. So so again there are some and theres obviously the issues with there's some heavy oil wells that if you shut in the warm holds can collapse those sorts of.

Things. So so again that you have to be cautious and do it pragmatically occur producer.

But again setting those aside the economic decision would be to set in shut in a far higher amount than that 20%. So that's just what are the number comes from that it's going to be higher I, just hate to take a stab at it.

All right and one more question from head on all the time, if I'm pretty sure ups to shut in a while at the field Premier past experience, how long should we expect those wells to state shut in for how quickly can they be returned a person does improve.

It all depends on the type of production.

Thank you can take longer.

In waterfloods or polymer flood in a lot of cases, they can continue to inject the polymer water to maintain pressure, maybe even increased pressure, while the balance of the field shut in.

But typically it's very quickly you can you can get you can get wells on very quickly. After when you make that decision to put them back on production it can be within days.

Okay. That's it for me thank you.

Thank you. Thanks, Sir our next question comes from the line of Mike Dunn with Stifel Firstenergy. Your line is.

Thanks, Good morning, everyone, Andrew I'm going to ask to speculate on.

Potential board decision and I know.

In the past to you.

Look at your dividend sort of annually.

But with the prospects for I guess very low pricing in Q2 combined with.

Significantly lower volumes.

At least temporarily we think.

If we're coming out of this I guess three months later with.

Curtailments largely behind us.

Or an outlook to that.

With weak pricing in Q2.

Would you speculate on what are the board would would look for Oh, another temporary adjustment to the dividend or.

I.

Would you say they would be comfortable with.

Funding any shortfall.

Your your credit lines here at least temporarily.

Yes, I mean, we've now we've always had we wouldn't you debt long term that pay the dividend.

Mike and thanks to question, but I guess, a 90% operating margin 50% of our production natural gas, it's given where the dividends sits today at 24 cents year six cents per quarter.

It looks well funded and I think you know if you again, if there was a shortfall it'd be in the order of $1 million on a $2 billion companies I'd be very very modest.

I don't think we.

Make any decision based on two weeks of being on sustainable because all your well get shut in or something like that that help answer your question.

Yeah. Thanks.

Is it for me.

Thanks, Mike.

Thank you and once again that is still isn't one to ask a question status star one.

And our next question comes from Jamie cubic with CNBC. Your line is open.

Good morning, everyone. Thanks here quick question for you given the strain on operators and balance sheets. In this environment can you talk about how you're.

Monitoring counterparty risks and have you seen any anything on that side that's.

Just concerning at this point.

Any anyway, you can shed on that would be great.

Yeah. Thanks to the question, Jamie I'm counterparty risk is something that we're always monitoring out we have very robust processes in place you know some of the things that we can do is obviously the leases are under our control NFV producer is behind him royalty payment.

We can take that lease back so that leaves.

A very powerful message to send to to someone who might be behind new royalties. We also have the ability to to take our production in kind. We currently take about 10% of our production volumes that way, which eliminates that counterparty risk and we have a few letters of credit in place with certain producers. So I'm, it's something that we continue to to monitor.

Closely I'm trying to get to work with a producers.

You know as Andrew mentioned on shut ins, but royalties or our priority and keeping our leases in good standing and Jamie if I could add one thing.

Again, it's a good reminder, when you on that piece of land you actually on the resource. So your Super secured in your head of the banks and you always have that option of kicking people.

A lot.

Let's go ahead.

That's why we typically if there is a bankruptcy process, which we've seen in numerous bankruptcies or lost five years.

The receiver pays on time monthly to ensure they secure that lease and ensure they keep their asset intact.

Okay. Thank you that's all for me.

Thanks, Jamie.

Thank you and I'm not showing any further questions at this time I would now like turn the call back your speakers.

Thank you very much again for everyone dialing into the price Guide Q4 conference call and as always please call camera myself, if you have any questions.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a great.

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